By Steve Doster | Mission Valley Money
The ending of a calendar year is an interesting time. People reflect on where they are in life, or where they are going. One thing I hear a lot in December, and I’m guilty of this as well, is some version of: “Wow, this year went by so fast!”
As a financial planner, I get to talk to people quite a bit. One thing I observe is that people are very busy. Another thing I know is that personal finances are not typically at the top of the to-do list. With these two things in mind, I challenge you to choose just one item from the following list to achieve in 2019:
- Pay off “unacceptable” debt
Unacceptable debt is primarily credit card debt. When paying of credit card balances, the following strategy should be applied:
- Stop using credit cards and end all recurring monthly charges
- Make the minimum payments on all but the highest rate card
- Pay as much as possible on the highest rate card. The total of all credit card payments should equal at least 15% of your income.
- Repeat this process until each credit card is paid off.
- Build an emergency fund
This money is set aside in cash to fund living expenses in case of emergencies. You may lose your job, get seriously injured, or have an unexpected car or home repair. Without an emergency fund, you will have to use credit cards or ask family or friends for money. In short, you build up debt that becomes difficult to repay. The standard amount of cash cushion is three to six months of must-pay expenses like rent, food, and utilities. This cash should never be invested because investments can be in a downturn right when you need money. Keep it in a separate savings account so you don’t accidently dip into it for non-emergencies.
- Get long-term disability insurance
Future earnings potential is the biggest asset for most of us. Long-term disability insurance protects this asset. Unfortunately, a lot of people don’t have it. Sign up for this coverage through work if it’s offered as a benefit. If you are self-employed or work for a small company that doesn’t offer disability insurance, look to a large industry association to get the best rates.
- Save 15 percent of income
People on track for a normal retirement age of 67 need to save 15 percent of their total income. Super-savers achieve a rate of 20 to 25 percent. Saving more also reduces your living expenses today, and in the future. Not only are you saving more, but you will need to save a smaller retirement nest egg to fund this new lower annual living expense.
- Hire a fee-only financial planner
Financial and tax laws are too complex to navigate on your own. Find a fee-only financial advisor at org to get a financial plan. Fee-only financial planner will not sell you insurance or annuities. They are legally required to only provide recommendations that are in the clients’ best interest. Unfortunately, most financial advisors are not fee-only. They make their living by selling financial products. You deserve better. Stick with a fee-only financial planner.
- Create estate documents
A common misconception is that estate planning is only for the wealthy or elderly. Every adult should have at least basic estate documents: advanced healthcare directive, durable power of attorney for finances, and a will. A living trust is a fourth estate document needed for people who own a home, a business, or have a large non-retirement account. All these documents can be created by an estate planning attorney.
- Check your life insurance needs
Parents with young children and spouses need about ten times their annual salary in life insurance. Someone making $100,000 per year should have about $1 million in life insurance. This is just a rule of thumb, but it gives an idea of the range you should be shooting for. Stick with term life insurance for the lowest rates.
As 2018 ends, remember that 2019 will go by just as fast. Pick just one goal from this list and get it done! In four or five years, you could have your entire financial life in order.
—Steve Doster, CFP is the financial planning manager at Rowling & Associates — a fee-only wealth management firm in Mission Valley helping individuals create a worry-free financial life. Rowling & Associates helps people with their taxes, investments, and retirement planning. Read more articles at rowling.com/blog.