Do you feel good about money? Does the thought of checking your monthly budget make you feel calm and ready? If there was an emergency, would you feel financially equipped to handle it?
If your answer to all of those questions is no, then it’s probably time to think about your financial safety net. It’s important to be prepared for the stresses that emergencies and life changes can bring. Part of that is having a financial system set up to cover extra bills and financial surprises.
In this article, we’ll explain what a financial safety net is, how to do a financial security check, and give you some tips on how to build your own financial wellness so that you can be prepared for anything.
Basically, a financial safety net is the financial protection that you have available for an emergency. It can take a lot of different forms, depending on the type of emergencies you need to be prepared for. If something can happen that might cost you extra money, you need to have a way to handle it. That’s your financial safety net.
Some of the things that can contribute to a financial safety net are:
Emergency Funds: An emergency fund is a savings account that holds three to six months of living expenses. The purpose of an emergency fund is to maintain your lifestyle financially in case of job loss, illness, pandemic lockdowns, or anything else that would keep you from maintaining your usual work and income. Emergency funds are usually held in savings accounts that have high-interest returns so that the money you’ve saved can do double-duty and earn you a little bit of extra income.
Rainy Day Funds: A rainy day fund is like a mini version of an emergency fund. It’s a relatively small amount of money that you set aside to cover small surprise expenses or emergencies. For example, if you suddenly need to cover car repairs, a downed tree in front of your house, or if the plumbing in your rental springs a leak and you need to stay in a hotel suddenly, then your rainy day fund should cover it. Because a rainy day fund is small—usually only $300 to $500—it can usually be kept in a regular savings account.
Retirement Funds: Retirement money is one of the most important pieces of your safety net. Most people aren’t able to maintain a comfortable lifestyle on just their government pensions once they reach retirement age. For this reason, most people invest in retirement accounts while they’re working.
Intentionally paying off mortgages, cars, and anything else purchased with large loans is another form of retirement preparation. For the purposes of your financial safety net, however, it’s important to know that you need some form of retirement account to help you live comfortably once you’re no longer in the office every day.
Insurance: A safety net isn’t only for you—it’s also for your loved ones. This is where insurance comes in, specifically life insurance. Other insurance products, like auto insurance, health insurance, and homeowner’s or renter’s insurance are also important parts of your financial safety net.
However, life insurance serves a specific purpose. It provides a large financial benefit to the loved ones of your choice–called beneficiaries–after you die. While this is never a fun topic to think about, when preparing your financial safety net, it’s important to think about the legacy you leave for the people who depend on you now. Life insurance is a good way to meet that need.
There are other pieces that fit into the financial safety net puzzle, but these are the most important ones. Start by thinking about emergency accounts, insurance, and retirement first, and your net will be pretty sturdy.
Now that you have an idea of what a financial safety net is, let’s talk a little bit more about how to get one.
If you’re just starting out, it can be hard to know how to build a strong financial safety net for yourself and the people who rely on you. Even if you’re a little more financially experienced, a little extra information can always help you add to the things you’re already doing.
Here are four things you can do to build a sturdy financial safety net for yourself and your family.
Before you can build a net, you need to check your current level of financial security. Let’s think back to the questions at the beginning of this article, and add a few more. Asking yourself a few simple questions can help you figure out where your starting point is, and what to do next.
First of all, do you feel good about money? Does thinking about finances stress you out? If you answered that you don’t feel good and that it does stress you out, don’t worry. Everyone has less-than-positive feelings about money, at least some of the time. Acknowledging these feelings gives you a place to start.
If thinking about your finances stresses you out, maybe it’s best to start small. Review your budget. If you don’t have a budget, make one so you can understand exactly where the money you work hard to earn goes.
Then focus on building a small rainy day fund. It’s a relatively easy task with a big payoff. A rainy day fund can relieve a lot of short-term stress and free up your mental energy to think about other financial issues. Once you’ve done that, you can move on to bigger parts of the net. As long as you’re consistent and intentional, your financial security will continue to increase.
Another question you can ask yourself is this: is there was a big emergency in your life—whether medical, social, structural, or vocational—could you handle it? The key here is not to worry too much about giving a ‘yes’ or ‘no’ answer. When emergencies happen, they have to be handled whether or not we’ve prepared for them.
Instead, focus on how you want to handle them. Do you want to use emergency funds? Insurance? Focus on the resources you have that you can use to handle an emergency. If you don’t have any resources, now is the time to create them.
