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Personal question: How solid are your family’s finances … y’know, actually? Are you equipped to handle sudden unemployment, or a huge hospital bill? How about a busted timing belt in your trusty commuter car?

When it comes to mapping out a money plan, many millennial and Gen X families are basically crossing their fingers and hoping nothing bad happens, says Karen Lee, CFP, an independent financial planner in Atlanta who has advised individuals and families for more than 30 years. “My parents’ generation is the last generation that really had its grips around money really well—and that’s really because they were so fearful,” she says. “They hoarded money.”

Luckily, there’s a middle ground between being scared and being oblivious: being pragmatic. Lee compares it to building a house. “The most important thing when you construct a house isn’t all the glitz and glam and flourishes; it’s about the foundation,” she says. “The foundation is what’s going to hold up your house in the tornado and the earthquake.”

The following five safeguards can help your family weather those financial hits. That said, don’t feel pressured to set up all of them at once. “Take baby steps and pick one thing to work on this year,” Lee says. “Then maybe check in every six months and see if you can do more.”

An emergency reserve that reflects your seniority

At some point you’ve probably heard the advice to stash cash for whopper one-offs such as major car repairs, sky-high medical bills, most critically, job loss. No argument there. “Having a cushion of savings is so important in terms of protecting you from creating high-interest credit card debt,” Lee says.

But the classic rule of thumb—to save three to six months’ living expenses—could leave many families short on funds. “The more you earn, the more months you need in your emergency reserve,” Lee says. The reasoning stems from job scarcity. “If you earn 30 grand a year, there are tons of 30-grand-a-year jobs out there—you have a good chance of finding a job in a month or two,” she explains. “But if you earn a 100 grand a year, there are way fewer jobs at that level. You’re going to need a longer emergency fund because it’s going to take you longer to find work.”

For higher-earning families, Lee says six to 12 months’ savings makes more sense. To reach that goal, automate payday contributions to a savings account, and if you come into a windfall—say, through a bonus, tax refund or side gig—add it to the reserve. “Your savings plan is going to be two steps forward, one step back as expenses pop up,” Lee acknowledges. “It may take a couple of years. The most important thing is committing to the plan.”

Family finance: what families need in their financial safety net

Life insurance for at least this long

Lee says life insurance is something parents tend to overlook because the topic of premature death freaks them out. Understandable? Yes. Advisable? No. Lee challenges her clients to think of life insurance as they do home insurance. “No one loves thinking about their house burning down, but they still insure the home,” she points out. “It doesn’t make sense that we insure our property—a pile of wood and stone and plaster—while we’re unwilling to insure ourselves. When someone dies prematurely, the grief is bad enough. Why add financial worry on top of that?”

At minimum, she advises parents to sign up for a term life insurance policy that will remain in effect until their all their children are at least 12 years old. As for coverage level, Lee says to aim for 5 to 10 times your annual income depending on the share of family expenses your paycheck covers. Sole breadwinners should aim for 10 times their income. Couples who split expenses 50-50 can opt for a policy closer to 5 times their individual income. Even parents who care for kids full-time need a policy that covers at least 5 times the annual cost of childcare—a financial necessity in their absence.

In addition to covering a family’s regular bills, life insurance also can go toward meaningful milestone expenses such as a child’s college tuition. Says Lee, “Imagine a fund of money that would allow your spouse to tell your kids, ‘This was a legacy your mom created for you.’”

One note about kids: It’s best not to name a minor child as a life insurance beneficiary, Lee says, as this will freeze the funds until the child turns 18. Better to create a testamentary trust in your will—a legal entity that can disburse money expressly for a child’s care—or name your co-parent or kid’s legally designated guardian as your beneficiary.

To cross reliable term life insurance off your list quickly and easily, check out companies like Ladder, which let you handle the life insurance process online and offer life insurance that can adjust with you as your life needs change, or work with a local broker to find an A-rated insurer from the independent ratings agency A.M. Best.

It doesn’t make sense that we insure our property—a pile of wood and stone and plaster—while we’re unwilling to insure ourselves.

Disability coverage that caters to your specialty

Disability insurance is aimed at keeping your family in the black if a long-term illness or serious injury takes you out of the workforce for a time (or forever). “This is the absolute worst financial disaster that can happen to a family if they aren’t prepared,” Lee says. “Your earning power is arguably your greatest financial asset. If you add up your income potential over your working years, we’re talking millions of dollars. Insuring that asset makes sense.”

The problem is that many people mistakenly assume that Social Security will provide disability benefits if they become unable to perform their jobs. Easier said than done, Lee says: “The Social Security definition of disability is that you’re unable to do any job for any length of time—it’s very narrow. Plus, the payments are more of a stipend. They’re usually not enough to cover a person’s bills.”

Lee recommends that parents get what’s called an “own occupation” disability insurance policy: “That means you’re entitled to benefits if you become unable to do your specific job—say, if you’re a designer who suffers a traumatic brain injury and becomes unable to create.” To find the right policy for you, Lee advises connecting with a local independent insurance broker who can show you options from different companies and walk you through the terms.

A line of credit you never touch

For many families, their home is their most valuable material asset. If you’ve been paying down your mortgage for a while, a home-equity line of credit (HELOC) can be a smart planning tool for major financial emergencies, Lee says. It works by allowing homeowners to borrow cash using their home’s market value as collateral. Unlike a traditional home equity loan, which releases a bucket of cash up front, a HELOC works more like a credit card in that you draw money only if you need it—and pay interest only on what you withdraw. HELOC interest rates tend to be much lower than those of credit cards.

To be clear: This source of cash should be viewed as a desperate measure for desperate times, to be tapped only after emergency savings are used up (and definitely never for fun stuff like vacations). So why apply for a HELOC now? Because you need to be on solid financial footing—with a steady of source of income—to qualify. Says Lee, “Your goal is to open that line of credit, rest assured that it’s there, and then never use it.”

 

A retirement fund that prioritizes you

Many parents feel torn between socking away money for their own retirement and kicking in for their kids’ future college expenses. Lee’s advice: Fund you—the equivalent of putting on your own oxygen mask first. College students have tons of ways to foot the bill from Yale: loans, financial aid, grants and scholarships (not to mention part-time jobs). On the other hand, no one’s giving you a grant to quit working. “You don’t want to become a burden to your children later in life because you put all your money toward paying for their college,” Lee points out.

The older you are, the more you need to save for a comfortable retirement. “Compounding interest only really kicks in big after about 15 years, so the money a 45-year-old saves for retirement is less valuable than the money a 30-year-old saves,” Lee says. If you’re younger, aim to save 10 percent of every paycheck in an employer-sponsored 401(k) and/or personal IRA. If you’re getting a late start, aim to squirrel away 15 percent. In any event, do your best. Assures Lee, “Saving money in any way is always good.”

About our sponsor: Ladder is life insurance built to be instant, simple and smart. We offer direct-to-consumer, fully underwritten, term life insurance online. We do not charge policy fees and we do not employ commissioned sales agents. You can apply for life insurance coverage in minutes and get an instant decision You can also decrease your coverage online over time, with no fees or penalties, so you can adjust your coverage as your family’s life needs change. Visit ladderlife.com to learn more.

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