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Cash Reserves
Learning Center • financial tips • cash reserves • insurance • savings accounts • growth investments • taxes • retirement • estate planning  |
In proper financial planning, there is always a cash reserve. A cash reserve account is usually a money market fund or a tax-free bond fund. This account should have check writing ability so you have immediate access to your money. These funds can also earn tax-free income.
A good cash reserve account takes the pressure off your other long-term investment accounts. You need it, for example, if your mother just went to the hospital on an emergency and you need to fly back there to be with her. You need a plane ticket, money to rent a car when you get there, and extra money for food and supplies and other things.
The general rule of thumb for a cash reserve is that it should equal three months' expenses when you are working and six months' expenses when you are retired.
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Your cash reserve is a separate investment account so that you won't have to sell part of your retirement accounts or investment funds or savings accounts, and pay surrender fees and extra taxes, when you need cash in a hurry. If you cash in part of a retirement fund prematurely, you probably will have to pay income taxes, penalties and surrender charges. The same could be true of early surrender of savings accounts or investment accounts.
A very important use of your cash reserve account would be if your company is downsizing and you will be terminated next Friday. You need a cash reserve to replace your paycheck until you find a new job.
The general rule of thumb for a cash reserve is that it should equal three months' expenses when you are working and six months' expenses when you are retired.
Peterson Money Books
Book: RICH By Choice, by Erlend Peterson, CFP
A Complete Guide to Your Financial Success
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