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Help Clients Spring-Clean Their Financial House
When you help clients improve their financial literacy, you move them along the road to achieving their financial goals in every season of their lives. • Eddie Gill
For many, spring is a time to refresh home and garden, but the turn of the season is also a great opportunity to assess your clients’ financial literacy. Every client has different needs and expectations when it comes to financial planning, whether it’s managing a monthly budget or planning for retirement. Providing clients with the guidance they need to improve their financial literacy will aid in their financial health and overall well-being.
Planning vs. Budgeting
Differentiating between budgeting and financial planning is an important distinction when it comes to financial literacy. While budgeting plays a part in financial planning, budgeting on its own is not a financial plan. Budgeting is an opportunity to list income and expenses and allocate the former to the latter, ensuring expenses don’t exceed income. When clients see where they are putting their money, they evaluate what is and what isn’t a necessary expense, which helps them make financially healthy decisions.
Financial planning involves setting goals for different stages of life. For example, someone in their 20s might be saving for a wedding, while someone in their 40s might be paying for their children’s college expenses. Along with planning for life’s milestones, other important financial considerations include insurance, investments, savings and retirement.
Cleaning Up Debt
Many clients think paying off debt must be their first priority when looking at their financial picture, but it doesn’t have to be an all-or-nothing proposition. Starting a savings or emergency fund and saving for retirement can be done in tandem with paying debt.
A client’s emergency fund should include a month’s worth of take-home pay. This can provide a safety net in case of unexpected expenses. Incorporating
a savings element into monthly budgeting as part of a long-term financial strategy will ensure that clients are on track to meet their long-term goals while they are tackling debt in the here and now.
Credit cards and student loans are two areas in which clients often incur large amounts of debt that can seem insurmountable and derail their financial goals. Student loans and credit card debt typically have higher interest rates, so paying them down first can be a good strategy for eliminating debt altogether or improving credit ratings.
If clients have a number of high-interest credit cards, they can prioritize repayment by organizing cards by interest rate and paying them off from highest to lowest to ensure they are paying as little interest as possible. Progress toward reducing credit card debt can help boost credit scores for future big-ticket purchases, such as a house.
Student loans aren’t just for those in their 20s. People of all ages deal with student loan repayments, especially those who are putting children through college or going back to school themselves. Private loans often have higher interest rates, so those should be paid off first.
Once clients have a plan to reduce debt, budgeting can be a useful tool to avoid taking on more debt. Identifying the causes of debt and suggesting ways to change patterns of behavior are important discussions to have. By reducing debt, clients have more options in putting together a financial strategy that will protect them in the event of financial hardship and proactively meet financial goals for retirement.
Making Room For Retirement
Many clients overlook the importance of retirement planning in their 20s. Just because retirement is off in the distance doesn’t make it less of a priority. Retirement planning offers an opportunity for clients to live comfortably after they retire. Clients who are in their 20s are probably just starting their careers at a company that offers a 401(k).
Taking full advantage of a company’s 401(k) offering is a great way to begin preparing for retirement and potentially earning free money if the company matches contributions. If a client’s company doesn’t offer a 401(k), they have the opportunity to start contributing to an individual retirement account. Contributing to these accounts over the long term will allow financial security when it comes time for retirement.
As the client ages, it is important to continue helping them prioritize retirement planning. Clients in their 40s need to think about what kind of lifestyle they want to live in retirement and make adjustments to their retirement plan. Once a client reaches 60, they will want to have six to eight times their salary saved in their 401(k). These guidelines can help a client get the most out of their 401(k) and prepare them to live comfortably in retirement. Another way to plan for retirement is through investments. There are opportunities to grow a client’s savings by selling their investments as the market rises. There are also risks that come along with investing, such as market crashes and dealing with inflation and deflation. When the market falls, clients can rely on other assets in their retirement portfolio, such as cash reserves or cash value within their life insurance policies, to tide them over until the market evens out again. By being proactive with retirement planning, inflation and deflation will have less of an impact on a client’s savings. Financial planning is an important part of financial success, and planning grows in importance as a client reaches retirement. Taking time to budget, repay debts and contribute to retirement is just as important to a client in their 20s as it is to a client in their 50s. Increasing financial literacy allows clients to take control of their finances early and, in turn, successfully prepare for their financial goals and ultimately enjoy retirement.
