You definitely have some experience in financial management even if you feel like you’re “failing at adulting”, as the memes say. If nothing else, you’re distributing your paycheck until the next one.
Long-term, though, you need a sustainable strategy, and it needs to be tailored to your unique circumstances.
What is a Personal Finance Strategy?
It’s a long-term plan for managing your money and it’s fairly intuitive. There are four basic things you need to do:
- Track your income
- Track your expenses
- Add to your savings whenever you can
- Protect your assets and liabilities
This will also make debt easier to manage. However, we all know life is messy and unexpected financial stress can hit at any time. That’s why you should add a fifth factor to your strategy: insurance, especially if you are a parent or will become one soon. Again, consider four basic points:
- Your lifestyle
- Your existing assets and liabilities
- The number of your dependents
- Any other short- and long-term financial obligations
It’s important to note here that “dependents” means more than your own children. It’s any minor you provide care for (fosters, adoptees, niblings you took on temporarily or permanently etc.), as well as dependent adults. Dependent adults are typically disabled and/or elderly family members. Take your time to consider everyone in your life and adjust your strategy accordingly.
Okay, But What Kind of Insurance?
Focus on a few versatile basics that will complement each other and net your max cover without breaking the bank. Insurance for individuals (as opposed to businesses) is broadly separated into life and general. General insurance is further categorized into health, home, vehicle, travel, etc.
Life and health insurance are absolute must-haves in your personal finance strategy. The premiums for both are typically deductible from your total taxable income. Together, they protect you personally and your family in the event of:
- Significant medical expenses (e.g. surgery, childbirth, emergency ambulance, etc.),
- Critical illnesses (e.g. Alzheimer’s, cancer, kidney failure, etc.),
- Old-age care, and, ultimately,
- Your death.
Life insurance can help with big expenses leftover behind you, like debt, and the resulting financial insecurity (especially if you were the primary breadwinner). Beyond death benefits, you can time your policies such that they’ll help fund your child’s education, wedding, or other milestone.
A health policy complements that with additional protection beyond what your employer gives you. If you’re salaried, you’re probably on a group health plan. Take the time to compare health insurance coverage scenarios provided by work to the risks you actually face in life. A personal policy can be tailored to fill those gaps, plus it’s a safety net if you lose your job.
Other general insurance factors in your strategy will depend on your lifestyle. Home content insurance covers things like art pieces, antiques, even vintage wines in your cellar. Vehicle policies include non-wheelers like motorboats, but if you sail a lot you might consider custom vessel insurance instead. What do you need to protect?
Why Does Insurance Matter Day-to-day?
Now that we’re clear on what kinds of insurance deserve a place in your personal finance strategy, you might be wondering about the palpable benefits. Barring some catastrophic stroke of bad luck, what’s the point of the expense?
First, you won’t have to chip your savings or dip into your emergency fund as much. Insurance is a good financial safety net for when you lose an asset, such as a vehicle, property, or other valuable belongings. Accidents happen, so even if it’s not a debilitating loss, it’s nice to know that your wallet won’t be hit as hard.
Second, insurance is a shield against accidents that are debilitating, even if they aren’t catastrophic. If you’re ever hospitalized, or become temporarily or permanently disabled in any way, or if anything else happens to prevent you from working for a time, health insurance can dramatically reduce the risks that you’ll face with your sudden loss of income.
Third, don’t neglect insurance as an investment portfolio item! The death benefits of a life insurance policy remain fairly consistent over time, which lends stability to your estate planning. Your real estate, business, stocks, investment art, etc. will fluctuate in value, so you want some kind of buffer if they crash.
Cash value life insurance is especially helpful if you max out your qualified retirement contributions. You can set it up to become a source of funding for long-term care or living expenses in your twilight years.
Finally, you can get significant tax reliefs when you claim for health, life, or education insurance. This is important if you’re uninsured due to being financially unstable or on low wages. Tax relief stacks and can make your financial situation much easier to handle long term. Take the time to ask your agent all about it and find the best plan for your circumstances.
To sum up, you need safety nets in place for your property, income, health, and your life itself. If you provide for anyone, you must plan for their futures, especially after you’re gone. Start factoring life and health insurance into your budgeting, and consult a certified advisor on what other policies you might need.
Remember to review them annually and adjust based on your needs and financial situation: when it comes to long-term money management, the best strategy is flexibility.
By Mike Johnston