The peak of the pandemic witnessed two categories of people: there were those who were able to pay bills and live well (even though they had to cut back a bit) and there were those who experienced the torment of not being able to keep up with their expenses.
The presence of a financial safety net made the difference between these two types of people.
Although no one longs for a financial emergency, life events don’t always turn out according to plan.
The only way out is to build a safety net for those moments when things go awry. By the end of this article, you would have gained insight into what it takes to prepare for a financial emergency and stay afloat when life hits.
How to create a safety net
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Put your financial house in order
If you don’t fix the leakage in the jar, it doesn’t matter how much liquid you put in, it will always get empty.
That same can be said of your finances. You have to fix the “leak” or else you would always find yourself in a financial mess no matter how much you earn.
“Leaks” are unnecessary expenses that take money away from more important things.
The first step to putting your finances in order is to strive to live below your means. This requires you to;
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Allocate a percentage of your income into a savings account
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Plan a strict monthly budget
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Prioritize needs over wants
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Get insurance
The only way to prepare for the unexpected is to expect the unexpected.
With insurance, the aim is that you never need it but in the case of an unfortunate incident, you would have a buffer to offset the incurred bills.
A car accident or damage to home property can drain you financially but insurance performs the role of a parent; they come through for you and help make everything better.
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Create an emergency fund
A financial emergency fund is a money set aside that can cover 3-6 months of expenses. The expenses covered are quite basic: rent, food, transport, utilities, child welfare, and insurance fees.
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Create other streams of income
The larger the size of your income, the better equipped you are in case of a financial emergency. There are two ways to do this;
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Increase your active income streams
Active income is money earned from working at a job. In this case, you can start a side hustle to increase your income margin. You can also take an alternate route by either getting a better-paying job or seeking out a promotion at your workplace.
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Create streams of passive income
Passive income is money acquired with little or no labor and without the presence of an employer or a contractor.
The most common sources of passive income are Returns on Investment (ROI) and rental income.:
i. Returns on Investment
Popularly called ROI, it is the money accrued from an investment portfolio consisting of shares.
A share is a unit of capital in a company and when purchased, they give the owner some stake in the company thereby allowing them to partake in the profits.
This means a shareholder who holds 10 units of shares (assuming said shares make up 20% of the total shares in a company) would receive 20% of the profits.
ii. Rental Income
Real estate (houses, shops, parking spaces, event centers) when acquired serves as a source of income for owners.
Although there is a bit of work to do like routine monitoring, much of the work can be outsourced to property managers and agents.
Things to know about passive income
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You have to have money saved before you even consider building passive income streams.
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Don’t use your financial emergency fund to create a passive income stream. Financial emergency funds are for emergencies only. Rather have designated savings for passive income streams.
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You need to become well-educated in the source of passive income you want to dive into. Taking investment as an example, you have to become versed in the various forms of investments, market prediction, and determining which investment is profitable and which isn’t.
Conclusion
In the course of your life’s journey, you would encounter several obstacles and challenges but creating a financial safety net in anticipation of a financial emergency would enable you to at least have your head above the water in unpleasant times.
Read this too: Best Budgeting Practices for Salary Earners