How to Prepare For a Financial Setback
The first things many people want to talk about when they sit down with their financial advisor are how they will save enough money for a comfortable retirement, pay for their kids' college educations, or maybe take a dream vacation.
While these are all important financial goals that require careful advance planning, there's another area of personal finances that's just as important but often overlooked: preparing for a possible financial setback.
Tip: Create an emergency cash fund you can access at any time without incurring a surrender charge or tax penalty.
There's no crystal ball
If things are going well in your financial life, it might be fairly easy to plan for the future. For example, if your job and income are steady and your expenses are stable and reasonable, you can probably live on a family budget that accommodates a comfortable lifestyle and also save and invest for long-term goals like retirement and college.
But we never know what the future holds. What would happen to your personal finances if you suffered some kind of financial setback, such as:
- The loss of your or your spouse's job.
- An accident or illness that leaves you or your spouse unable to work.
- The death of the family's primary income earner.
- A health emergency that results in large out-of-pocket medical bills.
- The need for assisted living or nursing home care, either for you or for aging parents who don't have the financial resources to pay for it.
- Poor investment performance or a serious market pullback.
- An adverse judgment in a lawsuit.
Responsible financial planning requires preparing for how you'll deal with such unanticipated setbacks and worst-case financial scenarios.
Create an emergency fund
The first step in your preparations should be to create an emergency fund of cash you can access at any time without incurring a surrender charge or tax penalty or having to pull it out of the markets at an inopportune time. For some, the best vehicles for this kind of fund are money market accounts and savings accounts. They provide easy access to your money without a penalty or having to withdraw money from your investment portfolio, which can potentially lower your returns and disrupt your long-term financial plans.
How much money do you need in your emergency savings fund? The answer is different for every family — it depends on your household and lifestyle expenses, ongoing financial obligations and responsibilities, and potential financial risks. A good rule of thumb is to accumulate six or even nine months' worth of living expenses in your fund. So if your monthly living expenses are $10,000, you might want to have between $60,000 and $90,000 in your emergency savings fund.
Re-examine your insurance
The next step in your preparations is to re-examine your insurance coverage, including the following:
- Life insurance – Would your current life insurance policy provide enough income for your family if you or your spouse died? If your financial situation has changed drastically since you first bought life insurance, you should reassess your current coverage to learn if you should increase your coverage to pay off debt or fund important goals, like your children's education.
- Disability insurance – Disability coverage will replace a portion of your lost income if an accident or illness leaves you unable to perform your job. Re-read your policy carefully; there are many nuances to disability policies that can affect the actual payout. Also be sure you understand how the benefits will be taxed to determine if your after-tax income will be enough.
- Long-term care insurance –This is especially important in light of rising health care costs and the significant expense associated with long-term care, whether provided in a nursing home, assisted-living facility, or at your own home. LTC insurance can help protect your hard-earned assets and provide peace of mind for you and your loved ones.
Start preparing now
Thinking about financial setbacks and disasters isn't much fun, which is why many people don't plan for them. In today's world of choices and challenges, your financial needs are complex and ever changing. When you are ready to partner with an experienced financial advisor to develop comprehensive, customized solutions based on your unique financial priorities, Synovus is here to help.
Give us a call at 1-888-SYNOVUS (1-888-796-6887.)
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This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
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