Your household finances are constantly changing. Even if you have a plan in place, be sure to review it often to ensure you're accounting for any recent life changes.
While financial security is vital for everyone, women, in particular, can benefit from building a financial safety net. On average, women earn less than their male coworkers, with women's salaries peaking much earlier than men.
Women are also far more likely to be primary caregivers (to their children or elderly relatives), reducing current and retirement income. For example, during the pandemic, four times as many women dropped out of the labor force than men in October 2020, costing them billions in current and future income. When financial disaster hits, women are more likely to be negatively impacted than their male counterparts.
What is a financial safety net?
A financial safety net is a comprehensive strategy to help protect yourself and your family in an unexpected financial emergency — medical expenses, divorce, loss of a job, death of an income-producing spouse or partner, or loss of assets as a home or car.
A financial safety net goes beyond building an emergency savings account (although this can be a significant first step) and includes a variety of insurance coverage and retirement planning to protect you in the event of a financial curveball.
How can women build a financial safety net?
The way you build your safety net will depend on your unique financial situation. Still, a successful one is typically composed of five categories: savings, insurance, assets, future income (for retirement) and Social Security.
Here's how to get started:
- Savings. A woman's financial safety net should usually include a liquid savings "emergency" account so that it will allow you to continue to pay your bills without relying on high-interest credit card debt. You should save as much as you can in your emergency fund, but your first goal should be to accumulate at least enough cash to cover six months to a year's worth of expenses. After you've reached that milestone, consider funding a Roth IRA or separate investment account to continue building your net worth and expanding your financial safety net.
- Insurance. Consumers buy insurance to protect their loved ones from financial disasters. You'll want to have, at a minimum, homeowners or renters insurance, flood insurance (if you live in an area prone to flooding), auto insurance (if you own a car), some amount of term life insurance (if you have dependents), and an umbrella liability policy (to protect your assets from litigation). Once you hit your 50s, consider investing in long-term care insurance.
- Assets. As you continue to save and invest your money in your 401(k) or other retirement plans, you might find you have extra cash to invest. If so, consider buying a property to rent out. Or, you could purchase stock. These assets (the liability would be any mortgage you carry on property) help expand your financial safety net, and in case of a financial emergency, you may be able to sell them or take out a loan against them in order to help get you through.
- Retirement income. People are living longer, which makes it even more important to create a financial safety net that will weather sudden financial shocks, such as a stock market drop, long economic downturn, or a medical illness or injury that perhaps prevents you from earning extra income. To create a financial safety net during your retirement years, you may want to use a "safety-based approach" that provides you with a stream of income through your investment portfolio. This includes stocks investments, but also a safer alternative of risk pooling and insurance.
- Social Security. You may be eligible to receive benefits if you become widowed or disabled. Depending on how old your children are when your spouse dies, they may be eligible for a dependent benefit. You should also know that there is no marriage penalty or limited benefits given to a married couple — you will get your own Social Security benefit if you have worked, and your spouse will receive their own. Finally, if you are divorced but were married at least 10 years, you are eligible for benefits when your ex dies.