Page 1 of 7
You’re the picture perfect example of a financially responsible person. You live below your means, max out your retirement accounts, have a nice emergency fund and even some investments. You’ve got life by the reigns and every month your net worth goes up and your debt goes down. Your living the American dream. Before you get too content with your progress, know that these 8 big "landmines” can ruin the best laid financial plans. This article will help you understand, plan for and hopefully avoid each of them.
This is an extensive and important article on a topic that few tend to discuss. It's more like a collection of 8 articles, so utilize the article index or feel free to view all pages.
Nobody likes to talk about death. There’s something morbid in even planning for it, but if you want to be responsible to your loved ones, take contingencies against early death and do it early in life. Statistically, you're unlikely to die during your “vulnerable” years: those years where we have dependents that rely on our earnings but we haven't accumulated enough assets to support them. For most families, the vulnerablility starts with the first child and ends when they are debt free and have enough assets for the surviving spouses to carry on without their partners. Typically, this period usually lasts about three decades - somewhere from your mid twenties to mid fifties. Once the kids are grown up, they fire up their own income machines and your spouse can either work or manage to live off the nest egg you have built up together.
Avoiding It: Refuse to die early. Look at the leading causes of early death: Heart attacks, cancer, accidents, diabetes. While there are genetic factors involved with the diseases listed, you can greatly reduce your risks by exercising every day and eating better foods. According to a recent report, 77% of all adults are inactive and 58% are overweight. Do yourself a favor, if someone depends on you, keep your weight down, don’t smoke, and take it easy behind the wheel, you’ll greatly reduce the probability that you exit Planet Earth early.
Planning For It: Get term life insurance early in life. The earlier you get it, the cheaper it will be. Because life insurance rates are based on risk factors and insurance companies compete vigorously for your business, premiums are fairly low when you're young - as little as a few hundred dollars a year for $500,000 of coverage . A good technique is to start with a smaller policy in your twenties that will give you good protection and then lock in a bigger 20 year policy when you are in your thirties. Rates in you early thirties are still inexpensive and it will carry you all the way to your fifties after the kids are on their own and your house is paid for. If you wait till later in life the cost of a policy becomes prohibitive and it's more likely that you won't qualify for the best rates. Shop around and use the Internet to get the best rate from a reliable insurance carrier.
Sickness & Disability
The expensive thing about death isn’t the burial or your tombstone, it’s the medical bills leading up to it. And you don’t need to die to get some monstrous medical bills. In fact, take the opposite, more joyous event, having a baby. The retail tab for a C-section delivered baby can be a staggering $30,000 in many hospitals (although insurance will cut that rate by two thirds). But for most people, medical bills will get out of hand with chronic conditions that need repeated doctor visits and medications over many years. A single event such as an accident may cause you to max out your out of pocket expense for a single year, but an ongoing condition will sap you year after year. Nothing in the recent health care reform will change this and many insurance companies have dramatically increased their maximum out of pockets, raised deductibles, and decreased coverage amounts. In addition, the loss of income from work while you are sick can far exceed the amount of money paid for health care. You can also become disabled which would significantly reduce or eliminate your earnings. Mental health? If you have kids, they might need a child psychologist or if you have a lot of kids you just might need one yourself.
Keep yourself in good shape. As we discussed in our first point, sickness is heavily influenced by your diet, weight, and exercise. If you have genetic dispositions to certain diseases, make sure that you take appropriate measures. For instance, if you have a family history of diabetes then avoiding excessive sugar, keeping your weight down and exercising are a must. If you have a history of breast cancer, make sure you get the appropriate screenings.
Planning For It:
Your emergency fund is there for a reason. When you get so sick that the costs exceed your ability to pay out of current income (or maybe your income goes away altogether), you’ll need to tap your emergency fund. Having a good healthcare plan is also critical. While it is unlikely that your healthcare plan will matter much early in life, as each year goes by, it will become far more important. Make sure that you choose a plan that is consistent with both your health condition and your financial condition. If your employer offers long term disability insurance, take it and use after tax dollars to pay for it so that any proceeds are untaxable. These plans will often pay 50 - 65% of your salary and if untaxed will typically net you more than you would have made working. The cost: typically only about $200 - $300 a year.