5 Financial Cornerstones for Young Professional Families
Building a strong financial foundation early on in life can set you up for a much more comfortable and manageable financial future. By doing so you allow yourself years to build and improve upon the foundation you created early on. Trust me, your future self will thank you.
If you do not know where to begin then here are 5 areas you can start with.
1. Build A Comfortable Cash Cushion
If 2020 taught us anything, it is that life is full of unexpected events.
Although we may not be able to foresee certain occurrences, we can aim to be as prepared as possible. That includes for financial events that you never could have anticipated.
A sudden job loss, a broken-down car, a health issue not covered by insurance. The list of unanticipated financial burdens could go on and on.
But rather than trying to predict what may or may not occur, why not be prepared regardless. This way your financial situation won’t be derailed.
You have likely heard that it is wise to have 3-6 months’ worth of expenses saved in an emergency fund. But this is just a rule of thumb. Instead, think about your specific situation and comfort level.
If you are a business owner or work in a commission-based job such as sales, then you may want to have a larger cushion as your income may be more variable.
If you have high job security in a well-paying job, with additional assets elsewhere, then perhaps you are comfortable with having a lower cash cushion in the bank.
For example: I am a business owner and therefore I have a personal preference of keeping 1-2 years’ worth of expenses in cash. This may sound high to some people, but it helps me sleep at night and that is what is important.
Knowing what to keep in cash is part financial and part personal. It also involves first knowing what your expenses look like. Take the time to assess your situation and then make a plan to get to the appropriate level of savings for you.
Use this calculator to help determine what might be appropriate for you.
2. Get Control of Your Debts
Debts come in many forms. Built up credit card debt, student loan debt, car loan, mortgage.
Some debts are “good” (maybe OK is a more appropriate word) such as a mortgage and some debts are undoubtedly bad such as high interest credit card debt.
But ignoring your debts and pretending like they do not exist is not a strategy to get control of the situation.
Take stock of your debts. That means know the balance of each debt, the associated interest rate, and your current repayment plan.
Once you have an understanding of your debts you can determine if there are better strategies to paying off these debts.
For example, if you have been paying extra on your mortgage that has a low interest rate, but are only paying the minimum monthly amount on your credit card debt then you would like benefit from switching that plan and paying the minimum on your mortgage and using that extra cash flow on your high interest credit card debt.
Other strategies that might help you get control of your debts include refinancing to lower your interest rate, consolidating debts and reevaluating your payment plan – especially for student loans.
Do not ignore your debts. Take ownership of the situation and get the issue under control by creating a plan and attacking that plan one step at a time.
3. Create an Investment Strategy
Investing does not need to be complicated, but it does require thought and strategy. This holds true whether you are investing your first $1,000 or have slowly built up a significant portfolio.
It is important to understand not only what you own, but why you own it and how it fits into your investment goals and objectives. Considerations when building your investment strategy include:
- Your risk tolerance
- Your investment objectives
- Your investment time horizon
- Your investment preferences
Without a disciplined strategy you might randomly buy and sell this and that based on what a friend, neighbor, or the media suggests. Here is a secret…none of them know what you are investing for and what is most appropriate for you.
If you do not have the time or desire to do the research, then contact a professional who can help. But please, do not just wing it with no thought. The consequences are too great!
4. Develop an Estate Plan
It is never too early to have an estate plan in place. Even the most basic of an estate plan will help you sleep better at night knowing that your assets are accounted for, should something happen to you.
Some estate planning basics include beneficiary designations, transfer on death designations, a living will (also known as an advance directive), financial power of attorney and a last will and testament.
Several of these techniques can be completed by you without the use of a third party, such as setting up appropriate beneficiary designations. But other strategies, such as a living will, may require the use of an attorney or online legal service.
Perfect times to consider your estate plan include when you have any financial assets, when you get married, or when you have children. Your estate plan should be revisited every few years to determine whether it still reflects your desires.
5. Purchase Adequate Life Insurance
Basic life insurance is something that you hope you do not need to use, but that will make your loved ones lives slightly easier should something happen to you.
There are several different types of life insurance, with the primary kinds of policies being term and whole life.
Term insurance covers you for a specified number of years and has lower premiums.
Permanent insurance can have numerous features, but covers you for your entire life assuming you continue to make the premium payments. Premiums tend to be much higher.
Purchasing life insurance is important to consider at certain milestones such as when you get married, purchase a house or have kids. Essentially, it is wise to have life insurance anytime there is another person who is reliant on you in some way, but you do not have significant assets that could assist them in the vent of your passing.
While it is important to have life insurance, it is also important to have adequate life insurance. Lets say your income is $200,000 a year and your spouse does not work. If you only have a policy with a $100,000 death benefit then this is likely to be insufficient (assuming you do not have a significant nest egg).
Experts suggest having coverage of at least 5-10 times your pre-tax income. What is important is that you determine, or work with a professional who can help you determine, what your insurable needs are and how much might be appropriate for your specific situation.
Just like your estate plan, your insurance needs are something that should be revisited on a frequent basis. Your life consists of a lot of change and therefore the insurance policy that you purchased when you first were married is likely no longer sufficient when you have two kids and own a home.
Final Thoughts
Take the first step and dedicate time to think about each of these areas. Getting these basics in place early will promote continued positive habits and will set you and your family up for the best chance of a comfortable financial future. If it is too much to think about all of these different areas and how they apply to your specific situation then seek professional assistance.
Crest Wealth Advisors is here to help you build the financial foundation that you deserve. Schedule a Call Today.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Jason Dall’Acqua, and all rights are reserved.