An Introduction to Cash: Part 2 of 4

How Should I Build Up My Cash Reserve?

If you are like the majority of Americans, chances are you have too much stuff and probably way too much stuff. Many experts agree that if you have not touched something in a year, that there is a good chance that it is taking up space. Consider selling it. If you are like the one in ten Americans who have a storage locker, this should apply doubly. Not only do you most likely have stuff that you are not touching, you are paying for the privilege of not touching it. In other words, it is most likely time to liquidate some of your personal property. Note that this does not necessarily apply to items that are being held for investment purposes.

Depending on how much you have to sell, this could easily translate from several hundred to several thousand dollars that you now have to put down for your cash reserve. If you have gotten out of a storage locker in the process, this could reduce the amount that you need to save for your cash reserve as well. Talk about win-win.

Assuming that you have established a budget, you will have fixed expenses and discretionary expenses. For those who do not have any cash reserve and no debt, I recommend that you save 80% on any excess funds above fixed expenses to go into the cash reserve until they have at least one month’s worth of expenses saved. For those with high interest debt, I recommend that 40% be used to pay off the debt and the other 40% be used to build up an emergency reserve until you have months’ worth of expenses.

 

I have one month’s worth of expenses saved and I no longer have to live paycheck to paycheck. What should I do now?

If you have high interest debt, chances are that this should be a substantial focus on your excess money.  The major exception to this is if you have free money available to you either in the form of a discount or matches to retirement plans made by your employer. I have a very hard time arguing with free money. If you have an opportunity for free money, I suggest you take it.

Otherwise, high interest debt repayment should be your focus. At least 80% of your excess funds should be going to accelerate debt repayment. According to a recent Bankrate survey, the average credit card rate is currently is 13.71% for fixed and 14.48% for variable. (As a side note, if you run across an investment advisor who guarantees returns greater than this that is not somehow in effect subsidized by a workplace plan, be extremely skeptical, and let me know who it is).  Pay off your high interests debts.