Friday, October 18, 2013, AM | 1 Comment
A life of financial freedom is part of the “American Dream,” but some neglect to plan for it. Most people live paycheck to paycheck, not realizing a financial disaster can sneak up on you from out of nowhere and wreak havoc on your life for years to come. The best way to avoid a financial disaster is to plan for one in the first place.
Below are some tips for avoiding 6 common financial disasters.
Not Having an Emergency Savings Fund
An emergency savings fund is a financial cushion to be used in case of an emergency. All too often, people neglect having an emergency fund, citing a lack of extra money as the reason why. To free up extra money for an emergency savings account, simply replace luxury purchases with necessity purchases; only buying the things you need and saving the rest for an emergency savings account.
As a rule of thumb you should have at least 3-12 months of living expenses in an emergency account. Living expenses include rent, mortgage, utilities, debt payments and other expenses you can’t put off in an emergency.
Not Having Enough Retirement Savings
The sooner you start to save for retirement; the better. The later you start to save; the harder. To determine the amount you’ll need to save, figure 65-70 percent of your current income, plus travel expenses, relocation expenses, medical expenses, how much you already have saved for retirement, inflation, how long you plan to be retired, if you plan to leave an inheritance for your heirs or not, and if you plan to work during retirement or not. Then use a spread sheet or online retirement calculator to come up with how much you’ll need to comfortably retire later.
As a rule of thumb, you should budget at least 15% of your income towards retirement savings. If your employer offers a retirement savings plan, take advantage of it to help you save. The federal government and some, banks, also offer various retirement plans. With a Roth IRA, savings are taxed when they are contributed, with a 401k, savings are taxed when they are removed.
Student Loan Default
The loss of employment or income can happen to anyone. To avoid student loan default, contact your loan servicer as soon as you run into problems. They will be able to inform you of the various repayment options available such as reduced payments, consolidation, forbearance, and deferment.
As a rule of thumb, only borrow what you know you can pay back, and be sure to understand your loan agreement, including interest rates and early pay-off penalties.
Getting into Credit Card Debt
Credit card debt can really sneak up on you. A swipe here and a swipe there can really add up, especially with credit card interest rates. Eventually, you may find yourself with a huge balance you can’t pay off.
As a rule of thumb, use cash instead of credit to make purchases. If you do use a credit card, pay the entire balance in full the next month to avoid paying interest. If you find yourself in credit card trouble, aggressively pay down one credit card balance at a time, while continuing to make the minimum payments on the others, until they are paid off.
Not Enough Insurance
Insurance can help you avoid a financial disaster, because it is protects against the unknown. Don’t worry about the premiums, instead focus on the costs of replacing your home, auto, income, medical, disability, or long term health care etc., out of pocket.
As a rule of thumb, the higher your net worth, the higher you want to increase your insurance coverage. This prevents being sued or having to come out of pocket to supplement an emergency. Also, If you are a home owner, consider flood and earthquake insurance if you live in an area that are prone to these elements.
Not Having a Diverse Portfolio
Having a diverse portfolio ensures that if one security tanks, the others will be safe. Don’t invest in one type of industry, instead spread your investments around.
Phillip Gruppelaar worked as a Sales Tax Inspector and Administration Manager before entering the finance industry in 1988. While working in motor vehicle finance he earned the “AIM Insurance, NSW Business Manager of Year 2000” award. He then moved to home loans and general asset finance including finance for machinery. In December 2011, he returned to his own management consultant business and focused on improving client relationships and staff training for another of Australia’s large truck finance brokers.