5 Smart Steps Toward Financial Security and Success

Personal Finance
5 Smart Steps to Financial Security and Success

By Larry Weiss, CFP, CPA

Learn more about Larry on NerdWallet’s Ask an Advisor

One of the great honors of working with my clients as a financial advisor is learning about their lives, talents and goals.

Of course, I also learn about the simple approaches they use to make sure their finances are on the right track. Over the years, I’ve seen the most important steps people must take to secure their financial futures. These five essential steps can help ensure you are on the right path:

1. Save for an emergency cash fund

Life happens, and occasionally there are bumps in the road. Having adequate funds to protect yourself in those vulnerable moments is essential. Six months of living expenses is a reasonable savings goal for either a single person or a family’s primary income earner. If you and your partner both work, three months of living expenses is a reasonable goal. Put these funds in a bank account, savings account or liquid money-market investment.

2. Have adequate life insurance coverage

If you have young children, having adequate life insurance coverage is essential. Affordable coverage can be purchased through term insurance. If one parent should die, there is a tremendous emotional and financial burden on the surviving spouse, which can leave a family in a dire way.

Providing instant liquidity and adequate funds to the surviving members of the family is paramount. Enough funds should be provided to allow family members the time they need to adjust to their new life without facing financial ruin. Also think about providing enough money for college for your children. Most often, people will buy 20- to 30-year term life insurance to provide their families the economic protection they need.

3. Maximize your retirement plan contributions

My mantra to young people who are just starting out in the workplace is, “It’s OK to be broke at 25, but it’s not OK to be broke at 65.” The solution is to contribute as much as you can to your 401(k) retirement plan at work. Many employers offer a company match, contributing money on your behalf for every dollar you commit to your 401(k). Some companies match 100% of your contribution up to a certain amount. If this is the case, it effectively doubles your money.

What’s more, every dollar you contribute lowers your taxable income, which lowers your tax bill. But the real secret to success is that your employer will automatically defer the money to your 401(k) from your paycheck each pay period. So the money never ends up in your checking account, which is a good way to ensure you’ll save it. In 2016 you can contribute up to $18,000 if you are younger than 50 and up to $24,000 if you are 50 or older.

4. Purchase disability insurance

Protect your income by purchasing disability insurance. If you’re unable to work for an extended period, disability insurance can be essential to protecting your family’s financial well-being. Some employers offer their employees disability insurance through work. Otherwise, you can purchase insurance privately. Most policies will provide you with funds to pay living expenses while you are recovering, usually after a 90-day period.

5. Create and share essential estate-planning documents

Putting your affairs in good order for your family and heirs is an essential part of a good plan. Make sure you have created the following documents:

  • A living trust allows your property to bypass the expensive and lengthy probate process. Having a living trust makes it so your property more quickly and easily goes to the people you choose.
  • A will is a legal document that indicates your decisions on how your estate will be managed and distributed at death.
  • A power of attorney allows you to name someone you trust to manage your finances should you become unable to make these decisions yourself.
  • A medical directive is designed to outline wishes in regard to medical treatment and interventions when a person is incapable of making his or her own decisions. Often the document will establish who can make these medical decisions on your behalf. These are state-specific, so make sure you use the correct one.

You can complete some of these forms online or talk to an estate-planning attorney for help setting them up. Once you have these documents, share them with the loved ones whom you have chosen to help best meet your wishes, and keep copies in a safe place. These documents should be reviewed periodically to make sure they reflect your wishes.

On track to financial security

Implementing the five simple steps above will help put you and your family on the right track to financial security. If you can, automate as many of these tasks as possible. Have money taken from your checking account each month for savings and retirement, and automate insurance payments to help you meet these goals. This will help ensure you stay on track, even when life gets hectic.

Tackling these essential steps now will allow you to move forward on your next life goals, whether those include buying a home, funding your child’s college education, or becoming an expert horseback rider or master sailor.

Larry Weiss is a San Francisco fee-based financial planner affiliated with NEXT Financial Group Inc.


Image via iStock.