How to Build a Cash Reserve Worth 3 – 6 Months of Salary

Posted on by Forest in Saving Money & Finances

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Thanks go out to Tom Becker again for this great guest post

When times are tough and money is tight, the last thing you might want to think about is building up a cash reserve. Sure, you have that change jar in the bedroom, the $50 government bond from your seventh birthday, and a couple bucks stashed in your underwear drawer, but other than that, you’re out of luck when it comes to financial emergency preparedness. Still, it’s hard to deny that thinking of having 3-6 months of your salary stashed away, just in case, wouldn’t give you a little piece of mind.

If you want that financial security, but just aren’t sure how to go about getting it, here is a guide that can help you get started!

1. Compare Expenses and Income – To start building your cash reserve, it is important to understand you personal finances. Review monthly incomes streams and compare those to your monthly expenses. Hopefully, you’ll find that you have a little money left over each month to begin your stash. If not, you have some work to do.

2. Determine Monthly Savings – Once you have compared expenses to income, you can start to build your monthly savings plan. If your current expenditures exceed your income streams, review your expenses thoroughly. This way you can look for ways to reduce spending so that you will have extra money to create a cash reserve. Determine what is a reasonable amount of money to set aside each month and look at this amount just as you would any other bill, but instead of paying it to a gas or electric company, pay it into a personal savings account. Consider also any outstanding debts that may need to be paid (especially those with higher interest rates) before considering how quickly you can start your cash reserve. Remember, the more you can set aside each month, the quicker you can create an emergency fund worth 3-6 months of your salary.

3. Set a Goal and Time Line – It’s nice, even for the best of savers, to have goals and time lines to meet in order to feel that sense of achievement when they’ve reached their objective. Goals and time frames for creating your cash reserve may be based upon personal preferences, situations, and saving abilities. Just remember, goals that are either too easy or too difficult to reach often become ineffective, so try to set your goals as realistically as possible. Little goals along the way, such as seeing how fast you can reach $500 or $1000 can make the saving process more interesting, rewarding, and effective.

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4. Stay the Course – If you’ve decided that setting aside $200 a month for 24-months will provide you with three months of emergency income, then it is important to ensure you stay on track. The easiest way to lose sight of your goals is by beginning to stray, skipping a month here or there or just putting in $50 rather than the full $200.

5. Review and Revise – Just because you’ve set a goal for yourself to reach your cash reserve, this doesn’t mean that you can’t adjust it part way through your time line. If $200 a month is your goal amount, but you find that you can contribute $400, consider adjusting your goals or time line. By contributing that higher amount, you could find yourself with double your expected reserve at the end of two years, or you could meet your three-month salary reserve goal in half the time. If you’ve set your sights too high, it is fine to readjust your goals as well, just remember to try not to lower them too much, as loftier goals often act as better motivators.

Tom Becker writes about managing money for MoneyCompare.com.au, an Australian comparison website offering consumers down under a means of quickly comparing the best savings accounts to help you build an emergency fund faster.

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