How much money should you have in reserve?
The reason for the question is that my wife and I were discussing whether or not to keep our Line of Credit open when it gets paid out in a weeks time.
We have used this in the past to help the kids get cheap finance, it's not a lot but once it's paid out there is a monthly fee to keep it available.
We think we would be better off having a lump sum in a buffer account just for those unexpected emergencies.
While we were both working this was never an issue, we usually had a large sum of money in reserve in any case because we live pretty frugally.
However, we are in the middle of home renovations which has drained our reserves to the extent that some bills are having a bigger impact than I would like.
Fortunately they are nearly complete so the issue will become moot and the bank balance will begin to climb again.
Neither of us like to have debt hanging around. We will use it when the circumstances make sense but usually we prefer to pay as we go rather go and then pay.
So, back to the question at the start.
How much should you have in reserve?
The consensus opinion for the amount you need as buffer when starting a new business is a years income over and above the start up and first few months running costs of the new business.
This allows you to live comfortably and plough the profits back into the business for the first year so it gets well established before supporting you and your family.
This situation is different though. I live in Australia where there is universal health care in the Public hospital system and I also have Private health cover so the buffer doesn't need to cover accident or serious illness. YMMV.
I also am debt free so there are no ongoing demands on my finances there.
The cars and caravan are covered by insurance, so is the house and contents so serious damage to any of those is covered.
Minor, but expensive, mechanical failure of any of those is most likely to be the source of the unexpected bill.
Some people would say that we don't need a buffer but for peace of mind and unexpected expenses, probably in the shape of our older relatives or children's needs, we feel that some buffer is required.
While that may be true we have decided that a buffer is required and the amount in reserve should be $15,000 to $20,000.
What would be the right amount for you?
Do you even feel the need to have a buffer account?
Where would you park that lump sum?
The rules for such a lump should be that it's available, but not immediately, so I'm thinking that a term deposit is the way to go.
It's safe, it's locked away for a fixed term but is accessible at short notice in a real emergency, it will earn interest.
This is not speculation money so don't put it into the stock market. It has to be available to you when you want it so you can't put it into real estate or bonds.
A savings account doesn't pay sufficient interest so term deposit is the way to go I think.
Do you have a viable alternative?