Personal Finance Essentials
Why Cash Reserves Matter
Your Next Crisis Is Already Scheduled
You Just Don’t Know the Date
Every day in America, life throws expensive surprises at people. More than 15,000 washing machines break down every single day. People lose jobs, kids need braces, children get married, cars need repairs and businesses go broke. As the saying goes, “Life is what happens while you’re making other plans” – something expensive is sure to happen when you least expect it. For all of life’s unexpected events, both good and bad, you need cash reserves to get you through them.
It’s worth emphasizing that both bad events and good ones carry a price tag. A car that breaks down, a health issue requiring extended care or a business that closes – these are obvious financial emergencies. But a friend’s destination wedding, a new baby in the family or a milestone birthday celebration can also create sudden, significant expenses. Cash reserves protect you from all of it.
When Your Paycheck Stops
Even if you’re not relying on investment income, your next paycheck might not arrive. Businesses close, employers run out of revenue and disruptions can come from anywhere. If your employer was unable to conduct business – stores closed, clients lost, revenue stopped – how long would they be able to keep you on the payroll? No income is truly safe from disruption. A crisis in one city can eliminate jobs in another. Your cash reserves are not just a backup plan for broken appliances. They are a financial lifeline that gives you time to find a new job, recover from an illness or navigate whatever upheaval has come your way.
When Markets Freeze
There is another, less obvious reason to keep money in cash: markets can close. Following September 11, 2001, every investment account in the country was effectively frozen for four days. Mutual funds, brokerage accounts, IRAs and 401(k)s – none of them could be accessed. Investors who depended on their investments for monthly income faced the real possibility of missing mortgage payments.
Liquid investments can become illiquid without warning. Mutual funds have the legal right to withhold redemption requests under extraordinary circumstances. In 2000, one municipal bond fund lost 70% of its value in a single day, and investors were locked out of their money for more than a year. In 2008, the Reserve Primary Fund – a money market fund – “broke the buck,” meaning its $1 share price fell to 97 cents when Lehman Brothers collapsed, and investors could not access their funds for an extended period. Cash – real, accessible cash – is the one asset that remains in your hands during a crisis.