Now that you’re doing what you love and earning an income, things should be looking up. Having an income allows us to pay bills, save for retirement, save for a rainy day, and take trips for vacation! Who doesn’t love vacation?
All this sounds well and good while the income is rolling in but what happens if it stops? What if you’re all of a sudden unable to work because of an illness? Now, paying what happens when it’s not just you counting on that income? What if you are your family’s breadwinner and something happens to you?
Unless you’re well prepared, only bad things would happen – very bad things. Bills pile up, credit scores plummet, houses get foreclosed on, savings are quickly eliminated… Not good.
How can we make sure that we’re protected in the unfortunate event of a job loss, illness, or even death? No worries, we’ll do 5 simple things that will help us limit the financial effects of a potentially catastrophic event. Because, when bad things happen in life, why should we have to pay an unnecessary financial price too? We shouldn’t have to.
Step 1 – establish an emergency fund
I’ll define an emergency fund as 3-6 months worth of expenses that you have saved in an easily accessible account. This way, if you’re laid off from work, you’ve provided yourself with a 3-6 month buffer period to find the next step.
There will be no maxing out credit cards and paying 25% interest rates, no bills going unpaid and wrecking your credit score or evicting you from your home. None of that because you did the work up front and saved 3-6 months worth of expenses. Now, you can transfer your emergency fund savings into your checking account, pay your bills, and get on the networking and job application circuit.
How can we determine what amount to save?
The exact amount will vary based on your unique situation but a good process is to examine your budget and see what expenses must be paid every month. I’m talking rent/mortgage, insurance, utilities to keep the lights on and water running, your car payment, groceries, etc. Take the sum of all of those numbers for the month and multiply by 3-6. No one else knows better than you exactly how you spend and what you need, so take all of this into account. A little math and due-diligence upfront can help save you a ton down the line.
Step 2 – purchase disability insurance
Defined as income protection for individuals that are unable to work for extended periods of time, disability insurance will pay a portion of your paycheck while you’re laid up. Sounds fantastic, right? Indeed.
Do you know what’s even better? Disability insurance is very affordable. The cost for disability insurance varies based on your monthly benefit amount, your age, and many other factors. However, the total cost is typically between 1-3% of your total income (per Financial Solutions Group, Inc.) That means, if you earn $50,000 annually you can expect to pay about $500-$1500 annually, or $42-$125 each month.
An example referenced by the linked site above shows us how a 30 year-old male would pay about $6,810 in premiums by age 45, where he would have a 40% chance of becoming disabled for a period of about 5.8 years. With a monthly benefit of $2,500 (which is the plan he signed up for), he would only need to get paid out 3 months to recoup his investment.
It might seem like an unnecessary item to add to the budget, especially if you’re a healthy individual. But all it takes is one accident for this insurance policy to be worth its weight in gold.
Now that having health insurance is the law, this one may go without saying. Add on that because of that law, you may be forced to pay a fee for not having health insurance. Now this one is starting to sound like a no-brainer.
Unlike our friendly disability insurance above, health insurance is not the most affordable thing in the world.
Three things to consider though:
Medical bills are the #1 cause of bankruptcy in the United States. About 62% of all personal bankruptcies, to be precise (according to a national study). What’s even more terrifying is the fact that about 75% of those bankruptcy filers actually had health insurance. This is why I can’t emphasize enough the importance of a well-rounded approach to income protection.
There are many more affordable options, relative to health insurance, than there were before. Now that everyone has to have it per the Feds, there are federally subsidized and more competitively priced options available.
Many employers do offer health insurance (at least with them paying a portion of the premium) as a benefit for your service with their organization.
As someone who has rushed to the hospital for an emergency then received the bills, I was eternally grateful that we did have health insurance. Anyone who has been through a similar experience can attest that what is billed by the hospital would be next to impossible to be covered by most families. Keep bankruptcy out of your life. Get health insurance.
Step 4 – buy life insurance
Nobody wants to think about the future death of someone in your immediate family, and most certainly not your own. You know what else we don’t want to think about? The terrible scenario of you being the breadwinner for your family while your spouse stays home to raise the kids. Then something terrible happens to either you or your spouse and your family is either without an income stream or childcare (which could be financially more devastating). Not to mention without their loved one.
Let’s just purchase the life insurance and go on about our days then. Sound good? Alright.
There are different types of life insurance. Whole life and Term. Each has their own benefits and may be more applicable to you depending on your unique situation. Find a professional you trust to explain the benefits of each to you so that you can make an informed decision.
Life insurance is affordable. It’s a payment you make with the hopes of never seeing the benefit. It is also the responsible thing to do if there are more in your family beside you.
Step 5 – diversify your income
Now that all of the disability insurances, life insurances, health insurances, and doom-and-gloomy things are out of the way, let’s try a more enjoyable approach!
“Bro, what are you talking about with this ‘diversify your income’ stuff?”
First of all, yes, I just used ‘bro.’ Secondly, I’m talking about looking outside of the traditional 9-5 for some cash. Not sure if you’re hip to this sort of thing but we’ve begun a transition toward a ‘gig economy,’ where people perform varying gigs for income rather than go to a job, work for 8 hours, then go home. This is a self-employment empowerment that’s capturing the hearts and imaginations of our millennial generation.
People can work online, work for themselves, work when they want, how they want, and on the type of work they want.
Personally, and as a fringe-millennialist, I definitely see the benefit and appeal. However, I also see how it could be difficult to implement this strategy full-time. That’s why I’m advocating for finding a little part-time-type of income from a source other than your primary job. If you have a few spare hours during the week this can help you boost your savings, improve your date-nights, or increase the frequency of your vacations.
You know what else? If you do get laid off from that traditional job, or for some other reason that income goes away, you already have some other form of income rolling in. Maybe in time, you could work that up to a full-time salary or maybe you could use it in combination with one of the other topics covered above to get you through the unemployment period. Either way, it’s fun, it’s different, and you can stop doing it if your life calls for that.