In this guide, we help you understand what wealth is and how you can build and protect it throughout your lifetime.
To manage wealth (without going broke), there are three primary areas of financial activity to understand:
Understanding how finances work, and how to manage finances as you grow, is the surest way to avoid losing the money you work so hard to earn throughout your lifetime.
What Is Wealth?
Most Americans consider people “wealthy” when their total net worth adds up to between 2 – 3 million dollars.
Each generation views wealth differently, though.
Opinions on how much money equals wealth, by age group:
- Millennials: $1.4 million
- Gen X: $1.9 million
- Baby boomers: $2.5 million
Different age groups have different ideas about how much money makes you wealthy, but most people can agree that wealth means achieving an abundant net worth.
Does Being Wealthy Mean You’re In The Top One Percent?
You need a net worth of $11,099,166 to be in the top one percent of U.S. households.
According to a report by DQYDJ, about 1.2 million American households are in the top one percent.
However, most people who make it into the top one percent don’t stay there for long.
According to research, less than six percent of people who make it into the top one percent will stay there for more than two years.
It usually takes an annual salary of at least $421,926 to make it to the top one percent, however, you can build wealth over a lifetime on an average salary.
Further, if you do build wealth despite earning an average salary, chances are that you won’t lose it, since it takes good money skills to get there.
Wealthy people, millionaires, are in the top ten percent of U.S. households.
Being in the top percentile doesn’t refer to how much you earn. It refers to your “net worth.”
What Is Net Worth?
Net worth is the sum of everything you own, after you subtract your liabilities.
Assets minus debts = net worth
Assets include everything you have of monetary value, such as:
- Cash in the bank
- Investment account balances
- Retirement account balances
- Equity in your home
- Value of your car(s), according to sell price
- Other valuable items such as jewelry, artwork, etc.
Liabilities include your debt, such as:
- Credit cards
- Child support
If you liquidated everything and paid off all your debt today, your net worth would be the dollar number you land on.
What’s The Average American’s Net Worth?
The average American household’s median net worth is just under $100,000.
- Median net worth: Americans’ MNW ($97,300) is the “middle point” where half the households have more and half have less.
- The literal average net worth ($746,821) is misleading because its calculations include the wealthiest Americans, which skews the big picture.
To your parents and grandparents, $100,000 probably sounds like a lot, however, in today’s high-priced economy, it’s only an average net worth.
What Does It Mean To Be Wealthy?
While many people put a dollar number on “wealth,” the truth is that numbers – and perceptions – change over time.
What it really means to be wealthy is that you have the time and freedom to enjoy life on your own terms, and the money to pay for things that matter.
Keep in mind that it takes money to access quality healthcare, dependable vehicles, and a home.
Over time, it also takes money to move on to new adventures such as travel and to keep in touch and visit with friends, who are likely to move to different parts of the country over the years.
If you plan on having children someday, you will also have their health, well-being, and education to consider — much of which relies on how much money you accumulate.
Above all, a wealthy life means freedom from worrying about money.
You don’t have to wait decades to live a wealthy life.
If you have hustle, drive, and determination, you can start your own business or develop investments that build wealth sooner, so that you have enough money to live the life you want while you’re still young enough to enjoy it.
How Much Money Do You Need To Build Wealth?
Most people can build wealth throughout their lifetime if they manage their money well.
Even people earning average salaries have amassed great wealth by managing their money well and investing wisely.
- Parking lot attendant Earl Crawley never made more than $12 an hour. Yet, he consistently invested a little bit of money at a time and built a net worth of half a million dollars over the course of 44 years.
- Maintenance man and gas station attendant Ronald Read quietly invested some of his earnings throughout his lifetime, building an $8 million fortune that not even his family was aware of until after his death.
- Abbott Labs’ secretary Grace Groner purchased three $60 shares of Abbott stock when she was young. She allowed them to grow, continually reinvesting the profits throughout her lifetime. Those three stocks expanded to 100,000 stocks, and Groner’s original $180 investment grew into a $75 million fortune over the course of 75 years.
Getting rich won’t solve all your problems, but it will allow you to help the people you care about, take care of your own needs, and enjoy many life experiences that you wouldn’t otherwise have, especially as you get older.
Understanding how to manage wealth is as important as understanding how to earn it because a high net worth doesn’t mean that you’ll be financially secure.
If you come from a low-or-middle income family, you may be at higher risk of losing wealth since you may not have an understanding of how to manage large amounts of money.
It’s a common belief that when you make a lot of money, all your money problems will disappear.
