What You Should Know About Building a Cash Reserve

Perhaps you think of it as your personal cash reserve, your emergency money or the rainy-day fund. Whatever you actually call it, your emergency fund can be the safety net that you need when disaster strikes. If you don’t yet have a cash reserve and you’d like to learn how to set one up, the following three tips can help you get started.

Setting a Budget

One of the simplest budgeting methods is the 50/30/20 budget. If you’ve never set a budget for yourself before, then you may want to try this one because it’s easy. Basically, this plan asks you to put aside 50% of your income for the necessities such as rent, transportation needs, utilities, etc. Next, you’ll earmark 30% for fun. This might be movies, coffee with friends or a dinner out. Finally, 20% of your income goes toward savings and debt. Ideally, you’d have no debt, so the full 20% would go toward your cash reserve.

Take Extra Steps

If you do have a lot of debt or you want to build your cash reserve faster, you’ll want to take some extra steps. First, be willing to do things like get a second job or have a yard/garage sale to make some extra money. Second, build your reserve in smaller steps, starting with about a $1,000. This fund will be for issues like unexpected car repairs, an emergency trip to the dentist’s office, etc. Finally, you should save enough money so that you have three to six months’ worth of income in the bank after you have the initial $1,000 saved up.

Using It

Your cash reserve should be used instead of credit cards when an emergency strikes. Eventually, this financial padding will replace your need to resort to high-interest credit. You may be in for an uphill battle initially, especially if you’ve been accustomed to using credit cards for every unexpected expense, but it’s worth the effort. As City Creek Mortgage points out, by using the cash reserve instead of credit cards, you train yourself not to build debt, and you can help secure your financial future. Learning how to live this way takes discipline and forethought, but it can be done.

Most people know they should have an emergency fund set aside to use when life’s mishaps befall them, but there’s a big difference between knowing they need one and actually having one. That’s where most people get tripped up. Building a fund takes time, sacrifice and discipline. However, that discipline pays off in the end. Those with a cash reserve weather life’s storms far better and with more peace of mind than those who don’t.

Setting goals for your financial life is important. Let us help you figure out how to do it!