The fact that every household needs cash during uncertain times has become one degree more complicated with the new health insurance situation.
After examining a number of health policies from different providers, I see a clear pattern. Each of us must expect to pay more of the regular costs for health care. The insurance policies are there to protect us from large and catastrophic costs. If you think about having a large deductible on your car or home, the analogy is apparent. You must be financially prepared to cover much of the costs of regular care and the first portion of the high costs associated with hospitalization for major health care.
So how should you adapt your finances to protect yourself? Heretofore, I have recommended an emergency fund for protection against a cash flow crisis spawned by a job layoff, distressed business, major investment loss, extraordinary health care expenses, or some other calamity. You cannot really anticipate these potential damaging financial events.
The new health insurance policies have much higher deductibles and total out-of-pocket costs before the insurance begins to cover the costs. Be prepared. I recommend that you have the annual out-of-pocket maximum amount in addition to your regular emergency fund. This may seem like a large amount, but the crux of the matter is how to manage any health costs which may occur each year.
Remember, the deductible resets each year.
The relevant question is how much reserve cash is appropriate to weather a financial storm. Too much cash is inefficient, while too little cash may turn a short-term cash flow crunch into a long-term financial struggle. Estimating the proper amount of emergency cash is more than academic. Proper liquidity can preserve your credit, buy time for a prudent job search, fund a career change or business start-up, and shelter your family from needless anxiety.
Here are general principles to consider for creating an emergency fund:
Consider these factors:
Then there are these:
There are other strategies you might explore, such as a home equity line of credit or more sophisticated portfolio structure. Keep in mind that all approaches carry risks that are specific to the asset groups and investment vehicles used.
Mark Sievers, president of Epsilon Financial Group, is a certified financial planner with a master’s in business administration from the University of California, Berkeley. Contact him at [email protected]