life insurance

Should You Get Life Insurance for Your Kids?

Emily Guy Birken — Thu, 21 Jun 2018 09:00:27 +0000

My father was a financial planner, and he got his start by selling insurance. That meant Dad had some very strong opinions about insurance in general, and life insurance in particular. He was not shy about sharing those opinions with a captive audience — aka, his daughter.

Even though I heard Dad opine (and rant!) on any number of finance-related subjects, the viewpoint that stuck with me most was Dad's stance on life insurance for children.

"There is no reason whatsoever to ever buy such a product," he told me on more than one occasion. "Life insurance is for income replacement. Policies for children are morbid."

While part of Dad's objection to life insurance for kids stemmed from the exploitative practices you can find among disreputable insurance salespeople, he was also quick to admit that his own superstitions about tempting your children's fate added to his distaste for the products.

Though dear old Dad was right more often than not, I have come to see much more value in children's life insurance than he did. Here are some compelling things to consider before purchasing life insurance for your child. (See also: Term vs Whole Life Insurance: Here's How to Choose)

Funeral expenses

The average funeral in America costs about $10,000. Financial experts (including my father) might say that parents needing to pay such expenses for a child should use their savings to do so. But considering the fact that half of all Americans couldn't come up with $400 in an emergency, the expert opinion may not match most people's financial reality.

My dad did have an answer to this objection, however. There are many funeral homes that will offer their services free of charge for families who cannot afford the burial costs of losing a child.

That means parents who are considering life insurance for their children just because of the potential cost of final expenses might not actually need a policy. Not only is it unlikely that you will ever need the insurance payout, since it's relatively rare for children to die, but you will likely be able to find financial help or free-of-cost services if the worst should happen.

Income replacement

Dad made it clear that he believed life insurance was for income replacement only. So unless you're raising a child star, there is no reason to purchase a policy for your kid. (And you didn't want to get Dad started on parents who pushed their kids into show business.)

However, Dad's view didn't consider whose income will need to be replaced after the death of a child. The majority of children do not have an income, of course — but it's important to remember the very real cost of grief. Heartbroken parents may find themselves paralyzed by their grief and unable to work.

Having a financial cushion can help keep a family afloat during a terrible time when work may be the last thing on anyone's mind. If you absolutely have to bring in every cent of your paycheck to manage your family's finances, a life insurance policy for your kids could potentially protect you all from the devastating costs of grief.

Coverage protection

Something that never came up in Dad's comments about children's life insurance was the importance of future insurability. While a child's life insurance policy is generally much smaller than those purchased by adults, they will often include a rider known as the guaranteed additional purchase (GAP) that a child can rely on once he or she reaches adulthood. This GAP rider will allow the child to purchase additional coverage as an adult without medical questions or underwriting.

I have seen firsthand just how important such coverage protection can be. My best friend's son was diagnosed with autism at 15 months of age. My friend had not purchased a life insurance policy for her baby, even though she had intended to do so.

Unfortunately, this means her son is now permanently ineligible for life insurance because of his autism diagnosis. Once he reaches adulthood, he will not be able to purchase a policy for himself. And autism is only one of several juvenile medical diagnoses — including diabetes, severe asthma, cancer, or a heart condition — that can render a child ineligible for life insurance in the future.

This is why my friend now recommends that every parent buy life insurance for their children when they are still babies. At the very least, it will allow the child to have coverage throughout his or her life, no matter what medical surprises may be in store.

Don't fall for the "investment" promises

Many children's life insurance policies provide an option to cash out the policy once the child reaches adulthood. There is nothing wrong with this — unless you are worried your kids will cash out the policy and go on a shopping binge — but it is hardly the "investment" that it is often touted to be. (In fact, you could make Dad go purple with outrage just by mentioning it.)

For instance, the Gerber Grow-Up Plan, one of the most commonly advertised life insurance products for children, promises that "each time you make a monthly premium payment for your [policy], Gerber Life sets aside a small amount of money. Over time, this becomes the cash value of your policy. It represents how much your policy is worth at any given point in time."

However, the cash value can potentially be less than the amount you have paid in premiums, since only a portion of your premiums are set aside. And the cash value will certainly be less than you would have earned through a traditional investment had you invested the premiums instead.

While there are legitimate reasons for choosing a life insurance policy for your child, the investment strategy is not one of them.

Buying life insurance for your kids is a personal decision

Despite my about-face on children's life insurance, my two sons are still uninsured. Dad's superstition about tempting fate has stuck with me — and my husband and I are lucky enough to be in a financial situation where we could handle the monetary costs if something terrible should happen. My only big concern is if either of my kids receive a diagnosis that will make them ineligible for future insurance. But we have decided to live with that risk.

It's important that all parents think through the full consequences of buying or not buying life insurance for their children. It is a distressing train of thought, but a necessary one. No matter what you choose, a well-thought out decision will lead you to what's best for your family.

Like this article? Pin it!

This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Money Moves Every Single Parent Should Make

Alicia Rose Hudnett — Thu, 14 Jun 2018 09:00:31 +0000

Parenting comes with a deep sense of responsibility for your children and a lifetime of having to make difficult decisions. Raising kids in a two-parent household can be stressful enough; being a single parent can be downright overwhelming.

When it comes to managing household finances, being a single parent isn't necessarily different from any other household with children. Instead, there just may not be a lot of financial flexibility — so there's more pressure to get things right early on. Take a breath and work toward reaching these financial markers to give you peace of mind.

1. Prepare your estate planning documents

People tend to procrastinate about getting their estate paperwork in place, but it's a smart idea for everyone to make it a priority. Experiencing a major life event, like having a child, should prompt you to either update your old documents or establish an estate plan.

Unless you're comfortable leaving your personal and financial decisions up to state officials, it makes sense to sit with an attorney to discuss your wishes should you pass away or become incapacitated and unable to make financial and health decisions for yourself. Since minor children cannot take control of inheritance money or make legal decisions, listing them as direct beneficiaries on your accounts and assuming that will accomplish your goals may not be the case. Every parent should also have guardianship papers in place, especially if they are raising children alone. (See also: Here's What Happens If You Don't Leave a Will)

2. Purchase life insurance

Generally, if someone is dependent on your income, you probably need life insurance. While you'll want to sit with a financial adviser or life insurance agent to discuss how much insurance you need, some factors to consider are how much it will cost to raise your children and send them to college, as well as to protect certain assets and pay off debt. You'll also want to consult an attorney or financial professional about properly selecting a policy beneficiary. While there are various types of life insurance, a term life insurance policy can be an affordable and efficient way to protect your family. (See also: Term vs Whole Life Insurance: Here's How to Choose)

3. Fund an emergency savings account

Having a fully funded cash reserve on hand is a critical component of everyone's personal financial health. In a one-income household with children, it's recommended to work toward having at least six months' worth of monthly bills and expenses saved and set aside. Once you reach six months' worth, aim for a year's worth. In a two-parent household, one adult may be able to cut back on essentials in the case of a job loss, but when children are financially dependent on you and only you for everything, that can be difficult to manage without a padding of emergency cash. (See also: 5-Minute Finance: Start an Emergency Fund)

4. Contribute to a retirement account

After fortifying your financial house with savings and the proper risk management documents in place, you should focus on saving for your own retirement. As a parent, you naturally put your children's needs and wants before your own, and there is nothing wrong with that. But it's also important to recognize that your early working years are critical to your retirement savings goals. There are no do-overs when it comes to saving for retirement, and every year you don't save is a year lost.

If you have access to a retirement plan at work such as a 401(k), strive to save 15 percent of your total income. If money is tight and your employer offers a match, start by contributing just enough to earn the full match. Over time, you can gradually increase your own contributions. If you don't have access to a workplace retirement plan (or in addition to one), you should open an IRA, which you can do at a discount brokerage firm or bank. For 2018, anyone with earned income under the age of 50 can contribute the lesser of $5,500 or their total yearly income. Make this a priority and make this a habit. (See also: 7 Retirement Planning Steps Late Starters Must Make)

5. Open a 529 account

A 529 plan is a tax-favored education savings account that allows individuals to save for future qualified education costs. Contributions are made on an after-tax basis, and the money grows tax-free. Distributions for qualified education expenses are also tax-free. Once you set up an account, anyone can make contributions to it; for example, grandparents could contribute on behalf of a grandchild. Even if you don't have enough money in your current budget to make regular contributions, saving your child's birthday, holiday, or other gift money they receive throughout the year can be a helpful way to see your funds grow.

Covering the entire cost of your child's (or children's) college education is a difficult task for any set of parents, so don't feel guilty about what you may or may not be able to accomplish with this account. Every little bit helps. (See also: The 9 Best State 529 College Savings Plans)

Being a single parent can sometimes make you feel as if you need to overcompensate in certain areas when it comes to raising your children, but it's important to not lose sight of building a strong financial foundation for your family and also for your own future.

Like this article? Pin it!

