Something that is very often seen with those who start investing is that they start investing with the first money they manage to save. It looks like you should see which asset is more promising and start buying.
But, what if I told you that you should do something before buying any asset so that your first step in investing does not become a stumbling block?
Don’t invest without being protected
It’s amazing how many people don’t have an emergency fund to cover unexpected expenses. Starting to invest without having it is like balancing on a tightrope without having a safety net underneath. Faced with an unexpected financial problem, you will have to liquidate your investments to cover those expenses, can cause significant damage to your finances.
Consider the pandemic crisis of 2020, which was accompanied by a sharp market decline. Those who in turn lost their source of income may have had to sell their investments at a bad time, assuming that a loss was later reversed very quickly. From there the importance of having an emergency fund to sleep soundly.
If you haven’t already put it together, before you buy any asset, It is very important that you allocate the first savings you have available to it. It should be on some instrument that doesn’t have huge fluctuations so you know you can use the same if needed. It is not convenient to buy only dollars as an emergency fund, since the dollar can have circumstantial drops, so it is advisable to have a mix between instruments in pesos and dollars that have a certain stability.
It is not recommended to include variable income instruments in the emergency fund as they have higher volatility thus they are not suitable for this purpose. This is why it is important to have these funds separate and know that this is the reserve you have to face unforeseen events.
One question I often get is: How do I determine how much my emergency fund should have? Of course, this is a very personal decision, which depends on each person’s circumstances. Having very little will leave you unprotected in unexpected situations. And conversely, having an emergency fund that is too large can mean you miss opportunities to invest in instruments with greater potential.
However, since many people are paralyzed when asked how much should I set aside as an emergency fund before I can invest, I leave you below A few tips to keep in mind:
Then your fund may be lower or higher according to your specific situation. In no case do I recommend less than 3 months of your monthly expenses, but I also don’t make the mistake of just putting together this mattress and never taking the step to become a true investor, leave aside the possibility of multiplying your capital.
Let’s be clear, the emergency fund should be calm and not have to touch your investment portfolio in case of unforeseen events. We don’t think about getting good returns, because that’s what your long-term investment portfolio is for.
Investing without an emergency fund is like driving a car without insurance. You are taking an unacceptable risk to your finances. And it goes beyond whether you are conservative or aggressive. It is simple that you need to have easily accessible funds for contingencies of daily life. Having this protection will prepare you to begin your path as an investor with greater success.