The amount of liquid funds will vary with your personal circumstances and comfort level. Another useful liquidity guideline is to have a reserve fund equal to:
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A. B. C. D.B
The answer to this question is A. 3 to 6 months of income.
Having a reserve fund is an essential part of financial planning. A reserve fund is a pool of liquid funds that can be accessed easily and quickly in case of emergencies or unexpected expenses. The amount of liquid funds you need to keep in your reserve fund depends on your personal circumstances and comfort level. Generally, financial experts recommend having enough funds to cover 3 to 6 months of your income as a reserve fund.
This guideline means that you should have enough funds in your reserve fund to cover your living expenses, including rent or mortgage payments, utilities, food, and other essentials, for at least 3 to 6 months if you were to lose your source of income. This guideline assumes that you have a stable job and a regular income stream.
Option B, 3 to 6 months of after-tax income, is not the recommended liquidity guideline, as it may not provide enough funds to cover your essential expenses.
Option C, 4 to 8 months of after-tax income, is higher than the recommended guideline and may result in unnecessarily tying up funds that could be invested elsewhere.
Option D, 6 to 12 months of income, is higher than the recommended guideline and may result in unnecessarily tying up funds that could be invested elsewhere, which could lead to missed investment opportunities and lower returns.
In summary, having a reserve fund equal to 3 to 6 months of income is a useful liquidity guideline that can help you manage unexpected expenses and emergencies without having to rely on high-interest debt or liquidating long-term investments.