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How to Create a Financial Safety Net During National Safety Month

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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The coronavirus outbreak has left a lot of big question marks for all of us — and data analyst Madison Ball and his girlfriend Julia Nicholson are no exception. Nicholson, who works for the housing department at Reed College, recently got news that she may be furloughed this fall if students don’t come back in person. This means the couple’s two-income household would drop down to one.

Fortunately, Ball has put a lot of effort into building up a multilayered financial safety net, including both a hefty cash emergency fund and a healthy Roth IRA. Having a plan for financial uncertainty helped him feel in control during a time of so much economic turmoil.

It just so happens that June is National Safety Month, so even if your finances are unaffected by the pandemic, it’s the perfect time to start or strengthen your financial safety net.

7 important links in your financial safety net

Here are some of the most important steps to shoring up your finances, this month and beyond.

1. A thoughtful budget

The first step to improving your finances is to understand what, exactly, they look like. And the only way to do that is to create a budget.

A budget could be as simple as a handwritten spreadsheet with your monthly income at the top and your expenses listed out underneath it. Or, you could take advantage of one of the many online budgeting programs available, like YNAB, Qapital or Mint. Their software allows you to link your checking account, credit cards and other financial products in order to automatically track your spending, while setting custom goals and limits for different expense categories.

Once you have a basic budget in place, you can begin to look for places where you might be saving more. Make sure to account for all your necessary expenses, like housing, transportation and groceries, and then take a closer look at your discretionary spending — dining out, streaming services, etc. Can you find ways to make cuts in either category? Doing so will give you the opportunity to funnel more money towards your safety net.

2. A cash emergency fund

Even with an ironclad budget, life has a way of surprising us — which is why an emergency fund is an absolute must. Whether it’s a job loss, a flat tire or an unexpected trip to the dentist, your emergency fund can turn a minor crisis into a mere annoyance.

Your emergency fund should be readily accessible (which is to say, not invested) so that you can retrieve the money at any time. One of the best places to stash your emergency reserve is in a high-yield savings account, which will still allow you to accrue some interest while staying highly liquid.

How much money should you keep in your emergency fund? Many experts recommend three to six months of living expenses, but a lot of it has to do with your personal circumstances. For instance, a freelance writer, whose income is by nature erratic, might aim to store more like six to nine months worth of living expenses.

3. Insurance, insurance, insurance

It’s nobody’s favorite bill to pay, but insurance is one of those things you’ll be thrilled to have if and when you need it. Furthermore, some insurance products are actually required by law (or by your landlord).

Auto insurance: Auto insurance is required by just about every state in the nation, though the required minimum coverages vary. It’s often not cheap, but it is way cheaper than paying out of pocket if you get into a serious auto accident — and many insurers offer lower premiums to safe drivers.

Health insurance: Medical debt is the number-one reason Americans file for bankruptcy — so although your health insurance premium may be high, it’s still worth budgeting for. If you don’t get health insurance through your workplace, you can purchase a plan on the marketplace.

Disability insurance: If you lose wages due to a non-work-related illness or injury, disability insurance can help by providing short-term benefits.

Life insurance: Life insurance can help ensure that in the event of your death, the people you leave behind won’t be left in a bad financial position. It can help replace the income you would have generated during working years or act as a wealth transfer vehicle. It’s a very good idea to have life insurance if you have a family or a business.

Home or renters insurance: If you own your home, homeowners insurance can protect your large investment from damage, theft and more. And if you’re renting, renters insurance can cover the cost of your personal belongings if they’re damaged or stolen — as well as liability costs if someone is injured on the property. Depending on your mortgage lender or landlord, these policies may be required, and considering the high costs associated with property damage, they’re well worth considering even if you don’t have to.

And more: There are many other sorts of insurance products available, like pet or travel insurance, that you might consider looking into — but make sure you research the pros and cons of speciality insurance before you buy. You may end up paying for coverage you don’t actually need.

4. A debt reduction plan

The faster you can pay off your debts, the more time you’ll have to save the money you need for your safety nets. There are multiple ways to go about it, like the avalanche method (paying off the debt with the highest interest rate first, while making minimum payments on the rest) and the snowball method (paying off the debt with the lowest balance first, while making minimum payments on the rest). The strategy you choose is up to you — so long as you make sure you do, actually, choose and implement one.

