At the beginning of your financial life cycle, you have little wiggle room. You’re entering the workforce, starting to make money, and learning to get by. Nevertheless, setting yourself up for long-term success requires you to build a strong financial safety net!
Truth be told, everyone needs to have and maintain a financial safety net, regardless of their income or employment status. After all, disasters can strike anyone without warning, no matter your financial situation!
To prevent surprises from turning into financial hardships, you need to be prepared. With a strong financial safety net, you’ll have resources available to handle whatever curveballs come your way!
A physical safety net is there to catch you when you fall. It prevents injuries and in some cases, disasters!
Likewise, a financial safety net is there to support you when life doesn’t go your way. Rather than being in financial free fall, it provides you with a cushion. This way, you’ll make it through tough times. Not only that but without having any lasting damage, either!
For instance, in the blink of an eye, you could find that you need major car repairs, medical treatment, or will be losing your job. With a financial safety net, you’ll have resources available to help solve the problem. But without one, you may have to borrow money and take on debt!
Being in a bind and needing fast cash, turns an already bad situation worse. Not only are you coming to terms with the situation, but you’re dealing with its financial aftermath as well as managing your emotions.
Most people don’t make the best decisions when they’re in a heightened emotional state, either. Rather than thinking things through, they’re more prone to making rash decisions which can lead to additional financial problems!
Also, if you don’t have a safety net, you may be on the brink of financial insecurity. When money is already tight and you’re taking on debt, you’re heading right toward a personal financial crisis, too!
However, with a financial safety net, you’ll have resources to rely on. Rather than taking on debt, you’ll have cash and other tools which can help stop your financial bleeding. Not only that, but a safety net also supports your long-term goals. Without it, a misfortune could delay your dreams or prevent them from ever happening at all!
While it’s impossible to protect yourself from everything that might go wrong in life, there are still some measures you should take. With that being said, here are 5 important things you can do to ensure you have a strong financial safety net!
Unfortunately, emergencies are a part of life. It’s not a matter of if they’re going to happen, but of when and at what cost!
Establishing rainy day savings and an emergency fund should be key components of everyone’s financial safety net. They’re liquid cash accounts that are easily accessible. This way, when you’re in a financial jam, you’ll have money available to get you out of it!
Without an emergency fund, most Americans don’t have any cash to rely on. Because of this, they’re forced to take out hardship loans or borrow money. Now, they’re not only dealing with an emergency, but they’re also facing penalties, larger tax bills, or wasting money they don’t have on interest!
But, when you have an emergency fund, you have resources to bail you out. The amount you keep in it comes down to your overall financial position and situation.
Having said that, one common money rule of thumb is to set 3 to 6 months of expenses aside for emergencies. But if you have variable income, rental property, or a business then you should consider having more!
Retirees aren’t exempt from having emergency funds, either. Because of their age and that they’re no longer working, they’re the most vulnerable. They should consider having 12 to 24 months set aside. Not only can it go towards increasing healthcare costs, but it reduces their sequence of returns risk, too!
Everyone, regardless of their age and income, needs to have an emergency fund as part of their financial safety net!
Today, you can insure just about anything. You can protect yourself from an alien abduction, winning the lottery, or injuring a body part. One news source reports that soccer star Cristiano Ronaldo has a $144 million policy on his legs!
Given all the different types of insurance available, it’s easy to get carried away. Not only that but considering insurance companies prey on your money fears, you may buy more than you need, too!
Although you may not protect yourself from an alien abduction, there are some types of insurance you should consider having. Depending on your risk tolerance, you may need:
Like your emergency fund, the amount and types of insurance you carry comes down to your situation. For example, it makes little financial sense to have life insurance if no one is dependent on your income. However, if you’re the sole breadwinner with a family, then buying it is a smart money move to make!
Also, it’s important to remember that life insurance isn’t just for the primary income earner, either. Part-time workers and stay-at-home parents need it, too. If something were to happen to them, the primary earner would need help taking care of their family and keeping up with their home. Besides that, it can provide them with time away from work to heal emotionally as well.
To be fiscally responsible, you have to carry adequate insurance. After all, it acts as a financial safety net in that it limits your out-of-pocket expenses. Otherwise, without it, you’re putting your entire net worth and financial wellbeing at risk!
Sadly, many Americans live beyond their means. They spend to such a great extent that they not only become handcuffed to their jobs, but they couldn’t come up with a few hundred dollars in a pinch, either!
However, when you start living below your means you begin to have greater flexibility and breathing room. Not only does it give you more choices, but it allows you to cover minor emergencies, surprise expenses, and other non-recurring costs with ease!
Also, when you begin saving, you lower your burn rate. In addition to having lower bills, you don’t have to endure toxic work environments, either. Instead, you have a greater degree of financial freedom and choice over how your time gets spent!
Lowering your monthly expenses further will produce greater savings. It gives you more money to put towards an emergency fund, paying down debt, and achieving your financial goals even faster!
In general, investment accounts are used to achieve your long-term goals. You invest in them to be able to pay for your child’s college education, purchase big-ticket items, or supplement your retirement.
Even though investment accounts aren’t usually considered part of a financial safety net, at times they can be. If you encounter a situation that threatens your financial future, you may need to put your goals on hold and pull money from the account to make it through!
For instance, imagine you lost your job and depleted all the money in your emergency fund. At this point, your only option may be to access an investment account to stay afloat!
However, before liquidating any investments or withdrawing from a retirement account, speak with a financial professional. They can review your entire situation, determine the best course of action, and keep your tax liability low, too!
Another part of your financial safety net that you may not have considered is your retirement accounts. While they’re designed to provide for you in the future, in an emergency they can take care of you, today!
Most people contribute to 401Ks and IRAs to build their nest egg. However, in some situations, you can also withdraw money from them early. As long as you meet the requirements of a qualified distribution, you can pull money from your 401K tax and penalty-free!
Luckily, pulling money from a Roth IRA is even easier. As long as you’ve had the account for at least 5 years, you can withdraw your contributions tax and penalty-free for any reason whatsoever. But, if the account is less than 5 years old, then there are only certain situations when you can avoid paying taxes and penalties.
Health Savings Accounts (HSAs) can also help you out in a financial jam. They allow you to withdraw money for qualified medical expenses that are tax and penalty-free, too. With that being said, if you have a health-related issue, then withdrawing from your HSA will likely be your best bet!
Before taking money from any retirement account, make sure you understand the terms and conditions. Depending on your situation, there may be additional nuances that can lead to steep penalties and high fees!
No matter where you are in the process of creating wealth, you need to have a strong financial safety net. After all, financial emergencies are going to happen regardless of whether you’re prepared or not!
Start building your financial safety net today. The stronger you make it, the more easily you can handle emergencies. Not only that, but you’ll also sleep better at night knowing that you and your loved ones are protected from life’s surprises!
What’s included in your financial safety net? Comment below.
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