3 Things You Need To Build A Financial Safety Net

Where do you turn when you're faced with a financial emergency? Do you have money set aside to cover the unexpected expenses? Is there some sort of insurance in place? Without the right financial safety net, you could find yourself in financial ruin.

The question is, what should your financial safety net cover? When putting together your money rescue plan, there are three tools to include that can all help play a vital role in protecting you and your family from life's curve balls. 

Emergency Fund

Your emergency fund is your go-to stash of liquid savings that you can access easily when an unexpected expense crops up. Financial advisors and experts often suggest having enough in emergency savings to cover your living expenses for at least six months in case you lose your job, become ill or can't work or experience another emergency, like a natural disaster. 

Without an emergency fund, your options for paying for an unexpected expense may end up being a credit card or a home equity loan or line of credit. With credit cards, you may be looking at a high-interest rate for what you borrow, which could make your financial situation even worse. In the very worst-case scenario, your only option for covering an emergency expense might be borrowing from your 401(k) or draining your individual retirement account (IRA). Taking money from your retirement accounts could leave you with a serious shortfall once it's time to retire. 

If you haven't started your emergency fund, there's no time to waste. Open a new savings account at your bank or look online for a high-yield savings account that offers a great rate. Then, create an automatic savings plan to build up your cash reserves. Schedule a recurring deposit from checking to savings every payday. When your contributions to savings are automatic, you don’t even realize that you’re saving money. Before you know it you’ve got a nice financial cushion for when a rainy day eventually comes along. 

Long-Term Disability Insurance

Becoming disabled is something you might think only happens to other people but it's a financial possibility you still need to plan for. If you're disabled for the long-term and can't work, that could substantially affect your ability to pay your bills and save for the future. 

Long-term disability insurance helps replace your income if you're unable to work due to illness or injury. This kind of coverage should be considered a necessity if you don't have other financial resources you can tap into in the event of an illness or injury. Even if you do have other financial resources, you may want to reserve those for something other than your daily living expenses. A disability can quickly eat through all of your savings or even lead you to tap into your retirement funds which could have a significant impact down the road.

Ask yourself this question: could you live without your income for three months? Six months? A year? If the answer is no, you need disability insurance. Many employers offer this coverage as part of your employee benefits package via a payroll deduction, which may be tax-deductible. You may automatically get short-term disability coverage through our employer, but check to see if they have additional coverage options.

If you don't have any short- or long-term disability coverage at work, start shopping around with insurers to find an affordable option. An agent or broker can help you determine how much coverage you need and how long of a disability policy you should have. 

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 if you were to pass away unexpectedly. A life insurance policy can be used to pay off debts, set aside money for your child's college expenses, pay for funeral and burial expenses or simply cover the monthly bills. 

One of the most important questions to ask when considering life insurance is whether to choose term or whole life coverage. If you plan to buy insurance other than term insurance provided by your employer, you should educate yourself about the pros and cons of the term, whole life, and other types of insurance. Term life is typically the most affordable option but whole life and similar permanent policies can offer lifelong protection with the potential to accumulate cash value that you can borrow against. 

You may also want to talk to a financial advisor about how much insurance is enough. If you don't have a lot of debt and you and your spouse already have a decent amount of assets, you may be okay with a smaller policy. On the other hand, you may need more life insurance coverage if you're carrying a bigger mortgage or you have higher living expenses.

Bottom Line

Unless you're extremely wealthy, a financial safety net is something just about everyone needs. Ensuring that you've included the right pieces of the puzzle can offer maximum protection. Once you’ve created a financial cushion with your emergency savings fund, disability coverage, and life insurance, you may find that you sleep easier knowing that you have a financial safety net in place that can help keep you protected through even the most difficult situations.