The Not-A-Millionaire guide to financial security
Forget rich for a moment. Think solvent.
NEW YORK (CNNMoney.com) – Who doesn't want to be rich? But let's face it, getting rich gets hard very fast if one or more of the following conditions applies:
Being financially secure, however, isn't out of the question. And once you achieve that, you've laid the groundwork for living well.
In fact, there's no point thinking about rich until you figure out how to get – and stay – solvent.
Solvency doesn't have anything (or at least not much) to do with how much you make. Any financial planner will tell you they've had high-income clients who, given free rein, spend themselves into the ground.
Broadly speaking, solvency means being able to meet your financial obligations. How solidly solvent you'll be depends on how you define "meeting your financial obligations." You may be able to pay the minimum on your credit card bill, but being able to pay off the whole balance every month reduces your financial risk.
For long-term solvency, though, you'll need more than just enough to pay your bills today. You'll need protections in place to keep you solvent when a costly crisis hits.
Otherwise, "solvency can be very fleeting," said USAA certified financial planner June Walbert.
To make sure you're the only thing fleet-of-foot in your life, here are four ways to lay a solid financial foundation.
Build a cushion
For life's pricey annoyances, there isn't MasterCard. There is an emergency fund.
It's a hassle to build if you don't have one, but you'll be glad you did next time your transmission sputters or your boss hands you a pink slip.
Walbert recommends setting up a high-yielding money market account dedicated exclusively to emergency money.
To fund it, besides curbing spending where you can, you might deposit:
• A bonus or financial gift from a relative
• A small amount from your paycheck every month – ask your employer to direct deposit it.
• Money you get back from a flexible spending account, a transportation reimbursement account or an insurance claim.
• An extra paycheck. If you're paid every two weeks, you'll get 26 paychecks a year. So in some months you'll get three instead of two. If your fixed monthly expenses don't change, you might be able to set aside one paycheck a year.
Live on less than you make
Earmark at least 10 percent of your gross income for retirement savings – which can be invested pre-tax in a 401(k) at work or in other tax-deferred savings vehicles.
Then live on 90 percent of your take-home pay and bank the rest for shorter-term savings goals like a down payment or vacation.
If you can swing it (it will be harder to do in areas with high housing costs - I know, I live in New York), don't let your debts (including mortgage or rent, credit card bills, loan payments, etc.) exceed 36 percent of your gross income, less if possible.
Adopt a pay-go, pay-off strategy
With a few exceptions, don't charge more than you can afford to pay off in full every month. Ideally, the only debt you should carry from month to month should be mortgage debt and student loan debt, the interest on which may be deducted on your tax return and which represent investments that can pay off later (your home and your education).
For new college grads who can't afford to pay outright to furnish their first place, Walbert suggests asking the furniture store if there is a 0-percent interest policy for one year. Then be sure to pay off the entire amount charged before the year is out. Otherwise, you'll get hit with deferred interest.
Pay off high-interest credit card debt as soon as possible, diverting some of the money earmarked for savings if need be to do it, Walbert said. It makes little sense, she noted, to pay 15-plus percent interest on credit card debt when you're only earning between 4 percent and 8 percent on your savings.
A health crisis can be a fast lane to debt if you don't have health insurance. But so, too, can long periods of disability unless you have disability insurance.
At a minimum, you want to have short-term disability benefits covering 100 percent of your gross pay for three months, and at least 60 percent to 70 percent of your pay for longer term disability. (This is typically what employers provide for their employees.)
If you're the main breadwinner in your family, Walbert suggests bumping up your long-term disability payments as close to 100 percent of your pay as possible. (Insurers aren't likely to offer policies that cover the full 100 percent, she said.)
As for life insurance, if you're the main breadwinner and have young kids, you might consider getting a term life policy – which is less expensive than whole life -- worth 7 to 10 times your annual salary, or whatever your calculate your kids will need to get them through college and what your surviving spouse will need until then and thereafter.
For car owners, Walbert recommends liability insurance on top of collision insurance for your car. Liability protects you in case you injure someone and wreck their vehicle.
And for renters, she recommends renters' insurance, which can cover the cost of your assets and liability in case someone injures himself in your home.
(USAA, it should be noted, sells insurance products. But Walbert does not and recommends clients shop around for the best policy.)