Cash Reserves / Reserve funds is simply extra money that sits in an account and used for emergencies. It is usually best to keep 6 months of cash sitting in a savings account or an extra checking account that can be used in emergencies to pay bills and other expenses.
Tips for your Cash Reserves
- How Much Cash is needed, 6 to 9 Months of all Bills
- Use a Separate Checking/ Savings Account
- Use only in Emergencies
How Much Cash is Needed
To calculate how much money you need to save for your reserve account all you need to do is add all of your monthly bills together to see how much money you are spending per month. Take this number and multiply it by 6 to 9. This is the amount of money that you should keep in reserve.
Use a Separate Checking / Savings Account
Out of Sight, Out of Mind. To help us resist the temptation of spending the money on things we don’t need. Remember that the purpose of this cash is for emergencies, not to buy that new large screen TV, take a vacation, or anything else. It is usually better to keep your extra cash away from your main checking account so that you don’t accidentally spend it. This means that you need to go to your bank and open another checking or savings account and use this account for your cash reserves.
Some people will want it to be in a separate checking account at the same bank they use while others will want to use a separate bank all together. The decision is up to you but a separate account away from your main checking account is usually a good ideal.
How and When do I use my Reserve Cash
This money is to be used for emergencies only.
Losing your job. Most people will use their reserve accounts in the event that they are laid off of their job or lose their income. They will use this reserve to pay the bills until they get another job.
Emergency repairs on a home or car. If you can not afford to repair your home or car with the money you make from your job. In most situations paying for the repair with cash in your regular checking account or, a credit card first then using your income to pay off that card quickly, is preferred. It is also possible to tap your reserves to pay for emergency repairs of your home or car if your main checking account or credit cards are not enough.
What not to use my Reserve Cash for
Here are some great examples on what not to use your reserve cash for. Don’t use your reserve cash for the following.
- Buy a new dress. It might be ARMANI, but that does not matter this money is for emergencies not to look good for a night out.
- Throw a large party. Yes the talk of the town will be how awesome that party was with the live band and the fireworks display. But in all reality is one night worth it.
- Take a vacation. You guessed it. DONT DO THIS! you might have 10-15 thousand dollars in your account and the trip to Europe. If you want to go save the money for this trip away from your cash reserves.
- Buy a home. Believe it or not, it is best to keep your reserves in the bank then to use it as a down payment for a home. It is best if you can save the money separately to purchase a home. Also your reserve account will make it easier to buy a home, lenders love extra money that is simply sitting there for emergencies. It is ok to tap your reserves a little for last min purchasing expenses for a home but do not drain it for the down payment.