Three Principles of Personal Finance: #3 Prepare for the Unexpected

How To

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This is the third part of a series entitled: “Three Principles of Personal Finance.” To read more about Principal #1: Spend Less Than You Earn, please click here. You can also read the second part of the series on Principal #2: Make The Money You Have Work For You, by clicking here.

The best laid financial plan can be quickly ruined by a streak of misfortune: job loss, fire, theft, or health problems. You need to protect yourself, but it’s not nearly as hard as you think.

Emergency Fund:

Without savings, living paycheck-to-paycheck leaves you vulnerable. You need a buffer, a way to get back on your feet if disaster strikes. Save enough for at least three months’ expenses. For most people, that should be $10,000-20,000. This is savings separate and distinct from your vacation fund and your investments. It’s your “open in case of emergencies only” fund.

Build your emergency fund. Earn rates 11 times higher than that of the national average. Just pay careful attention to the minimum balance require to avoid fees; amount required to open account; and amount required to maintain yield.



Yes, if you’re an adult, you need insurance. And no, not just car insurance. What you need depends on where you are in life.

Medical bills are cited in about half of all bankruptcies1. And it’s no wonder. Break your leg rock-climbing and you could be stuck with a $5,000+ bill. If your company doesn’t provide it, you need health insurance.

If you’re in your twenties or early thirties, choose an inexpensive plan with a high deductible. You want something to protect you from disaster, but without breaking the bank. In most states, you can find a plan with a $2-3,000 deductible for $50-100 per month. You may not have the prescription drug benefits, or the low co-pay of those $300 per month plans, but if you only go to the doctor once or twice a year, you’ll come out way ahead.

If you rent, you need renter’s insurance. Sadly, only about 33% of renters actually buy this coverage2. Renter’s insurance protects you against fire, theft, and most natural disasters. Step back and think about how much it would cost to replace your computer, TV, couch, bed, and everything else you own. With renter’s insurance, you can get $20k in coverage for only $10-15 a month. It’s dirt cheap and worth it.

Renter’s insurance also protects you outside your apartment. If your car window is smashed and someone grabs your laptop, your car insurance will only cover the window, not the laptop. A good $20,000 renter’s insurance policy would give you up to $2,000 to replace your loss. Keep in mind that roommates’ possessions are not covered; your roommate needs a policy of his or her own.


  • Save $10-20k in an emergency fund. Keep that fund in a high-yield savings account like CapitalOne Bank (5.00%) or HSBC (4.50%).
  • If you need health insurance, consider a $50-$100 a month high-deductible plan. Being without health insurance leaves you too vulnerable to bankruptcy or worse.
  • If you rent, get rent’s insurance. It’s only $120-$160 per year.

Did you like this article? If so, please share it. Don’t forget to also check back next week for the conclusion of this series!