In these kinds of situation, the salespersons from banks or investment managers or insurance companies are definitely not your number one friend (because they have their own interests and products) while financial planners are definitely not free. So I’m starting this blog in order to share some insights on investment for normal people like you and me.
So as an introduction to this blog, I’d like to share that I have what I call “the Chiawono’s Three Rules before You Start Investing on Anything” that all of us really need to read and DO. And by ‘all of us,’ I really mean all. That includes first time investors as well as regular investors.
First of all, before you start thinking about portfolio or asset allocation or simply thinking about where will this part of my money go, you need to make your own Emergency Fund. Our daily needs are paid with our earnings. But things happen. Salary-men get fired, freelances have their low order cycles, entrepreneurs realize losses sometimes, and even children get allowance cuts. I know, this may sound a bit pessimistic, but believe me, in managing your personal financial, you need to prepare for the worst. In the instance that one of those things happen, we need to make sure life goes on. That’s why everybody needs this Emergency Fund. So, if you don’t already have your own Emergency Fund, make it a top priority and set aside a portion of your income for this purpose.
Before we go deeper, we have to separate the Emergency Fund from our investments. Emergency Fund should be idle and liquid while investments (we’ll cover this later) should serve a purpose within a time frame and (therefore) not always liquid.
Now, how much money should we put into this Emergency Fund? Well, to really answer this question, we have to understand that everybody’s situation and needs are different. To really get an exact amount that suits a certain someone, you will need to consult with a financial planner. And even after that, your situation might change. So here are a few guidelines for starting your Emergency Fund:
1. Some financial planners assume the amount the amount from the expenses, while some assume the amount from the earnings. I use the latter approach. In planning for Emergency Fund, use your current income (preferably monthly) as a benchmark.
2. Understand that every source of income has different risk level. For example, a graphic design freelancer is considered to have less job security risk than an in house graphic designer in an established company.
3. Think for the whole family, not only for yourself. If you have a wife and / or children, you’ll definitely need more safety cushion when the situation where you need your Emergency Fund presents itself.
4. Always take time to evaluate your Emergency Fund periodically. Your income increases overtime and so does your expenses. It’s silly to think that the Emergency Fund may stay the same.
To make it practical, this can be your minimum starting point:
1. If you are single and employed, you should prepare 3x – 6x of your monthly salary for the Emergency Fund.
2. If you are married without any child, you should prepare 6x – 9x of your combined monthly salary for the Emergency Fund.
3. If you are married with 1 child, you should prepare at least 9x – 12x of your combined monthly salary for the Emergency Fund.
4. If you are married with 2 or more children, you should prepare at least 12x of your combined monthly salary for the Emergency Fund.
5. If you live off your pension fund, you should prepare at least 12x of your monthly pension for the Emergency Fund.
6. If you are a freelancer, you should prepare at least 12x of your average monthly income for the Emergency Fund.
Some of you might think that the numbers above are quite big. Well, they are. But in my personal view, when you’re bumping into a wall, it’s better to have an airbag popping out from your front. So while you are allowed to think that airbag and Emergency Fund are optional, we dread for the time when we regret that we don’t have them.
Well, what are the other 2 rules? Just stay around and expect them to be up as soon as possible.