How to Create a Financial Safety Net: Prepare for Life's Unwelcome Surprises Part I

Following are some tips on how to create a safety net that can help protect you financially from the challenges you may face one day.

Stash some cash for an emergency.
An emergency fund is an important part of any financial safety net. What is it? Simply put, an emergency fund is a sum of money that you set aside to help cover large, unexpected expenses or to help tide you over after a job loss. With an emergency fund in place, you may be able to avoid dipping into your retirement account or sinking into debt when emergencies happen.

The rule of thumb is to place enough money in the fund to cover your living expenses for three to six months. However, if you think it may take longer than six months to find a new job, it may be prudent to set aside a larger amount.

Your emergency fund should be kept in an account that you can easily access in an emergency. A savings account, a money market account, and laddered CDs that mature at regular intervals are good choices. An investment account containing lower-risk investments, such as money market funds, may also be an appropriate choice.

Protect your income stream with disability insurance.
What will happen to you financially if your paychecks stop because you are too ill or injured to work for a long period of time?

Health insurance will help with the medical bills, but it will not cover your living expenses, such as housing, food, and your other bills. Your emergency fund can help with those expenses, but it will eventually run dry if you are out of work for a long time. Fortunately, there is a type of insurance - disability insurance - that is designed to provide a stream of income when you need it most.

Disability insurance replaces a portion of your income when you are too ill or too injured to work. There are two main types of disability insurance: short­ term and long-term.

Short-term disability insurance, which many employers offer, typically replaces part of your income for a short period of time, such as three or six months.

Long-term disability insurance is designed to replace part of your income for a longer period, generally after a waiting period of six months or so after a disability. It may provide coverage for a specific number of years or until retirement age, depending on the policy.

Long-term disability insurance is sometimes offered through employers, although you may have to chip in for the cost. It can also be purchased from an insurer - an ideal solution if it is not available through your workplace or if the workplace policy is not adequate for your needs.
When reviewing long-term disability insurance, be sure to evaluate…

The waiting period. How long will you have to wait after you are disabled before benefits begin? Three months? Six months? Longer? Typically, the longer the waiting period you select, the lower the premiums.

The maximum monthly benefit. Disability insurance generally replaces a portion-say, 60% or 70%-of your base salary up to a specific maximum amount per month. Let's say your employer’s group plan caps the benefit at $5,000 monthly, or $60,000 annually. That may be acceptable if your salary is $100,000 or less, but if your salary is greater, your monthly benefit may not come close to replacing 60% of your salary. If your employer's plan does not meet your needs, consider supplementing it with an individual policy from an insurer.

What the benefits are based on. Are they calculated on base salary alone? If a good portion of your compensation is from incentive pay, such as commissions and bonuses, consider supplementing your employer's group plan with an individual disability policy from an insurer that protects a percent­ age of your overall compensation

Keep your business open when you are unable to work with business overhead expense insurance.
If you own a small business and are responsible for generating much of its revenue, an illness or injury that prevents you from working may make it difficult for your business to survive. Can you afford to keep your business going without the revenue you personally generate? Business overhead expense (BOE) insurance can help.

This type of insurance helps cover overhead expenses, such as employee salaries and benefits, rent, utilities, and insurance, for a period of time if the business owner cannot work due to illness or injury. And depending on the coverage you choose, BOE insurance can even help cover the salary of someone to temporarily replace you while you recuperate.

This is part one of a two-part series on "Creating a Safety Net". To view Part II please click here.

With offices in Williston and Rutland Vermont, Copper Leaf Financial Advisers take a holistic approach to your financial well-being so call us today at (802) 878-2731 to schedule a strategy session.