THE popular expression "cash is king" enjoys seasons of tremendous relevance during cyclical global economic downturns and intermittent personal fiscal crises.
Those possessing thick layers of excess money that is "storm-cellared" — in bank savings or fixed deposits or even in pure money market funds — enjoy higher levels of peace of mind during these difficult times.
Indeed, the single most important personal finance lesson I have learnt — via natural osmosis, direct observation, painful experience, and targeted study — over my six decades (thus far) on Earth is that creating substantial cash cushions is prudent and wise.
So, regardless of whether we're sailing through good times or bad, we should all ideally have in place sufficiently plump cash cushions or cash reserves to shield or buffer us from life's vicissitudes.
Such unexpected and unwelcome downturns in fortune and circumstance thankfully seldom last forever. Yet during such adverse episodes owning a thick cushion of cash is soothing.
Imagine facing a medical crisis…
When we do so, we should ideally have in place the appropriate financial instruments such as hospital and surgical, as well as critical illness insurance policies.
I consider such forms of wealth protection coverage even more important than life insurance — and that's saying a lot.
However, just because such policies are safely stored within our arsenal of defensive financial products does not mean that cash buffers are not needed. They always are.
Always.
BUFFER FUNDS
Building appropriately thick cash cushions or cash reserves or, using my preferred term, Emergency Buffer Funds (EBF), is a vital element of our lifelong wealth accumulation initiatives.
Ideally, we all need a fully funded and accessible EBF to courageously ride out the vomit-inducing crashes, dips and drops that the volatile capital market always presents us with at unknown intervals — and of unknowable depths.
It may be over the top (OtT) for me to venture beyond my usual EBF-related advice to suggest the establishment of two ancillary buffer funds to serve as possible sinking funds. Still, here you go:
Those two secondary BFs (buffer funds) can be earmarked for bridging expenses when medical insurance policies don't pay the doctors and hospitals directly because of delays in the issuance of the needed guarantee letter (GL) from the insurer.
Another is for a special cache of cash (pun intended) to deploy tactically into your investment portfolio when irrational fear causes global markets to implode.
(If you keep track of such nerve-wracking yet short-lived flash crashes, you should remember the recent Aug 5, 2024 global crash that started in Japan. It resulted in intraday falls of about 20 per cent in Japan, 10 per cent in South Korea, and about 5 per cent in Europe and the United States.)
Your primary EBF should be fully funded to the tune of three to 12 months of your personal regular expenses. Three to six months for those who are conventionally employed, and six to 12 months for those in business for themselves.
Interestingly, most people don't need to worry about establishing the additional buffers for two reasons:
1. Building just your primary EBF is a lot of work and typically takes between two and five years of disciplined underspending;
2. Relying only on your EBF to take care of medical emergencies and take advantage of flash crash opportunities is often practical for most people.
However, our world boasts a significant number of statistical outliers who are eager to build the additional coatings of economic protection from these cash cushions.
SMART INVESTING
Once you've built your targeted one or three buffers, it's crucial to invest the remainder. You see, there is a dangerously beguiling siren song that emanates from all fat piles of cash reserves. A song that entices the timid and the ignorant to not invest because of the associated risks.
In so doing, the save-only-but-never-invest crowd always fails to grow its money faster than inflation and taxes erode its purchasing power. Nonetheless, I avoid excessive risk-taking with my clients' money or mine.
Those unwise enough to sprint after such risky ventures are speculators who often lose their money or gamblers who almost always lose theirs.
In contrast, patient investors who are well-informed or well-guided usually win. Their money makes them significantly more money over time horizons that ideally stretch out for one, two, three, four or five decades.
But — and here's the rub — none of us can stay the investment course for so long without possessing financially and psychologically stabilising cash savings (read: buffers) in place.
So, make sure you invest appropriately over the coming decades. But regardless of whether you are a conservative, moderate or aggressive investor, if you wish to succeed, you must first save money. Lots of it.
American boxer Joe Louis once quipped:
"I don't like money, actually, but it quiets my nerves."
Let me tell you a secret: It quietens yours and mine, too.
© 2024 Rajen Devadason
Rajen Devadason, CFP, is a securities commission-licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com. You may also follow him on Twitter @Rajen Devadason and on YouTube (Rajen Devadason).