Saving Money is an Insurance Policy

insurance policyAn Insurance policy can save you during the bad times as you contribute to it during the (hopefully) good times. You contribute to it in case you do need it. It’s like putting in the work and preparing for the next presentation or job interview.  Preparation isn’t needed but if the spotlight suddenly turns to you, you’re prepared to capitalize and pounce on the opportunity. Without preparation or practice, there may not be a guarantee of success but there will be a guarantee of failure. Saving puts you up to succeed in the down times.

I’m a big fan of Mark Cuban. I’ve been following him starting 5 years ago and reading his story. He’s an inspirational figure who I really admire and jumpstarted my desire to put in the work. There’s one quote that he has in his book that particularly stuck out to me. He says,

Everyone has the will to win, but it’s only the ones who prepare are the ones who actually gets to win

Why do I quote him? To illustrate a point. Saving provides the preparation that you need for when the inevitable downturn happens. I’m predicting something will happen with 100% probability (I do want to be contacted if I turn out to be wrong). The prediction is that in the next 40 years, there will be AT LEAST one downturn where economic conditions turn sour. What I won’t make a prediction on, however, is when it will happen. 

Saving is an Insurance Policy

An insurance policy pays out when something bad happens. Car insurance is needed in case of a crash, medical insurance for an emergency operation, or dental and vision insurance for unforeseen events. Unforeseen events. It’s powerful.

Unforeseen events have ruined financial lives before. The Great Depression, the Great Recession, the Tech Bubble. Yes, a few people have seen those events coming (The Big Short, anyone?) but for the majority of people, it’s hard to see black swan events coming.

However, they happen whether we like it or not. These events are out of our control and when these events happen, the probability of getting fired gets higher. The fact is, there is no business that sells insurance for when the bad economic conditions occur. There’s no product that you can buy that protects your downside during these times.

That’s why saving is paramount. Saving PAYS you out during the bad times. It only pays you 1 to 1 (what you put into it). However, if your savings is a high enough number, that payout ratio is all you need. You increase the payout ratio if you’ve put that money to work and invested in the stock market. 

Protect yourself

It’s the good times and raining money in the stock market. Near all time highs, baby!! I don’t know how much longer that it can last and it was a bumpy road to get here. I’m scared of the valuations set in place in the US stock market when earnings haven’t increased significantly to justify the increase. During these good times, it’s smart to capitalize on your surpluses by contributing to an investment account and living a frugal life. 

I haven’t really experienced a bear market. In the tech crash and housing crash, my parents never really spoke about how hard it was. I don’t think they wanted my brother and me to worry about money so they kept it quiet. However, I worry all the time now because it’s relevant to me. I started my full time job a couple months ago and the thought that I could be let go any second (‘at-will’ employment) terrifies me.

It’s scary, to think that I will experience the consequences of a bad economy when I didn’t do anything wrong. To protect myself, I’m saving everything and anything that I possibly can. I practice discipline and frugality when I see something that I want to spend money on.  

An Insurance Policy that Pays You Either Way

Saving money even pays me during the good times. If I save enough, I can finally declare myself to be financially independent and not worry about my financial life. It gives me the option to choose to be retired if I want to. The best commodity to have is optionality.  

Right now, I have a 55% pre-tax savings rate that goes straight to my 401k. I switched yesterday to a 50% contribution rate because I want the increased cash flow to be able to put into my post-tax accounts. My 401k provider recommends a 10 – 15% savings rate but when I run the numbers, that would only help me if I want to be financially independent at 65. A savings rate of 50% buys me one extra year of retirement.

The idea is that if I spend 50% and save the other 50%, the 50% that I save will last me next year. Hypothetically, if I save 25k and spend 25k in a single year, then the 25k I saved will last me next year. Just by saving, I can save a whole year of not stressing about money. I can’t think of a better deal than that. Buying a year’s worth of time has unlimited potential upside. There’s no telling what you can accomplish if you were given a whole year’s worth of freedom!

There’s No Telling What Will Happen

Starting this blog lets me spend a lot of time on the internet guilt-free. In that time, I hop on over to personal finance websites (some I recommend are ThinkSaveRetire, BudgetsAreSexy, ApathyEndsThePracticalSaver, TheMillennialBudget, DebtDiscipline, 1500Days, and so much more). Some have quit their jobs by reaching financial independence and blogging full-time.

I’ve read some bad stories of how their employer either fired or mistreated their star employees and therefore are in a worse position. It could be completely out of your control. You can control your effort, but you can’t control the decisions of your employer.  

It can happen at any moment even when the employee or the employer didn’t have any bad intentions. It could be an economic downturn that forces them to conserve cash that does it, which is something completely beyond their and your control (some exceptions are Wells Fargo’s recent scandal and Enron’s).

This doesn’t mean that you shouldn’t work to the best of your ability and deliver results. The employer did give you a chance. I want to provide value to my employer. I also will work long-term for an employer if the loyalty is returned. I’m setting myself up to be protected in case something bad does happen and they have to downsize.


