Saturday, July 29, 2017

Develop a Financial Margin of Safety

The way people schedule their time is an example of the “margin of safety” concept. For example, if it takes 30 minutes on a day with “normal” traffic to get to work, you might leave 45 minutes ahead of time “just in case.” The “margin of safety” concept can also be applied to ways that people handle their personal finances. Below are three strategies to increase your financial margin of safety:
Live Below Your Means- People who spend less than they earn have a cash cushion to weather the unexpected. Not only do they have positive cash flow (income greater than expenses), but they likely have accumulated some savings by living frugally and setting aside some of their extra cash.

Build Adequate Emergency Reserves- An emergency fund provides a margin of safety against unexpected events such as accidents and unemployment. Financial experts recommend setting aside 3 to 6 months expenses, but many households do not come anywhere near this amount. Any savings is better than none.

Pay Off Debt- Debt is an albatross around personal finances. The sooner it is paid off, the more “wiggle room” people have to handle life events.  Aim to pay off outstanding credit card debt in a year or less and to make a final mortgage payment before retirement.

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