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8/23/13

Questions around the Financial Safety Net

Had a few comments/questions around the financial reserve post that I wanted to address. The following basically sums up the concern's

I cannot imagine holding back a years worth of money in cash form, and would never advise anyone do that. 

Two points on this:

1. I would not advise anyone to have a year worth of expenses in cash on hand/cold hard currency, unless very specific circumstances dictated it. Diversification is a must, and we'll talk more about that in a future post. Some cash on hand, yes...but not all of it.


2. A year's worth of expenses is on the high end for the safety net, and a shorter time frame is more reasonable for most. Your individual circumstances and level of risk aversion/preference will play into whether 3 months, 6 months, 9 months, 12 months or even longer is what is right to you.

For the average household, 6 months is a good goal to work towards.

If your income is less stable, then you'll want to work towards the higher end. If your income is fairly certain, then a shorter length of safety net is probably fine.

What makes one person's income stream less stable and higher than another? A single source of income versus multiple sources of income  into your household. Stability of your role and employer. Stability of the industry you work in (healthcare versus construction, for example). That sort of thing.

An actor or entertainer, for example, likely has a very unstable income--they tend to get gigs and do well for a while, then have a dry spell they need to get through before they land the next job. A tenured college professor, on the other hand, likely has a pretty certain paycheck for the next couple of decades.

4 comments :

  1. 1. I would not advise anyone to have a year worth of expenses in cash on hand/cold hard currency, unless very specific circumstances dictated it. Diversification is a must, and we'll talk more about that in a future post. Some cash on hand, yes...but not all of it.

    This depends very much on where they are in life in addition to individual circumstances. A person who has done well and is probably a bit older might have a paid off house, a year's cash sitting around and a nice retirement.


    2. A year's worth of expenses is on the high end for the safety net, and a shorter time frame is more reasonable for most. Your individual circumstances and level of risk aversion/preference will play into whether 3 months, 6 months, 9 months, 12 months or even longer is what is right to you.

    Given that the average unemployment is something like 9 months I'm not so sure 12 is totally out of whack. Also depends a lot on your specifics. If both partners work either in recession proof type jobs or multiple streams of income type situations then more like 6 months is probably fine. Now if all of the family income relies on one partner's job that is pretty risk prone, even if it is fairly stable.

    Coming back to the previous point I think it depends a lot on the families total financial picture.

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  2. i was a active duty medic on ft Carson know i am looking for employment i had built up a 3 month supply of savings and am greatfull i did with unemployment and living super cheap it keeps the mortgage man alway and food on the table without dipping into the supplies im learning the hard way how hard finding a job out here in Colorado springs as a medic is but am great-full every day of saving the money always it is helping more than you could imagine and it makes me more self reliant .

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  3. godfatherjsAugust 25, 2013

    Lots of medic jobs in wv if your willing to move.... just let me know

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  4. I honestly believe that most likely "end of the world as we know it" scenario most of us will encounter will be a lost job/unexpected unemployment. I think we all underestimate the importance of financial preparedness because it just isn't as cool as fixed blade knife or tricking out an AR-15.

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