3 Financial Priorities You Need To Address Now
It’s no secret that the roadmap to financial success starts with paying off debt, sticking to a budget, and saving for retirement. But there are other – not quite as sexy – financial priorities that often get overlooked when creating a financial plan.
Indeed, I’m talking about the thrilling topic of building an emergency fund, creating a will, and buying adequate life insurance.
Many of us fail to address these critical elements of our finances because we don’t consider them to be immediate priorities. I was in the same boat just a few years ago. Before I turned 30 and my wife and I had our first child, we were living paycheque-to-paycheque with no emergency fund, no will, and no life insurance policy.
I had read all the financial rules of thumb. Experts recommended setting aside 3-6 months expenses in a high interest savings account or tax free savings account.
Well, who could afford that? I decided that if an emergency came up, I’d just dip into my line of credit. Besides, I had a secure job and we lived a pretty frugal lifestyle. What could possibly go wrong?
Meanwhile, less than half of Canadians have a will and a large proportion die without ever making one. But getting a lawyer to draft a will for us would cost between $400 and $800.
Heck, we were only 30 – there would be plenty of time to look after this down the road. Why should I spend the equivalent of our monthly grocery budget on something I wouldn’t need for a long time?
I also had no idea how much life insurance was necessary for someone my age. So, like many 30-somethings, I buried my head in the sand and completely avoided the topic of life insurance.
When I changed careers a few months later, I sat through the employee benefit orientation and found out we had a mandatory group life insurance policy. That was perfect, I thought! I could check life insurance off my to-do list.
So what changed? Well, for one, I started taking control of my finances. I developed a comprehensive financial plan and realized that I could no longer ignore these three important areas of my finances.
We were in the middle of a recession when we decided that my wife – who had just been diagnosed with Multiple Sclerosis – should stay home full time to look after our kids. With plenty of financial risk in our lives, protecting my family from job loss or a major health-related event was paramount.
I realized that it took time and money to look after these things. We made a goal to take care of these three areas of our finances and then did the research to find out how much it would cost.
We wanted to build a $5,000 emergency fund so we began to set aside $200 per month, with a goal to have a fully funded emergency savings account in just over two years. We kept the line of credit open, as a fallback, but thankfully didn’t have to use it.
Then we met with a lawyer to draft our will and personal directive (living will). Your will should be updated and filed with your financial plan, but if you don’t have one in place you should hire a lawyer to draw one up for you. The process cost $800, and took about a month to complete.
The easiest area to take care of was our life insurance policy. I had a $250,000 group policy through my employer, which cost $14.50 per month. I found out that I could purchase additional life insurance in units of $10,000, up to a maximum of $500,000 in extra coverage. And at 58 cents per unit of coverage, topping up my existing policy to $750,000 would only cost me an extra $29 per month.
Final thoughts
No one likes to think about his or her own mortality, especially when you have your entire life ahead of you. And besides, who likes paying for something that you’ll only need when disaster strikes?
Emergency funds, wills, and life insurance are so easily avoided because we have the mentality that ‘it won’t happen to me’.
It’s amazing how much your perceptions change as you get older and start raising a family. Suddenly, there’s a huge feeling of responsibility to get these financial priorities taken care of. I’m glad we did because the peace of mind is priceless.
Hi Robb
At your age, your single most valuable asset is your human capital (the present value of all your future earnings). You need disability insurance!
The only thing worse than dying young and leaving no insurance coverage, is getting sick or injured and not be able to work and have no insurance…
Hi Garth and Russ, thanks for your comments. You both bring up excellent points about disability insurance being a top priority and I’m sorry that I overlooked it in the article.
Long-term disability coverage through my workplace plan would replace 60% of my salary in the event I was disabled and unable to work for longer than 120 days. I think that coverage is reasonable but I haven’t looked into whether I could top it up under our current plan.
I second Garth’s comment about disability insurance. Just as your wife’s diagnosis of MS came “out of the blue,” so could a disabling disease or accident happen to you, too, Robb. Disability insurance is frequently an option through a workplace benefits plan. At my place of work there are three tiers of disability coverage available. I personally took the highest level, and paid a larger premium for it, but it was worth it. In my case, I had been diagnosed with kidney disease in my 20s and knew that kidney failure and dialysis were quite likely sometime in my future. That future arrived a couple of years ago at age 55. I’ve been on a disability leave ever since (awaiting a transplant), with coverage via my workplace benefits provider and CPP Disability.
One of the nice things about the long-term disability coverage provided by my employer is that the premiums are paid out of salary “after-tax.” As a result, the benefits received are tax-free. I note that this is not universal as a former employer of my wife paid the premiums on behalf of its employees, resulting in the taxation of disability benefits.
Thanks for this great common sense advice. Our family has done all of the above. We got our butts in gear 7 years ago when we had our first child. Curious, how many months does your $5000 emergency fund cover? One month of expenses is more than that for us in Calgary. We’ve saved 6 months’ worth – hard to watch that much money essentially just sit there (more than $30K) but it’s the right thing to do, especially now in Alberta (oil price plunge and wildfires).
