Creating a Cushion

When is the right time to start investing? … The glib answer is NOW! … or, as soon as you can. However, there are things that must be taken care of first.

We have to create a cushion. This is your emergency fund that will carry you through … or at least not make you freak out so much … when one of life’s emergencies raises its head. The cushion is just my preferred term. The Barefoot Investor calls it his “Mojo” fund on his instructive site. The best place to keep your cushion is away from your day to day expenses in a separate high interest online account that is specifically set up as your emergency fund.

How big should your cushion be? This is difficult to define, but it should be enough to cope with unexpected bills or any of the usual life emergencies – Car problems .. Medical problems … House Problems… etc.

In the words of the immortal Spinal Tap

“The bigger the cushion … the sweeter the pushin’ …”

Do yourself a favour and research the incomparable film  “This is Spinal Tap” further . A Rob Reiner mockumentary that is as old as my investing career (30 years) but contains many classic scenes … All I can say is, that if you ever get the financial blues, just spend a minute with Nigel Tufnel … “These go to Eleven”.

Your cushion should be at least $2000  … and ideally enough to carry you through a couple of months expenses (rent, food, etc). As reported on the House of Debt Blog, a recent survey of 25 000 American households found that almost 40% of individuals either could not, or probably could not, come up with $2000 if an unexpected need arose. I am sure that this would be the same or worse in Australia and the UK.

Once you have enough cash in your cushion to help you ride out a few of life’s storms … and enough financial discipline to keep this fund for real emergencies … then it is time to start investing.