5. A healthy retirement fund

You can think of your retirement fund as a future safety net — one that helps ensure you’ll actually enjoy your well-deserved break when the time arrives. If you work for a company that offers a 401(k), you can take advantage of that vehicle, especially if a match is offered, but you might also tack on a traditional or Roth IRA.

Ball likes to stash cash above and beyond his cash reserves in his Roth IRA, because unlike other types of retirement funds, you can always take Roth contributions (though not gains) out, penalty-free. Of course, the idea is to leave them alone unless you’re really in a pickle, since letting your investments grow is the best way to ensure you’ll meet that big goal down the line.

6. Multiple income streams

We all know the old saying about putting all of our eggs in one basket. Similarly, having only one income stream can be a risky proposition.

If you don’t live in a household with multiple income streams — and even if you do — consider picking up a side hustle or trying to find ways to create passive income. Maybe you can monetize your hobby on Etsy or write and sell an ebook. If you have the time and energy, finding ways to make extra money could help you feel more financially secure.

7. An expert opinion

Finally, if you really want to shore yourself up against a potential financial crisis, you might consider hiring a professional. A certified financial planner (CFP) is a good pick, since they’re required to meet strict educational and ethical standards, and they’re held to a fiduciary standard of conduct — which means the interest of their clients must always come first. Generally, choosing a fee-only or fee-based advisor over one who earns a commission is a better bet, since the former won’t be incentivized to sell you anything. To find someone to help you manage your finances, you can search through the CFP Board of Standards or the Financial Planner Association.

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A 9-Month Money Guide for Expectant Parents

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There’s a lot to expect when you’re expecting — not the least of which is a dramatic uptick in expenses. Children are a blessing, to be sure, but any parent will tell you those blessings aren’t cheap. According to the latest data from the USDA, the cost of raising a child to adulthood tops $230,000.

You’ll certainly have more than your share of things to think about during the nine months leading up to the birth of your new family member, and budgeting might sound like just one more chore. But tackling monetary issues up front can help dissolve some of the overwhelm and stress, which, after all, will only increase once you’re also dealing with midnight feedings and diaper changes.

Here’s an easy month-by-month breakdown to simplify your growing family’s finances.

Month one: budget

A budget is critical no matter where you are in your life cycle, whether you’re a singleton just out of college or a married couple with an established family.

But for those just about to welcome a baby into the world, the flow of money is sure to change — which means it might be time to take a second (or third) look at your ledger. You’ll want to adjust your current categories (like groceries) to include new recurring expenses (like diapers). Kids also grow out of clothes like wildfire.

Budgeting can seem intimidating for those who’ve never done it, but there are a wealth of free budgeting apps that can help you get started or improve what you’ve already got.

Month two: augment your emergency fund

Keeping an accessible cash cushion is another money move that’s a good idea no matter how big or small your family may be. But once kids enter the picture, it’s that much more important.

You may want to adjust your current emergency fund from a three-month supply of cash to one that could cover six months, including the additional expenses Junior will incur.

Early on in the pregnancy is a great time to get aggressive with saving, since you’ve still got time before there’s an extra mouth to feed. Moving your cash into a high-yield savings account can also help you build your emergency fund faster.

Month three: plan for health insurance

Hopefully, you’ve already got yourself covered as far as health insurance is concerned — after all, giving birth is a major medical procedure. But the delivery is just the beginning; your kiddo is going to need their own insurance, too.

The Affordable Care Act requires employers with 50 or more full-time employees to offer those employees health care, and those plans are also required to cover dependent children until the age of 26. However, if you are not insured through a workplace, you may be eligible for coverage through the federal Children’s Health Insurance Program.

Health Savings Accounts, or HSAs, are another option to consider when you’re expanding your family. These incentivized accounts allow you to use untaxed dollars to pay for medical expenses, including copays and deductibles. However, you’ll need to enroll in a High-Deductible Health Plan, or HDHP, in order to be eligible. There are also limits to how much you can contribute to your HSA on an annual basis. For 2020, you can contribute up to $3,550 for an individual and $7,100 for family coverage.

