If there’s one thing we can count on, it’s that we can’t predict the future. Things happen—accidents, losing your job, big medical bills, natural disasters, theft, etc. If you’re a homeowner, the list is even longer. Common occurrences such as leaks, water or wind damage, and a myriad of issues can result in expensive, unexpected bills.
Part of the financial planning process is establishing a financial safety net for your family’s security. That safety net can be something for you to fall back on when something unexpected happens, big or small. More importantly, it can help you sleep at night knowing your family has some financial breathing room for unexpected expenses.
Here are some specific things you can do to create an effective safety net and improve your financial security:
1. Emergency Fund
A good first step is setting up an emergency savings account. This should cover three to six months’ worth of your normal living expenses. These cash reserves should normally be kept in a high interest checking account, savings account or a money market account so it can be accessed short notice. Your goal here is to keep the money handy and earning some type of return, with minimum risk. That way it will be there when you need it.
2. Life Insurance
If you have children or others who are financially dependent upon you, life insurance should normally be part of your safety net. That way if you die, your family can receive money to help make up for your lost income. The sooner you buy, the better, as life insurance cost is based primarily on age. Often the best type of insurance to buy is term life, which is the cheapest form of life insurance available. Ideally, if you can buy before age 35, you’ll usually pay significantly less.
3. Umbrella Insurance
As your wealth grows, another useful tool in your financial safety net is an umbrella insurance policy. These are normally add-ons to other policies such as a homeowner’s policy and provides additional coverage for any personal liability issues. As your net worth increases, this can protect you from various lawsuits. Usually, this umbrella policy is quite cost-effective, too, so in today’s litigious society, it’s a good idea to include it.
4. Disability Insurance
What happens if you get injured and can no longer work? Especially if you’re in a high paying profession that requires a physical skill (such as a surgeon), you need disability insurance. Even if you are a knowledge worker, there is still a risk that you could be injured and not able to work effectively. Disability insurance helps ensure your quality of life will not suffer too much if that occurs.
There are many types of disability insurance policies available at a range of costs. Some cover you for only the short term, while you rehabilitate. Some long term disability insurance can literally help you avoid financial ruin, as it can pay for your living expenses if you can’t work. Some larger employers may also offer group disability plans at favorable rates that you can often pay through a payroll deduction. In some cases, if the coverage is too low, you can purchase additional coverage.
5. Estate Planning
As financial planners, we consider estate planning part of your safety net. After all, if you die without your financial affairs in order, your family will have to deal with the fallout. Not all estate planning is complicated…in fact there are some simple steps you can take quite easily. For example, you can name beneficiaries for many of your financial accounts so they transfer on death directly to your beneficiaries, so they can have access to money quickly to keep bills current. Or, you can set up a living trust where assets will pass to your heirs without the hassle of probate. Of course, estate planning can go much further to help provide tax benefits and pass your assets on more tax-efficiently, too.
6. Reducing Your Debt
Another very practical step you can take for your safety net is to reduce the amount of debt you carry. Ideally, you want to get the point where you’re paying off your credit card balances in full every month and not paying any consumer debt. You may or may not want to prepay your mortgage, but those who do usually report being able to sleep more soundly at night. If you do have debt, it is usually best to pay off high interest debt first, so you can keep your money working harder for you.
7. Document and Organize
Finally, part of your safety net should be making sure information is easily accessible in case you or your spouse are injured or pass away. So get organized and agree on a secure location to store passwords and critical documents.
