Setting Up Your Buffers
Todd Polke
Investment Strategist l Helping Investors and Business Owners grow their Wealth Faster
As an investor, you need to have two financial buffers set up:
- Your personal buffer
- Your investment buffer
This is all part of keeping your personal and investment lives separate. You need these two buffers because trying to mix these two aspects of your life will only lead to pain.
Now, that leads me to a question, which I get a lot: How much should go into each buffer?
The key thing to remember here is that there’s no set amount for either. Instead, you’re going to put enough into each buffer to ensure you can sleep at night. What’s important is you’re sure that that amount is enough to get you out of trouble, if that time comes.
For the personal buffer, you’re going to think about how many months of cover you’ll need. Imagine that something happens with work, your family, or your health. Think about how much money you’ll need to handle your personal expenses so that you have time to sort the problem out. So, that means covering your personal mortgage, your bills, and the other essentials.
Now, some people have income protection and various insurances. This means they feel comfortable with a couple of thousand dollars. Others prefer to have a full 12 months’ worth of expenses in the personal buffer. Whatever makes you comfortable is what goes in here.
The investment buffer works in much the same way. How much do you need to set aside if something unexpected happens? Only in this case, you’re thinking about giving yourself time with the investment. That could mean making sure the buffer’s large enough to ensure you don’t lose properties from your portfolio. Or it may mean having enough money in the buffer to allow you to sell a property in an orderly fashion.
Once again, it’s all about how much you need to feel happy when you go to sleep at night.
— Todd Polke