Managing your risk
Maintaining a cash buffer after you purchase property is arguably the most important mechanism to managing your risk. This enables you to maintain a safety net for any future cash flow challenges, such as sickness, accident, employment or funding a major one-off expense outside of insurances. Generally, you want to strive for a cash buffer that provides for between 6 and 24 months of your total living expenses and costs.
Your living expenses are an estimate of a moment in time and will constantly fluctuate subject to the bills of the month. To ensure your Property Strategy remains the best fit for your needs, it’s crucial to update your cash flow summary as your circumstances change, budget improves and when you trim your expenditure.
It’s important to ask yourself, “If I had no income, how long could I survive given my current financial commitments and lifestyle costs before I would need to sell assets?”.
Self-awareness around this question will inform you of the level of cash buffer that you’ll want to have available via your bank or lender before and after making your next property decision or major investment.
Unfortunately, too many property buyers base their purchase price on a generic borrowing capacity without any forward planning and goal setting. Defining your preferred cash savings and cash flow buffers is a personal and emotional decision. Your risk profile will be different to others, and different to your spouse if you’re in a relationship. When determining your savings buffer goal, you should consider:
– Annual living expenses.
– How many months or years your existing savings will last should you drop to one
– Do you have insurances protecting your earning ability such as income protection, trauma, life and TPD?
– Stage of life.
– Risk profile.
– Number of properties owned and your ability to sell a property if absolutely required.
– Level of equity.
– Your monthly surplus cash flow goal.
Determining your goal for your available funds/cash savings buffer is an action item for you as part of determining your mortgage strategy and Property Plan. This should be completed before you can have clarity on your property strategy and selection for your next purchase.
Create your ideal lifestyle and understand your current situation by getting help from our experienced team today.