I have a new coworker who is in his first job out of college. With super sweet parents who are paying his college loans and cellphone and car insurance, his expenses are minimal. So, when one of our insurance agents approached him about purchasing life insurance, I agreed that it was a great idea. Being young and healthy now helps him lock in reasonable rates on permanent insurance and gets the expense into his budget early in life.
Except, he didn’t have a budget.
My mouth dropped open and I just stared at him. He’s a smart guy and took the hint to lay out all his expenses on paper so he could evaluate the real expenses in his life. You know, the ones you completely forget about like oil changes and gaming memberships? I reminded him about the things he wasn’t paying: cellphone, car insurance, renter’s insurance and deductions from his paycheck like health insurance, disability insurance, and 401k that he wasn’t eligible for yet.
It was his turn for a jaw-drop. He looked at me and said “I have no money.”
I just smiled, because I had been there, and told him that entry level professional pay doesn’t stretch far even in a major southern city with 4 roommates. I told him that budgets aren’t just for people like me who are desperate to turn their financial life around, but are a tool to stay financially healthy from the start. I also told him the purpose of that life insurance policy was to leave money for his heirs…ones he didn’t have. I suggested he rethink the $500000 worth he was just sold at a premium of $300/month.
I went home that night and made him a priority list of savings, insurance and investments based on his situation. Here’s what I came up with:
- General savings of 3 months income
- Medical savings in an HSA that covers the out of pocket maximum on the policy
- Disability insurance
- Renter’s insurance
From here, I suggested a balance of life insurance and retirement savings. The policy he was sold left no room in his budget for retirement savings which on the grand scale of things is pretty morbid. This strategy assumed he would die an early death and wouldn’t need money for his golden years. I don’t know about you, but spending my retirement on government assistance with a boat load of life insurance sounds sad.
The next morning I gave him my little sheet of paper explaining the why behind each priority. I’m pretty sure he disregarded the renter’s insurance, but did tell me he was changing the life policy.
I feel so lucky to have helped him on his way. He told me I should be a financial planner. I laughed my head off. If only everyone had such straightforward circumstances, that might be a great idea. For now, I’ll stick to my day job.
*This post is a real life example of why I think everyone needs to budget and manage risks in their life and is not intended to be financial, investment or tax advice of any kind. I made these suggestions to my coworker as a concerned friend only.