’)
There is a plethora of reasons to create a cash cushion sufficient to see you through any unforeseen emergency. Unexpected layoffs at work? Heat pump died in the middle of winter? Junior wrecked your car? These are just a few of the many potential occurrences that could have you in need of some cash. Rather than take on unnecessary debt, ensure you’re equipped by building up your cash reserves.
Determine How Much You Need
The first step toward saving is determining how much money you think you’ll need. To help figure it out, look at your monthly expenses. Use several months of statements to calculate what you spend each month on average. It used to be that 3-6 months of that amount would be a sufficient crisis stash. However, in today’s economy shoot for 9-12 and as many as 18 months of expenses.
Decide Where to Save
Now that you know how much you want to save, you need somewhere to put your money. There are several options for storing savings and we’ll briefly discuss a few here.
- Checking accounts provide you with immediate access to your money, allowing you to write checks and withdraw funds from an ATM. Unfortunately, your money will not grow in a checking account.
- Savings accounts also provide quick access to money. You’ll earn some interest, but not even enough to keep pace with inflation.
- Money market funds are offered through fund companies and discount brokerages and invest in CDs and other short-term savings. These allow quick access to your money while offering better returns. However, your money is not FDIC insured, so there is a small amount of risk.
- Certificates of deposit are secure investments that can pay out relatively decent interest rates, particularly those with later maturities. Funds in your CD are locked in until it matures, and if you withdraw it earlier, you will incur a penalty.
Start Saving
To build up a large enough cash horde to survive most emergencies, start socking away money today. Start small and build up your capital over time. As you save more, distribute your funds across a mix of vehicles. This will maximize returns while minimizing risk.
