Many people find personal financial planing boring. Building a cash safety net is an important part of your personal finances even though it isn’t exciting. I have written previously the very simple idea that you can just not buy what you can’t pay for. If you can’t pay for it this month, don’t buy it.

But that leaves out one thing. Even if you do have the cash you should be building up a cash reserve before buying luxuries. The typical advice is to build up 6 months of expenses in cash (rent or mortgage, food bills, utilities, health care, etc.). Now actually building up to that level can take awhile and forgoing all non-mandatory expenses until you have that saved is not usually reasonable. But as part of your personal finances building up an cash reserve is important (even if it is boring). And I believe you really should aim at a higher level – say building to 1 year.

A significant portion of downward spirals in personal finances are started when people have emergency expenses and have to borrow that money (since they don’t have cash reserves). And even worse when they start racking up huge fees for late payments, increased interest rates on outstanding debt, health care expenses if they fail to keep health care insurance…

If you are over say 26 and don’t have a cash reserve yet saving for it should be part of your monthly budget. How quickly you build that up is a personal decision but I would say a 2% of the target amount (so if you are aiming for a cash reserve of $20,000 then $400/month). If you have next to nothing saved now start aiming at 6 months. As you get 3 months saved up start aiming at 9 months. As you get 6 months saved up start aiming at 1 year. And you have to also be saving for other needs – you shouldn’t raid your emergency fund savings for other things (a new car, a vacation…). This takes real discipline but it is much easier than the challenges our ancestors had to face of billions of people face financially today. So yes it is not easy, but really those that feel sorry for themselves need to realize they shouldn’t expect that they are so special the world owns them financial riches with little effort.

Doing something is better than nothing so do what you can (even if it is less than 2% of you target). But realize that is one of the weaknesses in your personal finances and try to fix that as soon as possible.

Very important personal financial allocations for you to put first include: current needs (food, car payment, rent/mortgage, utilities…), insurance, creating a cash reserve, retirement savings, saving for future purchases. Then there are luxuries and treats, such as: eating out, vacations, cable TV… Many people put current needs, luxuries and treats fist and then say they don’t have the ability to do what is responsible (check how rich you are – before making such claims yourself).

Related: How to Protect Your Financial Health – Save Some of Each Raise – Buying Stuff to Feel Powerful – Consumer Debt Down Over $100 Billion So Far in 2009 – posts on basic personal finance matters

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