Smart Personal Finance Part 4: Do You Have A Financial Safety Net? (And How To Build One)
Do you have a financial safety net?
You need to set one up. What will happen to you and your loved ones if you lose your job for a few months? What if you get into an accident that may prevent you from earning a living? Or what if some unexpected expenses come up. Do you have anything in place to make sure the bills continue to get paid and your family is taken care of?
Get Started Now
If not, now is the time to get started.How do you start?Having three to six months’ worth of living expenses tucked away in an interest-bearing account is how to do it. Figure out what your family needs to comfortably live on if all income stops. Then start saving as much money as you can until you have built up this safety net.Put the money you usually spend on extras (eating out, going to the movies, impulse buys) into your savings account until you’ve saved enough to have a comfortable cushion. Take make this step go even faster, add any bonuses, tax refunds etc. as well.
Put your tax return toward any debt that you have first to put a dent into it. If that debt is paid off and you still have some tax return remaining, put it right into your savings account.
Don't Stop There
Make it a goal to add to your safety cushion when you can. Come back and revise your numbers from time to time. Your living expenses may go up or down and you can adjust how much you need to set aside accordingly.Life and disability insurance are another important part of your financial safety net, as is your retirement money. Do you have a plan in place to continue to cover your living expenses (or those of your family) when you can no longer work? Call up your insurance agent and go over your current coverage. Make sure the insurance you’re paying for will pay out what you need and if not, make adjustments.
It's Worth It
Once you have those two parts of your safety net firmly in place (your emergency fund and 3-6 months of savings), consider investing any additional savings into higher interest-bearing accounts. While you may not be able to access any money invested there right away, it will come in handy when you’re dealing with a long-term financial emergency or are ready to retire. The plus side is that there are plenty of investment vehicles out there that will get you a much better return than your plain savings account at the bank. Talk to your financial adviser and come up with a plan that’s right for you, your family and whatever the future may hold.