The Financial Buffer is the financial wall you build between yourself and economic insecurity. I want to stress that the financial buffer is not the same as an emergency fund. An emergency fund covers three to six months' worth of living expenses. An emergency fund is just common sense and structuring your life so that you are not living a whisker away from disaster. If you haven't created an emergency fund yet, see this post on getting your emergency fund going.
To me, the financial buffer starts to take shape at roughly the $50,000 in liquid assets level. This is when you have built a financial firewall of several years' (if you are single) living expenses between you and a desperate situation.
The financial buffer has a number of distinctions and benefits beyond an emergency fund.
- First, the buffer is often not invested in cash. Instead, the buffer is in stocks, peer-to-peer lending, or other assets that provide a decent return over time.
- Second, the amazing thing about the financial buffer is that at a certain point it takes on a life of its own. The assets grow to a point where they throw off enough income and capital gains that it's like you have another job--except this is happening automatically.
- Third, and what I love most about the financial buffer, is that it shifts your calculations. You can increasingly think about the long-term. About what you want to accomplish and how you can most contribute and help people.
- Fourth, the Financial Buffer lets you take risks you otherwise wouldn't be able to. You might even say it makes you more courageous.
- Finally, the Financial Buffer increasingly allows you to direct funds to charity and other philanthropic efforts.
Others might call the Financial Buffer "FU money." I have never liked that phrase, though I recognize its potency and accuracy!