There are all kinds of reasons why having a cash reserve is important. The biggest reason that you should have a cash reserve is for emergencies. You could have an accident and suddenly find yourself in a medical emergency where your insurance company may not pay all of your bills. Or you may have an emergency related to the cash flow of your household. This could happen if you lose your job or find yourself unable to work for a while. Other emergencies may be related to materials that fall into disrepair. For example, you may need to repair something in your car or your home water heater may stop working. There are thousands of little things that keep our lives running smoothly, if just one of these things is missing or needs to be fixed, suddenly you find yourself in a situation where you need more money than you might have.

A cash reserve not only provides you with the peace of mind that you want and the ability to afford unexpected expenses, but it also protects you from the long term negative effects of going into debt. It is important to have a cash reserve so that you are able to fix whatever problem you have encountered, without creating a completely new set of problems that are related to high interest rates and possible negative credit score consequences. Think of it this way, a cash reserve keeps you from having to take out loans. Every time you take out a loan, you automatically owe more money than what you got in the loan. This is because of the cost of interest. If you have to pay a high interest rate, it may only take one or two major expenses to put you so far behind that it is going to be very difficult to dig your way back out. It is better to be frugal and contribute to a cash reserve ahead of time than have to cut back because you have compromised your financial situation so badly that you risk an even greater threat such as losing your house.

So how much should you keep in a cash reserve. Some people suggest keeping enough money in a cash reserve to cover the costs of living for 6 months in cash reserves. Some suggest keeping your money in a place that earns the most interest (short term CD, money market, etc.) If you find the penalty too high for pulling the money out of an account like this, you might consider keeping just enough in a savings account to cover you until you can get to the money that is invested with a better return.

Cash reserves do not just happen. It tales careful planning and regular deposits to make your cash reserve grow over time. Many people wonder where they are going to find money that they need for a cash reserve when the money that they have barely pays the bills. In order to start building your cash reserve, you will need to start cutting back in other areas so you can save. Although it is going to require some conscious thinking, time, and effort in the beginning, imagine how good you will feel once you realize that you have enough of a financial buffer in your cash reserve to make sure you and your family will be taken care of if something unexpected were to occur.