Everyone wants financial security and peace of mind so they can enjoy their life. But every now and then we are bothered by financial worries – what will happen if I lose my job? Will my family be able to maintain their quality of life if something happens to me? Do I have too many loans and liabilities? 

Don’t worry. Most people have these same concerns and it is absolutely normal to worry about these issues, due to your sense of responsibility towards your loved ones and your genuine desire to ensure financial security for your family. 

These worries are not unrealistic. There are a few major risks which might severely threaten your financial security. The good news is that if you protect against these risks, you’ll be on the road to ensuring financial security for you and your family. 

Let’s review these risks and see how we can protect against them. 

Risk one: Your liabilities are more than your assets

This is also called Debt-to-Asset Ratio. There is a very simple calculation that you can do in order to check it. Take a sheet of paper and divide it in two. In the first section, list all your liquid assets.

These are assets that you can turn into cash relatively quickly:

• real estate,
• money in bank accounts,
• company stocks (of public companies).

Then add up all of these assets. It’s important to list only liquid assets.

For example, you should not list life insurance, unless you can turn your policy into a cash equivalent at any given moment, or a share in a private company, unless you can sell your share at any given moment (which is not usually the case for equity in private companies).

In the second section of your paper, list all your liabilities. These are primarily loans, leases, mortgages, and credit card debts but of course can include any type of liability – money that you owe to institutions or private individuals. Add these up.

Now, having these two sums, the Total Debt-to-Asset Ratio calculation is Total Liabilities/Total Assets. Divide the sum of your liabilities by the sum of your assets. 

As a general rule, the ratio should not be more than 0.5. I.e., your liabilities should not be more than 50% of the sum of your total liquid assets. Ideally, your target should be 20% or less. 

Having liabilities of more than 50% of your assets is a big financial risk. In this case, you should set as a priority limiting any new liabilities, e.g., new loans or leases. Drastically reduce your current liabilities and, as much as possible, increase your assets, until you reach a healthy ratio. 

Risk two: You don’t have life insurance

Life insurance is a great way to protect your loved ones should something happen to you. The insurance payout should enable them to maintain their quality of life. When choosing an insurance provider, make sure to choose a company with a good reputation.

Also, when calculating the amount of your insurance payout, analyze for how many years you would like to ensure that your family will maintain their quality of life if you are not there. If, for example, your family needs 50K per year, and you want to secure them financially for 10 years, your insurance payout should be 500K.

Still, be aware that insurance companies are not obliged by law to inform your family members about the policy and their rightful payout. Your loved ones might not remember about the policy after 20 or 30 years, so make sure to hedge against that risk through simple and free digital inheritance protection. 

Risk three: You don’t have digital inheritance

Digital inheritance services are a great and easy way to ensure that if something happens to you, your loved ones will be aware of your digital and financial assets and be able to identify and locate them. 

People these days have complex and diverse assets, which does not necessarily mean that they are high net worth individuals. People have bank accounts, pension funds, stocks and options, real estate, company shares, etc. When moving to other countries, they often also have assets in those countries. 

All this makes it difficult for the family members to know about the very existence of these assets. They are not able to identify and locate them, and as a result, there is a high risk that they won’t be able to inherit these assets:

• life insurances,
• pension funds,
• digital wallets,
• stocks,
• options
• company shares. 

Digital inheritance services ensure that family members will be proactively informed about the designated assets should anything happen to the asset owner, so they will be aware of the assets and able to identify and locate them. 

Many digital inheritance services offer additional features and protection, such as legal protection and tax advisory services. This is a great way to protect your assets and your loved ones – and quite an easy way too! 

Risk four: You don’t have disability insurance 

Even if you have life insurance, you should consider disability insurance. Life insurance hedges against a fatal event, but what about an event that leaves you incapacitated?  

In this situation, disability insurance can be of great help. It can ensure that you and your family will be able to maintain your standard of living, despite the inability to continue working. 

Risk five: You don’t have an additional retirement fund

Ok, let’s make it clear: we don’t mean public or private retirement funds. They were a great source of financial security years ago, but these days, we see an increasingly aging population. Retirement ages are continually rising, and the gap between remuneration and pensions gets bigger and bigger.

Now it is obvious that young people cannot rely on pensions to maintain their financial stability at retirement. The gap between their income while working and their future pensions will be so big that it will seriously jeopardize their financial stability and that of  their families. 

How should we protect against that? 

Invest in passive income streams. The easiest way is to allocate a certain amount of your income to the periodic purchase of company stocks or funds, e.g., ETFs (Exchange Traded Funds).

This technique is known as dollar-cost averaging (DCA) and is a great way to secure an additional income during retirement. By slowly piling up your stock portfolio, at your retirement, its yearly return could provide a good stream of income for you. 

Let’s make a very simple calculation. If you allocate $500 every month, resulting in 6K per year, for 25 years, you’ll allocate $150K into your stock portfolio. But that won’t be the sum that you will have!

Due to the yearly returns, which you can reasonably expect to be anywhere between 5% and 10%, the sum that you’ll have after 25 years won’t be $150K but close to $500K! This calculation assumes an average return of 8%, but even with 6%, you’ll end up with a very solid sum.

This means that even if you start at the age of 40, when you reach the age of 65, you’ll have half a million dollars in your stock portfolio. 

Now, because you won’t be adding any further money to your portfolio, you will merely enjoy its returns. 8% return on your $500K means $40K income per year. Not bad as an additional income stream! 

Of course, the earlier you start and the more money you allocate, the bigger your retirement portfolio will be. 

Risk six: You don’t have emergency savings

The goal of having an emergency fund is to be prepared to face and cope with possible emergency situations. 

Some people might argue that the emergency fund is US specific and that if you are in most of the European countries, you don’t need an emergency fund because of the well-established national unemployment funds. In Germany, for example, if you become unemployed, you’ll continue to get 75% of your last remuneration for the next year. 

Still, an emergency fund will give you the confidence that you will be able to meet unplanned crises in your life more comfortably. 

If you are in some of the European Union countries with well-established unemployment funds, you can maintain a private emergency fund for 6 months ahead. This means that your fund should cover your regular expenses for the next six months. 

If you are in the US or another country where such government unemployment funds are inadequate or non-existent, it’s good if your fund can support you for a whole year. You might ask, should I accumulate a bigger fund, e.g., for two or more years? We don’t recommend that.

The reasons are several:

• If you keep money in the bank, you are more or less losing money, as the interest rates in most banks are lower than the inflation rate. So it just doesn’t make sense to keep a lot of money in the bank, e.g., an emergency fund for more than a year ahead.
• If something happens and you need funds to sustain you for many years ahead, there are other means to ensure that, for example, disability insurance or savings life insurance. 

Financial security is top of mind for many people. With the above simple steps, you can ensure that you and your family are financially protected and secure. And remember – it’s never too late to start!