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Time buffers.

Discussion in 'Investor Psychology' started by Steven Ryan, 22nd Jun, 2015.

  1. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    How long could you stay afloat financially, if you were unable to work?

    Fear is a critical component of investing and it all comes back to the "What ifs".

    As investors, hopefully you’ve already asked yourself this question, and know the answer.

    It’s surprising how few people (particularly non-investors) have a large safety net of cash set aside.

    If your home is robbed, you probably have insurance to cover it. If you’re in a car accident, you probably have insurance to cover that too.

    Well, what if you lose your job, are injured, go through dramatic changes in your circumstances and don’t earn income for an extended period of time, or have an unexpectedly large expense–can you cope?

    I like the term “time buffer” to describe how long I could survive without working a day as what we’re talking about is time. If your living costs are quite low, you won’t need as much to last 6 months as someone with higher living expenses.

    Because I hold a portfolio of investment properties, I want to be sure I can cover their costs, plus my living expenses, even if I can no longer perform my job, if interest rates rise, if I need emergency medical treatment or if I decide to simply take an extended break from working.

    So, how long would you last if you didn’t earn a cent of income?

    Depending on how much risk you’re comfortable with and how many mouths depend on you to feed them, you might be happy with anywhere from 3-12 months of stashed cash. For some, even more. There are varying forms of insurance to cover loss of job and injury which can help, but true comfort comes from taking matters into your own hands.

    Don’t think that you literally need to have saved up every dollar of this “time buffer” yourself. Often this safety net can be woven together from multiple materials. Some cash, some equity (in the form of a line of credit or money in offset accounts/redraw against loans), some might even be passive/recurring income streams.

    If you haven’t already, work out your monthly living costs then divide this number by how much money you have immediate access to.

    This is how long you’ll last. Are you comfortable with it?

    Money is time.
     
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  2. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    I have a few solutions if I found myself in a desperate situation:
    1. I'd want to take in boarders or Airbnb guests to my home - I figure I could throw up some extra gyprock walls and rent rooms somewhat boarding house like. (Yes, there would be lots of things to consider legally... at least its not an overcrowded unit!) I have 3 bedrooms, and 2 massive living rooms in a house on a block nearly 800sqm so there's plenty of space here. There's buses direct to Mac Uni from my place so Uni students are the way to go.

    2. I'd bugger off and live somewhere in Asia for a while.

    3. If I got super desperate with huge bills I'd sell off an IP and live off the equity of that till I got back on my feet.
     
  3. WattleIdo

    WattleIdo renovating Premium Member

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    mmm - very important. This is where my (financial) sense of security comes from. The hard part is working out what you actually spend. I can be very frugal when I've got no income!! :)
    Maybe it's time to do another daily keeping of records and work out an up-to-date spending plan. If anyone else is interested in this, I'd recommend How to Get Out of Debt, Stay Out of Debt and Live Prosperously as a model for this. That's what I use.
    I like it because it encourages you to put your money where you get the most enjoyment from it - as well as meet your responsibilities.
     
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  4. wombat777

    wombat777 Well-Known Member Premium Member

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    I've got good buffers in place but toying with Income Protection Insurance. Have a number of quotes in hand. Just need to decide whether I bite the bullet. I'm single and have no dependants so not sure of the value of income protection insurance, given I have good buffers in place. Unless I get really sick. But then health insurance partly helps with that.
     
  5. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    Oh yeah... I forgot. I also have that but through my super. I'm set.
    :D:p
     
  6. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    Massive problem, a few years ago I was made redundant and I called up to see if I would be able to get the dole. They knocked me back... too many assets.
    :(:(:(;)
     
  7. wombat777

    wombat777 Well-Known Member Premium Member

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    I've been with my employer for 20 years so fortunate to have a solid redundancy package to fall back on.
     
  8. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    I was with Amex for 6 years... GFC came and I was made redundant on my 32nd birthday. :(

    No, it was really a great birthday present!
    Redundancy payout = deposit for an IP.:p
    So glad I didn't blow that cash on anything consumer stupid.
    And I still have that IP and its gone up in value more than 60% from when I bought it. :D:D
     
  9. Beyond Wealth

    Beyond Wealth Active Member

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    If i was fired tomorrow, didn't receive any additional payout except for leave, and had to live on accumulated cash and passive income only, i'd last 4-5 years. I'm pretty comfortable with that.

    I'm actually already in a position where I could permanently retire from a full time job, and simply do some part time work and live off passive income. Keeping living expenses low makes a huge difference.
     
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  10. S.T

    S.T Well-Known Member

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    I'd get another job almost straight away. But if I felt like taking a break, redundancy insurance, holiday pay, redundancy payout, plus cash would take care of me.....failing that move back in with my folks!
     
  11. Singo

    Singo Well-Known Member

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    If you are not earning anything, Centerlink pays! Can live forever :p

    No cash buffers. Have a LOC which is enough for an year.
     
  12. weejimmy

    weejimmy Well-Known Member

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    You need to remember thoe if the proverbial dose hit the fan economy wise, things like line of credit may disappear . Or you may be forced to sell a ip during a crash. Not ideal.
    And company's go bust . I'm not sure if there's a government garuntee on redundancy thoe?
     
  13. sash

    sash Well-Known Member

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    Based on my current spending habits and liquid savings...adjusting to say 4% inflation per annum...I would say somewhere between 20 years and infinity....

     
  14. rhinsor

    rhinsor Well-Known Member

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    If rents still came in i would say 18 months to 2 years
     
  15. Rixter

    Rixter Well-Known Member

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    Fully Exited rat race last year. Currently have a buffer consisting of 10+ years of annual lifestyle expenses, plus rental income, portfolio CG & SMSF increases over that period.
     
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  16. willair

    willair Well-Known Member Premium Member

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    recurring income streams..

    That's a quote from your post,plus once you add compounding factors on investments to the mix property only being one in the mix,and if you live a simple life,then the timeframe is endless..
     
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  17. sanj

    sanj Well-Known Member

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    Hard to say but If I stopped my active involvement in all businesses or projects I think around 7 or 8 years at current excessive lifestyle. If I cut down expenses to say 80k a year it would be longer, 10 to 12 years. By then hopefully rents would be higher and would cover a fair bit of lifestyle.

    Plan is hopefully in 2 years or so have enough passive income from various streams to be completely covered but I don't see myself slowing down too much for a while
     
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  18. Rixter

    Rixter Well-Known Member

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    Passively :)
     
  19. Eric Wu

    Eric Wu Mortgage Broker Business Member

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    you are a legend Sash
     
  20. jins13

    jins13 Well-Known Member

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    If I was not working, I would rent out my PPOR and move in with the folks. But wouldn't want to do that for the long term because of my father's mentality of "My house, my rules", which I can appreciate.