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