The opposite is true.
According to a recent report by PYMNTS, a shocking percent of high-income earners in the U.S. live paycheck-to-paycheck:
- 54% of U.S. consumers live paycheck-to-paycheck, including 53% who earn between $50,000 – $100,000 per year.
- 60% of millennials who earn over $100,000 say they live paycheck-to-paycheck.
- The average paycheck-to-paycheck budgeter has only $3,928 in savings.
If you don’t have the education, planning skills, and discipline needed to manage money on a small scale, you’ll make the same mistakes when you have a lot of it.
When you make a lot of money but can’t manage it well, it leads to bigger mistakes that can bury you in massive debt, bankruptcy, and legal troubles.
“Studies found that instead of getting people out of financial trouble, winning the lottery got people into more trouble since bankruptcy rates soared for lottery winners three to five years after winning.”
- Instead of using their lottery winnings to bail themselves out of financial problems, lottery winners usually spend their money quickly and often end up bankrupt.
One study found that 70% of lottery winners, or people who come into sudden windfalls, go broke.
Why do lottery winners go broke? Because they don’t know how to manage money.
According to research by economists Guido Imbens and Bruce Sacerdote, lottery winners only save 16 cents out of every dollar they win.
For example, when spouses Lara and Roger Griffiths won a $2.76 million lottery, they bought a million-dollar home, a Porsche, and several luxury trips to places such as Dubai, Monaco, and New York.
Amidst all their luxury spending, the Griffiths failed to fully insure their home. When a fire gutted their house and they had to cover the costs of repairs and seven months of accommodations out-of-pocket, they lost their fortune.
- It’s not only lottery winners who go broke.
Successful pro athletes, many of whom have no prior money management experience or education, also have a history of financial failure.
For example, the NFL pays its athletes well:
- The minimum starting salary for NFL players with a one-year contract is $480,000 per year.
- An NFL player with three years of experience earns at least $705,000 a year.
- Players with seven to nine years of experience make a minimum of $915,000 annually.
However, according to ESPN film documentary, “Broke,” nearly 80% of former NFL players go bankrupt or experience financial stress within two years of retirement.
If a business person is smart enough to build a million-dollar business, aren’t they smart enough to manage their money well, too?
- Business and financial management are two entirely different skill sets, and many of the world’s most wealthy business people have gone broke.
For example, millionaire entertainer and business person MC Hammer had a net worth of $33 million but spent about $500,000 a month on his staff and ten million on a mansion while also racking up high maintenance fees on 17 luxury cars and 21 racehorses. Hammer filed for bankruptcy in 1996. Fortunately, he reinvented himself and rebuilt his wealth. Today, in addition to several business ventures, Hammer lectures and speaks at business schools such as Stanford and Harvard.
- Many billionaires lost their money and landed in legal trouble while desperately trying to avoid financial collapse.
By 2012, billionaire Vijay Mallya racked up massive debt trying to keep his business, Kingfisher Airlines, afloat.
When the banks came calling for him, he fled from India to the U.K. and said goodbye to most of his fortune. Mallya now lives in the U.K. under threat of extradition.
American entrepreneur and inventor Elizabeth Holmes was America’s youngest self-made billionaire in 2015, thanks to her healthcare tech company, Theranos.
Unfortunately, Holmes quickly fell under federal investigation for misleading investors about Theranos’ blood-testing technology. Shortly after, Forbes devalued her personal wealth to zero.
Many wealthy people (even billionaires) end up broke or in legal trouble due to poor financial management.
Whether you’re living paycheck-to-paycheck or sitting on billions of dollars, financial education, planning, and discipline are the only lasting path to financial security.
The #1 best way to prepare for retirement is to invest wisely throughout your lifetime, starting from an early age.
If you’re employed by a company that offers a 401k or Roth 401K, you might also want to take advantage of it. It’s tough to pass up the free matching employer contributions!
Traditional Retirement Plan Options
Traditional retirement plans include options such as 401Ks and IRAs, however, none of these plans provide enough income to retire comfortably.
Traditional retirement investment accounts are popular, though, because they are easy to maintain and employers typically match your contributions.
If you work for an employer and don’t want to pass up the free money, these types of investments can make a nice addition to your overall retirement strategy.
What Is A 401K Retirement Plan?
A 401k retirement plan is an employer-based retirement account.
401k’s are an easy way to invest for your retirement, especially if you’re not familiar with how finances work, because:
- Your employer automatically deducts a certain amount of money from your paycheck each month, which goes directly into your retirement account.
