How to Prevent Financial Disasters

You can't stop economic downturns, but you can make smart decisions to protect yourself from financial calamity. Eric Schurenberg offers two simple tips.

In the wake of the great recession it's natural to think of financial trouble as something imposed on you by economic forces beyond your control but a lot of the financial misfortunes I've witnessed were brought on by decisions the victims themselves made. You can't stop macroeconomic cycles but 2 simple precautions can help you avoid 2 of the worst personal financial disasters. First, make sure you're adequately insured. The whole point of insurance is to protect your family from improbable but devastating financial calamities. The hard part is you have to buy insurance when you don't need it because you buy it once the calamity strikes or seems imminent. So if you earn a paycheck you need disability insurance that covers at least 60% of your income should you be unable to do your job for 6 months or longer. Your employer may offer some disability coverage but it's often not enough so be sure to check. Also if people in your family depend on your earning power you need life insurance equal to at least 5 times your salary as a rough rule of thumb and if you have substantial assets in excess of the liability coverage in your homeowners in your auto polices get what's known as umbrella liability coverage it will keep you safe from the lawsuit addiction that our culture is prone to and it's not expensive at all compared to the peace of mind it brings. Second don't ever believe anyone selling a financial product that sounds too good to be true. Anything that promises or guarantees a return should raise a red flag especially if the promise is for returns of more than 10%. All those people gulled by Bernie Madoff would have been fine had they remembered 1 simple fact: 10% returns are simply impossible in the real world without taking risk and if risk is involved the return can't be guaranteed can it?