Many Americans face financial insecurity due to rising interest rates, inflation, and low personal savings rates, which limit disposable income and opportunities for investment in education and personal growth. To manage financial uncertainty and build a safety net, establishing an emergency fund with three to six months of living expenses is crucial. Automating savings, starting with small amounts, and consistently contributing to the fund can help individuals navigate spending shocks and income shocks without resorting to high-interest debt. High cash value life insurance policies are presented as a beneficial tool for building emergency funds due to their liquidity, guaranteed protection, inflation hedge, and tax advantages. Working with knowledgeable strategists and regularly reviewing financial plans can ensure success with personal goals.
SECURING A SAFETY NET
The Smart Way
Written by: The Legacy Project
Financial freedom is a far-fetched reality for many Americans living paycheck to paycheck. Rising interest rates and inflation make it harder to afford basic needs, and the personal savings rate in America is at an all-time historic low, reflecting the reality of these hardships. These challenges reduce disposable income and limit opportunities for investing in one's education and personal growth. Inflation compounds these difficulties, eroding the value of money and making goods and services more expensive. With the cost of essentials like food, housing, and healthcare continually on the rise, individuals have to spend more of their income on these basics, leaving less available for saving.
Inflation itself reduces the actual value of saved money, meaning the amount of savings will buy less over time, undermining financial security and peace of mind. As a result, people need to save more to maintain the same level of security, which can be difficult when daily expenses are rising. Those fortunate to retain a meager amount of savings often invest in the stock market, where they have little to no control, thus introducing their savings to risk and volatility to hedge against rising interest rates and inflation. This in and of itself can create additional worry and concern in an unpredictable market economy.
Life is fraught with many uncertainties, and developing a financial safety net will help individuals better navigate life's unpredictable challenges. We will categorize these challenges as "spending shocks" and "income shocks." Spending shocks are unplanned and unwanted expenses that disrupt your financial stability. These can be one-time significant expenses, such as a vehicle collision, or smaller unexpected costs, such as medical emergencies or unexpected legal fees. Income shocks are sudden, unexpected reductions in income, which can result from a job loss, reduction in work hours, pay cuts, or loss of a major client if you are self-employed.
So how do we manage uncertainty, supporting not only basic survival but also long-term financial health and personal growth? First, we must create a plan for emergency preparedness by establishing an Emergency Fund. Traditional financial advice suggests keeping three to six months' worth of living expenses in your emergency fund to protect you from spending shocks and income shocks. If you spend generally $5,000 per month on housing, utilities, food, gas, healthcare, and other necessities, you should save between $15,000 and $30,000 in your emergency fund. This emergency fund will help manage these spending and income shocks without having to rely on debt or high- interest loans. Without an emergency fund, individuals are more likely to turn to credit cards or bank loans in times of need, which can lead to a cycle of debt that is difficult to escape. A financial buffer helps you avoid high-interest debt and the associated financial strain.
But how do you save even $1,000, let alone three to six months of living expenses?! Inflation, rising interest rates, debts, income variability, and a lack of financial knowledge are all challenges for someone living paycheck to paycheck. It may seem impossible, but let us make something very clear: No one is coming to save you. You are your most important asset, and your financial freedom starts with you. Financial freedom is your responsibility, so don't wait for a hero – be your own hero. No one is more impacted by your financial future as much as you are, so commit to yourself. If you are ready to take ownership, let's discuss a plan to help you establish a financial safety net.
Your Financial Roadmap
Creating Your Financial Roadmap. It is imperative you create a plan and, more importantly, follow your plan to create a secure financial future. Creating a financial roadmap involves:
Setting clear financial goals - Start by setting personal short-, mid-, and long-term financial goals. Your goals should be clear and achievable. You can start small, saving $100 a week or picking up one overtime shift monthly. Connect these goals to the larger objective of saving three to six months of living expenses. Our May 2024 Newsletter gives a rudimentary example of a monthly spending plan that you can use to set your financial goals. Pair that with talking to one of our strategists and you have the keys to success.
Assessing your current financial situation – Knowing how you spend your money and where your money is going is essential. It may help if you look at money as a form of energy. Money is nothing more than a means of exchange for goods and services. Therefore, if you earn $20 per hour and the concert tickets cost $100, you must trade five working hours to afford the concert tickets.