- Employers typically match employee contributions (up to a certain amount), which means free money for you.
- Employees feel they don’t need to take the time to understand how 401k’s work, since it’s all taken care of for them.
Here’s the catch, though: If you don’t understand how your 401Ks work, you can lose a lot of money over time.
There’s a massive difference between a traditional 401k and a Roth 401K, which you should be aware of before opening an account.
- Traditional 401K: defers your tax payments (all but FICA, which is a federal payroll tax that earns you credits for Social Security and funds Medicare).
- Roth 401K: allows you to pay taxes now, at today’s current rates, before making your 401k contribution.
For example, if your 401k investment (including employer contributions) totals $200,000 by the time you turn 60, you wouldn’t actually have $200,000 for your golden years.
Before you withdraw funds from your 401k, you would have to pay taxes on your $200,000 — at whatever the current tax rates are.
Today’s top tax rate is 37%, however, there are no guarantees that taxes remain reasonable:
- Between 1916 and 1918, income tax rates increased from 15% to 77%, to finance World War I, before dropping down to 25% in 1925.
- In 1932, during the great depression, Congress raised taxes from 25% to 63%.
- In 1942, not long after the bombing of Pearl Harbor, the Revenue Act of 1942 raised tax rates to 88% on incomes over $200,000.
- By 1944, top income tax rates were up to 94% and remained above 70% until 1981.
History shows us that we can’t rely on affordable tax rates.
Our current highest-income-tax rate of 37% is historically in the lower ranges, and not as high as we think it is.
What does this mean for your traditional 401k?
We don’t know what the tax rates will be when it’s time to pay the taxes on your 401k. If the economy collapses or the country is at war, you might be looking at a 70% – 90% income tax rate.
If you invest $200,000 into a traditional 401k and the tax rates shoot up to 90%, you’d have just $20,000 left to retire on!
That’s why we recommend avoiding traditional 401k plans and choosing a Roth 401k instead, which provides a better tax structure for your future.
What Is A Roth 401k Retirement Plan?
Income tax rates are currently at a historic low (37% is the highest), which makes the Roth 401k a significantly better choice for retirement investing.
The Roth 401k allows you to pay taxes on your contributions immediately, at today’s current tax rates.
You’ll still be subject to taxes on your employer’s contributions at the time of your retirement since you’re not able to pay taxes on them with either system (traditional or Roth).
However, you’re likely to save an impressive amount of cash by taking advantage of today’s low tax rates and investing in a Roth 401k instead of a traditional 401k.
For example, if you contribute a bit less to cover the cost of income taxes now, you might invest $90,000 instead of $100,000 by the time you’re sixty. Your employer’s contribution will still need to be taxed before you withdraw it, however, you avoid the risk of a higher tax rate on your personal contributions.
When tax rates are low (as they are in 2021), it’s smarter to invest in a Roth 401k retirement plan instead of a traditional 401k.
What Is An IRA Or Roth IRA Retirement Plan?
An Individual Retirement Plan, or IRA, is a retirement account that you can set up with your bank — as long as your income doesn’t exceed the eligibility guidelines. (in 2021, $140,000 for singles or $208,000 for married filing jointly).
For example, in 2021, your income must be less than $140,000 for singles or $208,000 for people who are married filing jointly.
The maximum annual IRA contribution allowed is $6,000 per year if you’re under 50 years old, or $7,000 for people over 50. Only earned income is allowed.
These limitations and amounts are subject to change.
IRAs give freelancers and other non-traditional workers an opportunity to take advantage of tax benefits for retirement investing.
You can also open an IRA if you already have a 401k through work, however, you should check with your accountant or tax advisor about the limits of both deposits and withdrawals.
IRA accounts are structured like 401k’s in regards to traditional versus Roth accounts:
- Traditional IRA plans defer taxes on the income you deposit until you retire.
- Roth IRA plans allow you to pay taxes on your contributions now, which means you can take advantage of today’s low tax rates.
Like a 401k, your IRA contributions are invested into mutual funds.
Most IRAs give you some control over which mutual funds you invest in, and you may want to hire an investment manager to help you make the best decisions for your IRA funds.
Traditional retirement plans such as 401k, Roth 401k, IRA, and Roth IRA usually do not allow you to withdraw money before retirement unless you’re willing to pay hefty penalties on your initial investment.
Stock Market Investing
Continually investing in low-cost mutual funds can be an excellent retirement strategy.
Stock investing allows you to access your money whenever you need it, without penalties. So, if you do run across a life emergency and must withdraw your funds, you aren’t subject to the same penalties that you would be with 401k’s or IRA’s.
