Cash reserves for emergencies
You may need to access cash easily and quickly to cover unforeseen expenses or emergencies. A cash reserve should be set aside to cover these situations.
Often unexpected expenses pop up that require quick access to cash. It is important to have money set aside in an at-call account that pays interest, so you have quick access when the need arises without incurring any penalties.
An alternative strategy maybe if you have a line of credit on your mortgage to pay additional amounts off your loan and then be willing to draw these amounts back down if an emergency arises. This may be a more cost-effective option for building a cash reserve.
When determining how much is suitable as a cash reserve think about the sorts of expenses that might occur. For example, what costs might arise for healthcare, home maintenance or car repairs. Would you need to pay for flights or other travel costs if your parents (or children) suddenly became ill?
Some people will aim to build a cash reserve for a specified dollar amount. Others, might look at several months of expenditure or even aim to estimate what expenses might arise.
The benefit of a cash reserve is that you have the money available to meet unforeseen expenses. This allows your other investments to remain invested so you are not forced to sell, possibly at an unfavourable time.
If you earn interest on your cash reserve this amount is added to your assessable income and taxed at your marginal tax rate. The earnings may impact on your eligibility for certain government benefits and concessions.
You should review your needs regularly to check that your cash reserve is holding the right amount of money.
If you would like more information, contact us to learn more.