If you follow just about any “general public” financial guru, you know that they devote significant air time or book pages on just how important it is to have an emergency fund consisting of cash reserves.
On the flip side, more “advanced financial experts” and some wealthy individuals approach emergencies in unique ways, lumping in access to emergency cash via short term debt instruments like HELOCs or credit cards (as to keep maximum amount of money fully invested).
So what is the correct way to plan for financial emergencies? Where is the best place to keep emergency cash? Is debt the best option in an emergency, or an option at all? How do I minimize taxes? How much do I need?
You can probably guess that there is no one right answer. Each individual or family has specific needs and specific philosophies, but there is a wrong answer: not planning at all.
To help organize our thoughts and to learn about the different ways to approach financial hiccups, Lez and I have written a series of posts on the topic. Here is our first discussion:
How does one create a plan that is right for them?
It starts with a few questions.
1. What is your financial philosophy?
“If a man is proud of his wealth, he should not be praised until it is known how he employs it.” ~ Socrates
I’m not asking whether or not money exists; or if a firm is bailed out, does that automatically mean it shouldn’t be able to reward employees for good performance?
I am talking about your aversion towards debt.
Obviously proper levels and forms of insurance play a large part in risk reduction, but eventually expensive problems will occur. This is where the question comes in: If you have the luxury of time before an emergency, how do you approach your financial preparations?
The reason we ask this question is because an emergency is just that, an emergency, something that hopefully doesn’t happen often.
Many people have access to one form of debt or another if they need to pay for something large and unexpected. It’s hard to fathom for some of us, but don’t forget debt is normal, and if managed wisely debt can be used as a tool. It doesn’t mean you have to like it.
Saved cash in a “safe” investment form is money that is not being risked in an effort to earn more money. Some might say this is exactly the point, but this balance often hinges on your philosophy.
Have an opinion? let us know in the comment section….
Next post we will talk about how much to have on hand, if savings is the right choice for you?
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{ 2 comments… read them below or add one }
Our Answer: We fall somewhere between (a) All Cash and (b) some cash but count on debt for a majority of emergencies. We are trying to have enough cash to cover the large majority of emergency situations, but would not be adverse to going into debt for those extreme killer situations. If checking a box we'd choose (a) as our philosophy is very skewed towards the cash side of the spectrum.
I went with B myself. I prefer cash whenever possible, but do understand that sometimes you may have to into debt for some emergencies. I've never been a fan of debt and hate bills and interest, but if it were absolutely necessary, I don't think I'd loose much sleep over it.