Saturday, January 28, 2012

Building a Strong Foundation - Part 2

In part one, I covered the 5 initial steps you MUST take to ensure success in the creation of your plan. They are simple steps, but very crucial. In this post I will cover the "meat" of how to build a "Strong Financial Foundation." When most people think of Financial Planning, the first thing that comes to mind are their investments or retirement plan. A true financial plan not only maps a strategy to achieve financial independence or other major life goals, BUT also addresses ALL the risks that are LIKELY to prevent you from achieving your goals. This is sometimes called "Risk Management." You can have the most perfect plan to be RICH by age 50, but if you lose your income, get sick, or die, your plan will never come to fruition. Below I cover all the risks you must address if you want a "true" financial plan.

Risk Management Basics:

-Cash Reserve- Lack of liquidity is your most likely risk. Don't use a "rule of thumb" like 3-6 months of your expenses. We all have different situations. A small business owner will need way more than a tenured professor with almost ZERO chance of job loss. I hope you get the point. Really think about your situation and make some assumptions about possible worse case scenarios. Is your job really stable? How much will my A/C unit cost if it goes out tomorrow? If the engine in my Accord blows up, what will I do?

-Health Insurance: You are more likely to get sick than almost anything else. How bad would it suck to end up with a $5,000 emergency room bill that could have been avoided if you had just looked at your health insurance plan. If that happens, where do you think the money will come from? If you guessed your cash reserve or your retirement plan, you are probably right! Also, health insurance is extremely complicated. You need a specialist that deals primarily with health insurance. Don't try to do this on your own.

-Auto/Home Insurance: Most people have no idea if they are properly covered in these areas. And the agents who sell this stuff I have also found to be a bit clueless. Get with an independent insurance agent that will help you get the correct coverage limits for YOU, and also save you the most money by shopping rates. To see who I recommend in my area go to and click Jason Recommends. Proper coverage is more important than price. You don’t want to get into a wreck, get sued, lose your investment accounts because you didn't have enough coverage. Or you don’t want your home to burn down and not have enough money to build at least the same size house back.

-Disability Insurance: What drives everything in your financial plan? YOUR INCOME! If it goes away, so does your any chance of retirement or sending your kids to college. You MUST protect your income from the risk of you not being able to work. You are more likely to become disabled than to die prematurely. Important note: NOT all policies are created equal! Also, if you have a policy through your work, chances are it isn't enough to replace most of your income loss. So, you will probably need to purchase coverage outside of your work plan.

Long Term Care: If you’re done with your working years or about to be, buy Long Term Care Insurance! We have great medical care in this country which keeps us all living forever. What that means is that we will likely end up needing some help when we get old. And if you go into a nursing home or need care in your home, you will die broke! Its expensive! And all your hard work is wasted. I suggest looking at buying this coverage by at least age 55.

-Life Insurance: No rule of thumb! DO NOT use 10 times your income! That is likely not enough! Imagine the life of the ones you will leave behind if you died. What do you want to happen? Pay off the house, pay for college, donate to charity, replace your income? Then use those desires to back into the amount of life insurance you really need. Term insurance is the best option for 95% of the public. Go out as long as you can. You don’t want to buy 20 year term at age 30, hit age 50, and be uninsurable. I know, I know... You'll be as healthy as a horse in your 50's. Wise up! NOT LIKELY! Prepare for the worse case.

-Debt Reduction: Its no secret, you can’t rich sending all your money to high interest credit cards. Pay off all consumer debt ASAP. But also educate yourself. Know the difference between good debt and bad debt! Math doesn’t lie! Understand the numbers and do what’s right for you. But don’t use the numbers to justify stupidity!

Lastly, there is NO way I can cover all the details of each risk here. I have painted some broad strokes. You must work with an advisor that is unbiased and objective. You need someone to guide you, hold you accountable, and yell at you when you screw up. No one can handle their own finances objectively. The Miami Heat doesn’t think it’s a good idea to send Lebron James, Dwayne Wade out to play without a coach. Hire a Fee Only Financial Life Coach! For more go to

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