From the moment you graduate college, the quest for building a solid financial future for many people begins. It’s been said a man’s home is his castle so let’s compare this “quest” for a solid financial future to building your financial castle. I’m amazed at the number of people I meet with who are 10, 15 or even 20 years into building their financial castle, and who unbeknownst to them have been building their castle on sand as opposed to building on a solid rock.
Before you start on any construction project, the foundation has to be laid. How solid that foundation is determines the viability of the rest of the structure that goes up. From a financial perspective, we can consider your financial foundation to be your cash flow. How solid, strong, and consistent your cash flow is will to a large extent determine the viability of the rest of the financial structure that you erect. So for those that are getting ready to graduate from college, the first question you should ask yourself is: have you invested in a career that will generate a solid, strong and consistent cash flow as you grow within your profession? If you are already working in your profession, have you taken the steps to protect your cash flow should the unthinkable happen…..a prolonged injury, a disability or even death?
Assuming you have a solid, strong, and consistent cash flow, the next step is to put up the walls and interior to your financial castle. The walls and interior to your financial castle will be the assets you invest in to achieve future financial goals. As you start putting up the walls, are you investing in financial products you understand? Are you investing in financial products that serve your needs versus those of the advisor you are working with? How do the financial products you are investing stack up to the four basic investment considerations of safety, liquidity, return, and taxes?
Is any house complete once the foundation is down and the walls and structure is up? I am yet to find a complete house or a complete castle without a roof. And why would it not make any sense to not have a roof over your castle? The answer is rather simple. You would have no protection. You would have no protection from the elements like sun, rain, bad weather etc. You would also have no protection from the risk of theft. In short, you would have no protection over the very precious items you’ve accumulated within the inside walls of your castle. As simple as this is, I marvel at how people while building their financial castle, pay little attention to making sure they have the right amounts and coverage for property and casualty, automobile, disability, life and long term care insurance. I also marvel at how very few people take the time to make sure their estates are in order to protect not only their property from the state and from unnecessary taxes but also to protect their assets from unsuspecting litigants.
If it seems rather ridiculous to build a castle or a home on sand, then don’t do the same when building your financial castle…..your financial future. Take the steps to ensure that your cash flow and income is protected by having sufficient amounts of disability insurance. You want to make sure you are protecting at least 60% to 70% of your gross income with a disability income policy. Should the unthinkable happen, you also want to make sure you have sufficient life insurance to replace your income and provide for your family.
One of the greatest risks people face who enter retirement is not planning for the ever growing costs of health care for the elderly. In addition to planning for your projected medical expenses after retirement, you want to acquire a long term care policy while still working as the costs of nursing care facilities for the elderly can quickly and single handedly wipe out your financial resources.
With the ever increasing occurrences of natural disasters throughout the world, it is becoming more and more important that you have the right amount and types of property and casualty insurance coverage. We live in an extremely litigious society so umbrella insurance policies are not just for the wealthy or for celebrities. They should be part of an overall risk mitigation plan for just about everyone. Taking steps like these could mean the difference between building your financial castle on a solid rock versus building it on sand. If you are going to build, make sure you are building on a solid foundation.