Foundation #2 – Protect What You Can’t Afford to Lose

Justin WallerNews

Financial Fitness Foundation #2 – Protect what you can’t afford to lose

Life is full of ups and downs.  We need to plan and work toward what we want to accomplish, but also make sure we are ready in case things don’t go our way.  Here are some examples of things you should consider protecting:

Protect Yourself – Cash reserves

A strong cash reserve protects your ability to make good decisions and stay out of “crisis mode”.  My guideline for Cash Reserves is 3-6 months of fixed/committed expenses that you wouldn’t be covered elsewhere.

Here is a quick example:

If your expenses are $5,000 per month, you should consider having $15k-$30k in cash reserve.
If you also have a pension that is paying $1,000 per month, you should consider having $12k-$24k in cash reserves.

Protect Your Stuff – Property and Casualty Insurance

Here we are talking about automobile, homeowners/renters, liability insurance.  Please talk to a reputable and responsible property casualty insurance agent about this stuff and review it at least once each year.  Tip: If you have an effective cash reserve in place, you may be able to increase your deductible levels and save some money each month.

Protect Your Health and ability to get better – Medical Insurance

Health insurance is a touchy subject these days, so I will stay way from the politics.  I encourage you to have medical insurance regardless of your situation.  Keep the deductibles and out of pocket amounts in mind as you are building your cash reserves and consider using a High Deductible Plan with a Health Savings Account if premiums on traditional insurance are a cash flow burden.

Protect Your Income – Disability Insurance 

Your ability to earn an income is usually your biggest asset early in your career and is still a significant asset for most people right up until retirement.  Most employers give you an option for at least some level of coverage here.  I encourage you to consider Long-Term Disability insurance.  If you get sick and can’t work for a month, that is what cash reserves are for.  Long-Term Disability can be financially and emotionally devastating.

Protect Your Heirs – Life Insurance

If others depend on you, you should assess your situation to determine if your survivors would need to have additional resources beyond what you have already accumulated.  If you have enough financial resources to pass on to your heirs that they would be comfortable, you may not need life insurance.   If you do not have enough resources, consider applying for term insurance to cover the difference and get to work building your own resources so you don’t need life insurance any longer.

This area also involves Estate Planning.  There is a wide range of options/strategies you can use.  Start with something.  Even if it is you sitting down at the table with a pen and a piece of paper, do something.  Some key areas to address are:

1.       What happens if I pass away?  i.e. Who gets my stuff?  and Who is going to care for my children?

2.       If I am still alive but cannot make decisions on my own behalf, who do I want making those decisions?

Long-Term Care – Protect your portfolio

If you are over the age of 45, you should be considering your options regarding Long-Term Care.  This is one of the largest risks most of us will face in our lifetimes.  Accordingly, the premiums can be quite high for this type of insurance.  Some additional thoughts and considerations are definitely warranted in this arena.

If you have no assets to protect, Long-Term Care Insurance may not be a priority for you.  If you have a tremendous amount of money i.e. $10 million+, you can likely self insure.  The folks that need to consider long-term care insurance strategies are the folks in the middle.  Let’s say $500,000-$3,000,000.

There are some great ways to protect your portfolio against the risk of long-term care expenses, but many of them are situation dependent.  Please consult a financial planner that can help educate you on your options regarding insurance and self-insurance.

And that wraps up Financial Fitness Foundation #2 -Protecting what you can’t afford to lose.  I could have easily written a post about each one of these topics individually.  There is a lot to know about these subjects and this post is intended as a starting point, not the comprehensive breakdown.   If these topics (or any others) are important to you and want to discuss it further, please let me know here.

In my next post, I will talk about Financial Fitness Foundation #3 – Building Wealth Systematically,  I look forward to your thoughts and feedback via Facebook or email.  Please let me know what you think and if there is anything else specific you would like me to address.

*I am not recommending anyone buy or sell anything specific, nor am I recommending any specific suggestions.  Everyone should discuss their individual situation with their own financial planner and develop a plan they feel comfortable with.  Please talk with your financial planner to obtain specific financial planning advice.  There are risks involved with everything.  Do not invest in anything you do not understand.  Refer to investment prospectus’ etc. for details on specific investments.