Cash Reserves
I find that tax season is always a good reminder to do a financial review. If you read financial planning information at all, you’ll find that everyone recommends that you build up a cash reserve and keep it somewhere safe. The definition of how much to keep, and where to keep it varies.
In my case, I want to keep 6 months of expenses in cash reserve, distributed this way:
- 1 month expenses reserved in my checking account (over and above current expected expenses)
- 2 months expenses reserved in a savings account
- 3 months expenses in CDs
So if I know I spend $3000 a month, I’ll want $3000-$6000 in checking, $6000 in savings, and $9000 in CDs.
I use a checking account which pays at least a little interest and no service charge.
I currently have most of my savings in an online bank savings account, which is paying better than average interest.
I keep the CD funds in 6 month CDs, with offset expiration dates, so every month a CD renews, with each CD renewing twice yearly. If I should need this reserve, I’ll almost certainly be able to wait until the natural termination of the CD, and simply stop the renewal. That will save me the interest penalty for early termination.
I reinvest all interest automatically, which will at least help account for inflation, and help keep my reserves updated.