This is from one of my recent weekly "Smart Money Monday" Segments on Waco/Temple/Killeen NBC affiliate KCEN 6.
Why is important to have a cash reserve?
You should have a cash reserve for three reasons: (1) to avoid running up credit card debt to cover unexpected expenses, (2) to have funds on hand to cover your living expenses for a while if you lost your job, and (3) to have money available to take advantage of an investment or other buying opportunity.
How much should someone keep in a reserve?
A good rule of thumb is to have from 3 to 6 months of living expenses in a reserve. If your income is steady and your job is secure, then 3 months might be fine. But if your income fluctuates or your job isn’t secure, then you should err on the side of caution and build a larger reserve.
How should someone balance the need to keep the funds liquid so they can be accessed quickly with the desire to earn higher returns?
Your cash reserve should have several levels in order to strike a balance between liquidity and higher returns. Consider using the following types of accounts and investments for your reserve funds:
Checking Account – Keep enough in your checking account to avoid bouncing checks and overdraft fees.
High Yield Savings or Money Market Account – This should be the next level of your reserves and can be kept at your local bank or online. Make sure it’s linked to your checking account so you can transfer funds back and forth easily.
Certificates of Deposit (CDs) – CDs earn higher interest rates but most have early withdrawal penalties. You can ladder CDs so you have one coming due every month, quarter, or semi-annually depending on your needs.
No-Load Short-Term Bond Fund – A short-term bond fund will have a higher yield but your principal balance will fluctuate so it shouldn’t be used for money you’re planning on spending soon.
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