Hey guys, welcome back to Financial Management 101! Now that we covered how to create a budget, we are ready to start thinking about building a financial safety net for times of emergency. 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?
Most financial professionals suggest that you have three to six months' worth of living expenses in your cash reserve. The actual amount, however, should be based on your unique circumstances. Do you have a mortgage? Do you have short-term and long-term disability protection? Are you making car payments? Other factors you need to consider include your job security, your health, and your income. The bottom line: Without an emergency fund, a period of crisis (like unemployment or disability) 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: If available, use payroll deduction at work; budget your savings as part of regular household expenses.
· Reduce your discretionary spending (e.g., eating out, movies, lottery tickets)
· Use current or liquid assets to build up your cash reserve. (those that are cash or are convertible to cash within a year, such as a short-term certificate of deposit)
