Emergency Cash – Is it Necessary?

 Cash is a liquid asset, and anyone who is financially successful knows that liquid assets are not that profitable.

Cash in the bank or in your pocket will not earn you much, if anything at all.

Most people erroneously believe that you must have a lot of cash in the bank just sitting there, to be financially secure.

If you consider the low return on your money, inflation and the opportunity cost of having idle money, then it becomes easy to put emergency cash into perspective

In the event of a sudden urgent need for cash, you will either have to use your own resources, or borrow the money.

The idea of emergency cash is to stop you from borrowing money at a high cost when you need it the most.

It is generally not a good idea to have a lot of idle money in your bank account reserved for emergencies.

Furthermore, the amount of emergency cash you keep should depend on your spending habits.

It is important to structure your finances such that you keep as little possible in liquid cash, and invest most of your money in cash generating assets.

The advantage of having cash generating assets is that you will be able to balance liquidity and profitability to get the best out of your money.

So how can you know how much an emergency will cost you before it happens? Well that’s where most people get it wrong. It is impossible to predict the future.

The question should be how long you can go without a paycheck or any income coming in before you become destitute.

The concept of emergency cash can be likened to that of an Uninterruptible Power Supply (UPS) or backup power system for your computer.

The backup power usually lasts long enough for you to shut down your computer safely without losing any data.

In the case of emergency cash, you should have a surplus amount that gives you ample time to figure out how to replace your income before you start selling off your possessions to meet your daily expenditure.

You therefore have to strike a delicate balance between your savings and your investments.

Emergency cash is necessary, but the discipline of saving the money and estimating the right amount to save make it easy for most people to overlook the importance of putting this money aside.