Devising a strategic plan to achieve those goals – What matters is measured. There are plenty of free applications and tools to help you track your finances and discover inefficient uses of your money. At The Legacy Project, we have identified taxes, debt services (e.g., interest), and inflation as the three most destructive weapons used against your financial health. Consider for a moment the cumulative taxes (federal and state income taxes, sales tax, luxury tax, estate tax, property tax, etc.) that you pay every single month. Now add the cumulative debt service (credit card interest, mortgage payments, student loans, car payments, etc.) you pay to banks and creditors monthly. Once we add in the effects of inflation, which is the loss of purchasing power over time, and the necessity of devising a strategic plan to achieve your financial goals should inspire you to take action immediately or forever live in fear of the next spending and income shock. Part of devising your strategic plan should be managing your debt. Do NOT take on unnecessary debt. If debt is a chief concern, we have tools available at The Legacy Project that will help you strategically pay off your debt at an accelerated rate while simultaneously helping you build an emergency fund.
Automate Your Savings. This is a convenient and effective way to build an emergency fund consistently over time. You should have set a savings goal when you created your Financial Roadmap. Divide the total amount you want to save by the number of months or pay periods you have to achieve your goal, and then automate that amount. This emergency fund should be a separate account, clearly distinguishable from your day-to-day checking account. This separate account will not only help you avoid the temptation to spend that money but also help you measure your progress over time. Ideally, you automate your transfers each month or pay period to ensure a portion of your paycheck goes directly to your emergency fund. If your bank or employer does not offer automated transfers, create a renewing calendar reminder to transfer the funds on specific dates manually. This will require a higher degree of discipline, so scheduling transfers weekly, bi-weekly, or monthly is the preferred method. Automating your savings takes the effort out of saving and ensures that you consistently contribute to your emergency fund, helping you achieve financial peace of mind and security.
Start Small and Increase Over Time. Begin with what you can. Start by automating small amounts that won't significantly impact your living expenses. As your financial situation improves, or as you become accustomed to living on a slightly smaller budget, increase the amount you automate to your emergency fund.
Consistency is Key. Treat your automated savings to your emergency fund as a non-negotiable contribution to your financial health and well-being. Resist the urge to dip into your emergency fund for non-urgent expenses. Remind yourself of the fund's purpose—to establish financial security and peace of mind.
Review and Adjust Regularly. Again, what matters is measured. Monitor your emergency fund balance regularly to see how close you are to reaching your savings goal. This will help you find small wins and develop momentum over time. If your financial situation changes or you find extra room in your budget, consider increasing the amount you automate to your emergency fund. Direct any unexpected bonuses, tax refunds, or other windfalls directly into your emergency fund.
Unlock Financial Security: Why Life Insurance is Your Ideal Emergency Savings Account
When it comes to saving, we mentioned earlier to have your safety net in a different account, namely so you can monitor its growth as well as resist the temptation to spend it. But where is the smartest place for you to hold that “safety net” money? Many will say a savings account, as the growth rate typically will outperform standard checking accounts. Others may even go further and get a high yield savings account, where the APY is over 4%! All of these options are good options, but are they the best option? At the Legacy Project, we believe the absolute best place to store your “safety net” money is in a specially designed, high cash value whole life insurance policy from a mutually owned company (yes, that’s very specific intentionally). Among the many advantages a high cash value life insurance policy affords, another significant benefit is the powerful yet often overlooked tool for building a robust emergency fund. Using this specially designed asset is not just an overall intelligent financial choice but an ideal means of establishing an emergency savings account. Here are a few of the chief advantages of utilizing high cash value life insurance as a personalized emergency savings account.
Liquidity and Accessibility - Quick access to funds is crucial during an emergency. High cash value life insurance offers unparalleled liquidity, allowing you to access your cash value through withdrawals or policy loans easily. Unlike traditional retirement accounts or investment portfolios, there are no penalties or restrictions on how you use the money, providing you with maximum flexibility when unexpected expenses arise. Compare this to a bank where there are limitations on the maximum amount you are allowed to withdraw at an ATM or digitally send via a plethora of apps on your phone! More considerable sums usually require a wire transfer, which not only costs money but takes time to do. Even with your money in a bank, you really don't have the liquidity you think you have.
Guaranteed Protection - Unlike traditional bank savings accounts or investments, high cash value life insurance offers guaranteed protection for your money. Your cash value grows steadily over time, earning an uninterrupted compound interest rate that is shielded from market volatility and economic downturns. This stability ensures that your emergency fund remains secure and accessible when you need it most.
