Personal Finance – How to Properly Build Emergency Reserves

Personal Finance – How to Properly Build Emergency Reserves

You must prepare for the worst to come. It could be a surgery or car accident. These things account for a lot of money. We all never know what the future might be. Therefore, we all have to prepare for the unexpected. Truth to be told, all smart people do it.

People have been saying that one must prepare ahead and leave 6 months of cash reserve in hand. This 6 months amount of money could be used to sustain life expenses and such. The question is how much to put in? Will it be too much for 6 months? In fact, some people question the 6-month period to be too long.

The three-month savings reserve

You should go for this short one if you have a 401(k) account for example, or if you have friends and family who you can borrow money from. This method is suitable when you need to keep things simple and want to optimize your other investments. It is also suitable when you have a steady stream of salary from your work.

The six-month saving reserve

This is a slightly larger amount. It is most suitable when you know you cannot rely on other people or places instantly. Therefore, you have the extra amount of cash to rely on in case something goes wrong with your income.

The one-year saving reserve

Predict your income. This is especially true if you want to venture into business and quit your job in doing so. However, most of the time, it is not smooth sailing. Starting a business can have negative cash flow during the first few years. When you know your income is not stable at all, be sure to have the amount of money that can last you a year.

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Credit cards can be relied upon

In times of emergencies, you can definitely rely on them. Why is this so? This is because you have the luxury of spending on credit and paying your debt later. But this can backfire if you spend too much. So, the proper advice is to still prepare a three-month cash reserve for living expenses as described earlier.

The golden rule is always count your expenses. Write them down if you can. Whenever writing is involved, there is success. In fact, you will see a common pattern between most successful people. They write their goals and their actions down all the time.