This article is from Alicia Rose Hudnett of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

10 Money Rules Every Working Adult Should Know

Kentin Waits — Wed, 18 Apr 2018 08:00:07 +0000

The media, money gurus, investment firms — they all have a way of making the world of personal finance seem hopelessly complex. We've all seen otherwise competent, capable adults go crossed-eyed when the topic of money management comes up. But don't be intimidated by the talking heads and conflicting advice. The most valuable rules are usually the simplest to understand. Here are the money rules every working adult should know.

1. Understand your income and expenditures

Knowing exactly how much money you have coming in every month — and where it all goes — is the foundation of good personal finance. It's the first step in creating a realistic budget, identifying money habits that are dragging you down, and avoiding dangerous credit missteps.

2. Create a budget (and stick to it)

Budgets are financial fences we create for ourselves. Without them, it's far too easy to wander off (overspend), panic (abuse credit), and get lost (end up deep in debt).

Build a budget that addresses your needs today and helps you prepare for tomorrow by following the 50/30/20 rule: Devote 50 percent of your income to necessities like housing and utilities; 30 percent for wants such as travel, entertainment, or dining out; and 20 percent to financial goals like paying off debt and saving;. (See also: Stop Using These 5 Excuses Not to Budget)

3. Establish goals

Goals give shape to the sacrifices we make and the effort we put into managing our money wisely. Set realistic and measurable financial goals for yourself. Do you want to pay off your credit cards within six months? Save enough for a down-payment on a home within five years? Retire by 60? Track your progress and reward yourself for incremental successes.

4. Live below your means

Spending less than you make is a total power move. Why? Because it leaves you with a surplus — seed money for every financial goal you have. However modest it may be, that surplus ensures that you're moving forward and not just treading water financially. (See also: 5 Dreams You Won't Achieve Unless You Live Below Your Means)

5. Save aggressively

Once you understand the power of living below your means, you can get strategic about saving. Turn saving money into a challenge. Can you get closer to (or move beyond) the standard budgetary rule of saving 20 percent of your income? Challenge yourself to reduce your overhead, earn extra cash, and save more.

6. Pay attention to the small stuff

Many budgets die from a thousand tiny cuts. Though the costs seem negligible at the time, all those morning lattes, lunches out, and ATM fees can really add up. Respect both the dollars and the dimes of your budget. In other words, sweat the small stuff.

7. Maximize your 401(k) match

If you're fortunate enough to work for an employer who matches a percentage of your 401(k) contributions, make the most of it. Contribute to the match limit (and beyond, if you can). Though it may take a few years to fully vest in those funds, every matching dollar is free money. (See also: 7 Things You Should Know About Your 401(k) Match)

8. Prepare for the "what-if" moments

Life is seldom a smooth road. Economic bubbles burst. Layoffs happen. People get sick. Weather these financial storms by building an emergency fund. Not sure how much to save? Start with this rule of thumb: Squirrel away enough cash to cover your minimum household expenses for at least six months.

9. Never buy a new car

Financially-speaking, buying a new car is a losing proposition. New vehicles can depreciate up to 20 percent or more each year for the first five years. And buyers who finance their purchase face an even bleaker equation: Based on 2018 figures from Edmunds, the APR of a new car loan currently averages 5.2 percent — for an item that's rapidly losing value. It just doesn't make sense. (See also: 3 Reasons Why You Should Never Buy a New Car)

10. Protect your loved ones

Estate planning is a fundamental part of smart personal finance. Protect those who are dependent on your income by purchasing a life insurance policy. Though the guidelines vary based on other income sources, family size, and financial obligations, the general rule of thumb is this: The life insurance death benefit should equal seven to 10 times your annual salary. (See also: Term vs Whole Life Insurance: Here's How to Choose)

Like this article? Pin it!

This article is from Kentin Waits of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Ways to Safeguard Your Financial Future With Just $200

Tim Lemke — Mon, 26 Mar 2018 09:00:06 +0000

Sometimes it is a series of small decisions that can make a big difference in our lives. This is certainly true when it comes to protecting our financial assets.

Building a high net worth isn't just about generating wealth. It's also about protecting what you have and avoiding disaster. Fortunately, there are a number of things you can do to put armor around your finances that won't cost you a lot.

Check out these ways to safeguard your financial future for $200 or less.

1. Get renters or homeowners insurance

You can protect nearly all of your belongings from theft, fire, and many other bad events by paying a monthly insurance premium that is often less than $200. Homeowners insurance can protect you from lawsuits, disasters, and other things you might not expect. If you don't own the place you live, your belongings can be protected for less than $20 a month with renters insurance.

Bad things can happen. We all want to pinch pennies, but insurance is an expense we should all try to budget for if we want to avoid financial tragedy. (See also: 5 Reasons You Definitely Need Renters' Insurance)

2. Get life insurance

If you are married and your spouse earns an income, would you be able to make ends meet if they suddenly passed away?

Life insurance will replace any lost income, and it's not very expensive to have a policy. With term life insurance, you pay a fixed monthly or annual premium to be covered for a specific amount over the course of a specific term. For example, you might purchase $1 million in coverage for a 20-year term. In most cases, you can get a very good life insurance policy for under $200 per month. (See also: Term vs Whole Life Insurance: Here's How to Choose)

3. Contribute to a retirement account

If you open a Roth IRA, you can contribute up to $5,500 each year and invest in almost anything. Since money contributed to a Roth IRA is taxed upfront, all future withdrawals are tax-free. If you have $200 a month, this will get you nearly halfway to that maximum contribution. A $200 monthly contribution over several decades could result in $1 million or more when you retire.

You may also choose to contribute to a 401(k) plan if your employer offers it. Let's say you're earning $40,000 annually, and set aside and invest $200 per month, or 6 percent of your income. And let's say your employer matches half that. That comes out to $3,600 annually, which can grow to well over a million when you retire. (See also: 401K or IRA? You Need Both)

4. Craft a will

Having a will is especially important if you have a family and a lot of assets. A will offers guidance as to who gets your financial assets after you pass away, as well as who is responsible for any dependent children you leave behind. If something happens to you, you need to know that the people who care about you will be taken care of. The good news is that it's fairly easy to write a will and it can be done cheaply.

LegalZoom and similar online services will allow you to file a will for as little as $69. Even if you go through an attorney, you may only spend a few hundred dollars. A will is a good investment, because without one, your family members may be stuck with astronomical legal bills to sort out the ensuing confusion after your death. (See also: Here's What Happens If You Don't Leave a Will)

5. Meet with a financial adviser

For $200, you are unlikely to get a financial adviser to meet with you regularly or manage your investments themselves. But, there are fee-only advisers who would charge that much for an hour or so, which is enough time to get some basic advice and determine if you are on the right track financially. Periodic meetings with a fee-only adviser can help you develop a simple financial plan and identify a few good investments. These sessions could pay for themselves easily in the long run. (See also: 7 Occasions When You Should Definitely Hire a Financial Adviser)

Like this article? Pin it!

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Estate Planning Questions Everyone Should Ask

Dan Rafter — Mon, 05 Mar 2018 09:00:07 +0000

There are no guarantees when it comes to the number of years everyone gets on this earth. You may plan to live well into your 90s, but circumstances — and your health — can change very quickly. This is why it's important not to put off the uncomfortable but necessary work of planning your estate.

Not sure where to start? Ask yourself these five key estate planning questions.

1. Why haven't I created a will?

You might not be rich, or even old, but that doesn't mean you don't need a will. A will is for anyone who wants to leave behind assets to loved ones or specify who should raise their children if they die.

That last point is especially important. If you are a parent of young children, you need to spell out in a will who should take guardianship of your sons or daughters should you unexpectedly pass away. If you don't, the courts will make that decision for you. Don't leave this up to chance. Draft a will and include these instructions. If you already have a will but you've had a major life change since you wrote it, it's probably time to update your will.

It's best to work with a legal professional when drafting your will. A professional can help you list clearly who gets what assets. If you want to leave your home to a loved one after you die, you might need to take the extra step to create a trust, too. This can get complicated, so again, it's best to work with an attorney. (See also: Here's What Happens If You Don't Leave a Will)

2. Do I have enough life insurance?

Life insurance is a necessary financial protection for your loved ones. If you should pass away unexpectedly, would your spouse be able to afford the monthly mortgage payments? Would your children be able to remain in the home in which they've grown up?

Life insurance can help ensure that your loved ones don't have to worry about paying their bills after you die. Upon your death, your life insurance will give an agreed-upon payment to your beneficiary, who can use that money to cover anything from mortgage payments to college tuition.

There are two main types of life insurance: term and whole. Term life insurance is less expensive but still provides solid coverage. With this type of insurance, you pay a premium for a certain number of years, perhaps 20 or 30. If you die during this time, your policy pays out. Once that term expires, you'll need to buy a new policy if you want to maintain life insurance coverage.

Whole life insurance is usually more expensive, but you don't have to worry about renewing after a term ends. Instead, you pay a premium every month — or every year — for the rest of your life. There is no end limit on the premium. The policy will pay out when you die.

How much life insurance do you need? That depends on your situation. Do you have young children dependent on your income? Does your spouse work? Are all your children young adults who are earning livings of their own? You'll want more life insurance coverage the younger and more dependent on your income your loved ones are. Your life insurance payout should at least cover the debt you owe for your mortgage, car, credit cards, and education. (See also: Term vs Whole Life Insurance: Here's How to Choose)

3. What do I want to do with my home?

One of the biggest assets you might have is your home. A home, though, can be a problem after you die.

