The three big C’s could happen to anyone: Covid, Cancer, Career Interruptions. (Ok, maybe I am stretching the alliteration there a bit but forgive me for the sake of grammatical art.) Maybe instead it’s a broken bone or a car accident. The point is: bad things can will happen, to everyone, at some point in the future. Maybe you will end up with the lesser of the Bad Things (maybe just a blown tire or you fail to get a promotion), or maybe you get Covid which causes you to be out of work and you lose your job then you find out you have cancer (and if that is you, wow, I am so, so sorry). You may not know what level or how often, but a bad thing or two will happen to you, and it may even be in the next few months. Yes, it’s scary but a little fear can be a good thing and can help you take action now to help you financially handle these Bad Things when they happen in the future. You need to protect yourself. While money cannot prevent Bad Things from happening, it can sure make the landing a little softer when you fall.
Keep Money In The Bank
Your relationship with your bank needs to be more than your checking account’s revolving door of money in and money out. You need some long term financial commitment to your bank. Leave your toothbrush and some money there overnight (ok, maybe not your toothbrush, that’s just weird). But piling up some money in your savings account will help you out of any future scrapes and your bank will reward you for a broader relationship with your hard-earned cash by paying you interest on it. Ideally you can save up 3-6 month’s worth of expenses. It may take a while but that’s the goal. Why 3-6 month’s worth of expenses? Because that is the average amount of time it may take you to find gainful new employment after you lose your job. And it also seems like a fairly attainable number since asking people to save 9 months worth of expenses seems just outlandish. But look closely at what you spend (this is expenses, not earnings) and sock away enough to cover your bills, debts, gas, and groceries for a few months). That savings account can then cover your expenses if you have to take a leave of absence from work due to illness or other emergency (or until you find a new job if you got laid off), or you will at the very least have a few thousand set aside to cover a large medical bill, pay a plumber to fix an emergency burst pipe, or make a major car repair.
Access To Lines of Credit
If you can control yourself and won’t spend the money on frivolity, day to day expenses, or a trip to Hawaii, having access to credit cards or a line of credit can help supplement that 3-6 months worth of savings or take its place while you are building it up. I know, it can be hard to save up that much money, so having available credit that you can tap into for an emergency can help bridge the gap while you are working to build up that emergency fund. Now, the important caveat here is that you not spend that credit. If you have a credit card with a $8000 limit on it and then buy a vacation or a Peloton on that card (Yes, they are awesome. No they are not a necessity), you won’t have that $8,000 available anymore. Sure, you can say that you will plan to pay it off when you get that bonus at work or your tax refund, but you are skating on thin ice because you could have an emergency before you get that bonus or you use the money for something else.
Life Insurance
Life insurance is to protect your family should you lose your life and income. Death is assured for all of us eventually, and hopefully a long time from now, but accidents and illness can sometimes end up with tragic consequences. The sudden death of a loved one is tragic in its own right, but it is compounded when the grieving family is now left with a major financial crisis due to the loss of that loved one’s income. Many of us think about getting life insurance when we marry and/or have children because now there are people counting in our income. It’s not just about you anymore. As such, your income goes to provide for your family and if that income suddenly disappears, would your family be able to pay their monthly bills, cover funeral costs, and continue to pay off debt or the mortgage? Even stay at home parents have an economic loss to the family as then a nanny or daycare needs to be paid to care for the children. Look to insure yourself for your salary times 10. This will give your family your annual income for 10 years, or if they don’t need it for that long they could choose to spend chunks of it to pay off debt, pay off the house, fund the kid’s college funds, etc. Think about the costs that you would need to cover (usually your debts and mortgage) and/or how long you would want to have your annual salary’s worth of money coming to your family. If you have little kids, you may want more money over a longer term than if you have a mostly paid-for house and teenagers. Then get term life insurance quotes to see what that amount would cost and adjust as needed. If you are ineligible for term insurance, whole life insurance is an option but tends to have higher fees and the cash value builds much more slowly than other forms of investments.
Disability Insurance
Disability insurance is about protecting yourself in the event you become injured or disabled and unable to work for an extended period of time. This is not workman’s compensation, but instead is for injuries that may not be related to your work. If you fall while hanging Christmas lights on your roof, need to have back surgery, and spend several weeks recovering, how will you afford your monthly expenses? Even if you have some sick leave to use, it usually won’t cover several weeks’ worth of work. Disability insurance will replace all or most of your income in the event of a covered illness or injury, usually one that will have you out of work for several weeks. Most people get disability insurance as part of a group policy through their employers. If your employer does not offer it you can also buy it individually though it usually comes with a higher price tag and may not cover as many conditions, such as postpartum recovery after childbirth. Check with your employer to see if a policy may be available for you to purchase and check with other private firms to compare rates and find one that best suits your needs.
Financial planning is about not only growing your assets, but also about protecting yourself and your family. Bad things will happen eventually to everyone. Why not plan for the worst and hope for the best? Having a good amount in savings, access to credit should you need it, and insurance to protect yourself and your family are key components to financial planning. Focusing only on asset growth is short sighted financial planning. Instead, look at the whole long term picture. It is better to plan well to avoid pitfalls than to hope you have enough money to dig yourself out after the fall.
