Thursday, July 24, 2008

The first step in your financial plan

I hope that you are still tracking your expenses -- it is vital step in handling your finances.  After you have tracked your expenses for 30 days, I will discuss how you can use that information to personalize your spending and budgeting decisions.  For the next few weeks though, I will cover some of the other basics of creating a personal financial plan for you and your family.  

The first step in any financial plan is to have adequate life insurance.

I know, I know, it's not an exciting way to start, and paying an insurance bill is probably not the liberating, rewarding experience that you came to this blog looking for.  But hands down, this is the most important thing for you to do right now.  This is one of the only steps of the financial planning process that is not gradual.  Either you are appropriately insured or you are not. There is no middle ground.  The good news is that once you decide to address your insurance needs you can immediately accomplish your goal, check it off your list, and forget about it for a few years.

Only you (and your spouse, if have one) can decide how much insurance is right for you.  Don't blindly listen to insurance salespeople and don't rely on simple calculators based on your income. Figure out why you need insurance and how much you need to cover your specific needs.  You should carefully consider what your family's financial needs will be in the event of your death.

Here are a few questions help you get started:

1. Income replacement - If something happened to you or your spouse would your family need to replace lost income?  If so, for how long?  Long enough for your kids to start attending school?  Long enough for the surviving spouse to find a job or to complete training and then find a job? For life?

2. College costs - Do you need to factor in enough money so that you know your children will be able to attend college?

3.  Housing - If you have a mortgage do you want to have enough insurance to be certain that the mortgage can be paid off or that payments can be made for a set period of time?

4.  Child care - Will you need insurance to pay for child care?  For how long?  Will the working parent need to take time off of work to in the event of their partner's death?  Will you need insurance money to fund that time off?  If so, for how long?

These few questions should get you started figuring out what the right amount of insurance is for you.  In the next post we will discuss how to buy insurance given your specific needs.

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