If you've paid off your home and own it, you'll have to determine what you want your survivors to do with that residence. Do you want to leave your home to a child? That can be a tough decision if you have more than one child. Or do you want your children to sell the home and split the proceeds? Make sure you specify in your will what your preference is for dealing with your home. This can help prevent tension among your survivors.

If you haven't finished paying off your house, your options may be more limited. Funds from your estate may be used to pay off the debt you owe to your mortgage lender. But if your estate doesn't have enough money to cover this, your home might have to be sold, especially if none of your survivors want to take on your remaining mortgage payments. (See also: Why You May Need a Revocable Living Trust)

4. Will anyone know how to find my key documents?

Where do you keep your most important financial documents? Do you have a designated place for everything, from your will, to your tax returns and bank statements, to instructions for your funeral?

Wherever that place is, you need to make sure that your loved ones know where to find these important papers. Having a will doesn't help if no one can find it. And making sure that your next of kin know exactly where your checkbook, bank account statements, and past tax returns are stored can ease the burden they'll face when trying to move on from your death. (See also: 9 End-of-Life Cost Savings Your Survivors Will Thank You For)

5. Who will care for your pets?

Do you share your home with a beloved pooch, cat, or parakeet? What would happen to these companions if you should pass away?

If you want to make sure that your pets are cared for after you pass, leave instructions. You can include this information in a will, especially if you are going to leave your pets to a family member. You might want to also set up a savings account or leave a sum of money that will help cover the costs of caring for your pets, as a way to ease any burden on family members.

If you have no one to care for your pets after you die, you might specify in your will that you'd like your animals donated to a pet-care organization. (See also: 6 Reasons You Need to Include Pets in Your Will)

Like this article? Pin it!

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Kinds of Insurance Every Retiree Should Consider

Dan Rafter — Thu, 01 Mar 2018 09:30:09 +0000

Your insurance needs don't remain constant throughout your life. You need different insurance coverage when you're single and in your 20s than you do when you're raising a family in your 40s. When you retire, your insurance needs will evolve once again.

There are certain types of insurance protections you'll no longer need after leaving the workforce, and other types that you'll want to add. Here is a primer on the kinds of insurance that every retiree should consider.

1. Health insurance

You'll absolutely need health insurance after you've retired. Health care costs are only rising, and seniors tend to spend a large percentage of their income on medical care each year.

A study released by Fidelity Benefits Consulting said that the average 65-year-old couple retiring in 2017 would need $275,000 to cover their medical expenses throughout retirement. That number isn't falling, either. Fidelity reported that the 2017 figure is up from the $260,000 that the average 65-year-old couple needed in 2016.

Most seniors will qualify for Medicare, the federal health care insurance program, when they turn 65. Medicare isn't free, but it does cost far less than what you'd pay for private insurance. Medicare covers a lot, but it doesn't cover every medical service you might need.

Do you need to purchase supplemental health insurance to boost the coverage you're already getting with Medicare? That's not an easy question to answer. It all depends on your health and how often you plan on visiting a doctor after you retire. For many retirees, Medicare may be adequate. (See also: 5 Common Medicare Myths, Debunked)

2. Homeowners or renters insurance

Will you still own a home after you retire? If so, you still need your homeowners insurance policy. This policy will pay out to help you rebuild if your home is damaged by a fire or other natural disaster. It will also help you pay for any items inside your home — such as electronics, clothing, furniture, and jewelry — that get stolen or damaged in a disaster.

Renters insurance works the same way, but it protects people who are renting an apartment. If you plan on ditching your home and renting after you retire, make sure to invest in a renters insurance policy. Think about how much money you'd need to replace your valuables if they were stolen or destroyed. (See also: 5 Reasons You Definitely Need Renters Insurance)

3. Auto insurance

If you plan to keep driving after retirement, you'll need to pay for auto insurance. It's illegal in most U.S. states to drive without car insurance.

Maybe you're planning to sell your car and move into an urban neighborhood after you retire. Instead of doing your own driving, you plan to walk, take public transportation, or Uber to grocery stores, movie theaters, and restaurants. In this case, getting rid of your car insurance might make sense. But even if you're hanging onto your car only for emergencies or long trips, you'll need to keep your auto insurance policy.

4. Life insurance

Life insurance is usually one type of policy you can drop after retirement. After all, life insurance is a way to protect your loved ones who are dependent on your income. Once you get to retirement age, these dependents — usually your children — should be self-sufficient. They won't need a payout after you die to pay their bills.

But what if your spouse or children still aren't financially self-sufficient by the time you retire? If that's the case, you should hang onto your life insurance policy. Maybe you have a child with special needs. That child might still rely on financial assistance from you. What if you were gone and you didn't have a life insurance policy? Would that child still get the financial assistance necessary?

In most cases, retirees no longer need life insurance policies. But for special cases, keeping the policy is the smart move. (See also: When Dropping Your Life Insurance Is the Right Decision)

5. Umbrella insurance

What if someone was visiting your home and seriously injured themselves? Would your homeowners insurance policy provide enough protection? Maybe. But umbrella insurance can provide retirees with the peace of mind that they'll be protected even if their homeowners insurance doesn't offer enough coverage.

Umbrella insurance provides extra liability coverage above the limits of your homeowners and auto insurance policies. Basically, it pays out in cases where your homeowners and auto policies don't pay enough to cover all of the damages for which you are responsible.

Say you get into an auto accident that ends up with a liability claim of $1 million. If your auto insurance only covers a maximum of $500,000 for liability, your umbrella policy would cover the remaining $500,000. (See also: Beware: Your Insurance May Not Cover These 8 Losses)

Like this article? Pin it!

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Reasons Why Financial Planning Isn't Just for the Wealthy

Dan Rafter — Wed, 14 Feb 2018 10:00:06 +0000

There's an unfortunate divide when it comes to financial planning. The lower your income, the less likely you are to have a financial plan. But it doesn't have to be that way.

A 2016 Financial Engines report found that only 37 percent of American workers with yearly incomes between $35,000 and $100,000 have a comprehensive financial plan to grow their wealth. Meanwhile, 48 percent of workers with an annual salary of more than $100,000 do have a plan. What's more, wealthier Americans tend to have more comprehensive financial plans than those followed by middle-income earners.

The problem with this is obvious: Financial planning can help everyone, not just people with higher salaries. But too many lower- and middle-income earners think that they don't make enough money to warrant having a financial plan. This is dangerous thinking, as lacking a financial plan can scuttle your efforts to save for retirement, help pay for your children's college education, or even buy a home.

Here are six reasons why you need a financial plan, even if you don't make over $100,000 per year.

1. Without a plan, it's harder to set or meet financial goals

How much money do you need to save for a healthy and happy retirement? Without a financial plan, you probably have no idea. And how do you accumulate these savings? Again, if you don't follow a financial plan, the odds are likely that you won't meet your retirement goals.

According to the Financial Engines study, people with financial plans save about 10 percent of their salaries toward retirement, while those without save only 6 percent. This can make a big difference. The study uses the example of a person starting out with $50,000 in retirement savings. If that person earns $100,000 each year, and saves 10 percent of that salary for 25 years, they will have amassed as much as $1.13 million in retirement savings. Meanwhile, someone saving 6 percent of that income for 25 years will only have saved around $890,000. (See also: Here's How Far $1 Million Will Actually Go in Retirement)

2. A financial plan can help you rein in your spending

When you get to the end of every month, is your bank account nearly drained? Do you know where your money has gone? If not, a financial plan can help.

A basic pillar of creating a financial plan involves tracking where your money goes each month. It's all about creating a household budget that lists the average dollars you spend on everything from utilities and rent, to transportation, groceries, dining out, and entertainment. Once you have these figures in front of you, and once you compare them with how much income you bring in, you can adjust your spending so that you aren't constantly running out of money each month. Without a financial plan, you'll just keep overspending. (See also: Build Your First Budget in 5 Easy Steps)

3. It will help you reach big financial goals

Do you want to buy a house? Or maybe you dream of helping your children pay for their college education. Attaining big financial goals such as these is a far more challenging task if you don't have a financial plan to guide you.

A financial plan will spell out how much money you'll need to reach life's big financial goals — everything from saving enough for a down payment on a home, to buying your first car, to saving enough money to help your children graduate from college without mountains of student loan debt.

Unfortunately, a majority of Americans earning lower or middle-class incomes don't plan for attaining these big goals. The Financial Engines study found that only 41 percent of middle-income workers have financial plans for saving for a child's college education. A far higher number — 61 percent — of wealthier Americans have financial plans that address this challenge. (See also: Why Saving Too Much Money for a College Fund Is a Bad Idea)

4. It will help you protect your loved ones

If you died unexpectedly, what financial ills would fall on your children or partner? If you invest in life insurance, you can help protect these loved ones in case you do die.

