A Daughter, a Dog, and a Disaster
Day 17. Sizing your umbrella
You have an umbrella. We all do. Is it the $5 New York street corner size, or the caddy walking along side their pro at The Masters size?
“Experts say you should have 3 to 6 months of living expenses saved,
in case you have an emergency.”
The statement is BS. It is a rule of thumb that doesn’t care about you.
You have different financial pressures, opportunities, and a tolerance for risk.
Where do you fit?
A household of lesser means, with a transactional checking account, maybe a small savings account, just getting started or getting by.
Or a household with at least $750,000 of cash and investments in checking and brokerage accounts that catches the eye of bread-and-butter financial advisors but is a tad short of the $10 million group who are the target of the well-heeled private wealth managers.
Most of us fit in between. Individuals and families paying the bills, funding a retirement account, and imagining the next vacation. If you are a member of this group, then a rainy day fund has crossed your mind.
Every household will experience their financial disaster. The collateral damage is the anxious moments that follow the thought, “Are we covered? Do we have a safety net?”
There is economic thinking that can “right-size” your umbrella.
Too high an amount set aside can turn the prospect of rainy days into a lifetime sequence of gray days.
Too low an amount set aside is planning that ignores household comfort.
The best way for a household to find its safety net is to start with a baseline economics-based financial plan. Then, look at the living standard trade-offs for different reserve scenarios. We write about this in the book, and paid subscribers can DM me for additional resources.
More discussion is in the attached class notes, the next iteration of the “Start Here,” series.
I love the blowing up of these saysings (your rainy day fund) that just make personal finance MORE complicated.
I think of my rainy day fund as the money that I have that is liquid and accessible with little or no costs or penalties associated with it. Can't count my house, car, IRA, illiquid investments (none, all index funds) tractor, etc. All else is my rainy day fund.
It is important to always have a reserve fund that acts as a safety net for whatever life throws your way, but setting up a fund based on a generalized statement seems like an inefficient plan. Since umbrellas of different sizes exist for different people and activities, the same should be true for reserve funds. The amount in a fund needs to be based on an individual's or household's needs and should align with their priorities. People should save an amount of money that aligns with maintaining a comfortable standard of living and how much risk they are comfortable with.