Aubrey L. “Al” Baker, CFP_®

One of the first pieces of advice I, and I am sure most, if not all financial planners, would give to a new client is to establish a cash reserve.

I advised the standard, which was to have enough money in a liquid account to cover six months of living expenses. The reasons I gave were also standard; in case of a job layoff or job loss, an illness or accident requiring a long recovery, a personal emergency. I never envisioned a pandemic that would affect millions of people, to include many clients.

As I started to write this, things were reopening and there were conflicting reports as to what to expect next.  Will the pandemic spike later this year?  Will things ever get back to normal?  Did small businesses survive?  How will my government ever bring down the national debt? 

Now, with the latest variant of COVID-19 tossing all solutions up in the air, and all advice more confusing than ever, we need a plan.

The tough lesson learned is the need to have money for a national emergency as well as a personal emergency. A cash reserve is absolutely necessary.

So what is a cash reserve really?  To me it is a cash account that will pay all necessary expenses for at least six months. That means mortgage or rent payments, any other loan payments – car, credit cards, personal loan. Next comes food, and I hope you have developed a budget so you know how much you spend on food eaten at home. Restaurants are out. 

Next are utilities, and again, refer to your budget for past utility payments.  After that is your discretionary spending, which is usually more than we realized. Once again, check your budget to see what else you spend money on.

Once you have that number multiply it by 1.1 because you will have missed 10% of your expenses.

Now the real challenge; saving up that six months’ worth of expenses.  Start by cutting out the wants from the needs. Look at your cell phone and cable bill.  How many bells and whistles are you paying for?  We need a cell phone to communicate. We do not need to look in on our house to spy on our pets.

How much do you pay to watch TV? I get over 40 channels; including the major networks for free using the old-fashioned method of catching the free signals broadcast over the air. New technology allows me to record shows and even automatically skip commercials on recorded programs.  Google will take you to the right place if you are interested.

Cut restaurant meals, including fast foods and that overpriced cup of coffee.  Okay- maybe one lunch a month as a personal reward for meeting your goal.

Let’s get back to the “B” word – budget. Record every penny you spend for at least three months. That includes those miscellaneous pennies spent on lottery tickets, designer coffee, fast food, candy bars, etc., etc., etc. Even the money you gave to that homeless person with the sign.

When the cashier asks if you would like a receipt, say “yes” and stuff it in your pocket or wherever you stuff things for later inspection.  If no receipts are offered, such as the homeless person who probably didn’t offer a receipt, make a written note.  Don’t rely on a mental note. They don’t work.

Record your expenses every day. Don’t skip any more than one day. Get a program that can track your income and spending.  After three months get an average.  Identify the things that you would criticize that homeless person for spending on. Those are the things you should consider eliminating.

Once you have your goal, do everything you can to get there. If there is no way to save that much, then consider part time work. As I write this, all the big box stores, and the little boxes too, are looking for workers who can pretty much write their own schedule.  Depending on your age, if you have parents or grandparents who began their working lives 50 to 60 years ago, part time work was necessary to make ends meet until their salaries caught up to their expenses.  And, these were the days before computers, internet, cable, and cell phone expenses.

You met your 6 months of expenses goal – now what?  My suggestion is to continue saving and put those dollars to work for another goal which could be retirement, college for kids, a vacation home or just a nest egg.

Do not forget that while you are saving that cash reserve you should also be saving for retirement. You may need money for a cash reserve.  You will definitely need money for retirement.

We’ll talk about retirement later.