What Do You Know About Reserves Fund

I wrote about the reserves fund in my first book entitled “Millionaires are from a different planet!” Let me now add some additional points about the subject.

Occasionaly, I run into people who think that it is a waste of time, resources and money to have one. And yes, I have read books (all from the west) that discourages having
a reserve fund as well.

Their main argument against it is that the money will notbe making more money for you. Since the fund is kept in a safe and secure investment vehicle – normally the fixed deposit – it’ll be earning a measly 3-4% return a year. So it is wasted. Why not take this money and invest it in the stock market, properties or someplace else and make the money work for you?

Now, let me first clarify that I have nothing against investing. In fact, I’m a firm advocate of investing your money. However, first things first.

Before you can run, you have to learn how to walk. And before you can walk, you have to learn to crawl first.

And before you invest, you must have a reserves fund worth at least three months of living expenses first. For example, if you require RM5,000 a month to ensure that life goes on as per normal, then have RM15,000 as your reserves fund. Of course, more is better.

This money, as mentioned in my book, should be kept in a safe and secure investment vehicle. And although you may consider the fixed deposit, I’ll give you two better alternatives – the ASB and/or the Tabung Haji. Both give a fair return for your money. ASB used to pay >12%; now
it’s about 10%. Tabung Haji used to pay >7%. (Of course, 2001 wasn’t a banner year for Tabung Haji. But they appeared to have sorted out their problems, and have paid decent returns again).

The purpose of the reserves fund is not so much to make more money, but to ensure that life goes on as per normal. It will ensure that your life will go on with minimal disruptions.

Otherwise, when a situation or an emergency arises (and they certainly will as long as we are living here on Planet Earth), it will compound our problems. We may have to sell our investments at a loss or borrow money (and pay an obscene interest) to address the situation. Both will cause more disruptions, waste more time, effort and money.

In summary, I will say this: if you do not have a reserve fund – forget about making an investment – any investment. You are not ready.

Author: Azizi Ali