There’s an old adage: “Hope for the best, but prepare for the worst.” Nothing could be truer when it comes to your finances.
There are all kinds of financial emergencies that crop up, from serious ones like the loss of a job, to minor ones like needing a new set of tires for the car. But if you aren’t prepared, even a small emergency can spell trouble.
You don’t have to depend on chance when it comes to protecting yourself from financial disaster. Here are five steps you can take to avoid sending your finances into a tailspin:
- Have an emergency fund – You should maintain emergency reserves equal to four to six months of your total expenses in a liquid account. The money in your emergency fund will still earn a return; it just won’t be as large as if the money were invested. However, the main advantage to such a fund is its availability.Â
- Get a safe deposit box – Keep a video or DVD record of your household belongings inside a safe deposit box in case you have to file a claim.
It’s also a good place to keep marriage, birth and death certificates; Social Security cards and children’s vaccination records; copies of wills, vehicle titles and other important documents; as well as jewelry, coins and small valuables. Never put your passport in it, because you may need the document when the bank is closed and you can’t retrieve it. - Have a will drawn up – You should have a will, a durable power of attorney, a financial and medical power of attorney, and a living will so that you can stay in control of how your finances are administered, and ensure that your final wishes regarding your health are carried out.
Wills also guarantee that your assets will be divided between your spouse and children as you intended. - Purchase disability insurance – If you are unable to work due to illness or injury, disability insurance can help to pay for essential expenses, including food, utilities, school tuition, mortgage and car payments.
In 2020, the U.S. Social Security Administration reported that more than one in four 20-year-olds will experience a disability that keeps them out of work for at least a year before they reach retirement age.
Social Security offers a minimal disability benefit, but you must prove that you cannot work at any job, not just your own, in order to be eligible. - Be sure you have enough life insurance – If you have small children, you should carry five to seven times your annual salary in coverage. This will help you provide for your family and help them maintain their current lifestyle if you were to die unexpectedly.
When buying life insurance, be sure to consider what the death benefit will be used to replace. That way you can get the right amount of coverage for your needs.