Paying Bills Tops The List Of Priorities
When asked to identify their top financial planning priorities in 2022, respondents identified: • Paying bills/expenses (48%) • Saving for retirement (39%) • Paying off debt/loans (38%) • Taking care of family (37%) • Investing (32%)
SOURCE: Northwestern Mutual Planning & Progress Study
Eddie Gill is a lead advisor with Wise Financial, a member of Northwestern Mutual Private Client Group. He may be contacted at eddie.gill@innfeedback.com.
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Pandemics Are Uninsurable Events, NAMIC Says
Pandemics are inherently uninsurable events, the National Association of Mutual Insurance Companies told members of Congress recently. NAMIC’s public policy counsel explained to a House subcommittee how the potential for widespread and concurrent losses from a pandemic for an indefinite period of time defies the fundamental nature of insurance.
“Insurance was not designed to insure policyholders who are all expected to suffer losses at the same time,” Andrew Pauley said. “It has been estimated that costs of
a pandemic for business loss of use could run in excess of the entire insurance reserve retention to pay all claims across all lines of insurance in a short period of time. This starkly demonstrates that pandemics are not an insurable risk.”
Pauley urged lawmakers to recognize that the economic toll of government-ordered closures and other public safety efforts should be the government’s responsibility. He encouraged them to resist the temptation “to create new federal pandemic programs that could needlessly and severely disrupt and destabilize the nation’s insurance marketplace without resolving these concerns.”
FLORIDA HOMEOWNERS STRUGGLE AGAINST SOARING RATES
Florida had the highest average annual homeowners insurance premium nationwide in 2021, at $3,600 — 157.5% more expensive than the $1,398 U.S. average. And things are about to get even more expensive. Homeowners insurance premiums are up nearly 25% this year and aren’t expected to level off soon, said Mark Friedlander of the Insurance Information Institute.
What’s driving the higher rates? Industry experts blame unrenewed policies, fraudulent roofing schemes, increasing replacement costs and lim-
ited legislative oversight. Dozens of insurance companies are either not renewing existing policies in Florida or are no longer writing new ones in the state.
Insurers say they can’t turn a profit in Florida and they are abandoning high-risk properties. In 2020, Florida’s insurance companies reported $1.6 billion in underwriting losses,
mainly caused by roofing fraud and increasing replacement costs.
NEW WILDFIRE STANDARDS FOR CALIFORNIA
California already has wildfire building standards for homes built after 2008. But as wildfires become more frequent and more intense, the state implemented a new approach to address the issue.
A three-pronged approach dubbed “Safer from Wildfires” aims to reduce the wildfire risk of older homes, including measures to harden homes, their immediate surroundings and the communities they are in.
As catastrophic megafires drive up the cost of insuring homes and thousands of homeowners in rural areas are dropped by insurers, the new standards would
prompt insurance companies to offer
QUOTABLE
There were several factors that cooled off the property market, including the resurgence of COVID19 as well as rising interest rates and rent prices.
— Mark McElroy, executive vice president and head of TransUnion’s insurance business
discounts, providing incentives for retrofitting older homes.
2020 WILDFIRES TOOK TOLL ON PHYSICAL, MENTAL HEALTH
Wildfires that struck Oregon in 2020 not only destroyed property, they damaged the physical and mental health of those affected, according to an AARP survey.
Survey results showed 46% of respondents said the fires took a toll on their mental health. Among those whose homes were directly impacted, 58% reported negative mental health affects. The fires harmed the physical health of about onethird of respondents. Almost two-thirds
of those people said they are fully recovered, while the rest said they are dealing with ongoing health issues, the survey found.
Fewer than half of property owners — 42% — who were impacted by wildfires said they had wildfire insurance coverage, and only 51% of renters said they had renters insurance. Financial assistance remains the top need for survivors, with 22% who were displaced saying they still need financial help.
DID YOU KNOW ?
