Mia Taylor* says that too many people are ignoring the fundamental behaviours required to lay the groundwork for financial preparedness.
Many Australians are failing to meet their financial goals, and as a result are (understandably) anxious about their long-term financial security.
One recent report found that few people engage in the fundamental behaviours required to lay the groundwork for “financial preparedness.”
Primerica measured long-term financial preparedness of Americans using what it calls a Financial Security Scorecard, grading survey participants on whether they engage in the following habits:
- Making more than the minimum payment on credit card bills every month.
- Having $50,000 or more in life insurance coverage.
- Saving every month, regardless of amount.
- Investing some of their savings in accounts other than cash.
- Having enough savings to cover three months of expenses if the primary breadwinner lost his or her job.
These are pretty basic steps toward financial wellness.
But startlingly, close to half of those who participated in the Primerica survey (43 per cent) reported engaging in only two or fewer of the five financial fundamentals.
- Making more than the minimum payment on credit cards
“The first reason for paying as much as you can on a credit card balance each month is to avoid paying interest on the balance, because interest keeps accruing and is made even worse by additional purchases, which causes people to feel like they can never get ahead of the curve,” says Michelle Clark, founder of Shake Your Money Tree.
“Even simply adding $5 to a monthly amount above the minimum can drastically change the length of time you will be paying off the card,” said financial professional Justin Ehrhardt.
He said credit card companies want you to make minimum payments because it keeps you in debt longer, which in turn means more profit for them bank in the form of interest payments.
- Having $50,000 or more in life insurance coverage
Obtaining $50,000 or more in life insurance coverage is a relatively simple task to accomplish, yet one that’s often overlooked, says John Holloway, of the insurance site NoExam.com.
“Many people put off buying life insurance, claiming that it’s too expensive,” Holloway explained.
Too often, however, people get caught up in what they perceive to be the complexities of buying insurance, mired in finding the perfect coverage amount, term length, and company until they just throw up their hands and put it off until later.
With the average cost of a funeral being about $9,000, even a simple, minimal policy can help your family at a difficult time when they don’t need added worries, said Holloway.
“We’re not talking about a million-dollar policy, just a small term policy to cover final expenses,” said Holloway.
“It’s a no brainer.”
Chris Mason, senior vice president for HealthMarkets sayd a life insurance policy is a necessity.
“The death benefits from life insurance are often used to pay for burial and final expenses, replace income of the individual who has passed, or to pay off a mortgage,” explained Mason.
“If you leave behind a spouse, children, or other loved ones, life insurance policies can help alleviate any financial burdens when coping with the loss of a loved one.”
- Saving every month, regardless of amount
This is one of the most important concepts people need to learn, says Ehrhardt.
Even if you’re living on a bare bones budget, saving just $10 a month will help you develop this habit.
“If you’re not able to save even $10 a month and build that habit, then when you free up your income, either by paying off debt or maybe a promotion at work, you will not have the habit of saving small, so you will not be able to save big,” suggested Ehrhardt.
- Investing money in accounts outside traditional savings
Investing is an important part of your overall financial plan if you want to accumulate money more rapidly than one would in a traditional savings account, says Michael Gerstman, CEO of Gerstman Financial Group.
It’s good idea to earmark some of your savings dollars to be put into equity markets, such as mutual or index funds, Gerstman explained, to create the potential for higher returns on your money.
“If the time horizon is 10 years or longer before the funds are needed, you could put as much as 75 per cent of savings into the equity markets,” said Gerstman.
“While it’s true that these monies may experience volatility, over time you could expect the return to be significantly higher than a traditional savings account.”
“While most savings accounts today pay less than 2 per cent, in the equity markets, it would be realistic to expect a 6 per cent to 7 per cent annual average return over a decade or more.”
- Savings to cover three months of expenses
Having at least three months of expenses saved for emergencies is something financial advisors say is critical to overall financial wellbeing.
“In the event of an emergency — like the loss of income, accident, or family crisis — this pad of ready cash gives you time, and time gives you options,” said finance author Byron Tully.
“You can handle it emotionally because you can handle it financially,” continued Tully.
“It may be stressful, but it won’t be disastrous.”
An emergency fund is not just important when a breadwinner loses a job, adds Ehrhardt.
It could, and should, be used for other life emergencies, such as when a major appliance breaks down, or a medical bill needs to be paid.
It’s better to dip into an emergency fund when the car engine needs to be repaired, for instance, than to put the expense on a credit card and likely increase your long-term financial problems.
So how do you stack up three months of emergency fund money?
Tully’s advice is to be consistent, be aware, and be patient.
To get started, find smaller expenses that aren’t necessities and trim them, he said.
So, how prepared are you?
How many boxes can you check on this “financial fundamentals” scorecard?
Which ones do you need to keep working toward?
It all starts with spending less money than you earn, and putting the extra money to good use.
* Mia Taylor is a journalist with more than two decades of experience.
This article first appeared at www.thesimpledollar.com.
