Cash Reserve or Emergency Fund?

One of the most supported strategies in personal finance is to build your emergency fund. The idea is sound; your car might decide to retire, the kitchen might nag for more attention and your government might decide to switch off the analogue signal and force you to buy a digital TV or a set top box.

While I endorse the idea of saving extra money in order to avoid getting into debt when the going gets tough, I’m just not crazy about the spirit behind it. Calling it “emergency fund” would plant in your mind how 1001 disastrous events could unfold in your life, hence unwittingly or subconsciously attracting them. Now, this might sound like an excerpt from a sermon in Tom Cruise’s church. But in my experience, if you live in fear, you deny yourself the chance of great life.

I personally use the term “cash reserve” for a few reasons. The term is largely used in business financial reports (which makes it sound more sophisticated, or pretentious) .  According to the American Heritage Dictionary, “cash reserve” means ” investment funds that are held in short-term assets such as Treasury bills and certificates of deposit until more permanent investment opportunities are available. A large amount of cash reserves offer flexibility and safety but generally hinder profitability.” It also covers expenses beyond the regular operating costs. Banks are required to have certain percentage of cash reserve to maintain liquidity.

Currently, our cash reserve is equal to 7-month general living costs. While it is intended to keep us liquid during the “creative or start-up period” of little to zero income, we’re open to using it for investment venture (up to 50% of the cash reserve amount) when the opportunity comes along.

In the end, the mindset plays a big role in building wealth. Think about it as an access to your financial freedom where you use it to support yourself while building your business or to fund investment ventures rather than let it sit and wait for emergencies to happen in your life.

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  1. […] at $15k for now. This is mostly a mental thing. Bytta at 151 Days Off recently wrote about whether you should have a cash reserve or an emergency fund. She says labelling it an “emergency fund” would “plant in your mind houw 1001 […]



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