Goal Setting – Financial Protection

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We’ll spend the next few posts looking at various milestones in the financial planning process, and start to understand exactly what you need to have in place for each stage. I am going to borrow heavily from Tony Robbins “Wealth Mastery” here as he has done an incredible job of helping people get clarity on their financial goals.

Today we’ll start with Financial Protection. This is the basic minimum goal for everyone. The idea here is to be absolutely certain that you and your family are protected, no matter what life may throw at you. You want to financially bulletproof yourself and your family against sickness, unemployment, an economic downturn or whatever else may lie in wait.

You have adequate financial protection when:

  1. You have accumulated an emergency cash reserve large enough to cover your basic living expenses for a minimum of 3 months and up to 24 months, depending on your needs. If you lose your job tomorrow, you need to be able to cover these basic expenses for as long as it takes to find new employment. If you have a very secure job or highly marketable skills, you may be comfortable with less. If you are self employed, or have a fluctuating income, you may need a bit more cash to feel comfortable. Write down the actual amount of money you need for your emergency cash reserve.
  2. You have obtained income protection insurance to protect yourself and your family against long-term sickness or disability. The amount of insurance you need is directly related to the amount you already have saved. Income protection insurance is designed to pay you a portion of your current income if you are sick and unable to work for the long term. It will often cover you up to age 65 for a relatively small monthly cost. Write down how much income you would require per year if you you were disabled and unable to work ever again from tomorrow.
  3. You have at least obtained basic life insurance to provide for your family if you were to pass away. Even if the amount of cover is small, try to at least meet your family’s basic income needs. If your family needs a minimum of $25,000 per year to pay the bills, then look at $500,000 in cover. The $500,000 invested at a 5% return = $25,000 per year. Go for a simple term life policy and set the term so it expires when your youngest child will become financially independent. Write down the amount of life insurance required to cover the basics for your family if you were no longer around.

Loss of income due to job challenges or long term illness are the main causes of economic trouble for families. If your choice is to make the first contribution to a retirement plan, or pay the first premium on an income protection plan, the latter is going to be far more valuable if you have an accident or illness.

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