Since April 2020, more than 52 million Americans lost their jobs. Tens of millions more are working from home. If you’re in either situation, you’re likely saving money in ways you might not realize. For example, you’re likely spending less on gasoline and auto maintenance than you were before the crisis began. You’re probably also not dining out, going to movie theaters, sending clothes to the dry cleaners or traveling as much (or at all).
The reduction or cessation of these activities means you’re probably spending less money each month than you were last winter. Add in the threat that you might experience a sustained reduction of income, and you find yourself with an excellent opportunity and need to increase the amount of money you have in cash reserves.
How much should you keep in cash reserves? First, determine how much you spend each month. Consider only the costs you cannot avoid, such as rent/mortgage, utilities (including internet), food, medicine and insurance. (In a crisis everything else – like Netflix, sorry – is tossable.) Your reserves should enable you to cover these expenses for between three to 12 months.
If you’re spending $3,000 a month on essentials, you should have between $9,000 and $36,000 in reserves. That might seem daunting. But if you’re no longer spending $300 a month on auto-related expenses (lower fuel bill and no parking fees, for example), you can divert that cash into your savings. Ditto for the money you used to spend on restaurants, travel and dry cleaning. You can probably find easy, newfound ways to save.
You should also consider moving some of the money in your long-term investment portfolio into your cash reserves, if necessary. For help with determining how much you need to set aside in cash reserves, and how to build up that account, talk with your Edelman Financial Engines planner.
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