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.
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.