What Is A Financial Safety Net?

You’ve probably heard the term “financial safety net” before, but what does it really mean?

A financial safety net is a cushion of savings, insurance, and other assets that you can fall back on in an emergency. Whether it’s an unexpected medical bill, a sudden home repair, or a family emergency, a financial safety net can help you cover costs without going into debt.

Ultimately, a financial safety net is a preventative solution to unforeseen financial setbacks.

Why is a financial safety net important?

A financial safety net can help you avoid debt and the associated interest payments and potential late fees. Plus, having a financial safety net can give you the peace of mind that comes from knowing you’re prepared for whatever life throws your way.

Since it’s not always possible to avoid financial emergencies, having a financial safety net can help reduce the stress and anxiety that comes with them.

Without a healthy reserve of savings, you may be forced to rely on credit cards or loans to pay for an unforeseen emergency, which can be difficult, expensive, and slow to pay off.

And let’s be honest, when you’re faced with any kind of financial emergency, a debt load is the last thing you need.

How much savings should you have in your financial safety net?

In terms of liquid savings, most experts recommend keeping enough money in your financial safety net to cover at least 3-6 months of living expenses. This will help ensure that you can cover your essential costs if you experience a loss of income or a large, unexpected expense.

This type of savings is often called an “Emergency Fund” or a “Rainy Day Fund,” and is the most basic form of a financial safety net.

Of course, the amount you’ll need to save will vary based on your individual circumstances. If you’re the sole breadwinner in your family, for example, you’ll probably want to save more than a multi-income family.

The important thing is to start saving as soon as possible and prioritize building your financial safety net. The sooner you build an emergency fund, the easier your financial life will be in the event of an emergency.

If you’re not sure how much you should save, consider talking to a financial advisor. They can help you create a personalized savings plan that takes into account your unique circumstances.

Where to keep your safety net savings

While a financial safety net may include more assets than liquid savings, a fully funded emergency fund is the most important place to start.

But where should you keep your financial safety net savings?

In short, you should keep your safety net in a savings account dedicated solely to financial emergencies. Ideally, this savings account should be easy to access in case of an emergency, but inconvenient enough to limit your temptation to spend it.

If possible, you should look for an account that earns a decent interest rate.

No, a savings account won’t make you rich, but it’s still nice to know your money is growing a bit while it’s there.

If you’re looking for a couple of good banking options for your financial safety net savings, we recommend CIT Bank Y Axos Bank.

See also: The best (and worst) places to keep an emergency fund

Other assets to include in your safety net

As we mentioned earlier, your financial safety net can (and should) include more than just cash savings. In fact, most experts recommend including a variety of different assets in your security network.

What kind of assets, you ask?

Here are some ideas to consider:

Medical/health insurance

No one is immune from illness or injury, so it’s important to have health insurance to help cover the costs of medical care.

Seriously, uninsured medical bills are outrageously expensive, and health insurance can save you from financial ruin in the event of a major health crisis.

If you don’t get health insurance through your employer, I recommend looking into private health insurance options.

I realize this isn’t a very exciting purchase, but you wouldn’t want to be caught without it in the event of a medical emergency.

term life insurance

If you have a spouse or children, term life insurance can help ensure that they are well taken care of financially if something happens to you.

Again, this is not a very fun topic to discuss. I mean, who really wants to spend their time focusing on his own death?

But this can be one of the greatest blessings you give your loved ones.

The good news is that term life insurance is not very expensive. Depending on a variety of factors like your age, health, and occupation, term life insurance can cost as little as $15 per month!

How Much Term Life Insurance Coverage Should You Have?

Most experts recommend having at least a 15-year term life insurance policy equal to 10X – 12X of your annual gross income. For example, if you earn $50,000 per year, you must purchase a term life insurance policy worth between $500,000 and $600,000.

Disability insurance

Disability insurance is similar to life insurance in that it provides financial protection for you and your family in the event you become disabled and can no longer work.

While most employers offer some form of disability insurance, this coverage is often not enough to financially protect your family if you become disabled.

That’s why it’s a good idea to supplement with your own personal policy.

Like term life insurance, disability insurance is not very expensive. And considering the protection and security it provides, this can be a great addition to your financial safety net.

Homeowners/renters insurance

If you own a home, you should have homeowners insurance to protect your property in the event of damage or theft.

And even if you don’t own a home, you should consider renters insurance to protect your belongings.

There is simply no reason to take unnecessary risks when it comes to your property.

Plus, homeowners and renters insurance is relatively inexpensive, so there’s really no excuse not to have this coverage.

Additional Tips for Developing a Strong Financial Safety Net

In addition to the asset protection strategies we’ve discussed, there are a few other things you can do to make sure your financial safety net is as strong as possible.

Here are some final tips:

live on a budget

One of the most critical things you can do for your finances is to live on a tight budget.

Budgeting will not only help you save for emergencies, but it will also help you navigate unexpected financial surprises or irregular expenses.

When you know where your money is going each month, it’s much easier to save money and make wise financial decisions.

Live below your means

If you want financial security, it’s important to live below your means. In other words, you need to learn to live with less than what you earn.

I know this is easier said than done, but it really is the key to financial success.

By reducing your spending and creating some financial leeway in your life, you’ll have room to save for emergencies, invest for the future, and build wealth.

Develop multiple streams of income

One of the best ways to bolster your financial safety net is to develop multiple streams of income.

That way, if one stream dries up, you’ll still have others to fall back on.

There are a variety of ways to generate additional income streams. You could start a side job, invest, or even get a second job.

Regardless of the method you choose, diversifying your income can greatly improve your financial security in the long run.

invest for retirement

Another very important step you can take for your financial future is to start investing for retirement as soon as possible.

I know retirement may seem like a long way off, but it will be here before you know it.

The sooner you start investing, the more time your money has to grow. And the more your money grows, the less of a problem financial emergencies will be.

To be clear, using your retirement investments to pay for an emergency should be an absolute last resort. The goal of investing for retirement is to create a nest egg that you can live with in retirement.

But if you find yourself in a situation where you don’t have a choice, it’s good to know that your retirement savings can act as a financial safety net.

Investing for retirement can include a variety of different strategies, but two of the simplest and most effective ways to invest for retirement are to contribute to a 401k and/or Roth IRA.

Oh, and if your employer offers you a 401k match, be sure to take advantage of it! This is free money that can really add up over time.

final thoughts

A financial safety net is an important part of any sound financial plan.

It can help you weather unexpected financial storms and protect your family in the event of an emergency.

While it’s not fun to stop at worst-case scenarios, it’s important to be prepared for them. Fortunately, once you develop a strong financial safety net, you can live without fear of financial uncertainty and operate from a position of confidence and financial strength.