The Money Tasks You’re Avoiding And How To Make Progress (Part 1)

Financial wellness is like eating healthy – it’s hard work and no fun but you know it’s good for you. Think about it, you always feel better after a healthy meal instead of a highly-processed one. But building a balanced meal plan takes more time and effort to accomplish. The same is true for a healthy financial plan. Not every financial planning task is exciting and groundbreaking, but each step secures your goals and vision for the future.  So let’s dust off your to-do list and explore actionable resources to help you accomplish some healthy financial tasks. 

1. Increase (or Get) Life Insurance

Life insurance is one of the easiest tasks to forget, yet it’s crucial if you carry significant debt or have dependents who rely on your income. The truth is, everyone who buys life insurance hopes their loved ones never need to use it, but it’s a true safety net for your family. 

Life insurance comes in many shapes and sizes; the two broadest categories are:

• Permanent life insurance
• Term life insurance

Permanent policies can offer good benefits but aren’t right for everyone. Due to the comprehensive nature of these plans, premiums are nearly four times higher than term policies and often don’t offer enough benefits to justify the sky-high rates. While these policies can accumulate a cash balance and investment opportunities, you can usually see more substantial returns through regular portfolio contributions.

Term insurance lets you buy a policy for a set time, anywhere from 10 to 30 years. The coverage lasts for that specific time and stops when the term ends. Term coverage is much more affordable than permanent coverage, which makes the monthly commitment much easier to stomach. Your coverage cost usually depends on:

• The provider (you can get a better price depending on the company you buy a policy from, so shop around and understand any fees before signing on the dotted line). 
• The amount of coverage (a $1 million policy will be cheaper than a $2 million).
• Your age (younger people tend to have lower premiums).
• Your health (healthy people (i.e non-smoker, physically fit, etc.) tend to pay less).
• Gender (men typically pay more than women) 

One of the most common questions about life insurance is how much coverage you’ll need. Your coverage level is unique to you and your situation. Here are a few things to consider:

• Your income
• Family size and additional income
• Existing insurance coverage
• Net worth
• Current portfolio and retirement assets

Did you just start a family, buy your first or second home, or start your own business? All of these should spark review to potentially increase coverage that meets your changing needs. Keep in mind, not everyone needs life insurance. Someone with no debt or dependents doesn’t need the added monthly expense.

2. Prepare Your Estate Planning Documents

People have a laundry list of reasons to avoid estate planning. But it’s not as painful as it’s made out to be. 

In fact, in the wake of the pandemic, many are re-evaluating their documents to ensure everything’s up to date. From video conferencing with their attorney to digitally updating or drafting a new will, people have been creative in how they approach this financial chore. Not sure where to get started? Let’s look at some key estate planning documents:

Will

A will outlines your wishes for your estate. One of the most common reasons people put off creating one is a perceived lack of assets. Do you own a car or house? Are you an entrepreneur who owns their own business? What about valuable jewelry or collectibles? Maybe even a coffee can full of cash? Once you start looking, you’ll find you have several assets to plan for. A will gives you a dedicated space to help ensure your estate gets divided according to your wishes.

Guardian/Trustee

In their will, parents either need to add or update guardians for their children. A guardian is someone who will care for your children should you be unable to. While a guardian cares for the children’s wellbeing, a trustee handles the finances like taxes and inheritance. 

Trust

For those planning to leave significant assets to family and loved ones, a trust is an excellent vehicle to consider. Trusts are private and secure, giving you the freedom to select one that will work best for you. For example, if you want your legacy to have a charitable-focus, you might consider a charitable remainder trust which funnels a certain amount to your chosen charity and the remainder to your beneficiary. 

Financial Power of Attorney

This gives someone the ability to handle financial matters on your behalf like settling debts, paying taxes, and more. 

Medical Directive

This gives the person of your choice the ability to make medical decisions on your behalf should you become incapacitated. It’s best to choose someone like-minded who will respect your wishes. 

All these tasks can’t be completed at the same time. Sit down and see where you’re at and make a detailed plan from there. If you’re starting from scratch, maybe start with drafting a will. If you haven’t updated your plan in years, see if your beneficiaries are still aligned or if you need to change a guardian or power of attorney. 

Estate planning is meant to bring confidence, clarity, and peace of mind to your financial plan. Taking the time to update your documents ensures your life is in order to create a seamless financial transition to children, family, or charitable organizations. 

3. Set Up or Rebalance Your 401(k)

A 401(k) is a tax-efficient way to save for retirement. Pre-tax contributions lower your taxable income and boost future savings. But to maximize the plan, you first have to set it up. Creating a new account can seem daunting (which is probably why you put it off in the first place), but it doesn’t have to be stressful.

When creating your account, you’ll have to make a few decisions:

Choosing which account to fund

Traditional, Roth, or even both depending on your plan.

Selecting your contributions

Most 401(k)s are funded by payroll deferrals, which means you select a percentage of your salary to fund the account. Struggling with how much to contribute? Start by putting in enough to qualify for a company match if you have one (normally 4-6%). A good rule is to increase your contributions with a raise, bonus, or other salary bump.

Making investment choices

While your company’s provider has some control over the pool of investments you have to choose from, you are able to decide how you want to allocate your investments.  Start by determining how much risk you want to assume (high, moderate, or low) and assess from there. 

Establishing your 401(k) is not a one and done activity. It’s important to periodically rebalance your portfolio. Rebalancing means buying and selling funds in your plan to maintain a consistent allocation and risk preference. It’s best to make rebalancing part of your annual (or even quarterly) process as it limits volatility and helps maintain your risk levels and time horizon.

Having the appropriate amount of life insurance, getting your estate documents in order and setting up your 401(k) and rebalancing every six months are just a few of the tasks you need to make progress on (and are probably avoiding). In our next post, we’ll cover four additional areas that I see people drag their feet on when it comes to taking care of their money.