The problem is, Americans who don't have financial plans are far less likely to take out enough life insurance or disability insurance to properly protect their families. The Financial Engines study found that 67 percent of middle-income earners have purchased life or disability insurance, while 83 percent of upper-income earners have these policies in place. (See also: Why Your Group Life Insurance Is Not Enough)

5. With a financial plan, you're likely to have less credit card debt

The 2013 Household Financial Planning Survey and Index, completed by the Consumer Federation of America and the CFP Board of Standards, found that those with financial plans tend to have less credit card debt and, when they do, are more likely to have a plan for paying it off.

According to the survey, 38 percent of adults without a financial plan have significant credit card debt, and only 47 percent of these people have plans to reduce it. Meanwhile, even a little bit of financial planning seems to help people rely less on credit cards. Among adults who fall into the "limited planners" category — meaning they have a financial plan, though not an especially detailed one — are less likely to have such debt. The survey found that 61 percent of these limited planners have no credit card debt at all. And only one in five people with comprehensive financial plans have significant credit card debt that needs to be paid down, with 92 percent having a plan to do so. (See also: 5 Ways to Pay Off High Interest Credit Card Debt)

6. You'll be better prepared for a financial emergency

What happens if your car's transmission goes on the fritz? What if your home's furnace conks out in the middle of a chilly night? If you don't have an emergency fund built up, you might have to pay for those repairs with a credit card.

Even worse — what if you suddenly lost your job? This is why that cushion is so important. Financial experts recommend that you have at least six months' to a year's worth of daily living expenses saved in an easy-to-access fund, like a savings account.

Building an emergency fund takes time, but if you have a financial plan, you're far more likely to set aside the money you need each month — even if your salary isn't particularly high. Just $200 or $300 a month can add up over time. And if you have a financial plan that shows you how to save that money every month — perhaps by cutting down on unnecessary expenses — you're far more likely to build an emergency fund. (See also: 7 Easy Ways to Build an Emergency Fund From $0)

Creating a plan

Now that you know why a financial plan is so important, it's time to create one. The good news is that while a financial planner can help, you don't necessarily have to work with one if doing so is too costly.

Start by creating a household budget that shows how much you spend each month, including estimates for discretionary expenses, and how much you earn. Then, determine how much money you need to save for retirement, college tuition, and building an emergency fund. If you can't save a lot, start by saving whatever you can each month. From there, you might be able to boost those savings by reducing some of your less important expenses.

Like this article? Pin it!

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

When Dropping Your Life Insurance Is the Right Decision

Dan Rafter — Tue, 14 Nov 2017 09:31:05 +0000

Life insurance is a crucial way to protect your family if you should suddenly pass away. The payout from a life insurance policy can help your loved ones continue to pay a mortgage and other large bills they may not otherwise be able to afford.

Life insurance is so important that few people ever decide to terminate their policies. But are there times when canceling a life insurance policy actually makes sense?

The surprising answer? Sure. It all depends on who continues to rely on your income and who doesn't.

Your children

When deciding whether to cancel a life insurance policy, don't focus solely on your age. Yes, the odds are higher that once you get older (past retirement age), you won't have as many people relying on the money you are making today. With fewer people depending on you financially, it might make sense to cancel your life insurance policy and save the money you are spending on premiums.

Life insurance is most important when you are worried about providing your children with a financial safety net. When your children are young, they need the financial protection that a life insurance policy provides. After all, they won't be working or generating their own income.

But when your children become adults, they might no longer need the payout that your life insurance would provide them if you should die. Canceling a policy designed to protect your kids is usually a sound financial move once these children become adults who are working and providing for themselves.

Your spouse

What if your life insurance policy is also a form of protection for your spouse or partner? That might change your decision to cancel, even as you get older.

Say you die at the age of 65. Would a payout from a life insurance policy provide that extra bit of financial protection to your spouse or partner? Would it help ensure that this person won't struggle with finances after you die?

If the answer is yes, canceling your life insurance policy may not be the right move. You may want to hold onto that policy, even as you inch closer to retirement age. (See also: When Should Single People Get Life Insurance?)

Getting a better plan

There are other reasons to cancel your life insurance. Say you are no longer happy with your current plan; maybe the monthly premiums seem too high.

If you shop around and can find a plan that provides enough coverage at a lower price, canceling your existing policy is not only OK, it ranks as a smart financial move.

Just be sure to compare your existing policy with your potential new one carefully. Yes, a new policy might be cheaper — but it might also not provide the same amount of coverage. Make sure to do your research before canceling any life insurance policy.

You've already paid for your biggest expenses

Life insurance is supposed to be a financial safety net for your loved ones in case you suddenly die. But what if you've already paid off your mortgage? Your spouse or partner won't need a payout from your life insurance policy to cover that bill. What if you've already paid for sending your children to college? Life insurance isn't necessary to help cover this big expense, either. So why not cancel your policy if those big expenses are already in your past?

You can take the money you were spending on life insurance premiums and save it for retirement, add it to your emergency fund savings, or invest in the stock market.

Of course, this type of plan only works if you actually will take the money you were spending and do something financially savvy with it. But canceling a life insurance policy when the big bills are paid can be an effective way of putting your dollars to better use.

Like this article? Pin it!

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Money Moves to Make After Buying Your First House

Christa Avampato — Thu, 28 Sep 2017 08:01:06 +0000

You bought your first home. This is an exciting conclusion to what was likely a long and winding road. As you are unpacking your boxes, settling in, and decorating your new digs, there are some smart money moves you should make immediately to keep the good times rolling.

1. Adjust your last will and testament

Now that you have a new home, you need to update your will. In this time of excitement, updating a will might feel like putting a damper on the fun, but it's critically important. You need to be responsible for protecting the future of your loved ones and your home. (See also: Don't Make These 5 Common Mistakes When Writing a Will)

2. Get rid of PMI as fast as you can

Private mortgage insurance (PMI) is a necessary fee for most people who buy a home with less than a 20 percent down payment. This can be a significant expense, sometimes costing thousands of dollars each year. Do whatever you can to get to that 20 percent equity mark so that you can drop the PMI payments.

3. Make a plan to pay a little extra every month

At the beginning of a mortgage, you are mostly paying interest and very little principal with every monthly payment. That ratio of interest to principal will decrease eventually, but it will take a few years.

To more quickly pay down your mortgage, set aside a little extra every month for your mortgage payment. Why? Anything you pay above your monthly payment goes directly against the principal. (Just be sure those extra payments are going to principal; check with your mortgage lender.) The faster you reduce your principal, the faster you will pay off your home. A lower principal will also make it easier to refinance the mortgage down the line if you choose to do that in the future. (See also: What's Faster for Mortgage Payoff: $100/Month Extra or 1 Payment/Year Extra?)

4. Replenish your emergency funds

Many people use a substantial part of their cash savings, if not all of it, when they buy their first home. It’s crucial that you begin to rebuild this emergency fund as soon as you can.

An emergency fund is necessary if you lose your job for any reason, have unexpected bills, or if you need to do emergency repairs on your home. Experts in the consumer finance field have varying opinions when it comes to how much to set aside in an emergency fund, but many suggest having three to six month's worth of expenses saved. Some more conservative advisers even suggest saving up enough to cover one year of expenses. Consider your lifestyle and personal risk profile to find the best target amount for you.

5. Reconsider your life insurance policy

Now that you have this beautiful new home, you will need to make sure the mortgage can be covered by your life insurance. You don’t want your heirs to struggle to figure out what to do in the event that an unforeseen circumstance occurs.

How much insurance do you need? Generally, the guideline for life insurance is 10 times your annual income plus any large debts like a home mortgage. Talk to your insurance company and/or financial adviser to get their perspective, and make any necessary adjustments. (See also: 5 Reasons Why Life Insurance Isn't Just for Old People)

6. Change your locks and install deadbolts

Safety is a huge part of homeownership, and it has financial implications. As soon as you have the keys in your hand, contact a locksmith to get all of the locks on your doors and windows changed, and install deadbolts on doors where you currently don’t have them. The previous owners likely gave copies of their keys to neighbors, friends, family members, the dog walker, or people who did work on the home. You don’t want those people to have access to what is now your house. You may also want to consider a home security system.

All of these safety measures may provide a financial deduction on your homeowners insurance. Contact your insurance company to find out if you qualify for a reduction in your rate. (See also: 7 Times to Update Your Homeowners Insurance)

There is a desire to rest on our laurels after completing the purchase of a home. You should definitely bask in the glow of new homeownership, but this is also a time to remain financially vigilant. Remember that when it comes to your personal finances, remaining responsible and forward-thinking is the key to lasting success.

Like this article? Pin it!

This article is from Christa Avampato of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Build a Secure Future Starting With Your Next Paycheck

Mikey Rox — Mon, 21 Aug 2017 08:00:06 +0000

If you've been putting off the inevitable with your money — finally getting your finances in order — now's your chance. Take advantage of that next paycheck coming in, and make these smart money moves.

1. Increase your savings and debt repayment, even by a little

Ideally you've been portioning out your paychecks to cover your monthly expenses, throw a little into savings, and pay down whatever consumer debt you've racked up. On your next payday, it's a smart move to increase (even by a small amount) the percentage you allocate toward savings and debt repayment. Every little bit will help provide you with more of a rainy-day cushion and chip away at nagging debt.

