Thursday, April 17, 2008

Build a Buffer Zone - minimum 3 to 6 moths' expenses, not salary

Other than the notes above, for those who are planning to "crashproof" their cash flow, you may want to have 1 year's living expenses in your buffer zone. Mind you, you most probably want to allocate your liquidity like something below to fight off inflation:
-2 to 3 months in bank account (lowest returns)
-3 to 4 months staggered / laddered in FDs (near / at inflation rate)
-6 months in bond funds / prepaid into flexi mortgage account (at / slightly higher than inflation rate)

The most important item to note is that without a buffer built, any cash investments you build will be extremely shaky as you may need to liquidate them at the wrong time.

Cash put into investments should be treated as unavailable for at least 3-5 years - having that mindset gives your investment time to grow above the costs you paid for them.

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