Since the first time you asked your mum for a chocolate at the checkout and she said no, you’ve been striving to achieve financial freedom – the freedom to buy what you want, when you want and live a comfortable and happy life. However, just because you have a regular job and a strong income doesn’t mean you have achieved personal financial freedom, unless you also have measures in place to protect your finances.
These personal finance protection measures can include:
1 – Disability insurance
While you may think that your house, your car or your investment fund are some of your biggest assets, in reality your biggest asset is your ability to earn money – if you lose that, you’ll likely lose your other assets as well. Therefore, you need to look at disability insurance policies which will replace your income if you are unable to work. This is in addition to insurances such as social security, which will only pay out if you are injured while at work.
While there are also social security benefits you could be entitled to if you suffer a disability, they usually won’t be enough to cover your previous income, and may only apply if you are so disabled that you can’t do any job, not just the job you have trained to do. Therefore, to avoid the risk of working in a call centre if you are unable to return to your regular career after an injury you can be protected by a long term disability insurance policy.
In most cases, insurers will offer a disability insurance policy which will cover around 70% of your previous income amount, but shop around for the highest percentage you can find. Also make sure the cover will continue to pay out until you are 65, when you will be able to access your superannuation fund.
2 – Health insurance
When you’re young, fit and healthy, the last thing you think about is getting sick, and unfortunately this is what can make the situation even more devastating if it does occur. When you are unprepared for an accident or illness you can find yourself struggling financially very soon after, so no matter how young or healthy you feel, if you are serious about taking steps to protect your financial freedom then you will want to take out a fully features health insurance policy.
Look for a health insurance policy which has a high excess as this will mean your monthly premiums are lower, and during a time in your life when it is unlikely you’ll need to make a claim, a high excess to pay isn’t as much of an issue as you’re unlikely to have to pay it. Compare insurance policies to find the one with the inclusions you want and need, for the right price, keeping in mind your premiums will increase as you get older, but are still much easier to manage financially than full medical costs.
3 – Liability insurance
Liability insurance is an important option to consider, as it can protect you if you are sued, or if you cause someone else damage. While your home and your car insurance will have liability clauses included, check the limit of the cover as it may not be enough for a serious claim. For example, the typical car insurance policy will allow $300,000 to cover liability costs but if you are in an accident where the other person claims $1 million in damages you could suffer significant financial damage.
To choose the amount of your liability insurance, choose a figure which is equal to at least twice your net worth if you are at a high risk of being sued, for example you are a doctor, lawyer or you have your own business. When you are looking to add liability insurance to your personal finance plan, look for umbrella coverage which is relatively cheap to maintain – usually between $150 and $300 a year. Umbrella coverage then extends over your existing home or car insurance policy and comes into effect when the original policy is exhausted.
4 – Long term care insurance
Long term care insurance is designed to help you protect your assets, and make sure that you receive a high quality of care if you can no longer care for yourself. Therefore, this type of cover is best suited to those over 50 years old, who have more than $100,000 in assets.
A long term care insurance policy will cover all of the costs associated with a serious illness which aren’t covered by a standard health insurance policy or government health programs. For example, if you need help to feed, clothe or bathe yourself, then long term care insurance can pay for a support worker.
Remember that long term care can be very expensive, for example a year at a nursing home will cost you around $60,000 and to have that same level of care at home will cost even more. If you have significant assets then you will probably be able to cover the costs of a high level of care if the need arises, but if you want to make sure you don’t put unnecessary financial strain on yourself or your family, consider long term care insurance.
5 – Manage your debt
With financial freedom comes financial responsibility but many of us learn this the hard way, after we’ve accumulated a deck of credit cards and our savings plan has fallen by the wayside. Therefore to help you safeguard your financial freedom you need to take control of your debt, which you can do in the following ways:
1.Stop saving if you have high interest debt. If you have been desperately squirreling away savings in an attempt to counteract your credit card debt and personal loans – stop. The amount of interest you’ll be earning on your savings will be much less than the interest you’re being charged on your debts, so you will be better off financially if you put all of your savings into getting rid of your high interest debt.
2.Consolidate your debts. If you are still having trouble clearing your debts consider a consolidation loan which will roll all of your credit cards and personal loans into one loan, with a much lower interest rate. You’ll then have a set term and set repayments so that you have a realistic goal of being debt free to work towards, plus all those sporadic monthly repayments can be made in one go.
3.Reduce your spending. You don’t have to give up all of the luxuries in your life, but you simply need to look for ways to cut back. For example, if you go out to dinner one a week, cut back to going out twice a month instead; rather than taking the family to the movies, put on a DVD at home and make your own popcorn. You can also make other conscious decision to save, such as buying in bulk at the supermarket or switching to the supermarket brand products. You can even start collecting coupons to make savings. Every little bit you save will help you pay off your debts, build up a savings balance and spend less than you earn to guarantee you financial security.
Kristy Ramirez writes for Life Insurance Finder, an Australian life insurance comparison website, where she helps people to compare life insurance quotes and select the best policy to meet their needs.