If you continually reinvest your stock market earnings, you can build an impressive amount of wealth by retirement age, assuming you start young.
The biggest disadvantage to stock investing is that, as with any investment, there is some amount of risk involved. So, you need to research and understand stock investing to offset your risks.
Successful stock investing requires a couple of personality traits that financially literate people will develop:
- Discipline and patience: investors should contribute regularly over the course of many years to build wealth.
- Emotionally cautious: investors should be able to take an emotionally distant approach to investing. Stocks rise and fall, and can do so dramatically during economic change. Successful investors understand this and act based on a pre-planned strategy instead of their emotions.
It doesn’t cost a lot to get started with stock market investing, and the costs and fees required are typically very low.
Real Estate Investing
Buying rental properties and earning passive income through rent payments is another excellent way to prepare for retirement.
Investing in real estate isn’t as quick and easy as traditional retirement plans or stock market investing. It does require a learning curve to understand which properties might be successful and how to manage them well.
Additionally, you need to save or raise money to purchase your first building.
However, real estate investing can deliver a much more sizable profit in a shorter amount of time. This means you can build a sizable passive income, no matter what your age.
Real estate investing also provides several tax breaks that allow your money to grow tax-free.
Real estate investing can be an excellent way to build wealth for your retirement, and after the initial learning curve, you don’t need to put in a lot of your time to earn significant profits.
How Entrepreneurship Can Fuel Your Retirement
Opening your own business can dramatically increase your salary beyond what you earn at a job.
As an entrepreneur, there is no age limit or income limit. If you are successful, you’ll generate more funds for your retirement.
Launching your own business comes with risk (usually higher than the other types of investments), and many people fail two or three times before landing on a successful business model.
However, the risks decrease over time as you become more experienced.
Starting your own business can help fuel a healthy retirement fund while also allowing you to enjoy wealth during your younger years.
Diversifying Your Retirement Investments
All investments require some form of risk, so when you’re investing for retirement, it’s a good idea to diversify your investments.
Create a retirement strategy that includes two or three types of investments, instead of relying on one.
For example, you might allocate a portion of your income to stock investing while also purchasing real estate rental properties. Along the way, you could also invest in a Roth 401K or Roth IRA.
The younger you begin investing for retirement, the more wealth you’re likely to build along the way. As your funds grow, you can learn more about your investing interests to help you build even greater lifetime wealth.
Retirement may be a long way down the road, but that doesn’t mean you should place blind trust in the process and move forward unprepared.
In this section, we answer some of the most common retirement questions to help you better understand how your money works when retirement comes.
How Do You Know When It’s Time To Retire?
When you’re young, it’s easy to think that you’ll never retire. Especially if you love what you do and thrive on the challenges work brings you.
Or perhaps you’re looking forward to retirement and even planning for an early one, so you can live life on your terms.
Most people won’t know for certain when or if they want to retire until the time gets closer.
Some won’t have a choice due to health issues and lack of energy.
Others will reach their peak at “retirement” age and go on to start successful new businesses or even enter politics.
And some will count down the days until they can walk away from their jobs and spend time traveling, pursuing new adventures, or helping to raise grandchildren.
Regardless of your retirement philosophy, you need to financially prepare for it so that you have the option when the time comes.
How will you know when it’s time for you to retire?
Financially, you should have the following in order before you retire:
- Your debts paidDebt makes it hard to retire because part of your income must go to debt payments. House payments, car payments, student loans, and stagnant credit card debt is an additional stress that no retired person will want to carry.
- Finances that allow you to live without income from work
- Quality healthcare and all other necessary insurances such as homeowners, life, and auto.
How Much Money Do You Need To Retire?
Sixty-one percent of Americans don’t know how much money they need to save for retirement.
Fortunately, it’s not that complicated to estimate how much money you need to retire.
To get started, decide how much money you’ll need to be comfortable.
According to a report by AARP, a good rule of thumb is to plan to retire on an equivalent of 80% of your working salary.
Of course, if you’re twenty years old and earning just $20,000 a year, you don’t want to base your future budget on your current salary. Instead, let’s assume you’re earning $100,000 per year.If you earn $100,000 per year you should plan on withdrawing about $80,000 per year during retirement.
A lot of Americans include social security income in their retirement planning, but if you’re young you should try to avoid relying on future social security payments. We don’t know what the state of the social security system will be in forty or fifty years, so you shouldn’t rely on it when planning.
