We have written elsewhere about the importance of having an emergency reserve. “Financial success” is very hard without having a cushion to fall back on. We regularly tell people deep in credit card debt to establish at least a $500 reserve. Without such a backstop, debt is hard to retire. Emergencies happen. Things break.
The proper amount of a reserve, in our opinion, depends on what feels comfortable. Experts vary in recommendations from three to twelve months’ cash flow need (Bentley 2011) If more cash makes one comfortable, all the better.
If you do not have an adequate reserve, you are not alone. As stated in an article by Kelley Holland titled: “Look Who’s Living on the Financial Edge” (CNCB.com)
According to a newly released report from Bankrate, 24 percent of Americans have more credit card debt than emergency savings, and 13 percent are not much better off—they don’t have credit card debt but they don’t have emergency savings either. Put another way, more than a third of Americans are living at risk of a financial crisis.
Keep it where?
An emergency reserve, to be any good, needs to be readily accessible. A savings account or CD is preferable. Some clients have opened savings accounts in other cities to make it a little harder to access the funds. Internet banks are another good option. I personally attempted to keep a small percentage of my reserve in gold and silver coins, though this has not been without its problems.
Another option is a community development financial institution (CDFI), and the like. By investing with a CDFI, you are helping those with little or no capital. You may not earn as much interest, or your money may not be as secure as with a federally insured institution, but this money can be as closely tied to helping others as possible without actually giving money away.
Without an emergency reserve, one is almost guaranteed to stay or go back in debt. Having a liquid reserve just makes good sense and shows that you have margin in your finances. With margin, you are better able to withstand an unexpected setback.
Let us know if we can help in putting the structures in place to give you some peace in your finances.
Please feel free to pass this post on. Also, be sure to check out our free report, located at www.wfrplanning.com, entitled Three Questions for Working Families.