I think everyone should strive to have two years of liquid assets to cover expenses. That’s not possible for most Americans, but it is something you should strive for. It will give you a ton of flexibility and keep you ethical.
The goal: To have enough cash in the bank that you could, without changing your lifestyle one iota, live on your cash for up to two years.
Why a strategic cash reserve is important
Just like the United States government keeps a strategic oil reserve, you should keep a strategic cash reserve. Maybe you cannot do two years — than start off with what you can put away and grow it from there. This reserve is not for a rainy day or for just a random emergency — you should try to keep other funds for that — this fund is for if you are out of work (or want to go without pay to start a business).
This fund gives you flexibility of not taking the first job you are offered. But more importantly, this fund will keep you ethical.
Keep you ethical? What do I mean?
I believe that most of the corporate scandals are due to the fact that people live beyond their means and most people will cheat, lie, and steal (or do whatever it takes) to maintain their current lifestyle. My theory on Enron, Worldcom, etc. it that the executives were over-extended and once things started taking a turn for the worse they started cooking the books because they couldn’t bear to lose their perks (their club memberships, their chauffeurs, etc.). Most people do not want to eliminate luxuries — people do not want to take a step backward in life.
You can ensure you never have that temptation. You can save before you take on a new expense. Let’s say you want to join a gym and it costs $100 per month. Treat that as a liability that you will have to incur for at least two years — and make sure you have an extra $2400 ($100 times 24 months) in your "life emergency account" before incuring that liability. Now this does not mean that you can go ramp-ape on one-time-purchases either (as you do not want to get too used to being on the charity circuit even though each gift is a one-time purchase).
Though most people can’t have a two-year of cash reserve, it is a goal worth striving for and it is my definition of financial success. I know this sounds crazy, but i know many people making over $150K/year that have less then $10K in their account and they are still paying off their credit card debt…
It would be great if all people had enough cash in their bank accounts but the reality is different.Many people find it hard handle with their personal finances and a great number of them fall victims of the banks.