In times of crisis, you don’t want to be shaking pennies out of a piggy bank. Having a financial safety net in place can help ensure that you’re prepared when a financial emergency arises. One way to accomplish this is by setting up a cash reserve, a pool of readily available funds that can help you meet emergency or highly urgent short-term needs.
How much is enough?
One guideline suggests that you have three to six months’ worth of living expenses in your cash reserve. The actual amount, however, should be based on your particular circumstances. Do you have a mortgage? Do you have short-term and long-term disability protection? Are you paying for your child’s orthodontics? Are you making car payments? Other factors you need to consider include your job security, health, and income. The bottom line: Without an emergency fund, a period of crisis (e.g., unemployment, disability) could be financially devastating.
Building your cash reserve
If you haven’t established a cash reserve, or if the one you have is inadequate, you can take several
steps to potentially eliminate the shortfall:
● Save aggressively: If available, use payroll deduction at work; budget your savings as part of
regular household expenses
● Reduce your discretionary spending (e.g., eating out, movies, lottery tickets)
● Use current or liquid assets (those that are cash or are convertible to cash within a year, such
as a short-term certificate of deposit)
● Use earnings from other investments (e.g.,stocks, bonds, or mutual funds)
● Check out other resources (e.g., do you have a cash value insurance policy that you can
borrow from?)
A final note: Your credit line can be a secondary source of funds in a time of crisis. Borrowed money,
however, has to be paid back (often at high interest rates). As a result, it may not be wise to consider
lenders as a primary source for your cash reserve.
Where to keep your cash reserve
You’ll want to make sure that your cash reserve is readily available when you need it. However, an
FDIC-insured, low-interest savings account isn’t your only option. There are several alternatives, each
with unique features. For example, money market accounts and short-term CDs are lower risk
investments that typically offer higher interest rates than savings accounts.
Note: Don’t confuse a money market mutual fund with a money market deposit account. An investment in a money market mutual fund is not insured or guaranteed by the FDIC. Although the mutual fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.
Note: When considering a money market mutual fund, be sure to obtain and read the fund’s prospectus, which is available from the fund or your financial professional, and outlines the fund’s investment objectives, risks, fees, and expenses. Carefully consider those factors before investing.
It’s important to note that certain fixed-term investment vehicles (i.e., those that pledge to return your principal plus interest on a given date), such as CDs, impose a significant penalty for early withdrawals. So, if you’re going to use fixed-term investments as part of your cash reserve, you’ll want to consider laddering (staggering) their maturity dates over a short period of time (e.g., two to five months). This can help ensure the availability of funds, without penalty, to meet sudden financial needs.
Review your cash reserve periodically
Your personal and financial circumstances change often–a new child comes along, an aging parent
becomes more dependent, or a larger home brings increased expenses. Because your cash reserve is the first line of protection against financial devastation, you should review it annually to make sure that it fits your current needs.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any
investment strategy will be successful.
The FDIC insures deposits up to $250,000 per depositor per insured institution.
This content has been reviewed by FINRA.
Prepared by Broadridge Advisor Solutions. © 2025 Broadridge Financial Services, Inc.
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