Introduction:
Often unexpected expenses pop up that require quick access to cash. It is important to have money set aside in an at-call account that pays interest, so you have quick access when the need arises without incurring any penalties.
Alternative Strategy:
An alternative strategy may be if you have a line of credit on your mortgage to pay additional amounts off your loan and then be willing to draw these amounts back down if an emergency arises. This may be a more cost-effective option for building a cash reserve.
Determining the Right Amount:
When determining how much is suitable as a cash reserve, think about the sorts of expenses that might occur. For example, consider potential costs for healthcare, home maintenance, or car repairs. Would you need to pay for flights or other travel costs if your parents (or children) suddenly became ill?
Some people aim to build a cash reserve for a specified dollar amount, while others might look at several months of expenditure or even estimate what expenses might arise.
Benefits of a Cash Reserve:
The benefit of a cash reserve is that you have the money available to meet unforeseen expenses. This allows your other investments to remain invested so you are not forced to sell, possibly at an unfavourable time.
Interest and Tax Implications:
If you earn interest on your cash reserve, this amount is added to your assessable income and taxed at your marginal tax rate. The earnings may impact your eligibility for certain government benefits and concessions.
Regular Review:
You should review your needs regularly to check that your cash reserve is holding the right amount of money.
The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.
