Why build a cash reserve
Most people have heard the sound advice, and believe it, that they should build up a cash reserve. The problem is that many people really are not sure as to why they should do that. Other than the obvious reasons, why have cash on hand? Wouldn't it be better to invest that money? Pay down your mortgage? etc.? The following are five reasons why you should build a cash reserve:
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- Rainy days do happen. There are times when the world appears to be stacked against you, and a cash reserve is going to be the life boat that gets you through. No matter how well prepared you are, there are times when cars break down, jobs are lost, injuries happen etc. When those things occur, having money to pay the bills, and put food on the table is critical.
- Liquidity.
While investing your money, paying down your mortgage and other things you can do with your money are admirable goals, you should wait to do those until you have a sizable chunk of cash saved. This is because when rainy days do occur, you are going to want your money to be liquid. If it is invested, or in your home, it could take several days, weeks, or even months to access. If you are in a pinch, that won't work. - Helps you make wiser financial decisions.
Studies have shown time and again that people who have money in the bank are smarter with their money. They are less prone to make emotional financial decisions, and are not as risky with investments. So, one of the best reasons to build a cash reserve is to help yourself make wise financial decisions so you can be better off financially now and long term. - Keeps you out of debt.
If you have a nice sized cash reserve you will not go into debt as easily. Debts for major purchases like a home will not be avoided with a cash reserve, but debts like buying a washing machine because yours puttered out, can be. You will never be able to stick to a budget, and stay out of debt if you do not have some money set aside for just such incidents as a broken appliance or car. - Establishes good habits.
In order to build a cash reserve, especially if you intend to do so quickly, you have to put some good habits in place. You have to learn to curb your expenditures, to prioritize your spending, and to find ways to reduce the cost on things you will buy anyway.
It is possible to build a cash reserve, and the fastest, easiest way to do it is to learn some tips for how to cut 10-20% of your spending in several areas of your life, including your food, utilities, entertainment, insurance, debt repayment etc. and applying that money to your cash reserve.
