There are 3 things you want to do before you do anything else when creating a financial plan. They are simple, and yet daunting at the same time. It feels like they are so time consuming and will take FOREVER! In our fast-paced culture, and get it done NOW mentalities, doing 3 things that may take 1-2 hours EACH seems unrealistic. But seriously, how many hours did you spend on social media this week? How much time did you spend in front of the TV? Whatever else your guilty pleasure may be, don’t you think it is worth a small sacrifice to make sure you and your family are going to be taken care of? It is truly a small price to pay. You just have to make the choice to do them.
- Get the Right Amount of Term Life Insurance in Place
The first building block to creating your financial plan is to make sure the loved ones in your life will be taken care of after your gone. None of us like thinking about dying and I am not speaking that over anyone. The fact is we are all one day closer to the end of our lives today, and the fallen world we live in includes unfortunate and unexpected accidents and illnesses. If you have family members relying on your income for everyday expenses (e.g spouse, children), you NEED life insurance! What is life insurance? Life insurance is an insurance policy that you pay monthly, quarterly, or annual premiums for and when you die, the person you have selected as your beneficiary receives a lump-sum of money. This is crucial for your family whether you earn an income to keep your family fed or you stay at home with kids, clean the house, and make meals. If you earn an income, you need to replace your income for your family with your life insurance policy. If you are a stay-at-home parent, you need to provide funds for your children to be cared for and fed if you were not there to do it anymore.
How much life insurance should you get? Dave Ramsey recommends 10 times your annual income in life insurance and I agree. For example, if you earn $50,000 per year, you should have $500,000 in life insurance coverage. The reason for this is your beneficiary can take that lump sum of money and invest it in good growth-stock mutual funds. Let’s say those mutual funds earn an average of 10% interest per year. Is 10% of $500,000 equal to $50,000? Yes, it is. Your income has just been replaced and your family has not had to change their lifestyle or living situation in addition to facing the tragedy of the loss of you. That is the best way to say “I love you” to your family. If you are a stay-at-home parent, calculate how much it would cost to hire childcare, a housekeeper, a cook, and/or personal assistant to do all the jobs you do every day and week. Now multiply that total annual cost by 10 so your family can do the same with that lump-sum—invest it and pay for those expenses with the interest it earns.
The best life insurance available is TERM life insurance. Don’t let anyone tell you otherwise. Don’t even argue with anyone about it, just know it. I will tell you why. There are other products out there with the name “life insurance” on them (e.g whole life, universal life, etc.) The problem with these other life insurance products is they have a secondary part to them outside of the part where they pay your beneficiary money when you pass on. They often include an additional “savings” feature. They are often 10 times more expensive than term life insurance policies because of this feature and all the extra fees. Now you might be asking, what is so bad about having an extra savings account? Isn’t that the goal? Yes, you want to save and invest, BUT you want your savings and investments to be just that, and not tied to anything else. Your investments have the potential to grow at a much greater rate when you are able to control what your money is invested in. PLUS, what the insurance companies don’t like to tell you (because they make A LOT of money on these products) is that when you die, they give you the face amount, but NOT your savings account. WHAT?!?! You’ve been paying extra for this policy so you could have this extra savings feature, but when you die, they keep the savings? Yep! See why it is important to keep your investments separate from your insurance? Because if you paid for a cheaper TERM life insurance policy and took that extra money they would have charged you on the other life insurance with the savings feature and put that money in a savings account or investment instead, when you die, your beneficiary receives the face amount of your policy AND your hard-earned savings. Now your family is even more taken care of! The last selling point they will use for these other life insurance policies is that they last you’re your WHOLE life, not just for a period of time. If you are serious about getting your finances in order, getting out of debt, and investing for your future, there will be a point in time you will be considered self-insured and you won’t NEED a life insurance policy anymore. Let’s say you get out of debt, get your kids through college and they are successfully living on their own, your home is paid for, and you and your spouse have been diligently saving for retirement for many years. At that point, you don’t need life insurance anymore because your family will financially be ok if you were gone. My point is, you don’t need life insurance for your whole life. You need it for 15-30 years depending on where you are in life when you start. A term life policy is your answer, and it is incredibly cheap.
2. Do a Monthly Budget
Start now and don’t ever stop! This is something you will do FOREVER! Make it your new habit. Trust me, it’s not as bad as it sounds. In the beginning it took me nearly an hour to set up the budget for each month. There was a lot of trial and error. For me, it came down to having the right tools in place. I first tried doing it with a pencil and paper using different templates, then I created an excel spreadsheet, next I tried using several different online budgeting tools. The one I landed on and continue to find the easiest and quickest to use is EveryDollar. There is a website as well as an app you can download to your phone. They have a free version where you manually enter your transactions or a paid version (annual subscription) that links to your bank account and automatically loads all of your debit transactions for you to categorize. I’ve used both. Obviously, the manual one is slightly more time consuming and the paid-for version is faster, but that’s the only difference. Everything else functions EXACTLY the same!
Setting up your budget for the first time is the most difficult one, but again, depending on the tool you use, it could make it easier. To start, you need basic categories and subcategories for your “budget items.” Examples of categories could be housing, transportation, food, etc. Examples of subcategories for housing could be rent/mortgage, electricity, water, lawn, security, repairs, etc. When I set up my very first budget, I didn’t want to be guessing, so I printed off my bank statement from the previous month and did a retrospective budget, putting every transaction into categories andsub-categories. I gotta tell you, it BLEW MY MIND to see where all of my money was going. Full disclosure, I had spent over $2,000 between Wal-mart and Target and had NO IDEA what I had bought! That’s why it is so important to be intentional. Dave Ramsey says “A budget is telling your money where to go, instead of wondering where it went.” Let’s just say after that eye-opener, my “grocery” category went on a diet. The most amazing and liberating thing about the whole process was that I could free up so much cash that I was missing out on before and use that extra money to pay off debt and save! It actually felt like I got a raise! I wasn’t sure how it was possible to pay off over $100,000 debt within 2 years until I saw these numbers (more on my personal debt-free journey in another post).
Just like learning any new skill, it takes time and practice to get the hang of it. Have patience and give yourself grace, but commit to becoming good at it! It will change your life for the better!
3. Create a Will
I’ll be honest, I put off creating a will for far too long (like, years!) And I had every excuse in the book not to do it (I’m going to have more kids, our financial situation may change soon, we might move soon, how much is this going to cost?, I don’t have time!) I know you make excuses for not doing very important things too, so don’t judge me. When it comes down to it, I don’t want the government to decide what to do with my child and my money, so I sucked it up and did it.
The best way to do a will is to just sit down and knock it out. I used US Legal Forms to purchase the correct will for my state and family situation. What I loved about their forms is it gave me a step-by-step process in how to fill them out. These are very legalese forms that when looking at it by itself, requires a lawyer to interpret. US Legal Forms provided a guide with my form that told me exactly what to write in for each space. Once complete, you have to take to a notary and have a couple of witnesses sign it as well. That’s it! Step 1: fill it out. Step 2: sign it in front of a notary and witnesses. Why do we put this off for years? I think it is dreading the unknown process. But hopefully I just made that easy enough for you that you can put it on your to-do list this weekend and knock it out. You will feel so much better that you did and your family will thank you for it!
