How to Be Financially Prepared

By Katy Song, CFP®

How many times have you heard, or even said, the Boy Scout’s moto, “Always be prepared.” When you become a parent, this takes on a whole new meaning. For most, it means having a well-stocked diaper bag, wipes, change of clothes, snacks, beverages, favorite toy, lovie, etc. The list goes on and on.

But what does it mean to be financially prepared? The first thing that comes to mind is usually an Emergency Fund. The rule of thumb is to keep between three to six months of liquidity (cash or CD) in a separate account to cover expenses in the event of an unforeseen job loss or true emergency. If you do not have an Emergency Fund, building one is a priority for financial preparedness. Tip: Make sure your Emergency Fund is in an interest bearing account earning at least 1%. Set a target amount for this account and determine a floor, below which you will never go unless you are in dire straits.

Insurance is also important, whether it is home, flood, earthquake, auto, umbrella or life. No one wants to pay insurance premiums year after year, and it can seem like a waste of precious cash when you never even file a claim. However, insurance is critical for risk management. Essentially, you are buying a certain level of protection in the event of a catastrophic loss. You have to weigh the level of coverage, how much risk you want to retain and how much you can afford to spend. While you want to make sure your coverage is sufficient, you can reduce your premiums by retaining risk through higher deductibles. For example, most insurance companies will encourage you to maintain a very low deductible, like $250 for auto or $1,000 for flood. Tip: If you have and Emergency Fund or are living within your means each month, you can afford to retain more risk and increase your deductible to $1,000 for auto and up to $5,000 for flood. This will save you hundreds of dollars a year.

Retirement savings and planning is longer-term financial preparation, but it takes decades to build. If you turned down or off your retirement contributions when you bought a home or had kids, now is the time to re-evaluate if you can increase your pre-tax contributions. It is also very easy for a SAHP to not save for retirement since the funds are not automatically withdrawn from your imaginary paycheck. Not only is meaningful and consistent contributions each year critical to meeting most retirement needs, but you also get a tax benefit. We like those! Tip: For a SAHP, you can save up to $5,000 per year pre-tax in a traditional IRA. That is $417 per month. Create an automatic transfer from your checking or savings account to a traditional IRA so that you are staying on top of your retirement savings throughout the year.

Make sure your financial house is in order. Good housekeeping includes knowing where all your accounts are (checking, savings, insurance, retirement, health care providers) and how to access them. In addition, make a list of important people, phone numbers and instructions, and give this list to a family member or close friend in the event of an emergency.

Having a comprehensive financial plan in place for your family is the ideal way to be financially prepared. The goal of a financial plan is not only to ensure that your financial house is in order and that you have all of the items above working for you, but also to proactively plan for the fun things in life, like growing your family, buying a home, remodeling, education, travel and financial independence. With a well laid out plan, you have the vision and tools you need to be prepared for the worst and take advantage of the best life has to offer.