Life happens – right! As much as you think you can prepare and plan for situations and problems, there is no way to cover every crisis that might occur. Obviously insurance helps financially buffer against some medical situations, car accidents, and home catastrophes, but you can never be fully covered and protected through insurance alone.
In order to help protect yourself from financial ruin, you need to prepare your moat.
Remember, a moat is a deep, wide trench typically filled with water that surrounds a castle or other structure, used as a method of defense against attacks. By having a deep enough moat, layers of financial protection, you can hopefully change the situation from a crisis or catastrophe to an inconvenient but manageable situation.
When you are dealing with these crises such as a sudden illness or accident, it is overwhelming enough to deal with the emotional aspect without having to agonize over the financial aspect as well.
I readily understand the anguish of a crisis. My wife and I are like everyone else. We go about our lives thinking things will stay pretty normal and routine. It is funny how we all get lulled into a false sense of security. Like so many others, as we were going about our normal pleasantly mundane lives, an emergency did happen.
Shockingly our baby daughter suffered from a seizure. We were horrified. Of course, like any parent, we would have gladly traded places with her, taking the medical problem on ourselves rather than having to stand by panic-stricken as our baby endured the seizure.
Logan’s seizure resulted in a visit to the emergency room, then another emergency room visit arriving this time by ambulance from Logan having a subsequent seizure along with a four-day hospital stay, follow-up visits with specialists, and prescriptions that are, as of now, ongoing for the foreseeable future.
We don’t know the medical outcome of our daughter’s epileptic seizures, but we do know that we are in a position that alleviates the financial stress of this situation.
Luckily my wife and I only have to deal with the emotional turmoil rather than the emotional AND the financial aspects associated with Logan’s medical condition.
So how do you financially brace yourself against life? You need to prepare your moat.
I can tell you that the bills come in quickly. Leaving nothing to chance, we had already set ourselves up to be able to handle pretty much anything that comes our way from out of the blue – financially speaking.
So far we are looking at about $6,000.00 in medical expenses from the emergency room visits, hospital stay, visit to the specialist, and prescriptions. We expect more medical expenses since her current prognosis is that the epilepsy will be ongoing. Of course, her condition weighs heavily on us emotionally, just as it does any parent. But financially, we were prepared since we play offense and defense with our personal finances. Let me explain.
Simplistically, we keep to a budget, making sure we have low fixed expenses, an invested emergency fund, investment flexibility, and a high monthly cash flow. We don’t deviate from this plan. This strategy of playing defense against life, has helped tremendously to offset the medical bills that have already come in for Logan’s seizures.
Let’s break these down in more detail to give you a better sense of our strategies to see if they can help you as well.
- Since we don’t have a mortgage, it is easy to maintain low fixed expenses. This gives us a high monthly cash flow. We budget so if either of us stopped working today, for whatever reason, we could still pay our bills and live as we currently do. Our lifestyle would not change. This is intentional. We can afford to live more extravagantly, but we don’t value that type of lifestyle compared to having a sense of security and peace of mind.
- Our second strategy is that we have an emergency fund that is fully invested in a brokerage account. This strategy has changed a bit over the years due to different levels of risk. Mostly we have changed the way our emergency fund is allocated. Presently we invest 100 percent of the money which has accrued to a considerable Taxable Brokerage Account.
Again, preparing for the unexpected, if there was a significant recession or financial collapse and the Taxable Brokerage Account fell sixty percent, we would have more than enough money to cover unexpected emergencies. This is the end game for this type of fund, so we are comfortable with investing in this manner.
Not everyone would agree, feel comfortable with this strategy, or be able to do this based on their other bills and debts. This is just what works for us.
- Along with the emergency fund, for the last five years, we have been investing into an HSA which is our third layer of protection, our third strategy. This now has built up to a sizable amount. Additionally, we maximize the triple tax savings benefit by paying every medical expense “out of pocket.” We save all receipts for the “out of pocket” expenses and are able to withdraw up to that amount for any reason whenever. This qualifies as a medical expense which is the third tax saving benefit. HSAs are worth looking into since they provide so many benefits and are one of the most tax-advantaged accounts recognized by the IRS. I’ll provide more information about all of the benefits of HSAs in a future blog.
- As noted earlier, we have a budget and stick to the budget. As part of our monthly budget, we have allocated a significant amount to automatically go into our Taxable Brokerage Account. This is our fourth strategy and last layer of protection. The ultimate purpose of this account is “early retirement.” This is automated and is flexible. If necessary for any reason, we can make changes and can pull back here.
Our strategy is to focus on keeping our expenses low, our cash flow high, and calculate the amount owed.
Obviously we want to keep our investments as close to our standard preset allocations as possible. However, we can pull from these various accounts, IF, but only IF, necessary. Our plan is to always pull from our monthly cash flow first and then see what is needed after utilizing this account. From there, if necessary, we would pull money from the Taxable Brokerage Account, our fourth layer of defense. If possible, we prefer not to touch the Taxable Brokerage Account or the HSA.
The benefit of good financing ensures that we should not have to touch these investment accounts since we have created a deep financial moat. Of course, life happens as we have experienced with Logan. Nobody ever knows when tragedy will strike or when accidents will happen. Having a plan though helps turn those emergencies into financial inconveniences rather than catastrophic tragedies. Being prepared for these events gives us the luxury of security.
One or more of these strategies may help alleviate some of the financial stress you have for the real events that happen in life. My advice is to educate yourself and be prepared. Let me help set you up for that security; I can help you create your moat.