Having an emergency fund is always touted by financial experts as one of the first things you should do to get your finances in order. There are also many points of view as to how much cash reserves you should have, and just as many opinions on where to put it. But what is not spoken of enough are guidelines on when it is okay to tap into those reserves.
To set the record straight, the amount of reserves one should have is based on the amount of cash someone is comfortable with to sleep well at night—that could be $5,000 or $50,000. But it doesn’t stop there. The general rule of thumb is to have 3-6 months of expenses for a household or individual that has a regular, steady income. For someone with a variable or contingent income such as a sales person on commission or a small business owner, at least 6-12 months of expenses is necessary to weather through the ups and downs.
For example, if your monthly expenses are $3,000 per month and you earn a steady, predictable salary, you should have at least $9,000 – $18,000 in cash reserves. However, if you can’t sleep well at night unless you have at least $20,000 in cash, then that is more important for your peace of mind.
So when is it appropriate to tap into your reserve fund? Your cash reserves fund should serve two purposes—in the event of an emergency, and to take advantage of opportunities. An emergency could be if your HVAC unit breaks down during the summer in the middle of a 100-degree heat wave, and your home becomes unbearable to live in as a result of the heat. Determining which event is both urgent and important to warrant the use of your reserve fund is generally easier than figuring out when to use your reserves to take advantage of an opportunity. Having a sufficient amount of cash on hand puts you in a position to take advantage of opportunities as they present themselves.
So how do you know which type of opportunity justifies using your reserves? Buying something because it is on sale is not an appropriate use of your reserves. The main criteria should be whether taking advantage of this opportunity enhances your ability to generate income or produce a return on that money. In other words, it is about making an investment as opposed to simply incurring an expense.
One example would be temporarily tapping into your reserve fund to attend a seminar or conference where you would meet and network with influential thought leaders in your field or industry. Another is taking a weekend course to add a specific credential to your resume to make you more marketable, or learning a craft or skill to enable you to launch a business or side hustle to increase your income.
Naturally, as in any investment you make in yourself, you need to follow through to ensure you get a return on that investment. This will keep you from indiscriminately accessing your reserve fund anytime you get a flyer in the mail or see an advertisement for a seminar coming to your city. The point to using your cash reserves as opposed to saving separately over time is that you can take advantage of these opportunities as they come. After all, the definition of luck is preparation meets opportunity. You can’t always plan for everything ahead of time, but being prepared by having cash on hand is critical to putting yourself in a position to succeed financially.