Are you financially prepared for the unexpected – three tips you can’t afford to live without

July 18th, 2011 Jeff Burkhart

Emergencies can happen at any time – there’s simply no way around it. You lose your job. Your spouse falls ill. Or a loved one passes away. And while disasters – thankfully – don’t occur very frequently, it’s critical to make it a priority to prepare for the unexpected.  After all, it could be the difference between a sound financial future and tremendous financial strain.

We’ve put together 3 simple tips to help you prepare your finances so you can face unexpected challenges with confidence and resolve.

Tip #1 – establish an emergency fund

An emergency fund is an easily-accessible chunk of money that you can withdraw when a financial emergency occurs. Also known as a safety net or rainy day fund, it’s something that you can fall back on when you are faced with an unexpected expenditure, such as medical costs, a new roof, car repairs or the loss of a salary.

At MidWestOne we recommend establishing a fund that contains roughly 3-6 months’ worth of your living expenses. In most cases, this will give you enough money to address the issue and develop a new long term financial plan.

Since you will need to access your emergency fund on short notice, it’s critical that you allocate the money where you are able to withdraw it without facing any penalties. Many people will set up a separate savings or higher-earning checking account for their emergency fund. With some added planning you could also allocate it in a series of 3-, 6-, 9- and 12-month CDs. This would likely give you a higher interest rate and allow you to have access to the funds every three months.

Tip #2 – set up a life insurance policy

If you or your spouse were to pass away unexpectedly, how would you overcome the resulting financial challenges? If you have not yet set up a life insurance policy, please do so right away. It will protect both you and your family in the case of death of a wage earner.

While there are many types of life insurance policies available, most boil down to term, permanent or combination of both.

Term life insurance policies offer death benefits only. You pay a monthly premium and they provide a stated benefit upon the death of the policy owner, provided that the death occurs within a specific time period. If you live past the length of the policy, you (or, more specifically, your family members) get no money back.

Permanent life policies offer death benefits and a “savings account” (also called “cash value”) so that if you live, you get back at least some of, and often much more than, the amount you spent on your premium. You get this money back either by cashing in the policy or by borrowing against it.

As most permanent life insurance policies are much more expensive than term life policies, many financial advisors recommend clients opt for a term policy so they can invest the difference.

In addition to choosing your policy, you will also have to determine how much you want to insure. The answer to this will be based on what you want to do with the money. While this is different for everyone, a good rule of thumb is to plan for around 8-10 times your salary.

Tip #3 –talk to others about your money matters

One of the simplest and most important things you can do to prepare for the unexpected is talk to your family or friends about your money matters. Imagine, for example, that your partner is the one who typically pays the bills. If something were to happen to him or her, would you know the passwords to your accounts? Or, what if your parents pass away – do you know where they keep their financial documents? Do they have a life insurance policy?  A will? What did they do with their retirement savings? What bank were they with?

While these details may seem mundane to you now, they will make things much, much easier if something were to happen.

It’s up to you to make sure that someone else knows where you have stored all your financial documents. Many families set up a safe deposit box that contains important documents and provide access to another family member or friend in the case of an emergency. Sit down with your family to discuss what makes most sense for your situation.

About the author

Jeff Burkhart is Regional President at MidWestOne.

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