259 | Three Layers of Financial Protection

Protecting yourself financially encompasses more than your typical emergency fund.

I help my clients implement three layers of protection. Having multiple layers of protection provides multiple safety nets in case of emergencies or unexpected expenses.

In this episode, let’s talk about the multiple layers of protection you can implement in your finances.

• • typical advice for protecting yourself in case of emergency and unexpected expenses
  • the three layers of protection to implement in your finances

You’re listening to Personal Finance for Lawyers. I’m Rho Thomas, and as a busy wife, mom, and former Biglaw associate, I know all too well the tension between the culture of the legal profession and pretty much everything else you want to do in life. That’s why each week, I’m bringing you the information and tools you need to improve your money mindset and manage your money to create true wealth. Because ultimately, it’s not about the money. It’s about the freedom and flexibility the money affords.

Hey, friend. Welcome back to the show. I hope you are doing well and having an amazing day so far.

Today we are talking about layers of protection in your finances. What I mean by that is having things that will protect you in the event of some unexpected expense or some sort of emergency or something like that.

How are you protecting yourself in those instances?

What we typically think about there is an emergency fund, right? Some money that’s set aside in savings or in some sort of account that we can access in those times. But, I actually help my clients create 3 layers of protection within their finances. So we’re going to talk about all three of those layers, one of which is the emergency fund.

But the first one I want to talk about is your cash flow.

So we talk often about the fact that you have to have some measure of cash flow in your finances to be able to achieve your financial goals. What I mean by cash flow is you have money leftover after you pay out your expenses.

So you’ve got money that comes in from your income. You pay out your expenses, you buy, you know, whatever else you want to buy. And there is some money left. That money that you have leftover between your income and expenses is your first layer of the offense in case of unexpected expenses or emergencies or things like that.

In my personal life, when my husband and I were on our whole journey of getting out of debt, we were spending substantially less than we were bringing in and we actually had a smaller emergency fund than typical advice suggests because we were spending so much less than what we brought in.

So our thought there was we could cash flow unexpected expenses or emergencies that popped up because we had that gap between our income and our expenses.

We often don’t think about that because so many times we are spending right up to what we make. And at the beginning of our journey, that was us. We were spending almost everything. We had very little left over at the end of the month.

But by planning how we were going to spend, by changing up how money was going out, and then by getting raises and not increasing our expenses, we were able to grow that cash flow. So your cash flow is your first layer of defense or your first layer of protection within your personal finances to be able to handle any kind of unexpected expenses that come up.

The next one that I want to talk about is the checking account buffer. Now this is something that we have talked about on the show before, but with the checking account buffer, this is some level of money that is sitting in your account between you and your account hitting zero. A lot of times we are going through, we’re spending whatever comes in, and then we’re getting really close to zero.

Like I said, back when we first started, we didn’t have a whole lot of money left after expenses. We had like $150 left at the end of the month, and I see often clients who are getting down into three figures or sometimes even dipping into the negative with their accounts and then they’re getting hit with overdraft fees and stuff like that.

So I teach my clients to create at least a $1000 buffer in their checking account.

This means that when their account is at $1000, they treat it as if they don’t have any money. And that buffer allows for those unexpected things that might come up, some sort of overspending that might have happened because they weren’t paying as close attention, or they weren’t being as intentional with their finances, whatever.

That buffer allows for those things to happen, and they aren’t actually hitting the negative. They’re not getting those overdraft fees.

So that buffer is a layer of protection for them. And we don’t want that to be the case. We don’t want that to be the norm, but that buffer is a layer of protection. And then what happens is if you dip into the buffer, then you’re going to replenish it.

Now I tell my clients to start with 1000. Some people will build up to a full paycheck. Maybe you have a couple thousand in there, whatever it is. But $1000 is your starter buffer because $1000 is pretty far from zero.

And so once you have that $1000 buffer in there then you’ve got a lot of wiggle room, or at least a lot more wiggle room than you have if you are typically spending down getting into the three-figure range or less.

So your checking account buffer is another layer of protection for you in your finances.

And then the final layer of protection is what we are traditionally taught about, which is the emergency fund.

So your emergency fund is an amount of money that’s set aside in savings that you have in case of emergencies or unexpected expenses.

Typical advice is to have three to six months of expenses set aside in your emergency fund, but you could do as little as one month. You could do as much as 12 months.

I think it really depends on you, your risk tolerance, your situation. In my personal situation we kept about a month’s worth of expenses in our emergency fund while we were getting out of debt because we’re a 2 income household. We were spending substantially less than we made so we had a lot of wiggle room, we had a lot of cash flow that we could handle unexpected expenses if need be and we felt good about that.

If you are a single-income household or something like that, you might decide that one month of expenses is not enough for you and you want to have a little bit more.

And I’ll say we didn’t stay at one month of expenses. So at this point we’re at about 6 months of expenses, but we were at one month while we were going through trying to pay off our debt.

For someone who is a single person or who is in a single-income household, you might decide to have a little bit more. Someone who has a more variable income, you might decide to have more. It is completely up to you, but your emergency fund is a layer of protection for you because you’ve got this money set aside that you can access in case of emergencies, unexpected expenses, things like that come up.

And when you’ve got these three layers of protection in place, so you’ve got adequate cash flow, you’re not spending everything you’re making and then some, when you’ve got a buffer in your checking account where your account is not getting so close to 0, and then on top of that, you’ve got an emergency fund, you’ve got all of these layers of protection that you can tap into if you have unexpected things or emergencies that come up.

And you can use all of those things or some combination of those layers of protection that allow you to cover whatever that unexpected expense or emergency is before you end up, for example, having to put something on a credit card that you don’t have the money for.

So that is the way that I think about protection within your finances.

It is a three-pronged approach. There are three different layers of protection there, and each of those layers is going to keep you from financial ruin or from having whatever financial crisis that might be coming if you didn’t have those things in place.

So that is what I wanted to share with you today. I hope that the concept of multiple layers of protection in your finances is helpful for you.

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As we close out, friend, I pray that you take the information you learn here, apply it in your life, and open up to the realization that wealth is available to you. As you do that consistently, week after week, you’ll continue to take steps to take back control of your time, build wealth, and live the life of freedom and choice you deserve. Talk to you later.