At the end of last last year, we talked a lot about saving, starting with an emergency fund and then moving forward into thinking long term. But I have an interesting question to ask…have you ever thought of insurance as a part of your emergency fund or saving strategy?
First let me give the high-level, overall saving strategy we advise people to follow… You must have some cash available at home – what if a natural disaster knocked out all of the electricity so you couldn’t use a credit card or withdraw anything from the bank? It’s a good idea to have at least a few hundred dollars that you have access to at all times. After that, you need at least a few thousand dollars, ideally 3-6 months of your expenses (in an account that can grow to keep up with inflation), that’s designated for your emergency fund – if you lost your job, this is what you might start tapping into so you don’t run up your credit card balance. This needs to be liquid funds that you can access within a day or two. And finally, you want to build long-term savings that’s growing for your retirement, and don’t touch it until then.
Now, let’s consider what insurance is in general… Insurance transfers some risk from you to an insurance company. You pay them a small amount ongoing, and they agree to pay a large amount IF certain circumstances arise. The idea is that if something happens that is covered by insurance, it doesn’t ruin you financially – in that moment they pick up the bulk of the responsibility. There are many kinds of insurance that cover all kinds of areas of life. Some insurance coverage is required by law, some kinds are very important to have, others are a good idea, and others are basically a total waste of money.
So back to my question, could insurance be part of your overall emergency strategy? You don’t want to sacrifice building your savings in order to pay for an insurance that is unlikely to ever give you a benefit. But some insurance coverages could be a very smart move, especially if there’s an indication that you will likely face the circumstance that it covers. It’s also important to point out that it’s very important for you to understand what an insurance policy does do and what it doesn’t do. Some people get burned because they think they’re covered for something, but they misunderstood what the policy actually does or that thing isn’t actually part of the contract. Be informed and don’t make assumptions.
Insurance isn’t saving, but they go hand-in-hand. If you have the right coverage when a situation happens, it could save you a huge amount of money at that point. You’ll have to balance your actual saving strategy with what protection you want to put in place, but make sure you protect the things you should. You also should review your insurance coverage periodically to see if what you have is still a good fit and if there might even be a better product or better rate available to you now.
Have questions? Comment below or message us and we’ll do our best to help.