If you have credit card debt, focus on your highest-interest card first, and go from there. This strategy, also known as the avalanche method, will save you the most money in the long run on interest payments. (See also: The Fastest Method to Eliminate Credit Card Debt)

You may have to cut a discretionary item from your budget — like a night out with your pals — to afford this responsible increase. You're an adult, and it's time to start managing your money like one.

2. Investigate your life insurance options

There are plenty of cases to make for taking out a life insurance policy, but the most important one is so your spouse and children can get through the first few years after your untimely death. This is not a fun subject to think about, but it's a necessity. If you should suddenly pass away, you will want to leave your family as well taken care of as possible.

If you're single without a mortgage, life insurance probably doesn't need to be a priority when you can put your money somewhere more useful — like a 401(k). But heads of households absolutely need to have this money move on their radar, if not at the top of their list. (See also: 5 Reasons Why Life Insurance Isn't Just for Old People)

3. Set up new accounts for automated savings

In all likelihood, you have a single savings account — but if you have a hard time managing your money, perhaps one isn't enough. In fact, Kevin, creator of Financial Panther, goes so far as to suggest multiple accounts to which you can automate your savings. By putting this concept into practice, he was able to pay off $87,000 of student loan debt in two and a half years.

"If people have a matching 401(k) for work, they should try to put as much as they can into that right off the bat, and try to increase it little by little each paycheck," Kevin says. "From there, I like to set up multiple accounts where I can send my money to. I have accounts for short-term savings goals, long-term, and a Roth IRA, which I contribute money to since I max out my 401(k) each year. I also have micro-savings apps working for me, which take out extra money from my checking account based on algorithms they have … and stores that money in a separate account."

The money Kevin is left with is what he considers his "true" income. His multiple savings account method creates barriers for him to access his money, in turn making it harder to spend on frivolous things. (See also: Build Savings Faster With a Multiple Account Strategy)

4. Invest in self-improvement

Fact: You can earn more money in your career when you have more relevant skills. Thus, investing in yourself is just as important as saving or paying off debt. The return on investment can be exponential if what you're learning is valuable and you put it to work for you. This can be as simple as brushing up on networking, or taking continuing education courses at your local community college. (See also: 11 Ways a Professional Association Can Boost Your Career)

5. Get that emergency fund back on track

Maybe you've recently had a crisis and you needed to pull money from your emergency fund. Or, maybe you've just had more important and costly bills to pay in the meantime that have disrupted your savings. Whatever the case, start building this fund again, even if it's just small contributions here and there. You owe it to yourself to be prepared for the unexpected, and you don't want to have to reach for a high-interest credit card to bail yourself out of a problem. (See also: 6 Fast Ways to Restock an Emergency Fund After an Emergency)

6. Switch banks if yours isn't the best place for your money

One of the worst financial habits is sticking with the same bank, even if it's not the best choice for your money. If you've been contemplating switching institutions recently, use your next paycheck to give the move serious thought. Maybe your savings can earn more elsewhere, and if you're lucky, you can find a high-yield checking account and other incentives — like a couple hundred dollars in free money — just for making the move. (See also: How to Switch Banks)

7. Make a move to get ahead

If you're lamenting on a regular basis that you never have enough money for this or that, sit down next payday and consider your options. How can you increase your income? How can you bump up your savings and retirement contributions? If this isn't possible with your current take-home pay, it's probably time to weigh your options.

Should you start looking for a new, higher-paying job? Should you go back to school to learn a new skill? Do you have time to add a side-gig to your schedule, like driving for Uber or Lyft, or pet sitting via Rover.com? These are all options you have; you just have to want them bad enough. (See also: 14 Best Side Jobs for Fast Cash)

Like this article? Pin it!

This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Are You Putting Off These 9 Adult Money Moves?

Tim Lemke — Fri, 18 Aug 2017 08:00:05 +0000

You are not a kid anymore. It's time to start acting like an adult, especially with regard to your money. Procrastination won't help you on the path to financial freedom, so it's time to grow up, and examine whether you've been avoiding these adult money moves.

1. Bolstering your emergency fund

When you are young, you may not need a lot of extra cash on hand. After all, you may feel like your life is simple enough that very few emergencies would result in financial ruin.

As you get older, though, there are more costly events that can crop up. You may own a home and face major, unexpected repairs. You may have children with unexpected medical needs. And because your overall expenses are higher, you'll be hurt more if you or a spouse loses their job.

While it's important to invest for the long-term, it's also crucial that you keep enough cash on hand to cover emergencies. At least three to six months' worth of income is a good rule of thumb. Without this savings, you may find yourself in debt or tapping into retirement savings to get by. (See also: 4 New Reasons You Need an Emergency Fund)

2. Tracking your money

When you're young and living large, you have no idea where your money is going. You are too busy having fun to worry about it. But now you're an adult, and it's time to actually assess what you are spending your cash on.

It's impossible to budget and save if you have no idea where to cut expenses. To begin tracking your money, analyze your bank and credit card statements to view all of the purchases you've made. Enter these into a spreadsheet, or use an account consolidation website such as Mint.com to help you. Once you start tracking, you'll have a good idea of where you've been wasting money and where you can start cutting down on your costs. (See also: Build Your First Budget in 5 Easy Steps)

3. Sticking to a budget

Once you get a handle on where your money is going, it's time to develop a system that will allow you to save money. The only way to avoid debt and save for the future is to keep expenses below what you earn. This may mean making tough decisions and reducing nonessential spending.

You may have to eat out less. You may need to cancel your cable TV or baseball season tickets. You may need to forgo that trip to the Caribbean. Set a budget for groceries each week, drive less, and clip more coupons. None of this is fun, but it's what adults do if they want to achieve financial freedom.

4. Getting your credit card debt under control

Early on in life, your credit card debt may just seem like a number you can hide from yourself. But at a certain point, it's something that truly impacts your ability to build wealth and obtain financial freedom.

When your debt is high, this impacts your credit score, which in turn impacts what you will pay for things like a mortgage and auto loan. In essence, debt can become a downward spiral of pain if you don't nip it in the bud early. Be an adult, and start paying down that credit card debt.

Try to go after the debt with the highest interest rates first, then go from there (otherwise known as the avalanche method). Begin using cards more sparingly and rely instead on good old cash as much as possible. Soon, you'll see your credit score rise and your overall financial picture will look much rosier. (See also: The Fastest Method to Eliminate Credit Card Debt)

5. Saving for a home

Homeownership isn't for everyone, but there will likely come a time in your life when it makes sense to build equity in real estate rather than spend money on rent. Owning a home gives you a sense of pride, a sense of stability for your family, and is a good financial move in the long run — as long as you can manage the monthly payments.

To make a sensible home purchase, traditional expertise has advised saving enough money for a down payment of at least 20 percent. So if you are eyeballing a $250,000 home, for example, that means amassing $50,000 — a sizable amount. While you aren't required to put 20 percent down, doing so can help you avoid having to pay private mortgage insurance, or PMI, until you build up equity in your home. Saving for a down payment is not an easy task, and may take many years, so it's best to start as soon as possible. (See also: 4 Easy Ways to Start Saving for a Down Payment on a Home)

6. Investing toward retirement

The notion of saving for your 60s might seem ridiculous when you're in your 20s. But you can't put off retirement savings forever, and this procrastination can really hurt you down the line. The earlier you start saving, the more money you will have when it's time to leave the workforce.

If you're into your 30s or 40s and have little saved for retirement, you need to start socking money away right now. Take advantage of your employer's 401(k) plan and any of your company's matching contributions. You can also open an individual retirement account (IRA). Max out these accounts, if possible. The sooner you start investing, the more time your money has to grow. (See also: 7 Retirement Planning Steps Late Starters Must Make)

7. Saving for your kids' education

It's hard to imagine saving for college when you have no children yet, or your kids haven't even left elementary school. But with college costing tens of thousands of dollars, and getting more expensive every year, you shouldn't put off saving for too long if you plan to help your children with some of the expense.

It's possible to begin saving before your child is even born, and there are many investment accounts, including the popular 529 college savings plans, that offer great tax advantages to those that save for education. It's not wise to save for college costs at the expense of your own retirement, but if you have the ability to put aside money for both, do it sooner rather than later. (See also: 5 Smart Places to Stash Your Kid's College Savings)

8. Getting properly insured

Proper financial planning isn't just about accumulating wealth, but protecting it. The best way to protect your assets is by insuring them at appropriate levels. Do you own a home? Make sure you have homeowners insurance to protect the structure and everything inside. Do you and your family members have health insurance to protect against illness or injury? And do you have life insurance so that your family will be financially OK if something were to happen to you?

Insurance can sometimes seem like a waste of money if you don't use it. But when something bad does happens, you'll be massively grateful you have it. (See also: 5 Reasons Why Life Insurance Isn't Just for Old People)

9. Crafting a will

Do you know who gets your assets if you unexpectedly pass away? Do you know who will take care of your children if you are no longer around? Have you given any thought to whether you'd like to be kept on life support if you are the victim of an accident? These are unpleasant things to think about, but they are important considerations.

