Occasionally, businesses may need to reduce operations due to unforeseen circumstances. This can have a trickle-down effect on employees. In those times it’s important to make sure you’ve considered financial protection issues as emergency savings, identity theft and various forms of insurance. This is the latest in a series of articles on personal finance that commemorate Financial Literacy Month in April.
Emergency savings
Even a minor financial setback can have a lasting impact without emergency savings. Without emergency savings, you may have to rely on high-interest credit cards or loans to pay for an unexpected expense. Or you might have to draw from a source of savings that has another purpose, such as a retirement fund, but such funds often charge early-withdrawal penalties.
Because emergencies are unpredictable by definition, deciding on the amount you need to keep in an emergency fund is a challenge. One approach is to consider the unexpected expenses you've had in the past and how much they cost, and then base your fund on that amount. While it can be very difficult to set aside any money when you're living from paycheck to paycheck, saving any amount at all can provide some financial security if you do it each month.
Strategies
The best strategies for saving for an emergency fund depend on factors such as the specific emergencies you're saving for and the predictability of your income. If you determine that your ability to save is limited, manage your cash flow more closely and place unexpected money such as a tax refund directly into emergency savings.
If you're earning a regular salary, have a system in place that will allow you to make regular contributions to an emergency fund. You can easily do this by setting up an automatic transfer from your primary checking account to the emergency fund at regular intervals, typically every pay period.
Set goals to help you stay on track with your emergency fund, especially when you're just getting started. You can easily calculate how long it will take to reach a given goal based on the amount of your contributions and how often you make them. Monitor your progress at regular intervals for encouragement to continue saving over the long term.
Identity theft
Identity theft is the deliberate use of someone else's identity with criminal intent. The growing accumulation of personal data in corporate databases is vulnerable to identity theft. In response to this threat, a variety of services, including security freezes, fraud alerts and identity monitoring, have become available at little or no cost for protecting your identity.
Security freeze
A federal law that became effective on September 21, 2018, allows consumers to freeze and unfreeze their credit records for the three major credit reporting bureaus, Equifax, Experian and TransUnion. A security freeze can prevent someone from opening a new line of credit in your name. You’ll need to lift this freeze before you can open a new credit account yourself.
The federal law does not apply to parties that request your credit history for non-credit-related purposes such as employment, insurance and tenant screening. Some states allow credit reporting companies to charge a fee of up to $10 for placing and lifting a security freeze, though the service usually is free.
Fraud alert
You can also place a fraud alert on your credit report if you believe you've become the victim of identity theft or are about to become a victim. This status requires lenders to take additional measures to verify your identity before opening a credit account in your name. Fraud alerts can last for up to one year, although an extended seven-year version is available provided you have a police report or a Federal Trade Commission Identity Theft Report.
Identity monitoring
Identity-monitoring services track your personally identifiable information for unusual activity that could indicate identity theft. These services typically cost only a few dollars a month, although some charge more than $15 a month. Some companies whose personal data has been hacked or other compromised will provide free credit-monitoring services to those affected by the data breach.
Beware of companies offering free identity-monitoring services, as this is usually only for a trial period.
Insurance is a time-tested means of protecting yourself from unexpected financial loss. The most common types of insurance are life, home and auto.
Life insurance
Life insurance may be classified into term life, universal life and whole life.
Term life insurance is for a specified time period, during which you can exchange it for a permanent life policy. Its primary purpose is to protect your family until a financially significant milestone, such as children graduating from college or a new business becoming self-sustaining.
Universal life insurance provides a guaranteed death benefit for a specific term or for a lifetime, depending on your choice. This benefit is based on a particular market indicator in the case of indexed universal life and investment performance in the case of variable universal life.
Whole life insurance is a lifetime insurance policy that is permanent. Premium costs and benefits are based on the desired cash value, which generally is higher than that of the other types.
Homeowner’s insurance
Homeowner’s insurance protects homeowners from damage to their home and personal property within the home. It typically covers losses due to natural disasters, theft and injuries that occur to people while on the property. Homeowner’s insurance is different from mortgage insurance and home warranties.
Auto insurance
The minimum amount of auto insurance that drivers are required to carry varies by state. Many states require you to have four basic types of coverage, though the amounts of required coverage will differ.
The four types are bodily injury liability, property damage liability, personal injury protection (no-fault) and uninsured/underinsured motorist protection. Not all states require the last two types of coverage, though, so check with your state insurance commissioner’s office for the minimum requirements in your state.
