Reserve funds is a topic not a lot of people want to talk about simply because they have not given it much thought. According to Bankrate.com, over 60% of Americans could be in trouble when they are suddenly faced with a $500 financial emergency. That says a lot about the present condition of how most consumers view and manage their finances.
The need for emergency reserves stems from the fact that there is no way to predict the future. There are people who calls themselves professionals and still they get the future wrong. The bottomline is that there is not one person who knows what tomorrow brings. This underscores the importance of reserves funds even more.
For a lot of people, the main focus is building up the reserve funds which is ideal. You really need to make sure that you have the money you need in case emergency strikes. This is really the first order of business when you are talking about reserve money. You need to determine how much you need and set out to save up that amount all while you are attending to your other financial obligations.
This is what makes this task a little more difficult than your usual payments because you have to work on it simultaneously with other payments. As you pay for your house, car, credit card, student loans and others – you have to set aside an amount for emergencies. This is why it takes some time to reach your emergency fund goal because you can usually only do it one step at a time.
Using your reserve funds
Now that you have the amount you need to have an emergency reserve, here are a few things you can look into to help you use it. The challenge does not end with you building up the fund. It extends all the way to how you use it. Here are a few thing you need to remember when using your reserve money.
- You must have a clear definition of what an emergency is. One of the things you need is a guideline on when you can use your reserves. This can start with specific situations you reserve funds would come in handy and how you define an emergency. You can also include the level of urgency or how you even define urgency. Is that new bag considered an emergency or a simple want so you can have the latest design when you get to the office the next day? How about that new laptop that came out? Do you want to have it just to show off or do you need it because the one you are using broke down and you need it for your part time job as a designer?
- Be decisive with the amount you need. This simply means that you should not take more than what you need. If your emergency only calls for $800 from your reserve money, you should only get $800 and not get into the habit of rounding it off to $1000. You might end up just using the extra $200 for frivolous expenses. You should know what you need and take only what you need from your reserves. This helps you keep the integrity of the amount intact and makes your emergency money relevant in times of need.
- Use the money asap to lower risk of temptation. Once you take out the money, it is a good idea to use it as soon as possible. The sooner it is out of your hands, the lower the temptation to use it for other expenses. This helps you manage the amount and be able to use it for ins intended purpose. The longer you hold on to it, the more ideas you might have on where to put the money. You might be tempted to try your luck and increase the amount by gambling it away. There are instances where you might win but the statistics of that happening every time is slim.
- Replace whatever you use in your reserves. One of the most crucial steps in using your emergency money is replacing the amount you take out. It does not have to be immediate especially when you are still feeling the emergency such as job loss. But the idea is as soon as you are back up on your feet, you get to work. You need to replace that amount in order to have some form of cushion when another emergency strikes.
- Adjust the amount as your needs change. Over time, your needs would change from the first time you set out to build your reserve funds. It can be having more children, bigger house or a developing medical condition that you have to prepare for. You need to increase the amount of your reserves to cover these life developments. This makes your emergency money relevant as it can cover whatever additional financial needs you might have with these changes.
- Make it accessible. CNBC.com pointed out that it is not the priority of your emergency money to earn a high return. The main thing you need to consider is accessibility on your reserve funds. You need to have the ability to access the money in times of emergencies. You might not have the luxury of waiting for weeks to liquidate or sell investments as you deal with unexpected financial emergencies in your life.
Do not abuse your emergency reserve
Now that you have an idea on how you can use your reserve money, here are a few things you need to keep an eye out for. These practices can be detrimental to how you manage your reserves.
- Using it to buy wants. When you are trying to understand the concept of money in relation to your budget, you should know the difference between your needs and wants. This is a crucial step in managing your reserve money. For some people, there is a fine line between what they need and what they want in life and more often than not, these two intersect and blur the lines. Just like how food is a necessity but eating out every night in expensive restaurants in and around the city is not the way to do it. You need a car to get to and from work but buying a new one every few months can put a serious dent in your finances. The idea is to never use your reserve funds in buying the things that you simply want so you can use it in real emergencies.
- Lowering down your definition of emergency. This usually happens when you want to compromise and convince yourself that your present need constitutes an emergency. You want to buy new clothes so you make yourself believe that a small hole on the one you have is an emergency and you need to buy new ones. You need to make sure you know what an emergency is to make sure you use your reserves well.
- Using the money to help other people. There is nothing wrong with helping others but as you do, you need to make sure that you do not put yourself in risky position. Help with whatever extra money you have and try not to dip into your reserves. But this is easier said than done so if you must because of your relationship with the person in need, be sure to replace the amount as soon as possible.
You need to understand the important role reserve funds play in your overall financial management. It serves as your financial cushion in times of hardship. And knowing how to best use it and manage the fund will make it go a long way.