Is Your Emergency Fund Strong Enough To Protect You?

Long before you find yourself in a situation where you need your Security Buffer, you have to know if that emergency fund is strong enough to protect you. Many financial gurus advise you to focus on a fixed number. They might say to save $1,000 or $10,000 or six months of your current spending. That’s a fine place to start, but once you’re there, you need to take a few extra steps and strengthen your Security Buffer.

Because what if your needs change in an emergency? Or what if your financial support doesn’t completely disappear, but instead shifts? And what do you even consider as an emergency? Do you know?

To understand the strength of your Security Buffer, you have to look beyond today. While doing so may require flexing your creative muscles, a potential financial emergency will be far less stressful when the time comes. Because you’ll know exactly how protected you are!

Here are three main things to consider when building your Security Buffer.

What Insurance Protections Do You Have?

Unemployment insurance, workers’ compensation, short-term disability, long-term disability, and more do protect you in a true emergency. But only if you know how these policies really work.

Most people today understand they should have life insurance. But disability insurance isn’t quite as well understood—even though you’re far more likely to need it.

A significant portion of workers believe that worker’s compensation will cover them if they experience a disabling accident or illness. But the truth is that fewer than 5% of disabling accidents or illnesses are work related. Which means workers’ compensation won’t have your back.

Be sure to check in with your employer on what they offer for both short-term and long-term disability insurance. The important questions: How much of your income is covered? Is there a waiting period? And how long will your coverage last?

Depending on your benefits, your needs for a job loss might be much lower—or higher—than you previously thought. And, hopefully, your career isn’t your only source of income!

Do You Have Passive Income?

Building sources of passive income is a key piece of your Freedom Generator. Every dollar of passive income you generate reduces your dependence on your nine-to-five job. You suddenly don’t need to replace your whole income just what your passive income isn’t covering.

And the best part? The passive income train keeps driving even when you aren’t at the wheel. If you suffer a medical or family emergency, your passive income sources may not be quite as productive, but the cash will still come in.

How Would Your Costs Change In An Emergency?

Often when people consider a financial emergency, they imagine a job loss or medical situation. But when your employment or lifestyle changes, your expenses change too.

On the negative side, what you spend today might not be enough. If you lost your job, could your family remain on a spouse’s health insurance plan? Or would you have to shift to a plan available in the Marketplace? In a medical emergency, might you need to hire outside help while you’re recovering?

Taking the time to determine those costs now, even a general range from an online search, really gives you a sense of how your Security Buffer will hold up.

Sometimes Costs Go Down

The good news is that movements in expenses go both ways in an emergency. Your spending today is likely above your Baseline Number. Your Baseline Number defines your spending stripped down to the essentials. That means you’ve already identified discretionary “comfort spending” where you can reduce costs in an emergency.

For example, being out of work may mean significantly lower commuting costs. Or a $50 a month decline in your dry cleaning budget. Depending on how you’ve structured your monthly spend, more time available can mean lower food costs from more home cooking. And with lower stress, you can probably do without that monthly massage.

So rest assured that if you know your Baseline Number, you already have a plan to quickly cut your monthly spend if you need to.

Pulling The Pieces Together

The real hope is you never need to lean on your Security Buffer. But with the Social Security Administration estimating that one in four 20-year-olds will become disabled and unable to work for some period of time before they reach the age of 67 being prepared doesn’t hurt.

To test the strength of your Security Buffer, take your Baseline Number and subtract what you would expect to receive in insurance benefits and passive income. Use that remaining number to give you a real sense of how many weeks or months of protection your Security Buffer will give you. And then think about whether that number is enough to keep you feeling safe.

Talking about disaster planning is never fun. We don’t want to imagine ourselves or a loved one sick. That horrible pit in your stomach you get even thinking about being let go by your employer a terrible feeling.

Mitigating those feelings is what Financial Freedom is all about. First, by building your Security Buffer. Then, over time, by building your Freedom Generator so you can buy back your time and follow your dreams. Because no one should have to live a life filled with Money Stress.


The views and opinions expressed are those of the guest author and do not necessarily reflect the views and opinions of MindShift.money.

image credit: Bigstock/JacobLund

Chelsea Brennan is a former Wall Street financial analyst and investment manager who changed gears in her career to chase her passion of improving financial literacy and independence. She is now a personal finance writer and content marketer. Chelsea shares her obsession with budgeting, investing, and raising financially smart kids at MamaFishSaves.com.

Post a new comment