Are you about to have another child and are wondering whether now is the right time to invest in property?
If you’re like most families, losing an income is no small thing. At the same time, you don’t want to lose out by not investing in the market at a time that could really benefit the family.
Managing cash flow and ensuring that you have sufficient funds when the family is being restructured is key to being able to relax and know that everything will be ok.
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Whether you’re a parent looking to invest or whether you’re just starting out, being able to manage fluctuations in cash flow all rests on having a cash buffer – or what I call a “sleep at night” fund.
A cash buffer allows you to cover all your expenses should things not go as planned or, for example, you might lose your job or you have a child and need to reduce from two incomes down to one.
Given that property investing is a long term strategy, a buffer allows you to be able to cover your expenses so that you’re not forced to do anything that is detrimental to your investment, like selling too early!
So the question is, how much should we have to the side?
I like to use the general rule of having a 3 to 6 months cash buffer.
That means if your total cash expenses throughout the month ─ i.e., groceries, bills, mortgage repayments ─ is around $10,000, for example, then you need to have around $30,000 to $60,000 set aside.
We don’t want that sort of money just sitting around either. I recommend putting it in an offset account – that way it’s offsetting the interest repayments on your mortgage.
Having this buffer set up gives you the confidence that if something did happen, you would be covered for 3 to 6 months until you could get your income back on track. That’s why we call it a “sleep at night” fund!
This doesn’t have to be hard-earned savings either. It could be a Line of Credit or equity that you could access easily in case of emergencies.
So remember, if you’re looking to invest in the market, you need to make sure that any future changes to your cash flow won’t negatively impact your investments or your lifestyle.
The best way to protect yourself is to make sure you have something to fall back on should things change. Allowing for 3 to 6 months of expenses will give you the confidence to move forward even when things don’t go as planned.