5 Steps to Protect Your Cash Flow Like the Rich
| September 18, 2007 | Posted by Roshawn Watson under Uncategorized |
By: Roshawn Watson
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Your financial ruin can occur in less than 24 hours; disturbingly, one accident can wipe you out financially. Throughout life, income fluctuations are very common and often unpredictable, making cash flow protection a critical component to any wealth-building plan. Learn these 5 methods to keep your cash flow growing into perpetuity, including the financial lesson I learned from Britney Spears. Shock!
Step One: Assess Your Insurance Needs. Medical expenses are the leading cause of bankruptcy in the US (Health Affairs, 2001) because without insurance, some health expenses are simply unbearable. Fortunately, most have medical insurance. Likewise, most also carry car insurance. However, three areas that often go uninsured or underinsured are: (1) long- term disability insurance, (2) life insurance, and (3) identity theft insurance.
- Long-term disability insurance is important because it replaces your income in the event you become disabled. According to the Senate Finance Committee, 70% of people between the ages of 35 and 65 will become disabled for three months or longer, and 90% of these disabilities will occur “off the job”. Don’t think Social Security will necessarily pick up the slack either. Many people with legitimate claims are rejected on a daily basis. Fortunately, some employers offer long-term disability insurance, so check with your benefits coordinator to see if you are covered. Otherwise, purchase an individual policy. Although it more expensive, the peace of mind is well worth it. I use MetLife myself.
- Adequate life insurance is also critical so that death of a love one does not financially ruin a family. It seems morbid to talk about death, but if one has dependents, it is critical. Many who have life-insurance do not have an adequate amount of coverage. One should have about 10 times his annual wage in insurance. For example, if one’s family income is $50,000 annually, a $500,000 life-insurance policy should suffice. Let’s crunch the numbers. A 10% annualized return on $500,000 would generate $50,000 per year; thus, the income has just been replaced. Do not let an untimely death devastate your family financially as well as emotionally. Lastly, go with a good term-life policy. You can obtain these for pennies on a dollar, especially compared to whole life.
- Identity Theft Insurance is also necessary because of the age we live in. Go with a policy that has a strong identity recovery program. That way, you don’t have to spend the countless hours proving that you did not make the fraudulent purchases: your insurance company will. Also, consider freezing your credit; it is the most comprehensive way to protect your identity. Financial guru Suze Orman talks about how to do this in a recent yahoo article.
Step Two: Eliminate Consumer Debt. Here are seven words that can change your life. There is no prosperity in consumer debt. Consumer debt comes in many forms, but the three most common types are (student loans, car loans, and credit cards). Moreover, debt equals bondage. By allowing your assets to purchase your luxuries (anything you can not afford to pay cash for), you can break out of the rat race forever. Read George Classen’s brilliant book “The Richest Man in Babylon” and my post entitled “Free Yourself from Babylon” for more on this topic.
Step Three: Invest for Your Future. You may be surprised to know that someone in Britney’s camp knew what they were doing, at least financially. Presumably, her money is invested. How else could she still be generating in excess of $700,000 monthly without releasing any new music in years? No one could have predicted that she would have her current personal and professional difficulties. Thus, learn from Britney, and invest. For a less comical and much more comprehensive look at stock and mutual fund investing, check out my four part series entitled Investing is For You.
Step Four: Invest In Yourself. I am currently reading The Seven Habits of Highly Effective People, and one of the things Dr. Steven Covey argues is to be mindful of the P/PC balance. P stands for production, and PC stands for production capacity. I assume most strive to increase their productivity; however, do not neglect your production capacity. One book can unfold secrets that will yield extraordinary personal growth. However, you will never read it if you are constantly busy with “producing.” Similarly, by taking one class, you perhaps could quadruple your company’s profits, but you have to set aside the time. Do not let your skills become irrelevant because you refuse to update them. Remember, the only job security is your ability to get the next job.
Step Five: Be Financially Solvent. I know most financial experts say live below your means, but try the less ambitious goal of living within your means. In other words, meet your financial obligations without borrowing any money (excluding the traditional mortgage). These “obligations” are (1) paying for insurance needs, (2) investing for your retirement, (3) paying for your household expenses (food, clothes, shelter, transportation, etc), (4) paying off all debt including mortgage (if applicable), and (5) investing for the education of your children. If you can do this, you are financially solvent, which is a critical step in any wealth building plan.
Final thought: simply incorporate these steps to protect your cash flow into your existing wealth-building plan. They simply decrease your risks, and the returns will be rich.
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Copyright 2007, Roshawn Watson, Pharm.D. All Rights Reserved.
Carnival of Twenty Something Finances
Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.
One thing that scares me silly about ever living in USA is finding a way to afford medical insurance that will cover all illnesses…. Scary stuff!It's easier to live in UK / Canada in this respect.Great post,Forest.http://frugalzeitgeist.com
Thanks a very good point. Having good quality medical insurance is definitely crucial. Putting yourself in a great financial position (a.k.a. building wealth) is another great defense financially. It doesn't hurt to shop around too, as long as you do not cancel your policy before starting a new one.
I do not really see the need for identity theft insurance. Insurance is for major catastrophizes, not for things you can deal with yourself. It may be a pain if you get your identity stolen but it is not catastrophic in my opinion and there so much more you can be spending your money on.