Supporting your recovery from an accident or illness can be lengthy and expensive; for some, this process can take months and years, too. Not only will this period of your life impact your physical and mental health, but your financial health, too.
While it is recommended that everyone has around three to six months’ worth of savings to support a loss of income, not everyone can do this. More than one in five Americans have no savings (source: Bankrate), and 27 % of Americans have less than $1,000 in savings (YouGov).
How would you survive if you were suddenly unable to work due to an accident or illness that put you out of commission for any time? If you’re one of the 68% of Americans who couldn’t cover a month’s worth of expenses if they lost their job, were forced to take unpaid time off (Bankrate), or would need to borrow money for emergency expenses, these tips can help you improve your financial health if something affects your physical or mental health, upending your life as you know it.
1. Pay Down Debt
One of the main reasons people are struggling financially in the US is a high debt load. While the ideal debt-to-income ratio is 35% or less, the average American owes around $90,000, according to data from Experian, with this figure rising to over $135,000 for Gen X.
If you are holding a high amount of debt, it can be a good idea to look at your finances and see how you can reduce your debt. You can choose either the snowball or the avalanche method to help you get a grip on your finances and be in a better position should you experience financial difficulties.
The debt snowball method means you make the minimum payment towards all of your debt and put extra money towards paying off your smallest debt. Then you use the money you were paying towards this debt on the next smallest debt once it’s cleared, and so on.
The debt avalanche method requires you to still make your required minimum payments while identifying the debt with the highest interest level and paying that off first. Then, move down the list using the money from the now paid-off debt to your next highest-interest debt until they’re all cleared.
2. Take Out Insurance
There are many different insurance premiums you can get to protect yourself financially and support your family should the primary income earner be unable to carry on working or need to take time out.
Wage insurance is vital to help protect your income in the event of job losses resulting in you taking out a lower-paying job. Let’s say you have worked for your employer for 6 years and are suddenly made unemployed; while unemployment would cover you until you find another job, there is no guarantee you would earn the same if you found a new job. This is where wage insurance comes into play; they will pay a proportion of the difference between your previous wage and your new wage upon starting a new job for two years.
Disability Insurance will cover you for time taken off work due to illness or injury or an inability to continue to work due to the nature of your accident or illness. Some employers offer this as part of their compensation package, or you can purchase private disability insurance to help you ensure you are protected no matter what happens. This can bridge the gap should you need to put in a claim for an accident or misdiagnosis if this is the cause of your situation. Finding the answer to can you sue the va, your employer, or the medical care facility involved in your health misadventures or diagnosis can take time, so disability insurance will kick in during this period when you are off work.
Life insurance is a way to protect your loved ones in the event of your death. If they are likely to struggle financially, then taking out adequate life insurance can give them a payout to help them support themselves with the loss of their wage.
3. Emergency Funds or Savings Accounts
Bankrate found that one in five Americans don’t have any savings at all. This figure is up 27% on previous years, meaning more people than ever are financially unprepared for any type of changes to their financial situation.
While it is easy for experts to tell people that 20% of their income should go towards savings, the reality is not everyone has 20% left to simply put away and not use.
It can be a good idea to get into the habit of automating money into savings or emergency funds just to get into the habit of this money leaving your account. If you desperately need to use some, you can dip into it if your account allows for it (reduce how much is automated if not), but try to avoid using it all so you slowly get used to keeping money in your savings. $10 per month is still $1,200 a year. Every small amount you can afford will help and give you a buffer should the worst happen.
But if you’re asking what the difference is between emergency funds and savings accounts or even sinking funds, the reality is they’re all just different types of savings accounts and are designed to be used for something different.
Sinking or emergency funds are funds designated for specific issues. Your emergency fund can be allocated for work absences and could be built up to hold three to six months’ worth of your income and held until you need it. If you don’t, then you have a lump sum to use in the future. But this pot can help you avoid dipping into your main savings account if you need that for other expenses. Sinking funds, on the other hand, are typically used for expenses outside of everyday living costs. This could be for auto repairs specifically or saving for a new auto. You can have one for replacing one or more appliances or for things like birthday presents, holiday season, or vacations. You can have one main account to use or split it up into many different ones depending on your needs, but you should try to build some savings to help you improve your financial future and ward off disaster.
4. Budget Correctly
Knowing how much you need to live off as a minimum will help you massively if your income changes quickly. No one wants to think their life will change, but nothing is guaranteed. Budgeting and knowing your minimum income to pay all of your essential bills will help you develop a better plan of action should this happen.
Record your income and outgoings without all of your nonessential spending to see how things balance. This will give you an idea of the least amount of money you need to live on (and will help you set your goals for your savings to cover your income if this is in your plan). Then look at what you spend on nonessentials such as going out, day trips, coffee shop visits, purchases from shopping trips outside of your food and toiletries, etc.
Not only will you see where you spend your money, but it will also give you a better idea of where you stand currently and the impact a reduced income can have on you.
Being in the best financial health possible isn’t always an easy feat and requires time and dedication on your part to get to a place where you can relax. But putting good money habits in place now will help you in the long term.