Lay a Foundation to Protect Your Family
It occurs to me as I write this blog, that there are seemingly endless opportunities around strategies and life topics that we can dig into. We have already seen this in the nuance of various subject matters (MBDR, SSI, College, etc). All of that being said, I think it is time to circle back and highlight some fundamental concepts that my wife and I have done to create a foundation so that our life framework can continue to grow.
At first, I was going to try and order these by level of importance, but that is difficult to do because many of these items need to be done ASAP. So with that said, here are the 10 things that you should do to protect your family:
1. Insure Yourself Against Catastrophes
Make sure that you are covered from the various catastrophes that could derail your life. If you are not protected, you could experience a massive setback no matter how close you are to the Financial Independence (FI) finish line. Do not leave yourself vulnerable!
While some of these are pretty common sense, we included the full list of insurance that we have in place.
Health Insurance:
Unfortunately the state of health insurance in the US is still heavily associated with employment. Many people currently rely on their jobs as the source of health insurance. The ACA and private insurance can play a role, but can be very expensive alternatives. There are also health share services that can be utilized but they come with some complications to the process. Depending on your method for FI, there are opportunities to qualify for subsidies in the ACA but it is critical that you understand the rules and income limits so that you do not find yourself with a large expense that you had not planned for. Despite the complication of the US healthcare system, it is critical that you cover yourself. The last thing you want to worry about in the middle of a major medical event is a potential major financial event.
Term Life Insurance:
If you have anyone who depends on your monthly income, this step cannot be skipped. Term life insurance should be the stop-gap in a financial plan where your income no longer exists. There are a couple ways to define this:
- 10-12x your income
-
DIME formula = Debt + Income + Mortgage + Education
We actually use a version of the DIME formula.
- Debt – We do not have any debt (outside of the mortgage) so this is zero.
- Income – for the income section we assume the 4% rule. This means that we take our annual expenses * 25 – our invested assets. As an example, if our annual expenses were $40k, then the 4% rule would be $1,000,000. If our invested assets are worth $600k, then insurance would need to cover the difference which would be $400k.
- Mortgage – This is just how much is left on the mortgage.
- Education – Estimated college expenses for your kids.
Once you add up all of these items, then you will have the dollar amount that your insurance will need to cover. What about the duration of the term? This will depend on how long it takes you to reach FI. Once you are at FI, you will be essentially self insured and no longer require life insurance. If you can get to this point in 10 yrs, then perhaps you would want to buy 15 yr or 20 yr term to allow for some buffer. If it will take longer, then perhaps you would lean towards 30 yr term.
Do not get this confused with whole life insurance. Whole life is overpriced and adds an investing component that underperforms the market. Stick to term life insurance only.
Disability Insurance:
Some employers actually provide short/long term disability insurance. This is more important if you are in a job that is very manual and requires you to do a lot of physical work. It is also much more important if you are not in a financial position to go without income for any extended period of time. The closer you get to FI, the less important this step becomes.
Identity Theft Insurance:
The world has become a digital marketplace. With this shift, there is more and more potential for someone to steal your identity. This can wreak havoc on your credit score and cause countless hours of clean up. Having identity theft insurance for your entire family will allow for early detection so that the damage can be limited. There are also some plans that will assign a caseworker to help clean up the mess. These plans are generally inexpensive and can prevent a lot of headache.
Umbrella Insurance:
While this is not critical early on, as your wealth increases, umbrella insurance will be an important step in protecting your nest egg. A rule of thumb is to purchase umbrella insurance when your net worth is greater than the limits of your auto or homeowners liability coverage. It is generally inexpensive and provides and added layer of protection to your assets.
2. Set Up a Will
There is no worse way to leave your family then to go without any final directions. If you have young children, then who will be their guardian? Do you want the state to figure that out for you? They are really good about handling so many other situations ~Sarcasm~. On top of that, how are your assets to be distributed? Don’t put your family in the position where they will need to fight over the estate. Take control now. Make sure that you have a clearly laid out plan and discuss it with the critical players ahead of time so that there are no surprises.
3. If You Have Minors, Create a Trust
My wife and I actually have a trust that will form on our death if our children are still minors. This is to make sure that our children are provided for as they grow up. We have a stipulations for general expenses, college, major medical events, etc. We did not want to put a lot of restrictions on what was given to them after they become adults, but as children, we have a few guidelines in place.
4. Formulate a Budget
Just do a freakin budget LOL. I talked enough about this in the post a couple of weeks ago. This is a major factor in setting your family up for success and it will allow you to align yourself with your goals. I won’t belabor this one any further. Check out that post.
5. Make an Emergency Fund
Emergency funds are your protection against the unknown. They can be the difference in an unexpected event being an inconvenience or an emergency. The classic view of an emergency fund is having 3-6 months of savings stashed away and there are many different views on the best vehicles to store them in. Our personal preference is in a money market savings account. This makes it easy enough to access that you can get to it as soon as needed, but not so easy that it will be used to fund lifestyle creep. I will be honest though, as we grow the balance in our roth IRA’s, we may start to lower the threshold in the emergency fund. I will not advocate that this is a smart decision at this point, but may cover our logic in more detail in the future.
6. Pay Off Debt
This is a huge item for us. Debt is like an anchor that can sink your future dreams when you do not have control over it. It restricts your cash flow, limits investing, and increases your required cost of living. We are huge proponents for eliminating debt as fast as possible and staying out of debt. Once you are on a budget, prioritize getting out of debt. We utilized the debt snowball but the debt avalanche is another route. Pick a method, stick to it, and knock it out.
7. Automate Your Bills
This sounds like a silly one, but automating your bills will simplify your life. I mentioned in the post about budgeting, that we use an account that is front loaded at the beginning of the month with all of our expenses. This allows us to not worry about what time of the month the bills will hit because the money is already there. If you have them automated, then you also don’t have to risk getting a late fee. Instead, they pay out in the background. This frees your mental capacity to worry about other items that need your attention.
8. Save/Invest
Do it consistently and in proven investment vehicles. This is the ticket to freedom. The more you save early on, the faster you will get there. There are two main factors in investments: Time and Rate of Return. The compounding effects that these factors play on your net worth can be astronomical; however, you have to do it for it to work.
Our personal favorite investment is in low cost index funds but there are others such as rental property and even a personal businesses that can prove to be lucrative too. The biggest thing around investing is not to get caught up in hype. Find assets that have a long track record of performing well and steadily invest in those. Beware of fees and hidden expenses that can degrade the returns and eat into your margins. Once again, do not get caught up in hype. Remember stories such as the Dutch tulip bubble and the shoe shine boy.
9. Plan for College
Time goes by fast. Don’t let your kids get to their Junior year of high school before you start to worry about how to pay for college. There are saving vehicles with tax benefits specifically designed for college such as ESA’s and 529’s. If you choose to use these, understand their limitations and penalties if they are not used for education. I am not going to dig much farther into this because I am working on trying to line up a guest post on this topic for later this summer. The main key is to have a plan and start early.
10. Dedicate Time to Spend as a Family
This is the last but arguably one of the most important topics. Dedicate time to spend with your family. Life is fast paced and it is easy to lose track of why all of this matters in the first place. If you do not actually spend the time with your family what is the point? It is very easy to get all consumed in trying to reach the finish line and lose sight of the entire journey.
Summary:
Congratulations! If you are able to complete these steps, then you should have a solid foundation laid out so that you can frame in the rest of your life.
Were there any items that we missed??? Leave comments below!
Until Next time, continue to Choose Beta
– Chris
