What happens when you Google “Protecting Your Most Valuable Asset”? You get 1,720,000 results for topics that range from spirituality, to privacy, to tangible assets such as your home, to your digital picture files, to fingerprint ID kits for your children. In the context of your financial plan, I believe your most valuable asset is your ability to earn a living. In our work as financial planners, protecting that asset requires three separate approaches:
1. Personal Development
2. Short Term Contingencies
3. Long Term Income Replacement
Employers today require a combination of hard skills, the technical ability to do the job, and the soft skills of communication and critical thinking. According to a recent survey by employment company Adecco, 92% of employers feel that employees are not as skilled as they need to be. Our education system is playing catchup to these demands from the business community.
To protect your ability to earn a living and increase your income over time, it is now your responsibility to create a personal development plan. Budgeting both time and money for certificates and advanced learning that apply to your job and your future career requirements has been the traditional development plan. Attending free webinars from universities or online learning communities like the Khan Academy and TedX can help with the technical knowledge. In either case, you should be ready to demonstrate to an employer how you have taken that information and applied it to your work with the resulting impact on your business results.
Short Term Contingencies
You see the headlines over the weekend that your employer is shutting down your facility. Or they are merging with a mega-company and eliminating your department. Or they are outsourcing your job to a contractor. Maybe you want to explore new career opportunities and need time away from the daily demands of your current job to sort through your options. Having a well-funded short term contingency fund will allow you to take the time to find the best employment situation for your next career move, no matter what the reason is for the temporary reduction of income.
How much should you have in a short term contingency fund? The rule of thumb is at least three months of spending set aside if you have a two income household, six months if you are on your own. From both my own personal experience and working with clients who have undergone significant job changes, those numbers are not enough. Unfortunately, there is no magic formula for the right amount. One significant variable to consider is your overall debt load. If you have not paid off your mortgage, student loans, car loan and credit cards, a better target is probably double those amounts.
Long Term Income Replacement
Warning, I am about to talk about insurance. Having worked as an agent for two of the largest insurance companies in the world, I am familiar with the resistance most of us have about discussing what happens at our own death or disability. Combine that with a culture of ‘salesy’ insurance consulting and it is natural to avoid diving into this subject. The reality is that properly insuring against a potential loss of income is, in my opinion, the second most important financial planning activity behind budgeting. After you figure out how to spend less than you earn, buying enough life and disability insurance ensures that the rest of your long term plans will be fulfilled. Yes, this is more important than starting contributions to your retirement accounts. It is more important than your asset allocation, funding your college savings account and paying off your debt, in my belief. None of those objectives will be met if you cannot go to work tomorrow.
How much insurance should you buy and what type of policy makes sense for your situation? This is a very individual answer. A great place to start is your employer benefit plan. You probably have the ability to add supplemental amounts of life insurance to the company provided benefit. You might also have the ability to buy long term disability income insurance to supplement the short term plan provided by your employer. When you are in the midst of funding multiple goals, buying as much insurance as you can for the lowest cost usually leads to buying term life insurance that only covers your life for a certain period of time. Start with an amount at least equal to all of your debt plus 10 times your income, with a goal of eventually having coverage of 20 times your income.
For example, if you are making $40,000 per year, have a mortgage of $90,000, student loans totaling $30,000, credit card debt of $10,000 and a car loan of $5,000, you can look at coverage for $500,000 that would pay off all of the debt ($135k) and leave $365,000 to partially replace your income.
If you are working in a highly specialized industry, buying your own disability policy becomes more favorable as you can customize when and how much that policy will pay in benefits. An important concept in disability insurance planning is what type of work you can do following an illness or accident. The insurance industry terms are “own occ” or “any occ”. Most group plans and many individual policies pay claims only if you cannot work in any occupation (any occ). The more narrow the specialization of your work, you would want to explore a policy that pays benefits when you cannot work in your own occupation (own occ), as it might be hard to replace your income working a different job even in a similar industry.
When it comes to preserving your assets, you should think short and think long. Invest time to continue developing the skills that meet the demands of a dynamic job market. Fund a short term contingency account and buy enough insurance to make sure there is enough money to pay for your long term goals. Then get to work saving and investing for college and for retirement and all of the ways you live a life of significance.
Josh Mudse is licensed to sell insurance in Ohio and Michigan.
This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Camelot Portfolios LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.
These materials contain references to hypothetical case studies. These are presented for the purpose of demonstrating a concept or idea, and not intended to be interpreted as representing any specific person. Such representations are not intended to substitute for individual investment advice, even if the case study appears to have similar characteristics. A447