Surprises are part and parcel of everyday life. Some may be pleasant, while others shock you in the most unanticipated ways, having lasting monetary effects. To safeguard your family and yourself against such unfortunate incidents, there are two main things you will need: life insurance and an emergency fund. Both have slightly different roles yet help provide you with financial security for yourself and your family.
Why You Can’t Do Without Life Insurance
Life insurance is one of the policies that all people need to include in their financial plans. This is because it’s meant to protect the financial welfare of your dependents in the event that you die. Upon the death of the insured person, proceeds from the life insurance contract in most cases go to the beneficiaries of that individual in the form of a lump sum. This money can be used to pay for burial, debts, or loss of income. In that way, the family can retain their quality of life even when the breadwinner is gone.
This is only one part of it, though. Life insurance is not only applicable after one’s demise. If a person has taken a whole life or a universal life insurance policy, then it’s probable that the same individual may receive some of the cash value components of the insurance policy during his or her life. During hard times, this cash value could be taken out in case of an emergency or even borrowed against in order to give you some type of cover. Alternatively, although this feature can ensure that you meet your everyday financial challenges, it really shouldn’t be considered an emergency fund. Cashing in your life insurance cash value is like cutting the hors d’ouvres at a party–it might serve your appetite in the moment, but it leaves you wanting.
What Is an Emergency Fund?
An emergency fund may be defined as an indeterminate sum of cash set aside for dealing with unplanned expenditures or unanticipated situations. Therefore, we can ascertain that an emergency fund serves a different purpose than a life insurance policy. They are two accounts that help you stabilize your financial condition. Life can sometimes throw you to the wall and a job termination is beyond anybody’s control. An interrupted flight or a company can sometimes demand hiring a car. All of this, plus paying for insurance can add up quickly.
In the absence of an emergency fund, you can potentially be tempted to use credit cards, loan, or even withdraw from your pension funds to pay for such costs. This could result in significant debts that can result in stress and can have long-term effects on your life. An emergency fund helps cushion an investment in case of any high-risk situations.
Planning for the Future: How to save an emergency fund
At first thought creating an emergency fund seems like a difficult endeavor, especially for people who are on a tight budget, living from paycheck to paycheck, or don’t not have a steady income. However, with a good plan in place, you can build your reserves gradually–it just takes a little patience.
Invest the Same Amount Under a Simplicity System: Don’t rush. First of all, decide how much of your money you want to set aside on a weekly, monthly, or annual basis. Do this regularly and don’t rush it. It doesn’t matter if the amount is minimal or not, it doesn’t stay minimal for long when it’s added repeatedly. Moving money from checking to savings accounts should be done with comfort so that people trying to save aren’t overwhelmed and continue to add funds.
Set a Goal: In terms of saving, having a clear goal makes it so much easier. One widely accepted recommendation is to set apart somewhere between 3 to 6 months of basic living expenses aside. If that still feels too intimidating, try to aim for smaller amounts, say $500 or $1,000, and then build up. You are more likely to be motivated to continue saving more once you begin to see it grow.
Boost Your Savings When Possible: Sometimes you may find yourself in possession of extra income–perhaps a tax return or a job bonus. Use it to top off your emergency fund. Although infrequently obtained, these added funds can greatly reduce the time taken for the fund to mature.
Monitor Your Progress: Make periodic reviews of your emergency fund to determine its level of development. This isn’t just important for keeping you motivated but it also helps you plan out the future of your savings. Once the goal has been reached, you have the option to retain that balance or increase it for greater protection.
How Much Can You Afford to Save?
No situation is one-size-fits-all. Furthermore, look at the possible unplanned costs you’ve had in the past. For example, when talking about car costs, how much did you pay for car repairs the last time it broke down? If you own a house, what were some of your biggest repair costs? What are you dreading to have to pay out for in the future?
If it’s difficult to answer that question, then you want at least three to six months of wages which you can use when in a tight spot. For those who work, the more money you keep in your savings, the better off you’ll be is something unexpected happens.
This is a generalization that most households can agree upon. Once you decide to build an emergency fund, you should intend to build it step-by-step. Strengthening your financial security doesn’t require excessive and extravagant spending, and knowing that you have a backup system in place will reduce any long-term anxiety.
The Importance of Having Life Insurance and an Emergency Fund
Life insurance and emergency funds are both important, but their use isn’t the same. The purpose of life insurance is to help the family in case something happens to the person who took out the policy. Emergency funds are there to prevent financial hardship in case the unexpected happens.
Discussing with an Insurance Agent
It’s very easy to get lost on the different types of available life insurance plans, but this is where an agent becomes relevant. Most insurance agents use sales expertise and education to write a life insurance policy. The agent plans the policy, is in charge of the administration, and of picking the one policy that fits the client’s needs.
When it comes to creating a realistic emergency fund, your agent might also help with determining the amount of coverage required for your specific situation.
Without a doubt, life is full of surprises. However, you shouldn’t suffer financial loss due to these transient incidents now that you have the necessary financial tools at hand. The stability life insurance offers, as well as the financial buffer made available with emergency funds, will fortify not only you but your entire family for any future unexpected changes. Invest your time into managing your reserves for unexpected events as soon as you have a chance–you will be grateful to yourself in the future for doing so.
