I wrote in previous posts about saving money for emergencies and for financial independence which could eventually become early retirement, but today I want to share some thoughts about change.
It is important to think beyond monthly expenses and just think about all the what-ifs. What if you lose your job tomorrow? What if there is a disaster and your home is damaged? What if there is a plague or severe drought and food prices double for a few months?
How adaptable are you? If one of the above occurred today, would you survive?
If you depend on your job for survival, it is essential that you start your emergency fund (cash) right away. If you lost your job today, you'd need money for food, rent, and essential bills for as long as it takes you to find a new job. You might need to take a course to learn new skills or get a new certification first. If you know where the market is going, have enough savings to cover those expenses and time. You want to have at least 3 months of expenses covered in your emergency fund. See my earlier post on that topic to estimate how many month's you'll probably need to set aside (typically 3-12 months) Once you go beyond 6 months, it makes more sense to put the money in Certificates of Deposit or other investments since if you have an emergency you'd first spend your cash savings and then you could plan to convert investments to cash with little penalty (as the CDs expire, etc.)
Of course if you don't have very expensive things the second scenario isn't terribly important if you have savings available to replace your stuff. However if your savings is limited or you have a priceless collection, it is time to investigate the cost of having home owner or renter insurance. If you can replace what you have with the money you'd have spent in 1-3 years of premium payments, it would make more sense to me to just save more money for emergencies. If your house is made of wood then I'd understand the need for insurance for fire damage. If your house is built on a flood plain then you should either sell it or get flood insurance since a flood could destroy everything very easily.
In the case of plague or drought, there are several things you could do. First, if you have the space you could always have one or two months of long lasting food which you actually normally cook and eat. Lentils, beans, rice, pasta, oats, and canned goods are normally good for months to years. Be sure to only buy what you eat though. It is also nice to have extra staple food in case you have a financial emergency. You could just eat the extra food and spend less on food until the emergency is over. If you eat one kilogram of rice a month, buy a couple extra bags, use the oldest bag and buy another bag when you go shopping.
This could also work for other basic things you use like shampoo, deodorant, toothpaste and soap. Buy more basic goods that you use when on sale, but don't buy more than you'll use before the expiration date, and don't buy more than you have space to keep them (and keep them organized)
The typical suggestion of saving 10% of your income is not realistic unless you spend a high % on insurance which is of course money you'll never get back. 10% of your net income probably will only cover retirement at age 65 if you start in your 20s and you never have an emergency or lose your job in all that time. That is NOT very likely. Most people will have many jobs in their lifetime and company paid pensions are a think of your grandparents' generation.
Don't forget that most things especially electronics and appliances don't last forever. All those things that make life easier could break down. Repairs and replacements are not free! It wouldn't be a bad idea to set aside 10% of your income for a repair and replacement fund. If you don't use it by the end of the year, you could put the money into your retirement fund investments or use it to save for a house or use it to pay down your mortgage loan early.
It is essential to be prepared for what you can't anticipate. Save at least 30% of your net income (take come money) and you'll have at least some level of safety.Save 50% for a year and you'll have enough money to live off of for another year, but don't stop there. Life is about more than an emergency. Keep it up and you'll eventually be prepared for almost anything including early retirement. (many people have to stop working long before 65 due to health reasons so don't just plan on working until you die!)
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