Managing Your Finances: A Personal Financial Security Review

Throughout our lives, we depend on our incomes to take care of ourselves and our families. Wages earned from our jobs go toward paying household and transportation expenses, educational expenses for our children, our retirements, and lifestyle purchases like travel or other expenses that enrich our lives. We work hard for our money, so it makes good sense to protect our financial security, not only for ourselves but for the financial future of our loved ones.

In this series of blog posts, we’ll talk about several aspects that influence personal financial security needs and discuss steps you can take to prepare for your retirement, provide for children’s’ educational needs, pay off household expenses like mortgages, and create estate plans, among others. By taking a careful look at your current expenses with an eye toward the future, you’ll be well on your way to a secure and stable financial status when you retire.

Earning Power Defined

Before we discuss personal financial security and the steps required to protect one’s finances, it is a good idea to introduce the concept of “earning power”. What is earning power? In simple terms, this means your ability to earn an income while you are able to work.

When it comes to earning power, income can come from four sources:

  • Your own income (wages and tips)
  • Your spouse’s income
  • Investment income (gains made from investments in stocks, bonds, mutual funds, etc.)
  • Other income (bonuses, monetary gifts, lottery winnings, etc.)

A healthy couple that is able to work for 30-40 years, or a typical career’s length, has the earning power to make over a million dollars. The longer you work and the higher your annual salary, you stand a great chance of making several million dollars or more during your career. It makes sense to protect your ability to bring in an income, does it not?

Identifying Personal Financial Security Needs

There are many financial needs in our lifetimes. In an effort to provide for our families and ourselves, we must take steps to protect our current income as well as our financial futures. To get a better idea of financial needs, here are some typical needs to investigate:

  • Protecting your family’s financial future – think about what may happen to your family’s finances if you should happen to die unexpectedly. How will they replace your earning power?
  • Retirement – are you ready for retirement? Are your finances ready to survive if you are no longer bringing in a salary?
  • Educational expenses – for those of you with children, how much of your income is set aside for paying for college? What happens if you can no longer earn an income?
  • Disability – if you were suddenly unable to work due to an injury or illness, what would happen to you and your family once you were no longer making income?
  • End of life expenses – do you and your family have money set aside to pay off funeral expenses and estate settlement costs if you were to die?
  • Paying off debts – if you no longer earn a wage, how would you pay off debts like mortgages, credit cards, or auto loans? How much of your current earning power is tied up in paying interest on loans?

There’s a lot to think about here. Each of these aspects requires careful thought and a plan to address them as you lay the groundwork for protecting your financial future.

Retirement Planning for Future Financial Security

Of paramount importance when planning for your future is your financial security after retirement. When you retire and are no longer drawing a salary, you’ll still have expenses to pay, including household, medical, and lifestyle costs.

There are many options for retirement savings. Individual Retirement Accounts, or IRAs, remain some of the most popular choices, allowing one to set money aside for retirement with tax-deferred growth or tax-free distributions upon retirement, depending on the IRA selected. Employer-sponsored retirement programs like 401(k) plans are also a valuable way of setting aside finances for future use.

The sad truth is that too many people don’t plan for their future financial needs. Most people, over the course of their lifetimes, borrow more money than they save. As a nation, we are a group of spenders, not savers, and many people are woefully unprepared for the financial realities that face us when we quit our jobs.

According to several studies, about 70% of all people in the U.S. turning 65 years of age will require some form of long-term care, whether that care comes from a medical facility or nursing home or an assisted living facility. These long-term care services are expensive. The average retired couple can also expect to spend about $265,000 on health care expenses throughout their retirement years. Having a plan in place to fund retirements NOW makes sense when faced with this statistics.

Speak to a qualified retirement planner today to take advantage of their knowledge. These planners can help you select the right retirement plans for your current and future needs, and offer insights into covering savings shortfalls even if you’re late to the game.

Educational Expenses for Children

Our children are important to us, and that includes the educational opportunities they have access to. In order to provide educational funding for your children, even after you retire, it is vital to know a few things about college tuitions:

  • In-state tuitions and fees at public colleges have increased dramatically, outpacing inflation. Tuitions and fees at private colleges have also increased beyond inflation.
  • For tuition, room and board, and fees, a full-time student at a four-year public college can expect the average cost to be over $20,000. For a private non-profit college, that average cost jumps to well over $45,000.
  • Those employees with college degrees can expect to earn, on average, about 60% more than those without degrees. This translates to about $20,000. Those employees with advanced degrees can expect to earn even more!

When planning for future educational expenses, you want to address several aspects, such as the kind of school(s) you want your children to go to, whether or not you will supplement your expenses with a loan, and how you will save funds for future use. A financial planner can help you find investment plans designed to be used for educational expenses – these accounts may even eliminate your need to take out an expensive student loan.

In our next blog post, we will discuss some of the other steps toward preparing for your financial future. Stay tuned for more information that can help you thrive in the future, even after you’re no longer earning a salary.

Stay tuned for part 2.

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