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When thinking about topics to write for my Personal Finance Basics series, one of the first ones that came to mind was the topic of planning ahead for emergencies. It's such a basic concept and one that will affect a majority of us, but unfortunately only a few of us ever plan ahead for unplanned expenses or emergencies.

Today I thought I'd take a look at planning ahead for emergencies.

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Everyone Has Emergencies

Whether we like it or not, we all will face emergencies or unplanned negative events multiple times in our lives. In fact, the stats are against us:

Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time.

Let's look at that. 78% will have a MAJOR negative event in a given 10 year period. At our house that has certainly held true – in fact we've had 3-4 major negative health events in the past 10 years. I wonder what the stats are for minor negative events – my guess is that it runs close to 100% With numbers like those it's a sure thing that you're probably going to need to have some sort of a backup plan. At our house our backup plan includes an emergency fund and plenty of insurance.

Insurance Helps Cover Against Major Negative Events

The first thing we've done at our house to plan ahead for major emergencies is to make sure we're covered when it comes to insurance. What types of insurance should you have? We would suggest having good coverage in the following types of insurance categories:

health insurance



life insurance

disability insurance

homeowner’s insurance

auto insurance

long term care insurance

What types of insurance you decide to buy will depend largely upon your personal financial situation, and whether you’re secure enough to self-insure. At our house we've got a ways to go so we've got everything on the list except long term care insurance, which we plan on buying after we turn 60.

While we have insurance in most of the above categories, the one that has more than paid for itself is the health insurance. A couple of years ago my wife had some major health events that meant she has spent close to a month in the hospital over the past couple of years. Our insurance has paid for almost $300,000 in medical care during that time while our out of pocket costs and premiums have been closer to $15,000. If we hadn't had insurance, we would have been in a world of trouble.

Give yourself that insurance umbrella in case the skies get cloudy and it starts to rain.

An Emergency Fund Pays For Smaller Emergencies And Negative Events

While insurance is great for transferring risk of major medical events, car accidents and disability to the insurance company, it isn't going to cover everything. There are a lot of negative events that can happen that won't be covered by insurance.

Car repairs

Emergency room visits

Unplanned hospitalizations

Unplanned travel expenses (funerals, weddings, etc)

Job loss

Water heater goes out

To pay for occasional expenses (property taxes, insurance)

To help cover the risks of negative things that can happen in life (like the things listed above), it's important to save up an emergency fund. The problem is, most Americans haven't done that.

A Gallup poll from a few years back that found only about 4 in 10 Americans say they actually have cash on hand in case of an emergency. Only 10% say they have $1,000 in cash available in case of an emergency. In fact, they found that most people say they will rely on other sources of emergency funds if it came to it including credit cards, family members or 401k loans.

In my opinion that's just bad planning – you should be saving up cash in an emergency fund.

How Much Should Be In Your Emergency Fund?

Experts vary on how much they say you should be saving in your emergency fund – and they'll give you different amounts depending on whether you're still in debt or not. If you have no other debt most will tell you that a good number to have saved is 3-6 months of expenses. In our case we're saving up almost a year of expenses to cover us in case of a job loss, major medical event or other catastrophe. We just feel safer having that much, especially with the economy being on the rocks as it is currently. It really depends on your personal level of risk you're willing to take on.

Your age, and status will also affect how much you save. If you're young and single with no major debts or obligations, you might get by with a smaller emergency fund. Have a large family and are a bit older? You might want to save up a larger emergency fund.

You will also want to take into account whether you are expecting a big event in the near future. Do you have a baby on the way, or foresee layoffs at your company? It may be time to stockpile cash.

Emergency Funds And Insurance Give Peace Of Mind

For me one of the biggest pluses of having a large emergency fund and plenty of insurance is the fact that I have peace of mind knowing that if something bad happens (and it will), we're covered for most situations. We've transferred risk from ourselves to the insurance companies for most possible major negative events, and self-insured ourselves against the smaller events. Because we've planned ahead we have less stress and we're able to focus on other important goals like boosting our income and creating wealth.

Have you protected yourself against the probable chance of life's little emergencies? Do you have insurance and emergency savings to cover you in case of a major or smaller negative event? Tell us your thoughts on planning ahead for emergencies in the comments!

Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time .

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