Money Basics: Defensive Planning (aka Risk Management)

In sports, playing defense involves preventing the other team from scoring. In life, you’re on one team and Murphy’s Law* is on the other. Shit happens. We’ve all experienced unexpected setbacks that have had some degree of financial impact.

In order for you to come out ahead when life throws you future curveballs, taking advantage of defensive strategies like having diversified savings buffers and doing adequate insurance planning is necessary. You can’t plan for everything, but considering your risks and preparing to the best of your ability and according to your comfort level is necessary.

I strongly believe that many people are improperly insured in most areas of their life. Don’t confuse that with me saying most people need more insurance- I’m not. I’m saying that these people are often over insured in certain areas and under insured in others which can spell trouble when looking at a plan as a whole. I believe this is because of a several factors, the primary being that according to a recent study cited by CNBC[1] some 58 percent of Americans believe their financial-planning efforts need improvement and 34 percent have no financial plan. Another main factor is that many people make financial decisions based on conventional wisdom rather than based on their overall goals and values.

Your defensive planning (which includes emergency funds and insurance) should be solely based on what you want the outcomes to be when life doesn’t go your way. But it’s hard to know what you’d want to happen when you don’t know how those choices impact your bigger goals and plans.

Do you really want 12 months of living expenses sitting in cash savings or do you just want to know that if you lost your job you wouldn’t be forced to take whatever comes your way? What if having 3 months of living expenses in the bank, investing the other 9 months worth of expenses, and opening a home equity line that gives you access to another 12 months worth of expenses (just in case the market is down when you actually need the money) gives you a potentially better overall outcome with more money in your pocket EVEN if you actually lose your job? Wouldn’t you want to know that alternate scenario so that you can make an educated decision even if you weren’t okay with the actual risk? I would.

Being empowered to make your own financial decisions in every area with concrete numbers around each option is something you can get if you’re getting comprehensive planning.

Why? Because there are so many considerations and options:

  • How much insurance coverage to get
  • What your deductibles should be
  • How much to invest
  • How much to keep in cash
  • What to buy insurance on
  • What to self-insure
  • How to self-insure

The list goes on and on. The thing is, too much or too little insurance (and emergency savings is included in that term) is completely subjective and based on your individual risk tolerance, needs, and goals. If you are over insured in one area, chances are you’re thinking you don’t have the cash to properly insure in another area. Or, you may be missing out on opportunities to get a better return on that money.

All of these decisions track back to cash flow and finding money that’s hiding under a veil of necessities. You need car insurance, but you likely don’t need to be paying an extra $600 per year for a $500 deductible on your plan if you have cash sitting in the bank that could pay for a higher deductible if you got in an accident this year. That $500 kept in your pocket instead of sent to your auto insurer could be reallocated to protect your paycheck through some disability insurance, cushion your emergency savings, or be invested long term.


Money Basics Series

Although there are certain basic financial rules of thumb that many people can agree make sense at face value (like “a house is always good investment”, “you should try to save as much money as you can for retirement”, and “you should always spend less than you make”), making financial decisions solely based on these rules of thumb is probably not going to help you maximize your money and can actually cost you big time long term if this advice isn’t in line with your personal goals and values.

That being said, after working with hundreds of clients, we realize that there are certain beliefs and fundamental principles we operate off of at Peterkin Financial that color the way we look at planning and consequently the way we advise our clients. Client goals and values followed by data and numbers always trump general rules of thumb, but we feel it is important to share them just the same. So we’ve decided to create a blog post series of what we’ve coined “Money Basics” so you can better understand our perspective as a planning team.


*Murphy’s Law- If anything can go wrong, it will.



Source: Nicole Peterkin []

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