Investment Tips: Cash Reserve

How Much Cash You are Holding?

Some people would consider investing is the same thing as saving in the bank, but in reality, some financial expert would treat it differently. Savings account is focused on short term goal, therefore, it relatively more fluid, meaning you could gain your cash at anytime. Investment on the other hand is illiquid. While both are using financial assets, you spend some money now with expectation of profit in the future, savings always in cash form, you could take it anytime through your ATM or any other way. Investment refers to assets ownership in a long period, in simplest term, you cannot turn it into cash at any time soon. Regardless of the difference between both, the important thing to be noted is in a long time period, investment have more potential to give more profit than savings. Therefore, too much savings will diminish your assets potential to their minimum values.


But why we should hold cash? At least there are considerations why we should hold cash. First, we need constant cash flow for everyday expenses such as transportation, utilities (electricity, water, etc), and other needs. Second, we need cash to handle emergency like hospital fee, car accident, or any other things that not fit in our flow prediction. So how much cash reserve should we hold to handle emergency situations?

Experts recommends that everybody should hold cash reserve at least six to twelve time from our routine expenses per month but it doesn't mean that we should follow it blindly. People have different type of income and cash reserve should meet that requirement to live better and without worries. Here are things that should be considered to determine the amount of cash reserves.

• Your income type, how often you gain money have impact on how much cash reserve that you should have. If you have irregular income, or your money is based on commission, you should add more money to your cash reserve as a precaution if your income reach its lowest point.

• How risky is your job? More risk means you need more cash reserve. Insurance claims takes time and you want your family to live on without worries when accident happened.

• How healthy are you? People with congenital disease or acute potential like heart disease should have more cash reserve. It does not mean that we defies God but having health disorder have a high risk to reduce our ability to gain money in the future.

• Fourth, ability to borrow money have direct impact on your cash reserve. High access to borrow money mean more flexible cash reserve.

• Fifth is income source. If you are the sole income source of your family, you want to put more into your cash reserve to handle emergency. But if you and your wife have the ability to make money, your cash reserves should be more flexible because the chance both of you losing the income at the same time is smaller.

Sun Tzu said, "If you know the enemy and know yourself, your victory will not stand in doubt." You should know yourself, your ability to make money, and the risk that might hold you down in the future. This article is just a reminder, not a strict guideline to follow. In the end, the main focus is to make sure you are financially secure by having enough cash to live and maximize your potential in investment.