Young and Carefree
(Financial Planning for the Young, Single Person)
Welcome to 2004! We hope you will accept our good wishes that you will have a wonderful new year. We are certainly going to do our part to help you along on the path to a successful year and one of the things you must think about is a financial plan for the coming year – a plan that lasts far longer than just 2004.
Oh, we know, you are young, single and have a lifetime ahead of you to prepare for the golden retirement years. Besides, what does it really matter? After all, you only have yourself to take care of; there can’t be that much you have to plan for.
That buzzer you just heard is the sound of the game show host telling you that there is far more to plan for when you are single than you might think. The only difference between the stakes in the game show and TV and those in the game of life is…well…your life!
What’s so important about this planning stuff? Well, let’s take a simple little example. If you are young and just starting out in life, you may be looking at purchasing a new car. How are you going to afford that car? Do you have enough for a down payment? If not, will the dealer let you buy with no money down? Oops, what’s that you say…you have no credit record? How will the lender make a credit decision on you? If you don’t have a credit record, how are you going to get a good rating built up?
Get the point? Just about everything in life takes planning and that applies to the young and less young alike. Whether you are married or single, rich or poor, starting out in life or nearing retirement, you have to take stock of where you stand, where you want to go and how you will get there. Let’s talk about a few things you should include in your first plan or budget.
Let’s first look at where you stand in the personal debt ocean. Are you just wading in it a little, or is it about to drown you? Either way, one of your first obligations to yourself and to your creditors is to work out a plan to pay off your debt. The general rule is that you should pay off any high rate credit card balances, if any, as quickly as possible. If you have any student loans or secured debt, most likely your creditors will have already scheduled out your monthly payments. Be certain to make these payments on time since timely payment of debt will have a significant effect on your credit rating in the future. This, in turn, can affect your ability to secure more credit, and can even affect auto insurance rates in some cases.
You may be footloose and fancy free now, but in forty years or so you will probably want to retire. Where will the money come from to do that? If you work for a company that provides a retirement plan, that’s great, but often, the retirement benefit will not allow you to live the way you want during the golden years. Even worse, most small businesses cannot afford to pay for a defined benefit pension plan (one where you get a specific benefit on retirement) and often rely on some sort of defined contribution plan that requires you to save money and may (we stress may) put in an employer match or other profit sharing contribution. You will likely see jargon like 401(k), SEP, SIMPLE or 403(b) if your employer offers one of these. You should plan to take advantage of these accounts for three reasons: 1) you avoid immediate tax on the contribution, 2) earnings on contributions grow tax-free and 3) amounts in a qualified plan are out of reach of most creditor claims should your financial picture go south.
At the ripe old age of 21, it’s very difficult to imagine having much of a need for health insurance. Most likely, you’re in good health and probably never had much more than a cold or broken arm. While that may be the normal situation for younger people, the fact is life is uncertain. What happens if you’re Chevy S-10 gets rammed by a tractor-trailer rig and the trucking company doesn’t have insurance to cover your medical bills? It is not unheard of for accidents and even devastating diseases to attack younger individuals. The fact is that you never know when a major medical bill may crop up and you need to be prepared. If you work for a company that provides insurance, by all means, take advantage of it when the cost is reasonable. If you are not able to acquire insurance through your company, look into a personal policy. Even a high deductible policy is worth the money when a catastrophic accident or illness occurs.
Let’s say you work for Mom and Pop Retailers, Inc. and get into a severe accident on the way to work one day. The accident puts you out of commission for over a year. How long do you think it will be before Mom and Pop are forced to hire someone to take your place? Do you think they will be able to keep paying you when you don’t work? Chances are they won’t. Some form of short or long-term disability insurance would help you cover living expenses for the period you are out of work. Depending on what you are willing to pay, you can often replace up to 60% of the earnings you lose due to disability through a disability income insurance policy.
Life insurance is one of those types of insurance you never want to collect on, but it’s nice to have around for your dependents. While you may be single now, it’s not a bad idea to look into some form of permanent insurance or at least a low cost term insurance policy for a fixed term. The simple fact is that the younger you are, the cheaper the insurance will be, assuming you’re in good health. If you ever plan on marrying, having a policy at low rates can ease the budget burden when you wish to provide for dependents down the road. The good news is that for a young, single person, life insurance is an option, not a necessity in most instances, but still worth looking into.
If you are young and single, you probably don’t think you need a will. That’s fine if you want the state to decide where your estate goes. Say, for example, you hate your parents and don’t want them to have a dime of your estate, but you love your brother. In many states, if you die without a will (i.e. in testate), your parents will get your money, not your brother. What happens if you love your parents and want them to have everything you own. If you don’t leave a will, then the court will have jurisdiction over your money and it will take longer and cost more for your parents to get what you want them to have. Much of the headache can be eliminated with a properly prepared will.
After you have provided for all of your needs and the necessities mentioned previously, assume you still have money to spend. Where do you put it? Should you put the money into the market and watch it grow beyond all expectations? Should you stay liquid? In the main, this will be one of your more personal choices because it depends in large part on what keeps you awake at night (i.e. your risk tolerance). One thing we will say, it’s wise to keep at least six month’s expenses in reserve in case you are disabled or do lose your job.
A wise man once said that the only thing certain in life is death and taxes. While we won’t dispute that, we will add that another thing that seems certain is the better you plan, the better your chance of achieving your goals. This applies to just about every area in your life and at every stage of your life. How is your financial plan? Does it need a major overhaul or perhaps a simple tune-up? Why not give us a call and let us see if there are areas you might look at to make your life a little easier? After all, that’s what we are here for.
Have a great 2004 and don’t forget to keep our troops in your thoughts and prayers.