Image by warrenski via Flickr
One of the things that attracted me to personal finance and economics is just how many parallels that can be drawn between personal finance and life. There are so many lessons that we can bring over from one sphere to the other.
Do you really need an emergency fund?
An important lesson that I have learned recently is: the importance of buffering. I wasn’t always a big believer in emergency funds,and even today I believe that emergency funds, while useful, are not adequate. I believe that it’s more important to have a solid gap between your expenses and your income, so that you can easily cover unexpected expenses and easily adjust to a loss of income. I also think that it’s very important to live in an affordable home. An affordable home is one where total housing expenses are no more than 33% of net income; if one partner loses a job, the other partner can easily carry the burden for some time, and there is some slack for interest rate increases.
Even with an affordable home and a high savings rate, an emergency fund is still a good idea to have. At least, this is what I think today. Why? Having some cash stashed aside gives you flexibility, which is a very important thing to have. When you have cash on the side, you have the ability to make decisions that you might otherwise not make.
How much is enough? It depends on how risk-averse you are and whether you are also investing your money for the future. If you have a year’s worth of expenses saved up, it might be much easier for you to decide to start your own business, since you won’t have to worry about where bread money is going to come from, at least for a bit.
Perhaps the truth is that “emergency fund” is a misnomer. Better to call it “savings buffer’, which is what it really is.
Buffering in all aspects of life.
This concept of buffering can also apply to so many other things. I used to write my blog posts on the spur of the moment. If you looked in my posts queue, most of the time, there was nothing there. Maybe there would be one post that I had written and had decided to schedule for later that week. 😉 Now I try to keep a whole month buffered for each of my sites. As of the time of this writing (January 14, 2012), I have achieved this for this site but not yet for the two others. Buffering takes a lot more time up front, but once you’ve achieved it you have more flexibility and security.
With buffering, I now have flexibility to write when I most feel like it and not necessarily when I feel like I must. I can get a lot done in productive spurts, and when I am not feeling so well I can take it easy for a bit.
Buffering is also an important concept in technology and manufacturing. Processors use it to achieve greater throughput and manufacturers use it to keep stuff rolling. Buffering applies to so many aspects of life, and while there is such a thing as too much buffering, it is also important to have the right amount in place so that you can maximize your value.
Dear reader, how much buffering is right for you?
Hey Kevin!
Here’s the lovely format I remember. Commenting on your site is a pleasure because your site remembers me, and all I have to do is type. Thanks for setting things back to the old format.
As for buffering, I’m impressed that you’re one month ahead on your blog posts. My posts are like yours used to be: spur of the moment.
I also wanted to say congratulations on your new employment ventures. I love your spirit.
And most imporant of all (if anyone else reads this they will likely have no clue why I ask this)—How many pushups did you do today?
Thanks for coming back, Andrew! And to answer your question… not at 100, yet! 😉
There are a lot of things I choose to buffer: Our bills, my investment goals, time spent with my family, personal time, projects at work, and even my blog (I too try to keep a backlog of posts ready to go). I think it is just wise to plan ahead and have things ready where you can. You never known when you’ll need that safety margin and it sure helps out if you’ve been designing it into your lifestyle all along.
It gives you the slack to change plans, or write what you feel like writing about without having as much time pressure forcing your hand. 🙂
I’ll echo the comment from Andrew, I prefer this commenting as well.
I have tried to buffer posts for my blog but I am battling with this concept called time … I was so busy for 6 months a couple of months ago I couldn’t do much. Now I have normal hours and I have put a plan in place. I just need to really take the time and execute.
From a finance perspective, I find that having an emergency fund should not be there to take care of annual spending that are forgotten or maintenance on a house or car that are expected. Your Income/Expense should cover that. On the other end, what’s the difference between an emergency fund and savings in a TFSA? If you are going to have a large amount of cash sitting around, you might as well put it to work. How often do you really dip in your emergency fund? and what do you consider an emergency? In case of a true emergency, my line of credit is used, then I will look at how I cover it; save more or sell investments.
I know some people keep 6 months worth of salary in case they lose their job – in some employment, it is a necessity to have funds but it’s also important to understand how employable you are and managing your expenses based on that. In which case you may not need 6 months of saving.
My thoughts anyways …
No, I think that is a very reasonable position to hold. I believe in staggering the funds at various degrees of liquidity, based on your personal position. I like the idea of the TFSA, but I wouldn’t rely too much on a HELOC or lines of credit since the bank could pull them when you need it most. That might just be my own aversion, though.
