Here is a 4-point checklist to building a financial safety net
If the Covid-19 pandemic has shown us anything, it’s the importance of having a financial safety net to deal with those unexpected curve balls that life throws at you.
Fact is, financial emergencies happen – and if you don’t have a safety net, you could find yourself having to borrow money to survive, and battling to pay your bills, says Bani Schmidt Marketing Executive at life insurer Stangen.
But how do you save money, let alone get ahead financially, when you’re just trying to make ends meet from month to month? “There are two major goals in building a safety net: one, you need to think about how you will protect yourself and your family; and two, you must save and invest for your future,” says Schmidt.
Here is Stangen’s 4-point checklist to building a financial safety net.
Start building an emergency fund
We know money is tight. But as Covid-19 has shown us, it’s possible to get ruthless with your budget when you have to. Cut back your spending to the basics, and you’ll be surprised at how quickly you can save R10 000. And once you have R10 000 saved, it’s easier to get to R20 000. And so you move on. Ideally, your emergency fund should have 3 to 6 months’ expenses saved to cover any unexpected costs.
Protect your family
If something happens to you that leaves you unable to work, how will your family survive without your salary? Protecting your family with life insurance will look after your family’s day-to-day needs should something happen to you. The benefit can be used to pay off debt, educate your children or simply provide cash flow each month.
Protect your income
Your most valuable asset is not your home or your car: it’s your ability to earn an income. What will you do without a monthly income? Who will pay your bond and car loans, credit cards and personal loans? That’s why salary protection, disability cover and critical illness cover are key elements of any financial safety net.
Salary protection provides you with a replacement income if you can’t work because you’re ill or injured. It ensures you receive a regular income until you can go back to work, or retire.
Disability cover pays out a lump sum if you are permanently unable to work due to an illness or injury. This lump sum will keep the home fires burning whilst settling any medical bills or other debts.
Critical illness cover pays out a lump sum if you contract a specified serious illness, like cancer or heart disease. This helps cover recuperation costs as well as basic living expenses.
Prepare for retirement
Saving for retirement is one of the best financial decisions you can make, because it gives you choices later in life. But most South Africans retire with way too little money, which means they either have to keep on working or rely on their state pensions and family members to stay alive. It’s critical that you save as much as you can while you are working – so even if you don’t have a cent to spare right now, making the time to sit down with a financial planner to work out your retirement goals is a step in the right direction.
“Developing a safety net doesn’t happen overnight. Start by creating an emergency fund first, and then build it out as you go. It takes some sacrifices and effort, but it will all be worthwhile when a financial emergency strikes,” says Schmidt.