Thursday, March 19, 2009

Preparing to Invest: Protect Yourself, Your Dependents, and Your Belongings

Personal finance is about more than just your stock picks or your carefully selected asset allocation. A holistic view of your finances also includes your ability to handle financial surprises, and protection against financial catastrophe. These come in the form of your emergency fund and various types of insurance.

Emergency Fund: It is usually recommended to have 3 to 6 months worth of living expenses (not salary) in your emergency fund. Tally up your rent/mortgage, food, bills, fuel costs, monthly insurance premiums, etc. and set aside 3 to 6 times that value in your emergency fund. Keep this money liquid, so that you can access it relatively quickly. For example, put it in a savings account, money market mutual fund, or cashable GIC.

Why do you want to have this set up before you invest? Since the markets are volatile and emergencies and financial surprises can happen at any time, you really don't want to be forced to cash your investments when the markets have taken a nosedive, as they do from time to time.

Insurance: Protect yourself from financial ruin. The types of insurance you need will vary based on your situation, and in some cases your employer may provide some coverage for you. Some of the more common types of insurance you need are:
  • Disability Insurance (protect your ability to earn)
  • Health Insurance (protect from possibly huge medical bills)
  • Life Insurance (protect your family's income)
  • Home Insurance (protect your property and possessions)
  • Vehicle Insurance (protect your vehicle and get coverage for liability)
I would strongly urge you to adjust your policies to get the best coverage for those cases that would truly bring financial hardship. Paying a couple hundred deductible for a broken windshield is annoying, but won't wipe you out like a court order for $1 million will. All insurance brokers have a default policy. It will work for the average situation, but nobody is average, so take the time to examine it and make adjustments that fit your situation.
Posted by at
Labels: ,

3 comments:

  1. AnonymousMarch 22, 2009 at 9:41 AM

    Good advise ! I heard the average Canadian keeps approximately $2000.00 CAD in the bank now as compared to $8000.00 some 20 years ago.

    Do to the current economic situation this shouldnt come as a surprise.Paying off their creditors and managing assets perhaps ?

    ReplyDelete
  2. Canadian Money BloggerMarch 22, 2009 at 1:00 PM

    @Anonymous: I do think that paying down debt is very important, and often times should be done before investing. Reducing the debt principle is an "investment" that reduces future interest payments and amounts to a guaranteed return.

    However, to your point, I think now more than ever, the emergency account should be properly funded. The chances of losing a job or other source of income are higher now, and if the worst should happen, you want to be able to live for a few months on your emergency fund. You'll be happy to have a few months to pick yourself up and find a replacement source of income without having to incur debt or worry about losing your home.

    ReplyDelete
  3. AnonymousMarch 25, 2009 at 6:53 PM

    I totally agree !

    ReplyDelete

Subscribe to: Post Comments (Atom)