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How to tell if your financial safety net is strong enough

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6 mins

If you spend a lot of time worrying about your finances, you’re far from alone.

According to a study published by Capital One and The Decision Lab, 77% of survey participants reported feeling anxious about their financial situation, with 58% feeling that finances controlled their lives.

Feeling uneasy about finances can affect our relationships, cause a lack of focus, and keep us awake at night. Many people worry about things like their family’s financial situation if they die, becoming disabled and not being able to pay the bills, and how they’re going to pay for things like fixing the car if it breaks down.

In this article, we’ll examine these issues and more. Through a series of questions, you’ll be able to tell where your financial safety net is strong and where it needs some bolstering.

Question 1: Do you have enough money to pay for an emergency?

Notice the question said “money in the bank,” which could be translated to “cash on hand.” What it didn’t ask was, “Do you have enough credit cards to pay for an emergency?”

Establishing an emergency fund could be considered the cornerstone of feeling better about your finances. Everything tends to look better when you have money in the bank. You don’t have to worry about being able to meet your monthly expenses for several months if you lost your job, pay for a new transmission, or buy a new refrigerator when the old one stops working.

Not being prepared for an emergency could lead to a personal financial crisis that takes you years, decades even, to recover from. To avoid this, most money experts recommend having three to six months' income socked away in a savings account that can only be touched in case of an emergency. It’s not a “put and take” account; it’s a “put and leave it alone” account.

[ Related: Rainy day fund vs. emergency fund ]

Question 2: Could you pay your bills if you get too sick or hurt to work for a while?

If you can’t show up for work because you’ve been diagnosed with an illness requiring extended treatment and recuperation at home, or you’ve been injured as the result of a bad fall at home, the chances are that your employer isn’t going to keep paying you. You need a backup plan.

The average duration of a disability is 2.5 years. Some are shorter, but many are longer, and some are permanent. Your emergency fund isn’t designed to last indefinitely if your paychecks stop coming.

Long-term disability insurance is the solution. It will keep paying you when you can’t work because of a disabling illness or injury. The top five reasons people file long-term disability claims are:

  • Cancer
  • Pregnancy
  • Mental health issues including depression and anxiety
  • Injuries such as fractures, sprains, and strains of muscles and ligaments
  • Musculoskeletal disorders such as carpal tunnel syndrome and rheumatoid arthritis

Buying long-term disability insurance is one of the financial moves which will undoubtedly strengthen your financial safety net.

Get a personalized disability quote in seconds.

Question 3: How would your death financially impact your surviving family members?

If you’re part of a two-income family or you have dependents that rely on your income, you need a safety net in case you and your income were no longer there. If you want your surviving spouse and dependents to maintain the standard of living they’re accustomed to, stay in their home, and get the education you desire for them; your income needs to be replaced.

The tool to do that: life insurance. Life insurance is for the living. It will give you peace of mind while you’re alive, knowing that your family is protected financially if you die, and it’s primarily for your survivors to continue living the life you want them to live. It’s a very unselfish purchase.

Question 4: If you're hit with a big medical bill, could you pay it?

Having adequate health insurance is part of a solid financial foundation. According to

  • Fixing a broken leg can cost up to $7,500
  • The average cost of a 3-day hospital stay is around $30,000
  • Comprehensive cancer care can cost hundreds of thousands of dollars

Each year over 500,000 bankruptcies are filed because of debt accrued due to a medical illness.

If you have health insurance, can you comfortably pay deductibles and co-pays? If you were referred to a specialist you absolutely needed care from, could you pay for a large portion of that out-of-pocket?

If you have health insurance through an employer, you are probably in pretty good shape if you were to have catastrophic medical expenses. That’s probably not true if you have individual health insurance, and if you have no health insurance, you need to remedy that immediately.

Even with good health insurance, you can still end up financially responsible for some of the costs of care and treatment for major illnesses. Look into critical care insurance as a safety net.

Question 5: Are you making progress in funding a retirement account?

Once you’ve taken care of getting your emergency fund established and funded, and you have enough of the right types of insurance, it’s time to build a safety net for your future.

If you work for an employer that offers a retirement plan like a 401(k), 403(b), or 457 plan, take advantage of these tax-advantaged plans and put away as much of your income as you can, at least the same percentage that your employer matches.

If you work where there is no retirement benefit offered, you’ll likely qualify to put money away for retirement through a traditional IRA or Roth IRA. If you’re self-employed, take advantage of retirement plans such as a SEP-IRA or solo 401(k).

Where there’s a will, there’s a way. Your “younger you” must prepare for your “older you.” It’s a sacrifice to have money taken out of your check right now for a retirement plan or deposit money into an IRA every year. But, it’s a sacrifice you’ll be glad you made someday.

Tying it all together

Well, how did you do? If your answers to any of these questions made you uneasy – you’ve got some work to do on your financial safety net. Take it one step at a time and make the commitment to yourself and your family that you’ll get your financial house in order. You’ll then feel much more at ease knowing that when the unexpected happens, and it will, you’ll be ready.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published March 30, 2021
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