The Aleph Blog » Blog Archive » Build the Buffer

Build the Buffer

When young couples come to me and say, “What should we do financially?”one of the first things I say to them is something like, “Build the buffer.”  You should have 3-6 months of expenses saved up.

I sometimes phrase it like this: use the stoplight rule.

  • Less than 3 months expenses in the savings fund? Red light. Defer all discretionary expenditures.
  • 3-6 months expenses in the savings fund? Yellow light. Some discretionary expenditures allowed, so long as you don’t dip back into the red light zone.
  • More than 6 months expenses in the savings fund? Green light. Discretionary expenditures allowed, so long as you don’t dip back into the red light zone.

For what it is worth, the same rule works well with congregational and other nonprofit budgets, for nonprofits without a significant endowment.  It balances mission needs, and donor giving.

But let’s take another look at the buffer, and why you might like to have it bigger.  Consumer finance charges really eat into the incomes of many people.  What if your buffer was so big that you could:

  1. Pay your insurance premiums in annual installments?
  2. Buy your next car without financing it?
  3. Pay off your credit card bills in full each month?
  4. Ask for a discount for cash when buying big ticket items?  (You’d be surprised.  I drove quite a deal with my orthodontist for my wife and eight kids. I’m the only one that hasn’t had braces.)
  5. End the escrow account on your mortgage?
  6. Pay tuition bills in full, rather than a payment plan?
  7. Take advantage of financial crises, and extend credit at tough times?  (I am still receiving 13% from a business associate that I lent money to in March of 2009, with warrants.)
  8. Retain cash in your corporation to reduce financing costs?
  9. Not worry about the minor disaster that recently hit?
  10. Raise your deductibles on your Auto, Home and Health insurance premiums to save money?
  11. Receive discounts on services that you want to receive, by getting a discount for buying years ahead?
  12. Fund your 401(k), IRA, HSA, whatever, to the fullest?
  13. And more…

Even when Fed policy is insane, the low rates do not apply to the masses, aside from GSE-supported lending.  In this environment, Fed policy starves liquidity in traditional lending to send it to the government, and related entities.

So, even though you can’t earn anything by saving, there is still the advantage of receiving a discount for full cash payment up front.  That doesn’t change, and because there are so many with bad finances, that discount is still valuable to businessmen who don’t want to deal with the costs of bad credit.

Now be wise.  When you use your liquidity to buy ahead, plan to replenish the buffer.  Don’t do everything at once; note the limitations of your liquidity, and act accordingly.

This is basic stuff, but I see many neglecting it.   Incidentally, the same rules apply to small businesses.  Being well-capitalized has advantages.  Take advantage of vendor finance discounts where you can.  Seek discounts for prompt cash payment wherever it makes sense.

I’m not saying be a miser and hoard cash.  I am saying there is a happy middle ground where you have enough cash to meet most contingencies and normal needs, and use the remainder to further long term goals and whatever you enjoy.

PS – I write this by the light of four candles as I continues to wait for power to be restored.  The candles illuminate my keyboard.  I will post this in the morning.






bloggerbuzzdeliciousdiggfacebookgooglelinkedinmyspacenetvibesnewsvineredditslashdotstumbleupontechnoratitwitteryahoo
Personal Finance | RSS 2.0 |

4 Responses to Build the Buffer

  1. [...] If your financial “buffer” big enough?  (Aleph Blog) [...]

    • Anso says:

      Hope this finds your power restored and things “back to normal”.

      Regarding # 4 – asking for a discount.
      It might make me sound like a scrooge,
      but asking for discounts works just about everywhere and with large as well as smaller items. Retailers, companies , service providers all need to retain customers and will extend discounts.

      This can be something as minor as free shipping and additional percentage off when ordering something on-line (call customer service and ask them for a promotion – they find one to make the sale). Or travel discounts (rental car, hotels well below consolidator websites rates when you call.) Or a rent negotiation which has not taken into account the continued deflationary pressure of lower real estate valuations in many parts of the country. I have found this to be true though publications everywhere mainly insist on rentals having some pricing power. Not so, not everwhere!

      It is all well worth giving it a try. Money goes further that way, and many of us work hard for it.

  2. Lucas says:

    This is why I trust David. A firm grasp of all the complexities, and a firm rooting in sound wisdom. our family lives with a 6 month emergency fund, it allows freedom and peace (financially). However as finances reflect our our life priorities it it a wise means of freedom and peace in many areas of life. We think of it as self insurance, insurance costs you money it does not, normally, make you money. But as cash is a strong place to bargain from, having savings at the time of a purchase gives us good return as well.

  3. [...] As far as I can tell, the only thing credit is really any good for is a mortgage. The rest you can save for pretty easily. And maybe you should be living your life that way, anyway. [...]

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.


Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

 Subscribe in a reader

 Subscribe in a reader (comments)

Subscribe to RSS Feed

Enter your Email


Preview | Powered by FeedBlitz

Seeking Alpha Certified

Top markets blogs award

The Aleph Blog

Top markets blogs

InstantBull.com: Bull, Boards & Blogs

Blog Directory - Blogged

IStockAnalyst

Benzinga.com supporter

All Economists Contributor

Business Finance Blogs
OnToplist is optimized by SEO
Add blog to our blog directory.

Page optimized by WP Minify WordPress Plugin