The Importance of a Cash Safety Net

So far, 2020 has been a year like we’ve never experienced before. With a pandemic and mass panic hoarding of basic essentials, it has shown that we need to always be prepared. But that isn’t just when it comes to your day-to-day life. You should manage your finances in the same way.

If you’ve ever felt anxious, nervous or stressed about your money, it’s most likely because of two reasons;

  1. You had high debt levels
  2. You didn’t have any (or enough money) in savings – you had no safety net!

The debt issue is for another day, but today I am going to talk about building and maintaining a cash safety net.

When you don’t have money in the bank, you don’t feel comfortable financially. You can feel nervous or anxious about money and that usually leads to stress. That’s because knowing you have money in the bank provides peace of mind.  You know that if something happens – the fridge blows up or your car breaks down or you lose your job because of a worldwide pandemic, you have money available to address the problem.

Having that reserve ensures that you don’t have to worry about relying on credit cards or borrowing money when life gets in the way. One of the main reasons people build up credit card debt is because they don’t have money in the bank to rely on when they have an emergency. That means they have to use credit cards to address their immediate needs.

Over time, this bad habit of relying on credit cards to get you out of trouble adds up. It can lead to carrying debts on your cards for too long and high interest payments that will set you back financially. 

So, how can you prevent this problem and make sure that you never have to worry about credit card debt? By making sure you have a safety net – money in the bank, on call for when you need it.

This is a core money principle that we discuss with all our clients. We tell clients that the first step they have to take on their journey to financial freedom is to put aside $1,000 – $2,000 in cash to cover emergencies.

The next goal is to actually create their safety net. Which involves saving up enough money to cover three to six months of their living expenses. That way, they can cover whatever life might throw at them. This amount will take time to build, but giving yourself a strong financial foundation and ridding yourself of short-term money woes is the best investment you can make.

Once you have your safety net sorted (3-6 months of living expenses), you set it aside and basically forget about it. Then you can start using the funds that were previously reserved for building your safety net to accomplish other goals – like investing, reducing your debt, taking holidays, and so on.

We never know what might happen tomorrow, but creating a cash safety net is a great way to ensure you’re prepared no matter what. As they say, cash is king. When you’ve got money in the bank, you’ll be able to make sure you never have to worry about racking up credit card debt!

It’s going to take some discipline and patience to build up your safety net, but it’ll be one of the best investments you’ll ever make. Not only will it give you peace of mind, but it will provide financial security for you and your family.

Ryan Porter is a Wealth Coach at Catalyst Wealth Group. His mission is to help his clients achieve financial success and live their ideal life.

Disclaimer: Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Accordingly, reliance should not be placed on the information contained in this document as the basis for making any financial investment, insurance or other decision. Please seek personal advice prior to acting on this information.