Why is it important to have a cash reserve

A cash reserve is a fund that you build to save money for use in the future. It is recommended by most financial advisors that you begin building a cash reserve as soon as it is practically possible for you and your family. Having a cash reserve fund will prevent you from having to go into debt if you face a financial crisis, which is a positive thing because you want to avoid debt if at all possible. Going into debt adds unnecessary risks and expenses to your personal finances, which is something that you can avoid if you have a cash reserve.

One of the most important reasons that you will need to have a cash reserve is because everybody will face some kind of financial emergency in their lives. These emergencies can be unemployment, an injury that affects your ability to work, natural disasters, or even medical emergencies. The only way that you will be able to get through these kinds of emergencies is to have enough cash or cash equivalents built up in an account, which this would be your cash reserve. If you do not have cash reverses and you run into some kind of emergency you will most likely have to revert to borrowing money from various sources to get through the crisis.

When it comes to building the cash reserve there is no set amount that you are have to save, but you are going to want to have a minimum amount saved. When building your cash reserve you are going to want to have enough money set aside to carry you through a period of unemployment or some other type of emergency. To figure out how much you should save you should calculate the amount to save based on the length of time the emergency will last rather than a fixed amount. For example, rather than saying you will save $5,000 in one year for your cash reserves you will want to figure out all of the expenses that you have each month and save up enough for a certain time, such as three months or one year. Most personal finance books and websites give you the advice to save between $1,000 and 1 year of living expenses in your cash reserve, the amount is going to vary based on the book or website you are reading.

To build up your cash reserve you are going to want to contribute 5-10% of your gross income each month. The best thing that you can do to save up 5-10% of your gross income each month is to look at all of your monthly expenses and see where you can cut back on your spending. All that you need to do is to cut a little bit here and there. For example, if you buy coffee before work each day you can cut back to buying it once or twice a week. The money that you save from not buying coffee each day can be placed in your cash reserve. Just cutting a little bit here and there quickly adds up, so saving money becomes a breeze.

When building your cash reserve you are going to want to place your cash reserve funds into a FDIC-insured bank account, which can also be an online bank account. By placing your funds in a FDIC-insured account your money is safe no matter what happens in the future. You want to avoid using money market funds because they are not FDIC-insured and can lose value. Placing your money into accounts that are not FDIC-insured there is no guarantee that your money will be safe if something happens in the future.

In addition to placing money into a savings account you will also want to keep some of your cash reserve at home. When keeping a cash reserve at home for large-scale emergencies you should have half to one month of living expenses built up in your cash reserve. Of course, you will want to make sure that it is kept safe, so be sure to store it in a secured safe.