Stashing Your Cash: How to Create an Emergency Reserve

Having emergency funds in the form of a cash stash is crucial for everyone and serves as the foundation of a well-balanced investment portfolio.  This is especially true for artists and other freelancers whose income can vary widely from month to month because the funds can function as a reserve to draw upon during low, incoming cash flow periods. Once you’ve determined your expenses each month—your monthly nut—you should then decide how many nuts to stash.  Financial experts offer a wide range of opinions on the appropriate number, but for artists and other freelancers I usually suggest ten to twelve months.

Saving the entire amount for even two or three monthly nuts—let alone squirreling away a year’s worth—may seem like a daunting task.  Unfortunately, this can cause procrastination and lead one to never establish this important buffer.   Instead of allowing yourself to become overwhelmed, try adopting some habits and tactics that will help you to build your stash as steadily and painlessly as possible.

One strategy is to first build each nut with cash for a specific expense. For example, save one month’s rent (or mortgage payment) as a start and then build up to two or three month’s worth of housing costs in your cash stash. Once you’ve achieved that, concentrate on adding another expense to those monthly mini-nuts—such as your cell phone bill. Eventually, you will find that you have the full amount of your monthly nut saved for these first three months and can then begin building additional ones. This slow and steady approach allows you to get where you need to be without feeling overburdened.

You’ll want to keep those first few monthly nuts handy and readily accessible, as you may need to draw from them during lean income months.  This means having them in an unrestricted account—such as a savings account—at the financial institution you use regularly.  Keeping those first couple of nuts handy and fluid will give you peace of mind.  Once you begin to accumulate additional nuts, moving them to accounts that are harder to dip into will prevent you from spending them on a whim.

Alternate places for these stashes can take the form of money market accounts, which may have higher minimum deposit thresholds and limited monthly withdrawals, and certificates of deposit, which impose a penalty if cashed prior to their designated maturity.  An added bonus to these accounts is that they usually pay a higher interest rate than regular savings accounts, so your money will be earning a little more for you while still being protected from any binge spending.

Maintaining cash accounts at a secondary financial institution can also be a good saving strategy for a few reasons.  It offers a place to stash several monthly nuts without the funds seeming to be as easily accessible as those at your primary financial place, which will again help to prevent the temptation of spending it on a whim.  You may also find that you can squeeze out slightly higher interest rates on your cash reserves in these secondary accounts—such as at credit unions or in non-government insured money market accounts.  Storing emergency cash nuts at two different institutions will also provide you with diversification and protection in the event that your cash at one place becomes temporarily unavailable due to issues with the institution.

Once you’ve set up these alternative, less readily accessible accounts, another great tool to help you squirrel away your monthly nuts is to set up automatic transfers.  Establishing a regular monthly (or weekly) schedule of moving even a small amount of cash to these accounts will help you to build cash reserves steadily and efficiently.  Rather than trying to remember to move some cash each month—and allowing yourself the opportunity for excuses as to why you shouldn’t move any this time—an automated transfer will keep you on track.  They are straightforward to establish online, will assure you continue to progress towards your goal, and can be easily discontinued or changed as your circumstances warrant.

Once you’ve accumulated your first few monthly nuts, another important strategy can be to start investing in other assets at the same time as continuing to build your cash stash.  The interest that is earned on cash is meager, but remember that its purpose is stability, not returns.  Once you’ve established the safety net of a couple of month’s worth of living expenses, simultaneously building additional nuts and other, more robust assets will help you achieve better returns in your overall portfolio while still increasing stability with your cash stash.

Emergency cash reserves serve as the ballast of your financial ship.  Finding ways to ensure that you consistently build this important resource will help you to achieve your goal of establishing a solid foundation for your financial well-being.  In addition, along with the strength and stability of having an emergency cash stash comes peace of mind—which is something we all can benefit from.


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