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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?

This stuff is simple. Your income minus your expenses equals the maximum amount you can save and invest. It’s simple, but not easy. You’ve likely heard about how compounding interest is powerful. You’ve also heard that starting saving for your retirement as early as possible gives you the best opportunity to gain wealth. It’s true. The math doesn’t lie. There are many financial calculators, spreadsheets, etc that can help you meet your financial goals.

With a quick internet search I came up with two that should hit pretty close for several of y’all. Dave Ramsey’s version compares someone who starts investing at 19 to one who starts at 27. Darwin’s Finance Version compares an investor who starts at 25 to someone who starts in 35. The young investor only invests for a short time, then never again. The older investor starts late and invests for much longer. The younger investor wins in both examples. They are typical results. Please take the time to read and understand them.

There are others, but you should get the picture. Saving much early in life can give you the freedom to either not invest at all, slow down, or speed up to save more. The point is that if you start early, you’ll have more options later in life. Having options and freedom allows you more flexibility to achieve what you truly value. Options could be to continue to work in the salt mines, sit on the back porch with children or grandchildren, or doing nothing. But it will be your choice. You won’t be a slave to your job or career if you get this Big Rock right.

We’ve covered assets, liabilities, and net worth in previous posts. This post is to stress the importance of starting early. A seemingly small decision like not funding your IRA, 401k, or any other investment for retirement can have a major impact on your finances. In Dave Ramsey’s version, for less than a typical car payment for a couple of years early in your life can buy you a significant amount of money in your retirement. Don’t brush over this. It’s important.

Don’t be like me when I bought a new car in my 20’s. If I would have kept a cheap paid for car instead of buying that new car, my retirement account could look similar to the one in Dave’s example. But it doesn’t. That one example of a poor decision hurt my finances way more than I fully understood. For just a little bit of delayed gratification, I would be in a much better position today. I’m still playing catchup from the mistakes I made by increasing my expenses instead of investing as I should have. Don’t be Average.

Please don’t think that if you are older than one of these examples that all hope is lost. No matter what your current age you can improve your financial situation. What is true is that the longer you wait to start, the more money you’ll have to invest to catch up in the future. So, be like the my speedy grandson in the picture. It’s possible. But at what expense? You’ll lose flexibility to do other things with your money because you’ll have to put more into your investments. So, it does get harder. You won’t have the power of compounding interest working as hard for you.

Be speedy in starting your investments. Even if you are older, start now. Be strong throughout your years of investing by saving or investing what you need to invest to hit your financial goals. Even if you don’t know exactly what to do. Doing something today to get started is almost never wrong. It may not be perfect, but it won’t be wrong. So, be like Speedy and start today.