The 5 Pillars of Personal Finance, Pillar #3: Protect
The topic of personal finance can be intimidating for newcomers. There is so much to learn; where do you even start? But you don't have to be a personal finance expert to create a healthy, successful financial life. You just have to understand some basics. Those basics are called the 5 pillars of personal finance:
Earn
Save and invest
Protect
Spend
Borrow
Today we explore the third pillar, protect.
Protect
There can be a lot of unexpected events in life; an accident, injury, illness, death, job loss, natural disaster, fire. The list goes on! In some cases, your money can help protect you and your family from these kinds of events, but you have to ensure that you've protected your money against them too.
Emergency Fund
Having an emergency fund is arguably the most important financial move you can make. An emergency fund is money set aside for unexpected and unavoidable expenses like a vehicle or home repair, a medical or dental expense, or a period of unemployment.
Your long-term goal is to have three to nine months of basic expenses in your emergency fund. This amount is typically meant to see you through a period of unemployment, be it due to a job loss or an inability to work due to illness or injury.
Your short-term goal is an emergency fund of $1,000. This amount can cover a lot of life's unexpected expenses.
An emergency fund offers protection from having to potentially go into high-interest debt. If you have an emergency fund, you won't have to rely on things like credit cards or payday loans if the unexpected happens. Because once you get into that kind of debt, it's hard and costly to dig yourself out.
Insurance
Insurance is a product that you pay for every month, and hope you never have to use! But not having insurance or being underinsured can be financially devastating.
Health Insurance
Medical care is very expensive in the U.S., and without health insurance, an illness or injury can result in having to declare bankruptcy. That's sometimes true even with insurance, but protection is about mitigating risk as much as we can.
Many employers offer health insurance to their employees, and U.S. citizens may be eligible to buy subsidized coverage on the healthcare marketplace. Non-citizens can buy private health insurance, which can be expensive. But there are options for low-cost medical care, and if you need medical care, hospitals cannot legally turn anyone away regardless of their legal status in the U.S. or ability to pay.
Auto Insurance
Almost every state in the U.S. requires drivers to have auto insurance. It's illegal to drive without it, and in the event of an accident, especially if you were at fault, you could face financial ruin.
Homeowners Insurance
There are no laws that require homeowners to have insurance for their dwellings, but if you have a mortgage, most lenders require it. Homeowners insurance can help rebuild or repair your home in the event of things like fire, water damage, wind damage, or liability if someone were injured or killed on your property.
Renters Insurance
Many of the same issues that homeowners could face could be faced by renters as well. Renters, however, aren't protecting the dwelling; that is up to the landlord, but their own possessions. If your apartment were to burn down, for example, the landlord's insurance would pay to repair or rebuild the apartment, but it does not cover a renter's possessions.
Renters insurance also protects the renter from liability costs if someone were killed or injured or caused property damage in the apartment due to the renter's negligence. And renters insurance can provide living expenses coverage if the dwelling is damaged or destroyed by a covered event that makes it unlivable.
Umbrella Insurance
Auto, home, and renters insurance offer liability coverage that will help protect your assets from a lawsuit, but every policy has liability limits. If you have accumulated substantial assets, those liability limits may not be high enough to protect you if you were to lose an expensive lawsuit.
Umbrella insurance can offer additional liability insurance. For example, if someone sued you for $500,000 for an injury that you were at fault for, and your homeowners liability only covers $300,000, you would be responsible for the remaining $200,000. Umbrella insurance would cover the additional cost.
Life Insurance
If you have people who depend on you financially, you need life insurance. Life insurance is meant to replace your income for your family if you were to die.
Disability Insurance
While disability insurance can provide in the event of an injury suffered on the job, it also provides in the event of a non-work related issue. If you were unable to work due to cancer, arthritis, or diabetes, for example.
If you are ill or injured and unable to work, disability helps supplement your lost income, typically replacing 40% to 70% of your base income.
Long-Term Care Insurance
Long-term care means things like in-home assistance to help with everyday tasks that you can no longer manage on your own or a short or long-term stay in an assisted living facility. This kind of care is very expensive. The average cost of a private room in a nursing home, for example, is $9,000 a month.
Genworth publishes the cost of different types of long-term care according to the area, and the prices are shocking. Even the healthiest retirement savings plans can be quickly wiped out, given these costs. Long-term care insurance can help pay for these expenses.
Credit
Credit is an important part of the U.S. financial system; perhaps more than any other country, America runs on credit. If you want to rent an apartment, qualify for some jobs, or borrow money, you need a credit score. If you want to save money, you need a healthy credit score. The better your score, the lower interest rates you'll be offered when borrowing money, and interest is the cost of borrowing.
Upwardli can help you grow and improve your credit score. Get pre-approved instantly - no credit check or deposit required! Each account includes an unsecured line of credit designed to build credit fast. What gets measured, gets managed! Track your progress and watch your credit score grow. You'll also get personalized insights to help grow your score even faster.
There are two aspects of protecting your credit; making sure you don't do things that will hurt your score and protecting your personal information. Criminals can do a lot of damage if they get ahold of your credit card or banking details or sensitive personal information like your name, date of birth, Social Security number or ITIN, usernames, and passwords.
Take care of your money so your money will be there to take care of you when the time comes.
In our next article, we'll discuss the fourth pillar of personal finance, spend.