A Six Month Reserve: A good goal for everyone

     One of the first suggestions that a financial advisor gives when you sit down with her to determine a savings/investment plan is -- have six months net income in cash for emergencies. Just past tax time in the U.S., my reserves are down but I can squeak by for a number of months with no added luxuries (no purchases, no special food, no takeout/curbside food, no presents, ...)

     I am one of the lucky ones. As we are witnessing in the U.S. (and probably many other areas of the world) people do not have six months of reserves in general. In fact, most people don't even have one month of reserves in savings. Going even further, there are probably a lot of people that are out of money by the time they receive their next paycheck -- living "paycheck to paycheck".

     This is a primary side-effect of steadily growing income inequality. Back in my earlier blog on living wages, I put forth the way people can determine what is a living wage for a person in a given geographical area.  Many people in the U.S. do not make a living wage. If you don't have enough money to pay for all of your necessities, then you will NOT be able to save money in addition. When there is a little bit extra, it is so tempting to use it to buy something desired that has been postponed (perhaps for a very long time). The more people who do not make a living wage, the more people who CANNOT prepare a financial cushion to ride out a disaster (pandemic, economic recession or depression, long-term unemployment, ...).

     OK. You make a living wage. Do you have that six month reserve built up? No? Well, in the first place, it may take a long time to build up a six month reserve even if you put away 1/10 of your salary each month (or more, recommended if you are able). Second, problems happen -- health problems are particularly possible in the U.S. and, even if insured, they are a large financial drain. (If you are NOT insured, welcome to the world of bankruptcy.) Or perhaps your car broke down and needs major repairs. Your parents need to be moved to your home for you to take care of them? Lots of possibilities to drain the reserve and hard to build it up.

     Let's say that no disaster occurs and you have a bit extra each month beyond living expenses -- maybe even a bit more than living plus a few luxuries expenses. What do you do with that money? When I was growing up, I was always in a savings mode. My brother wasn't quite that way so I was around as his personal bank. He often paid me back but it could not be relied upon. In our schools (and, often, in our homes), we are not taught how to handle money -- how to budget, how to avoid usury, how to save, how to invest, and so forth. A lot of celebrities and sports stars fall into this trap -- live high but when they break a leg or lose their popularity, they have not saved while they could. Some do -- they should be the most revered role models and not the ones that spend the most and are the flashiest.

     These examples, and the above essay, are about individuals. What about businesses? Well, quite a few large, often multinational, corporations have "deep pockets" and can take care of expenses, and carry on with business, for months (sometimes years) -- which doesn't mean they may not make business adjustments in anticipation of near-term or long-term needs. Other businesses have a credit line upon which they can draw for a few months of survival. But the small business is really in much the same condition as an individual.

     Small businesses often have a very small profit margin. Similar to an individual, the required cash flow may be considered to be "living wage" -- with any profit above and beyond. They, also, should try to save 1/10 (or more) of the profit each month to build up a reserve. But, as it is with an individual, it will take a long time to build up multi-month reserves. And, even worse than with an individual, many other people's incomes are also dependent.

     And the moral of the story? People need living wages plus. People, and businesses, need financial training. And saving for the future, when possible, is a very important item for the budget.