By Christopher Haymon
Christopher Haymon is the founder of Adulting Digest.
Are you planning for your financial future? If you’re like the average person, you’re more focused on today than tomorrow. But failing to plan comes with major consequences, and they don’t always wait until you’re 65+ to strike. These are the four steps you need to take to protect your family today and into the future.
1. Plan for Emergencies
According to a survey from GoBankingRates, 69 percent of Americans have less than $1,000 in their savings account. That’s less than you need to cover a broken furnace or a trip to the emergency room, let alone a major event like losing a job.
If you’re among that 69 percent, prioritize building an emergency fund over other financial goals. Your emergency fund should cover three to six months of living expenses. This includes non-negotiable expenses like mortgage or rent, car payments, and utility payments, food, and gas. The exact amount in your emergency fund depends on your expenses along with other factors, such as benefits you might qualify for if you lost your job.
It’s also beneficial to have a general idea of how much your assets are worth when planning for emergencies. Assets include your home, cars, investments, and other items of value you own. You can use an online estimate to calculate an approximate value for your home.
2. Pay Down Debt
Debt seriously hampers long-term savings goals, especially if you have a lot of bad debt. Debt.org defines bad debt as debt that doesn’t increase your net worth or hold future value, and it’s this debt you should focus on paying off first. Common forms of bad debt are credit card debt and car loans. While student loans are often considered good debt, high balances can still make this debt burdensome, especially for privately held student loans with high interest rates.
There are two philosophies regarding paying off debt: paying off debt with the highest interest rate first, to minimize the total amount paid over time, or paying off debts with the smallest balance first, to build motivation by eliminating debt accounts. Choose the strategy that works for your finances and your morale.
3. Invest in Good Insurance
Life is full of unexpected events. If you’re not prepared in the event of a medical emergency, disabling health condition, or early death, you’re putting your financial security at risk.
Paying hundreds of dollars monthly for insurance is a hard pill to swallow, but when you look at the numbers, investing in insurance makes sense: one in four people will spend at least three months out of work due to a disabling condition, the average funeral cost is over $7,000 and is rising, and medical debt is the leading cause of bankruptcy in the US.
Most Americans understand the value of a good health insurance policy, but life insurance and disability insurance are less understood. Disability insurance pays a portion of your income if you’re unable to work, both short-term and long-term disability policies are available. Many workers can purchase disability insurance through their employer at a discounted group rate. Life insurance pays money to beneficiaries in the event of the policy holder’s death. It’s important to have this if a spouse or children depend on your income or if you don’t have savings to pay for funeral expenses (though many people opt for burial insurance to help cover the cost of funerals). While many people opt for term life insurance due to lower premiums, a term policy doesn’t accrue cash value. Purchasing a whole life policy instead gives you the option to sell the policy later on to free up cash for retirement.
4. Save for Retirement
Unless you want to work until your final day, you need retirement savings. If your employer offers a 401(k), this is the best place to start. Workers contribute pre-tax income to a 401(k) through payroll deductions, and some employers match that contribution up to a set percentage. To save beyond the annual 401(k) contribution limit, or if you don’t have a 401(k), look to IRAs. You can save either pre-tax with a traditional IRA or post-tax using a Roth IRA. If you’ve maxed out both your 401(k) and IRA, talk to your financial advisor about other ways to invest.
You can’t afford to put off thinking about the future. While today may be comfortable, tomorrow won’t be without a strong financial foundation. Whether you’re just getting your finances on track or looking to expand your investments, talk to a financial counselor about how you can better prepare for your financial future.