The world we live in seems to have changing economic climates with high rates of inflation, stock market crashes, job loss, soaring expenses, and world economic volatility. When economic shifts arise, individuals and families that have set cash aside appear to navigate better through financial strains and concerns. Having a cash reserve is like having financial protection as it ensures a sense of security and flexibility during uncertain economic times.

One of the biggest financial steps an individual can take is to create a cash reserve as this will give him/her the ability to survive emergencies, continue current lifestyles, make wise financial decisions, provide a sense of comfort regardless of the level of income, and grant financial security in the long run.

What is a cash reserve?

A cash reserve refers to an amount of money that someone sets aside for potential emergency purposes or unforeseen financial issues. These sums are not meant for earning purposes, but for ready use when needed. A cash reserve generally takes the form of savings or money market accounts or other similar forms of saving products which are quickly accessible, to prevent debts and financial instability.

An emergency fund/cash reserve can be spent on:

• Healthcare emergencies
• Loss of a job or reduction of work hours
• Unexpected house repairs
• Car repairs
• Family emergency issues

Having money available in readily accessible accounts ensures that it will be there when it is needed and one will be able to have time to manage or prepare financially when circumstances require it.

Protection from job loss:

The greatest financial difficulty that one may face during times of economic recession is the loss of a job. Businesses are known to have layoffs or reduce hours when the economies turn downwards. Those that have not saved for potential financial issues will not be able to cater for:

• Mortgage/rent payments
• Utility bills
• Food expenses
• Insurance costs
• Transportation

Having savings would allow for essential needs to be paid until an individual is able to secure a new job, reducing stress on an individual’s finances and allow him/her to job search in peace.

Helps to deal with rising living costs:

inflation means that a price of a product or service is going to increase over time. As such, living expenses such as food, gas, accommodation, and healthcare may escalate rapidly when economies are in crisis. An individual/family who has a cash reserve would be able to afford the increased expenses without having to take out a personal loan or a credit card in order to balance their expenses. This way an individual may not have to make changes to their lifestyle or immediate drastic cutbacks.

Reduces reliance on debt:

Any unexpected costs often require borrowing from friends/family or from an institution in the form of a personal loan or credit card. Though this might solve immediate financial needs, it will most likely become a problem in the long run as it causes one to fall into debt. A cash reserve would help eliminate these issues as individuals would not have to rely on loans and hence:

• It helps individuals avoid unnecessary debt
• An individual’s credit score would not be jeopardized
• Stress would be eliminated as one would not have any recurring financial liabilities
• Financially unwise decisions would not be made

Provides peace of mind:

In economic uncertainties and possibility of a financial crash, an individual might experience extreme stress and panic. This can be greatly alleviated by knowing that one has set money aside for financial difficulties in case such a problem arises. An individual no longer has to worry about the financial stress and can be calm and focused when faced with financial setbacks. Having a buffer would enable individuals to be more confident and make good financial decisions even during turbulent economies.

A strong financial buffer helps individuals to build confidence in any economic environment.

Supports smarter investment decisions:

Markets usually face sharp fluctuations and instability when economies turn weak and poor, and as such investors might not have available money from savings to cater for financial burdens, resulting in forced selling of investments at bad times causing them substantial financial losses. Having cash reserves readily available, ensures that investors would not be forced to sell their investments at depressed prices when markets plunge, and would allow them to stick to a long term plan.

Create financial flexibility:

Changing economies may lead to new possibilities in life; however one has to have money in his/her saving account to be able to cash in on these opportunities as they arise. These include:

• Going back to school/getting a higher education
• Starting a new business
• Making a deposit on a house
• Buying a car

Taking advantage of opportunities available during an economic slowdown will ensure an individual does not stagnate financially but grow, as opportunities would not be missed by the lack of cash.

What is the amount that one must have in the cash reserve?

3-6 months of everyday expenses have been recommended by experts as an ideal amount for cash reserves for every individual. However, depending on the circumstances of an individual (their stability, family and their commitments), the amount might differ. An individual with multiple dependants or unstable income sources may want to ensure that they have more than six months worth of savings to depend on.

Building money at a slower pace would be ideal rather than trying to make the entire savings over a short span.

Strategies for saving for a cash reserve:

Regularity is key when trying to build cash reserves. Some important saving methods are:

• Make goals: work towards a desired cash reserve amount based on current cost of living and responsibilities.
• Automated savings: have an automatic transfer set from your main account to your savings account monthly.
• Reduce expenses: analyze your spending patterns to know where you can make savings that go towards your cash reserve.
• Unexpected income: if you are fortunate to get a bonus or tax refund, you could decide to put this into your savings for cash reserves.
• Keep track of your progress: review how much you have saved towards your goal regularly and make adjustments as needed.

Saving small sums regularly will lead to great returns on a large cash reserve.

Conclusion

Creating a cash reserve is perhaps the wisest financial strategy individuals can undertake when undergoing difficult economic times. It acts as a vital financial backup to deal with all sorts of situations ranging from losing a job, increase in living expenses, emergency situations to financial instability. Instead of taking personal loans or rushing into important financial decisions, a person with a cash reserve is better equipped to overcome obstacles, ensuring financial safety and peace of mind throughout. The habit of regularly saving will form the very foundation of one’s immediate financial stability as well as his/her long-term financial security.