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An unbeatable level of certainty in wealth building.

Sunday, May 29, 2016

Although we have to take chances sometimes, I always try to inject a high level of certainty in my life. Generally, I do not like leaving things to chance because there is a chance that things could go wrong.

So, when people tell me I should have taken a 5 year loan to buy my car because the interest rate is only 2.68% per annum and I could use the money to invest for higher returns, apart from telling them that the effective interest rate is really higher than that, I would ask them how sure are they that they would not suffer a capital loss or that the investment returns would not dip or disappear in those 5 years?



(If we could only afford to buy a car by taking a huge loan to do so, wouldn't we be financially better off not buying the car?)

Without taking a car loan, however, I know I have avoided a hefty sum in interest payment over a 5 years period. That is certain.

When people tell me that some financial gurus tell their students that they don't need to keep cash aside as emergency funds, that they only need to have credit cards and lines of credit, how certain are they that their debt would not one day snowball (or, worse, the credit lines terminated)?

Imagine dealing with an emergency with borrowed funds and having to pay interest. Remember that if we have to dip into an emergency fund, the situation could be dire and it could also happen at a time when our source of income dries up.

Sometimes, it is not whether we are responsible borrowers or not. Sometimes, life just throws us a curve ball or deals us a bad hand of cards. I think you get the idea.



I have an emergency fund although I have what might seem to be a comfortable passive income stream. Why? 

Is there any certainty that my passive income stream would not slow to a trickle or dry up one day?

This is also why I strongly believe that we need a risk free and volatility free component in our investment portfolio. So, I max out the benefits of my CPF membership. It might not make me rich but if everything else failed, I know I won't become old and destitute.

As investors, often, we have to take risks but, as savers, a penny saved is a penny earned. We should all try to be good savers first on our journey to financial freedom because that level of certainty in wealth building is unbeatable.

Leave fewer things in life to chance? 

Yes, please.

Related posts:
1. Don't think and grow rich.
2. A meaningful emergency fund is important?
3. A note on the CPF.

7 comments:

Serendib said...

The fancy term for this I "risk management". Unfortunately many people will realise it's importance only when things go bad - and for the general population, things have been going well f a long time, so people like you and I have been branded as "risk averse" and having missed out. Only Time will tell.

AK71 said...

Hi Serendib,

I remember the bad times.

I could benefit from the Global Financial Crisis because I was well prepared.

However, being prepared might not even be about benefiting from a stock market crash. For many, it could simply be a matter of being able to continue providing for their families.

A sense of invincibility is a dangerous thing for mere mortals.

Singapore Man of Leisure said...

AK,

Clowns right?

Credit cards and credit lines as emergency funds?

A bit like saying businesses don't need cash balances; just overdraft facilities from banks will do.

How about sovereign countries? Can issue bonds so no need to build up reserves for a rainy day? Maybe these snake-oils should visit Greece and Venezuela to see what reception they would get ;)

Sure, "friends" may bail you out and give you loans... With terms and conditions attached, what irony to seek financial freedom to only end up as a "debt slave"... Or a bankrupt...


If I'm a snake-oil, of course I will say no need to have emergency funds. If not how to pry cash out of your pocket into mine?

AK71 said...

Hi SMOL,

Your words are really sharp lor. If you open a restaurant selling snakes as delicacies, you won't need any kitchen knives. Slice them with your words! ;)

Unfortunately, even some financially savvy people (bloggers included) seem to have been taken in by these gurus and are helping to spread the word. -.-"

Singapore Man of Leisure said...

AK,

I practice 佛门狮子吼。

My words not sharp; bad breath yes :)

AK71 said...

Hi SMOL,

You have heart of a Buddha. Slicing snakes up will kill them. Bad breath might only disable them temporarily. Enough time for you to walk safely away. Om Amitaba.

AK71 said...

From an FB reader.

Vincent Chan H S:
"Actually spending less and saving more is the easy part. All within control if you set your mind on it. The tough part is the investing part. You can do all the due diligence but there will still be an element of luck that cannot be removed. And if you are damn suay...."

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