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Having Appropriate Cash Reserves

Having Appropriate Cash Reserves

| August 13, 2020
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It is always important to have a sufficient rainy-day fund, but with the current low rates and effects of inflation, it can be a leave you feeling a little wet. Each household is going to be different but here are some general guidelines. Most textbooks recommend three to six months of cash reserves necessary for fixed expenses like mortgage, car payments and groceries and that is a reasonable starting point. Which factors would justify less or more cash on hand?

 

A household with two stable incomes could afford to keep less in the bank especially if either of the incomes would cover the fixed cost. A household with one income should have a larger emergency cushion, especially if the other partner is not capable of working to support the family.  

 

We are in Los Angeles and advise many in the entertainment field where job security can mean knowing what show you will be on for the next six months. I would recommend closer to one year of emergency savings in this case or for anyone else with less job security. Another scenario where a higher amount of cushion would be recommended is those in retirement or transitioning into retirement. The reason being instead of accumulating assets by dollar cost averaging, a transition has been made to withdrawing investments and an additional reserve can prevent the need to sell assets in a down market.

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