Saturday, October 5, 2013

Some Basics


Consider these basic first steps to help you achieve your financial goals.

Build an Emergency Fund

Unexpected expenses may pop up at moment’s notice. Your car may break down, or you may require an expensive dental procedure. By keeping a cash reserve, you can tap this money without having to put the unanticipated expense onto a high-interest rate credit card. Popular media suggests between three and six months of expenses as a sufficient amount of savings.

"Imagine ... rapidly paying down debt. Now, you have an unanticipated expense... that must go onto the credit card."


Keep this money liquid; it should go into a savings account. If you're looking for a slightly larger return on your cash (and can handle a little bit of inconvenience), consider a Certificate of Deposit (CD) or a CD ladder. Do not put this money into a risky investment – like stocks (or dare I even say, "bonds").

 

Quickly Pay Down Debt

Once you have built up an emergency fund, redirect that extra monthly savings to quickly pay down debt. You want to establish the emergency fund first, and then quickly pay down debt. Why? Imagine the following scenario: 

You are rapidly paying down debt. Now, you have an unanticipated expense - and you do not have an emergency fund to tap. That surprise expense must go onto the credit card – which means more debt! Had you established an emergency fund first, you could take that emergency fund money to pay for the surprise expense.

Health Insurance

For some, employers already provide health insurance. For everyone else, read on:

For young, healthy folks, a high-deductible plan may be the best way to go. A high-deductible plan keeps premiums (monthly payments to the insurance company) low. The trade-off is that a high deductible plan only kicks-in at certain thresholds. That is, you have to spend several thousand dollars of your own money before the insurance company starts to pay the bills. A high-deductible plan works best for really expensive catastrophic events: like a severe injury from an auto accident, or cancer. A high-deductible plan is not as cost efficient for those clients seeing a doctor regularly. 

Also, some high-deductible plans allow for the creation of a Health Savings Account (HSA). An HSA is a tax-deductible investment account, with investment proceeds paying for qualified medical expenses tax-free. While that last line may sound complicated, it essentially says that there are particular tax-advantages with using an HSA. In the end, that means paying less for your medical bills.

For older individuals or those with health issues, consider a more comprehensive Preferred Provider Organization (PPO) plan.

"Just like a cash reserve helps stave off debt in the instance of moderate, unanticipated expenses, health insurance protects individuals from massive, unanticipated health-related expenses." 


Why even bother getting health insurance? Imagine working hard to save up an emergency account and paying down all your debt. Now, something happens that costs a lot of money – like a car accident that causes a severe injury. If something like that happened, consider your emergency fund gone and your debt ramped all the way back up. Just like a cash reserve helps stave off debt in the instance of moderate, unanticipated expenses, health insurance protects individuals from massive, unanticipated health-related expenses.

Renter’s Insurance

You may have accumulated some nice stuff over the years: a big flat-screen, a huge leather sectional, a carbon fiber bicycle, your engagement ring. Renter’s insurance can protect those assets in event of fire, theft, or other variables. Much more importantly, if someone is injured during an accident in your home, renters insurance will help protect you in the case of a liability lawsuit. Potential lawsuits can make up a tidy sum – more than all those valuables you accumulated many times over.

Umbrella Policy

An umbrella policy picks up where your auto and renter’s insurance leaves off, increasing the amount for which you are covered under both policies. One suggestion is to attain coverage for $1 million.  Fortunately, such high coverage is relatively inexpensive, and can be for less than $20 a month. 

"...money you have not even yet earned can be taken away from you. There is where an umbrella policy steps in to protect you."


Some make the case that you only need to insurance yourself for up to your net worth – the total value of how much money and other valuable stuff (car, home equity, etc.) you own. However, there are instances where future wages can be garnished in a lawsuit. Said another way, money you have not even yet earned can be taken away from you. There is where an umbrella policy steps in to protect you.

Umbrella policies are relatively simple to understand and purchase because there are few variables involved. This is in stark contrast to:

Disability Insurance

Many individuals mistakenly think that their house, their car or their retirement portfolio is their most valuable asset. In most instances, one’s most valuable asset is themselves – and their future earning power. That is, while your car may be worth $20,000, this is nothing in comparison to the wages that you will earn during the rest of your working career. You can insure this asset – your future income – with disability insurance. Disability insurance steps in when you are no longer employable.

"...disability insurance makes sense to cover living expenses not covered by Social Security and employer benefits combined."


Note that some employers already provide some level of disability insurance. Further, Social Security also provides some disability benefit payments too. The hard work comes from doing the math: how much in Social Security benefits do you qualify for? How long will employer benefits make payments for? When determining just how much (or how little) disability benefits an individual is eligible for, disability insurance begins to makes sense. This is because living expenses may exceed Social Security and employer benefits combined.

Retirement Savings

Once you’ve tackled the above, consider saving for retirement. (You can also attack these projects, and retirement savings, simultaneously.) Not sure how to get started on retirement investing? Consider either a simpler or more involved option for investing.

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