In the absence of a will or other documents that outline your wishes, family members may be left to make challenging decisions. The money and assets you wished to pass on to specific relatives may not be passed on according to your plans. Writing a will may not seem like a crucial thing to do when you are young, but it becomes more important as you get older, expand your family, and accumulate assets. (See also: What You Need to Know About Writing a Will)

Like this article? Pin it!

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Critical Money Mistakes People Make in Their 40s

Alaina Tweddale — Thu, 15 Jun 2017 09:00:10 +0000

The younger you are, the more time you have to bounce back from a financial mistake. As you inch closer to those retirement years, however, and as financial obligations expand, it's increasingly important to safeguard the assets you have — and to prepare for costly expenses that inevitably crop up as youth glides into middle age.

The experts agree: Even 40-somethings who feel confident about their finances are likely to make a few money mistakes. Which are the most common? Here, the financial pros tell all.

1. An expensive home remodel

The average cost to remodel a few rooms is upward of $37,000, according to data compiled by Home Advisor. It could cost even more — as much as $125,000 — depending on the size and location of the home.

Michael Frick, president of Promenade Advisors LLC, thinks that money could be much better spent by paying down an existing mortgage. "Forty-somethings need to realize that retirement is only 20 to 30 years away in most cases," he said. "Do they still want to have that large mortgage payment while they are retired on a fixed income? Will they even have enough retirement income to continue making those payments?"

Even worse, he added, is that many homeowners finance those pricey home renovations by borrowing from their existing home equity or — even worse — by raiding their 401(k) funds. The added monthly payments from a 401(k) loan can crimp the amount of money available to boost retirement savings during critical, high income-earning years.

2. Prioritizing kids' college over retirement savings

Most kids today expect their folks to pony up for the full cost of college, no matter which institution they choose. So says a 2016 Parents, Kids & Money survey released by investment firm T. Rowe Price. Most parents want to comply.

Still, midlife is "a period in which you should assess whether you're on track to fund the subsequent stages of your own adulthood," said Anthony M. Montenegro of Blackmont Advisors. As children age, "it's not uncommon for parents to continue putting kids ahead of themselves — even at the expense of their own needs."

"One way to look at this trade-off is to ask yourself, 'Am I willing to delay retirement and keep working another five to 10 years to fund my children's college?'" said Alex Whitehouse, president and CEO of Whitehouse Wealth Management. Plus, he added, a student who works to help pay for school will have "skin in the game," which can create a greater appreciation for the value of the education.

If there's an additional need for tuition funds, "money can be borrowed through student loans," Whitehouse added. "You can't borrow money for retirement." (See also: Why Saving Too Much Money for a College Fund Is a Bad Idea)

3. Skipping the estate plan

"The term 'estate planning' sounds like something old, rich people need to transfer their mansion and paintings," said Whitehouse. Still, anyone with basic assets they want to share with a loved one (or even with a chosen charity) should have, at minimum, a basic will.

No one wants to consider their own eventual demise but, even so, "lack of planning can lead to painful consequences for heirs, including a lengthy probate process, loss of control, and potentially even disinheritance," added Whitehouse.

For a straightforward will, there are inexpensive online DIY options available like Quicken WillMaker and LegalZoom. An attorney can help create a more comprehensive estate plan or set up a trust.

4. Not saving enough

"Lifestyle creep can be a major problem for those in their 40s. As they earn more, many families increase their spending on luxury items or dinner at expensive restaurants, rather than save the extra income," said Andrew Rafal, founder and president of Bayntree Wealth Advisors.

Small spending increases can be detrimental because they tend to happen slowly over time, and tend to mirror pay raises, so it's easy to not take notice.

Instead of spending those pay raises, Joshua P. Brein, president of Brein Wealth Management, suggests splitting the difference. "I always say it's a good idea to give your savings a raise if you get a raise yourself," he said. "If your savings habits don't match your increased income and instead stay small — even though your income grows — you could be underfunding retirement and falling behind inflation. When you retire, things will undoubtedly cost more than they do today, so save like it!"

Still, Brein still gives income earners carte blanche to spend half their raises. That means you can save more while also increasing your standard of living over time. (See also: 8 Money Moves to Make the Moment You Get a Promotion)

5. Being underinsured

Many 40-somethings have children or other family members who are financially dependent upon them. Even so, "many people in their 40s are underinsured," said Rafal. That means an unexpected injury, disability, or even death has the potential to torpedo even the most seemingly stable situation.

Rafal recommends taking advantage of any group life and disability plans offered by an employer, but also maintaining personal policies that are opened outside of the workplace. "That way you have the peace of mind that your family is properly insured even if you switch employers," he said. (See also: 4 Things You Need to Know About Disability Insurance)

6. A skimpy emergency fund

That three to six months' worth of expenses you set aside in your 20s may not be enough to replace your income today, if you were to need it. "Pretty much everything you own today is more valuable than it was 10 or 15 or 20 years ago," said Charles C. Scott, co-creator of FinancialChoicesMatter.com and founder of Pelleton Capital Management. "Your house is worth more. Your car is worth more. It costs more to take care of your health at this age than years ago, both because you're older, but also because health care costs are a lot higher."

Many midlife workers fail to adjust their emergency safety cushion to account for those increased expenses and earnings. If an unexpected emergency were to arise, and you haven't recalculated in a while, a meager account balance may not stretch as far as expected.

7. Paying too much for investment advice

Lower investment fees and higher performance returns go together like peanut butter and jelly. That's according to the recent research paper Predictive Power of Fees, released by investment researcher Morningstar. Still, many investors, even the most intelligent ones, don't fully understand the investment fees they're paying.

"What you don't know could be greatly hurting you," said Matthew Jackson, president of Solid Wealth Advisors. Fee information is often hidden deep within a mutual fund's prospectus or annual shareholder report. If you don't know what you're looking for, the information can be difficult to find.

Then there are the fees you're paying your financial adviser or broker. "Take the time to learn exactly how much you are paying for advice. Often, commissions and fees are obscure and not easily understandable."

The good news is that even "the worst money mistakes people make in their 40s can be fixed rather easily," said Jackson. First, he suggested, get engaged with your money. "Take the time to learn the basics. In the information age, it's never been easier to learn about asset allocation, maximum portfolio drawdowns, and portfolio volatility." In short, a little knowledge can go a long way. By learning a little, "people in their 40s can avoid a lot of pain in their portfolios," Jackson added. (See also: The Surprising Truth of Investing: Mediocre Advice Is Best)

This article is from Alaina Tweddale of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Questions Financial Advisers Hear Most Often

Tim Lemke — Fri, 02 Jun 2017 08:00:10 +0000

No one goes to a financial adviser if they already know everything there is to know about retirement planning and investing. So most people will, logically, come armed with a variety of questions when they meet with an adviser, especially if it is for the first time.

Financial advisers say they hear many of the same questions repeatedly from clients looking to build their retirement savings or live large in retirement. Most of the questions center around the ability of clients to retire, or the information needed to build wealth in the hopes of retiring comfortably.

This list of common questions for financial advisers was compiled with the help of Greg Hammer of Hammer Financial Group in Northwest Indiana, and Willie Schuette, financial coach with JL Smith Group in Ohio.

1. "Can I retire?"

This is really the ultimate question posed to most financial advisers. Clients want to know if they can afford to stop working. And if not now, when?

A financial adviser will help you determine how much money you have and how much more you'll need, based on your life expectancy and retirement plans. Both Hammer and Schuette said they often have to break the news to clients that they need to keep working, but that's better than telling them after they’ve retired that their money is likely to run out.

2. "Can you help me avoid paying taxes?"

The Internal Revenue Service can take a chunk out of your earnings, and often leave you with less cash than you originally planned. Financial advisers say they get a lot of questions about how to avoid a big tax hit, especially from retirees looking to preserve every dollar they have.

Advisers field many questions about Roth IRAs, which allow investors to invest money and withdraw it tax-free upon retirement. Many investors turn to financial advisers for advice on the tax implications of converting traditional IRAs into Roth IRAs. There are also a multitude of other tax questions relating to municipal bonds, inheritance taxes, and tax deductions.

3. "How can I preserve my money?"

Financial advisers say clients are generally aware that they need to invest more conservatively as they get older to protect against market downturns, but aren't quite sure how. What's the right investment mix based on their age, their money saved, and retirement date? What's the best way to go about shifting away from stocks to cash and bonds?

Hammer and Schuette say they get questions like this all the time, and are happy to walk clients through the best approach to keeping their retirement nest eggs secure.

4. "When should I collect Social Security?"

Retirees can begin collecting Social Security benefits as early as age 62, but will get larger monthly payments the longer they wait. Financial advisers will usually work with retirees to develop income sources that will allow them to delay collecting Social Security. But both Hammer and Schuette said their recommendations depend on the individual client's circumstances and financial needs. (See also: 5 Sobering Facts About Social Security You Shouldn't Panic Over)

5. "What's the deal with health care?"

