If adversity builds strength, many of us will start 2021 with the muscles of a professional bodybuilder. The past year delivered multiple gut punches: a pandemic, a recession, a volatile stock market and a vituperative election.
However, the calamitous year also provided valuable financial lessons. Because while pandemics are rare, personal setbacks are not. Your roof could fall in. A family member could become ill. You could lose your job.
An emergency fund is your first line of defense.
The standard advice is to save enough to cover living expenses for three to six months, but that may no longer be sufficient, said Liz Windisch, a certified financial planner in Denver.
“When entire industries disappear overnight, it can take much longer than that to find new work or train for a new career,” she said.
The amount you need to save will depend on your personal circumstances. Three to six months of expenses may be enough if you’re in a dual-income household. If you are the sole wage earner, you may need to save up to 12 months of expenses, or more.
Another lesson from the pandemic: The best-laid plans can be derailed by events beyond your control.
Andrew Marshall, a certified financial planner in Carlsbad, Calif., said he has heard from several people who are close to retirement age who fear that they’ll be laid off and won’t find another job that pays what they’re earning now.
“The lesson from these situations is that you should be prepared for alternative scenarios in case you are not able to work right up until your desired retirement date,” Marshall said.
Even before COVID, many older workers were forced to retire earlier than planned, due to corporate downsizing, health problems or family circumstances.
Protect your loved ones — and yourself. Make sure you have enough life insurance to cover your dependents if something happens to you, and that your estate plan is up to date.
If you’re the sole provider, you also may want to explore disability insurance.
This is also a good time to review other types of insurance, such as homeowners, auto and umbrella liability policies.