RATIONAL RESERVE RULES
DO you want to reduce your own financial stress? Then consider these time-tested guidelines. How many times in your life have you run out of money and felt your stress levels — perhaps along with your blood pressure — start to skyrocket? If you’re like me, the answer is: far too many times for comfort!
The cure for such episodes of financial difficulty is to be extra tough on ourselves so we consistently spend less than we earn. Yes, I know that’s tough! But if we figure out ways to do so then we will generate monthly cash flow surpluses.
If those surpluses are then channelled into savings and investments comprising a wealth accumulation portfolio, over time a person’s net worth (= value of aggregate assets minus total liabilities) will grow.
The investments selected for this purpose of long-term wealth building should, in my opinion, be regarded as distinct and different from three rational forms of cash reserves I will now outline for you. Note: Building your wealth portfolio, like crafting your career, will stretch across several decades. Thankfully, establishing your vital reserves should be done more quickly!
My cryptic abbreviations stand for your Emergency Buffer Fund (EBF) reserve; Emergency Medical Fund (EMF) reserve; and Emergency Wallet (EW) reserve for men and Emergency Purse (EP) reserve for ladies.
All these reserves should be in cash or near cash instruments like money market funds. Normal people are NOT able to cause such cash reserve buffers to magically materialise! It takes time — anything from one month to a whole decade of living below our means — to fully fund all three. Both your Emergency Buffer Fund (EBF) and your Emergency Medical Fund (EMF) should be in your bank savings account, your fixed deposit accounts and, possibly, safe and super-liquid money market funds. Your Emergency Wallet or Purse (EW or EP) reserve should be cash folded into secret compartments of your wallet or purse.
Your EBF should be large enough to cover three to 12 months of your normal expenses in case you are fired or need to change your car or face some other huge emergency expense. Wise men and women who are conventionally employed, meaning they earn a fixed salary, usually establish EBFs of as low as three months’ or as high as six months’ normal expenses. This process takes several years.
Your separate EMF may be calibrated to be as small (say, RM100) or as large (perhaps RM100,000) as you want. You should certainly ensure you are already covered by appropriate forms of life and medical insurance such as total permanent disability, critical illness, personal accident, and hospital and surgical policies. Also, carrying a medical card in your wallet (or purse) is smart.
Your EMF, however, is your own money you have earmarked for any medical emergency not readily covered by your various medical policies. If you use government health providers exclusively, you can get by establishing an EMF that’s, say, under RM10,000. If you tend to also use private clinics and private hospitals then growing your EMF gradually to perhaps RM50,000 or RM100,000 may save you a lot of grief and stress later. Thankfully, those of us who contribute to EPF may also be able to withdraw money from our Account 2 (which receives 30 per cent of our aggregate EPF contributions) for valid, serious medical expenses.
Finally, your EW or EP reserve is secret cash you carry inside your wallet or purse. It is not to be spent, unless you need to. Its purpose is to provide you with an invaluable sense of calm even when you may have forgotten to bring out your credit or debit cards, or been unable to visit an ATM in a long while.
Your buffers will not make you rich... directly. But they can help you build serious wealth (which in my book is RM1 million or more in liquid assets like stocks, real estate investment trusts, and unit trusts, as opposed to just in illiquid assets like physical properties and private businesses). Such liquid and serious wealth will reside in your longterm portfolio of wealth, which should be permitted to weather bad times.
As you know, life is uncertain. Sometimes it chooses not to rain but to pour! If you don’t have your three types of buffers or reserves fully or at least substantially in place, chances are great you will have to liquidate chunks of your portfolio of wealth at depressed prices. Murphy’s Law (if anything can go wrong, it will) is seldom denied; it often stipulates that pricey life emergencies rear their ugly heads at the most inopportune times.
However, if you choose to plan and live proactively by following my rational reserve rules you will be stacking life’s deck of cards in your favour. So allow me to wish you all the best starting — and one day fully funding — all three types of reserves.
There is no risk in this suggested form of saving; all the money you set aside is still yours to do with as you see fit, especially when you face an emergency.