Avoiding debt is the primary and most efficient technique for protecting your family assets. To achieve this, you have to design a comprehensive asset protection plan for your family. This involves purchasing insurance and actively managing your family finances to avoid exposure and help you pay off debts. While there are many options to managing your assets, these are the foundations to a comprehensive protection plan for your resources.
· The Limitations of Homeowners Insurance
Insurance may provide some degree of security for your family. However, it does not shield your assets from exogenous threats. Insurance policies are usually limited to a specific range of disasters. For instance, insurance cannot protect you from the harsh economic downturns which occur in unprecedented circumstances or improve your ability to pay your off creditors. However, an insurance policy covers your losses resulting from unfortunate events like accidents. In such a situation, your insurance agency is justified only to cover these losses while not addressing other unrelated variables like your electricity bills.
· Emergency Savings
Unlike insurance, your own cash can be accessed at your discretion. The challenge of emergency savings is that they are about the single least sexy thing you can do with your money. Having massive stockpiles of cash just sitting there, not making any money, drives investment gurus nuts! And there is a legitimate caution there – don’t park your entire investment portfolio in your mattress and expose it to the ravages of dust mites and inflation. But it is wise to keep a small amount (between 3-6 months of household expenses) in liquid cash in a money market account, so you can weather an unexpected financial storm. That way, you won’t be tempted to pull money out of your investments every time your radiator leaks. That’s how you end up selling at the bottom of the market.
· Avoid Endangering Assets
Speaking of not pulling money out of investments, the last thing you want to do is endanger your assets in the event of an emergency. Avoid HELOCs and Title Loans at all costs, and never pull money out of a retirement account – unless maybe it was necessary to avoid a bankruptcy or a foreclosure. We talk about this in our post NEVER Cash Out Retirement!. According to Want A Fresh Start, it’s very common to feel overwhelmed and stressed when being harassed by unrelenting debt collectors. Don’t let these snakes pressure you into making a bad decision! Money withdrawn from a retirement account will be treated as income by the IRS and taxed at your income rate, plus hit with an early withdrawal penalty. I really don’t like 35 percent or more of my money going to the IRS.
· Quit Borrowing Money
As a young family determined to protect its assets while offsetting some debts, stop digging yourself into a financial hole. Do not mortgage your family assets for short-term financial gains. Avoid credit and insist on paying with cash for both household expenses and income generating assets.
· Pay Off Debt
An ideal approach when you are in a lot of debt is to focus your assets on the loans with the lowest balance. Many financial advisors will tell you to prioritize debts with the highest interest rate first, and if you calculated simple math, this would be the correct approach. This is fallacious, however, because this isn’t a math problem – it’s a behavior problem. Harvard Business Review says, “Our research suggests that people are more motivated to get out of debt not only by concentrating on one account but also by beginning with the smallest.” The power of quick wins is a powerful tool for behavior modification.
· Invest Responsibly
With debts paid and investments protected with adequate savings and insurance, you are prepared to make your money work for you! Try to invest upwards towards 15% of your monthly income – but make sure you are managing cash wisely so you don’t end up in a pinch. If available at your income level, try to max out ROTH IRA’s and 401K’s, as these 4 little letters (R-O-T-H) could represent literally hundreds of thousands of dollars in tax savings, depending on how long between now and retirement and how aggressively you invest.
Investing can be an extremely intimidating prospect for the uninitiated. There are so many different kinds of investments with diverse strategies, gain potentials, risk and volatility measurements, and fee structures. Don’t let paralysis of the analysis stop you from taking advantage of the blessings of compound interest. Contact me today and I’ll help you walk through a comprehensive strategy to get the most of your investments.
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