Finance 10. Build an emergency fund If you’re a regular reader of this column, you’ll know that we’re big advocates for building an “emergency fund”: a stash of easily accessed cash kept in reserve for unexpected expenses and unforeseen financial difficulties. It’s a good idea to have such a fund at any time, but it’s even more important during “interesting” times, when both portfolios and personal circumstances can change rapidly. How much should you have in your emergency fund? That depends on your personal circumstances: whether you have other sources of income which you can rely on; what your typical monthly expenses look like; whether you’re still paying off your mortgage; how realistic it is for you to cut back your spending or pinch pennies when times are tight; and so on. A good general rule is to have between three months and six months of actual living expenses (do a monthly budget to get an idea of what those really are) sitting in a high-interest savings account or similar vehicle which you can access immediately if necessary. If you’re like most people, you’ll have to build up such a fund over time. That’s fine − even if you save only a few hundred dollars every month, you’ll be in a much better position if you ever need it. One final point. Some people believe that holding cash is an expensive formof protection − after all, a savings account earns you very little interest, so it doesn’t make sense to have a pile of cash sitting in reserve earning next to nothing. Instead of holding cash in a savings account, it makes more sense to secure a line of credit for emergencies, and use your cash for other things. It’s a fair point. But remember…these are “interesting” times. If another financial crisis emerges (like it did back in 2007-2008), your bank could change the terms of your credit line − increasing the interest rate, restricting the amount of money which you can access, or simply rescinding the line altogether. Probable? Nope. Possible? Yes. Call us old-fashioned, but we’d rather not take the chance. 11. Be cautious with speculations As the saying goes, to everything there is a season. And when it comes to “high-risk, high-reward” type of investments, now may not be it. In times of trouble, speculative investments typically see more extreme price movements − and those movements tend to happen much more quickly than with government bonds, blue-chip stocks, real estate, broadly diversified ETFs and mutual funds, and other “slow and steady” assets. Historically, in times of recession or market downturns, such investments will see increased selling pressure as investors move to protect capital. So it makes sense to trim back your aggressive, “next big thing” investments (electric cars; marijuana stocks; bitcoin; small-cap tech; etc.) and book profits now, cut back on risk and shift to a more conservative stance overall. Once the bad times have started in earnest, it’s usually too late to get out without losing your shirt. If you do come across a high-risk, high-return idea about which you feel confident, proceed cautiously and make doubly sure to do your due diligence before you ante up. Ask yourself the hard questions: do the numbers really justify the hype? Beyond the opportunity to make money, does the investment fit into your “big picture” financial goals? Perhaps most important: what would happen to this opportunity if the market suddenly took a turn for the worse? If after asking yourself these questions you’re still confident, then build your position slowly over time, rather than going “all in” right away. 36 | www.snowbirds.org
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