How to Build a Financial Safety Net

Introduction

The importance of having contingency plans for dealing with a financial crisis cannot be overstated. Whilst you may be fit and healthy now, what will happen if you are unable to pay the bills in the future? This article looks at how you can build a financial safety net to deal with unexpected emergencies.

1. Savings and Investments

Savings and Investments are often a good means of building a short term safety net to cope with a short term health problem or the result of redundancy or a career change. Research shows that you should seek to put aside the equivalent of 3-6 months in wages to deal with an emergency. Savings and Investments are easy to access or cash in, should you need some emergency resources and are a great short term safety net.

TIP: Money put aside for dealing with a financial emergency should be readily accessible. Whilst it is possible to get a better return by investing in a high interest savings account, these often require 3 months notice to access funds. Instead consider placing these funds in an instant access savings account preferably an online one, where the you can get at your money quickly.

2. Budget Planning

Creating a budget is one of the best tools available for helping to build a financial safety net. It can help you identify how best to spend your money at the beginning of each month and critically, help you to plan what amount you can afford to put aside each month, even on a tight budget.
There is a great free budget planner available via Microsoft at http://office.microsoft.com/en-us/templates/TC062062 791033.aspx

There is also a more detailed article available that I have written in relation to good budgeting, you can find it at http://www.helium.com/tm/475075/introductionbudgetin g-under-utilised-tools

Tip: Take an hour now to sit down and plan next month's budget and get an overview of your income and expenditure and what you can afford to save.

3. Insurance Policies

Few people like paying out for insurance policies because we rarely need to use them. Whilst there may be some things we can do without, like extended warranties on electrical goods, failing to plan adequate cover for loss of employment or ill health can have serious repercussions. No one can guarantee that their health will always be good and not building a financial safety net is like playing Russian roulette with your future.

There are so many insurance policies it can sometimes be daunting trying to establish which will be beneficial. I have highlighted a few of the key policies for further consideration.

a) Life Insurance

It's not pleasant realising that we are all mortal, but ignoring the matter can leave debts and hardship for those we leave behind. If you're concerned about how much cover you will need then factor in the main debts you could leave behind, like a mortgage or loans and base your insurance cover on meeting these.

b) Disability/Critical Illness Insurance

This type of insurance is worth considering, if for example like me, you are the sole wage earner in your family unit or live alone. I wouldn't recommend it for dual income earners as it can be expensive and providing one of you is able to work you won't need it. This policy will set you back between $25-40 a month and will pay out if you become seriously ill and unable to work. Basically it will cover your mortgage repayments.

c) Income Protection

This a better option than disability/critical illness cover, as it will pay out for your mortgage if you are unable to work due to redundancy. Research shows that the average time spent with any employer is now 5 years, gone are the days of a job for life. Insolvency within businesses has also increased meaning that you are more likely to be made redundant at some point in your career. It can often take 3 months to a get a new job due to waiting for responses from applications, attending interviews and getting a written offer of employment. Income protection insurance can provide an invaluable financial safety net. You should expect to pay between $35-60 per month for this insurance plan.

d) Medical Insurance

This really is essential as unexpected costs of health complaints or accidents can be significant. Medical insurance will ensure that you get treatment quickly should you need it, without having to consider cost implications. You should expect to pay a few hundred dollars per month for this insurance.

4. Antiques and Collectables.

Antiques and collectables are often a great source of investment given that they hold their value at the very least and have the added benefit of being easy to sell if you need a quick cash injection. In addition if you wish to leave a sum of money to family after your death they won't be hit with inheritance taxes often associated with large amounts of physical cash. Perhaps one of the major drawbacks to investing in Antiques and collectables is the requirement of a level of technical expertise, or access to those skills, to ensure that suitable items are invested in.

Summary

This article has attempted to examine the numerous ways in which you can build a financial safety net to cater for almost every aspect of your life. We have explored the importance of short term savings and investments to provide an immediate safety net and also examined how you can ensure you have a financial cushion in the future.