One of the most important financial planning questions we often hear from clients is around how much money to have in a cash reserve. People struggle with this question because the reality is that there isn’t an exact answer. For many years, the general rule of thumb was to build up three to six months in an emergency reserve in case of emergencies or opportunities. However, some people feel with the availability of credit and other assets that can be readily liquid that they don’t need to keep much money in an account that doesn’t bear much interest. Here are five steps to build up an Emergency Cash Reserve.
- Determine Your Need
This is really the first step in figuring out how much money you need for a cash reserve. Since most transactions are done electronically today, many families really don’t know how much their family ‘burn rate’ each month. What we are talking about is how much your fixed and variable expenses are each month. Once you determine this amount (let’s say $5,000 a month for example) then you can multiply that number by the rule of thumb of three to six months and that is a good place to start. The real question I find in the planning process is, “how much money in the bank will allow you peace of mind to go to bed at night?” This question will help you pinpoint more in your head what an emergency cash reserve should be for your family. Of course, since most marketable securities are liquid within two business days, you don’t want too much in the bank or you will just safely lose pace to inflation.
- Determine Where To Stash Your Cash
When most people think of cash reserves, they think of how much money to keep in their checking account. The WORST place in my opinion to keep a cash reserve is your checking account. For most families, when money sits idly in the checking account it finds a way to slip out the back door and vaporize. So, whether you set up a credit union account, a money market account, or some cash reserve brokerage account, make the cash reserve one step removed from your hands. If you really have trouble building up a cash reserve, you may need a coach or an advisor to help you by just challenging you if you ask to pull money out of the cash reserve.
- Build Up By Saving
If you do have disposable income as a family, one step to build up the cash reserve is to set up a systematic savings plan. Whether you do this as a direct deposit from your paycheck or you decide to set up a monthly ACH withdrawal from your checking account to the cash reserve, a systematic out of mind out of sight plan will work best.
- Build Up By Selling
If you can’t save on a monthly basis, consider getting your reserves filled up quickly by selling your stuff. I recommend starting with a good old-fashioned garage sale, but instead of accepting cash you should set up an app like Square and get the money directly deposited into your cash reserve account so you don’t spend it right away. If you don’t want to do a garage sale, then begin listing your items on eBay, Craigslist, or other peer to peer sale sites so you can raise the cash for your emergency reserve.
- Build Up By Getting A Side Hustle
If you can’t save and you can’t sell, then you should look in the mirror and try to pick up a side hustle. We aren’t even talking about starting a business but using the power of the internet to pick up some way to earn extra cash you didn’t have to fill up that emergency reserve. One great website is www.fiverr.com, where you can take any skill you have from being able to edit an article to drawing a cartoon to earn some extra bucks. Just list your talent on the website and you can begin to get jobs to earn income. One other unique idea is to become licensed to actually officiate and perform a wedding ceremony. You would think that it would be difficult to get a license, but nothing could be further from the truth. You could pick up $250 to $500 a month just by taking a weekend or two and performing a ceremony.
If you want to set up a time to discuss your cash reserve, please go to oXYGen Financial to set up an appointment.