976. Laura reviews financial safety nets that help you and your family survive and even thrive despite an unexpected hardship.
976. Laura reviews financial safety nets that help you and your family survive and even thrive despite an unexpected hardship.
Find a transcript here.
Have a money question? Send an email to money@quickanddirtytips.com or leave a voicemail at (302) 364-0308.
Find Money Girl on Facebook and Twitter, or subscribe to the newsletter for more personal finance tips.
Money Girl is a part of Quick and Dirty Tips.
Links:
https://www.quickanddirtytips.com/
https://www.quickanddirtytips.com/money-girl-newsletter
https://www.facebook.com/MoneyGirlQDT
Welcome back to episode 976 of Money Girl–I appreciate you downloading the show! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and founder of The Money Stack, my Substack newsletter. Free subscribers automatically receive my Money Success Toolkit, which includes the exact templates I use to manage my finances.
You can learn more, ask questions, and sign up for the Money Stack for free at LauraDAdams.com. Or leave a voice message with your question or comment by calling 302-364-0308. I'd love to feature your question on Finance Friday, our weekly Q&A, bonus edition of the show!
Today, I'm discussing a topic that's essential for achieving financial peace: creating the ultimate financial safety net. It's important because your personal finances are a balancing act, like walking on a tightrope.
But what if a sudden, unexpected gust of wind, like a job loss, significant car repair, or medical bill, throws you off balance and into debt? That's when it's crucial to have various financial cushions to stay safe. Slowly building your safety net over time is the best way to avoid or recover from a financial setback as quickly as possible.
We'll review four critical pillars that form an unbreakable financial safety net.
The first safety net pillar is having an emergency fund, also known as a cash reserve. It's extra money you set aside, keep safe, and keep easily accessible, separate from your regular checking or retirement accounts.
If you don't have a financial cushion to fall back on for a large expense or a sudden cut in income, it could take years or decades to recover from a crisis. Having enough money at your fingertips for emergencies should never be considered a luxury.
Building a cash reserve should be a top priority so you're never backed into a financial corner and have more peace of mind. However, be sure only to use those funds for genuine emergencies!
The best place to keep your emergency money is in a high-yield FDIC-insured bank account, so it's completely safe. While you won't earn a lot of interest, that's not the goal for this bucket of money. Your cash reserve should never be invested or exposed to market risk because it could lose significant value. Having funds available when you need them is the purpose of an emergency fund.
Ideally, you should have a cash reserve equal to at least three to six months' worth of your living expenses. However, depending on your work and family situation, you might need more or less.
For instance, if your job doesn't have stable income due to working on commission or being a freelancer, you might aim for enough cash to cover your essential living expenses for six to twelve months.
If you haven't started an emergency fund, just take small steps every month. Set a goal to accumulate $100, then $500, and finally $1,000 as quickly as you can. You might set up a recurring transfer on payday from your checking account to your emergency savings account. That way, you can build the fund slowly and consistently.
The second safety net pillar is purchasing various insurance products to provide a protective shield against potential disasters and lawsuits. Consider the benefits of the following coverages:
If you don't have access to a health plan through an employer, you can shop for Affordable Care Act (ACA) health and dental plans at the federal marketplace, Healthcare.gov. Open enrollment is from November 1 to January 15. You typically must enroll by December 15 to have a health plan begin on January 1.
However, you can shop Healthcare.gov anytime if you have a special situation, such as losing your insurance, getting married, starting a family, or moving.
While the government hasn’t extended a federal tax credit that helps consumers offset the cost of ACA health plans, it’s possible that a separate vote could achieve this before the end of the year. If not, the cost of coverage will increase significantly. Shop and compare plans to find the best policy for you and your family.
Remember that health insurance only pays a portion of covered medical expenses. It doesn't cover your living expenses — such as housing, food, or debt payments — if you can't work due to a health challenge.
If you don't have access to disability insurance through an employer (or if you do, but it's not sufficient), you can get quotes for a private policy at a site like Policygenius.
If you're single or no one depends on your income, you either need a minimal funeral expense policy or none at all. If you have a stay-at-home spouse who cares for your children, you also need a policy on their life to cover future childcare costs.
Life insurance is most affordable when you're young and in good health, so don't wait to get coverage if you need it. If you don't have access to life insurance through an employer (or if you do, but it's not sufficient), you can get life quotes at a site like Policygenius.
Renters insurance doesn't cover your dwelling, but it does cover personal belongings and liability, up to certain limits. When you rent, your landlord isn't responsible for your possessions—so, having renters insurance as a safety net is critical. A typical renters policy costs less than you might think: $185 per year on average across the U.S.
If you need extra liability protection, beyond the limits of your existing policies, such as auto, homeowners, or renters insurance, consider purchasing an umbrella liability insurance policy. It covers you up to a higher limit you set after other policy limits are exhausted.
LISTEN ALSO: 7 ways to cut healthcare costs
The third safety net pillar is prioritizing debt reduction, such as high-interest credit cards and personal loans. However, be sure you have a healthy emergency fund first.
Having less debt can take the pressure off if your pay gets cut, you lose your job, or your business income declines. It can also be the key to living within your means if you tend to overspend.
I recommend tackling your highest-interest debts first so you drastically cut your interest expenses. Not only will you save money, but having lower debt balances will improve your credit scores. That's important because it allows you to get low-interest loans and lower insurance premiums, saving money.
RELATED: 7 tips for excellent credit scores and more savings
The fourth safety net pillar is having a backup income plan. For instance, you might create additional sources of income, such as a profitable side business or a seasonal second job. Having multiple income streams helps you pay the bills, eliminate debt faster, and maintain security if one of them dries up.
Consider what interests you have that others would pay for, such as tutoring, gardening, designing, driving, caring for pets, or writing. Developing marketable skills could allow you to monetize them quickly if your main income stream disappears.
Maintaining a strong professional network is another type of safety net that could help you find new opportunities. So, stay connected to contacts you have in your industry.
LISTEN ALSO: Maximize tax deductions: how a side gig or small business can lower your taxes
To sum up, if you don't have most of these safety nets, make a plan to start building or improving them, beginning with a healthy emergency fund. Even small steps to improve your security will give you terrific peace of mind and put you in the best position to deal with any unexpected financial hardship.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio-engineers the show. Holly Hutchings is our director of podcasts, Morgan Christianson is our advertising operations specialist, Rebekah Sebastian is our marketing and publicity manager, and Nathaniel Hoopes is our marketing contractor.