Financial advisors typically advise holding six to twelve months of expenses in a cash emergency fund. This cash reserve, a strong defensive tool, will weather you through life’s challenges. But, this fund can also play a role in a strong offensive strategy. Life brings opportunities, and if you’re prepared, sufficient savings can allow you to capitalize on the opportunities and be more nimble in unexpected times.
When Might You Exercise this Option?
You might exercise an option for tangible and intangible reasons if the outcome increases your financial standing or happiness. Following are some examples of such moments.
Temporarily Leaving Employment
Perhaps you’d like to temporarily stop working to further your education, and don’t want to juggle full-time employment while doing so. Normally, such a plan would require long-term planning to save enough money to see you through this period of no income. But a sufficient cash reserve allows you to take advantage of an educational opportunity when it arises while scaling back or stepping away from your job. If, you’ll have increased earning power after you earn your degree, this is a positive financial move in the long run.
Caring for an Elderly Parent
Often, a family has time to prepare for an elderly family member’s transition to their adult child’s home, but sometimes the transition is unexpected. A cash reserve allows some flexibility in an otherwise stressful situation. Rather than trying to buy a larger home while your parents sell theirs, for example, you can take these steps in stages. For example, you can purchase the larger home and have your parents move in. Once they are settled, they can sell their home. Having a cash reserve allows you to weather a period of increased payments until the second house is sold. While this is not financially efficient, it might be more emotionally manageable.
Taking Advantage of an Investment Opportunity
Deploy your cash to create passive sources of income. For example, you might purchase a rental property or invest in a local business. Such investments provide passive income giving you more flexibility. Diversified income sources create a buffer against a job loss, provide for a child’s college expenses, and supplement retirement needs. Being able to act on this type of opportunity reduces your cash savings in the near term, but strengthens your financial position long term.
Some Considerations Regarding Your Cash Emergency Fund
If you view your cash fund as both an offensive and defensive tool, take the following into consideration:
- How much cash do you need to fund the option? Consider the expenses involved in the decision. If you want to scale back on work hours to pursue education, you’ll use cash for some or all of your living expenses, costs of education, and other incidental costs. Factor these in to determine if you can leave employment completely or partially.
- What other emergencies could occur at this time? Do you have enough to cover those needs? Be sure to consider a realistic worst-case scenario. If you leave employment and have enough funds for living expenses, what happens if you need to replace a car as well?
- Will making this decision benefit you for the short- and long- term? Will it increase your earning potential? Decrease your stress level? Further your relationships? Allow you time for personal growth? Consider the short- and long- term tangible and intangible benefits.
- Weigh these benefits with the short- and long-term risks before making a decision on whether to exercise an option.
Your finances help you build a fulfilling life. A sufficient cash account allows you to respond proactively during challenging times, and to capitalize on unexpected opportunities. If you don’t have a robust savings account, reevaluate, and learn how to start building that emergency fund now.