In being prepared for emergencies, the top of the list is to have access to immediate cash to meet your obligations in the short term. Once again, I part company with conventional wisdom on the approach to money for emergencies like sickness, injury, unemployment, or an unforeseen catastrophe.
Rainy Day Account Needs To Be Liquid
Many advisors will tell you to keep three months’ worth of living expenses in savings or some liquid investment. (By “ liquid,” I mean money that you could withdraw tomorrow if you needed it.) In many respects, I am more aggressive than others in financial matters, but when it comes to emergencies, I am more conservative. I recommend maintaining six months’ worth of living expenses in a reserve fund. Jobs are less secure these days, new ones take longer to find, and medical costs are in the stratosphere. All of these factors are sound reasons to provide yourself and your family with a bigger cushion.
Conservative Like The Farming Heartland
Perhaps my approach to a rainy-day account is conditioned by the innate conservative nature of the farming heartland where I grew up and which is part of the economy’s foundation in this part of the world. Even if our economy is no longer farm-based, many of our social practices and customs are. Many of us in the Midwest are no more than a generation or two removed from a farm economy. Why do farming areas tend to be conservative? Farmers can’t take too many risks, because the price of failure is too high. They get one shot each year at a decent crop, with no fallback position if what you plant doesn’t grow or yields too little. Change is measured in years, not weeks.
Real Wealth by Bruce Helmer
Real Wealth
Bruce Helmer is an experienced financial planner, bestselling author, speaker and weekly radio host. Real Wealth – How to make Smart Money Choices for what matters most to YOU
Great article! Here are some additional considerations…
The first question you should be asking is whether you are employed (and where your job stability is at work) or whether you are self-employed. My opinion is that people who own a business should have about double the normal cash reserve of someone who is gainfully employed with a corporation.
The second question is do you anticipate any major life changes over the next year. This could be the birth of new child, an upcoming marriage/divorce, or potentially relocating your job to another part of the United States. These changes often create the need for more cash as your cash flow will likely be unstable.
The third question is what major changes do you see happening with your employer over the next 12 to 24 months. Do you see more layoffs coming or a department restructure? Do you see the company cutting the commission/bonus plans of the salespeople? Questions like these are important for impacting cash reserve.