What is a financial safety net?
A financial safety net refers to a set of measures you can use to protect yourself and your family against financial loss brought about by things such as a critical illness or other personal tragedies. With a safety net in place, you can avoid financial disasters that can disrupt your financial security.
Here are ways and tips on how you can create a financial safety net.
1. Start an emergency fund
Your emergency fund is the go-to savings you can access during a crisis. Financial advisors suggest having enough savings to cover living expenses for at least six months in case you lose your job, become ill, can’t work, or experience other emergencies like a natural disaster.
Consider also setting up an automatic savings plan to build up your cash reserves. When your contributions to savings are auto-debited, you won’t even realize that you’re saving. Before you know it, you’ve got a nice cushion to fall back on when the rainy day comes.
2. Fortify your savings with life insurance
When you’re young, buying life insurance may be the last thing on your mind. But if you’re a new parent or have a family, life insurance becomes a must. You can use life insurance to pay off debts, set aside money for your child’s college expenses, pay for funeral and burial costs, or cover your monthly bills.
One crucial question to ask is whether to choose term or whole life coverage. While term life may be more affordable, whole life or similar permanent policies can provide lifelong protection while possibly accumulating cash value.
For instance, BPI-Philam’s life insurance with savings plan includes lifetime coverage, which can be your best option if you’re looking to secure a worry-free future. Having life insurance serves as a financial cushion against tremendous financial stress caused by unforeseen tragedies.
3. Use your skills for a side hustle
Your emergency fund can get a boost from putting in some extra work hours. If you have special skills, offer to work on a side gig. If you’re big on baking, cooking specialty cakes and cupcakes on the weekends can bring in additional money.
Pick a hobby you’re passionate about, and consider making money from it. You’ll be surprised at how much it can add to your savings.
4. Go on a spending diet
Just like it’s important to remove bad food from your diet, it’s also essential to cut wasteful spending from your financial diet. For instance, instead of splurging on a night out at an expensive restaurant, make home-cooked meals that you can eat while streaming shows.
Evaluate your current spending habits and identify which areas to trim. Learning how to manage your finances can be a total game-changer.
5. Invest in medical insurance
The pandemic has elevated the importance of health insurance. It continues to be a priority for many families even until now.
Coverage from health insurance can significantly relieve you of the burden of medical expenses. It provides financial protection in case of critical health conditions. You also get access to preventive services such as screening tests that can help detect illnesses early, leaving you with one less thing to worry about.
6. Avail long-term disability insurance
Disability insurance isn’t necessarily a priority when you’re young. However, there’s no way to predict when an accident can strike. Disability insurance covers your income in the event you become disabled and are unable to work.
For example, if you were earning Php500,000 annually before disablement and prevented you from continuing work, your insurance could compensate for a portion of your lost income. Building this part of your financial safety net has long-term benefits that far outweigh the alternative.
7. Save for retirement
There’s a little bit of resistance when it comes to saving up for retirement. Many young workers don’t believe in waiting for decades to enjoy the good life. They want to travel the world now, and there’s nothing wrong with that.
However, it’s wise to prepare yourself to be financially comfortable without having to work. A retirement savings plan will help ensure that you have enough money to enjoy a good life when you retire. Regardless of your views on retirement, saving early for the future gives you a huge advantage.
8. Purchase an umbrella policy
An umbrella policy is a supplemental policy to cover excess expenses your car or home insurance cannot compensate. It’s not a necessity, but it can provide an extra level of protection.
Say you got into an accident and you only have Php100,000 body injury coverage on your car insurance policy. However, the person you injured has medical bills exceeding Php500,000. If you have an umbrella policy, you can use it to cover the gap.
Adding an umbrella policy is an inexpensive yet valuable element to developing a robust financial safety net.