You know you need a financial safety net. But what should it include? And where should you get started?
Let’s take a closer look at what exactly a financial safety net is, and how you can future-proof yours.
A financial safety net is a system you put in place to protect your future finances — including loved ones who rely on. Your financial safety net should be a predetermined amount of money, a line that you refuse to let it fall below. In times of financial stress, you will be to lean on it for support. The ideal financial safety net is rarely just a bank account. Rather, it should have various components, including various insurance policies and specific pools of funds for different uses.
There are many ways you can create and strengthen a financial safety net for yourself. From properly budgeting to saving and investing, let’s look at a few of the many ways you can protect yourself through your finances.
Start with a budget
Perhaps the most common piece of financial advice is to make a budget, and with good reason. Budgets help you understand how much money you actually bring home each month, where it all goes, and how much you have leftover afterward.
Take some time to prioritize where you allocate your funds, perhaps with the help of personal finance apps like Mint, PocketGuard, or You Need a Budget (YNAB). This way, that you can be a more conscientious steward of your resources.
Think of your budget as the blueprint for your finances. In addition to your "needs" and "wants" of everyday life, it should also account for contributions to your financial safety net, like
Create an emergency fund
When businesses first started shutting down to prevent the spread of COVID-19, many people found themselves out of work. Without their source of income, thousands of families struggled through those first few weeks because they didn’t have an emergency fund in place for protection.
In situations where your income is suddenly stripped away from you, you need to make sure you have a safety net in place to catch not only you but your family as well. Start saving for an emergency fund now, and don’t stop until you have at least three months of your salary set aside. In fact, some keep saving until they’ve hit six or even twelve months. Only you can determine which amount is right for you. And once you have it saved, don't touch it unless a real emergency occurs.
Think of your emergency fund as your first line of defense in your financial safety net. It's a short-term solution available immediately if you need it, but it can only go so far and last so long.
Stock up on insurance
What happens when your three to six months of emergency savings run dry? That's where insurance steps in.
Long-term disability insurance
Long-term disability insurance protects you in the event you are unable to perform your job duties for an extended period of time. With this kind of insurance, you can still receive a portion of your monthly income for as long as your injury or illness last, up to a benefit period. Benefit period options typically include two, five, or ten years, or normal retirement age. Additionally, those illnesses or injuries that prevent you from working don’t have to be the result of on-the-job accidents. Even off-job accidents and injuries are covered under long-term disability plans.
Long-term disability insurance has an elimination period. Also known as a waiting period, this is the period of time you must wait after you become disabled before you're benefits begin paying. The average long-term disability waiting periods include is 90 days.
So, what are yous supposed to do for 3 months before benefits kick in? If you have an adequate emergency fund, you've got nothing to worry about. Think of long-term disability insurance as the backup you call if your emergency fund runs out.
Term life insurance
Term life insurance provides a layer of protection for your family in case you die unexpectedly. Your term life policy will pay a death benefit to a beneficiary of your choice if you pass away within a specific period of time, known as the policy's term. Common term lengths include 10, 20, and 30 years. The benefit can be used by beneficiaries to cover your leftover mortgage payments, funeral expenses, or any other expenses that may arise.
Get Started: Compare Term Life Insurance Quotes for Doctors
Home or renter’s insurance
Like other kinds of insurance, homeowners’ and renter’s insurance policies don’t prevent terrible things from happening. But they do act as a safety net in the wake of disaster or damage. Homeowners’ policies can help you afford the expense of reroofing a home, any personal liability if others are injured on your property, and other expenses associated with both the interior and exterior of your home.
Additionally, both renter’s and homeowner’s policies provide coverage in case you are robbed. It can help you recover or replace items that are stolen or damaged, sparing you the full expense.
Reduce your debt
One reason people struggle to develop a proper financial safety net is debt. With thousands, tens of thousands, or even hundreds of thousands of dollars in student debt, it can be incredibly difficult for new doctors to get started building a viable financial safety net.
The best way to counter this is by paying off as much of your debt as you can as quickly as possible. That way, if a financial emergency does arise, you don’t have to drain hundreds of dollars out of your savings accounts to cover your debt when you could use it to cover other, more vital expenses.
There are several ways you can safeguard yourself against future financial troubles if you start setting aside money through the proper channels now:
- Create a budget, the blueprint for your finances.
- Followed by an emergency fund, the first line of defense in your safety net.
- And back it all up with insurance for the really serious stuff, from long-term disability and term life to homeowners' or renters' insurance.
Ultimately, your safety net can be the difference between maintaining financial wellness and spiraling into financial hardship when times get tough. Plan accordingly.
Jack is the Head of Content Marketing at LeverageRx, the personal finance company that simplifies how healthcare professionals shop for financial products and services. A Creighton University graduate and former advertising creative, he has written extensively about topics in personal finance, work-life, employee benefits, and technology. His work has been featured in MSN, Benzinga, TMCNet, StartupNation, Council for Disability Awareness, and more.