Financial emergencies are inevitable. They can range from unexpected major home repairs to health emergencies or even losing a primary source of income. Having a safety net in place can help soften the blow of a financial crisis. These three steps can help you maintain an emergency cash reserve that’s appropriate for your circumstances.
1. Set a Goal
Having three months of living expenses is the minimum you should aim for in your cash reserve. The actual amount will be based on your current mortgage or rent payment plus the monthly cost of running your household and expenditures needed to maintain your quality of life. Also factor in the level of protections you have in place, such as auto insurance, homeowners or renters insurance, plus short-term and long term disability coverage offered by your employer, which can offset unexpected expenses.
2. Build Your Cash Reserve
Start by taking a close look at your spending habits and see where you can start to save aggressively. You may be surprised how quickly discretionary spending at restaurants and coffee shops, date nights and activities with the kids can equal the major expenditures you make on your home and cars. Find ways to curb the discretionary spending and put that extra money into a savings account. Also find a percentage of your paycheck, say 5%, that you are comfortable putting into savings each pay period.
A low-interest savings account isn’t the only option to help grow your cash reserve. Short-term investments can give you the boost you need to make your safety net readily available when you need it. Consider short-term CDs and FDIC-insured money market accounts as ways to supercharge your savings with higher interest yields than most savings accounts. Be sure to stagger investments so they mature at different times to avoid being penalized heavily if you need that money in your cash reserve to handle sudden financial emergencies.
3. Check Your Financial Safety Net Often
Once you reach your goal of having three months of living expenses set aside in ready-to-use cash, consider expanding your investment portfolio to reach six-month, one-year and long-term savings goals. Personal and financial situations inevitably change and so will the amount you need in your emergency cash reserve. As families grow, kids go to college and parents retire who may require additional assistance, make sure your safety net fits your current circumstances.
Get Professional Assistance
Get help with your short- and long-term financial goals. Contact a Farm Bureau advisor to start the conversation today.