Keep your safety fund handy

Safety is a Priority

Most people call it “Emergency Funds“.

But me, I prefer to call it “Safety Funds“.

Why?

Because whenever I hear or read the word “Emergency“, I automatically associate it to something bad.

Do you feel that way too?

Anyway, if you haven’t come across those terms yet, don’t worry.

I’ll explain it to you in a while.

Imagine these first

You are happily driving your way to the office, you woke up early and prepared a hearty breakfast so that you won’t be late.

Suddenly, in the middle of rush hour traffic, your car breaks down.

Naturally, you check it yourself first and when it seems that you can’t do anything about it, you call a towing service and bring your car to the mechanic to get it fixed.

Where do you get the money to get your car fixed immediately?

Here’s another scenario.

You arrive at work early and start going through your to-do list one by one.

Just before lunchtime, you feel an uncomfortable abdominal pain.

You think that it’s just some gas that you need to pass or, at the most, you just needed to go to the bathroom.

A few hours pass and the pain just doesn’t subside.

You decide to go to the emergency room and find out that you need to be observed because you have the symptoms of having appendicitis.

You soon learn that you need to go under the knife so the doctors can remove your appendix.

Where do you get the money to pay for your operation?

Here’s the last scenario.

You have been working for quite some time for your company.

You enjoy the benefits, the people you work with, you have a good boss and you are gradually climbing the corporate ladder.

An email arrives in your inbox one fine morning and you find out that there will be a meeting with your managers.

In the meeting, you felt as if a huge concrete slab was crushing your chest because you find out that your company is doing a major downsizing and they had no choice but to let go of their employees including you.

Where do you get the money for your monthly expenses while looking for a new job?

Your Safety Fund

If you answered, “My Savings” to any of the questions above then you have an ineffective money management approach.

Those scenarios are where you’re safety fund comes in.

Your safety fund should be money that you have immediate access to.

This fund should have around 3 to 6 months’ worth of your monthly expenses.

By knowing how your cash flows, you should easily be able to determine how much your average monthly expenses amount to.

You then multiply it by 3 or 5 or 6, depending on how safe you want to be.

I personally have around 6 months worth of monthly expenses stashed in my safety fund.

By the way, since this fund should be immediately accessible, you should put it inside a bank’s regular savings account so that you would generally have no problem withdrawing in case any emergency arises.

Your safety fund also protects your financial goals by not having to disturb your investment assets that are in place for the long term.

After you have successfully built up your safety fund, you are now ready to invest! (I am assuming you’ve done your net worth statement and cash flow statement)

Here’s another tip, while you are building up your safety fund, use that time to educate yourself about the different investment options that are available to you.

We’ll talk about the kinds of investments that you can have in another post.

To our success in all areas of life,

Argel Tiburcio

Image Source: http://www.aclibre.org/wp-content/uploads/2013/02/financial-emergency.jpg