Why Have Reserves?
For financial efficiency, having access to cash is a necessity. To fully utilize our cash flow, we are moving it directly to our lines as soon as we get it. So, what do we do when an expensive bill comes down the pipeline? Reserves are the safety net. They supply the peace of mind to take small risks with large rewards.
Cash is the undisputed king of currency. Especially when time is of the essence. Car breaks down? Fix it immediately while you wait for insurance. Have a great investment but it needs $10,000? Worry not, when you have reserves. The list goes on and on. Reserves are very useful
One overlooked benefit is the ability to increase our cash flow. When you have peace of mind, you are able to live more abundantly and skip a lot of the fear fees. One example is your insurance deductible. Raising your deductible gives you access to better rates. Additionally, you have the option to cover the inconsequential items yourself, rather than making a claim and raising your premium.
How Much Should You Have Saved?
The minimum reserve balance for Velocity Banking is 3 months’ worth of expenses in cash. This scalable value may seem arbitrary at first, but really adds the security needed to withstand the risk of living our lives. You don’t need to store this money in a savings account though, this can be any liquid investment that does not carry risk (such as cash value life insurance, or a money market account.)
Jumping off from the 3 months of expenses, we want to have an additional 6 months of expenses in cash or available credit. This will further free us up for more cash flow.
Lastly, don’t be afraid to use your reserves. We will set up a system for paying ourselves back in the next section, so make sure you use the reserves when you need them.
How Build Your Reserves?
The best financial advice that I have ever received came from my father; pay yourself first. Before you even make your budget, take out at least 10% and put it away, that’s your reserves. We will talk more about what you can do with this money when your reserves are filled up.
10% is a great starting point, but we really want to expand up to 20%. Why 20%? If our expenses are the remaining 80%, then 20% is one fourth of that. So, every four months we add another month to our reserves. That means it will take exactly one year to meet the minimum requirements.
But Daniel, what if I am living paycheck to paycheck? This is where our cash flow recovery techniques come into play. Use Velocity Banking to save on interest, ensure your tax withholdings are accurate, remove destructive expenses like bank fees. Use these ideas to get the ball rolling. You can break the paycheck to paycheck curse. I believe in you.