Keeping a cash reserve part of sound financial plan
By Teri Parker
Do I need emergency cash?
Building a sound financial plan is like building a house. You want to live in a house with a strong foundation, one that is likely to stand up against whatever Mother Nature throws at it. Similarly, a sound financial plan includes an appropriate cash reserve that provides liquidity in the event you experience unforeseen expenses.
Unforeseen expenses may include significant home or auto repairs, uncovered medical expenses, loss of income due to unemployment, illness or disability, or the cost of bailing a family member out of a financial crisis. In any case, you’ll want to have enough cash on hand to cover the expense without disrupting your longer-term savings or investment strategy, or requiring the sale of investments at an inopportune time.
The size of your emergency fund depends on several variables, but the single biggest variable is your employment status:
● Working. If you or your spouse is employed by a corporation or self-employed in a business with consistent cash flow, you should keep three to six months of your monthly expenses in a cash reserve. If you are concerned about your company’s stability or the economic environment, you may want to increase those numbers to 6 to 12 months. If you’re self-employed in a newer business, or one with inconsistent cash flow or operating expenses, you may want a bigger cushion. Perhaps as much as a year of expenses.
● Retired. Retirees should keep a cash reserve of 12 to 18 months of expenses. Of course, it is difficult to predict expenses during the first several years of retirement. You may want to create a larger cushion, at least until you get a better handle on what you’re going to spend on a regular basis.
Given today’s low interest rate environment, you may not enjoy the idea of tying […]