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69: How Much Cash Do You Need On Hand?

Wealth by Design

Release Date: 04/25/2019

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Hello, loyal listeners! We wanted to let you know that we have a quick update on the podcast and a few things that are happening over at Toujours Planning right now. As you may know, we are a Lake Charles-based business and family, and our community, homes, and offices were devastated by Hurricane Laura in August.

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More Episodes

There are plenty of “rules” out there about how much money you need to save up for a rainy day or an emergency, but how do you know what you need to save? This week on Worth It, Dustin and Danielle are digging into a simple formula that can help you answer that question, both for personal savings goals and for your business.

WHAT YOU’LL LEARN

07:05 Why most Americans are not prepared for an emergency

07:33 Why cash is a parachute, not an airplane

09:49 How much cash should you have on hand?

10:34 How much cash you need on hand for the short-term

11:16 Why your business cash savings should mirror your personal savings

12:25 What you need cash on hand for in your business

13:20 What you need to save if you have a business that earns $1mil in revenue

17:15 Why you need to consider your aversion to risk before calculating cash

17:35 The role your business industry and stability plays on calculations

19:27 Why long-term strategies should be implemented with short-term savings

20:32: What are the types of investments you want for your intermediate bucket

22:58 Juggling different savings goals

 

A SIMPLE FORMULA

When it comes to calculating what you need to save for an emergency — or to keep the lights on should your business hit some bumps — it helps to have a clear formula. That’s exactly what Dustin and Danielle provide this week on Worth It.

In the episode, they talk about different elements of your “short-term savings bucket”:

  • Personal emergency funds. These are 3-6 months of expenses, including your rent/mortgage, utilities, food, transportation, etc. If you run your own business and rely on income from that, it’s always best to err on the side of caution and focus on saving up at least 6 months’ worth of expenses.
  • Personal spending goals. These are goals you have the for the next 2-3 years, and include things like buying a house or that sweet Tesla Model X.
  • Business operating cash. Just like your personal emergency fund, your business should have 3-6 mos of expenses saved up. This includes payroll, leases, monthly software charges, utilities, etc.
  • Business investing cash. This cash fund will support any business investment goals you have over the next couple of years. This might include a new office, training, conferences, software, executive coaches, etc.

 

To make this a little clearer, Dustin and Danielle share an example in the podcast to demonstrate exactly how you should save. Let’s say you make $1 million revenue from your business, and you spend $10,000 a month to keep your household running.

In this case, for a 3-month personal emergency fund, you’d need $30,000.

For 3 months of business operating cash, you’d need about $250,000.

How did Dustin and Danielle come up with those numbers? This simple formula:

Total monthly expenses x 3 = your bare minimum emergency fund

For larger funds or more volatile income, Dustin and Danielle recommend that you up the monthly multiplier to 6.

The Cash on Hand Calculator inside of the Toujours Planning Resource Vault makes it even easier for you to find this magic number.

 

WHAT YOU DO WITH WHAT’S LEFT

So what do you do with your money once you’ve got these short-term “savings buckets” filled up? You start with your intermediate and long-term savings goals. This is where you can start investing in less liquid assets that offer compound interest, but it’s best to do that with the help of a CERTIFIED FINANCIAL PLANNER™.

If this is all overwhelming, seek help from a CERTIFIED FINANCIAL PLANNER™. And if you want help figuring out how much cash you need on hand and how much to invest, Toujours Planning may be able to help. Take our quiz to see if we’re a good fit.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual.

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