Anyone in business knows that the old saying “cash is king” is so very true and majorly important. Even the best business can be brought undone by a lack of available cash.
The same is true with maintaining your personal finances and keeping a steady buffer of cash on hand is equally as important, so in this article I’ll examine how to get it and what is best to keep on hand.
Do rainy days happen?
Absolutely. This is what we are talking about here with personal cash reserves (or a “buffer” as I like to call it) – providing for those “rainy days” where out of seemingly nowhere, something will happen that will require a chunk of cash to be spent without warning.
This could be repairs to a car, buying a new car, kids clothes/health/sport/school, operations, urgent renovations or even a loss of job. Odd things like this don’t come up too often, but they definitely do come up from time to time and it is always best to try to be prepared for these situations before they arise, rather than scramble at the time to find a solution.
How much should you have?
Not the simplest question to answer and it is always dependent on the specific circumstances of the family unit. So a young, single person still living at home with parents and working full-time has far less of a cash requirement than, for instance, a family of 4 or 5 with a mortgage and one main income.
Whilst it is completely dependent on your own individual circumstances, here is my own rough guideline that I generally like to see as a minimum for a few common circumstances (note not all circumstances are covered below, but enough to get the picture):
- Single, working, no children, with owner occupied property = around $20K minimum buffer
- Couple, both working, no children, with owner occupied property = around $30K-$40K buffer
- Couple, both working, 1-2 children, with owner occupied property = around $50K-$70K buffer
- Single parent, 1 or more child, with owner occupied property = around $100K buffer
If you are single, with no children, no property and paying no rent = you are living the easy life but it won’t last forever so get onto your savings program so you can get yourself out of home and into the property market!
How to get it?
If you don’t already have a buffer, then the easiest way normally to obtain one is to plan and execute a careful refinance on your mortgage to access the equity in your property (presuming you have some available equity of course).
Keep in mind that accessing equity for a purpose like this is considered by lenders to be what they call “cash out” – and all lenders have different cash out policies. Some are very tight and controlled and difficult to obtain whereas other lenders are still quite flexible.
Careful word of warning though, I would not be surprised with all the regulatory changes we have had in the past 12-18 months (and with the tightening credit market we expect to come in the next 2 years) whether the “cash out” policies of lenders will start to really tighten up. I’ve seen it happen in the past and I would not be surprised if it happens again.
We also have interest only loans starting to become a lot harder to achieve – and I’ve spoken about this in past articles – so this may mean in 3-5 years’ time your interest only loan may end up being principal & interest and this may have an impact on the buffer of funds you want to have because you want to have extra funds available when that time comes around.
So if you don’t have an appropriate buffer of funds right now, even if its planning for 3-5 years down the track, consider looking at this now rather than later – as its still relatively easy to obtain “cash out” now, but it may not be so easy in years to come.
There is no real formula and even the above guides are all subject to the individual or family unit – everyone is different and all circumstances are different. The theme to stick to is to be conservative and make sure you have a buffer that you are comfortable with for your specific circumstances.
Consider this now. Credit markets will change soon. Stay ahead of the game and you will minimise the impact of any future credit policy changes and the chances of being burnt by them.
0425 300 107
As MORE’s Head of Finance & Legal, Aaron provides the leadership and technical expertise that allow MORE to stand out from the crowd. Aaron is a fully qualified Residential and Commercial Mortgage Broker and Property Lawyer. He is also the Principal Solicitor of MORE Legal, the firm’s in-house legal division.