By Harry N. Stout
Our elected representatives in Washington have been in the throes of a long debate over the programs and related funding for our national social safety net designed to protect individuals and households.
The national safety net comprises numerous entitlements and other programs, including the Big 3 – Social Security, Medicare and Medicaid. These programs were designed over the years to assist households if certain life events took place.
But in my view, the national safety net does not properly reflect today’s basic economic needs and is not as comprehensive as it needs to be. The net has gaping holes through insufficient benefits, underfunding, benefits that need to be rethought and lack of periodic updating to reflect the reality of living in today’s world. That is why households must put their own personal financial safety net in place. The financial services industry, particularly the insurance segment, must step up and help.
Household Protection Realities
We read in the financial media about household insurance coverage and savings gaps for health matters, income protection, long-term care needs, sufficient life insurance and woeful levels of retirement preparedness. These gaps are real with many families just a paycheck or two away from major financial stress if a breadwinner should fall ill, die prematurely or live a very long life.
Our government has not and will not likely design the national safety net to provide these needed protections for households. The government is not and cannot be the insurer of last resort for all household financial risks.
The Personal Financial Safety Net
I have been trying to come up with a way to clearly and easily explain why households need to look after themselves financially and become more self-reliant. It’s like telling someone to lose weight, get more sleep or exercise better self-care. For some reason, the message does not resonate.
So I came up with the idea of the “personal financial safety net” to try to help make it clear. You can visualize what I mean – if you are a Cirque de Soleil performer, you need to have some safeguards (a net or cord) in place, regardless of your athletic and performing skills.
From a financial standpoint, here are six elements that I believe make up a personal safety net.
- Basic money knowledge
We have not formally taught individuals about money matters. Most households spend about two minutes a day managing their financial affairs. They can’t deal with the money issues without basic knowledge about money, how it works and how to use it effectively We should encourage individuals to spend at least two hours per week improving their financial knowledge. The time spent will pay significant dividends. The industry can help get this message out by focusing on the need to spend more time learning about money.
- Developing a money awareness mindset
When it comes to financial habits and discipline, you are what you think. An individual can’t be successful in their financial journey without having a money mindset. Money actions need to become second nature. Again, increased available education should help consumers improve their mindset and daily habits.
- Adopting reflective practices
From my experience, when I speak with people and try to convince them that they need a cash plan or budget, about 50% of them prepare to jump off a cliff and the other 50% send me sweet messages on social media. We need to teach budgeting and cash flow management a little differently. Budgeting and cash flow management must make people reflect on what they will be earning and spending. Individuals must take time to make sure they have more cash inflow than outflow and that they are saving funds for future needs and emergencies – including the reality that they likely will live a long life after their full-time work ends.
- Putting insurance in place to mitigate risks
Insurance offsets the cash needs when the unexpected happens and delivers cash in the future when it is needed. Whether it is auto, health, life, disability or accident related; these coverages provide cash for future delivery when it is needed. Overall, insurance coverage allow households to eliminate or minimize financial risks in exchange for a reasonable amount of money.
- Creating an emergency fund
The pandemic has taught us that the unexpected does happen in life. As part of the personal financial safety net, households must create an emergency fund to give them a cushion in case life gives some unexpected, uninsurable twists and turns such as an illness, a non-warranty related car repair, an accident, severe weather events or as in recent times — a pandemic. Having such a fund enables households to obtain the resources needed to pay the costs of the unexpected that typically can’t be insured.
- Maintaining the ability to earn a self-supporting income
The most important foundational building block of an individual’s personal financial safety net is their lifelong ability to earn an income that pays their living expenses. The decisions made regarding what type of college or trade education to obtain along with ongoing skills training and work experience build to create higher earning capabilities. What income can be generated based on work-related skills and experience lasts a lifetime and mostly dictates household cash inflow. Without the ability to earn a sufficient income, financial life can be problematic. The industry could assist by promoting the reskilling and upskilling of workers.
Americans must become more financially self-reliant. The national safety net will never become wide or deep enough to fully cover the costs of all of the financial risks households face. To enable households to be as financially successful and secure as they can be, the industry must better educate consumers to spend the necessary time putting in their personal financial safety net in place. It takes a little time, study and investment. It has at least six key dimensions. And it can change lives tremendously.
Being confident and relaxed about money matters in daily life enables life to be lived to the fullest. It is so important to enjoy life’s journey. The personal financial safety net really helps.
Harry N. Stout has been the president of Fidelity & Guaranty Life, deputy chief executive of Old Mutual Financial Network, and managing director of Insurance Insight Group. He is host of the “FinancialVerse” podcast and author of The FinancialVerse personal finance books and of Today’s Annuities — A Tool to Create Protected Lifetime Income. He may be contacted at firstname.lastname@example.org.
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