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How To Build a Financial Safety Net

This post was featured at Dollar Frugal.

Nothing will bring you greater peace of mind in an emergency than knowing you are financially secure. A financial safety net is often the difference between going into debt-sometimes life-changing debt-and keeping your head above water. Not only is this safety net vitally necessary, but it's within anyone's means; it only takes a little planning, a little discipline, and a little time. But where to begin? Financial planning can be quite intimidating, but far from impossible. Here is a step-by-step plan for your own financial safety net:

Step 1: Investigate insurance. Insurance is of the utmost importance because it can off-set or even prevent a financial emergency. If you have others who depend on you financially, it is important to have both life insurance and disability insurance. Life insurance provides income in the event of your death, and disability, should you become injured and unable to work. Check with your employer to learn what insurance programs are available. If you are self-employed, speak with an insurance expert at a company you trust to see what options you have.

Perhaps the most important insurance to have is health insurance. In the United States, health care costs are astronomical and can ruin you financially. Protect yourself, and protect your money.

Step 2: Lose the debt. What good is a safety net if you're already at rock bottom? Decide now that you've had enough of debt, and make a plan to eliminate it from your life. Begin by identifying areas where you can cut costs and save money. This could mean anything from cutting up credit cards, getting better rates on your insurance, downgrading to a more affordable car or home, etc.

Once you find ways to save, apply that money to your highest interest debt first. Once you pay that off, apply all that payment money to your next highest interest debt, and so on. Once you are debt free...

Step 3: Build an emergency fund. An emergency fund is money used for just that: emergencies. It is not for splurges and other expensive luxuries. This fund is an important aspect of your financial safety net, providing you with a chunk of money to be used when life throws unexpected and unpleasant surprises your way. Try to save 3-6 months worth of living expenses, or more if possible. This fund will keep debt at bay, and help to protect your assets and your credit score.

This money is best kept in a money market, where it can be accessed easily and quickly, and where it can earn a little money for you while it sits unused. Online money markets, such as through INGDirect or HSBC, offer you interest rates as high as 5% for keeping your money with them, helping to build your fund even faster.

Step 4: Invest for the future. The final step is building a safety net for your financial future: retirement, children's education, whatever that may be. Once your debt is controlled and your emergency fund in reserve, you can begin socking away cash for the future. Great ways to do this include contributing to your 401(k), a Roth IRA, 529 savings plans, and others. Research on your own, or talk with a financial adviser to map out a course for your future finances.

Completing these four steps will provide you with a financial safety net so you can feel secure...no matter what life throws at you.

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