This piece is not a sales pitch to sell you life insurance… (although it will feel that way at the start), the intention is to give you the tools to create an alternative to continiously increasing your life policies over time while still comfortably looking after your loved ones. Quick hint, you create real wealth as an alternative. No jargon or difficult graphs, I promise.
The financial pressures of modern life have created an interesting conundrum for most families. How do you balance assets and debts to the positive, so the family is cared for after you die?
The average household start out with few assets and must borrow to acquire big ticket items like homes and cars over time. As the debt on these items will be unserviceable for the family members if the breadwinner’s life comes to an end, in roles Mr. Insurance salesman with the solution… A life policy to cover the shortfall created by the debt on your assets and the required living sum for your surviving family.
These policies have a habit of accumulating over time, as your debt and assets grow. So, you are caught in a fixed cost trap without the means to build real wealth.
Focus on the fixed costs
Fixed costs are the items you must pay before everything else each month. You know the big items, your house, car, insurance policies, kids schooling, domestic help and cell phone contracts. All of these “necessities” are payable before you are able to save. Routinely, some of us do not have money left over at the end of the month to save.
Clearly not a recipe for success.
“Oh boy here we go… but you said no graphs." No, I said no difficult graphs, this one is easy.
The chart breaks down your financial life into three overly simplified categories to give you the gist. This family is sailing too close to the wind, as the fixed costs are keeping up with their earnings and leaving them unable to save. Please note the slow accumulation of real wealth of this hypothetical household. Clearly, those insurance policies will have to remain in place as this family do not have the real wealth to sustain them.
You might have guessed the crux of the argument. Build consistent room for savings by keeping your monthly fixed costs as low a possible.
“Oh yeah! You have never felt the pressures of dealing with school and nappies and there is no room for anything.” I can hear you say through your computer or phone screen.
Yes, I understand. This is your financial life and you have all the tools needed to build real wealth and independence. The message might seem tone deaf while the Corona Virus is raging but all you need to do is start and you can only start from where you are.
Big things start small
Build a habit, start small and you will be blown away as your creation grows to significance over time.
“Big things start small. The biggest oak starts from an acorn.” Jeff Bezos.
The ideal family model
So how is this family able to achieve this?
A small monthly contribution in a savings plan will grow your real wealth. Wealth that gives you choice and flexibility. The actions today might feel insignificant but can lead to some interesting investment choices in the future.
As the investment grows you can realise additional savings as you no longer need the additional life insurance policy to supplement your family income, so the increase in fixed cost is avoided and another opportunity to save and compound your wealth is created. Apply this strategy over a career or life time and the results will blow your mind.
Please for goodness sake this is not a call for you to laps your existing life policies, but an opportunity for you to become clear on the policies purpose within your specific financial plan. Ask yourself, do you hold enough saved to provide your family? If the answer is yes, then maybe there is no need for the policy but rather build your investments by saving the proposed premium.
How do I know if there is enough?
Spend time to decide what your family will need to sustain themselves when you pass. It will be worthwhile to speak to a financial advisor to understand the cashflow implications for your family over time as well as the tax considerations. This is not a static number and it will change. You know… when life happens.
Ok you have a number. Now what?
Next, determine your net worth by adding together your retirement annuities, savings, disposable assets.
You guessed it, then subtract the required assets from your eisting wealth and you will be left with the amount that needs to be covered by a life insurance policy.
As part of this process, I would strongly encourage you to create a savings plan to swing you even further from insurance policy to the wealth side of the equation.
Ideas to change your personal fixed cost model
Structured planning
Most of us expend our mental capacity in our daily lives and do not have the energy spare to structure and understand our financial lives. If this sounds like you, find a person you trust to assist you in simplifying your financial life and help you understand it better.
Together with the advisor you should build a roadmap to your personal ambitions and goals. Getting to grips with your financial life should be your first step in your journey towards independence. Simplify, budget and understand.
Pay yourself first
Are you unable to beat the fixed cost curve in your life? Well add to it and adjust.
Huh!? Well yes, pay yourself a non-negotiable sum each month into your saving plan. Out of sight, out of mind and you will adjust in your flexible spending.
No savings plan? Look into a tax-free savings account or get advice.
Please comment or disagree by connecting via social media or info@LeRouxInternational.com