The Importance of Financial Preparedness

When you are thinking about your financial goals, you might find it easier to focus on saving for big items, such as buying a home or a car, funding retirement or paying for a child’s tuition, than saving money to have in reserve. However, building a financial safety net is important. Life is unpredictable, and unforeseen events such as car repairs, unexpected tax bills or sudden illness can happen to anyone and can be expensive. While these costs can be difficult to predict, by preparing with an emergency fund and the proper insurance policies, you can offset some of the costs. 

Emergency Savings

Most experts recommend having an emergency fund to cover at least six months of living expenses, but if you are newer to saving, accumulating three months of living expenses is a great start. Our Spring 2019 Merrill Edge Report(1) found that many Americans are already taking steps to improve their financial lives. Thirty-five percent of respondents reported saving enough over the past year to live on for three months without an income.

If you haven’t created an emergency fund, consider the following steps:

1. Determine your essential and non-essential monthly expenses and try to limit what you spend on the non-essentials, like eating out, shopping or entertainment.
2. Open a safe, liquid account, like an FDIC-insured savings account, and keep it separate from your everyday savings so there is less temptation to borrow from it. If you do borrow from it, prioritize rebuilding the balance.
3.  Set an attainable goal—maybe $1,000 to start—and then devote a percentage of every paycheck to it. Consider setting up automatic transfers into your emergency fund account.

Insurance

Beyond standard health, vision and dental insurance, supplemental insurance policies can be greatly beneficial in the case of an emergency. Whether you receive your insurance through employee benefit elections or have to research and secure your own provider, here are three additional coverage options to consider adding:

1. Health Savings Account: If you are enrolled in a high-deductible health care plan, you may be eligible to open and fund a Health Savings Account (HSA) with pre-tax deductions and use these savings to cover qualified medical expenses.
2. Long-Term Disability: Many employers offer group disability insurance, but it may not cover all costs over an extended period of time, so check if any supplemental policies are offered through your employer. If you can't get sufficient coverage through work, consider buying an individual policy.
3. Whole Life: Life insurance can help protect the financial future of your beneficiaries. While an employer may offer life insurance, it is most likely term life, which only provides protection for a set period of time. Whole or universal life insurance can provide lifetime coverage; however, determining whether or not to purchase a whole life insurance policy can depend on many factors, so do some research before making a choice.

Life can be unpredictable. It is important for all of us to prepare for the unexpected by building a safety net of savings and insurance. These tips are a great starting point to help you prepare for a financial emergency, but you have additional questions or concerns, consider consulting with a financial advisor.

(1) Merrill Edge Survey Methodology

Concentrix (an independent market research company) conducted a nationally representative, panel-sample online survey on behalf of Merrill Edge April 17-May 9, 2019. The survey consisted of 1,000 mass affluent respondents throughout the U.S. Respondents in the study were defined as aged 18 to 23 (Gen Z) with investable assets between $50,000 and $250,000 or those aged 18 to 23 who have investable assets between $20,000 and $50,000 with an annual income of at least $50,000; or aged 24-plus with investable assets between $50,000 and $250,000. For this purpose, investable assets consist of the value of all cash, savings, mutual funds, CDs, IRAs, stocks, bonds and all other types of investments such as a 401(k), 403(B), and Roth IRA, but excluding primary home and other real estate investments. We conducted an oversampling of 300 mass affluents in Atlanta. The margin of error is +/- 3.1 percent for the national sample and about +/- 5.6 percent for the oversample market, reported at a 95 percent confidence level.

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