Money is a ubiquitous stressor. 71% of Americans say that money is a significant cause of stress in their lives. Financial stress is frequently caused by a lack of money, but almost 60% of high income earners making over $175,000 annually still worry about money. There are some money-related stressful events that you can’t predict or prevent, but there are great tools available to reduce your financial stress and lessen the impact of those unexpected events.
1. Emergency fund
An emergency fund is versatile and can help protect you from a wide range of unexpected financial events. Lose your job? Your emergency fund can help bridge the gap until you find a new one. Get in a car accident and need a rental car? Emergency fund. Pet needs expensive surgery? Emergency fund. A study conducted earlier this year found that 42% of Americans don’t have an emergency fund, which could help explain why so many are stressed about money.
If you are one of those 42%, where do you start? Check out the Financial Order of Operations. Building a full emergency fund is step 4, so depending on where you are at, it may not be an immediate priority. Once it is, consider saving at least 3 to 6 months worth of expenses in a high-yield savings account. Depending on the potential financial risks you face, such as a higher risk of job loss, a larger emergency fund may be more appropriate.
2. Investment accounts
Most investment accounts aren’t meant to be accessed until retirement, but they can still reduce a great deal of financial stress in the present. 61% of Americans age 50 and older are worried they don’t have enough money for retirement. Start investing for retirement as early and often as possible. It’s rare to find someone that wishes they would have invested less for retirement, but all too common to find people that wish they would have saved more or started saving earlier. Check out our free download, “How Much Should You Save?,” to see exactly how much you could have saved by retirement based on when you start saving and how much you invest.
3. Insurance
Paying for insurance coverage can often feel like a waste of money – until it isn’t. There are many different types of insurance out there, so I want to give a quick rundown on which types of insurance coverages may be worth it.
Life insurance isn’t necessary for everyone, but if you have financial dependents, like a spouse or children, consider using term life insurance as a tool to cover your family in the case of your untimely death. Almost everyone should consider their need for homeowners or renters insurance, auto insurance, and health insurance. Umbrella insurance may be worth a look if you have a significant amount of assets. If you live close to a body of water that is prone to flooding, flood insurance may be a smart idea. Disability insurance may be a necessity if you are at risk of suffering a long-term disability that would impact your ability to continue earning the same wages.
Check out this article to learn more about different types of insurance: “What Types of Insurance Do You Need?”
4. Financial plan
Whether you are a DIYer or work with a fee-only financial advisor like Abound Wealth, a financial plan can help address some of your biggest money concerns and preemptively eliminate money stressors. A financial plan can help you identify and prioritize your financial goals and develop a plan of attack for accomplishing those goals. Without a plan for your money, you are just a rudderless ship drifting about the sea. Give every dollar a job and let your money work harder than you do.
5. Estate planning documents
If there’s one thing we all enjoy, it’s sitting down and thinking about what happens after we die, right? Nobody really likes estate planning, and it might as well be called death planning, but it can greatly reduce your financial stress knowing that your family and assets will be taken care of according to your wishes. There are three major estate planning documents that you should consider a top priority to put in place.
A will and/or a trust can be used to designate the distribution of all assets not already covered by beneficiary designations and can also direct assets into trusts to support family members. An advance healthcare directive or living will outlines your healthcare wishes if you are unable to make decisions yourself and can designate a proxy to make decisions on your behalf if you become incapacitated. A durable power of attorney can make financial, asset, and other legacy-related decisions on your behalf if you become incapacitated.
Unexpected stressful financial events in your life are unavoidable, but being unprepared for those events is completely avoidable. By using the tools available to you, including an emergency fund, investment accounts, insurance, a financial plan, and estate planning documents, you can be better prepared for many of life’s financial risks.
