Financial Planning Focuses: Debt, Life Insurance, and Retirement
by Scott K. Schmidt, Chief Financial Officer, U.S. Money Reserve
There’s much to think about when you are planning for your financial future, but these are three key elements to consider.
You have numerous aspects to focus on when thinking about building a financial plan. It can seem overwhelming to try and narrow the financial field down to just a few crucial elements, but some key issues have an outsized impact on how you should plan for your financial future. Items like debt, life insurance, and retirement are extremely important elements in financial planning. Here’s what you need to know about those three key pieces of getting a financial plan in order.
Understanding and Managing Debt
One of the most significant components of creating a financial plan is understanding and managing debt. Debt has a bad reputation in the world of personal finance. It can be like an anchor around your neck if you are carrying too much, and it can be a real struggle to escape from. Debt, however, can be an instrument to judiciously leverage your assets. It’s a tool to understand and utilize, and partly that means recognizing that debt can be either a positive or a negative on your personal balance sheet. The truth is that some debt can help improve your finances and help you achieve your financial goals. Here’s what you need to know about debt.
First, it’s important to understand that there is “good” debt and “bad” debt. While it is true that there is no such thing as purely good debt, some forms of debt can actually help improve your credit and your ability to borrow, should you need to. Examples of good debt include school loans and home loans. Mortgages are considered good debt because they offer low interest rates, and even though they are usually 30 years long, they are closed-ended debts. This means a debt used for a particular purpose over a set amount of time. At the end of the time frame, the debt is due. Lenders like to see this kind of debt being paid off regularly because it shows that you can and do consistently pay your bills. Carrying this kind of debt can significantly improve your credit score. Additionally, portions of good debt are often tax-deductible. Items like mortgage interest and a portion of student loan debt can be deducted on annual income taxes.
Bad debt is debt that can hurt your credit score and often carries high interest rates. Examples of bad debt include high-rate car loans, credit cards, and unsecured loans like personal loans. These kinds of debts can ding your credit score, and often because they carry high interest rates, they can be difficult to pay off.
Once you understand the difference between good and bad debt, you can begin to use this tool wisely. When considering taking on new debt, a good rule of thumb is to ask yourself how you feel about the debt. Does the idea make you anxious? Are you worried about the payments you’ll need to make annually or monthly? If you do feel worried or anxious, this can be a good indication that you should probably not take on the particular debt.
In addition to this consideration, you should look closely at your finances to ensure that you can afford to carry the new debt. This means that before considering taking on more debt, you should have a comprehensive budget showing the variety of ways you currently spend the money you earn and have. Looking at your budget is a great way to get a handle on whether or not you can afford to take on additional debt, and it can ease anxiety about being able to pay debt off.
Life Insurance: Planning for Contingencies
Financial planning, at its heart, is not only about managing your debt. It’s also about planning for tough times. This means that considering needs such as insurance coverage is a vital part of the planning process. Life insurance ensures that your loved ones will be taken care of should you die unexpectedly. If you are the primary breadwinner, it’s vital to ensure that your loved ones will be able to continue to take care of themselves even when you aren’t there. A comprehensive life insurance plan makes sure this can happen.
The truth is that life insurance doesn’t have to cost a lot — and there are different types of life insurance. Term life insurance covers you and your loved ones for a set period of time — say 20 to 30 years — until you no longer have dependents. Permanent life insurance covers you for your entire life. According to data from Quotacy, on average, life insurance for a healthy 40-year-old costs around $26 a month for a 20-year term. Of course, this can vary based on your health, age, income, and insurance policy type. Permanent life insurance costs more than term life insurance and often includes an investment portion that can be used later in life.
The good news is that, in general, no matter how old you are (or whether you have any preexisting medical conditions), you can get life insurance. In some cases, you need to head to a doctor for a checkup before signing up. Getting the right life insurance policy makes good sense if you want to be sure to take care of your family after you’re gone.
Retirement: Planning for the Good Times
Retirement is something we all hear about from the time we enter the workforce, yet in many cases, we don’t really think about it until we hit midlife or later. We may dream of retiring to our own private island or living somewhere deluxe on a beach. Retirement planning is a critical part of financial planning because it helps you determine your long-term goals and take specific, actionable steps to achieve those goals.
Financial planners generally recommend that you consider saving 25 times your annual expenses for a comfortable retirement. That can seem like an astronomical number, but the sooner you start saving for retirement, the less you’ll need to contribute regularly, thanks to the magic of compounding. The younger you are when you start planning for your retirement and contributing to a retirement fund, whether it is an IRA or a 401(k) (or if you’re lucky enough to have a pension), the less painful it will be to save for retirement.
When planning for retirement, it’s also essential to think about how your spending might change. During the years when you work, you likely spend money on things like lunches, work clothing, transportation, and coffee. When you retire and no longer need to commute to an office, you might spend money on passion projects — say, learning to paint or restoring a beloved vehicle. The costs associated with these activities can be significantly different, so it pays to think about and envision what your future retirement might look like.
Other factors to consider when planning for your retirement include things like healthcare expenses and housing. In 20 to 30 years, the housing market could be considerably different from what it is today, as could the costs of healthcare and health insurance. Planning for those costs is part of the process of planning for your retirement, and sometimes these factors can be quite complex. It might make sense to consider hiring someone to help you make a financial plan for your retirement so you can take these factors into proper consideration.
It’s also important to realize that your actions now — in your day-to-day personal life — will affect your retirement in 20 to 30 years. If you eat poorly and choose not to exercise, scientific evidence shows that you could pay the price later in life. The same goes for financial planning and retirement. Having spendy ways now can be okay as long as they don’t impact your ability to be financially secure down the road. Financial planning can help you determine your goals and set a path to reaching them. Sticking to the path is the trick.
The Bottom Line
Whether you’re experienced at financial planning or new to it, figuring out what to focus on in the process can be daunting. There are many financial tools to learn about, and many of them can seem really complex, but if you simplify your approach and focus on just a few points at once, the process can become a lot easier. The three key places to focus on are debt, life insurance, and retirement. By focusing on these three specific areas when you sit down to think about the future of your finances, you can set a clear path and plan for both the good times and the bad, thus giving you greater peace of mind as you head toward those wonderful sunset years.