Month four: tackle parental leave

Although U.S. parents are guaranteed up to 12 weeks of unpaid time off for parental leave through the 1993 Family and Medical Leave Act (FMLA), paid parental leave is a far rarer beast — and those who work for small firms with fewer than 50 full-time employees might not even be covered under FMLA.

You definitely want to figure out your employer’s policy on parental leave sooner rather than later, whether that means planning for a gap in your income or just getting your ducks in a row at work. Fortunately, a few states do legally require employers to offer paid parental leave, and other states are considering such legislation for the future.

Month five: figure out childcare

Even if your workplace does offer parental leave, you’re likely planning to go back to work someday, which means someone’s going to have to be responsible for your bundle of joy during the day.

With average American childcare costs ranging from about $5,000 to over $10,000 annually (depending on which state you’re in), you’re talking about basically paying the equivalent of rent each month for your babysitter. Make room for that expense before the baby is born. If possible, shop around to find the most affordable, yet reliable, option — it could make a major difference down the line.

One vehicle for accumulating the savings is a dependent care flexible savings account (FSA), or DCFSA. Typically offered by your employer, these tax-benefitted accounts allow you to use pre-tax dollars to pay for qualified out-of-pocket expenses related to caring for a dependent, including preschool, after-school programs, day summer camp and daycare.

Month six: get ahead of education

As expensive as a newborn is, that cost grows exponentially by the time they reach 18 — thanks in large part to one particularly hefty bill, which is the cost of a college education.

While not every parent plans on paying their childrens’ way through college, if you do, opening a 529 or Roth IRA could help. You might also want to earmark state-sponsored programs that can help ease costs, like Florida’s Bright Futures Scholarship.

Month seven: prepare for tax time

The third trimester is in full swing, and chances are taxes are about the last thing you want to think about — even if it’s April.

But having a kid does change your tax situation, and often in a positive way. For instance, you may be eligible to claim the child tax credit, which can reduce your tax burden by up to $2,000 per child under 17.

You’ll also be able to claim your child as a dependent, which may qualify you for an exemption decreasing the amount of your income subject to taxation in the first place. Finding some extra money in your taxes is never a bad thing — especially two months before you have a baby!

Month eight: consider life insurance

It might not be something you particularly want to think about, but planning for the worst-case future scenario is an important step toward living in a peace-filled now.

Depending on your financial scenario, it might make sense to consider purchasing life insurance for your baby. Some people consider life insurance just another savings vehicle, which might eventually cover costs like college or a home down payment.

But financial planners warn these coverages may be unnecessary — and overpriced. If you do opt to buy a plan, give yourself time to find one that won’t lead to you paying more than you need for insurance.

Month nine: last-minute essentials

As the big day draws near, chances are you’ll be pretty busy. But fortunately, if you’ve followed this guide, you’ll also be in pretty good shape money-wise.

That frees you up to focus on bringing new life into the world and making sure you’re completely ready, stocking your house with the necessities, like diapers and bottles and toys and onesies, you’ve so carefully budgeted for.

Then, when the time comes, head to the hospital (or wherever the delivery is to take place) with as much serenity as possible. Your money is covered, so you can focus on your family — which is the whole point of getting your finances in order in the first place.

Post-delivery

Once baby is home safe and snuggled in their bassinet, the parents’ work is just beginning. Even with as much forethought as possible, you’ll still have some money-related tasks to tackle after the delivery, such as:

  • Creating an estate plan. You’ve tackled life insurance, but you’ll also want to make sure you create or update wills, powers of attorneys or trusts now that your baby’s in the world.
  • Continuing to fund your retirement. It’s easy to get wrapped up in your child’s expenses, but don’t forget to save for your own retirement so you can take advantage of compound interest.
  • Updating your listed beneficiary. If a parent or other family member wants to name the new child as a beneficiary to an insurance policy or investment account, now’s a good time to make the change.

Oh, and don’t forget to get at least a little bit of sleep every once in a while.

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Think Money Can’t Buy Happiness? Think Again

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They say money can’t buy happiness, but in a capitalist society, you do need at least some of it to get by. According to an article published in scientific journal Nature Human Behaviour, we should be shooting for a specific number when searching for emotional well-being — a surprisingly low figure, starting at about $60,000 and ranging to $95,000 per year, depending on global location.

