Insurance Life Insurance

11 Practical Ways to Protect Your Family from Financial Ruin

Following these practical steps could shore up and protect your family money position.

By Miranda Marquit

Edited by Jess Ullrich

Updated Dec. 17, 2024

You never know when a financial catastrophe will strike. In fact, at some point in your life, you’re likely to experience some type of setback when it comes to money. When possible, shoring up your family money position can help you weather these shocks and setbacks.

It can take some time to adjust your finances, and you might need to start small. However, if you take some practical steps toward guarding your family against financial ruin, you’ll likely ease some of your money anxiety and purchase a little peace of mind over the long term. Here are 11 steps to take.

11 practical ways to guard your family against financial ruin

None of us like to think of financial difficulty for our families, especially when it could come as a result of our untimely death. However, taking these practical steps when you’re able can help you safeguard your family’s finances.

Get on the same page about budgeting

Your first step is to consider having a conversation with your partner about money. It’s important to be on the same page about your financial values and priorities. Talk about how you want to use your money, and what might make sense for your lifestyle.

Once you’ve established common goals and uses for your money, it’s a good idea to choose a spending plan or budgeting system that works for you. Not every family needs a traditional budget, but having a system for making sure you’re putting money away for your most important priorities can be helpful.

There are several budgeting apps that might help you stay on track, ranging from those that help you use the envelope system to those designed specifically for family budgeting. Discuss which app might work best for your family and begin using it to stay connected to what’s happening with your money.

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Grow your emergency fund

One of the ways you can provide a backstop against financial ruin is to grow your emergency fund. Doing so can provide you with a pool of cash to draw on in the event you need extra money to cover expenses. An emergency fund might also reduce your reliance on credit cards and other debts in the event of an emergency.

You don’t have to grow your emergency fund all at once, however. Consider starting small, with any amount you can set aside, and get in the habit of regularly moving money to a high-yield savings account specifically for that purpose. The best savings accounts offer a higher-than-average annual percentage yield, and that compounding interest could help to grow your emergency fund over time.

In the past, some experts had recommended saving three-to-six months’ worth of expenses, but now, in the wake of the COVID-19 pandemic, some are saying that perhaps nine or 12 months’ worth of expenses might be a better goal. No matter what, having any type of emergency fund, if you can start building one, might help you during tough times.

Consider buying life insurance

If you have family members depending on your income, consider buying life insurance. The best life insurance companies offer coverage designed to provide for your family in the event of your untimely death. Although life insurance won’t directly benefit you financially, it can provide peace of mind because you know your family will be taken care of when you die.

There are various rules of thumb when it comes to how much life insurance to buy, but it can be a good idea to start with your individual family situation and needs. Think about how much it would take to provide the necessities of life for your family until your children are 18, or how much money you need to pay off your debts so your surviving partner doesn’t have to worry about them.

The cost of a life insurance policy will depend upon a variety of factors, including your age and your health. But in general, it might be possible to get a 10- or 20-year term life insurance policy at a relatively affordable price.

Look into disability insurance

The Social Security Administration reports that about one in four 20-year-olds will become disabled before retirement age. Additionally, the AFL-CIO estimates that with underreporting, between 7 and 10.5 million U.S. workers are injured or become ill on the job.

Disability insurance could offer a supplementary income source in the event you become ill or injured and unable to work for a significant amount of time. Short-term disability insurance might cover you for shorter periods of time, and long-term disability insurance could potentially provide payments for months, years, or even the rest of your life.

If you’re concerned that the loss of your income due to illness or injury could impact your family’s finances, it might be worth considering disability insurance.

Contribute to a retirement account

As you build wealth for the future, one of the most efficient ways to do so is to contribute to a tax-advantaged retirement account. When you invest in a retirement account, your nest egg has the potential to grow faster over time, providing you with the possibility of a more secure future. However, it’s important to note that all investments come with the risk of loss.

Even if you feel like you can’t set aside a lot of money to save for retirement right now, just getting started could help you begin taking advantage of the power of compounding returns. It’s also worth checking to see whether your employer offers matching contributions to your 401(k). If it does, work toward getting the maximum match, as that’s free money that goes toward your future.

You also have the option to use other vehicles like individual retirement accounts (IRAs) and even taxable accounts to invest for retirement.

Contribute to your flexible spending account

Your flexible spending account is funded with pretax dollars and allows you the ability to save for qualified medical expenses. This money can be used to help you cover out-of-pocket expenses for health care, including copays and even over-the-counter medications and other costs.

It’s worth noting that in most cases you need to use the money in your FSA before the end of the year or risk losing it. Some employers do offer grace periods, which allow employees a bit more time to spend their FSA funds, though this isn’t always an option.

An alternative to the FSA, if you qualify, is to use a health savings account. If you’re eligible for an HSA, you can get a tax deduction for your contribution, and you don’t have to pay taxes on the money as long as it’s withdrawn for qualified medical expenses. Plus, the money in your HSA rolls over year to year, so you don’t have to worry about losing it if you don’t spend it in one year.

Start a college fund

Starting a college fund could be a good idea if you want to potentially protect your kids from crippling student loan debt down the road. On top of that, saving for college early might help you avoid trying to come up with the money to cover the cost of tuition and fees all at once.

There are different ways to save for college, including opening a 529 plan and investing for the future. Although there aren’t federal tax breaks for college fund contributions, some states offer tax deductions for contributions, and the money in the account grows tax-free as long as it’s used for qualified education expenses.

Draft a will

Drafting a will can also be an important way to protect your family’s finances. Your will can be a way to allocate resources for the care of your family when you die.

Realize that beneficiary designations outweigh what’s in your will, so it’s a good idea to double-check and make sure your will matches your beneficiaries on insurance policies and retirement accounts. Consider reviewing your will and beneficiaries regularly, especially after you’ve experienced a major life change.

Consider establishing a living trust

If you’re concerned about passing on your estate and minimizing taxes, establishing a living trust can be one way to smoothly transfer your assets to your loved ones. A living trust is managed during your lifetime, with the expectation that your designated beneficiaries will receive access to the assets later.

Designate a guardian for your children

What would happen to your children if you and your partner both died while your children were young? Who would raise them and how would they be financially cared for?

One way to settle this issue is to designate a guardian for your children. This can be a big job, so it’s important to make sure the person you choose is willing and able to take it on. If you have insurance and a trust, it could be a little easier for the guardian to have the resources to care for your children in the event of your death.

Choose an executor

Finally, it may make sense to choose an executor for your will and estate. This should be someone you trust to carry out your wishes after you’re gone. A good executor is likely to ensure your family receives the assets they’re entitled to in a timely manner, rather than having them languish in uncertainty if you die.

The bottom line

Safeguarding your family against financial ruin is about taking steps to protect your income and assets while you’re alive, while at the same time making provisions for your family in the event of your death. Although you might not be able to do everything right now, making even small progress toward these practical steps could make a big difference down the line.