Hedge Against Inflation – The cash value in these policies will compound every year, even with outstanding policy loans! In other words, your premium deposits earn an uninterrupted compound interest rate, which serves as a hedge against inflation since the compounding continues until the insured person is 121 years old! Compare that to the 0.01% interest in a traditional bank or even the 5.00%+ in other financial institutions like Robinhood or Forbright. Banks make money with your money; why not recapture that for yourself!?
Flexible Automation - We encourage you to make automatic deposits into your personal banking policy. What is convenient with these specially designed policies is the funding schedules. You can fund your banking policy annually, semi-annually, quarterly, or even monthly. If you start off monthly and decide you want to change your deposits to quarterly or annually, you have the freedom and flexibility to make these changes. It is, after all, your bank.
Tax Advantages – As mentioned, taxes are one of the most destructive forces against your financial health. Tax advantages are among the most compelling benefits of high cash value life insurance. These specially designed banking policies grow at an uninterrupted compound interest rate, and the insurance companies also disperse dividends (in mutual companies) to the policy owners every year. The policy owner can access all of this growth tax-free via policy loans!
Asset Protection - In addition to providing financial security, high cash value life insurance offers asset protection benefits. In many states, the cash value and death benefit of a life insurance policy are protected from creditors, liens, and legal judgments, safeguarding your savings from potential financial liabilities.
Death Benefit – Although we use the asset of high cash value life insurance for banking purposes, it is still life insurance at the end of the day. What this means is there is a death benefit that will be paid to the beneficiary, tax-free and immediately, i.e., no probate court or waiting around for the funds. When establishing an emergency fund for your family, this is another layer of protection that will protect the future income loss if something unexpectedly happens to the insured person.
How to Maximize Your Emergency Fund with High Cash Value Life Insurance
Assess Your Needs - Before purchasing a high cash-value life insurance policy, carefully assess your financial situation and determine your emergency fund needs. Consider factors such as your monthly expenses, existing savings, and potential future obligations to determine the appropriate amount to deposit into your personal banking system. Creating your Financial Roadmap will help you assess your needs. When working with our Strategists at The Legacy Project, we further help you determine what is Meaningful and Manageable when funding your banking policy.
Work with a Knowledgeable Strategist - Navigating the world of life insurance can be complex, so it's essential to work with a knowledgeable Strategist who can help you understand your options and tailor a banking policy to meet your specific needs. Everyone at The Legacy Project actively uses these specially designed policies for banking purposes, so we know how to tailor these to your unique goals. Look for a Strategist who specializes in high cash value life insurance and has a track record of helping clients achieve their financial goals.
Customize Your Policy—High cash value life insurance policies offer a range of customization options to suit your unique financial objectives. No two people are alike, and therefore, it is essential that your specialized banking policy is tailored to you and your goals. Unlike traditional bankers who provide vanilla savings accounts, our Strategists will tailor a banking policy that aligns with your financial needs and helps you achieve your goals.
Fund Your Policy Consistently - Once you've purchased a high cash value life insurance policy, it's essential to fund it consistently to maximize its growth potential. Make premium deposits on time and consider additional contributions to accelerate the growth of your cash value over time. If you knew that you would get back all of the money you funded in this asset plus many times more, and you could access all of this growth tax-free, it becomes clear this asset is a wonderful tool to help establish financial peace of mind.
Review and Adjust Regularly - As your financial situation evolves, periodically review your high cash value life insurance policy to ensure it remains aligned with your goals. You will likely optimize your cash flow and free up additional resources. This, in turn, will create more opportunities for you to start another branch of your bank, i.e., fund an additional banking policy. Perhaps the next branch of you bank you want to use to enhance your investment strategies, or help to reinforce a lasting legacy? As your life changes, so will your banking needs. It is important to review, adjust, and grow with your improving life circumstances.
Secure Your Future with High Cash Value Life Insurance
In uncertain times, having a reliable emergency savings account is essential for achieving financial peace of mind. By leveraging the unique benefits of high cash value life insurance, you can establish a robust financial safety net that protects you and your loved ones against life's unexpected challenges. Spending shocks and income shocks do not have to be a source of panic and despair if you are adequately prepared to absorb the inevitable volatility of life. We want to help you design an emergency fund that suits your unique goals and lifestyle. We can help guide you out of financial uncertainty, but make no mistake, this is your journey. You have to take the first steps and be the hero of your own story.
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