Emergency Fund
An emergency fund is your quick stash of liquid savings that you can easily access when unexpected expenses arise. Financial advisors and experts often suggest having enough in emergency savings to cover your living expenses for at least six months in case of job loss, illness, inability to work, or other emergencies like a natural disaster.
Without an emergency fund, your options for covering an unexpected expense may end up being a credit card, a mortgage loan, or a line of credit. With credit cards, you may face a high-interest rate on the borrowed amount, potentially worsening your financial situation. In the worst-case scenario, your only option for covering an emergency expense might be borrowing from your retirement account or depleting your individual retirement account (IRA). Withdrawing funds from your retirement accounts can leave you with a significant shortfall when it’s time to retire.
If you haven’t started your emergency fund yet, there’s no time to waste. Open a new savings account at your bank or search online for a high-yield savings account that offers a good interest rate. Then, set up an automatic savings plan to build your cash reserves. Schedule a recurring deposit from your checking account to your savings account with each paycheck. When your savings contributions are automatic, you don’t even realize you’re saving money. Before you know it, you’ll have a good financial cushion for the rainy day that might come later.
Long-Term Disability Insurance
Becoming disabled is something you may think only happens to others, but it’s a financial possibility that needs planning for. If you become disabled for an extended period and can’t work, it can significantly affect your ability to pay your bills and save for the future.
Long-term disability insurance helps replace your income if you are unable to work due to illness or injury. This type of coverage should be considered a necessity if you don’t have other financial resources to draw upon in case of illness or injury. Even if you have other financial resources, you may want to keep them for other purposes beyond your everyday expenses. Disability can quickly deplete all your savings or even lead you to draw down your retirement funds, which can have a major long-term impact.
Ask yourself this question: Can you live without your income for three months? Six months? A year? If the answer is no, then you need disability insurance. Many employers offer this coverage as part of your employee benefits package through payroll deductions, which may be tax-deductible. You may automatically receive short-term disability coverage through your employer, but check to see if they have options for additional coverage.
If you don’t have any short-term or long-term disability coverage at work, start shopping around with insurance companies to find an affordable option. An insurance agent or broker can help you determine how much coverage you need and the length of the disability policy.
Life Insurance
When you’re young and healthy, buying life insurance may be the last thing on your mind. But if you’re married or have a family, life insurance can help protect them financially in the event of your unexpected death. A life insurance policy can be used to pay off debts, provide funds for your child’s college expenses, cover funeral and burial expenses, or simply pay monthly bills.
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One of the most important questions to ask when considering life insurance is whether to choose term insurance or whole life insurance. If you plan to purchase insurance other than the term insurance provided by your employer, you should learn about the pros and cons of term insurance and whole life insurance, as well as other types of insurance. Term insurance is generally considered the most cost-effective option, but whole life insurance and similar permanent policies can offer lifetime protection with the potential to accumulate cash value that you can borrow against.
You may also want to speak with a financial advisor about how much insurance is sufficient. If you do not have much debt and you and your spouse have a good amount of assets, you may be fine with a smaller insurance policy. On the other hand, you may need more life insurance if you have a larger mortgage or higher living expenses.
Conclusion
Unless you are extremely wealthy, a financial safety net is something that almost everyone needs. Ensuring that you have included the right pieces in the puzzle can provide maximum protection. Once you create a financial cushion with your emergency fund, disability insurance, and life insurance, you may find that you sleep better knowing you have a financial safety net in place that can help keep you protected in the toughest situations.
Source: https://www.thebalancemoney.com/how-to-build-a-financial-safety-net-1289682
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