Just like when you’re driving on a damaged road, the path to financial security can be littered with pitfalls and potholes. Although some of these are minor enough, others can be financially catastrophic. While some of these difficulties are inevitable or part of your financial learning curve, others can easily be avoided with a little planning, preparation, and foresight.
Knowing what potential financial potholes might be lining your road to financial independence makes it that much easier to maneuver around them. Here’s how.
Protecting Yourself Against Minor and Major Financial Disasters
It’s happened to all of us at one time or another– an unexpected financial problem arises that we’re not adequately prepared for, and we suffer added losses as a result. This can be anything from a car accident or an illness to a natural disaster. Sometimes Murphy’s Law strikes, and it can feel like everything goes array at once. One individual we know got a divorce, then his house needed major unexpected repairs, and then he lost his job – all within the same year.
When something like this happens, it’s easy to point at circumstances or bad luck as the culprit. However, in the end, our financial situation can be reasonably managed through the financial choices we make before something catastrophic occurs. Therefore, it’s incumbent upon you to control what you can and prepare for those unknown variables that are beyond your power.
As you read through the following suggestions, you may be comforted in finding that your ability to steer clear of financial potholes is possible. Here are ways you can protect yourself from circumstances that threaten your financial success.
Navigating a Sometimes-Difficult Road
Below are the top 8 ways to avoid money potholes that can truly wreak havoc on your finances:
- Set specific short, medium, and long-term goals and track the progress you make toward them. This practice will go a long way toward improving your day to day decision making.
- Pay attention to your financial situation. This means tracking your spending closely, knowing where your money is at all times, and reassessing your net worth. Paying attention also entails making necessary adjustments if any of these factors get out of whack.
- Revisit your financial goals and adjust annually if necessary. To gauge your progress toward financial goals and prevent things from becoming too static, you’ll want to reassess your plan. Life and priorities change – maybe you had a major life change in the past year. Make sure your financial plan ebbs and flows with your life plan.
- Work constantly to expand your knowledge of the financial world. You needn’t become a financial expert, but it’s not a bad idea to familiarize yourself with financial concepts that allow you to make smart choices with your money. By staying engaged in your money management, you have the opportunity to make wise money decisions for you and your family.
- Make sure you’re properly insured. This means having both the right type and amounts of coverage for everything you have that’s worth protecting. Although insurance can sometimes seem like an expense that offers no return, a single accident can prove disastrous without the proper protection. Life insurance, auto insurance, disability insurance, homeowner’s insurance, umbrella insurance: these are just a few you should verify you have adequate coverage. [Related content: The 6 Types of Insurance That Can Keep You Out of Trouble]
- Maintain a funded emergency fund. This fund will help you manage the inevitable financial potholes that everyone encounters. Devote between 3 to 6 months of your monthly expenses to your emergency fund and you’ll likely feel much more secure and be able to absorb the occasional minor or major ding.
- Avoid debt whenever possible. Just because you can afford a monthly payment on a new car doesn’t mean you should buy one. A good rule of thumb is that if you can’t buy something outright, then you probably can’t afford it.
- Pursue other sources of income. Having a side hustle or finding a way to increase your income through other channels can not only help you reach your financial goals faster, but it can help minimize any financial hardships that may arise if you were to lose your full time employment or find yourself unable to work for a period of time. [Related content: The Least Likely Places You Ever Thought You’d Find More Income]
It’s impossible to overemphasize the value of taking full responsibility for all your financial affairs. Some financial potholes are inevitable, while others can be avoided with proper discipline and planning. By following the guidelines we’ve outline above, you can minimize the damage of the unavoidable challenges and steer clear of those that are unnecessary.
Get started on these behaviors as soon as you can, but do not hesitate to contact your financial professional for guidance on the best ways to put them into action.