All of us know that we’re supposed to have a cash reserve right? There are always going to be emergencies that come along that we didn’t expect, and that’s when our cash reserve is the most important. So, why is it that many of us struggle to even have a comma in our cash reserve? We’ve gone through our whole lives attempting to save, but we don’t even have a thousand bucks in cash. Here are five reasons why your cash reserve might not be working.
1) It’s Too Accessible – Many of us are just trying to beef up our checking account and keeping our emergency money in with the funds we use to pay bills. When you do this, it’s just way too easy to dip into your cash reserve. Instead, you need a completely separate account that you can’t spend with a debit card. If you really need to use the money, you’ll have to make a transfer either online or at the bank. This small barrier will help keep your reserve safe.
2) Not Enough Flexibility in Your Cash Flow – One of the biggest reasons we dip into our cash reserves is because we don’t have enough cash flow from month to month. Money is so tight that the slightest unexpected expense leads us into our reserve. To ensure that your cash fund doesn’t go anywhere, you need to reduce your monthly expenses.
3) Too Much Instant Gratification – We live in a world where everyone expects to get what they want right now! I urge you not to be that person. Most of the time, what we want and what we need are two totally separate things. If you don’t need that special something and you’re going to have to dip into your reserve to get it, just don’t buy it! I know it can be tough to walk away, but there are always deals to be had elsewhere.
4) You’re Feeling Rich, Time to Spend – Everyone has their number where they start to feel wealthy. For some, this is $1,000. For others, it’s $10,000. When their cash reserve reaches “their number”, they suddenly feel like they are rich and can afford to spend some money, rather than just leave it in their account for a rainy day. My friends recently did this when looking for a car. Initially, they were only going to spend $6,000, but when their cash reserve kept growing and growing, so did their “need” to have an expensive car! All of the sudden, they spent $13k on a car rather than their initial plan of $6k. Now they’re feeling tight with money. Go figure.
5) No Incentive to Keep It There – Saving money is honestly pretty boring. When you put that money into a savings account, it probably earns 0.05% interest, which equates to a few bucks a year. Your savings don’t have to earn such a low amount though. There are some banks out there that will pay more than 1.0% for your savings, and if you have the will-power to have your reserves in your checking account, you could earn more than 3% at some credit unions. Getting $20 or more per month is way more fun than a dollar or two.
I think this happens to way more people than we think -> “You’re Feeling Rich, Time to Spend” especially with young adults who aren’t used to having money in the bank. It’s easy to start feeling like you have a lot of money after the first few thousand when you haven’t had much in your bank account the past few years while you were going to school.
I used to go through this total boom/bust cycle when I first worked for myself. Great payday = steaks. Horrible payday = Ramen. I didn’t start getting ahead until I learned to manage the cycle instead of letting it manage me.
I never start feeling rich when I have extra cash in my checking account. I start feeling greedy! Muahahaha!~
Transfer it to stocks! Then you’ll feel rich….
Good post Joe! I would agree with all of these, especially #1. Having that separate account really can help you build up your savings, assuming you have the right mindset to begin with. We have the large majority of our cash pile with USAA actually so if we feel the need to dip into it that would require logging in over there and transferring that money over to our usual bank account. It’s just something about doing that that always makes us think about whether we really need to move the money or not.
USAA is generally the best place to go for anyone who’s eligible. They were always my #1 choice. Good stuff.
I really needed to hear this because I’m guilty of all those things, and May has just been pretty bad as far as spending goes. I feel like I lost a little of my frugality mojo and need it back!
You can get it back! 😉
I’m right there with you Tonya! We have to get our spending back under control too.
Joe, A large cash reserve helps me feel confident that I can handle any financial eventuality. I’ve trained myself to keep impulse spending at bay (most of the time:) ).
“Most of the time” is key for me, too!
#5 is my favorite Joe,
I think people should look to real assets if they have some extra cash laying around.
Be smart.
Buy all of the gasoline that you will use in 2014 THIS YEAR.
This automatically locks in a return for you next year.
You can also buy gold and silver and hold for a few years.
Don’t wait until it’s too expensive to buy.
Once the real estate bubble pops again golds going past $2000.
I never thought about buying gas early. Doesn’t gas evaporate? How do you get around that? Interesting comment, Darnell…
I really liked the blog. I agree with #1. You really need to hide the money from yourself. For the impossible saver, another option in the equity in a home. Yes, I realize that this disappeared a few years ago. But we are seeing prices increase and thus equity will build up again. This equity can be used in a pinch. The problem is that in the pinch there is usually not the extra cash to pay on the HELOC.
I like the idea of equity in the home as long as you have a cash reserve. It’s difficult to get at equity when you lose your job and really need money. Nobody will give you a loan to reclaim your equity….
I think you always need a compelling reason for savings. Whether it is for a vacations or something else you have saved for, you need something. If you don’t have that compelling reason, it is too easy to spend it.
Amen, KC. The reason for spending is always right in front of you, so it’s far more compelling!
I think a lot of folks need an incentive to stash money away, at the same time, many of them get excited as the dollars build and then make rash decisions to buy crap they don’t need…
Our tight budget gets the best of us sometimes. Luckily, our emergency fund is in a money market account that takes 3 days to transfer, so I don’t really EVER touch it. My main issue is not touching the “extra income” form month to month to cover extras. That’s why a monthly budget re-balance before the month begins always helps 🙂
Very true. Accessibility is perfectly the number one reason because cash reserve is oftentimes mistaken as part of the buffer budget.
#5 is definitely what gets us. Even as we’ve been piling up money with the intent of paying Mr. PoP’s folks back (they loaned us $50K so we could buy our duplex 3 years ago), we’re looking around and seeing if there isn’t something else we should be investing in rather than paying them back two years early.
Not the worst problem to have, I know. But it’s been a bit weird at times.
Accessibility seems to be the main issue. It seems that we may have reprogrammed our habits to pay closer attention to plastic spending.
I agree with not having the emergency savings in a main account. If it’s in the account it will likely get spent. When it’s out of mind out of sight and I pretend it’s not there than I won’t touch it. Great post!
Number two is definitely our issue. With our debt load so high right now, unexpected expenses are a killer to our emergency savings. We’re working on it, though. 🙂
One of my employees has been doing really well with paying off some bad debts and building up savings. I don’t offer too much input because I’m the boss boss, but I’ve been really proud of her, until two weeks ago, she went out and bought a brand new car! I can’t say anything because I’ve certainly done that before. It’s hard to watch someone else repeat your mistakes. I agree that having a little bit of money can make you want to go out and spend. It took a long time to see that having a good amount of savings makes me more happy than things I could buy.
The what am I saving for is one that I hear all to often. Its like people don’t like having money just sitting. There as to be a reason other then just in case or to build up. Buying clothing and cars becomes that cycle they live in. I think having your money accessible should be a positive but often its not.
thank you! I really liked this post!
Great points, Joe. I agree with #3. Too much instant gratification empties your cash reserve before you even realize it’s gone. As a father I have learned to keep impulse buying under control and save for the rainy day. These days I’m trying to teach my son to manage money 🙂