Emergency Funds vs Insurance, What You Need to Know


As a dad, part of your job is protecting your family from harm. Another part of your job is helping them get to where they want to be in the future. Setting up the right level of protection in the right way can serve both purposes. Here’s what you need to know.

The basics of everyday finance

The basics of everyday finance are income, regular savings, an emergency fund, and insurance. Your income and regular savings cover predictable expenditures. Your emergency fund and your insurance cover unpredictable expenditures.

Once you have all that in place, you can turn your attention (and remaining money) to investing for your family’s future.  

It’s important to work in that order because, as the ARQ Wealth Website makes clear, investment is for the long term. This means that if you want to succeed, you need to give your funds a chance to grow.

You can’t keep taking your money out of the market to deal with short-term issues.

The basics of emergency funds

Emergency funds are sometimes known as “cash cushions”. That’s a pretty accurate description of what they do. Essentially, they provide a bit of padding for when you hit a bump in life’s road.

Having an emergency fund means that it’s less likely that you will need to apply for credit to deal with an unexpected bill. It can also help to lower the cost of insurance by making it possible for you to agree to a higher deductible in return for a lower premium.

It could also give you the option not to claim on insurance so you could maintain your “no-claims” status.

It’s therefore vital that your emergency fund is big enough to see you through any real-world emergency you are likely to face. At the same time, you generally want to avoid keeping more cash savings that you really need. Even when interest rates are decent, there are often better options for growing your money.

The basics of insurance

Insurance allows you to buy a high level of protection for a relatively low price.

Its most obvious use is to make sure you can afford necessary expenses that would be way too high for the average person to pay out of savings. Medical expenses are one example of this. Legal expenses can be another.

In fact, getting cover for legal expenses can be a major argument in favor of getting insurance instead of relying on your emergency fund. For example, if you use a bicycle on the road, then you risk getting into an accident with a motor vehicle. The driver will almost certainly have insurance and their insurance company might choose to fight any claim you try to bring.

As with emergency funds, it’s important to have the right level of cover for your needs.

On the one hand, you need to make sure that your insurance cover actually does offer meaningful protection. On the other hand, you want to avoid wasting money on excessive cover as any payout will be dependent on the nature of your claim, rather than your premium.

Jeff Campbell

Jeff Campbell is a husband, father, martial artist, budget-master, Disney-addict, musician, and recovering foodie having spent over 2 decades as a leader for Whole Foods Market. Click to learn more about me

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