Some people cut back on expenses during their retirement years. For example, the expense and upkeep of a large home may seem unnecessary once the kids are grown. Or, you may choose to move to a less-expensive location.
Others increase their expenses so they can experience all the travel and adventures they missed out on while working so much during their younger years.
All these considerations are tough, if not impossible to predict decades in advance. Instead of making all your decisions early on, you can estimate based on statistics.
A popular way to estimate the total portfolio you’ll need by retirement age is based on the 4% Rule.
Divide your desired annual retirement salary by 0.04 to discover how much you need to save for retirement. Alternatively, you could multiply your desired annual salary by 25 and end up with the same figure.
Salary Total Portfolio needed
$50,000 divided by .04 = $1,250,000
$80,000 divided by .04 = $2,000,000
$120,000 divided by .04 = $3,000,000
There are countless variables when it comes to investing and planning your retirement, and the above is only an estimate. Continue reading to learn more about how The 4% rule can help you plan for retirement.
How Much Money Should You Withdraw When You’re Retired?
Determining how much you’ll withdraw for retirement each year isn’t as simple as dividing your funds by the amount of years you’ll need . There are a couple other factors that come into play.
Two significant considerations affect how much you’ll withdraw at retirement age:
- Inflation will change the dollar amounts of what you need. Decades from now, things will be more expensive and your cash will be worth less.
- You have to leave enough in your retirement fund to allow it to maintain a balance that produces income.
Fortunately, there’s a simple guideline, called The Four Percent Rule, that lets you know what’s safe to withdraw each year during your retirement.
The Four Percent Rule: Withdraw 4% of your investments + inflation adjustments each year.
Year one: Withdraw 4% of your total investments.
Year two: Withdraw 4% + the cost of living increase.
Year three: Withdraw your base (4% plus the previous inflation raise) + the latest cost of living increase.
For example, let’s assume you have a one million dollar portfolio and retire at age 65. For the sake of this example, let’s imagine that inflation rises 2% evenly each year.
Four percent of one million dollars is $40,000, and you would withdraw an even $40,000 during your first year of retirement. Then, add an inflation increase each year:
- Age 65: withdraw $40,000 (4% of your one-million dollar portfolio)
- Age 66: withdraw $40,800 ($40,000 + 2% inflation)
- Age 67: withdraw $41,600 ($40,800 + 2% inflation)
- Each year, continue adjusting the amount to cover inflation.
Inflation isn’t the same every year. It often lands somewhere between 2-3% per year, but there’s no guarantee. For example, inflation in 2021 was 5.3%.
To find out the current year’s inflation rate, check out the US Inflation Calculator website.
The four percent rule isn’t perfect, but it can help you come up with an estimate for your retirement. The rule assumes that your portfolio, at the time of retirement, is split between stocks and bonds, and that returns follow a historical pattern.
Remember, there are no guarantees for any type of investing. All investing is a risk, although you can minimize the risk by investing intelligently. However, there is no way to predict with certainty the exact amount of money you can withdraw for a retirement that’s thirty or forty years away.
The four percent rule will help you estimate, though, so you can work toward a retirement salary that fits your lifestyle. As you get closer to retirement, you’ll adjust your figures accordingly.
If you plan on building financial security or wealth during your lifetime (and hopefully you do!), then understanding how to protect yourself and your assets is critical, even when you’re young.
Most people, especially those under 40 years old, don’t have hundreds of thousands of dollars sitting in the bank to cover them for emergencies such as losing a home to fire, losing the financial support of a spouse if they should pass away, or paying the high cost of medical bills related to disease or injury.
Even if you do have that much money banked, you don’t want to lose it.
Sooner or later, everyone encounters some type of financial surprise in their lifetime, whether it’s related to a car, home, health, or even loss of life.
Insurance helps to cover you for most of the unexpected financial demands that may arise.
To get an insurance policy, you’ll need to do a couple things:
- Research the best policy for you (and your family).
- Find an insurance agent to sell you the policy.
- Pay a monthly, semi-annual, or annual fee to keep up the policy.
- Review each policy at least once per year to ensure that you’re getting the best deal and the coverage you need.
In exchange, the insurance company will cover part or sometimes all (depending on your policy) of your expenses when an event happens, such as when something happens to your home, health, or car.
This means that you won’t lose all of your money and assets when a crisis hits. In the case of healthcare, it often means that you can get the care you need without cutting corners or relying on doctors you don’t trust.
Insurance policies cost money, and you have to pay for your policies even when things are going along smoothly.
It may sometimes seem like an easy expense to skip, especially when you’re on a tight budget.