With Congress working to repeal and replace the Affordable Care Act, many clients are wondering how their health care may be affected. Financial advisers have received this question from retirees who are not old enough to collect Medicare, as well as younger clients who don't get insurance through an employer. Advisers say they will walk clients through the cost of health care and the proper plans, as well as assist with setting up things like health savings accounts and emergency funds.

6. "I know I need life insurance, but what kind? And how much?"

Financial advisers say clients usually know they need some sort of life insurance to protect their families, but are often bewildered by the offerings. There's whole and term life insurance, and policies with varying sizes, lengths, and premiums. An adviser can help find the right kind of insurance for each person and their unique situation. (See also: Why Your Group Life Insurance Is Not Enough)

7. "My spouse just died. What do I do?"

Many people feel confident in their financial planning, until something changes in their life that throws things out of whack. A loss of a spouse or other major change cannot only be challenging emotionally, but it can drastically change a person's financial needs. There may be a sudden loss of income when a spouse dies, and there are endless concerns about taxes, life insurance, and even real estate.

8. "How do I take care of my heirs?"

For most people, the main financial goal is amassing enough wealth to last their full retirement, and there's not much consideration for the next generation. After all, saving for your own several decades of life after retirement is hard enough.

But Hammer and Schuette say there is a segment of clients seeking the best approach to passing wealth onto to their children and other relatives. Financial advisers say that in these cases, the conversation centers not only on amassing wealth, but taking into account things like inheritance taxes, and performing full, in-depth estate planning.

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Make Sure You Don't Run Out of Money in Retirement

Philip Brewer — Fri, 26 May 2017 08:30:09 +0000

An annuity is a stream of fixed payments that's guaranteed, often for as long as you live. Having an annuity can make retirement more secure, but it's hard to recommend them as investment vehicles, because almost every annuity on the market is a terrible investment. They tend to be sold by salesmen, so they're often loaded with fees. And, because being upfront about the fees would make them hard to sell, these fees are obscure (often outright hidden) and are typically different for every product, making it especially hard to comparison shop. (See also: Should You Get an Annuity?)

But my experience these past few years — helping older relatives with their finances, and starting to take the little pension I earned as a software engineer — has given me a new perspective on annuities. Having an annuity is more than just nice: It's wonderful! It's just buying them that's usually terrible.

Fortunately, there are a few that are worth buying. You don't hear about them often, because they don't siphon off a big chunk of your investment to pay a salesman, so salesmen don't push them.

Why annuities are great

It used to be that anyone with a good job retired with an annuity in the form of a pension. This is how I've gotten my recent experience with just how great it is to have an annuity: All my older relatives are now receiving pensions.

You never outlive your income

The main thing that's great about an annuity is that having one means you're never going to be broke. Even if you overspend and run down your savings, even if the stock market crashes or you make terrible investment decisions and your investment portfolio takes huge losses, you'll still get that monthly check for as long as you live.

You don't need to have an annuity to arrange that — you can live off capital in a way that makes it last the rest of your life — but an annuity makes it much easier.

They can raise your income

The other thing that's great about an annuity is that it can, at least potentially, be more money to live on. See, the only safe way to live off capital is to just spend the income from your investments. But that's not much money (especially these days).

If you knew how long you were going to live, you could spend down your capital so that you'd die with just enough money to pay off your last month's bills. But since you don't know how long you're going to live, you have to make a conservative estimate, holding back enough capital so that you won't go broke even if you live to 100. (Of course even that might not be enough. What if you live to 114?)

The company that provides your annuity has a much easier job. They don't need to know whether you'll live to 97 or kick the bucket at 67. They count on the fact that the average person will live an average life span. They can arrange the terms of the annuities so that the payouts don't exhaust the total pool until the last person dies. The fact that some people die the month after their pension starts means that there's enough money to pay for the people who go on to live for decades.

Offset against that is the fact that the company that's providing your annuity needs to make a profit, and it also needs to hold back a reserve against the possibility that it'll get unlucky and a bunch of their customers will live longer than average — but both of those factors are relatively small.

Annuitize, but how much?

If you accept the idea that you probably ought to have an annuity of some size, the next question is: How big should the annuity be?

At one extreme, you could just annuitize all your money — take all your savings and investments (except your checking account and your emergency fund) and buy an annuity. Then you'd know what your income would be for the rest of your life and you could budget for it.

I recommend against that. There are many reasons why it's worth having some capital. Your capital earns an investment return and it also provides a measure of safety as a backup to your emergency fund. It makes it possible to fund expenses beyond your bare-bones budget. Perhaps most important, having some capital saves you money in all kinds of different ways — because you have funds on hand, you can take advantage of deals, you can avoid high-interest borrowing, and you have money to put down a large security deposit in cases where that will save you money.

At the other extreme, you could annuitize none of your money and just live off your capital. I've just explained the downsides to that.

You want to be somewhere in the middle. With a modest annuity, you're protected from running your income down to zero, and yet you can preserve some amount of capital.

My advice is this: You should annuitize enough to cover your rock-bottom expenses, the lowest amount you could live on indefinitely. That way, you're putting yourself in a position where you can be sure you can get by no matter what happens to your investments, while preserving enough of an investment portfolio to fund your other life goals — travel, making a major purchase, leaving an estate to your heirs, etc.

Before you start shopping for annuities, be sure to take into account any annuities you already have. But unless you're old, and even then only if you had a pretty good job at a pretty big company for many years, you probably aren't going to have a great pension. (If you're only kind of old, and worked at a pretty big company for a few years before they all phased out their traditional pensions in the early 2000s, maybe there's a small pension waiting for you. If so, that's great. Even if it's not enough to live on, it's a very positive contribution to your retirement income.)

However, most people reading this probably won't get a good pension.

Fortunately, there is an annuity you very likely do have.

The annuity you already have

You almost certainly already have an annuity in the form of a national pension scheme, such as Social Security. The amount of Social Security you will get depends on your own employment history. For most people, it will provide a large fraction of the "rock-bottom expenses" I recommend you cover with an annuity, but you can generally expect there to be some gap.

If you have an employer-sponsored pension, even a small one, it may well cover the gap. If you don't, I recommend that you cover it with an annuity that you buy.

How to buy an annuity

As I said at the beginning, most of the annuities you can buy are terrible investments, but there are good ones. It is possible to buy an individual annuity and get an OK deal. It's just hard because the companies that sell them make it virtually impossible to compare one annuity to another.

This is especially true for the sorts of annuities that are most like a pension: The ones set up so you make a payment every month starting in your 30s or 40s, then get a check every month starting when you're 65.

Those are called deferred annuities (because you defer getting your money until age 65), and they're always terrible. They always have what are called "back-end" fees — money that the salesman gets to keep when you figure out that you've made a terrible deal and want to get (some of) your money back. The rules on back-end fees are always different.

To make it even harder, these sorts of annuities are usually bundled with some sort of life insurance (supposedly so that if you die before you retire your estate won't "lose" all the money paid into the annuity) — and of course the details of those insurance policies are always different as well.

Comparison shopping

It is possible to buy an annuity in a way that does allow you to compare them. Don't buy one with monthly payments. Instead, save and invest the money in the stock market yourself during your working years. Then, when you're ready to retire, buy what's called a "single premium immediate annuity" — you put up a big chunk of money today, and then start receiving monthly payments immediately that last for the rest of your life. (The monthly payments, of course, should equal the gap you identified between your Social Security and your rock-bottom budget.)

That is something that's easy to compare: How much do you have to pay today for a stream of income that starts next month and lasts the rest of your life? You can get a few quotes and pick the best deal.

These sorts of annuities usually don't have the life insurance policy that supposedly protects against your dying before you start taking payments, because the payments start immediately. That's good. Bundling in life insurance just makes it harder to compare prices. If you need life insurance, buy a life insurance policy separately.

Be very careful of letting them include any sort of survivor benefit, because that can also make the annuities harder to compare (although as long as the rules are exactly the same, it is at least possible). One alternative, if you need a survivor benefit, is to buy a life insurance policy that will pay off enough for your spouse to buy his or her own annuity.

As an aside, let me mention that the annuity salesmen among you are going to jump in and point out that you're giving up an important tax advantage if you only consider an immediate annuity. This is technically true, but in fact is pretty unimportant. Let me just say this: If you are maxing out your 401(k), and your IRA, and your Roth IRA, there is an opportunity to tax shelter a bit more money through an annuity contract. In practice, I'm willing to bet that the tax advantage will never equal the fees you're going to end up paying.

If you do save your money in a 401(k) or IRA, there are tax rules for using that money to buy your annuity. Follow the rules and you won't owe any taxes when the money is used to buy the annuity. You will, however, pay taxes on the annuity payments when you receive them (just like you would if you'd taken distributions from the tax-deferred plan directly).

Where to buy

Pretty much any life insurance company will sell you an annuity, but I only know of two places to get a good one: Vanguard and TIAA-CREF. (There used to be a third, but Berkshire Hathaway got out of the business a few years ago.)

The main problem with buying directly from an insurance company is just that their annuity sales operations are organized around their annuity salesmen, who will immediately start trying to sell you something that's more profitable (to them) than a single premium immediate annuity — that's the step you avoid by going through Vanguard or TIAA-CREF. (They also have enough buying power to get especially good rates, because they bring in large numbers of customers.)

