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Welcome back! This week we’re going to talk about building your cash reserves. I wish so badly that somebody would have taught me this when I started out, but they didn’t…so, I’m going to teach you. Building your reserves, both for your business and for your personal life are critical steps in securing your financial freedom. When you build your reserves, it essentially gives you a cushion and takes the edge off so you can focus on doing what’s best and producing for yourself, your family, your staff, and your customers.
The first thing I want to talk about is building a 3-month reserve for your personal finances. For the sake of this example, we’re going to say your personal expenses and business expenses total $5,000 a month each. That means you need to build a 3-month personal reserve totaling $15,000. That amount should be sitting in your checking account, it’s not savings.
The reason for this 3- month reserve is to take the edge off. There will always be things that happen in life, such as a car breaking down, your furnace going out, an injury and time away from work, etc….anything can happen. Nearly anything that can happen will end up costing your money. Experts like Dave Ramsey talk about having a $1,000 cash reserve. Personally, I think that’s ridiculous… Almost everything these days costs more than $1,000…. So it’s simply not enough. I want you to build a 3-month reserve of personal expenses. In this case, $15,000.
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Most people follow me for wholesaling and flipping houses. Let’s take a wholesale deal for example, if you can wholesale a house and you make a $15,000 profit, that is literally one deal to cover a 3-month reserve. One deal and you have your reserve built. This is not something that should take you years and years to build. If you’re not currently wholesaling or flipping houses for BIG PROFITS, well then, you should probably start and follow me for that reason. But if you’re not, then find some other ways to generate some revenue very quickly. It could be buying and selling about anything or doing odd jobs that pay well. It can also be from a job if your job pays well enough and your expenses are low enough (most people are not in this position).
So, the first is a “3-month personal reserve.” Second, you’re going to build a 3-month business reserve, for the same reason as to take the edge off your business and add a little cushion, so you can start to make better business decisions. When you have a 3- month reserve you are not 100% reliant on bringing in fast money, solving problems, and covering overhead. Instead, you can make better-educated decisions. You can make decisions that are going to take care of and benefit your staff, which in turn will take better care of your customers, thus making you even more money. So, build at least a 3-month business cushion after you have your 3- month personal cushion. Now… still using the same example as above, you should have $15,000 in your personal account and $15,000 in your business account.
Next, you’re going to raise your personal reserves up to 6-months. We do this so we can really start to focus less on our personal needs and start to really focus on building our business which is the main driver for our wealth and freedom. When you have a 6-month personal reserve, you’re probably in the top 5%. Most people do not have that. In this case, if your expenses are $5,000/ Month, and now you have $30,000 set aside for a personal reserve, that’s more than enough. There’s not really anything that is going to be costly enough to wipe you out at this point. Just make sure you are well insured so some freak accident or illness doesn’t wipe you out. . Most things are going to cost a couple of grand, $3000, $5,000 at the very most. Having a 6-month reserve puts you in a position to make smart decisions for the future and not to make decisions that are potentially irrational or emotional.
Then, the last step is to build up to a 6-month reserve for your business. Again, when we build a 6-month reserve for business, it takes all that stress out of having to make decisions. Having a 6- month business reserve allows you to be more future-thinking, flexible with market conditions, the ups, and downs, the market cycles, etc, without worrying about doing something wrong that may put you out of business. Until you get to this point, your business is essentially at-risk. If something catastrophic happens… Like Covid, the people and companies that do not have their reserves in place may suffer very quickly and likely go out of business.
After that point, once those reserves are built, that’s when you start investing for your future… But Do Not Invest Before Your Reserves Are Built!!! Building any cash outside of these accounts once your reserves are built is unnecessary. In fact, it’s probably considered not very intelligent, financially speaking. You still “can”, it’s just not needed. If you have a business that is producing profits faster than you can invest then consider yourself one of the lucky few.
The entire reason for building reserves is to hedge our risk. Things will always happen in life, often outside our control, but when we expect the problems to happen and set ourselves up to be protected, then the problem often hurts a lot less.
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