Yet insurance on your home, health, car, life, and even pets may be the best investment you ever make.
Because when you need it, good insurance policies might mean that you have the care you need to save a loved one’s life or replace a home or car that you rely on to survive.
Without insurance to protect you, all your financial planning, saving, and investing can be wiped out in what seems like the blink of an eye.
When emergencies happen, they tend to happen quickly and without warning — and no, you will not be able to add insurance later when a crisis is pending.
Insurance has to be purchased when there are no problems on the horizon, and in many cases, insurers require you to wait a year or more for full coverage to kick in — just to make sure that there are no pre-existing issues.
Financial protection begins with insurance, and eventually expands to include attorneys and wealth management experts.
Whether you’re earning $20,000 or two million a year, protecting your health, home, and family is a critical step toward financial health.
Homeowners insurance protects your home (apartment, condo, or house) against specific types of damage.
For example, if your home is damaged in a fire, homeowners insurance can pay for the cost of repairs. Most policies also cover your food and hotel expenses while your home is being repaired.
Standard homeowner insurance policies do not typically cover your home from damage caused by floods, earthquakes, or a sewer backup.
To cover your home against floods and earthquakes, ask your insurance agent about additional coverage. Flood and earthquake insurance can be expensive, but if you live in a high-risk zone, it may be worth the additional expense.
Most standard homeowner insurance policies include six types of protection:
- Dwelling coverage pays for the repair or replacement costs in the event of damage to your home, such as fire, vandalism, theft, or lightning.
- Other structures insures structures such as your swimming pool, fences, and detached garage.
- Personal property coverage protects the personal belongings on your property, both inside and outside of your home. Your personal property coverage usually extends to off-property possessions, such as items you have in a hotel or storage facility.
- Loss of use coverage helps you out when you’re displaced from your home due to a covered loss such as a fire. It pays the difference between your standard living expenses and the cost of living off-site while your home is being repaired. Most policies cover hotel bills, meals, and loss of rental income.
- Medical payments protect you in the event that a guest is injured in your home, and typically cover you for between $1,000 – $5,000, depending on your policy.
- Personal liability protects your assets if you’re found liable for an injury that happens on your property, regardless of who’s at fault. Most policies include between $100,000 – $500,000 of personal liability protection.
If you’re concerned about damage to significantly expensive possessions, or from floods, sewers, or earthquakes, or if you need additional liability insurance, you may want to consider adding additional coverage to your standard homeowner insurance policy.
Understanding the six types of insurance coverages can help you make better decisions when choosing a homeowners policy.
Homeowner insurance tips:
- Don’t buy more or less coverage than what you need.
- Understand exactly what’s covered before you buy the policy.
- Know exactly what your insurance company will pay, and how to quickly file claims, in the event that something happens.
- Find an insurance company you trust. If there is a massive disaster, such as a hurricane that wipes out your entire city, will your insurance company be able to afford to pay you right away?
- Always check online reviews before you sign with a new insurance company. Does the company have a good track record and excellent reviews for easy and quick payouts?
- Negotiate with insurance agents for the best pricing.
- Claim all the discounts you possibly can, to help lower the cost of your policy.
- To keep your insurance rates low, keep your credit rating high and review your policy once a year to see if you can claim more discounts or negotiate a lower price.
- Never miss a payment! Missing a homeowners insurance payment on a home with a mortgage loan could cost you your house. Technically, you can lose your loan if you miss a payment, so put your insurance payments at the top of your list of expenses.
- Keep detailed records of improvements, renovations, and repairs to your home, and make an inventory of your possessions. These records can help you get paid more quickly in the event you have to file a claim.
Tips for adding homeowner insurance on a new home:
- Don’t let your realtor choose your insurance company. Prices can vary significantly from one insurance company to another, and you should always shop around for the best price.
- Shop for homeowners insurance immediately after your offer is accepted. Your mortgage company will likely require proof of insurance, and you don’t want the loan process delayed.
A home is a serious investment, but if you don’t protect it with homeowners insurance, you could lose everything and still end up owing money to the bank if something happens.
Homeowners insurance protects your financial future and allows you to better enjoy the present by granting not only insurance coverage, but also peace of mind.
Life insurance may not be the simplest or easiest topic, however, many of us work hard for one reason: to protect our families.
When it comes to protecting your family, life insurance is one of the most critical steps to take.
Will you benefit from life insurance anytime soon? Hopefully not!
However, if something bad should happen to you, life insurance can prevent your family from struggling with debt or basic needs such as food and housing.
