Getting Started: Establishing a Financial Safety Net
May 28, 2014
In times of crisis, you don't want to be shaking pennies out of a piggy bank. Having a financial safety net in place can ensure that you're protected when a financial emergency arises. One way to accomplish this is by setting up a cash reserve, a pool of readily available funds that can help you meet emergency or highly urgent short-term needs.
How much is enough?
We suggest that you have 6-12 months' worth of living expenses in your cash reserve. The actual amount, however, should be based on your particular circumstances. Without an emergency fund, a period of crisis could be financially devastating.
Building your cash reserve
If you haven't established a cash reserve, or if the one you have is inadequate, you can take several steps to eliminate the shortfall:
- Save aggressively
- Reduce your discretionary spending
- Use curent liquid assets
- Use earnings from other investments
Where to keep your cash reserve
You'll want to make sure that your cash reserve is readily available when you need it. However, an FDIC-insured, low-interest savings account isn't your only option. There are several excellent alternatives, each with unique advantages. For example, money market accounts and short-term CD's typically offer higher interest rates than savings accounts, with little increased risk.
Review your cash reserve periodically
Your personal and financial circumstances change often - a new child comes along, an aging parent becomes more dependent, or a larger home brings increased expenses. Because your cahse reserve is the first line of protection against financial devastation, you should review it annually to make sure that it fits your current needs.