I believe everyone should have a financial game plan, but many don't have a clue on where to start. Hopefully this blog will help understand what your financial plan should include. I'm not sure how to draw a house in Google Blogger, so you have to follow these instructions to draw it.
1) Grab a blank piece of paper
2) Draw a large simple house (a vertical rectangle box with a triangle on top of it)
3) Now draw 3 horizontal lines, evenly spaced, in the rectangle box. Each of these boxes represent a floor of your financial house.
4) On floor one (which is the bottom floor), write, "DEBT"
5) On floor two, write, "Emergency Fund"
6) On floor three, write, "Retirement"
7) On floor four, write, "Education"
8) In the roof, write, "Will"
Now I'm going to explain why you should have each part included in your financial plan. The first step is to eliminate debt, which is floor one. Having debt will make you worry every day on when you going to pay it off. If you don't find a way to eliminate debt, you will be in debt for a very long time. I have found that Primerica Financial Services is one of the better companies that is good at tackling personal debt without any extra cost to the client.
Second step is having an emergency fund. An emergency fund is an easily liquidable asset that in case of an emergency, you can take money out. You should put in between 3-6 months of your income into an emergency fund. For example, if you were fired at work, where would you go to pay off your bills and be able to survive without income? Or if you become hospitalize and you can't work for awhile, where would you go to draw income from?
Third step is retirement. This should be the primary step that everybody should focus on. I believe there is no such thing as "saving too much money." But if you don't have anything or not much saved for retirement, you are going to be in deep trouble. Social security don't pay out much, pension plans are going extinct, and the government is going to make it very difficult for you to get help (because the government is in debt too). Where are you going to go to get money? From you kids or grandkids? They are more likely to have problems of their own. Do you want to put this huge burden on their shoulders as well? There's various retirement plans out there for all kinds of people from IRAs to Variable Annuities.
Forth step is setting up an education fund for your kids (if you have any). Before funding your kid's education, you should make sure that your own retirement plan is in order. Your kids will grow up and find ways to save money. Hopefully you will teach them the importance of saving. Anyway, there are several ways to fund for your kid's education. They are 529 plans, Coverdell, UGMA, US Government Bonds, and Certificates of Deposits.
Fifth step is having a Will. If you die tomorrow, who should get your assets? Who should take ownership of your home? If you don't have name a beneficiary, everything that doesn't have a name beneficiary will be held by the state and the state will decide on who should get what. This usually leads to family wars and your family will pay taxes on your estate. So you want to take care of this as soon as possible.
But if you look at your financial house, do you notice anything that is missing? What are all buildings built on top of? A foundation! Step 9: Draw a horizontal rectangle below floor one. Write: "Income Protection" in the foundation.
Without a foundation, your house will begin to sink or fall apart. In life, without having income protection (also known as life insurance), you are putting a high risk on your family that you are going to live for a very long time and that nothing is going to happen to you. But what if you do die unexpectedly, how would your family survive? Without life insurance, your spouse will first use the emergency fund. Soon that will disappear. Then your spouse will go either into the kid's college fund or the retirement plan. Eventually those will disappear until your spouse finds a new partner or your kids go to work to keep the family in the house. If not, the family will have to move in a cheaper home or rent an apartment. If you and/or your spouse don't have life insurance right now, then the entire financial house is resting on you and/or your spouse shoulders because both of you are providing income to the family (unless your spouse doesn't work, or you are not married, then the whole burden lies on you).
With life insurance, you are managing your risks. There are many types of life insurance out there and the ones that are commonly sold are whole life or universal life. I can give you many reasons why they are sold more, but I pretty much revealed the whole truth about cash value life insurance in this blog. With cash value life insurance, you can only buy what you can afford. That's why many families are under-insured. With term insurance, you can buy the right amount of coverage because premiums are low.
In every financial house (your financial plan), you should have life insurance to protect it. You should have a game plan to eliminate debt, open an emergency fund, save for retirement, save for kid's education, and complete a Will. This is what I do for every family I sit down with.
