Complete Guide on Emergency Funds and Cash Reserves

One of the best personal finance concepts we’ve ever heard is of the ‘emergency fund’.

A good chunk of people disregards the idea of using emergency funds as an essential part of personal finances. However, they fail to anticipate their ultimate use during tight spots.

Emergency Funds Are the First Line of Defense Against Financial insufficiencies

An emergency fund you build can be a good resource when your cash money needs flexibility. It can be put to use when an urgent need arises, and it is almost unavoidable.

Here are the 3 main reasons why you need cash reserves

Of course, life can be quite taxing emergency falls upon you. Unexpected expenses don’t come knocking whether it’s car servicing, paying medical bills, or phone repairs.

1. Avoiding Increasing Debt

   If you don’t have enough cash available to pay off debt or buy essentials during unemployment days, no other alternatives can provide a positive comeback.

   At max, you can use credit cards with heavy interest rates or personal loans which can be even worse.

2. Better Manage Investments or Improve Economic Volatility

   If you already have enough investments in place than its important to remember nothing can be fairly predicated in life. After retirement, most elderly avoid being in a financial shell & therefore engage in liquidating their investments whenever there’s a fall in the face value.

   

   It’s not just a theory borrowed from the stock market, the term “volatility,” can also be inclusive when you’re running short of cash due to other compelling circumstances.

   Even when you own several properties, it’s likely that the prices may fluctuate & you lose some money that you may have considered. So, with market volatility, it is best to be careful than being over-confident about your actions. 

   The main question is how large should your cash reserves be? Should you at all depend on investments for your everyday lives?

3. Safeguard Against a Job Change

   A job change cannot be controlled unless you have voluntary options in hand. Job changes are inevitable and therefore devise a way around. As an ambitious employee, you may like to grow by quickly shifting jobs which could be as frequent as 4 times in 5 years.

   Unexpected layoffs or termination can be slightly more intimating compared to a planned change of job. So, to cover up the gap you must have your financial preparations in place. if you take a voluntary exit, it’s best to prepare for the change. 

   Having an emergency fund can give you the surety to take up an independent career opportunity & create a financially relaxed environment.

Choose An Option That Fits Needs of Your Family

All mentioned pointers must be essentially considered but you may choose to have a definite savings target which fits good your family, in line of convenience & needs.

Importance of Cash Reserves During Retirement

When you’re retiring, you need extra cash reserves along with standard emergency fund, if you primarily plan to survive on your investments. When you already have cash reserves, you can live off on the cash instead of selling your investments straight away. 

There are many intricacies of retirement planning, so better consult a financial expert on the best approach to follow in your specific situation.