How to financially plan for the unexpected

Benefiting You

How to financially plan for the unexpected

Most people know what it’s like to get caught without enough cash in the bank or to lose sleep about a growing credit card balance. By then you’re feeling stressed and perhaps uncertain about how you’ll get your finances back on track.

While it may be impossible to prevent a crisis that affects your finances, there are key ways to safeguard it. Having healthy finances means that you manage money wisely in the present and are also prepared for the future.

Make a goal to create a rock solid financial foundation, so you’re comfortable and less stressed when something unexpected happens, like losing a job, getting injured, or losing someone you love. Here are four ways to financially plan for the unexpected so you’re protected no matter what may be around the corner.

Build a cash cushion.

Make a goal to set aside a small amount each month to start or build up a cash cushion, known as an emergency fund. Having a cash reserve that you never touch, except in the case of a real crisis, is a safety net for both your financial and emotional well-being.

Ideally, you should have three to six months’ worth of living expenses on hand in case your income dries up or you have a large unexpected expense. But if you’re starting from scratch or have substantially less savings, remember that having some cash to fall back on is better than none.

Keep your emergency fund safe in an FDIC-insured bank savings so you can tap it right away, if needed. It won’t earn much interest, but that’s okay. Avoid the temptation to invest emergency money and expose it market volatility or risk. Otherwise, the value could drop at the exact moment you need it.

Have enough of the right insurance products.

In addition to having extra cash for life’s unexpected events, you can easily manage risk by having enough of the right kinds of insurance, such as health, disability, accident, and life policies. Many types of coverage can be surprisingly affordable, so do your homework and get quotes at work or on your own.

Health insurance – is a safety net that everyone needs to protect their health and their finances. Even when you’re young and healthy, a short trip to the emergency room for a broken bone could leave you with a massive medical bill. If you have a serious illness, being uninsured could be financially devastating.

Disability insurance – allows you to keep up with bills and everyday living expenses by replacing a portion of your income, such as 60 percent, if you can’t work due to a covered disability, illness, or accident.

According to the Council for Disability Awareness, the odds of becoming disabled are probably higher than you think. One in four of today’s 20-year-olds will have an injury or illness that causes a long-term absence from work before they retire.

Remember that health insurance only pays a portion of your covered medical expenses. It never covers living expenses, such as food, housing, or utilities. Disability insurance helps you cover everyday expenses and bills if you can’t earn during an extended period.

Accident insurance – helps pay bills not covered by your health insurance, such as out-of-pocket expenses related to a covered accident. It provides a lump-sum payment to spend as you like.

Life insurance – is critical when your death would create a financial hardship for those you leave behind, such as a child, spouse, or partner. There are two basic types: term and permanent.

Term life provides a benefit if the policy owner dies during a set period, such as 10 or 20 years. Permanent coverage includes a variety of products that provide a death benefit and an investment for your entire life.

Invest using tax-advantaged retirement accounts.

Once you have some emergency savings and adequate insurance in place, it’s time to build wealth for your future retirement. Using tax-advantaged retirement accounts at work or on your own is a smart way to grow your money and cut taxes.

The most popular retirement accounts are offered by employers, such as a 401k, 403b, or 457 plan. But if you don’t have a job that offers a retirement plan or are self-employed, almost everyone qualifies for an IRA or Individual Retirement Arrangement.

Just be sure that you won’t need the money before the official retirement age of 59½. Taking early withdrawals from a retirement account typically comes with a 10% penalty plus  income tax on amounts that weren’t previous taxed.

Reduce your dangerous debts.

 An often-overlooked way to plan for the unexpected is to shrink what you owe. Having less debt takes the pressure off if you lose your job or business income.

First, work on reducing dangerous debts that have sky-high interest rates, such as payday loans, credit cards, and retail accounts. Leave your low-interest loans that come with money-saving tax deductions, such as mortgages and student loans, for last.

Use these tips to shore up your finances so you’re in the best position to deal with any unexpected hardship that could jeopardize your financial security and happiness.

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