What is a safety reserve in financial planning?

A safety reserve in financial planning refers to additional funds that are set aside to buffer against potential underperformance or unexpected financial challenges. This reserve acts as a protective measure, ensuring that there are funds available to cover expenses or obligations when investments do not perform as expected or when unforeseen circumstances arise. Having a safety reserve is a prudent strategy as it helps maintain financial stability, allows for more strategic investment decisions, and provides peace of mind during market volatility. By establishing this reserve, individuals or organizations can better withstand periods of poor performance without jeopardizing their overall financial plan or objectives.