Most people know what it’s like to get caught short without enough cash in the bank due to an unexpected financial hardship, such as having a big medical bill or losing your job. Life and money are both unpredictable.
While having a positive mindset is key for success, it’s also critical to prepare for potential money problems. A big part of having healthy finances is building safety nets to protect you and help reduce stress. Just like a smart acrobat would never cross a high wire without a balancing stick and a big, strong net stretched out below, you should never go without financial safety nets.
Let's review ten types of safety nets you can create that will help you and your family survive and even thrive despite a financial hardship.
10 financial safety nets for your personal finances
- Emergency fund
- Health insurance
- Disability insurance
- Home or renters insurance
- Life insurance
- Retirement account
- Reducing debt
- Multiple income streams
- Professional help
Now, we'll take a closer look at the 10 financial safety nets you should start building today.
1. Emergency fund
It’s probably no surprise that having an emergency fund is my number-one recommendation for staying out of financial trouble. It’s also known as a reserve account or a safety net fund. The idea is that we all need extra money set aside to stay safe from the unexpected. If you don't have a financial cushion to fall back on for a large expense or a sudden cut in income, it could take years or decades to recover from a crisis.
Of course, not having enough money on hand to pay for an emergency is how many people get into credit card debt in the first place. If you make card charges that you can’t afford to pay off quickly, interest on the balance grows every month, and you could end up owing double or triple the amounts you initially charged.
Having enough money at your fingertips for emergencies should never be thought of as a luxury. Building up a reserve should be a top priority, so you’re never backed into a corner, financially speaking.
Building up a reserve should be a top priority, so you’re never backed into a corner, financially speaking.
Not only does having a safety net protect your finances, but it also gives you incredible peace of mind and eliminates stress.
Keep your emergency money in an FDIC-insured bank account, so it’s completely safe. No, you won’t earn much interest, but that’s not the goal for this bucket of money. Having funds available at the moment you need them is what having a cash reserve is all about.
Ideally, you should have at least three to six months’ worth of living expenses in the bank. However, depending on your work and family situation, you might need more or less.
If you haven’t started saving emergency money yet, I know it can seem daunting. Don’t worry; just get started by taking small steps every month. Make a goal to accumulate $100, then $500, and $1,000, as quickly as you can.