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Do You Have a Financial Safety Net?

Do You Have a Financial Safety Net?

4 Aug 2021

A surprising number of people lack a financial safety net despite the fact that they work full-time.  Some are unsure how to go about creating a financial safety net.  Others lack the financial means necessary to create such a safety net.

If you have not yet created a financial safety net, it is in your interest to meet with a fee-only fiduciary financial advisor in Canton, OH to learn more about this essential form of financial planning.  Your financial advisor can also help you build a strategic plan for your money, setting the stage for a timely retirement.

This should include comprehensive financial and estate planning, and investments made based on research and facts rather than emotion and guesswork.

Let’s take a look at the basics of establishing a financial safety net.

 

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Why a Financial Safety Net is a Must-Have

Financial emergencies may have become much more common during the global pandemic and economic recession.  It is no secret that just about everything has seemingly become more expensive across the prior decade yet wages have largely stagnated.

Add in the fact that fewer employers are offering health insurance to their employees along with the rise in severe weather events and it is that much easier to understand why financial emergencies are on the rise.  However, it is possible to prevent or at least mitigate these emergencies by establishing a financial safety net.

Think back to what you did the last time you had a financial emergency.  If you have not yet had a financial emergency, use your mind’s eye to envision what you would do should such an emergency arise.

Take a moment to think about the money you have saved and invested.  Perhaps you have a savings account at a local bank.  Maybe you have money invested in stocks, bonds, mutual funds, ETFs, CDs, money market accounts, or even real estate.

You might even have a form of insurance in place.  However, if you don’t have an easily accessible financial safety net that you can tap into in the event of a financial emergency, you could easily end up with an insurmountable financial challenge.

The Components of Your Financial Safety Net

Recognizing the fact that you need a financial safety net is just the start of planning for a financial emergency that may arise months, years, or even decades down the line.  The next step is to create an actual financial safety net that provides the money necessary to hold you over until the emergency ends.

An emergency fund is the most important tool that will safeguard your finances and help you live with peace of mind in the event that an unfortunate event arises.  Part of an emergency fund may consist of liquid savings in the form of cash deposited at a local bank or credit union.  Some people also may decide to keep cash at their home.  However, not only could this money become stolen, lost, or destroyed, it is also not earning any interest.

A good practice is to keep an emergency fund that contains enough savings to cover your cost of living for a minimum of six months.  This way, if you become unemployed, fall ill, or cannot work for another reason such as a hurricane or powerful earthquake, you will have enough cash to hold you over for at least six months.

Fail to establish an emergency fund and you may have limited options for covering unexpected expenses.  The last thing you want to have to do is use your credit card or take out a home equity loan to cover costs during an emergency.  Credit cards have comparably high interest rates.  It costs money to apply for a home equity loan and there is no guarantee the request will be approved in a timely manner.

Another option is to borrow from your 401(k) or individual retirement account (IRA) retirement money yet doing so ultimately extends your targeted retirement date that much farther away. There are oftentimes fees involved as well.

If you have not created an emergency fund, there is still time to do so.  Head on over to a credit union or a bank to start a savings account and redirect a percentage of your income to this account every month.  You can even create your own automatic savings plan that redirects cash to a high-yield savings account.  It might also make sense to coordinate a recurring deposit from your checking account to your savings account each payday.

Life Insurance is an Essential Component of Your Financial Safety Net

Buying life insurance when healthy and young is not exactly a priority for most.  However, if you have a family or are married, you may want to consider life insurance as a way to provide financial protection in the event that you unexpectedly pass away.  Your life insurance policy may help cover the cost of monthly bills, pay debts, or pay for your child’s college education as well as burial and funeral expenses in the event that you pass away.

Obtain life insurance and you will face the decision of whether whole life coverage or term coverage is best.  Those who plan on purchasing insurance aside from term insurance that is sometimes provided through an employer should consider the merits and drawbacks of whole life and additional insurance types.  Though term life is usually the most cost-effective option, permanent policies such as whole life provide protection across the entirety of your life, creating the potential to build up a cash value that you may be able to borrow against.

It is in your interest to ask your financial advisor about how much life insurance you should purchase.  A comparably small policy might be optimal for an individual or couple who are not overloaded with debt and own several assets.  However, those saddled with a sizable mortgage and elevated living expenses will find more life insurance coverage is necessary.

The Role of Long-Term Disability Insurance in Your Financial Safety Net

No one wants to think about the prospect of becoming disabled.  However, we are all susceptible to injury and illness.  If you become disabled and cannot work, you may find it difficult to pay bills and build up your savings.  Long-term disability insurance can replace income in the event you become unable to work due to injury or illness.

Those who lack accessible financial resources may view long-term disability insurance as a necessity.  However, even those who lack financial resources should also give long-term disability insurance serious consideration as a disability may chew through whatever money is saved or invested, creating significant financial hurdles down the line.

By working with a fiduciary like McGervey Wealth Management, you can be assured you’re getting investment advice from a firm that has the obligation to disclose conflicts of interest and put your interests ahead of its own. We get to know you on a personal level and keep things simple, using common language everyone can understand. To learn more about McGervey Wealth, contact us today or get your wealth score to see how you stack up for retirement.

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More About the Author: E. Michael McGervey, CFP®, CRPC®

Mike is passionate and skilled at helping clients solve complex financial challenges. He’s known for his thoughtful communication, educational approach, and exceptional customized service. Mike has been a sought-after source for financial television, magazines, and newspapers looking for insightful analysis. His expertise has been featured by CNBC, FOX Business and...