Sometimes, I can’t help but think about how much hurt and pain there is in the world. In every country, there are those that are homeless, hungry, abused, neglected and truly unable to change their circumstances.
Yet, there are so many, many others that have fear and stress that is very much avoidable. Saving money and having and the right mindset about money could eliminate or alleviate the majority of problems that Americans face on a daily basis.
I do not go around judging others’ financial situations. At the same time, I think everyone probably knows someone that makes plenty of money, spends as much as (or even more than) they make, and then has a financial crisis such as a major car or home repair that they can’t “afford” to pay.
It’s only a financial crisis when you aren’t prepared. One person’s financial crisis is just a bump in the road to someone else.
The moral of the story: Get your finances in order, save for a rainy day, manage your risks and enjoy a much less stressful and much more secure life. If you’re reading this, you have the opportunity to do so.
Start With A Small Emergency Fund
The very first thing you should do is save up a small amount as soon as possible to cover a minor emergency. Your beginning emergency fund could be around $1,000 and would cover things such as:
- A trip to the emergency room
- A broken washing machine
- Towing and repairing a car
- A parking or speeding ticket
Even just a thousand bucks in the bank will help you to really be able to not sweat the small stuff. Unfortunately, life can and will throw some bigger things at you, but this will cover most common and frequent unexpected expenses.
Just think how much better it will feel when the next minor problem comes up and it is just that…minor.
Where to keep your emergency fund: This money is best kept in a savings account linked to your main checking account so that it can be accessed immediately, yet still kept separate from day-to-day funds.
Review Your Insurance Policies
While simply having insurance policies is a great step, it’s time to really understand your insurance coverage and the costs involved if you ever have to make a claim.
Insurance policies will cover you for events such as:
- A car accident (auto insurance)
- A major hail storm damaging your home (homeowner’s insurance)
- Being diagnosed with cancer (medical insurance)
- Injuring your back and temporarily not being able to work (disability insurance)
- A lawsuit against you for an accident on your property (liability insurance)
- Death of you or your spouse (life insurance)
So, sit down with some chocolate and a box of Kleenex and make a list of all the bad things that could possibly happen. Then determine whether you are covered for each circumstance through insurance or your own personal savings. If not, figure out a way to plug those leaks.
It’s vital that you know how much your deductibles are and have at least that amount of money saved. In most cases (homeowner’s insurance works a little bit differently), you will have to cover your deductible before the insurance company will start paying anything.
Equally important is knowing the limits of what your insurance will cover. For example, even an “all perils” homeowner’s insurance policy excludes floods and earthquakes. There are also limits to liability coverage on auto and homeowner’s policies, which can be increased through the use of an personal umbrella liability policy.
There is a (free) mini-class in the financial plan class series dedicated to each one of these types of insurance. Look under “Sophomore Year”.
Build a Larger Cash Reserve
Once the bare minimums are covered, it’s time to work toward saving 3-6 months worth of expenses. A cash reserve of this size is meant to help cover:
- Loss of income due to a disability (there is generally a waiting period before disability policies kick in)
- A period of unemployment
- A major medical illness such as cancer (for example, if you have a high-deductible plan with a maximum out-of-pocket of $5-10,000 or more).
Exactly how much you’ll want to stash away in your cash reserve will depend on your employment situation, health, and tolerance for risk, among other things. Ultimately, it should be an amount that you’re comfortable with since the main purpose it to give you peace of mind that you’re covered under numerous potential financial circumstances. For some, it might be even closer to a year’s worth of savings.
Where to keep your cash reserve: I recommend that you keep your cash reserve of 3-6+ months of expenses in an online savings account (which currently yield about 1%). This will still allow you access to your funds, but not be quite as accessible for spending. It will also allow you to earn a little bit in interest than if kept in a checking or savings account with a big bank chain.
Save for Your Future Elderly Self
Ultimately, you can count on not being able to work someday. Around 65 is the standard retirement age, but it isn’t uncommon for people to need to retire earlier to take care of themselves or a loved one due to health concerns.
- At least 30-40 years of expenses without earning an active salary or wage income
- Increased medical costs that come with old age
Insisting that you will “just work forever” is not a good plan for these years of your life. Relying on Social Security is an even worse idea, since there are some significant uncertainties around the system’s funding in the future.
Your future elderly self will thank you immensely (while sitting in a rocking chair on the front porch) for your good saving choices today! Getting older is one thing you can absolutely count on, even if you never ended up using any of your other emergency funds and never file an insurance claim.
Where to keep your retirement savings: Retirement accounts such as a 401k and a traditional or Roth IRA can help you to save more for your future by providing tax advantages. Health savings accounts can also be used to provide money to pay for medical care.
I hope that your thoughts aren’t “should I implement these?”, but instead “how am I going to implement these savings plans personally?”
I remember the first time I had a major financial emergency that I could completely cover with cash. We had a brand new baby, our roof started leaking in our little starter home and our dog ate something poisonous all within the same week. There was so much peace of mind that came with knowing we could cover it financially. Peace of mind that money can’t buy…except that it essentially did.
Having the proper measures in place will ensure that there is no need for you to fear the future. Money can buy a lot of things, and peace of mind can be one of them.
What times have you had that you were so glad that you had an emergency fund?