Thursday, October 2, 2014

Financial Power and the Importance of Reserves to You



There are two reasons that make financial reserves important to you. One reason is defensive the other is empowering.
Defense for an Emergency
When traveling through remote areas you probably like to keep plenty of gas in your tank as the next gas station might be many miles away. It works the same way with money. We never know when we could suddenly lose an important source of revenue like your job or an important piece of business. So it is the course of wisdom to save up money, a reserve, just in case you need it when the unexpected happens.
The standard recommendation use to be to have at least two months of reserves in the bank. But the world has changed and you may need to have more than two months. Consider your situation and have a plan in place for what you will do if your cash flow dries up. How much would you need until you can land another job or get enough additional business to replace the cash flow? These questions should give you an idea about how much you need.
Power to avoid an Emergency
There is a much more powerful reason to have a reserve also. Consider, you can put your reserves to work for you by investing them. You might even want to get enough in liquid and semi-liquid investments that you could live off the income they produce if you need to. Think of the power you will get from your investments and they will provide for you. If you have reserves working for and you lose your job or some business then the loss need not be a disaster for you.
When we think in terms of gaining power we have a much stronger motivation to work a plan to reach our goals. While it is important to have reserves in the case of an unexpected change it is much more powerful to have reserves to keep the unexpected from becoming a disaster. It feels much better to rely on your own investments than the fortunes of a company you work for.
Financial Plan
Typically the financial plan will first include establishing a reserve, for an emergency, that you will want to have in a very liquid account. Then beyond that your investments can be in less liquid accounts which will typically give you the opportunity to generate higher returns on your money. Just think about having money in investments that you can fairly easily liquidate to cover necessary expenses or even better to take advantage of better investment opportunities.
Executing the plan involves doing without some things now so you can add financial power to your life. It is worth giving up some things now to get power over your finances and life.
The CPA Superhero wants to help you to succeed in business, life, and in retirement.  While my main business is preparing tax returns, I also work with clients to setup accounting systems to start, manage and develop their business(es) and develop and implement a financial plan. Contact me using my information below to schedule a free introductory consultation up to a half hour. 

Jeff Haywood, CPA

The CPA Superhero
972-439-1955
jeff.jhtaxes@gmail.com

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My posts contain general information that does not fit every situation, they are not all inclusive, and as always for your tax situation everything "depends on facts and circumstances."  In addition, the information/IRS requirements are always subject to change.  So call me to talk about your specific facts and circumstances and what you want to accomplish.