Life insurance is simple to buy and only takes a few minutes.
There are a lot of scammers out there, though, and you don’t want to get caught up sifting through them. One way to shop safer is by visiting a reputable quote comparison site.
Many comparison sites also provide free consulting, which is helpful as long as the agents aren’t incentivized to sell you one type of insurance over another.
There are two basic types of life insurance: term life and whole life.
- Term life insurance is a time-based policy that pays benefits if you die during the term that your policy is active. Term life is the type that financially-literate people purchase.
- Whole life insurance is a terrible financial choice.Whole life insurance policies require you to pay a set amount of money, on contract, for the rest of your life. A typical whole life million-dollar insurance policy might cost you $827 a month (compared to about $30/month for a term life policy) – every month for the rest of your life. Imagine what you could do by investing that amount of money into stocks or real estate!Whole life is not an investment, despite what salespeople might try to convince you. An investment is something that makes your money grow. Whole life insurance makes your money shrink.
At a typical 1.5% return annually, whole life policies don’t even keep up with the average annual inflation rate of 2-3%. The money you put into whole life policies loses money because it doesn’t earn enough to keep up with inflation.But that’s not all!Whole life policies come with high surrender fees if you wish to withdraw your money while you’re still alive. 45% of whole life insurance policies are surrendered within the first ten years, and all of them lose money on their “investment.”
Knowing that you want to avoid whole life insurance, let’s take a deeper look at the good kind of life insurance — term life.
Term life insurance is built around the “term,” or period of time, that your policy lasts. In most cases, you choose between a 10, 20, or 30-year term.
Your price is locked in for the duration of the term, and if you buy a policy when you’re young, you pay less.
- For example, a 30-year old man in good health might pay $30 a month for term life insurance. If he dies within that 30-year period (and all payments are made), his family receives a million dollars.
Unlike whole life policies, you can cancel term life at any time without penalties. However, you’re likely to lose the price that you had locked in if you do cancel.
What should you look for when shopping for term life insurance?
When you’re ready to purchase life insurance, look for the lowest-priced policy that comes with the highest payout.
If you compare quotes online, you’ll need to provide general information such as your date of birth and marital status before you can get quotes. You’ll also need to answer some general health questions before receiving a quote.
It takes most insurers about four to six weeks to send their formal offer once you’ve chosen your coverage, and you’ll probably need to take a (free) routine medical exam before your policy becomes effective.
Please note that insurance policies differ from one company to the next, so you’ll want to check with your agent about how your policy works.
Life insurance is the ultimate act of caring for your family, as it ensures that they will be taken care of even if something happens to you.
Term life insurance is a low-cost policy that pays benefits to your family if something should happen to you.
We recommend that you shop for the lowest-priced term life policy and sign up for a minimum 10-year term policy equal to ten times your annual salary.
Estate Planning goes hand in hand with life insurance.
Planning your estate, in the event something should happen to you, is not just for rich people.
Estate planning is the documentation of your choices and instructions regarding your physical assets and your health, in case you should become incapacitated or pass away.
What Is Estate Planning?
Planning your estate means making decisions, in advance, in the event you should become incapacitated or pass away.
Estate planning includes:
- Power of attorney, both for your financial and medical decisions: A power of attorney is a legal document that allows someone else to make decisions on your behalf in the event that you are incapacitated and can’t do it yourself.
- Will: A will is a legal document in which you state how you would like your assets to be distributed after your death, and is usually developed hand-in-hand with an attorney. If you have no will, the state will decide how your assets should be distributed.As part of the will, parents of young children should name a guardian or guardians that will take care of their children in the event the parents should die.
- Living Will: A living will is a healthcare directive that states your wishes for end-of-life care, for your doctors, in case you can’t communicate them yourself.
- A trust (optional, but may provide tax benefits): A trust is a legal arrangement that allows a third party to hold and distribute your assets during and beyond your lifetime.
Well-thought estate planning can help you limit estate taxes, set up arrangements for disability income, determine the transfer of your business, provide for your loved ones, and reduce court costs and unnecessary legal fees for your family, and more.
To get started with estate planning, consider using a planner or workbook to guide you, such as:
Please note: Minority Mindset has no affiliation with and does not specifically endorse these books — they are only suggestions to help you get started researching estate planning.
Estate planning doesn’t end with life insurance. Consider using an estate planner book or hiring an attorney to help you fully plan your estate.
Purchasing a term life policy is an inexpensive investment that allows you to care for your family long after you’re gone if something should happen to you.
