Sequential Investing Hierarchy – Surviving
The next foundational step is “surviving.” As a reminder, this step comes after all short-term, high-interest debt has been eliminated and a spending plan has been established. Now that there is more cash flow available (because some debt payments have been eliminated), households have the opportunity to add on to the foundation. The “surviving” stage is two-fold: establish an emergency fund and implement the proper insurance policies.
As a general rule of thumb, an emergency fund of 3-6 months of living expenses is a healthy amount. These funds should be in accessible, low-volatility accounts, because the time-frame of the funds is potentially short-term.
As for the insurance policies, most households (while employed) need life insurance, long-term disability insurance, and health insurance. Upon retirement, the need for life insurance and long-term disability insurance often decrease or go away entirely. We’ll discuss these types of insurance in more detail down the road.
The Biblical principle is to build margin and prepare for the unexpected. The only certainly in financial planning is that the unexpected will happen!