Building a Cash Buffer: How Much Is Enough?

See how a cash buffer can help you handle unexpected expenses while staying focused on your financial goals.

Setting aside an adequate cash reserve is an important step toward greater financial security and overall wellbeing, since it gives you a way to cover emergency costs.

But how much should you keep in reserve? And can a cash reserve become too large? A financial advisor from Ameriprise can help you decide how much to hold and how to organize a balanced reserve so your money continues working for you.

To help you think through your choices, here are answers to common questions.

What is a cash reserve, and why does it matter?

A cash reserve is money kept aside for surprise expenses, such as major home or car repairs or household costs after a job loss. Rather than selling investments too early or relying on credit cards, a reserve can help protect your progress toward financial goals from being derailed by the unexpected.

It can be especially useful if you already carry debt, since it may reduce the need to borrow more in an emergency. It can also be valuable for retirees, offering a cushion for unforeseen retirement expenses, especially health care costs.

How much cash reserve should I have?

Many people aim to save enough to cover three to six months of essential expenses, including housing, transportation, utilities, groceries and medical costs. Still, the right amount depends on your circumstances, life stage and potential needs. General guidance includes the following:

• Dual-income families may be comfortable with a reserve on the lower end of the three- to six-month range.
• Single-income families may want six months of savings or more, since a job loss could eliminate all household income.
• High-income earners and people in specialized fields may need a larger reserve, as replacing that income could take longer.
• People with variable income, including business owners and commission-based or seasonal workers, should also consider a larger reserve.
• Retirees may want enough to cover 12 to 24 months of essential expenses, or three times the gap between dependable annual income and necessary annual spending.
• Certain situations may justify saving beyond six months of expenses, including owning an older home, having a high-deductible insurance plan, or needing to travel a long distance to help family in an emergency.

Where should I keep my cash reserve?

Even though reserve money needs to be available when an emergency occurs, you also want it to earn a return when possible. One approach is a three-tier structure for your emergency fund that offers liquidity and some protection against inflation.

How do I build a cash reserve?

A systematic savings plan can help. By automatically setting aside a fixed amount of income at regular intervals, you can build the habit of saving and grow your reserve steadily over time.

You can also speed up the process by putting windfalls such as a bonus, tax refund or other unexpected money into your emergency savings. Combining regular deposits with occasional larger contributions may help you reach your goal sooner and strengthen your financial cushion.

What are my other options for emergency access to money?

If you need funds for an unexpected expense without using cash reserves or selling investments, a line of credit may be worth considering. Before pursuing that route, speak with your financial advisor about the benefits and risks of these options:

• Home equity lines of credit (HELOC) let you borrow against the equity in your home, often at rates lower than many other borrowing choices. If you have enough equity, you may choose to open one in advance so it is available if needed.
• Securities-based lines of credit allow borrowing against the value of a nonqualified investment portfolio, offering a flexible way to cover unplanned costs.

Plan for the unexpected

We can help you build a cash reserve to prepare for unforeseen expenses while staying aligned with your financial goals.

Questions to ask an Ameriprise financial advisor during your initial complimentary consultation

• Based on my income, lifestyle and job situation, how many months of expenses should my cash reserve cover?
• How should I structure my reserve so it can keep up with inflation while remaining easy to access?
• Where should I put my extra savings once my reserve is large enough?

When you're ready to speak with an Ameriprise financial advisor for a complimentary initial consultation, consider bringing these questions with you.

Third-party companies mentioned are not affiliated with Ameriprise Financial, Inc.

This information is provided only as a general source of information and is not a solicitation to buy or sell any securities, accounts or strategies mentioned. The information is not intended to be used as the primary basis for investment decisions, nor should it be construed as a recommendation or advice designed to meet the particular needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial situation.

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