Now more than ever, protecting yourself and your family is paramount. Not only in terms of your health and safety, but for your finances too. Financial protection is a key component of financial planning. It may not be as exciting to discuss protecting your assets rather than growing them, but downturns in the market and accidents will always happen. Hence it is smart to plan for the bad days rather than just hope you can outpace them with your investment gains. Let’s look at a few ways you can not only grow your assets but protect your financial plans.
Saving for Emergencies
Whether you call it a rainy day fund or an emergency fund, it’s purpose is the same. You need to have 3-6 month’s worth of expenses set aside to get your family through any kind of issue, whether it’s just a little rain or a flood. Hopefully, you will not have to use those funds but if you have a major illness, job loss, natural disaster, or even a leaky roof you will be glad you have that money to live off of or to repair your home. Though you may not know the severity of it, you can guarantee that bad luck will occur eventually, so you better plan for it. The money you save in your emergency fund should be kept liquid and easily accessible, ideally in an online bank account( which are currently offering interest rates around 1.5% APY). While you may not earn a lot in interest, but you will gain a lot of peace of mind by socking away money in your emergency fund.
Diversification
The best way to protect your portfolio is through diversification. By keeping a variety of investment vehicles in a variety of industries, you protect your entire portfolio from an economic downturn. There are always companies that will be winners and losers, even when the market tanks. In today’s current COVID-19 crisis, many retail companies are in dire straits and watching their stock fall as they are forced to close stores and lay off workers. But other industries, like online videoconferencing platforms, are booming. If you spread your assets among many industries, then instead of being completely crushed by a certain company or industry you will only be pinched and perhaps will have gains in another area to offset the losses.
Insurance
You can protect many things with insurance: your health, car, home, and even your valuables. Buying insurance transfers the risk of something bad happening to the insurance company so if a disaster strikes, you will have to only pay your premium and deductible, leaving the insurance company on the hook for the rest. As we noted earlier, accidents will happen. The real unknown is how bad it will be and how much it will cost. Even if you go 10 years without a hospitalization or car accident, transferring the risk to the insurance company can buy you major peace of mind. You know that you will be able to afford medical treatment or repairs to your home or car whenever the accident happens, no matter how severe it is. Insurance protects your financial plan because you won’t have to liquidate your retirement accounts to replace your car, pay medical bills, or repair your home after a natural disaster since the insurance will cover the bulk of your costs. Paying the annual premiums is a worthwhile investment in protecting your long term financial plans.
Life Insurance
The best way to protect your family and your financial plan is with life insurance. If you die, how will your family carry on financially? No one wants to think about death but it will happen to everyone, guaranteed. So why not plan financially for it? If you have no will or life insurance, your family may end up in dire straits with a spouse or dependent unable to access money in your savings account or not enough money set aside to help them carry on without your income. Life insurance allows you to take care of your family after your death. You can plan to replace your income for a few years so your family can grieve and get their bearings, use the insurance money to pay off all your debts, house included, so that there is less financial stress on the surviving spouse, or maybe use the money to fund trusts for your children’s education and future savings. However you plan to do it, life insurance is a caring act that ensures that your family will not end up diverting from your carefully set out financial plan should you pass away unexpectedly. Families without debt, with grown children, and lots of money in savings may not need life insurance, but they certainly will still need a will to avoid issues with property in probate or feuding family members who each lay claim to an asset. Taking the time now to set out your financial plans for after you are gone helps them to be executed smoothly.
Disability Insurance
Another way to protect your income is by purchasing disability insurance. What kind of disability insurance you will need and the amount of coverage depends on your work and financial needs. Disability insurance can replace all or part of your income if you become injured, whether the injury is related to your job or not. A serious illness or injury not only puts your health at risk, but also can put your income and job at risk. If you are unable to work while recovering from surgery, how will your family pay the bills? That is where disability insurance comes in. You may choose to carry disability insurance that only covers on the job injuries, and many companies will pay for it and include it in your benefits package. You may also choose to get coverage through a company like Aflac that can help replace your income for injuries and illness sustained outside of the workplace. If your work carries a high risk of injury or an inability to work if you are injured (factory worker, police officer, performer, etc), you may need more than the average office worker who sits at their computer all day.
Paying annual insurance premiums, investing conservatively, and socking away money in an emergency fund can be boring or even frustratingly costly when you think you could instead invest that money in a hot stock that is on the rise. But in the long run, these financial protections will protect your assets far more than any startup tech stock ever could and leave you with more money in the bank. If you never plan for the bad times, you will be left with nothing when the good times end, as they inevitably do. Financial planning is about growing your assets and protecting them for whatever the future may hold. It may be more fun to talk about increasing your net worth, but more people get into trouble by not having enough insurance rather than failing to invest in a hot stock.