Hi MJ, it was an arbitrary goal we set several years ago. Today we have about that much set aside in cash, access to a line of credit, plus the income earned from our online business, of which we draw about $3,000 per month.
Good job setting aside that big of an emergency fund. It is nice to have that to fall back on, especially in the recession that we’re facing in Alberta.
I think six months worth of expenses is smart if you’re working in a volatile industry, you’re self-employed, or your income is commission-based. Otherwise I think 1-3 months is fine.
I received this comment from a reader who wished to remain anonymous:
Apropos your column today about life insurance, here’s my two “hard lessons” about it.
1) Buy the right kind, and read the fine print. I did buy a term insurance policy in my early thirties (I’m now in the latter half of my seventh decade!), but didn’t understand at the time, and not until my 60th birthday, that I’d bought the wrong kind. Instead of level insurance with escalating premiums (as I aged & could afford higher premiums) I discovered I had purchased declining insurance with level premiums. As I aged, and got a BIT smarter about things, I discovered that my insurance coverage would lose 25% of its payout value when I turned 60. On my 65th birthday, another 25% cut. Since my 65th birthday, I’m down to 50% of my original insurance, at 70 it will be cut to 25%, and at 75 coverage stops. And by age 60 – or even 50 for that matter – I was WAY too late to afford additional insurance . . .
2) Buy it early . . . And live a healthy lifestyle. In my late 40’s, I lived an unhealthy lifestyle, high stress job, overweight, and a VERY high risk stroke candidate (although I hadn’t smoked cigarettes since age 24 or anything else ever). So we made significant lifestyle changes to improve our “odds”. But when I tried to buy insurance right around my 50th birthday, I was shocked to discover that I was either uninsurable (several companies declined coverage outright), or the premiums were unaffordable ($900-plus monthly for $100,000 term policy).
So I have for sure been seriously under-insured, and with limited & expensive options for improving things. The saving graces are that my health situation is better than two decades ago, and I’m two decades closer to the “no-insurance-needed” point!
I’m not trying to start an argument, but is this actually a bad situation? My understanding of life insurance is that its main purpose is to provide replacement income for your dependents in the event of your death. At age 65 and older, the need to replace income from employment is virtually a non-issue. Given the declining benefit, it seems to me that your insurance company is giving you an incentive to do something that I think you might want to do anyway, that is, cancel your coverage because it’s no longer necessary.
Russ, exactly what I was thinking – purpose of insurance is to replace working age income for the benefit of your surviving family. I’m at exactly that same point in life. 50+, close to retirement (whether it’s my choice or not), and I have two private policies from early on ($135K in total) and a workplace life insurance $300K.
As I’ve done my homework on whether to swallow the egregious premium increases on the private policies, I decided to let the $35K policy lapse, and will likely do the same with the $100K private policy. While I’m working I have the workplace life insurance. After I retire, based on discussions with my financial advisor, I don’t need life insurance.
Long term care or critical illness insurance are things to consider at that point. However, it all depends on retirement income and life expectancy.
Great article.
Does anyone have any experience with how robe-advisors advise on issues like these?
Like this, David – https://boomerandecho.com/how-this-unconventional-pairing-can-save-you-money-on-your-investments/
Thanks Robb – I was hoping for some more real life experience that would reflect how important it actually is to pair asset allocation (what robo’s do) with real planning (what most people need). Getting to an appropriate asset mix is arguably not best accomplished with an algorithm resulting from a questionnaire. Real advice and planning require a discussion. I agree wholeheartedly with the fee for service plan and we, at Steadyhand, are active advocates and users of fee for service planners. We are also users of our own product and some of us also have robo accounts to see what the experience is like. I like the people I have met at Wealthsimple and wish them well. I heard their founder interviewed and while he claims they are not building to sell to a bank, they are building to go public which will invariably introduce the common conflict of shareholder vs unit holder alignment. Something all clients of a bank should really appreciate.
My husband and I are both in our 50’s and looking forward to retirement. We both have life and critical illness through our employers. We decided that it would be good to get coverage outside of our employment as we hope to retire in the next 3 years. Although we are both healthy at this time, we were both declined due to previous health concerns. Now we have to consider whether or not to defer our retirements until age 65 when the government will contribute to our healthcare costs.
My recommendation, keep the insurance through work, but add some outside while you are still healthy and insurable. I wish we had done it 10 years ago, then we would still be on track to retire at the end of 2018. Now we aren’t sure what we will do.
I did this as well because, hey, who knows where you will be in your job. I have changed jobs 3 times in last 10 years due to layoffs. During one of those layoffs, all of a sudden, I had no insurance and I got injured during this time. Fortunately, I recovered quickly but it got my butt into gear to get personal insurance.
Most insurance can be set up to top up the work plan and convert to full plan after leaving work for whatever reason. This is how my disability insurance and critical illness is set up.