So you saved a little money with your insurance policy. Are you happy now? Did you stop to think about what could happen next if something went wrong and you needed that policy? If your deductible is $1000 per incident, do you have the money now or will you have to borrow it when you need it?
Before you can even think about saving for retirement and your cash reserves, you need to set aside money to cover the deductible on your insurance policy. The first and foremost thought in each person's financial planning should always be about finding ways to mitigate one's foreseeable liabilities. To accomplish that goal, one should always set aside enough funds to cover all of the deductibles on all of the insurance policies just in case all insurance policies were needed at the same time.
What happens when you live paycheck to paycheck? Most residents in the United States live paycheck to paycheck. Some even live only on borrowed money. You have to start slowly and let it build up over time. For example, many commonly held insurance policies cover health, life, auto, and home-owner or renters. You should set aside deductibles for each of these policies.
Where to save your deductibles
Your health insurance deductible should be stored in the form of an interest bearing savings account. You may need this on a regular basis. If you have a good healthy year and do not use this money, you should continue adding to it on a regular basis. If you exceed $1000 + the current year's deductible, you should consider siphoning off the excess (in $1000 increments) into interest bearing Certificate of Deposits (CDs) that are short-term in longevity (for example: 3 month CDs).
Your auto insurance policies should be stored in the form of interest bearing CDs. If you have a $1000 deductible, you will need a $1000 CD. This would be good to have it set aside in the form of short term CDs (for example: 3 months). If you have three autos and your deductible is $1000 each, you need to set aside $3000 in the form of CDs. A good savings strategy includes not lumping the insurance policy deductibles together. Instead, you would want to keep each deductible separated into its own CD. The main reason is to help you avoid any early termination penalties that may apply should you need only part of your deductible and not all of the monies set aside to cover your deductibles.
Your home-owner's or renter's policy deductible also should be set aside in the form of an interest bearing CD. You could set aside these funds in the form of a six month CD, however, if you are uncomfortable with the prospect of waiting til maturity to access these funds, then three-month CDs would be ideal.
Your life insurance policy doesn't have a deductible. It really is one of the last insurance policies that you should concern yourself with. If you plan the savings and your CDs correctly, you can actually have your term life insurance policy premiums paid for each month by the interest on your CDs. This would result in little or no money out of pocket for this expense.
Strategy for implementation
Your CDs should not be set up to mature all at the same time. Staggering maturity dates or months is critical for your success. You should establish your CDs to mature first in different months and then mature on different days of the months in the event that you have more than one CD maturing in the same month. The purpose for that involves assurance that the monies would be available shortly after you need access to them each month. It also incorporates the objective of minimizing or eliminating any early termination of CD penalties (which are deductible on your tax return) that may apply to your CD investment arrangement.
Stress reduction savings
When challenging or unexpected events happen, the last thing you should have to worry about is how to pay for the event. By structuring your insurance deductible savings in this manner, you will eliminate much of the financial stress caused by the crisis. You will be able to focus more on the recovery side of the scenario. Furthermore, if you don't need the funds during the year, you have placed those funds hard at work for you making extra income while giving you some peace of mind and an added sense of security.
Andrew Griffith - Here's a brief summary for those who want to know more about me: Professional Background I own a small bookkeeping, tax and ...
