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Building Your Financial Safety Net: How to Create and Maintain Cash Reserves

The Ultimate Guide to Cash Reserves: What They Are and Why You Need Them

Having a financial safety net is crucial in today’s uncertain global landscape. According to the Federal Reserve’s latest survey on the Economic Well-Being of US Households, 37% of Americans lack enough money to cover a $400 emergency expense. Cash reserves and emergency funds are the safety nets of personal finance. They are the financial buffers that protect you from the unexpected expenses that life throws your way. This summary explains why they are essential and how to effectively build and manage them.

What is a Cash Reserve?

Cash reserves are liquid assets readily available when needed. Unlike longer-term investments, these funds are not exposed to market risks and can be accessed without delay or penalty. They serve as a cushion for regular fluctuations, unexpected expenses like medical emergencies, job loss, or urgent home repairs. This savings is your financial lifeline when faced with situations that could otherwise lead to unwanted debt or other financial distress.

How Much Should You Keep?

A common rule of thumb is to have enough in savings to cover 3 to 6 months’ worth of living expenses. A more conservative view would be to have 6 to 12 months’ worth of living expenses in reserve. The right amount for you will be based on your personal situation, job security, and risk tolerance. The more unstable and unpredictable your income, your typical needs or your overall situation, the more in reserves you should have.

How to Build Your Cash Reserves

  • Getting Started: If you don’t have the 3 to 6 months’ worth of living expenses saved, begin by setting a modest goal, such as saving $500, and gradually increase your target to $1,000, then $2,500, etc.
  • Cutting Expenses: Review your monthly expenses; this could mean taking a look at your monthly credit card statement in order to identify non-essential expenses that you can reduce or eliminate to free up more for your fund. Subscriptions you are no longer using and coffee shops or convenience food purchases are common places where savings may be found!
  • Automatic Savings: Set up automatic transfers to your cash reserves to ensure consistent contributions. If you are just getting started, start with $50 or $100 monthly and then increase that gradually over time.
  • Extra Income: Consider using tax refunds, bonuses, or income from side gigs or a second job to bolster your emergency savings.

Where to Keep Your Cash Reserves

Your cash reserves should be kept in a place that offers a combination of liquidity, safety, and some return on your money, such as a high-yield savings account or a money market account. The most common places to keep readily accessible cash is a bank or credit union. Deposits are insured up to $250,000 by the FDIC and for Banks and by the NCUA for Credit Unions, so in most cases, safety should not be a concern. Assuming these funds will stay deposited for a long time, you should select the account that will pay you the highest interest rate.

Using Your Funds Wisely

Resist the urge to dip into your reserves for non-essential purchases. Your cash reserves are a vital component in the creation and preservation of your financial future. Think through in advance how and when you might use your cash reserves. Some possible reasons to tap into your cash could be:

  • Medical Emergency
  • Job Loss
  • Car Repair
  • Unexpected Home Repair or Appliance Replacement
  • Spur of the Moment Vacation: Wait a minute – don’t think this qualifies!
  • Downpayment on a New Car: Maybe
  • Home Renovation: Maybe
  • Helping out a Relative: Maybe

If you have a spouse or partner, it can be helpful to outline the purpose of these funds and open a discussion around what is considered a necessary expense. For most, these savings should be reserved for unexpected, necessary expenses, not for planned purchases or discretionary spending.

Replenishing Your Fund

Assuming that you will tap into these funds from time to time, you should have a way to replenish what you used as soon as possible. You may need to adjust your spending and your savings plan to prioritize rebuilding your safety net.

As you build a broader financial plan that incorporates your other goals and needs, balancing what is added to your cash reserves with your other financial objectives will be something you need to consider.


Cash reserves and emergency funds provide more than just financial security; they offer peace of mind. By prioritizing these funds, you ensure that you’re prepared for life’s uncertainties and can avoid the pitfalls of debt and financial instability.

Creating a cash reserve is a necessary step to gaining financial security, and creates an essential foundation upon which to build. Protecting your legacy is an important next step, and understanding estate planning can empower you to make informed decisions about your assets, protect your loved ones, and navigate complex legal and financial matters effectively. Check out the article: Don’t Leave Your Legacy to Chance.

Financial conversations don't have to be uncomfortable. Relying on a team of experienced advisers can help mitigate challenges surrounding money and emotions in your family. Connect with OneDigital’s Wealth Management team to learn more.


Investment advice offered through OneDigital Investment Advisers LLC, an SEC-registered investment adviser and wholly-owned subsidiary of OneDigital. These materials are provided for informational and educational purposes only and do not constitute a recommendation to buy, sell, or hold any security, nor do they constitute legal, accounting, investment, or tax advice. The materials and the information provided are not designed or intended to be applicable to any person’s individual circumstances. These statements do not constitute an offer or solicitation in any jurisdiction. All included information and data are limited only to the inputs and other financial assumptions indicated.