At a point in some people’s lives, they conclude they need some sort of assistance with their financial situation. This could be a recent high school or college grad determined to start off on the right track, or those in their mid to late working careers wondering if what they’re doing is the “right” way of doing things financially. In either case, the hope may be to make as few mistakes as possible along the way.

Related: Emerging Markets in Tough Spot, Says Harvard Professor Reinhart

When considering this situation, there are a few things to look at first, before moving on to other planning areas. In other words, think of the follow as a good foundation to have before expanding on or continuing your wealth management plan.

  1. Emergency Fund. This is the money set aside to pay for non-discretionary expenses that will not go away in the event of an emergency (loss of a job, medical, etc.). Although the amount and time frame for the emergency fund may vary, a good rule of thumb is to set aside at least three to six months of non-discretionary expenses. Some individuals may choose to go to nine months or even a year.

This protects individuals so they do not have to leverage expenses on a credit card, home equity, or dig into precious retirement or college investments. As non-discretionary expenses increase, so should the emergency fund. However, non-discretionary expenses don’t have to increase arbitrarily. Be cognizant of whether an increase makes sense (e.g. higher rent, mortgage, car payment, etc.). Which leads to our next point.

  1. Levels of Debt. Look at all the debt that is outstanding. Mortgage, car payments, credit card, student loans, and other debt. If there’s none – congratulations! If there is, consider the impact the debt has on retirement savings, college savings, and other wealth building assets. Debt payments could be replaced with cash flows to these assets to build wealth. Arguably, the only debt “worth” having is a home loan – but even that should be paid off as quick as possible.

Being over-leveraged makes or causes delays or shortages to retirement and college funding. It makes us susceptible to working just to pay current debts, instead of working to fund long-term goals.

  1. Risk Management. Before wealth can be built, it must be preemptively protected, then proactively protected. This is where insurance plays a less-glamorous, but critical role.

Life insurance protect human capital (current and future wages) from pre-mature death, disability insurance does protect income if we can no longer work due to disability. Auto insurance protects us against liability from accidents and homeowners provides liability protection in addition to protecting (for many individuals) their largest asset. An umbrella policy (which everyone should have) provides additionally liability should limits be exceeded on underlying policies.

Health insurance covers illness so we do not become insolvent due to an illness, while long-term care insurance may be necessary to preserve wealth due to long-term care needs. Annuities (the other life insurance) may be necessary to protect against outliving one’s income.

While not exhaustive, these are the general areas to think about then first getting started, or continuing with your wealth management plan.

As always, feel free to reach out to use if we can help you along the way.

For more investment strategies, visit the Portfolio Construction Channel.

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