The Most Important Asset You're Forgetting to Protect

Portrait of a young man sitting in a wheelchair and holding a pair of crutches
Have you ever stopped to think about what makes the magic happen when it comes to living the life you want to live. What it is that lets you take care of your family and pursue your dreams? Hard work and determination aside, it really boils down to your income -- the money you earn through your talents, skills and labor.

So have you thought about what would happen to your family or to your lifestyle if you were no longer able to earn a living? According to the Council for Disability Awareness, more than one in four of today's 20-year-olds will become temporarily disabled before they retire.

On top of that, the average long-term disability claim lasts 34.6 months. So even if you follow the sound advice of the personal finance world to set aside three to six months of emergency funds, odds are, if it happens to you, you'll come up quite short on money to get through.

First Injury Taught Him a Valuable Lesson

Quinton Hill, a personal trainer who twice has experienced an income loss due to injuries, is of the opinion that many people don't know that disability insurance exists, and even if they do, most probably don't think they need it. Hill didn't have disability insurance originally because nobody told him about it. "I just assumed it was for older people because of how it's marketed. I wasn't walking around thinking I wouldn't get hurt. I just didn't know this coverage was for me as well."

Back in 2009, during an informal game of flag football, Hill, then 24, ruptured his Achilles tendon. He found himself without a salary (he was a subcontractor) and unable to work due to the injury. "It was an incredibly difficult time personally and financially," Hill said, and even after he was able to get back to work, it took him a few years to get out of the debt he'd accrued.

Fast-forward to two years later, when Hill tore his other Achilles tendon while playing football again. This time, he was prepared. "After the first injury, my company encouraged me to sign up for disability insurance and accident insurance," he said. Because he had coverage, he was able to cover living and medical expenses in full. "It was like night and day from the first time."

How Can You Ensure You're Prepared?

When obtaining or reviewing an income protection policy, ensure you understand the following:
  • Is it short-term or long-term coverage? Short-term typically will generally cover you for up to 90 days, paying up to 66.6 percent of your income. Long-term covers beyond that scope, for up to a similar amount of income.
  • Is coverage provided through your employer? Will you need to obtain an individual policy? Or both?
  • How much of your income will be replaced?
  • What is the elimination period? In other words, how long until the policy kicks in?
  • How long will the coverage last?
  • Is it an "any" or "own" occupation policy? In other words, does it pay if you can't perform your own occupation or any job?
  • Will the benefits be pre-tax or post-tax? This comes into play when participating in employer group policies.
  • How am I faring financially compared to the Disability Security Plan from the Council for Disability Awareness?
As Hill noted, "Your financial obligations don't stop when you get hurt." If you're not prepared, start by building up your emergency fund, reviewing your employee benefits and coverage and reaching out to a financial professional to determine your insurance and coverage needs.

Mary Beth Storjohannis a certified financial planner for Gen Y. She created Nine Steps to Workable Wealthto help you make smart choices with your money.

10 Financial Land Mines That Can Decimate Your Net Worth
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The Most Important Asset You're Forgetting to Protect

Managed to get that raise or promotion? Fantastic -- now don't go out there and spend it all immediately. In classic "keeping up with the Joneses" fashion, too many of us see an increase in salary or a sudden windfall (like an inheritance) as an excuse to take our lifestyle up a notch. We buy bigger houses than we need, get the latest gadgets even though ours work just fine,and spring for fancy steak dinners just because we can.

​Instead, whenever your financial situation gets a boost, consider the best ways to put that money to work for you. The truly wealthy are those whose money continues to grow and earn them more, even when they're not actively doing anything with it.

The average American household that carries credit card debt holds a balance of around $15,000. If you're among those who have a credit card balance, you've probably seen the little chart on your monthly statement telling you how much you'll pay in interest over the next several years if you make only the minimum payment. (If you haven't, look at it.) The same chart will also compare that to a "suggested" payment that's slightly higher. 

​Our recommendation? Throw everything you can at paying your balances off as fast as possible. And make sure not to take on any additional debt in the future; if you can't pay for a consumer good out of pocket, don't finance it.
We don't demonize student loan debt the way we do credit card debt because we see an education as an investment -- and higher education often is the difference between one income bracket and another. Similarly, many people justify taking out a car loan by stating that they need a car to get to work.

​That said, debt is still debt, and the longer you take to pay it off, the more interest you'll pay. Once you've freed yourself of credit card debt, paying down your car and student loan balances should be next on your list.

Whether it's to handle an unexpected car repair, a sudden illness or a major plumbing problem, you should always have some money set aside to cover unforeseen expenses. Set up a regular monthly transfer from your checking to your savings account to earmark this money before you're tempted to touch it. If necessary, cut back in another budget category (like eating out or entertainment) to free up the funds to save more.

​Putting aside a little each month could prevent you from getting socked with a hefty bill you can't afford and then need to finance.

No matter your age, you should be adding to your retirement funds -- such as your 401(k) or individual retirement account -- each month. Just setting aside money sporadically won't cut it; you need to identify how much you'll need to live on once you stop working and monitor whether you're on track to reach that amount.

​Here's a quick-and-dirty rule of thumb: multiply your annual spending by 25. This is the amount you'll need in your retirement portfolio, if you assume that you'll withdraw 4 percent per year to live on during your retirement. In other words, you'd need $1 million in your portfolio to live on $40,000 annually. Creating a plan will help you make sure you're able to retire the way you envision.
A home is a big investment, and sometimes that investment doesn't wind up netting you the return you thought it would.

The biggest culprit is having too large a balance on your mortgage, which detracts from your own personal stake in the current market value for your home. The sooner you pay this amount down, the better your home equity will be.

​You also want to be careful when purchasing a new home. Buying in a neighborhood that's on the downward spiral or buying the most expensive home on the block, likely won't net you a good return when it's time to sell. Also take care to stay away from custom renovations (like turning the garage into a recreation room), which could negatively affect your resale value. 

Paying high investment fees eats away at your gains. And since your gains compound over time, this creates a domino effect that can really chip away at your wealth. Take a close look at your investment companies' fees and shop around to make sure they're not taking more of your money than they need to be.

If you don't have a long-term investment vision and are simply playing the market, you could seriously undermine your wealth-building potential. Stop paying attention to market fluctuations, media pundits and the stories of your friends and family. Instead, create your own long-term investment strategy that will maximize your overall returns. Resist the urge it play it ultra-conservative (or fall for get-rich-quick schemes) and educate yourself on the best way to make your dollars work for you.

​If you're having trouble making sense of your options or want a second opinion, seek the help of a trusted financial adviser.
Based on your experience and seniority level, education and industry, you should have a fairly good idea how much you ought to be making at your job. If you don't, check out a site like PayScale to get a ballpark figure.

If you're not making what you're worth, you're doing more than leaving money on the table; you're also losing all the compound growth and investment returns that money could be generating for you. Invest in yourself with professional development and continuing education, make the case for that raise or promotion, or seek out a company who will value you higher.

If you don't have proper insurance coverage, you're taking a very big risk that could come back to bite you. Too many people think the worst can't happen to them, but the hard truth is you can't predict the future, and scrimping on sufficient insurance is never a good idea.

Of all the things we're hesitate to part with our money for, adequate insurance coverage should not be one of them. No matter your age, everyone should be properly covered with:

  • Health insurance.
  • Disability insurance.
  • Homeowner's or renter's insurance.
  • Flood insurance (if you live in a flood-prone area).
  • Umbrella liability insurance (especially if you own a small business).

If a spouse or children relies on you for support, make sure you have a decent term life insurance policy, as well.

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