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Building a Financial Safety Net - Emergency Fund, Disability, and Life Insurance

Prepare for the Unexpected With 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. What good is it to earn, save, and invest money if it isn't protected in the event of a financial crisis? Learn how to create your financial safety net so you can protect what you have.

Emergency Fund

Financial advisors suggest having enough savings in an easily accessible account to cover your living expenses for at least six months in the event of illness, job loss, or other serious emergency. This is money that you should have in a savings account or other liquid account that you can tap into without penalty in the event of an emergency.

Without an emergency fund your options for paying for an unexpected expense may end up going on a credit card. That will almost certainly carry a hefty interest rate and make your situation even worse. Beyond that, many people are left with tapping into their retirement assets to pay for these emergency expenses. This is a bad idea since you could seriously put your future in jeopardy.

So, start by setting some money aside for your emergency fund. The best way to do this is to create an automatic savings plan. When you make it automatic, you don’t even realize you’re saving money and before you know it you’ve got a nice financial cushion.

Long-Term Disability Insurance

Long-term disability insurance helps replace your income if you are unable to work due to illness or injury. Many people consider this coverage a luxury, when in fact, it should be considered a necessity for those who don't have other financial resources they could tap in the event of an illness or injury. Even if you do have other financial resources, would you want to use them to pay your monthly expenses if you were to become disabled? 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.

Don't think it could happen to you? Although your chances of having a disability increase as you get older, illness and injury can happen at any age. Car accidents, sports injuries, back injuries, pregnancy, and disease are just a few examples.

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. Employers often offer this coverage 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.

Life Insurance

Life insurance is necessary if you have dependents who will suffer financially if you die. Whether it’s a spouse of children, if they depend on the money you earn from your job, they need to be financial secure if you’re no longer there for them. If you have no financial dependents, life insurance isn’t completely necessary, although many people also use insurance as part of their estate planning and cash accumulation regardless of their dependent status.

If you plan to buy insurance other than term insurance provided by your employer, you should educate yourself about the pros and cons of term, whole life, and other types of insurance. You may also want to talk to an adviser about how much insurance is enough.


Once you’re created a financial cushion with your emergency savings to handle life’s unexpected expenses, protected your ability to earn an income with disability insurance, and have life insurance in place to secure your dependents’ financial security, you can sleep easier knowing that you have a financial safety net in place that can help keep you on track through even the most difficult situations.

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