If you're sure you can bear up under the sales pressure, there's no reason not to get quotes directly from the insurance companies. (Just because I don't know of any other good places to buy one doesn't mean there aren't any.) Insurance companies that sell annuities will be very easy to find — just do an internet search for information about annuities and you'll get a dozen ads for them and for online tools to compare their offerings.

You're handing over a large fraction of your wealth and counting on the insurance company to be around for the rest of your life, so you want to have considerable confidence in the financial soundness of the company you pick. I would not consider any company rated less than A by the insurance grading firm A.M. Best, and I'd be happier with one rated A+.

Buy when rates are high

To buy an annuity, you have to put up a pretty sizable chunk of cash. (Vanguard quotes the cost today to a 65-year-old male buying a single premium immediate annuity of $1,000 a month for the rest of his life as being $180,052.)

Unless you're rich, the cost of an annuity that covers your rock-bottom expenses is going to be a large fraction of your entire retirement savings — which is OK, because it's going to be a large chunk of your entire retirement income.

The insurance company that sells you your annuity is going to invest that sizable chunk of cash in a portfolio of stocks and (mostly) bonds, and then use the dividends from those stocks and (mostly) the interest payments from those bonds to pay your annuity. Because of this, an annuity is much cheaper when interest rates are high.

If you bought an annuity right before the financial crisis, you made out very well. If you wanted to buy one in the past eight or nine years, you probably found that they were incredibly expensive. But in the current era of rising interest rates, annuities are becoming more affordable again.

Still, if you're approaching retirement age, understand that there is no rush. Figure out your rock-bottom expenses — and then live with that budget as an experiment. Maybe you'll find that you'll need more than that in retirement. Maybe you'll actually need less. Do some comparison shopping. Take your time. Then, when you've got a pretty good handle on the expense of your retirement lifestyle, at a time when interest rates are up a bit and you're ready to quit working, go ahead and buy that annuity.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Beware: Your Insurance May Not Cover These 8 Losses

Dan Rafter — Fri, 19 May 2017 08:30:08 +0000

You might think that you have enough insurance protection. After all, you have car, homeowners, life, health, and disability insurance coverage. What else could you possibly need?

Here's an unsettling truth: Even if you've taken out all the insurance policies necessary to protect yourself and your family, you might still face coverage gaps. Review your policies regularly. And when you do, watch for these potential gaps in your coverage.

1. Life insurance

Many employers offer group life insurance to their workers as an important financial benefit. The American Council of Life Insurers said that at the end of 2015, group life insurance represented 44 percent of all life insurance policies issued in the United States.

Employees like this insurance because it is usually inexpensive. But there are some negatives: Most group life insurance policies end if you leave your employer, and the next company at which you work might not offer this coverage. Secondly, the payouts for group life policies tend to be smaller than for an individual life policy that you'd buy for yourself. Usually, the death benefit with a group life policy is one to two times your annual salary. That's a nice bit of cash, but it's certainly not enough to provide for your family long-term should you unexpectedly pass away.

That's why you should use a group policy as a supplement, not a replacement, for an individual life insurance policy. Yes, an individual policy will cost more, but you'll also receive a far larger death benefit. (See also: Why Your Group Life Insurance Is Not Enough)

2. Dog bites

According to the Insurance Information Institute, dog bites and other dog-related injuries accounted for more than one-third of all homeowners insurance liability funds paid out in 2016. That equaled 18,123 claims, with the average cost for each claim coming out to $33,230.

The challenge with dog bites is that many insurance providers won't insure homeowners who own certain breeds considered "dangerous." Insurance companies vary on this, but many won't insure pit bulls, Rottweilers, German shepherds, or Doberman pinschers. If you have a dog, check with your insurance company to make sure that it is covered. Paying for a dog bite without the help of your insurer can prove costly.

3. Transportation expenses

Your car insurance policy will cover the damages to your vehicle following an accident as part of its collision coverage. But what if you need to rent a car to get around while your vehicle is in the shop? That can be expensive.

Unfortunately, most auto policies don't provide what is known as transportation expenses coverage. And when policies do provide it, the amount they'll give you to rent a car — often as little as $20 a day — might not be enough to cover the whole cost.

Check your policy to determine if it will cover a rental car. If it does, make sure you know exactly how much you'll be getting. If you're not satisfied, it might be time to pay to boost this coverage.

4. Extra liabilities

What if a neighbor drowns while swimming in your pool? Will your homeowners insurance provide enough coverage if your neighbor's family files a costly lawsuit against you?

Probably not — and that's where an umbrella insurance policy comes in. An umbrella policy provides extra liability coverage above the limits of the coverage provided by your auto or homeowners insurance. Maybe your homeowners insurance policy provides liability coverage of up to $500,000. If someone sues you for $1 million, you then might be on the hook for the extra $500,000.

An umbrella policy can protect you from this. It kicks in when a legal action against you supersedes the amount of liability coverage you have. In the example above, your umbrella policy would cover the extra $500,000 that the homeowners policy would not. An umbrella policy can offer you the same kind of extra protection if you cause a serious car accident.

Umbrella insurance isn't overly expensive. The Insurance Information Institute says that consumers typically pay between $150 to $300 a year for $1 million worth of umbrella liability protection. This investment might help you avoid a financial catastrophe.

5. Not enough disability coverage

You might think you've taken the steps to protect yourself and your family by taking out a disability policy. If you are injured or become ill and can't work, this policy will kick in to provide you and your family regular payments.

Here's the challenge, though: Most group disability insurance plans only pay out 60 percent of the insured's base salary. And employees who rely on bonuses and overtime won't receive any pay out for those extras.

Receiving 60 percent of your pay even though you are not working might sound like a good deal. But it can be challenging to live on just a portion of your regular income. Could you afford to cover all your monthly expenses if 40 percent of your income suddenly disappeared, especially if you've got medical deductibles and other costs to cover?

If not, consider investing in supplemental disability insurance. You will have to pay for this, of course, but this extra coverage could protect you in case medical problems keep you out of work.

6. Wind or hurricane damage

A 2016 report from Travelers Insurance identified heavy wind storms as the cause of the greatest number of homeowners insurance claims from 2009 through 2015.

You better make sure, then, that your homeowners insurance policy provides adequate coverage for wind damage.

The Insurance Information Institute says that many insurers, especially those clustered along the Atlantic seaboard and Gulf of Mexico, include deductibles for hurricane and wind damage that are separate from those for incidents such as fire or lightning strikes. These can be expensive. Your standard deductible for most forms of home damage might be as low as $500, meaning that you'll have to cover the first $500 of any repairs before your homeowners insurance kicks in. But an extra deductible for wind or hurricane damage may instead be a percentage of the insured value of your home.

Say your home's insured value is $300,000 and your insurer's wind or hurricane deductible is 5 percent. This means that you'd have to cover $15,000 in damages out of your own pocket before your insurance coverage would kick in.

If you live in a storm-prone area, check your coverage. If the deductible for wind or hurricane damage is too high, it's time to shop for a new policy.

7. Flooding

If a heavy rainstorm causes your basement to flood, a standard homeowners insurance policy won't cover the damages caused by the water.

If you want to protect yourself from floods, you'll need to purchase a separate form of protection known as flood insurance. You can usually purchase one of two policies — one that covers your home for up to $250,000, and a second that covers your personal property for up to $100,000.

Flood insurance will only cover water damage resulting from a flood. It won't provide coverage if your water heater bursts and floods your basement or if water backs up from your toilets.

Flood insurance doesn't do much to protect your personal belongings if they are stored in a basement, either. This insurance only covers damages to mechanical systems, electrical systems, and structural elements. (See also: 9 Surprising Things Your Homeowners Insurance Doesn't Cover)

8. Fire

What if a fire destroys your home? Yes, your homeowners insurance policy will help you rebuild. But don't expect it to pay for the full cost.

Most insurance policies place caps on the amount of coverage they'll pay out. They also factor in depreciation when determining the value of the possessions that were destroyed in the fire. You might receive a much smaller payout than you expect when it's time to rebuild your home.

Call your insurer to make sure that you will receive enough coverage should a fire destroy your home. If that coverage isn't enough, you might have to pay for extra protection.

9. Theft

According to the Insurance Services Office, the average loss in a home burglary is $3,786. Your homeowners policy can help you recover some of the costs from your stolen personal property, but don't assume it'll reimburse you completely. Often, the payout comes up very short.

In order to keep premiums down, homeowners policies put caps on some valuable items, such as jewelry, electronics, or artwork. Even cash often has a measly limit of $200. Let's say your homeowners policy puts a $1,000 threshold on jewelry, and your $3,000 diamond ring is stolen, along with several other expensive necklaces. You'd be out thousands of dollars. The payout wouldn't come close to the value of what was stolen.

If you have valuable items in your home, you may want to consider purchasing an additional rider (or "floater") policy that will cover items beyond what homeowners will offer. Some providers offer special riders for unique items, such as jewelry or camera equipment.

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: