April is Financial Literacy month in America. The real impetus behind this effort of a whole month of promoting financial literacy is to increase awareness around the subject. Espousing healthy financial habits are just as necessary as having healthy eating and physical habits. Can it be said that Americans care as much about their physical health as their financial health? The jury is definitely out on that according to a 2014 survey by Wells Fargo (the 3rd largest bank in the US measured by assets). Let’s cover some of the topics that might be helpful as you gauge your own level of financial fitness.
Q. Should I work with a financial planner?
A. I would imagine this is probably one of the most pondered question. But first let’s discuss why anyone would normally seek professional advice on a subject. It usually has to do with the degree of importance of the subject. I very well may choose to look at a YouTube video to change out a toilet seat, but I wouldn’t very well use YouTube to figure out how to do a root canal (especially on myself!). Usually finances are a subject that becomes so much more emotional than changing a toilet seat or a root canal. Why? Possibly because it is through your own hard work that you’ve earned the money you have so there is an emotional attachment to it. In exchange for irreplaceable minutes and hours, money was earned and now to entrust someone else with its direction is a little counter-intuitive. I think that acknowledgement of this natural barrier is key. Only after that hurdle has been crossed, can an individual assess whether or not their investment and financial goals warrant professional help. However, since with most things, better results are obtained through accountability and support (e.g. having a gym buddy) the answer is usually “yes”.
Q. What things should I prioritize when it comes to financial planning?
A. This is really subjective and person-dependent. Young married couples with small children will probably consider college planning and life insurance important components of any plan. Empty nesters or singles won’t need much or any of either. High net worth individuals may really be concerned about keeping the bulk of their investment earnings and avoiding unnecessary taxes. As you can see, this really is dependent on the stage of life that you are in. However, working with an investment professional will at least start a conservation about what is most important and prompt you to think about how all of your goals can fit together in a cohesive plan.
Q. Should I be debt-free before I start my financial plan?
A.Becoming debt free is usually part of a financial plan. Per the Wells Fargo survey: “Only a third of adults have some type of financial plan or a simple household budget in place, which means most Americans don’t have the roadmap needed to improve their financial health.” So since most people operate without a budget this obviously exacerbates being in debt. Notwithstanding, it may just complicate things to hire someone just to tell you that. However, getting out of debt only takes time and discipline. Consider that at the most basic level, earnings can be spent only two ways: current and future consumption. Debt accumulates when future consumption has been combined with current consumption instead of delayed. The only way to fix the problem is to reverse the process which means to start delaying future consumption. Then, all the deferrals can be focused on paying down the existing debt.
Q.How can I tell if I’m underinsured? I have coverage through my employer, but I’m unsure what happens if I become unemployed.
A. First, we need to discuss what types of insurance may be necessary. Leavingproperty and casualty insurance aside, life, medical and disability are the big three that most people need. Typically, employer coverage is adequate when it comes to medical and disability. More often than not, they are offered as part of the compensation package and can be too expensive if purchased privately. In the event of unemployment, medical insurance can be obtained through COBRA (the most expensive) or you can be covered by the Affordable Care Act (less expensive than the former). Lastly, life insurance may be offered by your employer, but typically this is the area in which most individuals are under insured. Because of the relatively low cost of coverage, it usually makes sense to have your own private policy in addition to what your employer offers. Why? Because the consequence of having too little insurance in the event of a death likely means you are unable to replace the income of the deceased wage earner. So for a relatively small expense, healthy individuals can purchase plenty of coverage to avoid that possibility.
The value of developing a thorough, actionable financial plan goes way beyond the amount you will pay to a professional (if you choose to go that route) and is something worth considering on your path to better financial health.