The coronavirus outbreak has left a lot of big question marks for all of us — and data analyst Madison Ball and his girlfriend Julia Nicholson are no exception. Nicholson, who works for the housing department at Reed College, recently got news that she may be furloughed this fall if students don’t come back in person. This means the couple’s two-income household would drop down to one.
Fortunately, Ball has put a lot of effort into building up a multilayered financial safety net, including both a hefty cash emergency fund and a healthy Roth IRA. Having a plan for financial uncertainty helped him feel in control during a time of so much economic turmoil.
It just so happens that June is National Safety Month, so even if your finances are unaffected by the pandemic, it’s the perfect time to start or strengthen your financial safety net.
Here are some of the most important steps to shoring up your finances, this month and beyond.
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1. A thoughtful budget
The first step to improving your finances is to understand what, exactly, they look like. And the only way to do that is to create a budget.
A budget could be as simple as a handwritten spreadsheet with your monthly income at the top and your expenses listed out underneath it. Or, you could take advantage of one of the many online budgeting programs available, like YNAB, Qapital or Mint. Their software allows you to link your checking account, credit cards and other financial products in order to automatically track your spending, while setting custom goals and limits for different expense categories.
Once you have a basic budget in place, you can begin to look for places where you might be saving more. Make sure to account for all your necessary expenses, like housing, transportation and groceries, and then take a closer look at your discretionary spending — dining out, streaming services, etc. Can you find ways to make cuts in either category? Doing so will give you the opportunity to funnel more money towards your safety net.
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2. A cash emergency fund
Even with an ironclad budget, life has a way of surprising us — which is why an emergency fund is an absolute must. Whether it’s a job loss, a flat tire or an unexpected trip to the dentist, your emergency fund can turn a minor crisis into a mere annoyance.
Your emergency fund should be readily accessible (which is to say, not invested) so that you can retrieve the money at any time. One of the best places to stash your emergency reserve is in a high-yield savings account, which will still allow you to accrue some interest while staying highly liquid.
How much money should you keep in your emergency fund? Many experts recommend three to six months of living expenses, but a lot of it has to do with your personal circumstances. For instance, a freelance writer, whose income is by nature erratic, might aim to store more like six to nine months worth of living expenses.
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3. Insurance, insurance, insurance
It’s nobody’s favorite bill to pay, but insurance is one of those things you’ll be thrilled to have if and when you need it. Furthermore, some insurance products are actually required by law (or by your landlord).
Auto insurance: Auto insurance is required by just about every state in the nation, though the required minimum coverages vary. It’s often not cheap, but it is way cheaper than paying out of pocket if you get into a serious auto accident — and many insurers offer lower premiums to safe drivers.
Health insurance: Medical debt is the number-one reason Americans file for bankruptcy — so although your health insurance premium may be high, it’s still worth budgeting for. If you don’t get health insurance through your workplace, you can purchase a plan on the marketplace.
Disability insurance: If you lose wages due to a non-work-related illness or injury, disability insurance can help by providing short-term benefits.
Life insurance: Life insurance can help ensure that in the event of your death, the people you leave behind won’t be left in a bad financial position. It can help replace the income you would have generated during working years or act as a wealth transfer vehicle. It’s a very good idea to have life insurance if you have a family or a business.
Home or renters insurance: If you own your home, homeowners insurance can protect your large investment from damage, theft and more. And if you’re renting, renters insurance can cover the cost of your personal belongings if they’re damaged or stolen — as well as liability costs if someone is injured on the property. Depending on your mortgage lender or landlord, these policies may be required, and considering the high costs associated with property damage, they’re well worth considering even if you don’t have to.
And more: There are many other sorts of insurance products available, like pet or travel insurance, that you might consider looking into — but make sure you research the pros and cons of speciality insurance before you buy. You may end up paying for coverage you don’t actually need.
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4. A debt reduction plan
The faster you can pay off your debts, the more time you’ll have to save the money you need for your safety nets. There are multiple ways to go about it, like the avalanche method (paying off the debt with the highest interest rate first, while making minimum payments on the rest) and the snowball method (paying off the debt with the lowest balance first, while making minimum payments on the rest). The strategy you choose is up to you — so long as you make sure you do, actually, choose and implement one.
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5. A healthy retirement fund
You can think of your retirement fund as a future safety net — one that helps ensure you’ll actually enjoy your well-deserved break when the time arrives. If you work for a company that offers a 401(k), you can take advantage of that vehicle, especially if a match is offered, but you might also tack on a traditional or Roth IRA.
Ball likes to stash cash above and beyond his cash reserves in his Roth IRA, because unlike other types of retirement funds, you can always take Roth contributions (though not gains) out, penalty-free. Of course, the idea is to leave them alone unless you’re really in a pickle, since letting your investments grow is the best way to ensure you’ll meet that big goal down the line.
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6. Multiple income streams
We all know the old saying about putting all of our eggs in one basket. Similarly, having only one income stream can be a risky proposition.
If you don’t live in a household with multiple income streams — and even if you do — consider picking up a side hustle or trying to find ways to create passive income. Maybe you can monetize your hobby on Etsy or write and sell an ebook. If you have the time and energy, finding ways to make extra money could help you feel more financially secure.
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7. An expert opinion
Finally, if you really want to shore yourself up against a potential financial crisis, you might consider hiring a professional. A certified financial planner (CFP) is a good pick, since they’re required to meet strict educational and ethical standards, and they’re held to a fiduciary standard of conduct — which means the interest of their clients must always come first. Generally, choosing a fee-only or fee-based advisor over one who earns a commission is a better bet, since the former won’t be incentivized to sell you anything. To find someone to help you manage your finances, you can search through the CFP Board of Standards or the Financial Planner Association.
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