FP Article 1
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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.
||Have you ever
been to the circus and watched aerial artistes
go through their motions on a high wire act?
If so, you should also have noticed, at least in
passing, that the safety net strung out directly
below the acrobats serves a seriously important
succeed in our financial lives, we
too need a 'safety net'. So my advice
to my consulting clients and to
audience members, when I speak
professionally, is to establish just
such a cash buffer.
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.
This is an article on the importance
of establishing a personal emergency
buffer fund. I hope
you enjoy reading it. But if it isn't what
you're looking for, you're welcome
to search for something that better meets
your needs. Thank you for allowing
me to serve you.
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
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
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
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
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.
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
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
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
PRACTICAL STEPS YOU CAN
Here are my
guidelines on emergency buffer establishment for
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
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
Warning: It may take as long as three years to
build this buffer. So, keep at it and save
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
because establishing an emergency buffer hinges
on your developing the ability to save money,
for a few fun quotations on savings,
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
© Rajen Devadason