Investing Series Part 3 - Establish a Buffer

Building an Emergency Fund

We have all been there. You decided to drive your car to drop off your son at school. Suddenly, the tire pressure indicator light comes on, entering a turnpike. This perplexes you as you just checked the tire pressure last night. The next exit is about 2 miles away if you could just make it to the exit—about 1/4 of a mile away from the tire flies of the wheel. You are on one of the busiest intersections, so you drive on the rim that lasts 1/4 of a mile. This ends up costing you a smooth $1k. (I can't make this up. It was close to that amount).

It's really nice to have cash earmarked for life events such as these or other things that happen. This is a very important step in creating a path toward FI.

$1,000 Emergency Fund

The first buffer you need is $1,000. This will help you could handle life events, such as a broken down car, blown tire, etc., so you don't tap into your investments or borrow money.

Recurring Non-monthly Expenses

I bring attention to recurring non-monthly expenses because one of the biggest reasons people dip into their emergency fund or go into debt is that they don't create budgets or buckets for recurring nonmonthly expenses. Think of things like Christmas, annual insurance premiums, and maybe taxes on your house. YNAB does a great job creating buckets for these expenses; most online banks allow multiple accounts or buckets. This should never be unplanned and help to keep a buffer.

Non Recurring Expenses

This is another big one. Usually, this includes car maintenance, house maintenance, saving up for a new phone, etc. Creating sinking funds helps you plan for these expenses and will help you not be off track on your plan.

3 to 6 months of base living expenses

You need to have 3 to 6 months of base living expenses. I make it easy and do three months of all expenses, and that's usually enough to cover six months of base living expenses if I cut back in the case of a job loss. This also safeguards against being tempted to touch your market funds during a downturn.

Conclusion

Investing is a key part of becoming ultimately financially independent, and to do that while meeting life's unexpected (sometimes expected) events, you need a cash buffer.

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This article is informational; it should not be considered Health, Financial, or Legal Advice. Not all information will be accurate. Consult health, financial, or legal professionals before making any significant decisions.

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Updated 11/2/23