Stepping Stones to Investing: Risk
By Gary Silverman, CFP®
We talk a lot about the risks inherent in investing. Managing those risks is an important part of good investing. But there are a lot of non-investment related risks out there that can trip up your finances. Today, we’ll talk those and how you can be ready for them.
The first way to protect against the risk of the unexpected is to build up some emergency funds. (You can call them emergency, contingency, or rainy-day….it’s all the same to me.) This is the building block of all other savings and investing programs. The emergency fund keeps the debts from piling up, allows you to use timed deposits (think CDs) and riskier assets in other areas, and gives peace of mind.
No emergency fund? While you may not want to think about the surprisingly bad and expensive things that can happen in life, assuming things will go as planned relies on hope, not realism.
How much is enough?
- Enough to handle “general” emergencies like a broken refrigerator, car accident, or a trip to visit a sick relative.
- Enough to handle medical emergencies. In other words, enough to cover your maximum annual out-of-pocket cost under your health insurance.
- Enough to handle other big expenses that you have savings plans for but might come up early. As a minimum this is where the money comes from to pay expenses that your auto or home insurance deductible won’t pay.
- Enough to last 6-12 months without a job.
That last one can take a lot of money. So I don’t mind you paralleling that build-up of funds with the start of your investing program. With care they can play double-duty.
The second way is to protect against risk is by purchasing an adequate mix of insurance that will cover your property and help you through a period of sickness or disability. Life insurance falls under this as well. But in this case we don’t care about the amount held on your life…if you’re dead, you really don’t need much money. Instead we want to make sure there is enough coverage on whomever you are dependent upon for income. Usually this is a spouse, but in a business it may be a co-owner or key employee.
Of course, your spouse will want the same for you.
Any of the problems that these types of insurance protect against can derail your savings plans or empty out your investments prematurely. You are, through insurance, transferring most of the risk of one of these unlikely “problems” messing you up from your pocketbook to the insurance company.
Many folks will forgo insurance or underinsure because they think it is a waste of money. Here’s the thing: You HOPE it is a waste of money. Insurance pays the economic cost of some tragedies of life. I’d rather the insurance company keeps the money and I never have the tragedy.
This article was published in the Wichita Falls Times Record News on December 18, 2016.