As happens often in conversations with ongoing clients, I bring up the subject of cash reserves. It usually surfaces naturally when they make known their desire to explore the acquisition of more investment property. Since we all live in the universe of reality, we understand the status quo is but a measurement of the here and now. Assuming your financial status has remained static the last 1-5 years is a mistake we simply don’t allow. Things change, and often in ways we never saw comin’ — both positively and negatively. For that specific reason it’s axiomatic that any Purposeful Plan must have flexibility as a major building block in its foundation.
How much do ya need for cash reserves? Here’s the formula.
You didn’t really believe there was a formula, did ya? There are investors who can prudently maintain reserves smaller than those whose portfolio is half of their own. You must take in the entire financial picture. What’s the family income? How much are you saving after tax? Do you have wildly or mildly cash flowing properties? Are you planning moderate to major changes and/or additions to your portfolio? Is your income — from any source(s) gonna go up or down significantly? Is your family budget about to change significantly? Which direction? And the beat goes on.
The answer to the question? Cash reserves should be more than you think, but not so much as to be silly. The scientific test that’s worked for decades is: Do your cash reserves allow you to sleep like a baby? Yes? You probably have enough. Add flexibility to this — the same as every other chapter of your Plan, and you can check of the box marked, cash reserves.
The importance of cash reserves simply can’t be overrated. I’ve literally seen entire portfolios lost as a consequence of reserves relegated to after thought status. Virtually all long term real estate investing is done for the expressed purpose of creating a magnificently abundant retirement income. Therefore, having the cavalry ready to save your entire retirement from imminent peril is probably something you should have ready — and before you begin investing.
Why? Cuz things change.
Photo: Damian Gadal