In an earlier post, we conducted a reader poll to find out what you would consider a financial disaster. The situation mentioned most often was job loss coupled with either the inability to pay bills, or having to be the sole breadwinner as the result of someone else’s job loss.
While job loss is definitely a major upheaval, especially in an economy where unemployment is still over five percent, it’s not the only disaster that can affect your finances, and it’s not necessarily even the worst.
Perhaps it’s the invincibility of youth, but people in their early twenties rarely think of accidents, injuries, and illnesses as something that can happen to them; chances are, you are no exception. The problem is that not being prepared for these situations could ruin your finances.
As previously stated, most millennials never expect to be widowed, suffer a debilitating injury, or be stricken with a chronic and life-threatening illness, and yet these things happen all the time.
· Motor vehicle accidents are one of the leading causes of death in the United States. In 2012, 33,561 people died in motor vehicle accidents, and of those 9,920 were between the ages of 16 and 29 – that’s almost one third of all cases.
· The average median age for first-time marriages in the US is 28.3 for men, and 25.8 for women.
· Roughly 45 percent of Americans has some type of chronic disease. Although the middle aged and elderly still make up a bulk of cases, chronic health conditions in people under age 30. Additionally, diabetes is the leading cause of kidney failure, blindness, and other complications in people aged 20 to 74.
Based on these few statistics, you can see how it would be possible for a younger individual to become widowed, injured, or face a physically and financially devastating health crisis.
Preparing yourself for a potential upheaval is an ongoing process and it involves several activities including:
- Organizing your finances;
- Getting insurance coverage;
- Making a will; and,
- Making a living will.
Organizing Your Finances
If you are a regular subscriber to this blog, you have probably already started getting your finances in order. You’re not just pursuing investments, you’re also making sure you have a clean credit history, and that you have a balanced debt to income ratio. If not, then there is no time like the present.
· You should first get a copy of your credit report and review it for any errors or bad entries. If you notice anything wrong with your report, you need to file a dispute with the credit bureau. Removing disputed items can be a long and difficult process, so you might need to hire someone to help you with your dispute.
· If you have balances on any of your credit cards, your next step would be contacting the credit card companies to get a lower interest rate and make a concerted effort to pay off the balances on all the cards. You can also consider transferring the balances to a different card.
· If you have any installment loans, such as a car loan, consider negotiating a lower interest rate or refinancing at a lower rate. As with the credit cards, you should also consider paying off the balance as quickly as possible.
· If you are behind on any payments, get current as quickly as possible, and stay ahead on your payments to avoid falling behind again.
In addition to settling your debts, you should also have a savings plan in place. You can sign up for an employer 401K, and transfer the balance to a new 401K whenever you change jobs, or you can start your own retirement account.
· The advantage of the 401K is that you aren’t taxed on that money until you withdraw it.
· The advantage of the IRA is that you generally won’t get taxed if you withdraw the money after retirement age, because you will have already paid those taxes up front.
In addition to health and automobile insurance, you should also look into a good life insurance policy.
Life insurance pays out a set dollar amount to your beneficiaries in the event of your untimely death. This will allow your beneficiaries to continue paying the bills, and even pay off debts, when you’re gone. Some life insurance policies will even let you borrow against them while you are still alive.
Many employers offer life insurance as part of their benefits package, but that coverage ends the minute you leave your job. If you work somewhere for several years, that’s hundreds (and even thousands) of dollars down the drain. Rather than use an employer policy, get an individual policy that goes with you no matter how many times you change companies.
A will is a set of clear instructions as to what should happen to your assets after you are gone — not just material assets, but guardianship of children and pets. It will give you peace of mind knowing that these things are taken care of, and it will save your loved ones the heartache of having to handle them.
You can write your will alone, but some states might require specific language, having the will notarized, and other things to make it legally binding. Even if you write it yourself, your best bet is to have a lawyer review it or purchase a template or will software specific to your state.
Once you write the will, you should periodically update it as your life circumstances change.
A Living Will
A living will tells your loved ones, and medical professionals, what to do if you can’t make medical decisions for yourself. It involves designating someone you trust to make decisions on your behalf, as well as clear instructions on what to do in medical situations, such as if they should use extraordinary measures to revive you, or whether or not to leave you on a ventilator if your brain function has ceased.
Just like the standard will, you should periodically review and update it.