Research also shows that spending money on experiences rather than material objects leads to more overall satisfaction. More specifically, we’ve learned that spending money on *certain* goods and services is even more strongly linked to well-being than income level.

In personal finance writing, we spend so much time talking about what you shouldn’t spend money on. Instead, here are five purchases that can actually boost your overall happiness.

Paying someone to do the dirty work

Although it doesn’t always feel like it, money is a renewable resource: you can always make more of it.

But the same can’t be said for time; we all only have 24 hours in the day.

You can, however, buy yourself more time by paying someone to do routine housework… and research shows that doing so can, indeed, make you happier.

Harvard Business School researchers surveyed over 6,000 American and European earners on how often they outsourced chores like cooking and cleaning. They found that those who engaged in “buying time” in this way experienced a statistically significant increase in happiness.

They also performed an experiment in which they gave participants $40 to spend on either time-saving services or material objects. Those in the former category reported higher levels of satisfaction thereafter.

Even if hiring a full-time housekeeper isn’t in the budget, there are plenty of time-saving services that can be affordable when planned for, such as meal delivery services.

And keep in mind that housekeepers and other home service professionals can usually be hired on a one-time, rather than recurring, basis — so if you just need someone to help out during a particularly busy week, it might be a worthy investment.

Opting for experiences

Imagine you find a spare $50 in your coat pocket — a small, but totally unexpected, windfall.

You could spend it on a new pair of shoes or on tickets to a concert. Which choice would make you happier?

As mentioned above, much scientific research suggests that spending money on experiences rather than material possessions leads to higher long-term satisfaction. Although the shiny newness of objects fades, memories can last a lifetime, leading to “more enduring happiness,” said Amit Kumar, an assistant professor at the University of Texas at Austin, in his doctoral research at Cornell University.

However, opting to spend on experiences isn’t a foolproof metric for avoiding buyer’s regret. For one thing, not all experiences are pleasant or memorable (think: dashing out for lunch on a work break or getting an oil change), and in some cases, saving money may still be the better option.

Saving it up

Speaking of savings…

Although it might not count as “spending” money in the traditional sense of the word, funneling money into your savings account is still a way to allocate your funds.

And as it turns out, research shows that many consumers, and millennials in particular, experience more life satisfaction when they engage in “proactive financial strategies” — like saving some of it.

Given that money is one of the main sources of stress for Americans, it makes sense that padding your emergency savings cushion could lead to a greater sense of well-being. In fact, one report found that increasing savings by 10% had a greater impact on life satisfaction than being happily married, which is a pretty impressive statistic.

Investing in others

When we think about spending money, we typically think about ways we might spend it on ourselves. But some studies show that prosocial spending — money spent on others — can lead to more satisfaction.

According to an article by researchers Elizabeth Dunn, Lara Aknin and Michael Norton, the benefits of prosocial spending have been self-reported by adult survey respondents around the world, and are apparent even in toddlers.

There are many ways to engage in prosocial spending, whether it be in the personal sphere (giving gifts to friends and family) or the community (donating to charity). However, donating money to certain eligible organizations, like nonprofits and religious institutions, has the additional benefit of being tax-deductible.

However, it’s important to carefully vet the places you’re considering supporting to ensure your charitable donations go to the right place. Scams do exist, and accidentally gifting your money to a charlatan is unlikely to increase anybody’s happiness… except, of course, the scammer’s.

Going to school

Although money can’t buy happiness, it can buy more time in school… which can lead to increased happiness, even if you aren’t the type who loves the classroom.

For one thing, higher levels of education are correlated with better-paying jobs — which, as established above, is one ingredient in the recipe for life satisfaction.

But other research suggests that education in and of itself increases happiness, with one survey suggesting that graduates are better able to cope with challenging life events like divorce, illness and unemployment.

It’s important, however, to add the caveat that the same study found that the effect has diminishing returns: each successive level of schooling (undergraduate, postgraduate, doctorate, etc) added “a little less to the well-being score.” And if you can’t afford to go back to school out of pocket, or without taking out substantial debt, the weight of student loans might easily supercede any positive effects of the decision.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.