If you are a long time reader, you’re probably well aware that I tend to be a somewhat negative guy. There’s not particular reason that I can point to for why this is; it’s just the way I have always been, ever since I was quite young. I’ve just always seen the glass as half empty (and even that was usually being optimistic).
As a result, it probably hasn’t surprised anyone that I’ve written more than a little bit about emergency funds and other means of keeping your head above water when trouble strikes. There’s plenty of financial instruments available to help you minimize your risks, and there’s seldom a good reason not to take advantage of them. So, here is a short guide to some of possibilities that are out there:
Q: What sort of insurance should I have?
A: This tends to be a tough question, if only because there are so many types of insurance out there, as well as different situations for everyone. At minimum, you should have: health insurance (frequently provided via your job, here in the US), disability insurance (necessary as long as you work for your money), homeowner’s/renter’s insurance (including natural disaster insurance), and automobile insurance (if you have a car). Other types of insurance are less of a cut and dry matter; your need for life insurance, in particular, depends on who depends on your income. Speaking of life insurance…
Q: Should I go for permanent life insurance?
A: Short answer: probably not, as term life insurance is less expensive and simpler. Longer answer: permanent (or cash value) life insurance do have some advantages, building up a (sometimes substantial) cash value from which you can borrow later in life. If you have a lot of trouble saving and investing unless you are forced to do so, they might be worth considering. Make sure you do plenty of research and get unbiased (that is, not trying to sell you an insurance policy) help before you opt for a permanent life insurance plan, if you end up choosing one.
Q: How much of an emergency fund should I have?
A: You will get more different numbers for this than almost any other (non-investment) personal finance question. These numbers, generally cited in months of expenses, range from as little as one month to twenty-four months. It’s hard to narrow it down to one answer that serves everyone; your best bet is to find an amount that works for you. My advice: three months as a good minimum (particularly if you have dependents) and one year is a pretty solid maximum (after that, you can start to blend your emergency fund into the safer portions of your investments).
Q: Where should I keep my emergency fund?
A: With an emergency fund, the key is safety above else, with ease of accessibility coming a close second. You don’t want to lose your money the moment you need it, or be unable to get to it when the need arises (or have to pay stiff penalties for the privilege). You’ll want to stick with a bank account for the first few months’ worth of savings, only considering higher earning alternatives (CDs, money market funds, possibly even bond funds) when you build your savings even higher. You also want to keep some cash on hand, just in case.
Q: How much money should keep as cash on hand?
A: Generally, you want to keep a sizable portion of money, probably a few hundred dollars as a bare minimum, in a safe place at your home (not on your person, as there is the possibility of it being lost or stolen); there are too many examples of natural disasters or other emergency situations where it becomes impossible to use cards or get money from a bank. How much beyond that will depend on how likely you consider such a situation, as well as how many options you have for other sources of help in such emergencies.
Alright, that’s enough of the doom and gloom, even for me. Hopefully, you will not need to use insurance or your emergency fund any time in the near future (or ever), but if such a situation arises, at least you’ll be prepared. And really, sometimes that all you can ask for.