Emergency and Cash Reserve

Cash reserves are highly liquid assets that can earn law rates of interest.
These funds could be invested in savings o time deposits, investment companies
or mutual funds. These funds may also be kept in short-term stable investments ,
which can easily be turned into cash without losing money. It may also be held in
short-term treasury bills and certificate of deposit(CD).
With enough cash reserves you can take advantage of opportunities that may
come your way. This could also be used for emergency or unexpected important
expenditures.
The amount of cash reserve you should maintain will depend on your cash
flow. That will also depend on how long you will be able to get your next cash flow.
Your basic expenditure will also determine it. Basic expenditures could be food,
housing, health and other expenses. The amount of funds you have to set aside
will depend on your age, health, financial situation and health insurance
coverage.
Money you may use for short-term needs can be kept in a low interest bearing
account. Those for medium term needs can be kept in short term certificate of
deposit and those needed for longer term can be placed in money market mutual
funds, or certificate of deposits(CD). Funds needed from 3 to 5 years may be kept
in short term bonds of treasury notes.
If you have other sources of income, you can count on this as a source of
emergency funds. In case you have a low source income, you can use a
combination of cash and credit. If you have a seasonal job or your job is uncertain,
you may need a bigger amount of cash reserve.
Risk Management
Risk management refers to the practice of identifying ,qualifying, and
managing possible risk in advance that a person or an organization could possibly
face. It is important that one should be able analyze possible risk that can take
place and should take precautionary steps to reduce such risk.
The possible risk that a person can encounter may be death sickness,
disability, loss of income, damage to properties from fire, flood, earthquake, etc.
Possible risk that a business can have are:
1. Recession
It refers to a slow down of business activity.
2. Inflation risk
It is an overall, upward increase in the general price level of goods and
services over a period of time. Tendency is that fewer goods can be brought by a
unit amount of money.
3. Market Disruption
This is a sharp, rapid weakening of market performance in response to
external forces. It may be a result of an economically detrimental event or group
of events which anxiety becomes contagious and causing consumer confidence or
investor confidence to fall. An example of which when trading in stocks, the
market can decline rapidly in just a short period of time because of the occurrence
of an unstable and highly erratic trading.
In the United States in the year 2000, credit and sub-prime mortgage resulted
in market disruption, which brought to halt consumers spending which in-turn
increased unemployment and fluctuations in the day-to-day stock prices.
Consumers and investors perception rather than a fundamental collapse usually
causes these market disruptions. To encounter this, large stock exchanges have
established contingencies that automatically stop trading when indications of
sudden substantial losses occur.
4. Default Risk
This could occur when the issuer of a bond or stock whether a business entity
or a government entity would fail to meet the return of investment because of
bankruptcy or mismanagement of the government or the business entity.

5. Regulatory Violation
When a business entity violates government regulation, this would affect the
operation of the business.
6. Environmental Disaster
Environmental disaster could be due to earthquakes, tsunami, nuclear
disaster like the Fukushima Daiichi Nuclear Disaster in Japan.
7. Technology Risk
This can be due to computer or network failure. It could also be a problem
from hackers. Hackers can break into your I.T. System, and can steal valuable data
and even money from your bank account, which can put you out of business.
8. Economic and Financial Risk.
It could be an increase in interest rates, cash flow shortages, bad debt risk,
interruption of supplies, global financial event and etc.
How to mange risk?
1. Get an insurance coverage for your specific risk
2. Insurance key people
3. Avoid risky positions and transactions much as possible
4. Sharing risk with others
5. Minimizing risk by diversification, hedging, leverages, etc..
Insurance is very important for protecting you from unforeseen events. It is
important that you get appropriate insurance policy, which fits your needs.
Insurance protects you in case of death, theft, lose or damage to properties. There
are various kinds of insurances such as: Life insurance, Health insurance, Car
insurance, Property insurance, Property insurance. Home insurance, Financial
disaster insurance, etc.
Tax Management
A tax is a compulsory financial contribution imposed by the government on
personal income, on properties and business income. There are several taxes
imposed by the government:
1. Income tax
This is a tax imposed on a persons income, which is subject to some
deduction.
2. Corporate tax
Tax imposed on the income of a corporation.
3. Property tax
Tax imposed on a persons properties such as house, lot, building, and
corporate properties.
4. Capital gains tax
Tax imposed on the profits made from the sale of an asset.
5. Withholding tax.
An amount withheld by an employer from his/her employee, which will be
paid directly to the government. It could also be withheld by the bank from
interest income earned by a depositor from his deposits or investment with the
bank. Review your withholding tax every now and then, to see that the tax you
pay the government is not more than what is necessary because you are only
giving the government an interest free loan, which could have used more
effectively.