Obtain Level III Financial Freedom by Building a Cash Cushion
It’s time to move on to Level III, which involves creating a Cash Cushion, after you finish Level II of the game to Financial Freedom and begin a Retirement Plan. What is necessary to complete this level? Your emergency fund must be available. That’s right, you need to open a straightforward savings account and begin saving for at least three months’ worth of expenses. Seems fairly simple, doesn’t it?
Mistakes I Made – the Short Version
In terms of myself, I spent at least ten years on this Level. I’ve always believed that there is a better place for me to invest my money.” You would think that your money would be working for you. I would accumulate a sizeable portion of my goal every three to four months. I would think, “I need to invest this money and get a return,” when I saw that money in my savings account. It is simply resting there.” Moreover, I would attempt to skip this Level. For a while, I mistook playing at Level VII for Level III, even though I thought I was.
I used to take that cash and invest it in risky stock speculation at first. Since I was constantly monitoring stock prices and making trading decisions, I wouldn’t even consider what I was doing to be investing. That isn’t investing, either. I would always lose 20% to 40% of the investment and sell it.” I’d be depressed at that point and re-invest the money in my savings account. You know what happened after I had saved for another three to four months and had reached a significant portion of my goal.
Has my lesson been learned after the initial few instances? No. Did I pick up any knowledge during the first few years? No, I didn’t. Did I learn how important it is to save money for unplanned expenses? No, I’m “smart” and obstinate.” I can overcome the “system.” I kept acting that way for years.
Why it’s so crucial to keep some extra cash on hand was for me another aspect of this lesson. Numerous emergencies may arise that call for additional funds. You must sell something to raise money if you don’t have the money sitting in a savings account. Usually, you’re selling at a terrible time. Perhaps you find out you owe more in taxes than you anticipated. Selling something is necessary if you lack cash. What happens if the economy is in a recession? The stock market typically experiences a 20% or greater decline when you lose your job. When you have to sell something at a loss in order to raise money, that hurts a lot. Your financial investment “system” almost has a “buying high and selling low” process.” Your net worth won’t rise as a result over time. You’ll lose money if you do that.
The Importance of Level III – the Future Levels
I’ll give you one more justification for the significance of Level III. Later on in the game, we’ll invest in properties and companies that produce cash flow but aren’t viewed as liquid. Consequently, selling them won’t be simple. Selling these non-liquid assets will take time. It will resemble selling a house more than it will selling a stock on the stock exchange. Because of their capacity to generate cash flow, these non-liquid assets hold a significant amount of power. With the hope of never having to sell them, we’ll be looking to buy them. We won’t be aiming for capital growth. Cash flow is what we’ll be looking for. As a result, you risk getting into a lot of trouble if you don’t have the necessary reserves in place and if you haven’t yet absorbed this lesson. Due to insufficient funds in the bank, entire dynasties have fallen. Unless you can seize it, a chance isn’t really a chance. Otherwise, it’s just a good idea. You will require cash in order to be able to seize an opportunity. You will need money to be able to cover some of your other investments.
This priceless lesson only dawned on me after more than a decade. Maintain a savings account with at least three months’ worth of expenses in it. Your emergency fund serves as the system’s redundancy and buffer to ensure that the other components of your financial structure operate effectively. The grease is what gets you where you need to go, not the gas, but both are necessary for a well-functioning vehicle.
I consider Level III to be challenging. It’s simple to overthink Level III and attempt to outperform the market because it is cunning. I hope you can avoid my errors and keep this Level straightforward. To save that much money might take some time. Do not forget that I said it was simple, not easy. To reach Level IV and beyond, you must save money all the way through.
