When someone puts away money into savings, the first purpose in doing it should be to build up a safety net for a minimum period of six months. In our current economic climate that could be extended to twelve months if you’re able to swing it.

Building up a personal cash reserve for at least a six-month period means you could continue living like you are and take care of all reflects the money you’re currently making at your existing job. So whatever you’re making on the job monthly now, you should multiply by six and have a goal of having at least that in your cash reserve.

Most of us know about or have heard something like this before, so we won’t get into that part of it. What I want to do is help you understand that reasons behind that financial safety net and not to move off of it no matter what happens.

I’ve been talking about investing in low interest rate and potentially high inflationary periods of time recently, and that can have the type of negative effect on someone in regard to their cash reserves if they attempt to battle those factors to the neglect of the purpose behind having a financial safety net under you.

The first thing to remember is your financial safety net is just for that and nothing else. No matter what happens, your purpose is to have a minimum of six months cash on hand available to take you through that time without suffering any losses. Nothing should move you off of that, even things like interest rates and inflation.

Now it doesn’t hurt to understand these pressures and know how to combat them, as long as it doesn’t cut into your saved capital.

So what you don’t want to do is start moving out of your comfort zone or the safety factor of your backup fund in order to beat inflation or get a better yield, if it has risk associated with it that could lose you money, or possibly cost you more through fees to change it to another account type which may give you a better return, but cost you as much to make the change.

If inflation does rear its ugly head in a big way, sure we must be mindful of that, as it could cut into the funds we have set aside to protect ourselves in difficult times. So what at one time was money set aside for six months could fairly quickly only pay for five months of living if inflation really takes off; which it probably will over the next couple of years.

At the same time though, the low interest rate environment should also stop, as it’s thought they should start rising sometime near the end of 2010, assuming the job market changes, which the Federal Reserve says will be largely the determining factor in keeping rates low if it doesn’t improve.

If inflation rises along with interest rates, you should be able to hold pretty steady for your safety fund, as they will grow together, hopefully close enough so you won’t have to try to increase your risk factor to keep up with it. Resist that temptation.

It would also be better to go over your financial obligations and habits in order to find places you can cut back if the cost of living goes up, as your primary financial goal should be to have enough put away in case of emergency. Everything else is build out from that foundation.

The bottom line is you must understand why you have a safety net in the first place, and even if outside factors like inflation cut into the buying power of that fund, you can either add more money to it to make up for that, or simply have a little less time to buy if things get bad unexpectedly for you. The worst thing to do would be to take steps which could threaten your protective nest egg.

A financial safety net is just that, and no outside force should do anything to make you start to take money out of it, other than for the purpose it exists: you lose your job and need to buy time to find a new source of income. That’s the purpose of putting money away: to buy time, and nothing else.

Now a little earlier in the article I mentioned something about the economic times we live in. Not only am I talking about the job market and inflationary pressures, neither am I talking about the pathetic returns we’re getting on our money. Rather, I’m talking about an even more increasing practice of businesses in outsourcing, hiring on a temporary basis, and moving to a more part-time culture.

With that in mind, it’s more important than ever to build up a cash reserve fund for yourself, as this will usually mean times of feast or famine for you, and developing the practice of putting away money when you have it is the best financial discipline you can have going forward.

Remember, a financial safety net exists for financial safety. Don’t do anything to tap into it unless it meets the needs you build it up for in the first place.

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Tags: money management, savings goals

This entry was posted on Monday, January 11th, 2010 at 7:00 am and is filed under tips. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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