A financial safety net is usually embedded in a financial plan to provide you with a cushion when there is an emergency that requires instant cash. It is best to start planning for your financial safety net once you have put your day-to-day expenses in order and your long-term financial goals are in motion. An emergency fund should be included in your financial safety net, it is an important component that you can fall back on when you need an emergency fund. Such needs could be in the form of health needs or suddenly losing your job. It is advisable to have enough savings for six months to cover your safety net funds. Other components of the financial safety net include life and disability insurance. Building a financial safety net requires careful and systematic planning that requires few tips. Some of these tips are discussed in this article.
What Is a Financial Safety Net?
A financial safety plan is a combination of various insurance policies and a savings account. Its function is to help you reduce financial risks that may be caused by unexpected expenses. It protects you and your family's long-term financial goals by giving you a fallback plan that will not derail your overall financial plan.
Emergency funds are held in a liquid savings account which makes it easily accessible, unlike your investment funds which may be locked in for a specified period. Financial advisors always recommend setting aside a specific amount to build your financial safety net for expenses that carry significant financial impact.
Why Should Creating An Emergency Fund Take Priority?
You never can tell when you will need a financial safety net. That's the whole essence of having one. To prepare for any eventuality. If you speak to people who have an emergency fund when they need one, they will testify to how happy they were that they had an emergency fund and how difficult it was to find the amount of money if they didn't have one. An emergency fund helps you plan ahead. No one prays for any financial emergency but these things happen and you have to be prepared for them.
The Covid 19 pandemic is an example of such an emergency. A person with an emergency fund would have coped better for a few months than someone who had to dip into their investment funds. Here are some reasons why you should make creating an emergency fund a priority:
You Just Started Budgeting
When you just start out budgeting your income and expenses as part of your financial plan, it is not unusual to leave out some expenses that you may need to plan for. An emergency fund will come in handy when you finally realize you have left out some important expenses. It will help you cover the expenses for the main time till you recover and put them in your budget.
You Have Only One Source of Income
If you fall under this category, it is important to have an emergency fund in case of any eventuality. An emergency fund will protect you from a sudden job loss or illness that can keep you from earning your regular income.
You Have A Medical Condition
If you have a medical condition that requires constant testing and purchase of drugs that may max out your income, an emergency fund will help you cater for these costs. It will also protect you from any medical emergency that may force you to take days off without pay.
You’re Saving For A Goal
If you have a financial target you want to meet, having an emergency fund will guarantee you achieve this goal in case of any emergency. An emergency fund prevents you from touching your savings and investments to meet any emergency financial need.
You Own A Car or A Home
These two assets do not give a warning when they want to break down. They are very essential for your everyday living and should they need fixing, it has to be done as soon as possible. An emergency fund comes in handy in these kinds of situations. If your car needs repairs or your home needs some repair and upkeep.
5 Reasons Why You Need A SafetyNet
A financial safety net protects you from a financial hit and cushions your fall in cases of emergency. A safety net also allows you to take some investment risk to grow your investment funds without the fear of being impacted should it fail. Here are some of the reasons why you need a financial safety net:
To Protect Your Long Term Investments
A financial safety net gives you the discipline you need to avoid touching your long-term financial goals. When an emergency situation arises, there is always the temptation to dip your hand into your investment to meet the financial emergency. Essentially, a financial safety net prepares you for a rainy day.
To Provide For Your Family
A financial safety net is not only for you. You also do it with your family in mind. Your kids could fall I'll, needing major medical attention that could hit you financially. Having a financial safety net will help you feel the impact less. Losing your job or taking sick leave without pay could affect your family being the breadwinner of the family. A financial safety net helps your family deal with these kinds of situations till you get back on your feet.
A financial safety net gives you financial stability by providing a cushion for any financial emergency. With a financial plan, all your income and expenditures are structured to meet your financial goal. Any slight change in the routine could put your finances off balance. This is the essence of a financial safety net. When an emergency arises, instead of distorting your financial plan, your safety net takes the hit while your financial plan is still intact.
It Improves Your Saving Culture
A safety net fund is another set of saving you have asides from the savings plan in your financial plan. Knowing that you are building a safety net keeps you in check and prevents you from spending extravagantly. One saving plan still gives you the room to spend impulsively but with a safety net plan in place, you are restricted on your spending to be able to meet up with all your financial goals.
It Helps You Organize Your Financial Plan
A safety net plan is part of your financial plan. Having it included in your financial plan gives it structure and organization. A safety net can be classified as one of the strategies for meeting your mid-term and long-term financial goals. It will guarantee your investments are not distorted by any financial emergency.
Ultimately, a financial safety net is a strategy used to meet your long-term financial goals.
5 Ways To Start Saving Today
For young people, saving can be a problem because it might seem like there's enough time to save in the future. This is a wrong orientation that you should correct. Saving helps you build your financial plan to meet your financial goals. It also ensures that you have a financial safety net for rainy days. No one is too young to save and you should start developing the habit today. Here are some tips methods of having a saving culture:
Have A Budget
One effective way of saving is having a budget and sticking to it. Young people mistake having a budget to restrict the amount of fun they have. By creating a budget, you will be able to track your expenses and allocate funds for your savings and investment. You can track the amount you spend on fun and what you spend on securing your future.
Have A Safety Net Plan
This is another way to develop a saving habit. A financial safety net plan requires you to set aside a portion of your income for an emergency fund. It will ensure you keep to your saving plan to meet up with your financial safety net plan. You can use a high-interest liquid savings account as your safety net plan so you can access it in a time of emergency.
Set Savings Goals
Goal setting is known to be an effective way of achieving a desire. Visualizing what you're saving for keeps you in check and ensures you follow through with your saving culture. Setting goals like buying your home in 3 years will improve your saving habit because you have a goal to meet.
Find Ways To Cut Your Spending
If you have high expenses, you won't be able to save. If you are interested in developing a saving habit, you need to cutdown on your expenses. You will need to do away with some of the unnecessary things you buy just for the sake of buying. The habit of buying clothes thinking you will need them in the future will have to stop. Cut back on expenses on entertainment and eating out. Having a budget will help you cutdown on unnecessary spending.
Try Out Automated Saving
Automated savings ensures that a predetermined amount is deducted from your main account into your savings account before you access it. With automated savings, you can split your income between your main account and your savings account to gradually meet your saving goals.
Track Your Progress
Tracking your savings progress is essential because it will ensure that you stick to your savings plan. It also helps you to know when you are not meeting up with your savings plan. It will also encourage you by showing you how far you have come with your savings plan.
Financial Safety Net Conclusion
Having a savings habit is essential, especially at a young age because it will ensure you prepare for a secured future. Do not think you are too young to save, as a matter of fact, this is the best time for you to start saving for your future. Have a financial plan that consists of investment plans, financial goals and a financial safety net plan.