Systematic saving: The key to building a cash reserve

Key Points

  • Your cash reserve should include at least six months' worth of living expenses, and ideally one to three years' worth depending on your age and income.
  • Creating a process of setting aside a set amount of income at regular intervals is key to building a cash reserve.
  • There are several ways to make saving automatic so you don't have to worry about it.

All it takes is one unexpected event — a broken furnace, a property tax hike or, worse yet, a job loss — to underscore the importance of a cash reserve. Maintaining a healthy cash reserve of at least six months’ — and ideally one to three years’— worth of your living expenses can provide a cushion in case of an emergency and put you on track for long-term fiscal stability.

But how do you build a cash reserve while simultaneously meeting your regular financial obligations? Consider a systematic saving plan.

What is systematic saving?

Simply put, systematic saving is the process of automatically setting aside a specific amount of your income at regular intervals, whether weekly, biweekly or monthly. Rather than putting away money whenever you have some extra cash, or saving whatever is left after paying your monthly expenses, with systematic saving you pay yourself first and make building your cash reserve a priority.

In effect, the amount you save on a regular basis becomes a budget expense item, with the same priority as your other monthly payments, such as for your mortgage, insurance and utilities. When you make your savings plan automatic, you’re more likely to succeed as a saver because you can avoid the temptation to spend your extra cash.

Make saving automatic and hassle-free

To work systematic saving into your plan, make an arrangement with your employer or financial institution to transfer a specified amount of money from your paycheck, checking or investment account to a cash reserve at regular intervals. That way you don't have to worry about taking action on your own.

There are many ways you can systematically save. Here are just three options to consider:

  • Payroll savings plan. A key feature of many employer benefit plans is a payroll savings plan. Ask your employer to withhold a designated amount of money from each paycheck and automatically deposit it into a specified account — similar to how an employer-sponsored retirement account works. Depending on your employer's payroll savings plan, the account may be at your bank (e.g., checking or savings account), a credit union or other financial institution (e.g., a brokerage account). You're generally free to change the dollar amount withheld as you see fit and stop the withholding at your discretion.
  • Automatic bank account transfers. Most banks and credit unions let you set up automatic transfers between your checking account and higher-yielding savings or money market deposit accounts. So your checking account would serve as the hub for automatic transfers into your savings, money market and/or other designated cash reserve account.
  • Financial account alternatives. Similarly, most financial institutions, brokerage firms and mutual fund companies give you the ability to automatically transfer money between their different savings and investment vehicles. Of course, if you're looking to enhance your cash reserve, you should first discuss with your financial advisor which funds or securities are most appropriate for this strategy.

    If you own individual securities that pay regular dividends, such as Treasury notes or bonds, you may be able to have those dividends directly deposited into your designated cash reserve account. Keep in mind that investment distributions are subject to taxation, so consult your tax advisor before implementing such a plan.

    It's important to remember a key difference between most bank accounts and brokerage and investment products: Bank checking and deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor, per ownership category (e.g., individual account, joint account, etc.). Brokerage and investment products are not federally or FDIC insured.

Start paying yourself now with a systematic savings plan

Accumulating a healthy cash reserve can help put you on the path to a more financially secure future, where unexpected expenses and financial emergencies don’t trigger monetary mayhem. Putting away a set amount of money automatically and at regular intervals ensures a portion of your income always supports your long-term savings plan, keeping you prepared for life’s inevitable financial emergencies — and opportunities.

Your financial advisor can help you evaluate systematic savings opportunities and implement a strategy appropriate for your financial situation.