Proven Tools to Master the Defense of Wealth Building

Webster defines Defense as THE ACT OR ACTION OF DEFENDING or THE CAPABILITY OF RESISTING ATTACK.

Many aspects of life threaten our ability to defend against an attack on what we work so hard to build. As our incomes increase, a lack of a defense can, and will, ultimately hamper the ability to build wealth.

When evaluating your defense, it’s essential to couple it with a strong offense.

See Proven Tools to Master the Offense of Wealth Building. You cannot avoid structuring a career, increasing your income, or mastering your chosen skill in building wealth while only focusing on protection aspects.

It has been said that “the best defense is a good offense.” If taken too literally, this can actually be poor advice—but it does drive home the point that establishing and growing income sources is pivotal to your overall financial plan. You can’t expect to win the game with one and not the other.

Now, I know what you’re thinking…

You think this is just going to be a spiel about the importance of budgeting or the need to take out insurance policies on everything but the kitchen sink—but that would be incorrect.

Balance, yes. Overbearing, no.

In order to create margin in life, certain aspects need to be addressed to provide you with some peace of mind.

Defending what you’ve worked so hard to achieve should be a high priority as you establish your career and life.

We must address two primary categories to gain the defensive advantage.

To beef up your defense, focus on:

1. Plan to Spend: Plain and simple; no one likes to talk about budgets. A budget seems too restrictive, too structured. The very name seems to suck the fun out of life. However, a Plan to Spend enables you to figure out where and how to apply the freedom you’ve gained from your income to what’s most important to you.

A Plan to Spend is critical to your long-term financial success.

Building a Spending Plan through Mint, Personal Capital, or what I use, EveryDollar, allows you to plan for your finances. You tell your money where it will be going instead of being broke at the end of the month and wondering where it went.

1. Reserves: Once you are living within your Plan to Spend, building reserves will be next. Life is full of the unexpected—plan for it. First, define what is considered an unforeseen event (a layoff, broken-down car, birth of a child, etc.). Then create a reserve account of at least 6-12 months of living expenses in a high yield savings account, money market account, or a safe investment that is higher than inflation.

The amount itself is calculated by the carrying costs, or burn rate, of your monthly expenses. If you have a spending plan, you can pull the number from your total monthly expense column and multiply it by the desired number of months you would like to have available.

The rule of thumb is typically 3-6 months; I err on being more risk-averse and feel more comfortable with 2-4x that amount. Pull together all contractually binding leases, cell plans, life insurance policies, student loans, and other debt along with expected consumption of groceries, fuel, and household items. Once you have the “basics,” take this total amount and annualize it—total * 3, 6, 12 months.

But remember, these need to be separated from your monthly operating costs/account. There are quite a few options, so be sure to check the ratings of each bank and ask whether the account is FDIC insured, has check-writing capability, and whether you have to maintain a certain balance to benefit from the higher percentage rate. Also, watch for the fees associated with the account. I personally hold at least a year in a high yield savings account.

1. Insurance

Insurance You Need Immediately:

• Health Insurance: Whether you work for an employer who has a sponsored plan, co-op, or are on Medicare, you need health insurance.

The leading cause of personal bankruptcy is not student loans: it’s being uninsured or underinsured with the resulting high balances of medical debt. Having health insurance should include at least dental, if not also vision.

• Auto Insurance: If you own a vehicle, this is a requirement. Depending on the value of your vehicle and the area that you live in, you will need to choose between having comprehensive or liability insurance on the vehicle. You cannot simply look at the premium. Ask what that premium includes. Utilize kbb.com or nada.com to determine the value of your vehicle, then take the difference in premium cost between the two and divide that by the value of your vehicle. This calculation would show you the number of months/years it would take to replace your vehicle in the event that you purchased only liability. If your vehicle is financed, you will most likely be limited on what type of insurance you can buy. So, before making that vehicle purchase, be sure to look into this.

• Renters Insurance: If you are a renter, this is crucial—your belongings are not protected if a break-in, flood, or fire occurs. Most think that their belongings would be covered by the owner of the property or property management team if this occurs, but this is not typically the case. Make sure to update a listing of your belongings once per year. This should be done via pictures or video and should be maintained on something as simple as a Word document or Excel spreadsheet.

OR

• Homeowners Insurance: This one should be obvious and is required if you have a mortgage, but when evaluating your policy (annually), make sure that the full replacement value is stated, not the value of the home/apt/condo/townhouse when you originally purchased it. If you are in a high-growth area, this could be significant, so don’t make the mistake of overlooking your coverage in this area.

1. Insurance You Need in the Next Three Months:

• Short-Term Disability: This policy pays you a percentage of your current income in the event you are hospitalized beyond the available PTO you may have. It also protects you from going without an income due to being on leave without pay.

• Short-Term Disability: This policy pays you a percentage of your current income in the event you are hospitalized beyond the available PTO you may have. It also protects you from going without an income due to being on leave without pay.

• Short-Term Disability: This policy pays you a percentage of your current income in the event you are hospitalized beyond the available PTO you may have. It also protects you from going without an income due to being on leave without pay.

• Life Insurance: Unless self-insured, you want at least 8-10 times your annual salary. Being self-insured means that you are debt-free, have an emergency fund that exceeds the 6-12 month mark, have enough in retirement savings for your family to live off the dividends and growth, as well as having the proper amount of savings to bridge the gap between your current age and 59½ (when you are able to begin drawing on the retirement savings you have built). This is all put into place in order to ensure your assets well exceed any liabilities and that your family would be cared for financially in the event of your premature death.

There are a lot of life insurance policies out there. Some will try to convince you to make your life insurance policy a savings account or upsell you in some other way. Although this is an excellent way for an insurance provider to up their premiums, this is most likely not in your best interest. Simply purchase a term life insurance policy that will last until your kids are out of college, your home is paid off, and you have considerable savings in a retirement fund.

• Umbrella Insurance Policy: This inexpensive policy is recommended if you have $750k+ in assets or a net worth exceeding $350k+. This policy protects you if you are faced with a lawsuit above and beyond the limits that your home and auto can provide. This is an added protection to the wealth you have accumulated.

• Long-Term Care: This is only necessary once you are “over the hill,” but essential to be mindful of nonetheless. This will protect your family from footing the bill if you need additional care as you age.

Other Ways to Beef Up Your Wealth Building Defense:

1. Check your credit at least once per year. It ensures accounts are accurate and no unauthorized accounts have been established.
2. Purchase identity protection. Identity theft is a growing issue and can cause many headaches if your identity is compromised.
3. Have your taxes completed by a CPA. This practice will add a level of oversight to ensure that you are taking advantage of necessary deductions, ensure that the filings are appropriately handled, as well as add a level of protection for you and your family. Be sure to store tax returns for at least seven years.
4. Have a safety deposit box or safe to store titles, deeds, tax returns, or other important documents like a will or trust (in the state you reside).

The Takeaway: The defensive approach to your finances protects your accumulated wealth from diminishing. For more on what documents to store, where to store these documents, and how long to store them, stay tuned for an upcoming post on everything you’ll need to know.