The 5 Policies You Shouldn’t be Caught Without

I have always been one of those advisors who is a reserved skeptic when it comes to insurance.

I am currently taking a few classes working towards the Certified Financial Planner designation and one of them is a risk management course. I went into the course excited to learn more so I could really make a great debate against insurance products… isn’t it funny how those are the famous last words in so many arguments?

I should prefaces this article by saying that I do not sell insurance, nor do I anticipate selling insurance any time soon. So I am really not trying to convince any of you that you should call me up to buy some. I do have a couple friends who would be  more than happy to help you out though!

When it comes to insurance I think the over arching motto to remember when thinking about a policy is: never buy something you do not understand. With that being said, here is my list of insurance policies that you should never be without.

Renters/Homeowners Insurance – You cannot stay in good graces with your mortgage company if you don’t have a homeowners policy but many renters think that they can get away without it. Don’t be silly, a renters policy costs about $20 a month and is well worth it. If your building burns down, if you are burglarized or if someone is hurt in your space you will wish you had this.

Automobile Insurance – I think every state requires that you carry insurance on your vehicle to register it. Most people don’t understand how much coverage they have or need. Review your policy to make sure you have enough coverage, the last thing you want is to be in a terrible accident and not have enough insurance.

Health Insurance – If you are young and healthy, good for you. But you still need some form of health insurance, even if it is just  a catastrophe policy. The leading cause of bankruptcy in this country is due to medical bills. Don’t be a statistic, get some health insurance – oh by the way, you will be required to have it in 4 years any way thanks to the new health care legislation.

Disability Insurance – The odds are that you will not die prematurely, but the odds are fairly high that you will either be temporarily or permanently disabled. In terms of the impact on your finances disability is far worse than death. Loss of earning power and increased medical expenses will cripple your assets. This leaves your family with the responsibility to pick up the slack. You need this policy, check with your employer benefits program, often they have an affordable policy available.

Life Insurance – There are a bunch of different types of life insurance policies out there. Most people are fine and dandy with a term life policy. Remember what you are insuring against here, premature death. You want to have a policy that covers your present debt obligations such as your mortgage and covers your future earning potential. Whole life policies are where insurance agents get a bad wrap, most people do not need these types of policies but they are pretty profitable for the agent. Remember, only buy what you understand!

The definition of insurance is: “a financial arrangement that redistributes the costs of unexpected losses.” It’s not an investment guys! If you meet with an insurance agent and they try to sell you a policy under the pretense that you are buying an investment – run away as fast as you can.

How Much Do I Need to Retire?

A friend of mine forwarded me a sobering article this week called “$1 Million Doesn’t Cut It for Retirement” by Joe Mont. I would urge you to go out and read it this weekend but the basis of the article is this: Conventional thought for the last decade or  so was that you need $1 million to retire comfortably, the new perspective is that you will need double that amount.

Does that notion melt your mind?! DOUBLE!

I think  a lot of times we don’t fully grasp how much 1 million is. So to put it in perspective, if you had $1,000,000 today in a savings account earning 2% you could spend $1000 every day for the next two and a half  years or you could spend $10,000 a month for more than 14 years before you ran out of money. That’s a lot of money!

But according to the article “…Seniors are the only generation that may come close to needing only $1 million. Forty-four percent of advisers said $500,000 to $1.5 million is sufficient for average families in that age bracket.”

So how much do you need? Well there is this little factor called inflation that you have to take into account. Inflation is the depreciation of your purchasing power over time. For example, if a pen costs $1 today and next year that same pen costs $1.03 then there was 3% inflation over the year. The average inflation rate over the last 100 years has been about 3%.

So how much do you need? Well the answer is… it depends. Because of inflation the younger you are the more you will need. Joe Mont’s article suggests that Generation Y (ages 18 to 26) needs to save at least $2 million to $3 million and  Generation X (ages 27 to 42) should save at least $2 million.

What can you do to reach the goal and have enough for retirement? Well, no matter how much time you have whether it is 2 years or 20 years it is never too late to start saving. As little as $100 per month will help you reach your goal. If you saved just $100 per month for the next 20 years and earned an average of 8% on your investment your balance would end up at a little less than $100,000. There is a start!

Normal

I started working as a teller at a local bank during the last few years of college. I remember when I first started doing transactions for customers and seeing the  balances in their checking account. It was eye popping for me to see the range in account sizes. This was where I first realized that I didn’t want to be “normal” any more, I didn’t want to drain my checking account to $0.15 every two weeks. “Normal” is in quotes because it is all too normal for this to happen.

We recently had an operations manager contact us looking for ways to help improve the financial education and in turn the financial positions of his team members. He was looking for a way to quickly infiltrate his large team with impactful information and strategies that will help them change their habits. He doesn’t want his staff to be normal any more!

When you go to do missions work they say that if the people are hungry they can only hear the growl of their stomach and not the message you are bringing, so you need to feed them. The manager that contacted us knows that if his team members are struggling with their finances, all they can think about is the next paycheck. These employees are bound by their needs and are not free to focus on the work at hand.

So how do we show the world that you do not have to live paycheck to paycheck? How do we communicate that their quality of life is being depleted by draining their checking account?

“Not until the pain of the same is greater than the pain of change will you embrace change.” Dave Ramsey

For me the pain of the same was living life as a broke college student, always worried that if my truck broke down I would be in serious trouble. I knew that I didn’t want to add my wife to this precarious situation and I wanted more for the future of our new family.  But the only real change happened when I realized that I could no longer be “normal”. Normal is just not good enough, normal is being one missed paycheck away from disaster. Normal is having credit card debt, leased cars and a McMansion in the suburbs.

As with most things worth doing, the steps to break the cycle are clear but difficult:

1. Put together an emergency fund.

2. Pay off your credit cards, car loans, student loans and any other type of consumer debt.

3. Build up your emergency fund to 3 – 6 months worth of expenses.

4. Save 15% for retirement.

If you do these 4 things then you wont be normal any more.