When you’re a working professional, nothing is more important than a steady source of income. It’s the whole reason you have a job in the first place. Workplace benefits, being part of a great team and making an impact on society are all well and good, but they won’t pay the bills. If you’re not making money, odds are you won’t stay in whatever job you’re in for very long.
But even if you have a well-paying job, there are plenty of risks to your income that you have to account for. Even in today’s healthy economy, layoffs, outsourcing, and injuries are all common occurrences. If all you’re counting on to make money is having a job come tomorrow, you’re setting yourself up for failure.
If you haven’t already, you need to take the following four steps to protect your income now. Take advantage of the resources and technology available to start managing your money simply and effectively.
1. Start an Emergency Savings Fund
When it comes to dealing with a disaster, an emergency saving’s fund is indispensable. This is the security net you’ll need if you suddenly find yourself having to repair or replace your car, cover emergency medical expenses, or recover from a house flood or fire. An emergency savings fund will ensure you can pay your regular expenses in addition to any emergency costs.
How much you want to save depends on your typical expenses and how much you can set aside each month. I would recommend that you aim for at least a year’s worth of your regular income. However, this may not be enough. You may need to double that amount if you:
- Don’t make a lot of money
- Plan on making larger purchases like a house or car in the future
- Have a large family of five or more
2. Get Personal Insurance
Even if your employer provides extensive insurance coverage, you can’t rely on it alone. This is especially true for health and life insurance benefits. CNBC reported that most group life insurance policies would only offer up to three times your annual salary. Since the Bureau of labour statistics reports that the average income is around $38,000, that’s only $114,000. Considering the average mortgage alone costs around $110,000, this isn’t nearly enough to cover other expenses your surviving family will have to deal with.
Additionally, most group plans have very set conditions that you can’t change. A common area where this is true is disability insurance. Typically, employers only offer short-term disability coverage. Howmuch.net calculates that most short-term disability insurance covers around 80% of your average income and usually only applies for 60 to 180 days. Depending on your disability and expenses, you may need more coverage. This is particularly true for physicians and dentists, who often have extensive student loan debt from medical school and other costs to cover.
It’s a good idea to do your research when it comes to all life’s issues, but it’s also good to be aware of what companies offer in your area as Canadian insurance companies work differently from those around the world.
3. Invest Your Money
If all your money is doing is sitting in a savings account with your bank, it’s going to waste. If you want to protect your future, you need to invest your money to earn more for yourself.
Investing can range from something more basic and secure like a GIC or mutual funds, 401K, RSP’s, or even something outside finance like real estate.
Comparing Return on Investment
Bankrate.com reported that the average annual percentage yield on a savings account was 2.25% at the start of 2019. To put that in perspective, that means having $5,000 in savings would only net you an additional $112.50 in a year. There’s not much money to be made with savings accounts.
By contrast, The Motley Fool reported that the average S&P 500 return on a 1-year investment was 13.69%. That means your $5,000 investment would now earn you $684.50.
The Risk of Investing
That being said, investments can be a risk. Stock prices can plummet overnight, and it can take many years to see any serious return. The same report by The Motley Fool found that most investors underperform by a ratio of about 24.21%.
When you invest, there are a few safe practices you need to follow:
- Find a good stockbroker with a solid reputation for getting goods returns.
- Choose an industry to invest in that you’ll stick with for ten years minimum – that way, a sudden drop in the market doesn’t mean you’ll automatically be ruined.
- Start small, with low-risk stocks. Don’t drop your life savings to buy $200 stocks that will only be worth $20 when you sell. A $50 stock that sells for $70 is still making you money.
- Don’t count on one stock to make you rich – take your investment and diversify in different stocks in different industries. That way, even if one stock isn’t performing well, another may make up the difference.
4. Start Your Own Independent Retirement Fund
If you’re counting on Social Security (USA) or CPP (Canada) to pay all of your bills after you retire, you’re making a big mistake. The Social Security Administration reported that Social Security only covers 40% of an average year’s earnings. While you may be able to have paid off your mortgage, car loans, and student debt by the time you reach 65-years-old, other expenses will increase, such as healthcare.
To ensure that you have protected income, you need to take advantage of a 401(k) and a Roth IRA.
How a 401(k) Works
With a 401K, you put money into your account to be used for mutual fund purchases. These are tax deferral investments that you can start drawing from after a certain period of time. The advantage of a 401(k) is that many employers not only offer them but will contribute the same amount that you’re putting in, up to a certain percentage. However, you only see limited gains, have penalties for withdrawing early, and may have to pay taxes for making a withdrawal.
How a Roth IRA Works
Roth IRAs are similar to 401(k)s. However, they have some additional benefits. Both deposits and withdrawals are tax-deferred, and you have more choices in the types of funds you invest in. However, most employers don’t offer Roth IRAs, so you’ll have to set one up and pay in all on your own. The program that is similar here in Canada would be an RSP, Retirement Saving Plan.
Whether you make a lot of money or a little, the critical factor is to be smart with your money. Knowing how to save, and once you do, how to leverage the money best is the key to not only having some savings it’s crucial in having enough money when it comes time to retire.