There’s something deeply satisfying about having a bounty of cash stashed away for emergencies.
Not only is it liberating, it's certainly better than counting sheep when it comes to helping you sleep through the night.
We all have our own barometer for how much we need stashed away to pass the sleep at night test.
For some it’s a few thousand, for others it might be $100,000.
Whatever the amount, I encourage you to get there as soon as possible.
If I may be so bold to suggest an amount, I would recommend that you aim for at least three months of living expenses (including all your loan commitments) as the bare minimum.
Why three months?
Because life happens to us all the time. You never know what will happen next.
You might have an accident, or be made redundant.
You might find out you are unexpectedly expecting.
What about this…you’re placed in a situation you don’t like at work and as a result of your diligent saving and discipline, you can look your boss in the eye, throw around a few expletives and announce your resignation.
These events happen everyday of the week to ordinary people like you and me.
The reality is, unexpected events are stressful. And when you’re dealing with a stressful event, you don’t need money worries thrown in on top.
Having three months of savings up your sleeves allows you to get back on track without all the stress.
When investing, you also need to give your investments time to grow. For shares, the general recommendation is that you should not invest any money you will need in the next 5-7 years.
As shares are volatile, you need to give your investments sufficient time to grow and ride the volatility.
You also don't want to be in a situation where you need to withdraw your investment to fund emergency expenses, as selling your investments will typically trigger selling costs such as brokerage fees and Capital Gains Tax. Or worse, you might be forced to sell your investments at a period when the investment is worth less than you originally paid to acquire it.
Before you start investing, first save at least three months worth of expenses.
You’ll thank me if something ever goes wrong.
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