Personal Finance » Insurance

3 ways to build a financial safety net

“To expect the unexpected shows a thoroughly modern intellect” – Oscar Wilde

Life throws curves. Sometimes those curve-balls lead us to amazing opportunities, sometimes they lead us through tremendous stress and heartache. When those curve-balls impact our financial well-being our stress levels tend to be amplified and the amount of time it takes us to recover can be much longer. According to the Holmes and Rahe Stress Scale, some of the most stressful things that can happen to a person are the death of a spouse or close family member; marriage, divorce or separation; personal illness/injury and the loss of a job. Not only is each of these life events incredibly stressful but each also has the ability to cause financial stress. Chances are, if you think of ten people that you know, at least one of those events has happened to more than one of them. While we might not have the ability to avoid being hit by a curve-ball we do have the ability to protect ourselves from the financial impact by taking the following three steps to build a financial safety net.

Adequate insurance

There are a variety of insurance products available to provide protection in the event of death, injury or illness. Life Insurance can be a cost-effective way to provide survivors and dependants with a means of paying final expenses, covering lost income, paying debts or equalizing an estate. Critical Illness insurance pays a lump sum if you suffer from a critical illness such as heart attack, stroke or cancer while disability insurance can provide a monthly income if you’re unable to work due to illness or injury. How much insurance a person needs depends on their individual circumstances and will often change during their lifetime. Consult with an insurance professional to find out where you might be vulnerable and how insurance products might be able to help protect your financial health.

Adequate savings

When life throws curves there is usually a price tag attached. Whether it’s an unexpected bill, a missed paycheque, a job loss or an illness, having funds available to dip into can often make the difference between sinking and swimming. Keeping consumer debt to a minimum, building a slush fund, a contingency fund and keeping monthly expenses under control will create a buffer zone to protect your finances in the event of a curveball. For too many Canadians, the only buffer zone they have is the available credit on their credit card or a line of credit. This is a challenge for two reasons; running up debt creates more stress at an already difficult time and borrowing money from a credit line or credit card is much more expensive than borrowing money from yourself. Doing whatever you can to minimize debt and maximize savings is an effective way to create a financial safety net.

Adequate instructions

If you’d passed away last night would your survivors know where to find your will and all other relevant documents? If you’d been taken ill and couldn’t make decisions for yourself would there be someone with power of attorney to make decisions for you and handle your affairs? Putting a will, power of attorney and/or personal directives in place doesn’t have to be expensive or time-consuming but too many of us delay doing what needs to be done because we think we have all the time in the world. Or, we put everything in place and neglect to discuss the details with the people who need to know things such as where the will is located and where all the documents relating to our bank accounts and insurance products are kept. Anyone who has lost a spouse or family member will tell you how complicated settling an estate can be, especially if a person dies without a will. Having a will, power of attorney and/or personal directives (and updating them as necessary) is an easy way to build a financial safety net that protects your wishes and makes a difficult situation much easier for those you care about.

Cars are built to protect the people inside them in the event of an accident. Sports equipment is designed to protect us from the impact of playing sports. In almost every aspect of our day to day lives, there are features and procedures in place to protect us from the unexpected and unpredictable elements of life. Building a financial safety net that protects both our finances and the people we care about from the impact of unexpected life events is an important factor in maintaining our financial health and building a solid financial future.

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