In the Sermon on the Mount, Jesus finishes his teaching with a parable of two people who built their houses on either the rock or on sand. As you likely know, it didn’t go so well for the latter individual because when the storms came, his house folded like a deck of cards.
One of the things I love about this teaching is one of the assumptions that Jesus makes – that life is going to have storms. The rains will fall, streams rise and winds blow and beat against our houses. It’s pretty ignorant and foolish for us to assume that the weather will always be sunny and our plans will work out just like we drew them up.
With our finances, it’s always good to think through the various storms that could arise and jeopardize our plans. What are the things that either have a high likelihood of happening at some point, or might be financially devastating if they do come to pass? Better yet, are there things that can be done now to help safeguard against some of these dangers, or ways to avoid them altogether? Keep reading to find out some of the most common danger areas we see and how to better protect your financial house.
Cash is king it has been said. While most of us don’t keep very large amounts of physical dollars anymore, one of the best thing you can do is to keep enough cash in the bank in order to insulate you from disaster. Cash needs fall into one of two categories – expected and unexpected.
The unexpected needs are hard to predict because, well, they’re unexpected! The car suddenly dying, a health emergency, a job loss, the HVAC unit croaking, the list of these could go on and on. Most experts will give a range of 3-6 months of living expenses as an “Emergency Fund” to keep for these unanticipated financial storms. Conventional wisdom is that it should be on the higher end for single income families and lower end for dual-income families since there’s more insulation on the income-side.
In reality, we tend to see this number get higher as people get older, more conservative, and have more that they can afford to set aside for a rainy day. Personality also certainly comes into play when it comes to the right amount for this. Regardless, if you have any short-term debt like credit cards, you should pay these off before saving up an emergency fund because the emergency fund is just meant to keep you from taking on debt like this to begin with.
The expected cash needs are things like an aging car that you know will need to be replaced, paying for planned home upgrades or major travel and things of the like. These things aren’t emergencies by nature and should be factored completely separate when it comes to how much cash you’re keeping. Often it’s best to escrow these future needs on a regular basis so that you have the full amount saved up in addition to your emergency fund before the expenses actually arrive.
Some things just aren’t logistically coverable by cash savings like paying for a kidney transplant or replacing a house. Others, like replacing a newer car or dental work, might be paid without insurance but it may be a good idea to have a policy to cover them.
Again, this is part wisdom and part personal preference. In general, insurance is meant to cover events that are unforeseen and potentially catastrophic. So things like homeowners insurance should be a no-brainer (and is required if you have a mortgage), while others like Pet Insurance or insuring a toaster are in my opinion a bit more superfluous.
Where should you draw the line? Much of this depends on what you consider to be catastrophic events, how much cash you have in an emergency fund, and your personal comfort level. I lean on the non-insurance side of the spectrum, and will often decline insurance coverage on appliance, travel plans and things of that nature. Others might prefer to potentially outlay more in up front expenses if they can limit their downside risk on those items. It’s okay to take on the uninsured risk so long as you know what could potentially happen and have enough of an emergency fund to take on the potential expenses. You should also think through your deductibles when it’s an option on things like home and auto insurance. Higher deductibles mean lower premiums and vice versa, and which one is right for you should depend on the same factors.
In a word – no – you cannot recession-proof your investments. While you can avoid downside risk by sitting on the sidelines or buying an annuity product, these solutions often cause more damage than they avoid by exposing you to inflation risk, hidden fees and a host of other problems.
You can, however, be smart about how much of your investments are exposed to certain amounts of risk such as stock market volatility. Make sure you have any amounts you’re expecting to withdraw in the next several years in conservative assets like bonds and cash. That way when the storms come (not if), you won’t have to be anxious or panicked as you’ll have plenty of time to wait out the storm.
That’s why your investments should always go hand in hand with your overall financial plan. Lining up your investment strategy with your future cash flows allows you to have a lot more confidence in your ability to anticipate and plan around the things that could jeopardize your goals being reached.
Lastly, we want to encourage you not to focus too much on the storms. When Jesus told Peter to get out of the boat and walk towards him on the water, he did just that. He was literally walking on water, until he got distracted by the wind and waves around him. When he did that, he sank like a rock (which, ironically, is what his name means!). We can focus so much on the storms that haven’t even happened yet that it can cause us to try to build up huge portfolios and bank accounts so that we will be safe. But security in this world is ultimately an illusion. It can never really be attained and we wear ourselves out trying to run after that which is unattainable.
So do your best to be wise and guard against the dangers that may lurk ahead while not letting the fear of the future tear down your house.
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