Risky Business, Part I

To me life has risk management in every facet. I ride a motorcycle, but I hedge my risk by wearing a helmet. When I ask a pretty girl out, I risk the (high) chance of rejection for the pay off of a good date.

In every financial interaction, a smart investor has got to weigh the risk vs. reward. Well no duh right? But this is actually much more difficult than it seems, and sometime can spell big trouble when you least expect it. I'd like to walk through a few of my current financial decisions and explain how risk management can greatly effect a position.

Emergency Fund

Last night I had a discussion with Fratboy about a young person’s emergency fund. More traditional financial gurus typically recommend holding 6 to 9 months of your current salary in a fund to be used if you're laid off, hit by a train, shot by a terrorist or otherwise disposed for a while. If you're young like me... I say this is bull. Here's why.

Mommy and daddy.

If you have a decent relationship with your parents, and your parents aren't bums, you can always run to them in an emergency.

Low to zero liability.

Do you have kids? A house payment? A huge car payment? Student loans? Seiously what bills do you have that you'll REALY need to pay in a pinch, especially if you've moved back home?

Credit Cards.

Credit card APRs are crazy high, and carrying a balance on them would not be fun. But if worst came to worst I know I could get my hands on nearly 30 grand from my plastic. That right there is a significant ''emergency fund'' but paying the interest would admittedly be a nightmare.

Now we have to weigh the chance of what could happen vs. What would result. For me, getting laid off is a tiny chance. I also have health insurance, and long term disability through my work.

If it did come to pass that I lost my income, I have a good relationship with my parents so while it would be humbling, I think I could go back without a ton of problems. I have all almost no liability, and what's more, no student loans.

Further, you can have a lump of savings which can serve as your "emergency fund", but is in fact something else. For me I'm saving for a house currently, so the money I have set aside as a down payment could be used in a fix to get myself out of trouble.

Which brings me to my final point.

The last resort: School.
If you lose your marketability as an employee, that is you just can't find another decent paying job due to such things as a recession or a horrible ''supply chain management'' degree (I kid), then maybe it’s time to think about a graduate, doctorate, or even another undergraduate degree. Doing this would pass time and allow for the market to come out of its funk, and also could be a valuable investment in your marketability. If you have student loans this could also buy you more time since you're back in school. The obvious down side here is the time investment and the tuition, if you don’t land a sweet RA or TA position.