Not sure whether to save, pay off debt, or invest for retirement? Use this 5-step guide to make smart money decisions. It will help you leverage your financial resources, reduce stress, and build wealth as quickly as possible.
Step #2: Fill your insurance gaps.
In addition to having an emergency fund, an important part of taking control of your finances is being adequately insured. Many people get into debt in the first place because they don’t have enough of the right kinds of insurance—or they don’t have any insurance at all.
As you earn more and your net worth increases, you’ll have more income and assets to protect from unexpected events. Without enough insurance, a catastrophic event could wipe out everything you’ve worked so hard to earn. Make sure you have enough coverage to protect yourself and those you love from something unexpected jeopardizing your financial security and happiness.
Drivers and homeowners with a mortgage must have auto and home insurance. Ask yourself if your current coverage would give you enough protection based on the assets you own and your net worth. I have an inexpensive umbrella liability policy that offers additional protection for any type of lawsuit.
But there are other types of coverage that can be affordable and give you financial protection. For instance, if you rent and don’t have renters insurance, you need to get it today. At an average cost of $188 per year, it’s a bargain for the protection you get!
Health insurance is a critical coverage because any kind of medical issue or accident could leave you with a massive bill. Even a quick trip to the emergency room or a short hospital stay could cost thousands of dollars.
The Affordable Care Act, known as Obamacare, makes it mandatory to have health insurance, even though the penalty is no longer enforced. No matter the politics behind healthcare, going without a policy is a risk you should never take.
If you believe that you can’t afford a health policy, shop for coverage on the federal or state marketplace, which offers coverage at a reduced price based on your income and family size.
Disability insurance is another important, yet often-overlooked, coverage that every earner should have. It provides a percentage of replacement income, such as 60% or 70%, if you’re unable to work due to a disability, illness, or accident.
Remember that if you’re sick or injured and can’t work, health insurance only pays a portion of your medical bills—not everyday living expenses, such as housing or food. Disability benefits allow you to pay any bills or debts until you can get back to work.
There are short-term disability policies that begin in as little as a couple of weeks for situations such as back injury, digestive problems, or pregnancy. Long-term policies typically begin coverage after six months for issues including cancer, cardiovascular problems, and joint disorders.
If you don’t have a disability policy through work (or you do but it’s not sufficient), purchase a policy and have enough emergency money set aside to tide you over until coverage begins.
Life insurance is critical when you have loved ones who would be hurt financially if you died. If you’re in relatively good health, a term life insurance policy for $500,000 might only cost a couple hundred dollars per year.
Step #3: Pay off any dangerous debts.
After accumulating some amount of emergency money and having the right types of insurance, your next financial priority should be getting rid of what I call dangerous debts. These might be tax liens, overdue child support, or accounts in collection. If you have any of these types of debt, you need to get caught up as quickly as possible.
Dangerous debts also include high-interest credit accounts—such as payday loans, credit cards, and car loans—with rates in the double digits. These accounts can destroy your financial health because they drain your resources and keep you from using your money to save or invest instead.
In general, it’s best to tackle your highest-rate debt first because it’s costing you the most in interest. Don’t worry yet about paying off low-interest debts, like mortgages or student loans, ahead of schedule because they’re relatively inexpensive. In addition, they come with built-in tax deductions, which further reduces their cost on an after-tax basis.
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