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Jul 7, 201402:39 PMFinancial Perspectives

with Michael Dubis, CFP

Young adults: Avoid these 6 financial mistakes

(page 1 of 2)

Most of my clients have children; some are young, working adult children. Some of my clients are young adults as well.

Occasionally, clients ask me for tips they can offer their adult kids. I angle my suggestions toward preventing mistakes, because for people of any age, especially young folks, mistakes made today have an exponentially large impact on their lives 10, 20, or 30 years from now.

Here are some considerations that young people (post-school, working young adult) should keep in mind. Ignoring them could have a major impact on their long-term wealth and quality of life. 

  1. Disability insurance. Young people, and often their parents, tend to be grossly uninsured for disability. A working person’s human capital is essentially everything for the next 20 to 40 years of his or her life. Yet most young people, and even those who hire me, lack proper disability insurance. Whether you are married or single, obtaining adequate disability insurance is critical.

    As an aside, it’s highly unlikely your work-provided disability plan will be sufficient. See a qualified (and ethical) insurance agent to discuss this gap. Buy the best plan you can get. Keep updating that plan on a regular basis (usually annually or every few years as income increases). This is an area you don’t want to ignore. 
  1. Life insurance. This is almost as important as disability insurance — equally so if you’re married. Again, most folks are grossly uninsured for life because they often rely on their ridiculously inadequate employer-provided coverage, or they use silly rules of thumb like 10 times salary for coverage needs. Which makes sense only for the person whose salary, multiplied by 10, would cover the survivor’s needs for the rest of his or her life. That’s likely insufficient for young married couples, especially those with kids.

    Further, many people don’t buy a lengthy enough term. A 20-year policy should be a minimum purchase; 30 is often ideal because it offers a sufficient time frame to save the difference in your investment portfolio. Beyond 30 years, you’re getting into permanent life insurance, which most young folks do not need. Here’s a better rule of thumb for life insurance: Figure out what you might need if one of you were gone. For every $10,000 of gap need, in today’s low-yield environment, you will likely need about $500,000 of coverage (yes, that’s a lot for a young person, but that money calculation is designed to cover your survivor for at least 30 years and beyond). It’s not unusual to find a young family needing at least a couple of million dollars in life insurance for either income earner.
  1. Emergency fund. It’s said that most young people will have three to 12 different jobs/careers during their working years. If that’s true, those transitions will not be easy! An emergency fund of three to six months in cash or short-term investment-grade bonds makes those transitions easy.

    I would argue that beyond maximizing any retirement plan deferral strategy through work (to take advantage of company matches), you should be putting all discretionary savings into an emergency fund until you hit at least three to six months of lifestyle needs. Once that’s covered, go ahead and increase long-term retirement savings plans like work plans, Roth IRAs, etc.

(Continued)

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It is an understatement to say the world has experienced a radical shift in capital markets. There are more layers of information and opinions on the direction of the world than we've seen in decades. The internet and the media do not always make it easier, but Michael Dubis' contribution through IB blogs will help you sift through the noise and give you some perspective. You can find his company online.

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