how much is a financial reserve?

We recently used the talk, One For The Money, by Elder Marvin J. Ashton as the basis for a Family Home Evening Lesson. As I prepared that lesson, I read the following quote, "Liquid savings available for emergencies should be sufficient to cover at least three months of all essential family obligations." I think three months worth is a pretty good beginning goal. I've heard some financial planners state that we should save at least six months worth. Some try to have a one year supply of finances as well as food.

You probably have a sense of how secure your job is -- though no job is completely secure. I think that knowledge coupled with the guidance of the spirit can help your family decide how much of a financial reserve you need.

At first glance, you might assume that three-months' worth of savings is a huge amount. And I guess it is, IF you make tons of money already. But for the rest of us, the amount is not as big as you may first think. If the amount of money saved is used to replace your salary, many normal monthly costs would not apply. For example, you probably already paid your tithing on money in savings (so no need to subtract 10%). Also, retirement, taxes, social security, medicare, and state taxes would not be taken out of your savings (this would differ depending upon your state/country). If you add up your normal bills for each month, minus any services that you could immediately cancel like cable, cell phones, lawn services, gym memberships, etc. (I'm assuming that you would cancel everything that you were able to -- but don't forget those "contracts" that bind you to a service for several years), then you can figure out what you would need to save for a month's worth. For our family, the amount we needed to save "essential family obligations" was roughly half of my husband's normal paycheck per month.

In many cases, this financial reserve may not end up being used to replace salary. It might be needed in an extreme health care situation. Or it might prevent you from having to use consumer debt when your clothes dryer, dishwasher and toilet all break on the same day (which happened to us yesterday). So obviously more is better than less.

[variation on a previous post from 8.11.2008]

1 comment:

Connor said...

I think it's important to keep in mind that having some money tucked away does not mean it has to be in dollars. Indeed, if there were a collapse in the dollar (say, through hyperinflation), then you'd feel really dumb having a whole lot of worthless paper.

I think having a financial reserve is a great idea, but I usually advocate that people do it more in other currencies and things than just dollars. Food, gold, silver, euros, some dollars, etc., are all good ways to diversify your financial reserve and create a hedge against one or two of them going kaput.

Putting all of your eggs in one basket is never a good idea, no matter what the subject.