How do you financially protect yourself from the ups and downs of life?
You can diversify your portfolio, you can buy insurance to replace your car and house. But if you get laid off.. or some other bad stuff happens to you what is the only thing that will allow you to keep moving forward with your head on straight?
The answer is…cash in the bank.
Having cash will allow you to make smart long term decisions, as opposed to, quick bad ones. If you are desperate for dough and need to make the mortgage payment you will be looking for a quick fix.
So how much cash is the right amount?
You can’t put all your money in the bank because you will forfeit compounding returns which you need for retirement and you can’t put nothing in their either.
The experts recommend 3-6 months of EXPENSES, not salary.
3 months if you’re married and you have a working spouse.
6 months if you’re single.
But in reality, you should think about the number YOU need. It should be the amount of cash that you need in the bank to pay your bills and allow you to sleep soundly at night. So, adjust these numbers UP if you want to take extra precaution or have upcoming expenses.
I know saving cash is not exciting but if something were to happen, you will be very grateful to have the money available.
More than once, I was very lucky to have extra bucks available. Professionally and personally I have had to dip into the emergency bucket and thankfully I was able to come out ahead because I didn’t have to freak out about the next bill that was due.
So where is the best place to keep the cash?
Let me be clear–it is not under the mattress or in a safe in your basement. You should keep your cash in a readily available account either at the local bank or an online bank.
But not in a checking account paying 0%. At most keep 1 month of expenses in there.
Everything else should be in a savings or money market account. The current rates can be compared at www.bankrate.com.You will earn more at an online bank mainly because their overhead is much lower.
For example, right now Bank of America (Brick and Mortar) is paying around .03% vs. Ally Bank (online) 1.45% Think about how much interest you are giving up by keeping your savings in a local bank!
By the way, they both have the same FDIC protection!
The bottom line is you should protect yourself financially by having money in the bank. The rainy day always comes when you least expect it and having cash available will allow you to weather the storm. I promise.
-Jared
