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After you have completed Level II of the game to Financial Freedom and started a Retirement Plan, it's time for Level III – creating a Cash Cushion. What's it going to take to win this level? You need to have an emergency fund. That's right, you need to set up a simple savings account and start putting away at least 3 months of expenses. Sounds pretty easy, right?
Mistakes I Made – the Short Version
As for me, I was on this level for a long, long time – probably a decade. I always thought there was a better place to put my money "to work." Your money should be working for you, right? Every three or four months, I would amass a good chunk of my goal. I would see that money in my savings account and say, "I need to invest this money and get a return. It's just sitting there." And, I would try and skip this Level. There were years, I thought I was playing at Level VII, but really I was still playing Level III.
In the beginning, I would take that money and put it in some risky stock speculation. I wouldn't even call it investing because I was watching the stock prices daily and making trading decisions on a daily basis. That is not investing. I would invariably end up losing 20% - 40% and sell the "investment." Then I'd be down and put the cash back into my savings account. After another three or four months, when I saved up another good chunk of my goal, well, you know what happened next.
So, did I learn my lesson after the first few times? No. Did I learn in the first couple of years? No. Did I learn the importance of having cash set aside for emergencies? No. I'm stubborn. I'm "smart." I can beat the "system." And so I continued like that for years.
Another version of this lesson for me was why having extra cash around is so important. There are so many emergencies that can happen that require extra cash. If you don't have the money sitting in a savings account, then you have to sell something to raise cash. Typically, you're selling at a very inopportune time. Maybe taxes come up and you owe more than you think. If you don't have cash, then you have to sell something. What if the economy is going through a recession? Typically the time you lose your job is the same time that the stock market is down 20% or more. That really hurts when you have to sell at a loss to raise cash. It's almost having a process of "buying high and selling low" in your financial investments "system." That is not going to increase your net worth over time. That is going to lose you money.
The Importance of Level III – the Future Levels
Let me tell you another reason why Level III is so important. Later in the game, we're going to be investing in real estate and businesses that generate cash flow, but are not considered liquid. That means you can't sell them easily. It's going to take time to sell these non-liquid assets. It's going to be more like selling a house than selling a stock on the stock exchange. These non-liquid assets are where a lot of the power is because of their ability to produce cash flow. We'll be looking to buy them with the potential of never selling them. We won't be looking for capital appreciation. We'll be looking for cash flow. So, if you don't have the proper reserves in place, and if you haven't learned this lesson yet, you're going to get yourself into a lot of trouble. Entire dynasties have been brought down because they did not have enough cash in the bank. An opportunity is only an opportunity if you can take advantage of it. Otherwise, it's just a good idea. For you to be able to take advantage of an opportunity, you're going to need cash. For you to be able to protect some of your other investments, you're going to need cash.
It took me over a decade to learn this invaluable lesson. Save, at a minimum, three months of expenses in savings account for emergencies. Your emergency fund is the buffer in your system, the redundancy, that allows all the other systems in your financial structure to work well. It's the grease, not the gas – but, both are needed in a well-running car to get you where you need to go.
I think Level III is a hard level. Level III is sneaky. It's easy to over think this one and try to beat the market. I hope you can learn from my mistakes and keep this Level simple. It may take a while to save that much cash. Remember, I said it was simple, not easy. Save the cash. Save it all the way to get to Level IV and beyond.