Cash Reserves Are Critical In A Down Economy

Posted on January 4, 2011

Pick up a newspaper or turn on the television news and you won’t be able to avoid stories about the sagging economy; homes being foreclosed, gas prices hitting record highs, savings at all time lows and mounting personal and governmental debts. During times like these people with cash reserves survive and often thrive while those without reserves get in serious financial troubles. When the economy is booming and everyone is making money, it’s easy to get lured into believing it will continue forever. That has happened to many people.

Read any financial help book and you will find the recommendation to accumulate enough savings to cover 3-6 months of expenses. This cash cushion is what lets you continue to pay your bills timely in the event of an unexpected loss of income. Whether you experience an accident, illness, job loss or an overall downturn in the economy, with cash reserves, your chance of surviving unfortunate or uncontrollable events is greatly improved.

Invariably, the people who don’t save are the first ones looking for help when the going gets rough. These are the people who took out sub-prime loans or low teaser rate ARMs to buy more house than they could afford. Then when the real estate market cooled and the loans began to adjust they couldn’t make the payments. They also probably bought expensive vehicles and financed them over six or seven years instead of buying something more practical that would allow them to build up some savings.

The reason financial advisors recommend building up comfortable cash reserves is because they know that everyone experiences periods when funds are tight or expenses soar. But, how do you build cash reserves when it’s taking everything you earn just to live? I’ve written extensively about the importance of planning and budgeting; it’s not rocket science. You can’t save unless you live on less than you earn. Saving and investing are the only sure ways I know to get ahead financially, but when you’re already stretched to the limit, how do you do it?

I have yet to meet someone who didn’t waste money, me included, but the most interesting thing I’ve learned is that people who say they can’t save are the ones who tend to waste the most. It’s not that they intentionally squander money or fail to have good intentions, in most cases; they simply don’t know how to analyze their spending. For this reason, they don’t see themselves as spendthrifts. I had this same problem when I was young. So have my sons and most of the other young people I’ve known.

Early in my adult life, although I was a hard worker, I always seemed to come to the end of the money before I got to the end of the month. I didn’t see myself as a spendthrift, but no matter how much I earned, I just couldn’t seem to get ahead. I wrote about this a couple of years ago, but in light of the current economic conditions, it’s time to discuss it again. With the country mired inĀ a deepĀ recession, I’d like to share a simple technique I learned as a young man that might help some people survive this difficult time.

Here’s a tip! Go to any store that sells office supplies and purchase a small spiral notebook, one that you can carry in your pocket or purse. For the next 30 days, write down every penny you spend. I mean everything; candy, drinks, gum, cigarettes and beer as well as groceries, house payments or rent, car payments, other loan payments, everything. Just doing this will open you eyes, but the exercise has a much bigger purpose.

After keeping this register for a full month, sit down with your notebook and categorize each expenditure as necessary or unnecessary. Be honest with yourself when doing this; remember, bad habits like smoking and drinking are not necessary. Expenditures for things required to live, like food, water, electricity, clothing, and house payments or rent are necessary. It’s fun to spend money for movies, Starbucks lattes, bowling, skiing, golf, or payments on boats, RVs and other similar items, but these aren’t necessary expenses.

Once you have categorized all of your expenditures, add up the ones marked unnecessary. Whether it totals $100 per month or $1,000, it is by adjusting what you spend on these items that will allow you to start building the cash reserves needed to smooth out the rough times. I’m not advocating giving up all of your pleasures, only some of them. Just by taking half of the money spent on unnecessary items and putting it into a savings account, you’ll be amazed at how fast your cash reserve will grow.

I did this over 40 years ago and found that in a single month I had spent over $600 on unnecessary items. Several soft drinks, candy, a pocket knife and a new bowling ball were among the items on my list. That was a lot of money back then and it still is today! By adjusting my spending and starting to save part of the money instead of wasting it, I gradually built a cash reserve that allowed me to pay my bills on time even when my income was erratic. This improved my credit rating and eventually allowed me to take advantage of other investments that required good credit to finance.

Try this simple method for just one month, and see what it does for you. I think you will be just as amazed as I was, plus it may help you get started saving. Remember, until you identify your spending habits, it’s hard to improve them.

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