Everyone needs a safety net of money for unforeseen problems that will cost you money at an unexpected time. So, how safe is your net? Will your savings carry you through an unforeseen emergency without having a major impact on you and your family?
Your rainy day fund, emergency fund, or savings combined with your insurance create a financial safety net to ride out rough times. Emergency fund and Insurance are the two big rocks in this post. As you see in the pic above, Corey and I trust the safety net of those sweet hammocks. But how’s your safety net?
Not only do you need money for things like car repairs, house repairs, etc. Emergency funds should cover the deductibles on your car, home, and medical insurance. Don’t overlook the importance of insurance. Insurance is there to prevent you from going bankrupt or causing major financial problems during emergencies. More about insurance in a future post.
In the past, I had a small amount of money in my savings account for emergencies. But it never seemed to be enough of a safety net in the past. After reading and listening to Dave Ramsey I realized that putting emergency things on a credit card was plain stupid and not working for me. I changed my finances to ensure I had my $1,000 initial emergency fund and 3-6 months of expenses were available for emergencies. This wasn’t necessarily new information. Ever since I was a child, I’ve heard the ol’ saying “make sure you are save enough money for a rainy day.” But it was Dave Ramsey who finally made it sink in that there’s a method to this rainy day fund. By tying it to my expenses, it finally gave my engineering mind a concrete number to shoot for as a goal. Rather than whatever felt comfortable, it finally sunk in that your rainy day fund should be tied to your expenses. That was the one thing that made it click. So, that’s what I did.
So, how did that work out for me?
In 2014 a significant hail storm came through my town. Immediately after the storm, roofers started swarming the area like flies. It seemed like every day, there was another roofer beating on the door trying to “inspect” my roof or leaving a card on the doorstep. My roof wasn’t leaking and looked OK to me, but I did wonder if my roof was damaged. So, since USAA has never let me down as my insurance company, I decided to give them a call.
After a quick inspection by an an USAA approved adjuster and one of the USAA approved roofers, they gave me the news. My entire roof needed to be replaced. They also went on to explain that my fence was damaged, all of my gutters and downspouts were damaged, and a few miscellaneous items were damaged as well. The damage was over $35,000 dollars. Yikes! That’s a lot of money. I had insurance for this, so I only had to pay my deductible. My deductible was approximately $10,000. It was based on a percentage of my home value. Ouch! But, there was no getting out of it. So, I wrote a $10,000 check. My roof was replaced, my fence was power washed and stained, and a few items in the yard were damaged and replaced. My insurance worked as planned.
But dang. Writing a $10,000 check will get your attention. So, I evaluated my insurance. I’ve always been a firm believer that insurance is to cover catastrophic events to protect you from massive financial problems. I knew that a higher deductible means a lower insurance premium. So I chose a high deductible insurance policy. Did my insurance do that? Yep. I had the money in my emergency account. But that didn’t totally satisfy me.
Writing a $10,000 check really got my attention. Could I potentially do it better? Was I being efficient? So, again I called USAA. After talking to them and going through many quotes, I found out that there’s a sweet spot in the insurance world for homeowner’s insurance. The fine man on the other end of the phone explained it to me simply. At about the $5,000 deductible, the insurance company figures that you are the type of person who will only file an insurance claim for catastrophic type incidents. If your insurance deductible is less than that, they expect you to be one of those type people who will be filing multiple claims for every little thing that happens. If you are the latter, your premiums will be significantly more.
With this new knowledge, I reduced my deductible from approximately $10,000 to $5,000. This difference was so small, I don’t even remember the exact amount. It was something like $50 per year! If I would have gone much below that $5,000 deductible the price started increasing very quickly. I mean like multiple hundreds of dollars per year for like a $5,500 deductible! So, it is worth your time to spend with your insurer to ensure you are getting the best value for the insurance you need.
So, while my insurance and emergency fund were sufficient in my circumstance in 2014, it wasn’t efficient. By evaluating my insurance needs and comparing them to the insurance premiums, I was able to reduce my deductible significantly without increasing my insurance premiums significantly. Now my safety net is in place AND more efficient.
Now, fast forward to April 9, 2018. Yep, you guessed it. Another hail storm rolled though my town. So, here I sit typing this shortly after I wrote a check for my much lower deductible of $5,000. The change to the deductible was insignificant, but saved me $5,000!
Having an emergency fund is great. It will become a bedrock for smoothing the rough patches along your financial journey. But don’t neglect to ensure you are optimizing your emergency fund in conjunction with your insurance! By optimizing these two aspects of your finances, you can be assured that your safety net will carry you through any storm that comes your way! Emergencies don’t have to be a catastrophe. Emergencies should only be an inconvenience. I kinda think of optimizing as making the holes smaller in the net smaller. The smaller the holes, the less will slip through the net. Kinda like little Skylar and her baby doll below. They are kicking back in the safety of a net with small holes that keep them safe and secure.
How safe and tight is your safety net?