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Building a Financial Safety Net in Case You Fall
The Savvy Consumer

By Teresa McUsic

Just as you should have an emergency plan for your family in case of a disaster, so, too, should your finances have an escape hatch.

Whether it’s a major emergency due to the illness or death of a breadwinner, or a little less dramatic like your air conditioning goes out or your car won’t start, there are certain protections you can put in place to avoid financial disasters.

1 Emergency fund. Financial planners recommend that everyone maintain emergency reserves equal to four to six months of total spending, not your monthly salary, according to Bryan Clintsman of Clintsman Financial Planning in Southlake.

Clintsman points out that money in your emergency fund can still earn a return. The amount you earn won’t be as large as an investment return, but it will be just as available as it would be in a checking account or under your mattress.

He suggests keeping about one month of total spending in a bank savings account to provide immediate accessibility and overdraft protection for checking accounts. Put the rest in a money market account, often at a brokerage account that can also be accessed quickly, Clintsman says.

To find the best rates either locally or nationally on savings accounts and money market accounts, go to BankRate.com.

Such a fund can be lifesaving financially if you lose your job or have unexpected expenses.

2 Safe-deposit box. Insurance agents will tell you that placing a video or DVD record of your household belongings somewhere outside your house will help expedite your claim in the event of a disaster. A safe-deposit box is also a good place to keep stock certificates and U.S. bonds; marriage, birth and death certificates; Social Security cards and children’s vaccination records; copies of wills, vehicle titles and other important documents; as well as jewelry, coins and small heirlooms.

But some things should not be put in a safe-deposit box, including passports, which may be needed urgently when a bank is closed for the night or over a holiday. And remember, contents of a safe-deposit box are not insured by the Federal Deposit Insurance Corp. up to $100,000, like bank accounts.

Annual fees range from around $20 to several hundred dollars, depending on size.

3 Will. Everyone should have a will, a durable power of attorney, a financial and medical power of attorney, and a directive to physicians (living will). If not, the state will make many of those decisions for you, says Lisa Jamieson, a partner with the Shannon, Gracey, Ratliff and Miller law firm in Fort Worth.

Without a will, minor children will have guardians appointed by a court administrator, and the guardian will have to report to the court every year to approve spending of the estate, Jamieson says. And assets may be divided among spouse and children in ways not intended by the deceased.

Texas has a very efficient probate system if you have a valid will when you die, Jamieson says. And be careful of handwritten or software-created wills — they often do not totally comply with Texas law or leave out major items such as trusts for minor children.

Local attorneys typically charge between $500 and $3,000 for a will and related documents, depending on the complexity of the case. Look for experienced and board-certified attorneys.

4 Disability insurance. Only 40 percent of U.S. employers offer short-term disability and 30 percent offer long-term disability, according to a Labor Department National Compensation Survey.

That means more than half of Americans would be unable to pay their bills or meet expenses if they are disabled and unable to work.

“Disability insurance is a way to cover your most important asset — yourself,” says Scott Dial, an insurance specialist in Dallas with Guardian Life Insurance.

Social Security offers a disability benefit, but you must prove that you cannot do any job, not just your own, and the average monthly benefit this year is $1,004.

When looking for a private policy, pay attention to the difference between noncancelable policies and guaranteed renewable policies. Noncancelable is just what it sounds like: Your policy cannot be canceled. But it also means that your monthly premiums cannot be increased over the life of the policy. Premiums on guaranteed renewable plans can be increased over time, but the policies are often much cheaper.

Several Web sites offer information about the different kinds of disability insurance to help consumers make a better decision, including DisabilityCanHappen.org and LifeHappens.org.

5 Life insurance. Young families generally need five to seven times their annual salary, Clintsman says. As net worth increases and children get closer to leaving home, the need for life insurance starts to gradually decrease, he adds.

Term insurance is the most efficient way to buy the amount of insurance you need, Clintsman says.

“Buying permanent insurance products” such as whole life, universal life and variable life “is simply mixing insurance with investments where both are more expensive than doing them separately,” he says.

When buying life insurance, be sure to consider what you are seeking to replace, whether it’s an annual salary, future education costs for your children, or final bills for a funeral or unpaid debts.

Bottom line: It pays to be financially prepared.