Everyone needs a cash reserve

Posted in How-To

hungry piggy bank
Many of us are living close to our financial limit these days. We pay our bills on time, but there’s not a lot left over. That could be a dangerous situation. If things go wrong, your financial situation can change very quickly from adequate to critical. Without a cash reserve, you could find yourself in serious trouble.

It’s important to have a cash reserve of at least three months’ living expenses. Invest your reserve in a safe, liquid account. Consider investments such as a bank CD, a money market fund, or a very short-term bond fund. Make sure you have easy access to the funds without losing too much interest. And once you’ve built your fund, avoid temptations to raid it for non-essentials.

Great, Rex, I get it.  But how the heck do I build that reserve in the first place?

There are only two ways to build up a cash reserve: reduce expenses (decrease outflow) and gain revenue (increase inflow).

I know you’re thinking, “well, duh!”  But it’s important to realize that it really is that simple.  Well, simplistic; not simple.  If it were that simple, you’d probably have that savings account filled up already.

Here’s an no-brainer way to start: A Dartmouth economics professor and three colleagues published a report late last year that found by simply texting people and reminding them to save money increased their savings-account balances by 6%.  The increase was even greater if the message included a reminder of the specific goals customers gave when setting up their savings accounts.

Yes, a simple, daily text message increased savings. One of the authors noted that it’s likely caused by the additional attention it forces you to pay to your savings, rather than a lack of self-control.  In addition to reminders you could set up for yourself via Google or Yahoo, the brains behind SaveEveryWay will do it for you.

Personal finance blog The Simple Dollar offers a step-by-step guide to creating an emergency fund.   Here’s the recap:

  • Set your initial target low
  • Find your breathing room
  • Make it automatic
  • Set reasonable milestones along the way

Actually, there are a number of incredible free resources with useful tips to help stretch your dollar in all kinds of ways:

Wise Bread

Get Rich Slowly

Frugal for Life

You can also read Jeff Yaegar’s book The Cheapskate Next Door.

Ultimately, expenses can only be cut so far.  No matter how spartan you’re willing to live, you’ll probably still need to pay for some kind shelter and to feed and clothe yourself.  In another post, we’ll explore some of the ways to increase the inflow of money.

Photo by nieve44