Learn 4 ways to take control of your finances and stay safe
Have you ever felt stressed out about money? Most people know what it’s like to get caught short without enough cash in the bank or to lose sleep over mounting debt. The key to overcoming any financial crisis is to have the right safety nets in place to keep you safe—and help you sleep at night. I’ll show you 4 simple ways to take control of your finances so you’ll be protected no matter what happens.
What is a Financial Safety Net?
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. The types of safety nets you need depend on your personal and family situation. But they typically provide the answer to various “what if” questions like:
- what if I lose my job?
- what if I have a big unexpected expense?
- what if I get really sick and can’t work?
- what if my spouse dies?
- what if I get sued?
I know thinking about those situations is a bummer, but believe me, if something bad does happen you’ll be glad you did. Being prepared for the unexpected is a major part of having a healthy financial life.
Americans Have Weak Financial Safety Nets
In a recent study, conducted by MetLife, nearly three quarters of Americans said having financial security is vital for achieving the American Dream. Americans want to provide their own security rather than having to rely on anyone else. However, 70% also indicated that they don’t have an adequate financial safety net. See the interactive visual that shows how much coverage each of the generations has for different types of financial safety nets.
Interestingly, the study reveals that the American Dream is less about living large and more about attaining a comfortable, modest lifestyle that’s based on personal values. You can download the results of the 2011 MetLife Study of the American Dream here.
Here are 5 safety nets you should start building today:
Safety Net #1: Reduce Debt
Having less debt takes the pressure off if your pay is cut or you lose your job or business. Reducing what you owe may also be the key to living within your means if you have a tendency to overspend.
What most people don’t realize is that you can actually reduce your debt for free! First, work on reducing high-interest debts that don’t come with a tax deduction—like payday loans, retail accounts, and credit cards—by doing the following:
Apply for a low-interest loan that you can use to pay off high-interest credit cards. Investigate your options with a local bank, credit union, or peer-to-peer lender like prosper.com.
Use a balance transfer card that has a reasonable annual percentage rate (APR) after the promotional period expires.
Refinance high interest installment loans for a lower rate.
Modify a mortgage to take advantage of current low rates
Chapter 5 of my book, Money Girl’s Smart Moves to Grow Rich, gives you more clever options and details about how to deal with debt. The money you save can go a long way towards plugging holes in the next 3 safety nets that I recommend.
Safety Net #2: Accumulate an Emergency Fund
The second important safety net is to make it a goal to set aside a small amount each month to start or build up your emergency reserve fund. Ideally, you should have 3 to 6 months’ worth of living expenses to fall back on in case something unexpected happens.
Keep your emergency money in an FDIC-insured bank account, like a rewards savings or money market deposit account. It’s never wise to invest your emergency money because you want to keep it absolutely safe from market volatility and risk. It’s great if you can earn a modest interest rate on your cash reserves, but remember that you need to protect those funds like a junk yard dog so you can tap them right away, if needed.
Safety Net #3: Have Adequate Insurance
According to the Council for Disability Awareness, the odds of becoming disabled are probably higher than you think. One in 4 of today’s 20 year-olds will have some kind of injury or illness that causes a long-term absence from work before they retire. Disability insurance allows you to keep up with your bills and meet living expenses because it replaces all or a portion of your income while you’re recuperating.
Don’t assume that all insurance is expensive; in many cases, the monthly premium for a disability or term life policy is comparable to the cost of a data plan for your cell phone!
Safety Net #4: Invest Using Retirement Accounts
Lastly, once you accumulate emergency funds and have adequate insurance in place, it’s time to build wealth for your future retirement. Using tax-advantaged retirement accounts at work or on your own is a smart way to grow your money and cut your taxes at the same time. Just about everyone is eligible to open up an Individual Retirement Arrangement (IRA) and contribute a maximum of $5,000 for 2011.
To find out which type of IRA is best for you, read What is the Difference Between a Traditional and Roth IRA?
Taking these small steps to plug the holes in your financial safety nets will give you peace of mind and put you in the best position to deal with any unexpected hardship.
Get More Money Girl!
There’s a huge archive of past articles and podcasts if you type in what you want to learn in the search bar at the top of the page. Here are all the many places you can connect with me, learn more about personal finance, and ask your money question:
- Money Girl Newsletter
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- Money Girl Personal Finance Group on LinkedIn
- Money Girl podcast on iTunes
- Email: firstname.lastname@example.org
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