Saving money isn’t just good for protection in a downturn but for upside in an upturn. It’s an insurance policy that you dictate the pricing (how much you contribute). A 50% savings rate is a great goal to shoot for. 

That is why I recommend saving and living a frugal life to ease stress and risk. Saving money provides the insurance policy that pays you when you need it the most. So start today and your wallet will thank me tomorrow!

Readers, are you taking advantage of this insurance policy? Let me know in the comments below!

Finance Solver

I grew my net worth to $40,000 as a college student through hard work, discipline, and a little bit of luck. I graduated college in 2016 and will be starting to plan for my retirement once I start working.I am planning on reaching financial independence by my early 30's and I will document my moments of inspiration all the way to desperation here.

My goal is to enable your success in personal finance so that you can realize the American dream. The first step is starting today!

Read more about me here.

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18 thoughts on “Saving Money is an Insurance Policy

  1. My goal for this year was to save 50% of our post tax once but right now it looks like we might come up a bit short. Even though we may miss our goal, we are saving as much as we can to make sure we are ready if any downturn would affect our family. Nice post!

    • Finance Solver says:

      I think you guys still have a fantastic savings rate, especially when it comes to post-tax savings! I save 50% pre-tax because I started my job on July of this year, so I have to play catch up to maximize my 401k. I won’t hit it anywhere close to it this year, but I know I can catch up next year. Thanks for stopping by!

    • Finance Solver says:

      Ah, I didn’t know that. I don’t get employer matching until after 1 year of service so I haven’t worried about it but something I will keep in mind for next year. Thanks for the information!

  2. Good advise, but 50% saving is bit difficult for us as we are one income family with around $55 K yearly income.

    I build a diversified dividend portfolio to grow my passive income, and have a goal having net worth of 1 million dollar in Dec 31, 2024.

    • Finance Solver says:

      That’s true. I’m an anomaly because I’m single and I live in one of the most affordable cities in the US. Adding extra dollars to grow passive income is a great way to ramp up savings rates!

  3. Some nice thoughts!

    I really like your “optionality” comment. It’s a good way of structuring the idea.

    A 50% contribution rate to the 401k seems pretty steep to me. Those funds are tough to extract before you hit a “traditional” retirement age (without a steep penalty), and employer matching cutoffs are usually pretty low. Which means you may obtain better overall value from your savings if some of what you’re currently contributing is redirected into other types of accounts. Just a thought. Nice work!

    • Finance Solver says:

      Great point! I should have clarified. I started work on July so I needed to catch up for the first 6.5 months that I missed out on contributing. If I were to keep up 50% savings rate next year, I would be over the 18k limit, which is not something that I want.

      Next year, my pre and post-tax savings rate will look completely different from this year’s! It’ll probably look more like 35% pre-tax savings plus an additional 8-10% post-tax savings rate. That is TBD though and who knows what will happen in a year!

    • Finance Solver says:

      The fact that nothing is guaranteed.. So scary, savings give me the peace of mind to sleep soundly without worrying.

      No problem, thanks for stopping by Kelsey!

  4. 100% FS, really like your post. Saving money and having money gives that security and stability. It gives the foundation to build our future life on.

    The more we’re able to save, the safer we will be. You’re right about the world living in a high time, many bloggers haven’t experienced a cash like the 2008 lows. I hope we don’t have that again, but if we do, we have to be ready for it 🙂


    • Finance Solver says:

      It also helps me sleep a lot better at night!

      I am guilty being a part of that statistic.. I hope that the record bull market doesn’t create an over-confidence bias that can bite them in the end when the next downturn is sure to happen. I don’t know if it’ll be as catastrophic as the subprime mortgage situation but let’s hope not!

  5. I really like to think about savings as an insurance policy too! It’s comforting to know you have it to fall back on if hard times come.

    50% savings rate is great! We are hovering around 40% for the last year or two – hoping to get it higher next year.

    • Finance Solver says:

      Yes! I don’t know how people can spend all of their money and still sleep very soundly. I for one am terrified if I don’t have a savings fund that will push me forward during the rainy times!

  6. I totally agree with this. Unexpected expenses come up all the time. Your A/C goes out. Your car breaks down. You get a huge speeding ticket. These things are costly, and having a good chunk of cash is like having insurance against these unfriendly expenses. Having a nice cushion to back you up in these cases makes things go a lot smoother. In fact, it’s even better than an insurance policy, because that money is yours! When you pay premiums to an insurance policy, that money is gone for ever. When you pay money into your bank account each month, it’s there when you need it, but unlike insurance premiums it’s your money!

  7. A women up the street from my wife and I just had her husband pass away. They didn’t have “enough” money to pay for life insurance and they really never saved enough either. Now, she is wishing that they hadn’t purchased the new car a few years ago, or went on a vacation to Cancun.

    Saving money can really be a pain sometimes, especially when there are so many things out there that people want to buy! But sacrifice, is never a bad thing!

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