EMERGENCY CASH RESERVE - YOUR FIRST LINE OF PROTECTION
Having an Emergency Cash Reserve fund is one of the most important Financial Position recommendation you should consider. Especially in today's shaky job market, one never knows when the cash flow stream will stop and these reserves need to be tapped into.
How Much Should I Have?
Experts recommend that you should hold three to six months of reserves to buffer against a cash flow shortfall. If you are married and both you and your spouse are working, you might not need as much. Consider maintaining at least three months for your reserve.
Review your insurance deductibles to ensure that you have the minimum on hand to cover out of pocket expenses. If you have disability insurance, often there is a waiting period before benefits begin. You need to be sure you can cover the waiting period.
Where should I Keep My Savings?
Emergency Reserve Funds should not be commingled with your other accounts but should be kept separate. These funds are to be used only when you are facing an emergency, not to be tapped into when you wish to take an impromptu vacation.
In normal times when interest rates are higher among investment choices, a tiered system is normally recommended. One may consider holding 1/3 of the savings in a simple savings account where there are no withdrawal restrictions and money can be instantly accessed. Savings accounts historically do not pay much interest. Now, with bank fees increasing, it may be difficult to hold a savings account without having to pay more fees than you are earning in interest. So be sure to review fees. Credit Unions often offer better benefits with fewer fees.
A second tier of savings could be a Money Market Fund. Currently, these instruments pay about as much as a savings account, virtually nothing. Money Market Funds were once considered as good as cash but with the collapse of the Reserve Fund in 2008, it's hard to consider anything safe. Money Market Funds may have certain restrictions such as a limited number of withdrawals in a month or year. But since you only expect to tap into these funds in the event of an emergency, this should not be a major consideration in your decision.
The idea of the second tier savings is to earn more return while maintaining safety but giving up the 100% liquidity that simple savings account provide.
The third tier could be a short-term bond fund. Bond funds are readily available through most mutual fund providers or through Exchange Traded Funds. These funds are not as readily available. Your principal may increase or decrease depending on interest rate changes, however, because of the short-term nature of the instruments held in these funds, principal should not vary significantly.
Other Alternatives
One alternative I've found in these times of low interest rates are annuity and insurance fixed accounts. Many of these insurance products offer Fixed accounts that can pay as much as 4% or 5%. Check over your prospectus to see what options are available. If you have a variable product, you can most likely shift to the fixed option.
Before You Do Any Other Investing
fund your Emergency Reserve Fund. Even if you are unable to earn any interest these days, maintaining a solid cash reserve can help you weather temporary financial setbacks, helping you to avoid the stress that many of those who are unprepared face.
