Monday 15 August 2011

Watch Your Cash Flow!

In the financial press, everyone seems to be is shouting "Buy, buy, buy"; so (as usual) you need to be a bit contrary and cautious. One factor you must always consider is: do I have enough ready cash for unexpected expenditure?
Just as businesses need to watch cash flow (or the balance between current expenditure and income), so does the DIY Income Investor.
This is why the Income Pyramid has two foundation levels: Level 1: cash savings (and no debt) and Level 2: easy access accounts. Together they form an 'emergency fund' that should cover 3-6 months (or more) of your family expenditure.

Events of the last month have highlighted the need for such a buffer to cover unexpected costs. If you had needed to access the savings or investments on the higher levels of the Income Pyramid, you might have either incurred penalties (on fixed term savings accounts) or lost money (shares). On the other hand, you might have made a bit of money on your commercial bonds (as they were seen - unusually as 'safe havens') but that would not have been part of the plan (as you need to keep diversified).

As my previous post reassured (Keep Calm and Carry On), most of the time when the sky seems to be falling on Chicken Little, it really isn't - and what you need to do is sit tight. If you have a chunky 'emergency fund' you can remain fairly serene. But if you are financially overstretched your finances may get difficult to manage.

So the message is: yes, buy a few bargains if you can afford them but don't think the financial turmoil is over - and keep an eye on your medium-term cash flow. Now is not the time to spend too much cash unless you are sure you can afford it.

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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