Financial strategizing: First things first
Whenever you start on a new endeavor, like launching your own small business, moving to a new state, or even tackling your daily to-do list, it’s wise and time saving to put first things first. Personal finances are no different. But there are so many aspects of financial strategizing that it can be hard to know where to concentrate your efforts. That first critical thing may not be what first comes to mind. Likely you think it’s to eliminate debt. Hang on a moment.
Let’s try a quick thought experiment: You have your dream job, you’ve paid down your credit cards, your personal loans, and maybe even put a big dent in your mortgage. That’s truly a feat to be proud of! But then, you become disabled, or worse. What happens now? The short answer is that your cash flow suddenly stops. You, or your loved ones, burn through your savings and retirement funds, turn to your credit cards, and even start to fall behind on your mortgage. Given this scenario, what would be the first step to true, deep, long-lasting financial and emotional confidence?
Protecting your assets — which includes you — is the single most important step in increasing your financial and emotional confidence. Here are three “protections” every working American should consider:
- Health insurance: Even if you’re young and healthy, a serious illness or injury could put your financial future at risk. Navigating the health insurance maze isn’t easy, but it’s important to try to find coverage to protect yourself from medical debt. In fact, 46% of Americans with medical debt say it’s preventing them from buying a home, while 43% can’t save for retirement while trying to pay off their medical bills.1
- Life insurance: If you died tomorrow, would your loved ones be able to pay essential bills, keep their home, and maintain their lifestyle? Life insurance provides a financial parachute for loved ones, and, with some whole life plans, you may even be able to build cash value to fund things like education.
- Disability insurance: If injury or illness interrupted your income stream for an extended period, would your savings hold you over? It could be tough. The average individual disability claim lasts 31.2 months — nearly three years.2 Disability insurance can help by replacing a portion of your lost income during this period.
In 2021, the average American saved only about 11.9% of their income.3 Set up a personal savings account, if you don’t already have one, and set a goal to save 15 to 20% of your income by committing to a budgeted lifestyle. Quick tip: Use direct deposit through your employer — it’s painless. If you get a tax refund, have it deposited directly into your savings.
Building a cushion
Did you know that only about 4 in 10 Americans have enough savings to cover an unplanned expense of $1,000?4 Some experts say to build the equivalent of three months in spending. That may not be enough. The ideal is to save the equivalent of a year’s income. That’s a tall order and something that will take time, but if you ever need it, you’ll be glad you have it. Quick tip: Keep your emergency funds separate from your other savings accounts.
Not all debt is bad, but if you’re carrying a heavy load in high-interest loans and credit card debt, you’re throwing money out the window. The average U.S. household that carries credit card debt will pay interest charges of $1,029 annually.5 Once you put the protection steps in place, focus on paying down your credit cards and living within your means. Quick tip: Resolve to pay cash for both small and major purchases.
If you do nothing else this year from a financial perspective, take action in these four areas, one by one — protect with the right solutions, become a world-class saver*, build an emergency cushion, and reduce your debt. These steps will help you move from concerned to confident, financially and emotionally, to make the most of the new year ahead.
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2022-140803 Exp. 7/2024