personal risk management and liquidity

I am a cautious investor.  I have too much money in cash accounts and stick to index funds and blue chips.  The riskiest thing I have in my portfolio is an overweight position in Apple.  You could say I play it safe and focus on quality, dividends, and stability.

I am also a strong believer in using OPM – other people’s money.  My overall cash position has grown to the point that I could pay off many financed objects if I so chose, but I would rather have my money work for me.  For instance, my current mortgage was a 15-year loan at 3.125%.  I had 12 years of payoff remaining but for some reason I looked at my finances and decided that a refinance to a 30-year loan would give me more flexibility to reinvest elsewhere.  I could take the $800 per month savings and look to buy a rental property or invest in the market in a taxable account.  Sure I will pay more interest in the long run but I am very confident that my return on investment of the $800 per month will double or triple that number.

Here is where it gets interesting….

I closed on my refinance April 25.  My only cost to close was my quarterly tax payment which was due on May 1 anyway.  On April 27 I WAS LAID OFF!

I was so thankful that I took the initiative to increase my cash flow through a refinance.  I did not see the layoff coming but I am always reviewing my risk exposure.  Refinancing my house seemed like a good place to focus.  I am able to live in a great neighborhood, in the same house, for nearly half the cost.

Another area that people need to review is their investment strategy.  Many “experts” will tell you to fund your tax deferred retirement accounts first.  You need to consider this advice cautiously.  What good are your retirement accounts if you have little to no liquid savings?  Be sure to build up your cash position or taxable brokerage account before you put all of your eggs in to a 401k basket.  You might lose out a little bit on compounding interest for the portion of your account in liquid safety net, but it certainly beats having no way to pay your bills.  Look into the “3 Bucket” approach which identifies spending, saving, and investing strategies.

The loss of job proved that you never know what is around the corner and that you should always plan for the future and the improbable.  Who is the risk manager in your household and what decisions have you made to stay safe?

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