Boss Blog: February 15, 2017
Emergency Funds…You have to be Liquid baby
As I began on my financial journey I started watching the industry Gurus. Experts such as Gail Vaz-Oxlade and Suz Orman were always in my daily routine. I would chew up any information they would spew out. One common theme they always seemed to stress was to be liquid. I would always hear, “Well how liquid are you?” So then I started to wonder what it meant to be truly liquid. Well, what is liquid? Liquid, in its most simple definition, is cash. Liquid is straight cash, that is easily accessible. Well, then why is it important to be liquid? In this post, I will go over why being liquid might be the most important thing you can be when it comes to your money.
1) Ain’t no Sunshine when it rains
We have all heard you should save for a rainy day. Usually, when it rains I don’t go anywhere so why should I save for that. Rain does suck, but you know what sucks more, broken water heaters. Dead transmissions, new roofs, braces for the kid, and losing a cell phone are pretty crappy too. What’s even crappier is to have to put any random expense on your VISA and then carrying a balance. This is why being liquid is so key. I borrow from myself, and then I pay myself back. I refuse to pay the bank or VISA back with interest on simple things that I should be able to afford. Being liquid will, in turn, protect your credit rating. It also protects your ability to borrow for things that you should actually be borrowing for. Things like a house.
2) Being Liquid Protects your Investments
So you have taken all the right steps. You have the RRSP and you have bought the house. You’re putting money away for your child’s education and even opened up a TFSA. So the question then becomes what happens if you become ill or injured? What happens if you get laid off or start a different job that pays less? Where do you think you will draw from once you have exhausted all your credit? That RRSP was meant for retirement not to float you during tough times. That home equity was an investment, not a stop gap. Being liquid allows you to keep investments intact when tough times hit. Being liquid can even allow you to continue your personal financial plan. It is nice to be able to keep on saving even when you experience a change in life. I doubt you want to retire at 66 or 70 because of one tough year in your 40’s.
3) Take Advantage of Opportunities
Have you ever come across a fancy new item in the store and said, “If I only had the money, I’d get it.” Well, what if that fancy new TV you held back on was instead a job opportunity? What if that brand new handbag was instead a rental property that can earn you extra income? What I am trying to say is that opportunities in life will present themselves. In order to capitalize on them, you will often need cash. I imagine there were many people Mark Zuckerberg approached to help him fund his silly start-up FaceBook. It’s amazing what 10K got the ones who bit on his idea. I’m not saying opportunities like that will come along. What I am saying is that being liquid is what allows you to move on opportunities that come your way. With careful planning of course.
Solution:
Create an emergency fund and contribute often to it. Each year set a new goal of what you want this fund to be by the end of the year. My emergency fund is not my credit card or my line of credit. It is definitely not my TFSA or my RRSP. My emergency fund consists of straight cash easily accessible in my savings account. Every year I set a new target of what I want that fund to grow to and then I set aside money from each pay to do so. When I reach that goal level, it becomes my new zero balance. That means I don’t go below that amount. If I need extra cash I take from it then replace it as soon as possible. I borrow from myself, not the bank. Creating a strong and dedicated emergency fund should everyone’s goal. It doesn’t take a lot of effort, just dedication. Find out what it costs you to survive every month and then aim to have 3 months saved. Once you reach that amount make it 6 months. Once you reach that, make it 1 year. Be strong and don’t let up. Remember everyone, “Cash is King!” Always has been and always will be.
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Joseph James Francis is a Financial Advisor. You can find him on various social media platforms and at budgetboss.ca.