In times of crisis, you don't want to be shaking pennies out of
a piggy bank. Having a financial safety net in place can ensure
that you're protected when a financial emergency arises. One
way to accomplish this is by setting up a cash reserve, a pool
of readily available funds that can help you meet emergency or
highly urgent short-term needs.
Most financial professionals suggest that you have three to six
months' worth of living expenses in your cash reserve. The
actual amount, however, should be based on your particular
circumstances. Do you have a mortgage? Do you have short-term and long-term disability protection? Are you paying for
your child's orthodontics? Are you making car payments?
Other factors you need to consider include your job security,
health, and income. The bottom line: Without an emergency
fund, a period of crisis (e.g., unemployment, disability) could be
financially devastating.
If you haven't established a cash reserve, or if the one you have is
inadequate, you can take several steps to eliminate the shortfall:
- Save aggressively: If available, use payroll deduction at
work; budget your savings as part of regular household
expenses
- Reduce your discretionary spending (e.g., eating out,
movies, lottery tickets)
- Use current or liquid assets (those that are cash or are
convertible to cash within a year, such as a short-term
certificate of deposit)
- Use earnings from other investments (e.g., stocks, bonds,
or mutual funds)
- Check out other resources (e.g., do you have a cash value
insurance policy that you can borrow from?)
Your credit line can be a secondary source of funds in a time of
crisis. Borrowed money, however, has to be paid back (often at
high interest rates). As a result, you shouldn't consider lenders
as a primary source for your cash reserve.
You'll want to make sure that your cash reserve is readily
available when you need it. However, an FDIC-insured, low-interest savings account isn't your only option. There are
several excellent alternatives, each with unique advantages. For
example, money market accounts and short-term CDs typically
offer higher interest rates than savings accounts, with little (if
any) increased risk.
Note: Don't confuse a money market mutual fund with a money
market deposit account. An investment in a money market
mutual fund is not insured or guaranteed by the FDIC. Although
the mutual fund seeks to preserve the value of your investment
at $1 per share, it is possible to lose money by investing in the
fund.
When considering a money market mutual fund, be sure to obtain
and read the fund's prospectus, which is available from the fund
or your financial advisor, and outlines the fund's investment
objectives, risks, fees, expenses. Carefully consider those factors
before investing.
It's important to note that certain fixed-term investment vehicles
(i.e., those that pledge to return your principal plus interest on
a given date), such as CDs, impose a significant penalty for early
withdrawals. So, if you're going to use fixed-term investments
as part of your cash reserve, you'll want to be sure to ladder
(stagger) their maturity dates over a short period of time (e.g.,
two to five months). This will ensure the availability of funds,
without penalty, to meet sudden financial needs.
Your personal and financial circumstances change often--a new
child comes along, an aging parent becomes more dependent,
or a larger home brings increased expenses. Because your
cash reserve is the first line of protection against financial
devastation, you should review it annually to make sure that it
fits your current needs.
To learn more about our CD offerings visit one of our Bank Office
locations or visit CNBank.com/CD.
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