Building Financial Security for Your Family
Photo courtesy of mikebaird
When it comes to money, most of my decisions are based on how it will help me achieve either of my top two financial goals:
- Security
- Freedom
Today I want to talk about the first of those goals: financial security.
My absolute primary financial objective is to make sure that my family always has enough money to meet their basic needs. No matter what’s going on in our lives, I want to be able to afford food, shelter and clothes. Beyond that I’d like to always have enough to keep their daily lives stable so they can keep going to school, meeting up with friends, and the other little things that make up a regular life.
We can live without luxuries, but I want my family to also live without the worry of money issues causing a big disruption in our lives.
Building that kind of financial security takes some work and it takes some time. So how do you get there?
Live below your means
The very first step in building financial security is learning to live below your means. None of the rest of the steps are possible if this isn’t in place.
What does it mean to live below your means? Very simply, you can’t spend every single dollar that comes into your bank account.
The extra money between what you make and what you spend can be set aside as savings, or at the very least it can serve as a buffer when those unexpected expenses come along.
But if every dollar you make is spent, you’re putting your family in a dangerous situation where it would be difficult to handle even the smallest financial hiccup.
Build short-term savings
I don’t care what interest rates are, I’m always going to have a good chunk of money in a good old-fashioned savings account. The reasoning is very simple: life happens and I want easily accessible savings on hand to deal with it.
When your car breaks down, where will that money come from? When your roof has a leak, how will you pay for it? What about when your son breaks his arm, or your daughter has a cavity, or you get laid off and the unemployment checks aren’t enough? These are the kinds of situations for which you build both an emergency fund and saving to spend accounts.
Where people get into trouble with this kind of savings is when they start worrying about the interest rate they’re earning. Beyond taking simple steps like using an online savings account instead of one at a traditional bank, the interest rate is really not something you should worry about here.
When you reach for higher returns you end up taking on more risk and open up the possibility that the money won’t be around when you need it. Do yourself a favor and keep this money somewhere you know is safe.
Make sure you have good insurance
No matter how good you are at saving, it’s almost impossible to save up enough to protect your family from some of the worst-case scenarios it might face. This is where insurance can truly be a life-saver.
Insurance makes sure that your family is financially protected from uncommon but potentially devastating events. Life insurance can pay off debts and replace your income if you were to die. Disability insurance will ensure that income remains relatively steady in the event of long-term sickness or injury (which is more common that you might think). Liability insurance on both your auto and homeowners/renters policies ensures that a lawsuit wouldn’t cripple your finances. And of course a good health insurance plan will help your family get the care it needs, no matter what the cost.
I’ve written before about how much I love insurance because of the security it gives me. It’s really the only way I can afford to provide a truly stable financial environment for my family, so it’s one area where I refuse to skimp.
Invest for the future
Once you’ve got the foundation laid with the steps above, it’s time to start planning for the future. One of the greatest gifts you can give your children is ensuring that you yourself are financially independent so that they won’t have to support you in your old age. The best way to do that is to make a plan and start investing now.
The good news is that you can do this relatively simply. Start by making a very simple retirement plan to determine how much money you should be saving. Then you can work through this two-part series on how to start investing.
Remember that the best investment strategies are often the simplest and focus most of your energy on the basic steps of starting now and saving as much as you can.
The best part of investing for your future is that you’re not only increasing your family’s financial security, but you’re also bringing yourself closer to financial freedom. Imagine a day where you and your family not only have the money to live your life without financial worry, but you also have the time to enjoy it. Isn’t that something worth working towards?
Great tips! I think living below your means is the easiest and best way to get started on building wealth for your family – can you imagine how many more people would be financially secure if they simply didn’t try and spend every penny (and then some) they brought in every month?
Agreed. It’s such a simple concept but it’s one that can nevertheless be difficult to implement. But if you aren’t at least doing that, you really can’t make progress on anything else.
I have similar goals for security and freedom. It’s important to keep those at the forefront of your mind when making decisions of how to spend your time, money, and making career/education choices. I ultimately want to have enough money that my family does not have to stress out about it and never have to worry about not having home, food, etc.
It would be nice to be 100% free to make decisions regardless of the financial impact. In the meantime, I want to protect us from some of the more likely negative scenarios. Luckily both goals work towards the same end.
Very good tips. I think most people with a family will say that financial stability is the main goal and it can be achieved by following the steps that you outlined. Living below your means is probably the most significant step and once a family can accomplish that, they will have the funds necessary to save for the short term and the long term.
Well said Andrew.
What remarkably simple & boring advice. And I genuinely mean that in a very positive way!! 🙂
Haha, thanks!
Great, easy steps to follow to ensure financial security. My parents unfortunately started this late in the game, after my dad was laid off. I definitely want to make sure I never go through what they did with the endless anxiety and worry over money. It’s also why I keep a decent sized emergency fund.
I think it’s great that you’ve been able to learn from the more negative aspects of what’s around you. It can be as important to know what we don’t want as it is to know what we want.
I’m with you, Matt. Security and freedom would be my top priorities too. So many people get caught up in having money sitting in a savings account and earning pennies in interest but like you – I say get over it. This money is for your emergencies – which will happen. Its purpose is not to grow – that is why you also need to invest. Those are two different buckets of money with two very different purposes.
