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Tuesday, November 17, 2015

Disciplined savings for cash sucking events in life, and not just create an emergency fund

Cash sucking events does not mean emergency funds, but emergency funds will help in allievating cash sucking events.

My definition of cash sucking events is pretty huge, and it's probably a wider definition as compared to just what emergency funds can do.

I list some examples of cash sucking events below

1) Marriage
2) House
3) Baby/Kids
4) Medical Bills
5) Parents' Medical Bills
6) Business
7) Car? Not a necessity but it increases convenience if you have old parents or baby kids who may need to be rushed to the hospital anytime.
and more

I don't really like the idea and concept of just emergency funds, or maybe the more commonly accepted idea that it is for emergencies only. This is especially the case for younger people.

And in my opinion, many emergencies could be covered somehow by adequate insurance. House damage? House insurance. Car accident? Motor insurance. Medical emergencies? Medical insurance. The list goes on. The rest of my thoughts does not apply if you do not have adequate insurance cover.


And as for emergency funds that are catered for loss of income due to unemployment, it will really depends on situation. How much debt do you carry? Any part time income source? How much investment income from dividends and bond coupons?

Typically the younger you are, with less debt and burden and responsibilities, the lesser the amount of "emergency funds" you really need. In my mid twenties, I spend maybe a max of $900 a month, with average of around $700. 3 months emergency funds would be $2.1k, which is easily a month of salary after deducting expenses. In such a situation, does emergency funds really make much sense?


Instead, for the younger crowd, I would think that a systematic preparation for cash sucking events is more important.

Which means, a personal finance plan should entail preparing for cash sucking events, not just retirement or emergencies.

The question is... how?

By Discplined Savings

I tested this over the last few years.

Basically, I have a separate bank account where I transfer $300 every month into it without fail. Month after month. The moment I received my income, I transfer $300 out into this bank account.

Pretty similar to a savings plan, but at bank pathetic interests.
And sometimes, when I feel like I received bumper dividends, etc, I transfer about $500 or more. But nothing below $300.

This is probably what is commonly termed as "pay yourself first". And it is at an amount which most likely does not affect the quality of life. The younger you start, the better, as money responsibilities tend to increase as one grow older.

I thought nothing of it as this does not affect my lifestyle, but after some time, I realised that the particular bank account became over $10k. 3 years had passed in a jiffy without me really realising.

This cash, I could choose to use it in anyway I would deem fit. I could
1) Buy stocks
2) Use it as part of marriage expenses
3) Renovation expenses
4) Any other cash sucking event.

It's slow, but it's there. And the advantage over a savings plan? You could choose to contribute more, or take it out to use it anytime you want.

No matter what, $10k will definitely help in many of the cash sucking events.

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