> TEOTWAWKI Blog: Questions around the Financial Safety Net



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.