While most of us fear the possibility of suffering investment losses, other losses can also impair our financial wellbeing, including financial emergencies. While it’s impossible to predict when financial exigency might arise (the 2020 pandemic is a quintessential example with inflation in 2022 a runner up) and how much they could set you back, you can be certain that they will occur from time to time. Preparing for these eventualities is essential; otherwise, you risk a painful and perhaps long-lasting financial setback.
Unexpected events that will require an outlay may cover a wide spectrum of our daily lives. At the lower end of the cost scale are repairs to the home or our steel and plastic master – the family car. Medical and dental expenses that are not covered by insurance can put a sizeable dent in the family coffers, particularly with high deductible medical plans. At the upper end are matters like losing your job or, later in life, having to pay for assisted living, home health care, or skilled nursing care. Another increasingly common event is helping financially challenged children. Parents are usually inclined to help needful adult children even when they can ill-afford to do so.
How should you prepare for the inevitable? As the saying goes, there’s nothing like “money in the bank” to help smooth out life’s pecuniary vicissitudes. Ideally, you’ll have an “emergency fund” set aside that is readily accessible. Depending on your financial situation, a good rule of thumb is between 3 and 9 months of monthly expenses. Many prefer to settle for earning Lilliputian interest on savings accounts to keep funds secure and available on short notice. Others are willing to take a bit more risk by putting the money into, say, conservative stock and bond mutual funds or ETFs to perhaps enjoy some principal growth. Whatever your approach, don’t put any such money into illiquid or high-risk securities. Moreover, don’t consider your retirement plan investments as a source of emergency funds since in most instances withdrawals will trigger a tax bill and, perhaps, a penalty. History has shown that investment losses can be recouped. The same cannot be said for large and unexpected financial outlays, especially for retirees.
Smart Money Tips
- Savvy investors think long term. In addition to occasionally stating the obvious, like “in the long run, we’re all dead” the great economist John Maynard Keynes also noted that “very few American investors buy any stock for the sake of something that is going to happen more than six months hence, even though this probability is exceedingly high; and it is out of taking advantage of this psychological peculiarity of theirs that most money is made.” True to his economic roots, this statement is not a paragon of clarity, so let me edify: “Invest for the long term.” Let the denizens of Wall Street and most individual investors worry about what’s going to happen to their money over the next six months. The advantage of figuring out how best to diversify your money and filling up the various “slots,” for example, big cap, international, corporate bonds, and so forth using excellent exchange-traded funds, mutual funds, and/or individual securities, is that you really don’t have to worry about what’s going to happen in the short run, because you know you’ll do just fine in the long run.
- Avoid foolish home renovations. Just as there are good reasons to borrow and bad reasons to borrow, so there are good home renovations and bad home renovations. Good home renovations will add value to the home when you sell it. They include added living space, adding or modernizing bathrooms, kitchen makeovers, etc. On the other hand, swimming pools (particularly in colder climes), bocce ball courts, and converting a garage into a fitness room (mea culpa on that one) won’t provide much, if any, financial benefit. In fact, some renovations will detract from its value. Unless you expect to reside in your digs forever, pay attention to how much a contemplated improvement will enhance the value of your manse.
Food for Thought
There is usually only a limited amount of damage that can be done by dull or stupid people. For creating a truly monumental disaster, you need people with high IQ’s.
Money Can Be Funny
I childproofed the house – but they STILL get in!
Word of the Week
onomatomania (on-uh-mat-uh-MAY-nee-uh) – An obsession with particular words or names and desire to recall or repeat them.
Origin: Latin, from Greek onoma (name) + -mania (excessive enthusiasm)
“I suffer from a serious case of onomatomania. I’m always repeating the word ‘actually’ in any sentence I utter.”