Setting up a term life insurance policy doesn’t take much time, and the process is fairly simple — you can start coverage quickly.
Once you’ve set up your life insurance policy, consider how and when you might set up your estate planning documentation. In many cases, you don’t need to rush into estate planning, however, it’s good to have a plan on when you’ll get started so that your loved ones are further protected.
Health insurance may be the most valuable purchase you ever make, for you and your family.
Without health insurance, you’re likely to compromise the quality of medical care you need and skip or avoid appointments or medically necessary procedures.
No matter how much money you make during your lifetime, you can’t buy your way out of health issues that develop due to lack of good care, so quality healthcare isn’t something you want to set aside for later in life. Everyone needs quality healthcare, even from a young age.
Currently, health insurance is affordable for many people through healthcare.gov. Before you shop for healthcare, stop by their website to find out if you qualify for reduced-cost health insurance.
Purchasing car insurance is required in most states, and if you buy your car with a loan, additional insurance is probably required.
When looking for car insurance, your goal should be to find the lowest rates possible without compromising on the coverage you need.
Oftentimes, insurance agents will offer you rock-bottom prices by removing some of the most critical coverage, such as uninsured motorists or comprehensive coverage.
Purchasing an auto insurance policy that doesn’t fully cover you could put you and everything you own at risk.
To ensure that you choose the right auto insurance policy, be sure to understand and shop for coverage before you talk to an insurance agent.
A good auto insurance policy will protect you from three types of losses:
- Damage to your property or yourself
- Damage to other people or their property
- Your personal assets
The three basics types of losses are protected by several types of coverage, including:
- Bodily Injury Liability
- Property Liability
- Medical Payments
- Personal Injury
- Uninsured & Underinsured Motorists
When you’re ready to purchase auto insurance, check the insurance discounts carefully to see which ones you qualify for — these can save you a decent amount of money on your premiums.
There are many types of discounts that can help lower your rates, including:
- Higher deductibles
- Annual, instead of monthly, payments
- Military or club discounts
- Multiple-insurance discounts (buying life, home, and auto through the same insurer)
- Buying safer cars or living in an insurance-friendly neighborhood
- Having good grades (if you’re a student), good credit, or lower monthly mileage
You can comparison shop for auto insurance online, and negotiate with agents by letting them know what lower prices are available elsewhere.
To lower your auto insurance rates, review your auto policy every six months for new discounts or to try and negotiate a lower price.
Pet parents may not think to add health insurance for their tiniest loved ones, but most wouldn’t hesitate to hand over thousands of dollars if their pet’s health was at risk.
Instead of putting your bank account at risk, or facing the possibility of not being able to afford medical care for your pets, consider finding a pet insurance policy.
Most pet insurance policies let you see any vet of your choosing, and they reimburse you for everything from wellness exams to vaccinations, accidents, surgeries, and even cancer treatments.
Pet insurance rates and coverages vary from one insurer to another and usually start at $10 a month.
You can take out more comprehensive policies, based on what suits your budget or your pet’s breed.
For example, a deluxe, $40/month pet insurance policy for a young healthy puppy (less than one-year-old) with Pets Best covers:
- Accidents, Illnesses, Cancer, Hereditary Conditions, Surgeries
- Emergency Care
- Take-Home Prescriptions
- Accident & Illness Exam Fees
- And more, including wellness benefits that pay for some vaccinations, preventative medications, and labs.
Most pet parents will pay for medical care if their furry family members are in trouble, even if they can’t afford it. Pet insurance is an excellent way to lower your financial risks without compromising on their quality of care.
Pet insurance can save you from having to make tough decisions about the kind of care your pet receives if anything happens to them.
Protecting Your Financial Security Through Insurance
Unexpected things happen in life, but if you have the proper insurance policies in place you can avoid losing all your money and assets when they do.
Health insurance, life insurance, auto insurance, homeowners insurance, and pet insurance are the basic policies you should put in place to protect your financial well-being.
Creating And Protecting Wealth Throughout Your Lifetime
Many people grew up thinking of wealth as something that only rich people could achieve, but that’s not the case.
Even people earning average salaries can invest their money in ways that build wealth and prepare for a comfortable retirement.
As you earn and make more money throughout your lifetime, it’s essential to understand what you’ll do with it and how you’ll protect your assets and your loved ones.
Obtaining the right kind of insurance, including homeowners, life, auto, health, and pet, is one of the best ways to lower your financial risks.
By developing your financial literacy and the discipline it takes to build wealth, you lower the risks of losing your assets and boost your chances of building even greater wealth.