Learning The Basics On How To Create Financial Security
July 9, 2019 .4 min read
Creating financial security might be the most crucial part of any financial plan. But, with so many different terms to know, it can quickly become overwhelming and confusing, especially if finances aren’t exactly your area of expertise.
So, to eliminate as much confusion as possible, we’re breaking it down, giving you some of the most important terms you need to know so you can not only understand your finances but also create and achieve financial security.
So, let’s start with the basics.
Creating financial security means having protection around your most valuable assets.
That could be:
and most importantly, your life.
And one of the best ways to go about protecting your most valuable assets is by obtaining insurance.
But one of the most common misconceptions about life insurance is that only people with a family or have assets to protect, need insurance.
Having insurance at all stages of life is essential.
Here are the types of life insurance options available and what they provide:
There are two types of life insurance, term life insurance, and whole life insurance.
But no matter the type of life insurance you decide to go with, it’s always important to revisit your financial plans whenever a significant life event occurs and adjust accordingly.
For example, having a kid?
While having a child can be very rewarding, remember, it can also be very expensive. But with life insurance, you can ensure that your family can maintain their current lifestyle and can even help fund longer-range needs, like college tuition and retirement, if something were to happen to you.
Just lost a loved one? Having insurance on a loved one, in this case, would be beneficial so you can focus on more critical decisions instead of worrying about finances.
So, always remember, in any event, it’s always a good idea to reevaluate the type of coverage you have as your circumstances change.
Term Life Insurance
This type of life insurance that offers coverage for a specific amount of time, or "term" of years.
This is life insurance that many times has a defined objective – for example, providing coverage until your children graduate college. At any point, you can convert some or all of your term policy to a permanent policy.
Remember that you also always have the right to drop a policy if you discover that it isn’t what is best for you at that time.
Whole Life Insurance
This insurance provides you coverage for the course of your life, whether you live to 50 or 85.
With whole life insurance, you pay a premium each year to ensure that you have continued coverage. Think of whole life insurance as a savings account because similar to a savings account; as the policy is open for longer, it will grow in cash value.
Your most valuable asset is YOU and that includes your ability to earn an income.
In a recent article on myWorth, Cara Sullivan Drew is a Financial Advisor with Concord Wealth Management said:
"We insure many things in today’s day, our cars, our homes, our boats, our cell phones, even our pets. If you owned a machine that provided an increasing income stream every year and that machine provided the income that allowed you to buy that car, home, boat, etc., would you insure it? Of course, you would, because the consequences of that machine not being able to work, thereby producing that income, would blow up your ability to live your best life. We are our own machine. With that, you make yourself a priority."
Disability insurance protects you, your most valuable asset, by allowing you to earn an income if, at some point, you are unable to bring in money due to a disability.
There are two main types of disability insurance – long term and short term.
Short term disability insurance protects you when you’ve become disabled for a short amount of time. It provides you with coverage to maintain an income when your injury is preventing you from being able to work.
Long term disability insurance protects you if you become disabled for an extended amount of time. This goes beyond what short term disability can cover you for, and it protects you and your ability to work.
In the situation that you become injured and cannot work any occupation for any period of time, you will likely still need to bring in money, as you will still need to meet monthly expenses. This is where disability insurance comes in and provides you with the necessary coverage.
Creating a will gives you freedom in deciding who and where your money will go to when you pass away.
Without a will, your family members are left to make some critical and difficult decisions. Making a will allows you to decide who your beneficiaries will be and exactly what they will receive.
You might have children to split items up among, you might have one child who is the sole beneficiary, and you might have no children, in which you’d likely choose another family member[s] to be the beneficiary. Keep in mind that no two wills are the same! There is a lot that goes into writing a will and you will likely want to sit down with a professional who can assist you with specifics.
If you have any questions on these terms, myWorth is here to help. Feel free to reach out to us here to get any of your questions or concerns addressed. If you would also like to speak to a myWorth advisor, click here.
Ande began her 20+ year career as an adviser and quickly realized that many people weren’t taking into account was how emotions play a huge factor in financial decision making. Leaving behind her practice to focus solely on educating both advisers and consumers alike, she became an expert in behavioral finance. Author, speaker, thought leader, and money educator, Ande is helping women to take control of their money.