Saving for a Rainy Day…

Although the economy is finally beginning to rebound as home prices increase and more jobs are added, the last six years have been tough on families in the area.  Pinching pennies took on new meaning as it became a necessary habit just to pay bills, but if you have some surplus in your monthly budget, you may be wondering what to do with your additional funds.  Depending on your age, income, and other factors, there could be many competing priorities: leaving a legacy, paying down debt, saving for your children’s college, retirement, and immediate needs that have been put off.

The vast majority of individuals will not make enough money to save enough to cover all of the above expenses.  However, without advice tailored specifically to your situation, it is impossible to determine what expenses are worth the allocation of funds, even though there is a wealth of financial articles written claiming to do just that.  For example, much of the financial advice over the past several years has been geared toward a “rainy day fund,” which would ideally cover your expenses for at least six months if you lost your job, and toward paying off debt.  While both are good pieces of universal advice, they may not be the best courses of action in your situation.  Your estate planning attorney and financial advisor can help you focus your efforts where they make the most sense for your given situation.

For example, if leaving a legacy is among your goals, it is wise to dedicate some time to planning for your health needs.  Especially if you are still quite young, you may consider a low-premium term or whole life insurance policy.  A life insurance policy can provide financial security to your family after the loss of your income and, if it is a whole life policy, serves as an asset that can be borrowed against or cashed in if necessary.  If you own a home, and especially if you are married, a QMap Trust can provide a substantial amount of flexibility and help you secure Medicaid (Medi-Cal in California) funds if necessary, while preserving many of your assets.  If you prefer to pay as much of your healthcare expenses on your own as possible, a long-term care insurance plan may be beneficial.  Finally, an Advance Healthcare Directive reduces your healthcare wishes to writing, which allows an agent to make informed healthcare decisions on your behalf if you are unable to do so.  By being proactive now, it is possible to prevent a catastrophic health incident or sudden illness from bankrupting your family or your estate.

Similarly, most people can plan on a reasonably long retirement, but are not saving enough money to support themselves through their life expectancy.  The advantages of retirement saving, such as tax free growth and often free money through employer matching, may be substantial.  A 529 plan can operate similarly to pay for a child’s education expenses.  However, if you believe that it is likely you will need the money in your plan because you do not have sufficient other savings, the penalties associated with withdrawal are often dramatic.  In any event, the earlier you begin planning how to set aside money, the less money will be needed to achieve your financial goals!

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