How Healthy are Your Finances? Part 3 of Series
Got cash? Well you should. Simply stated, you need cash for the emergencies that arise in life. Whether it is a temporary job loss or your car breaks down, having liquid funds available to cover these emergencies will definitely cushion the financial blow. Even though having an emergency cash cushion is an important step in financial planning, according to the 2010 Metlife Study of the American Dream, only 34% of Americans feel they have an adequate personal safety net.
How much is enough?
Most financial professionals will recommend setting aside about 3-6 months worth of your monthly expenses as a cash cushion. For example, if you spend $3,000 per month, then you want to have at least $9,000 as your cushion. Some feel more comfortable having 12-18 months set aside as their cash reserve. The amount you have as a cash cushion depends on several factors, i.e. how easy it is to replace your income if you lost your job, the number of dependents you have, etc.
Where do you put it?
Once you decide on your target amount, the next step is to figure out where to keep it. Typically you want to spread your cash across a checking, savings, and high yield savings account. The whole point is to have your money working hard for you while it acts as your emergency fund. By keeping most of your reserve in a high yield savings or money market account, you will be able to earn interest over time on your money, although no such return on the account is guaranteed. Typically these types of accounts yield 1-4% on average over time. To find current rates on different types of cash accounts, check out bankrate.com.
For further information about building your cash cushion please email me today! Brittney.castro@Lpl.com
How is your credit? Check out Part 4 in my Healthy Finances series.