Why you need a cash reserve and emergency fundgsrc2020-06-02T12:43:05-07:00
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As we continue to struggle with the consequences of the global pandemic of the novel coronavirus, there are many lessons that can be learnt from how we reacted and how ready we were to deal with this unique challenge. Most people regardless of current situation would say significant room for improvement regarding response and preparedness is warranted. There will be books written about this event and lengthy analysis of where things were done right and wrong. A first-time mistake in cases as life and death as this one is not easily forgiven. Fortunately, this is a financial blog and the worst thing we deal with are losses of a replaceable asset.
As we reach unemployment that is close to Great Depression numbers, many people look to the government for support. The CARES Act has given individuals and businesses some opportunities to be able to get by. Unemployment has offered additional payments to try and replace lost wages. However, we don’t know how long this will last or how long stimulus will be available.
Many workers live paycheck to paycheck, so it becomes difficult for them to try and build a reserve to cover situations where government assistance is not sufficient. This also becomes a difficult conversation to quite often have with people as the definition of necessity is very different for different people. Was is necessary to go out to eat or to have that vacation? As we see with the isolation, mental health quite often comes into the equation.
I feel one of the realities of every one of us is that there is some dollar amount that can be put away. If you look at putting away a dollar amount every paycheck as a necessity just like buying food, then it will happen. This then becomes more a matter of resolve and mind set then can it be done. Are the sacrifices easy, for many it is gut wrenching and hard choices need to be made. There is an immediate need versus putting away money that will sit in potential, what is the right choice?
Probabilities speak to this as most of us will have a point where we will be unemployed and most probably it will happen multiple times. If this is the case, then we can look at a rainy-day fund as not a potential situation but a circumstance that will happen to all of us. If this is so, we understand that we must do what we can to create some buffer for these situations. The preferred is six months cash reserve but two months or even one month is better than nothing.
We want to control out destinies and financial independence or at least some flexibility allows this to happen. I hope that this provides some insight and incentive to try and create a cash liquid fund that will be readily available in case some unforeseen setback occurs whether it is a layoff or a pandemic that we are going through now.