Finally, ask yourself if the people who depend on you financially will be taken care of if there is an emergency. Check to see if you have the resources to provide for them if for some reason you are unable to work. It’s also necessary to think of what will happen to those loved ones if you were no longer here and add those preparations into your financial safety net as well.
Having a financial safety net is all about preparing for the worst-case scenario, and doing what you can to make it a little bit less difficult. If that means purchasing insurance, saving intentionally, or going to financial therapy in order to improve your knowledge of how your money works, it’s always better to get started sooner than later.
Now that you’ve checked on your level of financial security, it’s time to decide what kind of financial safety net you need. This can depend on a lot of things. Your lifestyle is the first factor, of course.
How much do you need to have prepared to maintain your lifestyle in an emergency? If you have a lot of money, you’ll need to think about protecting your wealth, If you aren’t as financially flush as you’d like to be, it’s a good time to think about ways that you can build a safety net while also giving your money the opportunity to grow and build more security for you.
Ultimately, the amount of money you need to have available as a financial safety net boils down to how much you need for an emergency fund, a rainy day fund, retirement, and insurance, as we discussed before. Figuring out the exact numbers begins with you sitting down and reviewing your budget. Once you total up the amount you need for three to six months’ worth of living expenses, add it to the amount you decide is reasonable to have on hand for small emergencies. That should be your financial safety net savings goal.
Then, it’s time to think about retirement and insurance. This is when you need to think a little bit more carefully about the people who depend on you, and the lifestyle you want to live as you get older. If you have a spouse or partner, this is a conversation you definitely need to include them in. The decisions you make here are very personal and individual, but you need to make them, for your own peace of mind and to care for the people around you.
Now that you’ve figured out the needs and the numbers, it’s time to get started.
If you’re just beginning to think of how to get financial security, start with smaller tasks and work your way up. Focus on building a rainy day fund, then move up to an emergency fund. Start building your retirement fund by taking advantage of options offered through work, then look into other options once you feel more comfortable navigating retirement accounts. Opt for an affordable term life insurance policy, and if you decide you need more coverage or want to build up cash value, look into converting it into a whole life policy. Start small and work up to bigger things.
If you’re a little more financially established, now might be a good time to look into getting a financial advisor to help you work through issues regarding taxes, estates, and wills. You’ll have different options after you reach a certain level financially, but you’ll also have different obligations. Working with a professional can help you avoid any costly mistakes.
No matter where you are financially, you can always benefit from financial literacy education. There are many different financial wellness education tools available and it’s always a good idea to take advantage of what’s available. A few places that you can check are:
Your bank or credit union: Check to see that you are using the best types of accounts to help you reach your goals. Credit unions occasionally have financial education classes for members that can be helpful, too. If you’re not sure where to start, set up a meeting with a banker—they’re often happy to help customers who are looking for ways to save money safely and profitably.
Your employer: Some employers are beginning to offer financial wellness resources to help employees get back on their feet post-pandemic. Check to see if your employer has financial wellness classes, coaching programs, or even rainy day fund grants to cover employee hardships. If you check and they don’t have these things, think about asking the human resources department to consider them. Programs like this have been shown to increase employee retention and maintain work focus.
Online: The internet is an endless wealth of information. You can easily find blogs (like ours!), Youtube channels, podcasts, savings and investment calculators, and all sorts of other resources with a simple search. If you’re not sure where to start, jump on the internet and see what you can find. As long as you vet your new resources carefully, the internet can be an enormous help to your financial safety net.
Financial Advisors: If you’ve looked into other resources and still feel a little lost, it’s okay to seek the advice of a professional. The type of professional you consult depends heavily on your financial situation, location, and goals. Think about what you specifically need to build your ideal financial safety net and achieve financial security and find a professional willing to help and advise you.
Once you’ve gotten started building your financial safety net, your peace of mind and ability to respond to an emergency well financially will definitely increase. Life has a way of constantly changing, though. It’s important to check your overall financial situation at regular intervals and see if your plan for maintaining a financial safety net needs updating.
Set regular checkpoints for your financial checkups. You can check every month, six months, or every year if you want. You can even make a point of updating your financial security plans every time you have a major lifestyle change that impacts your finances, like a promotion at work, a new baby, or when retirement is in sight. Whenever your financial life changes, your financial safety net will need reinforcing and sometimes rebuilding.
Building a financial safety net for yourself doesn’t have to be stressful. In fact, it’s a way to relieve stress. Creating financial security can give you peace of mind when an emergency comes up. Take a look at your budgets and get started today!