How to Know if Your Financial Safety Net is Strong Enough
You’ve worked hard to build a solid financial strategy, all while working within your budget. Still, you have worries. What if another economic crisis comes along? What if you become seriously injured in an accident? Is your financial safety net strong enough to carry you through?
Mountain America Credit Union put together five questions to ask yourself to identify where your financial strategy is strong and where it may need some additional support.
Let’s get started!
Question 1: Do you have money saved for an emergency?
An emergency savings account is an essential first step to strengthening your financial safety net. It helps to ease the burden whenever an unexpected financial event occurs and minimizes the risk of added debt.
This account is not for just anything—even if you eventually pay it back. It’s specifically for necessities like when your car needs a new transmission, your refrigerator conks out or you need to replace your roof.
If you haven’t started your emergency fund yet, here are some tips:
- Give the savings account a name like “Emergency Fund” or “For Emergencies Only” so you know it’s for a specific purpose.
- Start with a small goal—say, $1,000.
- Automate a monthly or bi-monthly transfer into this account. Choose an amount that works with your budget.
- Don’t dip into this fund unless there is a true emergency.
Once you’ve reached this short-term goal, consider adding to this balance for longer-term challenges such as a job loss or an unexpected medical expense. Shoot for saving enough to cover 3–6 months of expenses.
If you’ve already got a healthy balance in your emergency fund, congratulations! This will give you added peace of mind when an unexpected financial challenge arises. Don’t forget to have a payback plan in place to replenish any funds used.
Question 2: How often do you review your budget?
Even if your income has stayed the same, your overall expenses are likely to fluctuate throughout the year. Reviewing your budget more often can help strengthen your financial safety net. Doing so helps you adjust areas of overspending or irregularity and get back on track. It can also help with allocating spending categories for holiday shopping, back-to-school supplies or something that we’ve all seen impact our budgets lately—higher costs on gas and groceries.
Depending on your current financial goals, a quarterly review may be all you need to see what’s working and what isn’t. However, with this timing, you may feel like you are uncovering too many surprises—when it comes to things like fraud or missed bill payments, it pays to learn about these items quickly.
Consider looking over your budget more frequently and making adjustments as needed. A monthly or weekly check-in helps you adapt to your changing needs. Plus, the more you use and review your budget, the more you’ll gain a general overview about finances and your own specific financial picture. Get more tips to build a successful budget.
Question 3: What disability insurance do you have to protect yourself during high-impact health events?
According to the American Bankruptcy Institute, medical bills, illness and injury are some of the most common causes of bankruptcy. Adding short and long-term disability insurance is an instant way to shore up your financial safety net and give you added peace of mind.
A short-term disability plan is a great way to mitigate income loss during a temporary illness or injury and will provide benefits for three to six months during your recovery. However, according to the Social Security Administration, 25% of those entering the workforce can expect to be out of work for at least a year due to a disabling condition during their working years.
Since there is a strong chance you may experience a medical issue that requires a longer recovery, adding long-term disability insurance provides extra income protection in the event you’re out of work for an extended period of time.
Question 4: Have you set up an investment plan for retirement?
A best practice strategy for retirement savings is to start as early as possible. If you also have debt, it’s a good idea to consider loan refinance options. To shore up your financial safety net, concentrate the bulk of your money on reducing debt while making a smaller contribution to your retirement account. You’re likely to get more from your money by contributing to your retirement now while also working on lowering your debt. There are two reasons why: you’ll get more benefits long-term from compound interest and you can take advantage of company matching programs (basically free money!) available to you with a 401(k).
The chart below illustrates how contributing regularly to a retirement savings account for an additional 10 years can increase your earnings exponentially. Click the "20 Years" and "30 Years" tabs to see the difference.
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