How to Build a Cash Reserve

Quick tips to make it through major financial disruptions like job loss or significant life changes

A cash reserve is a separate chunk of money you don't dip into and save it for unforeseen and costly life changes like medical issues, significant home repairs, or loss of income if you lose your job. Having a cash reserve is a crucial safety net. No safety net means more potential and expensive debt. So the big question: how much should you save and how?

Explore your options for building a cash reserve

There are different ways to save for a cash reserve and opinions on how much to save. Financial professionals recommend saving three-to-six months of your living expenses or your income—and the choice is up to you! Choose whichever amount lets you sleep at night, knowing that if you had a significant change in your life, you'd make it through.

The second part of this equation is how to hold this "reserve"? Is this a cash-under-the-mattress suggestion, a separate savings account, or an investment in a cash alternative like a CD or short-term bond fund?

How much to save for your cash reserve

Depending on your lifestyle, income, job security, monthly costs, and dependents, we suggest starting with a goal of three months of your typical living expenses. Update your nest egg as you go. If you have inconsistent or unstable employment, potential upcoming substantial expenses, or medical bills, you may be more comfortable with more. If you have very stable employment and a stable income, a smaller reserve may work for your lifestyle.

Where to save your cash reserve

Having a substantial amount of liquid (accessible) cash in your home, under the proverbial mattress or in a safe, is a bit risky and most likely not a good idea. Neither is leaving all of your cash in an illiquid CD because they often cause withdrawal penalties and fees. The best answer might just be a traditional savings account. A separate savings account with an interest rate allows you to access this cash whenever you need it without penalties and fees.

Getting mentally prepared to save for your cash reserve

The idea of building a cash reserve may feel overwhelming. Most of us don't have three months' worth of expenses lying around in cash, for starters. And, not to mention, if you have student debt or children or are aggressively trying to save for retirement, a cash reserve may not make it to the top of your priority list. If you're saving for several things at once—excluding high-interest debt, which you should typically tackle first—consider putting funds into each of those other goals regularly versus accomplishing one at a time.

How to build your cash reserve

Try the Budget Calculator in our app! We'll coach you through identifying how much money you have to save once you account for your living expenses and debt payments. We'll help you create a stick to a monthly savings goal to reach your ultimate cash reserve amount.

Here's a quick review of how we'll walk you through the process of creating a cash reserve:

1. Determine what you spend on a monthly basis.

   Your first step is to know your cash flow and budget. Don't have it set up? No problem. It's time to create your budget.

   
   

2. Choose your goal.

   We will automatically suggest three months of your income as your goal. Feel free to save more!

   
   

3. Create a habit of saving.

   Once you create your budget using the Budget Calculator in our app, we'll create a monthly bucket for you to save toward this fund. Of course, you'll feed this fund after you account for your living expenses and debt payments. We'll coach you through all of that! A helpful hint is to set up an automatic transfer from your Checking Account to your Savings Account.

   
   

4. Clean up your checking account.

   At the end of the month, make the habit of transferring any excess money to your cash reserve, until you hit your goal. From there, our Budget Tool in our app will coach you where to spend that next dollar of income.

5. Cut your expenses.

   We'll coach you to identify the difference between wants, needs, and savings so you know how to prioritize your spending. Ultimately, we help you determine where that next dollar will go.

   
   

6. Continually assess and adjust contributions.

   Using our Budget Tool in our app, you'll easily be able to track how much money you're saving each month and adjust when necessary or possible.

   
   

Get started

Time to visit our Budget Tool in our app and start saving for your cash reserve!