Phase 1: Foundation

“New Year New Me.” Well, not quite. Studies show that 8% of people actually achieve their New Year’s resolutions and the 3rd most common resolution is “Spend less, Save More.”1

The problem with resolutions is we don’t set up specific tasks along the way to make it manageable to achieve our goals. For 2015, every quarter we will release a simple checklist of items to get started on to get your finances in order. Recognize, finances are a marathon, most of the items on this checklist can take months if not years to complete – so don’t try to tackle them in all in the first month. This quarter’s focus is on the basic, yet often the most overlooked, items to implement for 2015.

Foundational Considerations:

  1. Establish an emergency reserve (3-6 times monthly fixed expenses). You hear this all the time, however the complaint I get is why do in need so much in cash? I agree the likelihood of you needing that may be slim; however a solid financial strategy must work in the worst case scenario. Not only that, cash gives me opportunities and allows me be aggressive with my investments. If I need money for a project, or want to start my own business, and all my money is invested and let’s say 2008-2009 repeats itself when the market crashed – I don’t want to have to sell at a significant loss to get access to cash. Also, I encourage people to keep their emergency reserve separate from where you bank so you’re not tempted to dip into it. Consider opening up an online savings account that doesn’t have a credit or debit card to go along with it. Within that savings account, I can open up sub-accounts to keep my money organized, for example: Emergency reserve, vacation account, property taxes, down payment for a home, etc.
  2. Automate your savings. Within my online savings account, I can also setup automatic transfers to go to each of my sub-accounts. Why is it there are trillions of dollars that are saved within 401ks? Because we set up automatic transfers and never get to see the money – out of sight out of mind. The same needs to be done with your normal savings and brokerage account investments. For couples who cannot figure out your budget this is the simplest way to do so. Automate 15-20% of your gross annual income towards your savings and whatever is left over is what you live on. Create a spreadsheet with your monthly after tax income, subtract your 15% automatic savings habit, subtract your fixed expenses, and whatever is left over that is your “guilt free spending” amount. Divide that number by 4 to determine what you get to spend on a weekly basis.
  3. Create a debt elimination strategy. Car loans, credit cards, student loans, mortgages etc – figure out when your scheduled pay off date is. Mark these dates in your calendar to have a game plan as to what you will do with that extra monthly payment when your debt is gone. It’s also important to celebrate your financial successes – money can be stressful and overwhelming so whenever you pay off a debt or reach a savings goal reward yourself, just don’t put yourself back into debt!
  4. Secure private income protection (also known as long term disability protection).  The very foundation of our well being is supported upon one thing: our income. This allows us to save, pay down debts, take vacations, etc. I see many people insure their jewelry, TVs, etc but don’t protect the one thing that provides all of that. Insure your income. 1 in 4 of today’s 20 year olds entering the workforce will become disabled before retirement. If you have a group plan, after taxes it will only cover about 45% of your income2. Consider supplementing your group coverage with your own private policy that goes with you no matter what, that way if the next firm you join doesn’t have it, you will still be protected.
  5. Secure adequate life insurance. As of 2010, only 44% of U.S. households have life insurance. 70% of U.S. households with children under 18 would have trouble meeting everyday living expenses within a few months if a primary wage earner were to die today.3 How do I determine how much I need? What is the family’s monthly need if you pass? Let’s say it is $5,000/month. Then you need $1.5million of life insurance. Similar to if you won the lottery, you could take the principal and invest it conservatively and live off of the interest. If I could earn 4% every year off of $1.5million that’s $60,000/year or $5,000/month and that $1.5million would last your family a very long time. This is why roughly 70% of lottery winners go broke because they don’t understand this concept.4
  6. Secure umbrella liability insurance.  It is designed to help protect you from major claims and lawsuits and as a result it helps protect your assets and your future. The reason I recommend it is because it provides additional liability coverage above the limits of your homeowners, auto, and boat insurance policies. This protection will kick in when the liability on these other policies has been exhausted. This is a smart asset protection strategy especially for professionals that are assumed to have a high net worth. With Google anyone can look you up these days and if you have initials behind your name, it’s my belief you’re likelihood of getting sued goes up.

Contacts for each step:

  1.  Emergency reserve – work with a financial consultant to determine how much cash you need. Most don’t charge you for this advice.
  2.  Automate savings – work with a financial consultant to set up savings goals and determine how much you can save on a monthly basis. Most don’t charge you for this advice.
  3.  Debt elimination – work with a financial consultant to set up debt elimination goals and determine if it’s more efficient to get aggressive on your debts or start to invest. Most don’t charge you for this advice.
  4.  Private income protection – work with an independent financial consultant who can shop out the market for the most competitive rates and doesn’t have an incentive to go with one company over the other. Most don’t charge you for this research.
  5.  Life insurance – work with an independent financial consultant who can shop out the market for the most competitive rates and doesn’t have an incentive to go with one company over the other. Most don’t charge you for this research.
  6.  Umbrella liability – work with whomever you have your auto and home insurance set up through because your umbrella coverage must be bundled with the same company. For example – Allstate, State Farm, Nationwide, etc. Most don’t charge you for this other than the premiums you will pay for the coverage.

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Tanner Fedell

Author: Tanner Fedell

I am an independent financial consultant working through North Star Consultants in Dallas, Texas, but I also work virtually with clients throughout the U.S. Whether you are an individual or a business, we have a whole host of solutions to fit your needs that I won’t bore you with listing here. If it impacts you financially, we can help.

Tanner is a registered representative and investment advisor representative of CRI Securities, LLC and Securian Financial Services, Inc.