Well said Shannon. It always makes me nervous when people start getting into the interest rate conversation because it makes me think they’re about to do something risky with the money they need to keep safe. It’s so important not to confuse the money you want to grow with the money you want to protect.
The stat about becoming disabled before retirement age (1 in 3?) is shocking. We currently have some long term & short term disability coverage through my employer, but I hadn’t paid it too much attention. But with a 1 in 3 chance, I’ll have to give my options a long look this year during open enrollment. Thanks for this info!
I would look into independent long-term disability insurance if you can. Your options may be limited given your employer coverage, but securing it independently is really the best route because it will follow you wherever you go. You can usually get better coverage as well, meaning fewer exclusions.
If there is no cost through my employer, would you still recommend purchasing independently? I worry about buying double coverage and confusing the issue of who is primary. Might I be fine simply waiting until I end my employment to go that route of purchasing independently?
It’s a good question. I’ll preface this by saying that I’m definitely not an expert on disability insurance. But here’s how I would think about it.
First off, how impactful would it be to you and your wife if you couldn’t work anymore? Consider the fact that you may require medical care and/or extra help with daily life for at least some period of time. Maybe in your situation that would simply delay retirement for your wife, which wouldn’t be a devastating outcome. But if it would be a big deal, then I would consider it further.
The problem with waiting until the end of your employment is that you don’t know what will happen between now and then. If you’re in perfect health at that point, then it would work out fine. But what if you are disabled beforehand in a way that your employer plan doesn’t cover? Then you’re in trouble. That of course leads you to the need to understand what your employer plan does and doesn’t cover. I’ve heard of employer plans having big loop holes that could put you in a tough spot. Make sure you understand what those are (or are not) and that you’re comfortable with them.
The other problem is that you can only get disability insurance if you have income. If you’re in a low-risk job now and moved to a more high-risk job, your premiums would increase or there would be more exclusions if you waited. And you couldn’t get the insurance at all until you got the new job, and there’s always the possibility of disability happening during that period in between. Of course if you’re at retirement stage at that point, you have no income because you don’t need it and therefore disability insurance is irrelevant.
There’s also the issue of taxation. Your employer plan is likely paid with pre-tax dollars, though it’s possible you could ask them to do it post-tax. If it is pre-tax, then any benefits paid out would be taxable. With an independent plan you would pay premiums with post-tax dollars, making the premiums more expensive, but any benefits would be received tax-free.
The final consideration (that I can think of) is whether you’d even be eligible for independent insurance at all. I believe many insurers will either not cover you or will cover you for less if you have employer-provided coverage.
In the end it comes to how important your income is to future goals, how good the coverage is from your employer, how certain you are of your continued employment, how much coverage you think you need, and how much risk you’re willing to take on. Not easy decisions.
I agree, but I would add planning for your future is an important part of it.
Would you distinguish between that and “investing for the future” as I mention?
We have even purchased umbrella insurance policies that extend above and beyond our basic insurance coverage. That’s how secure and protected I want to be.
We have umbrella insurance as well and I agree that it’s an effective and cheap way to provide some extra security. In my head that’s part of the liability insurance mentioned, but perhaps I should have made that clearer. Thanks for explicitly bringing it up.
I really agreed with you Matt! I hope someday I will be financially independent but right now I’m on the saving part and hopefully next year will be good to me. 🙂
Thanks Clarisse. Sounds like you’re off to the right start.
Living below your means is definitely the top one. You should invest in yourself to improve your means. Matt when do you gt your CFP certification.
I currently still have to pass the experience requirement. I’m a few years away at least.
I’m with you on the insurance. I’ve heard too many stories of bank accounts being set up in the name of families whose husband and father left them with nothing. I’ve heard too many people say it’s a gamble to pay for insurance, but it’s really a gamble NOT to!
I agree. With insurance the whole point is to protect yourself from the unlikely but devastating scenarios. The likelihood is that you’ll end up spending more on it that you get from it. But if you need it, boy will you make out well.
Good ole personal finance 101, we all need to hear this every now and then. Now that I have family of my own, security became my top priority and freedom really far second.
I’m with you on security easily being priority #1. My son (soon to be sons) relies on me for financial support and that’s really not something I want to jeopardize. Even if that means delaying freedom a little big longer.
Lately I’ve been thinking a lot about self-sufficiency and its correlation to living below your means. Every time you can find a way to provide yourself with one of your basic necessities without spending money on it, that’s a little less that money (or more pointedly, the lack thereof) can impact your family. I think it’s part of why I’m starting to get so interested in gardening, and in encouraging people to start growing some of their own food, even in urban areas, even if it’s just as small as a little herb garden on the porch or a hanging tomato plant.
Spending less is a double benefit because it not only allows you to save more, but it requires you to save less. It’s an incredibly powerful tool.
Its kind of scary how easy it is to be under-insured. I was in an accident last year and the property damage total came in at <$100 less than my limit and the personal injury total came within a few dollars of it. After that, I paid the extra few dollars to increase the limits!
I think many people are under-insured and have no idea. Especially when it comes to liability insurance like you describe here, the cost is so small compared to the benefit that it just makes sense to make sure you’re properly covered.