Smart About Money: Should people be required to have cash reserves?

Personal finance expert Suze Orman often speaks about the importance of “expecting the unexpected,” and she’s right.

Of course, sometimes people face disasters no one could have seen coming or planned for. But things such as higher property tax bills, “emergency” dental surgery, significant veterinarian bills for pet operations and car repairs are among the common “unexpected” expenses everyone runs into sooner or later.

Banks are required to have reserves, and many have reserves in excess of what’s required. Because banks are also required to expect the unexpected and most banks figure that the higher their reserve levels, the more “unexpected” they can weather.

Should people be required to have cash reserves? That probably won’t happen anytime soon but – knowing how having reserves helps banks – it certainly could be an interesting idea.

You may have read that Americans have very low savings rates, that many are living paycheck-to-paycheck and couldn’t cover an unexpected expense of even a few hundred dollars.

Is that true? It’s probably true of some number of individuals, especially young people just starting out. But there is also some indication that Americans’ savings rate is actually higher than commonly reported.

The bottom line: It doesn’t matter if other people have savings/cash reserves or not. You will be able to weather more of the expectable “unexpected” if you do.

If you have money set aside and you never need to spend it, great. But since it takes time to build or refill your savings, today is a great day to get started.

There are different ways to build cash reserves but there’s no doubt in my mind that this is the easiest. Have two savings accounts, two separate “buckets” – one for smaller expenses, say, under $1000 and one for expenses above that. Set an automatic sweep of a comfortable amount at regular intervals from your checking account into each of those savings accounts. And increase those sweep amounts by a few dollars on a regular basis.

As little as $20 a week will give you more than $1000 in a year. $200 a month would give you nearly $2500. The key is to let set-and-forget, week-after-week or month-after-month consistent saving work its “magic” for you over time.

You can basically use the same idea to fully fund every tax-advantaged, free-money match savings plan your employer may offer, including a 401(k) account, flexible spending account and (if available) a Health Savings Account.

Most people – even people with very modest incomes – report that they “never miss the money” and they’re 100% delighted to see their reserves growing “so painlessly” and so quickly. When an unexpected expense comes up and they don’t have to put it on a credit card, they’re even happier. They start to see that having savings makes life easier in all kinds of ways. It does!

One last thing: Death is the ultimate “unexpected” to expect. Some individuals – possibly kidding – claim their goal is to get to the end of their lives with nothing left in the bank. Well, to each their own. There’s no prize for dying the same day the money runs out, and possibly a substantial amount of anxiety if the money’s all been spent and someone who “expected to be dead” is still very much alive.

Nick Maffeo is the President & CEO of Canton Co-operative Bank in Canton. “Smart About Money” is a regular column he writes for the Canton Citizen. Have a financial question you’d like to ask? Email to


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