We should manage our fortunes as we do our health - enjoy it when
good, be patient when it is bad, and never apply violent remedies except in an
extreme necessity. ~ Francois de La Rochefoucauld (1613 - 1680)
Many people enjoy planning - provided it is the "right" kind of planning.
Planning for parties and trips, planning to watch a sporting event or movie are
all enjoyable types of planning. Unfortunately, when the subject matter isn't
fun, people usually dread planning. In fact, they often avoid it completely!
Avoidance generally stems from the feeling that Financial Planning is too
intimidating for the average person. But much of that perception comes from two
sources: not knowing exactly what financial planning is, and not recognizing
that plenty of help is available to explain the process.
What follows is a very broad overview of the typical components involved in
financial planning. Your income, age, and goals will determine if you should
learn about some or all of these. And while some of these may not apply to your
situation specifically, everyone's financial plan can be understood better by
looking at the "Financial House."
The Financial House is a tool that helps explain the financial planning process.
Just like a real house, a strong foundation is required and each subsequent
floor must be adequate to support the upper floors. Unlike a real house, it is
OK to build the house "out-of-order." But the ultimate goal should always be to
build a strong financial house overall.
The Foundation
The foundation of the financial house as well as your financial plan is an
adequate source of emergency funds. One of the difficult aspects of planning
for emergencies is that, by its nature, an emergency is something you cannot
easily predict. Perhaps your car breaks down and needs major repairs. Maybe
there is a major problem in your home that is not covered by homeowners
insurance. The problem is, no one knows!
But even though you may not be able to accurately predict the cost of an
emergency, by following financial planning guidelines, you hopefully will have
adequate funds for most emergency situations.
Financial planners recommend putting aside three to six months of net income for
emergencies. Admittedly, most people don’t have that much, but they should. The
best emergency fund has two important characteristics. It is safe and it is
liquid. A savings account is an excellent place for emergency funds. If your
financial plan does not have an adequate emergency fund, identify where you
could get the money if needed for an emergency. Could you borrow from relatives
or the bank? Could you take a loan from a pension? Could you sell some stock?
Once you have a contingency plan, start building up that bank account to
appropriate levels for your income.
The Farm Bureau Bank is a great source of banking products to help you prepare
your emergency funds. Your Farm Bureau Insurance Agent can help you get started
on your financial house foundation!
The First Floor
The first floor of your financial house or plan is designed to protect your home
and auto, your largest assets – and your largest liability exposures – from
disaster. As luck would have it, virtually everyone has some sort of plan for
this first floor, mainly because they have to.
Still, a proper financial plan includes liability coverage amounts on your home
and auto that are high enough to protect you, your property and your future.
And while no one can say for sure exactly how much coverage you need on these
assets, because no one can predict the type of accident that may arise,
financial planning guidelines recommend that you have liability coverage equal
to no less than your net worth. A quick way to calculate your net worth is to
add up the equity you have in all of your assets - home, cars, boat or other
recreation equipment, vacation property, big-ticket items like jewelry or
firearms, for example.
It may be tempting to purchase the minimum coverage required, but in the long
run, you may be simply trading a large disaster for a smaller one. But it's
still a disaster.
When selecting liability coverage, you must also look back to your emergency
funds. More and more people are choosing high deductibles on their insurance in
an effort to lower their premiums. This is a great idea - provided you have the
money in your emergency fund to pay the higher deductible! That's the piece
most people forget.
Remember, your Farm Bureau Insurance Agent has a full range of homeowners,
renters, auto and other policies, plus the expertise and experience to help
complete the first floor of your financial plan.
The Second Floor
Certain planning is extremely important, but not required by the government or a
lender. This includes planning for disability and/or unexpected deaths.
To understand the importance of this level of the financial house, consider a
very typical example: Jeff and Mindy have one child in elementary school, both
work good jobs and have monthly net take-home pay of about $2,000 each. They
enjoy a typical middle-class lifestyle, with a mortgage payment of $1,200 per
month, two car payments totaling $850 per month, utility payments of about $300
each month, and they have additional, routine expenses such as an Internet
service, cell phones, cable TV, etc. Despite all of these monthly expenses,
they still have over $1,000 each month to go out to eat, go to movies and buy
many of the things they want.
Jeff and Mindy are living the good life.
However, if either one becomes disabled or dies, the picture changes
dramatically. In an instant, the survivor will be faced with monthly bills of
almost $3,000 with an income of only $2,000. Standards of living can be
reduced, but it takes time to sell houses and cars, disconnect services, etc.
Too often, people rely on the benefits they are provided through work for this
piece of the financial plan. But in reality, many employer-provided disability
plans will not pay benefits unless you are disabled to the point that you
cannot engage in ANY occupation, not just the one you have now. In other words,
under that definition, a doctor is not disabled as long as he can be a store
greeter!
Employer-provided life insurance benefits may be inadequate as well. Often, the
death benefit, when converted into a monthly income for the survivor, will not
even pay one of the car payments!
Your Farm Bureau Insurance Agent is a great source of information and products to
help you with disability and survivorship planning. A no-obligation needs
analysis can assure your present situation is proper for you.
The Top Floor
The final step in financial planning is preparing for the future. Once you have
addressed the issues that could impact you today, it is time to plan for the
golden years.
Retirement planning has never been more important – or more complicated.
Luckily, the tools available to assist you in retirement planning have never
been easier to use. Your Farm Bureau Insurance Agent can help you adequately
plan for retirement on your terms and at the age you choose, not the one the
government or your employer selects for you. He or she can review and explain
your investment options and strategies and even recommend a mix of IRAs, mutual
funds, pension products and bank products to help you reach your retirement
goals.
The last part of most people’s financial house is estate planning. Contrary to
popular belief, estate planning is not just for the wealthy. Certainly, clients
with a higher net worth have more complicated estate plans, but in reality,
estate planning is for everyone. A good estate plan may involve a simple will
or trust, a durable power of attorney and a living will. Or it may involve
complex trust arrangements, businesses and stock transfers.
Your Farm Bureau Insurance Agent has access to experts in the field who can
assess your situation, make recommendations and explain them to you in an
understandable manner.
Congratulations!
Buying a new house is an exhilarating experience. And while building your
financial house may not be quite as exciting, it still stirs a very special and
rare emotion - peace of mind.
Securities Products and Services Offered Through: *EquiTrust Marketing Services,
LLC 5400 University Avenue West Des Moines, IA 50266, Member SIPC.
* EquiTrust Marketing Services, LLC and EquiTrust
Life Insurance Company are not an affiliate of Indiana Farm Bureau
Insurance.
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