I often hear people say, “I really need to get my financial life in order!” Some people have more of it together already than others. Think of your financial life as a pyramid. The foundation has to be stable before you can start to build it up higher. For the base of the foundation, you should start with protection. The mandatory stuff, such as homeowners, auto and fire insurances, goes without saying. The rest are things you may or may not need, but they are the ones I think of the most or review in a planning meeting often.
• Life insurance: Some policies can be very inexpensive, especially if you are young and healthy. Instead of purchasing insurance, I often hear people say ridiculous things like “my spouse could sell the house” or “the kids could transfer to public school or an in-state college.” Trust me, when your family is going through the unimaginable loss of “you,” the last thing they want to have to do is add more worry to their lives! Also, don’t worry about being “overinsured.” I’m yet to meet the person who told me to return part of the money back to the insurance company because it was simply too much money.
• Disability insurance: I ask business owners all the time, “If you had a machine that produced $100,000 to $300,000 of net profits each year, would you insure it?” I ask this because you are that machine. Your ability to earn an income is your greatest asset. Therefore, you should consider insuring it. For nonbusiness owners, imagine being disabled and trying to pay your bills. Now imagine those bills just went up 20% because you need care or to modify your home. If you are 30 years old, you are 4 times more likely to become disabled before age 65 than you are to die.
• Long-Term Care Insurance: This typically applies to people around age 50 and above. I can help design a great financial plan for you, but if you suddenly had to increase your expenses by $40,000 to $100,000 per year due to care expenses, those plans could be useless. New and innovative products potentially make LTC a viable option for many more people than in the past.
• Umbrella policy: Like life insurance, these can be inexpensive and extremely valuable. They are policies specifically for additional coverage to your homeowners policy. If you own a trampoline, dog, frequently have people to your house or have assets, then you should consider an umbrella policy.
• Flood insurance: Even if you don’t live in a flood-prone area, you may still need flood insurance. Shortly after I moved into my house I had some water in my basement because the water table rose to its highest level in 100 years! Luckily, nothing was damaged except for a few cardboard boxes, etc., but it could have been a disaster, and my homeowners policy would not have paid for it.
• Emergency reserve: You should have or have access to savings totaling 4 to 6 months’ worth of bills. This can help mitigate a major life change such as an illness or job loss.
• Line of credit: This can serve as an emergency reserve if need be.
• Estate planning: Like insurance, estate documents can offer protection for you and your family.
Once you have a strong foundation, you can move on to the next items such as paying off debt, investing and saving for retirement. I’ll talk about those next week in part two of this series!
T. Eric Reich, CIMA, CFP, CLU, ChFC is president and founder of Reich Asset Management and can be reached at 609-486-5073 or email@example.com.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax adviser with regard to your individual situation.