What the finance is an emergency cash reserve? An emergency cash reserve is a separate "pot of money" either an actual savings account that you don't access, or a theoretical chunk of your cash that you save for unforeseen emergencies like medical crises, home repairs or an income if you lose your job. Having an emergency cash reserve is a crucial safety net. No safety net means more potential debt. So the big question: how much should you save and how?
You have options! There are different ways to save and different opinions on how much to save. Some experts say, it’s enough to put aside three months of your monthly spending; others say six months is sufficient. The good-ish news? The answer lies with you! What amount lets you sleep at night, knowing that if an emergency were to arise, you'd make it though?
The second part of this equation is how to hold this "reserve"? Is this a cash under the mattress suggestion, a separate savings account, or an investment in a low-yielding cash alternative like a CD or short term bond fund?
How much? Depending on your lifestyle, income, monthly costs and dependents, we suggest starting with a goal of four months worth of living expenses. Update your nest egg as you go. If you have inconsistent or unstable employment, potential upcoming substantial expenses or medical bills, you may be more comfortable with more. If you have very stable employment, stable income, a smaller reserve may work for your lifestyle.
Under the mattress, a savings account, or a CD? Having a substantial amount of liquid (accessible) cash in your home, under the proverbial mattress or in a safe, is unnecessary and simply not a good idea. Neither is leaving your cash reserve in a CD because they often cause withdrawal penalties and fees. The best answer? A savings account! A separate savings account wit a low interest rate allows you to access this cash whenever you need it without penalties and fees.
How to do it? The idea of building a cash reserve may feel overwhelming. Most of us don't have four months worth of expenses lying around in cash, for starters. And, not to mention, if you have student debt, children or are aggressively trying to save for retirement, a cash reserve may not make the top of your priority list. If you're saving for several things at once - excluding high interest debt which you should tackle first - we recommend putting funds into each of those regularly versus accomplishing one at a time.
Determine what you spend on a monthly basis. Your first step is to know your budget. Don't have one? No problem. It's time to set one.
Set a goal. How much should your cash reserve be. Use four months worth of living expenses as a starting point, then increase or decrease it from there.
Create a habit of saving. Each month, put aside some cash. This new routine will help make the saving easier. Set automatic transfers from your checking account to your cash reserve account monthly, even if you must start small. Baby steps!
Clean up your checking account. At the end of the month, make the habit of transferring any excess money to your emergency cash reserve.
Cut your expenses. Even if you're not running out of money each month, try to trim parts of your spending to prioritize your cash reserve saving.
Keep the change. Take a jar in your home and drop any excess change in it.
Continually assess and adjust contributions. Track how much money you're saving each month and adjust when necessary or possible.
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