Your Finances are Relying on this Get-Out-of-Jail-Free Card!
Things won’t always go to plan. There will be times when things will go haywire. There will be times when you’ll have the joy of having unexpected things happen to you.
Some good some not-so-good. But that’s life.
It’s messy, it’s random, it’s unknown.
Luckily there are ways in which you can protect your finances from these out-of-the-blue events because when it comes to our investments they do not like to be caught off guard.
They like to know that they’re well-cared for.
And what’s more is that they do not like to be sold on the cheap. No way José.
That’s why it’s so important to plan for unplanned events and to make sure that your finances are prepared for such things, too.
You need to have enough dosh to make it through those dull, rainy days.
If covid has taught us one thing it’s that everything can change in an instant.
From jobs to stock markets, nothing is ever guaranteed.
It can all come and go in the blink of an eye.
That’s why you must plan for the worst but hope for the best.
A mantra that I do my best to live by. Read here why your future self needs you to save now even if you have nothing to save for…yet!
Ran out of cash? Oops.
Let me show you how something seemingly minor can crop up and quickly throw your finances off course.
Say you had budgeted for an entire month’s worth of expenses and at the end of the month you calculate that you’ll be left with £100.
Okay, fair enough. Well, what would you do if your boiler broke down (prices range between £500–13,000!) and you’re now rather short?
Or, take something a little less drastic — what if your car needed an urgent repair?
I take it that most of us would put this random, hopefully not-too-frequent, expense on our credit cards (a.k.a take out a loan) or use our overdraft if we’re desperate.
Perhaps we might even sell some of our investments if we really had to.
But none of this is ideal.
No one wants to be lumbered with more debt nor do you want to be forced to sell any of your investments.
And since no one can time markets you could be selling your holdings at a really nasty time.
You don’t want to ever be a forced seller
Mounting debt is bad, selling investments is bad and touching your overdraft is a dangerous game since banks can (technically) ask for their money back at any point and failing to pay it back will harm your credit score.
It won’t be pretty.
Then there’s credit card debt: interest will keep piling on and on until you’ve paid the debt off, in full. Read here why credit cards are cool and crazy plus top tips to stay on track!
Debt holes are dangerously tricky to climb out of and they usually come about when you’re short of cash
When you don’t have enough liquid cash (aka cash that can be accessed right away) it leaves you having to resort to credit cards and nasty overdrafts to service the payments.
I don’t blame you. It’s so hard to have cash (and to avoid touching it!) since there are always things that surface every now and then that even if you are in possession of some spare cash, it doesn’t stay spare for much longer.
But luckily all of this can all be avoided with one simple move in your finances.
Say hello to your emergency fund: a real-life get out of jail free card!
An emergency fund (says the name) is for emergencies only.
This cash should not be used when you’re in desperate “need” of a new pair shoes nor should it be used to invest because if you have £1,000 in your emergency fund but decide to invest it and the market crashes, this could shrink your precious umbrella.
You need this cash in an ultra-safe place, away from markets and crypto or anything else remotely volatile.
This is precisely why it’s best to keep this cash in a good old-fashioned high-yielding savings account.
It won’t pay you much in interest (though it’s rising!) but your money is 100% safe.
Here are 4 steps to building your emergency fund
#1 Before you begin saving, you’ll need to calculate your monthly expenses.
This includes all your outgoings, from your train fares to your mortgage.
Tally this up and make a note of it.
#2 Your emergency fund should (ideally) be 3–6 months’ worth of expenses, as a general guide.
So if your monthly expenses are £1,200 then your emergency fund will need to be between £3,600-£7,200.
If you wanna bump it up, you could save a year’s salary.
#3 Start small.
Building up half a year’s worth (or more) of expenses in an emergency fund is no small task.
So begin by saving a little each month increasing it gradually and overtime, you’ll have built up your fund.
#4 I recommend storing this cash in a separate savings account.
I say separate because this removes the temptation to want to splash the cash and reduces the likelihood that you’ll spend it — accidentally, of course!
So keep it separate and under lock and key.
This cash will give you peace of mind knowing that if the worst happens, your finances can almost certainly handle it.
If you get laid off from your job, you’ll be able to cover 12 months of expenses without relying on an income. Psst: read here how to bullet-proof your finances to survive a layoff.
That’s pretty comforting if you ask me and is bound to take off some of the pressure during the gruelling job search.
So, when it comes to this fund, the more the merrier! Pile it on.
Cash is king
Having a cash cushion is probably one of the best things that you can do for your finances — and your future.
You’re probably thinking that your precious cash will get washed away by inflation (quite rightfully so) and that there are better ways to grow your capital.
Gotcha. All true.
Except for this: cash allows you to take advantage of market downturns and pounce on ’em.
It gives you an edge and, if used wisely, can really boost your returns.
Don’t make the mistake of underestimating the glimmer of cash, for when the time comes, it can be your saving grace or knight in shining armour.
Take your pick.
You first gotta work on building up that rainy day fund and when its buff enough, you can build another cash pile — for when markets take a tumble.
Double yay.
The top 1% all have a hefty proportion of their net worth stashed in cash.
Not because they’re boring, unadventurous or because they can’t think of better places to put their money!
But because they’re bargain-hunters. Opportunists.
Cash gives you buying power. That gives you freedom.
Dare to think different.
To do different.
You might just be rewarded.
Disclaimer: This is not investment or financial advice. It is my opinion only. This is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
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