You might already have a plan to leave your house quickly if a fire breaks out. But could your finances withstand the blow from a disaster?
A financial emergency could strike at any time, leaving you struggling to make ends meet. Here are six events that could wreak havoc on your finances and ways to limit the damage.
Build an Emergency Fund to Get Through a Job Loss
A job loss is the second-most common financial hardship people face, according to a survey by the Federal Reserve Board. The Bureau of Labor Statistics reported that the average length of unemployment for those who were out of work as of March 2017 was about six months. However, one-third of adults surveyed by the Federal Reserve said they couldn't cover expenses for even three months if they lost their main source of income. That's why you need an emergency fund.
"It is important to remember that the liquidity you need for a job loss is more than what you might need if your car broke down," said Leslie Thompson, a chartered financial analyst and managing principal at Spectrum Management Group in Indianapolis, Ind. You need to save enough in an emergency fund to cover several months' worth of expenses. The money should be easily accessible in an account with no market risk, such as a savings or money-market account — not an investment account, she said.
To build your emergency fund, you could use your tax refund. The average refund this filing season is $2,851, according to the IRS. You can keep funding it by having a portion of your paycheck deposited into savings each month or setting up automatic transfers from checking to savings so the money is set aside before you have a chance to spend it.
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Have Enough Cash to Cover Medical Emergencies
A health emergency can create a financial crisis if you're not prepared. It's the most common source of financial hardship for Americans, according to the Federal Reserve. In fact, a Kaiser Health Tracking poll found that most Americans who have problems paying medical bills have had to cut back spending on food or basic household items.
One way to force yourself to save money for medical costs is to take advantage of a flexible spending account (FSA) or health savings account (HSA). If you have health insurance through work, your employer might offer one of these accounts that lets you set aside money for out-of-pocket medical costs.
You can contribute up to $2,600 a year to an FSA. The money comes out of your paycheck before taxes and can be withdrawn tax-free for qualified health expenses (an added benefit of the account). However, you usually have to use all the money you set aside within a year or you'll lose it. Review your past medical spending when deciding how much to contribute to an FSA.
If you have a high-deductible health plan, you might be able to contribute to an HSA. The maximum you can contribute in 2017 is $3,400 if you have individual health coverage with a deductible of at least $1,300. If you have family coverage with a deductible of at least $2,600, you can contribute a maximum of $6,750. HSA contributions can be deducted from your paycheck before taxes and withdrawn tax-free for health care costs. Unlike an FSA, you won't lose funds in your account if you don't use them within the year.
Get Life Insurance to Protect Your Loved Ones
If you have a spouse, partner or kids who rely on you financially, what would they do without your income if you died? Their lives could be turned upside down in an instant, said Chris Huntley, founder of Huntley Wealth Insurance Services.
More than 40 percent of Americans say they would feel a financial impact within six months if the family's primary wage earner died, according to a 2015 survey by Life Happens and LIMRA. Fortunately, there's a low-cost way to prepare for this sort of financial crisis. "Life insurance is the cheapest way to prevent a financial disaster from occurring as a result of that type of unexpected death in a family," Huntley said.
For most, a term-life insurance policy is ideal, and it costs a fraction of what universal or whole-life insurance costs, he said. For example, a 40-year-old man in good health can buy a 10-year term life policy with $250,000 of coverage for $12 a month, Huntley said. That means if you die within 10 years of purchasing the policy, your beneficiaries would get $250,000.
A longer-term policy with a bigger benefit is still affordable. A 20-year term policy with $500,000 of coverage would cost $29 a month, he said. Over 20 years, you'd pay just $6,960 for a $500,000 payout for your loved ones if you died. "That's what insurance is for — to transfer a risk you can't afford to take to the insurance company," Huntley said.
The key, though, is to purchase a plan that fits within your budget. "You need to easily be able to afford this policy because you don't want to ever think about dropping this one," Huntley said.
Keep Reading: 8 Ways to Save on Life Insurance
Protect Your Income If You Become Disabled
Could you pay the bills if an injury or illness left you unable to work for a while or permanently? According to a Life Happens survey, half of Americans would face financial difficulties within a month.
It might seem unlikely that you'd be faced with this sort of financial crisis. However, the odds are pretty high. A 20 year-old worker has a 1-in-4 chance of becoming disabled before reaching age 67, according to the Social Security Administration.
Social Security does provide disability benefits if you can't work because of a medical condition. To qualify, though, you must be unable to work for a year or more to receive benefits. Even if your application is approved, the payout probably won't be enough to replace your income. The average monthly disability benefit is just $1,171, according to the Social Security Administration.
A better option would be to get disability coverage. See if your employer offers disability coverage as part of your benefits package — it might come at no cost or at a lower group rate than what you'd pay for coverage on your own. If your employer doesn't offer disability coverage, see if you can get group coverage through any professional organizations to which you belong.
Insure Your Home Against Disasters
If you own a home, you likely have insurance to protect you financially if a natural disaster, fire or other event damages your property. You should have enough in an emergency fund to cover the deductible on your policy.
However, you might not have enough coverage to protect you if disaster strikes. Standard homeowners insurance doesn't cover flood and earthquake damage, sewage backup, mold or termite infestation. You can add sewage backup coverage for about $40 to $50 a year, according to the Insurance Information Institute (III). Flood insurance is available through the National Flood Insurance Program. And you can add earthquake coverage as a separate policy or endorsement to your policy, according to the III.
Also check your policy or call your agent to make sure you have enough coverage to rebuild your home. The III recommends coverage such as a guaranteed replacement cost policy — which pays the full amount to rebuild your home — or inflation guard to adjust your coverage limits as construction costs rise. And check whether you have replacement cost coverage for your belongings or actual cash value coverage, which pays to replace your possessions at their depreciated value.
It's also a good idea to create a home inventory to make it easy to file a claim if your property is damaged. The III has a free Know Your Stuff app you can use to create an inventory.
Guard Your Finances Against Identity Theft
The number of identity theft victims in the U.S. hit a record high of 15.4 million in 2016, according to a recent study by Javelin Strategy and Research. The financial loss as a result of ID theft over the past year was even bigger: $16 billion.
Identity thieves often steal account information and make fraudulent charges or use personal information to open accounts. The Javelin study found that victims whose accounts were taken over by ID thieves paid an average of $263 out of pocket as a result of the fraud.
There's no guaranteed way to prevent identity theft, but you can take steps to reduce your risk. Thompson recommends using different passwords for all online accounts. "If you do not, it makes you vulnerable to someone hacking in and stealing your identity," she said. "There are free and inexpensive sites to help secure passwords."
Install virus protection on your computer to guard against malware that can track your key strokes and access your files, she said. And don't keep sensitive information in your email inbox. "Hackers can get in and read that information then send emails, for example, to your financial advisor that sound very personal and include specific details — making it hard to distinguish that the email is not from you," she said.
Also get a free copy of your credit report to check for accounts you didn't open or other suspicious activity. You also can protect against identity theft by paying for a monitoring service such as LifeLock, ProtectMyID and TrustedID.