I am terrible at buffering! Long term planning is something I really need to work on, but I tend to favour a spur of the moment approach and doing things when I feel like it. Luckily I have just enough motivation to keep it consistent… but I do need to get better.
I like the spur of the moment approach, but I like the flexibility that buffering offers, since you can still do the spur of the moment thing but also take a break when you need it without missing a post. 😉
I work in the manufacturing sector and I have personally seen how lack of buffering ruined some companies. Specifically in the auto sector, people were working on razor thin margins and then when the market tanked, a bunch of companies went under because they had all their eggs in the auto basket.
Buffering also makes life simple. You don’t have to be as efficient with budgeting and watching costs when you have a good buffer. I’m at the point now where I have a broad brush goal of how much I’d like to spend a month and a little slop here or there does not matter as much.
I think the best buffer to have in the PF scape is a big gap between income and expenses. Makes for many well-rested nights. 🙂
There is no blanket “right answer”. In many cases, buffering is a form of inefficiency. For example, I auto-pay my bills on the due date.
Regarding the manufacturing analogy, LEAN principles are all about reducing inventory and partially completed work.
This is a good point, and there can be such a thing as too much buffering. I think personal finances need to be staggered for the person’s personal situation, and at least as far as blog posts go, there is very little cost to keeping extra posts around, so lean methodologies don’t really apply. 🙂
Got rid of Livefyre as well???
Bufferring posts is not an easy exercise. I wish I had that much content ready to go!!! Well done on that front Kevin!
For finances, I feel bufferring is essential. An emergency fund is a must around our house, the problem is, we don’t have much in it right now!
Nice post.
My emergency/liquidity fund are one and the same right now. 😉 LiveFyre was good, and the support team was good, but a couple of problems were too serious to ignore. Duplicate comments on older posts, and some commentators that could never get in. 🙁
To me, buffering is the money you invest in solid companies to generate healthy return. I think of it as my garden of finance. Money keeps growing. I can use it if needed as emergency when I needed.
You trade off volatility when you do this, but I agree, this is a valid form as well especially if you have a significant gap between income and expenses.
I try and get a month’s posts ready ahead of time as well 🙂 It’s way too stressful otherwise and sometimes when we’re under stress it’s hard to be creative and write posts.
Great post Kevin!
The stress is the main thing I want to avoid! I don’t believe in excessive multi-tasking; I believe in concentrating on one task and getting it done. That can be hard with email, etc…. but that is the plan. Having stress to write a post cause it’s Monday would get in the way of that.
The concept of buffering in finances is a great one. I have been building an emergency fund that would fund eight months of living expenses (not quite there yet) but I think if push came to shove it could be stretched out even further because we do have a nice gap between income and expenses.
As far as the blogging thing, I used to have quite a buffer, but lately a lot is coming out in the spur of the moment. I need to work on that.
The gap is one of the most important things to have. 🙂 The other side of the coin of the buffer is keeping it full, and not slacking because you think “well, I have a bunch of posts lined up”. 😉
To have a month worth of posts as a buffer is impressive! You inspire me to attempt to do the same.
Except for the carnivals! I still do those on the fly. 😉
Btw…I replied to your question about capital gains vs. dividends. Let me know what you think 🙂
Thanks for the great reply! 🙂 If you ever have the chance, check out the four posts here and let me know what you think: https://www.google.com/search?q=invest+it+wisely+living+to+100
I checkout out all 4 posts…hands down great content than should motivate many to start thinking about many aspects of their finances, retirement, and investments. I left comments on each post.
You’ve provided some informative and very well written content! 🙂
Thanks for checking out the posts and commenting! 🙂
youngandthrifty stole what I was going to say 😛
I think buffering in all aspects of life is fundamental. From blogging to food and from presents to money – failure to prepare is preparation for failure!
I agree Savvy Scot. An EF is not the only way to buffer your life. Buffering all aspects of your life is the best way to get ahead and not get affected as much by the bumps in road of life.
Agreed, guys! Winging it can be fun, but having a buffer means you won’t be forced to wing it 😉
I’ve alternated between having about a week’s front-loading versus the current spur of the moment. Impressed that you’re a month ahead on both sites. Good post, Kevin, you’ve spurred me to get a little more ahead of myself.
That’s where I used to be, but too many times that spur of the moment meant things started to get rushed. 😉