Anytime money accumulates, risk and uncertainty also enter the picture. Thankfully, as the leader of your family, you can make certain proactive decisions to guard your financial future and safeguard against serious threats. You likely don’t have a family wealth office, so the sooner you put them into practice, the better.
Adopting a Long-Term Financial View
Money is often an emotional subject. And anytime emotions become involved in decision-making, it’s much more difficult to maintain objectivity. Choices become skewed based on what’s most exciting, opportunistic, or enjoyable at the moment. Unfortunately, these short-term decisions often produce long-term ripple effects that are something less than ideal.
To handle money successfully, you need to learn to neutralize emotions and adopt a long-term outlook. For example, rather than thinking primarily about what’s best right now, it’s far better to think about what’s best for your family in five, 10, or 15 years.
Living for the moment is fun, but the stability of a promising financial future will help you sleep easier at night. Wanting a bright financial future isn’t to say you can’t enjoy the resources you have today — you can — but you have to be smart about balancing immediate gratification with future financial security.
Techniques for Protecting Your Family’s Financial Future
Of course, every family’s situation will be different. However, the sooner you start planning for the future, the better you’ll build up your finances. Listed below are several steps you can take.
1. Set clear goals.
You can’t possibly cast a long-term vision for anything if you don’t have specific goals or don’t know where you want to be in the future. So think about what you hope to accomplish — and before you do anything else — it’s time to dream a bit.
The best way to do this is to grab a sheet of paper or dry erase board and start jotting down everything that comes to mind. If you’re married or have a significant other you plan to be with long-term, they should be involved in the exercise. Here are some starter questions to discuss and respond to in writing.
- Where do you see your family in three, five, 10, and 15 years?
- What do you want your daily lifestyle to look like?
- What assets do you hope to acquire?
- When do you want to retire?
- What do you want your career to look like in three, five, 10, and 15 years?
- What goals do you have for your children?
The more in-depth and detailed you are with your analysis, the better. The point of this exercise is to help you figure out what sort of monthly cash flow you’ll need to create the lifestyle you want. For example, if you only need $5,000 per month, the steps required to reach and sustain this income level will be much different from someone who needs $50,000 per month.
2. Get organized.
Once you’ve spent some time dreaming and vision-casting, it’s time to roll up your sleeves and get to work. Of course, this starts with getting organized. Here are a few recommendations:
- Make a list of every financial account you have. These accounts should include checking accounts, savings accounts, credit cards, brokerage accounts, retirement accounts, and so forth. Record all balances in a spreadsheet and store all login/password information in a secure password wallet.
- Make a list of all your debts from smallest to largest. Then, make another list of all your debts from highest to lowest interest rate.
- Create a paper filing system and digital filing system. Use these for all financial statements, documents, and records you receive. Then, begin filing all new documents away in an orderly fashion.
- Comb through your bank and credit card statements. You’ll want to review all income and expenses. Use this information to create an itemized monthly budget and optimize for maximum savings.
You’ll probably be amazed by how much relief you feel just by getting organized. Even if your finances aren’t in great shape, the simple act of consolidating information and putting it all in one place will give you peace of mind.
3. Pay down bad debt.
Few things have the potential to hold your future finances back as powerfully as bad debt. Whether it’s credit cards, car loans, medical bills, or excessive student loans, bad debt chokes your budget and eats away at your cash flow. So paying bad debt down as soon as possible should become your top priority.
Many people start playing defense with their debt. They make the minimum payments and just sort of push the “ball” down the road until next month. However, if you want to set yourself up to succeed, you have to go on the offensive with debt.
Going on the offensive means taking every spare penny above and beyond your essential expenses — housing, food, medical, transportation, etc. — and using it to pay down debt. When it comes to paying down debt, there are essentially two major approaches:
- The Debt Avalanche Method. Using this method, you make minimum payments on all of your outstanding balances. After that, you use any remaining money to pay off bills with the highest interest rate. Then, you move down the list until all debts are paid off. Theoretically, this approach saves you money by attacking the most expensive debt first.
- The Debt Snowball Method. Using this method, you make a list of all your debts, lowest to largest, and pay down the ones with the smallest balance first, regardless of interest rate. The goal is to build momentum by getting rid of as many line items as possible until you get to your largest debt. At that point, you put all of your energy and effort into knocking that one out.
Some people choose to implement a hybrid method that combines elements of both. However, don’t get so caught up in the details that you miss the bigger picture. Regardless of the method, your objective is to eliminate bad debt as soon as possible so you can start investing in your family’s financial future.
4. Purchase the right insurance products.
Insurance isn’t the most exciting thing to purchase, but it provides one of the keys to protecting your family’s financial future. Life is full of unknowns; you need some sort of cushion in place should your family encounter a worst-case scenario.
While these are dozens of different types of insurance, there are three that everyone should have:
- Health Insurance. All it takes is one medical emergency or surprise surgery, and your finances could fall apart. Health insurance provides at least some protection and allows you to get the care you need when you need it.
- Long-Term Disability Insurance. What would happen if a serious illness or injury prevented you from working for three months, six months — or two years? Could you survive without that income? Long-term disability insurance ensures you continue to get paid. It typically costs just a few dollars per month but can make a massive difference in your finances. Not to mention, it also helps you sleep easier at night.
- Life Insurance. Finally, make sure you have some term life insurance on yourself and your spouse, assuming they generate income for the household. Generally speaking, it’s a good idea to take out 10-times your annual income. For example, if you earn $100,000 annually, you need to take out at least $1 million in term life insurance.
As you get older — usually in your 50s — you might also consider getting long-term care insurance to help cover future costs associated with senior care facilities or nursing homestays.
5. Plan for your estate.
You don’t need a seven-figure net-worth to plan out your estate. Anyone and everyone should have an estate plan in place. An estate plan includes a will, testament, power of attorney, etc. If you’re looking for a fast and inexpensive way to do it, some online services are available for less than $100. However, if you want something more customized to your needs, it’s better to consult with an estate planning attorney.
6. Partner with trusted advisors.
With all of the do-it-yourself online platforms and apps available these days, it’s tempting to manage all of your finances on your own. However, there’s still value in partnering with a trusted team of advisors to help plan out your investment strategy. Your team will include a financial advisor, insurance advisor, and certified public accountant (CPA). While you can probably find one person who wears all of these hats, it’s wiser to divest yourself from one single person and create your own makeshift team of financial experts who specialize in one niche.
7. Teach your children about money.
The final suggestion is to invest consistently in the financial education of your children. They’ll be the ones who (hopefully) inherit some of your wealth in the future. You want to make sure your children or others you may help financially are well equipped to manage these funds.
Financial literacy is at an all-time low in the United States right now. You simply can’t depend on the school system to teach your children about money. It’s up to you to impart lessons around saving, investing, and spending.
Adding It All Up
Of course, there’s no perfect formula for building and sustaining wealth. If it were a matter of filling in an equation and aligning the right puzzle pieces in the proper places, everyone would be wealthy and financially secure. But, alas, it’s not that simple. Every individual’s situation is unique, and any number of circumstances change from one family to the next.
While there’s no way to secure your financial future with 100 percent certainty, implementing the strategies outlined above will put you head and shoulders above your peers. And keep in mind that the more urgency you bring to the task, the better your chances are of orchestrating a bright future for your family.