1) Buy Insurance
Insurance is like a linebacker for your financial plan; it takes on the major expenses when the unexpected happens to your car, home, body, coveted teapot collection, etc. You can buy insurance for just about anything. Did you know that some professional singers have insurance on their voice? Insurance can be complicated, but luckily for most of us, it doesn’t have to be.
Having a good defense for your net worth is crucial, so like it or not, you are going to have to include insurance premiums in your budget. Depending on your age and personal circumstances, your insurance needs will vary from time to time.
Here are some of the most common primary insurances:
- Health insurance – Covers expensive health care tabs if you or a covered family member becomes sick or injured.
- Auto insurance – Insures against liability when operating an automobile. Many policies al so include collision coverage in the case there is a crash and comprehensive coverage in case your ride is damaged by something non-crash related.
- Life insurance – Insures against your loss of income in the event you pass away.
- Homeowner’s insurance – Protects the financial interest of the mortgage company (or the homeowner if they own the home outright) and covers damage caused by fire, smoke, wind, vandalism, etc. Liability coverage is also included in homeowner’s insurance to cover those pesky slip-and-falls on your property. Most policies include comprehensive coverage for personal belongings (like that coveted teapot collection) in the event of loss or damage.
- Renter’s insurance – Covers loss to personal property in a rental home or apartment.
- Flood insurance – Covers damages caused by water – this could be from bad weather or a burst water pipe in the apartment above yours!
- Private mortgage insurance (PMI) – Insurance for the mortgage company in case you default on the primary mortgage. This is typically applied if your down payment less than 20% of the property’s purchase price.
Some folks have the need for other, more specific safeguards:
- Long-term care insurance
- Disability insurance
- Liability insurance (umbrella policy)
- ID theft insurance
2) Pay Off Consumer Debt
Paying off what you owe to others is not only foundational to creating wealth, it is a characteristic of integrity and a biblical principle. Just like anything else in life, there is no ‘only way’ to paying off your debts. In any case, you have to start by understanding what you owe to who. Create a list of all known lenders that includes important information like remaining balances, due dates, and interest rates.
Notice the work ‘known’ above – often enough there is outstanding debt that one might not know about. These surprises are easily found by running a credit report. Federal law requires reporting agencies to offer one free credit report per year. You can get yours at annualcreditreport.com for a review. Look for old debts you may have forgotten or new debts you don’t recognize.
Now that you know all of your outstanding amounts owed, create a plan that best fits your budget and start paying it off!
3) Invest For Retirement
When investing for retirement, this is the hierarchy of investment methods:
- Employer-matched contribution
- Roth IRA or 401k
- Traditional IRA or 401k
Simply put, match beats Roth, Roth beats traditional, traditional beats nothing! It sounds like rock, paper, scissors but the winners never change.
Investing in a plan with an employer match is always where you want to start – it’s literally free money! After the matched amount has been funded you will want to start contributing to a Roth plan, whether it’s an Individual Retirement Plan (IRA) or a 401k plan.
If you still have money left to invest after maximizing employer match and Roth contribution limits, look for a traditional retirement plan (IRA or 401k) that you can invest in to shelter you from taxes now and provide you with income later.
4) Plan Your Legacy (Estate Planning)
Estate planning can be complex and heavy on the mind and soul. Just like with insurance, your estate plan will vary substantially depending on your stage in life. At its most simplistic level, an estate plan should include these basic documents:
- Wills (or Testaments) – This document establishes where your possessions and property go after you pass away and who will be in charge or their distribution (the executor)
- Trusts – A trust also dictates where assets are directed after you pass away. A popular use of trusts is when a person or a married couple have minor children or developmentally disabled children. A trust can also be used to control the amounts and intervals of distributions to the beneficiaries.
- Power of Attorney – This document enables a person to appoint an agent to act on their behalf in the event they become incapacitated.
- Living Will – This set of documents is used as an advance directive to answer health-related questions in the event of illness or mental incapacitation.
It is a good idea to have this information in a ‘legacy file’ located somewhere where the executor of your estate can find it.
Wrapping It Up
Yea, getting your finances in check can seem like a daunting challenge, but it is absolutely worth it if you plan to create wealth that will span generations. Many of the items listed above will enter your life at the most fundamental level and will slowly require more attention to detail as you begin to grow your responsibilities, family and net worth. Check out more articles to work on your personal finance checkup!