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Soar As High As You Like - But For God's Sake, Get Your Safety Net In Place First!

by Rajen Devadason

Money isn’t the most important thing in life,
but it’s reasonably close to oxygen on the ‘gotta have it’ scale.

 Zig Ziglar

More specifically, I urge people I care about to establish a reserve fund of between 3 and 12 months' regular expenses. I usually call this reserve fund or cash buffer or economic safety net an emergency buffer fund. Its fundamental purpose is to provide both fiscal and emotional stability during times of personal economic upheaval.

You see, for most of us normal people, our biggest asset is not anything that shows up in a conventional net worth statement.

A net worth statement is nothing more than a simple listing of material assets and liabilities, which allows for quick calculation of your net worth position. It’s quick because your net worth is mathematically derived by this simple formula:

NET WORTH = ASSETS minus LIABILITIES

Typical items that show up on the plus side of a net worth statement are key assets like cash, stocks, mutual funds or unit trusts, vehicles, gold, real estate and jewelry. Normal liability line items are home mortgages, credit card balances, car loans and family loans.

All these are important, but the biggest asset a person has is not one of the key assets I've just mentioned. No! The biggest asset for most of us is our capacity to earn money for 20, 30 or 40 years at our jobs.

Yet, let’s face it, virtually all of the money most of us will ever earn evaporates into the financial atmosphere as personal expenses, interest charges and taxes.

Clearly, to be successful financially, we have to reduce that seemingly persistent rate of evaporation. Let me be blunt:

Our long-term future wealth can only be built from the bricks and mortar of the financial surplus we set aside each month.

This surplus should usually be invested in assets that fluctuate in value. (This is closely tied to the concept of investment risk. If you would like to learn more about that intriguing subject, click here.)

It has been historically proven through more than 200 years of equity market data that those most able - both economically and temperamentally - to ride the ups and downs of markets are the people who tend to accumulate the most wealth throughout their lives.

Yet, to successfully ride those nerve-wracking but eventually profitable fluctuations, you must have a safety net, the strong strands of which are made of cold hard cash. This safety net is your emergency buffer account.

However, if you’re concerned that you don’t know enough about investing to risk putting down real money in real investment markets, then what you need as much as an emergency buffer account is an easy, personally activated education programme.

My FREE ebook 26 Books to Take YOU All the Way to the TOP! is just such a resource, which is aimed at helping begin a five-year self-study programme in personal finance, economics and investing.

Now, as I was saying about the ups and downs of markets, you will find that fluctuations in investment asset values usually go hand in hand with the dips and rises of the general economy.

The perverse side of Nature that has caused Murphy’s Law (‘if anything can go wrong, it will’) to gain such wide prominence is that in most cases when you need extra cash because of a downturn in your personal, internal economy, the entire external economy also chooses that moment to falter.

The only way to safely ride the bumps in our economies - general and specific - is to have our financial safety net in place.

So, look at your own circumstances, check your various bank balances, other savings and investment balances and figure out just how long you can last if a catastrophe takes place today that stops you from actively earning a living for one full year.

Be honest now, can you last a week, a month, three months, six months, nine months, or a year?

Only you can answer that question.

I hope you do so because the answer you give the person you see in the mirror will help you confront honestly where you are in your life’s financial journey.

Again, your willingness to invest resources in educating yourself is directly correlated to your chances of long-term success in the financial arena. If you see yourself as a rookie in this field, then my very first book, Your A-Z Guide to the Stock Market – And all You Need to Know About Capital Terms, is a great resource. It contains 1,001 terms that are usefully cross-linked to help you take a self-directed journey of financial self-education. (You may learn more about it here.)


PRACTICAL STEPS YOU CAN TAKE!

Here are my guidelines on emergency buffer establishment for your consideration:

If you are employed by an established, healthy company that is unlikely to go bust anytime soon, put in place savings amounting to between three and six months’ normal expenses. If your boss loves you to bits and can’t get along without you, three months is plenty. But if your boss would love nothing better than to tear you to bits and spit out the pieces, err on the high side!

If you are self-employed, running your own business, make sure you have at least six months’ expenses available in savings if your business is in good shape with many clients who pay on time. If business is shaky, then opt for an increased buffer size. Having a full year’s reserves is generally more than enough for most people.

Warning: It may take as long as three years to build this buffer. So, keep at it and save diligently.

And remember, your emergency buffer is for emergencies, not for exciting ‘opportunities’ like a great sale at the local department store! Having your buffer will give you financial stability, which will quickly morph into emotional stamina during otherwise traumatic periods in your life.

Also, your enhanced financial stability will help you weather the ups and downs of the investment markets.

Just one point before I conclude: If you currently have very little saved as a buffer, you are in a financially precarious position.

It is imperative that you reduce your near-term expenses and build up your reserves as fast as you can to your targeted sum.

For most people, doing so usually takes anything from 12 to 36 months. It’ll be a long slog, unless you suddenly have a massive bonus land on your lap or have an investment rise suddenly in value and are savvy enough to take some profit and park it within your buffer fund.

Do yourself a favour. Don’t bank on or hope for some strange occurrence to provide you with the funds needed to weave your safety net. Just do the work and set the money aside in a safe place where yields may be low but certainty of being able to get your money back is absolute. To my financial planning clients, I recommend the use of bank fixed deposits and money market funds. (If you are based in Malaysia, where I have my practice, and need help in starting a savings programme that utilises a sound money market fund, then you're welcome to drop me a line after taking the time to figure out who exactly I am. Details are here.)

In closing, because establishing an emergency buffer hinges on your developing the ability to save money, for a few fun quotations on savings, click here. Also, if you feel a stirring deep inside yourself to make establishing your very own buffer a major life goal, you might find it helpful to invest in, read, and subsequently study my ebook on goal-setting  UNLEASHED!)

© Rajen Devadason