Financial Priorities - List

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Paisley
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Financial Priorities - List

Post by Paisley » Sun Apr 14, 2019 9:06 pm

Thanks so much for the replies to my earlier question about financial priorities. I came across a list of them, seems to be ranked in descending order of priority.

Emergency Cash Reserve
Health Insurance
Term Life Insurance
401(k): Up to the Employer Match      
Bad Debt: Agressive Payoff Plan
Health Savings Account
Traditional IRA / Roth IRA / Backdoor Roth
401(k) / Roth 401(k)
Good Debt: Reasonable Prepayment Plan
Permanent Life Insurance
Long Term Care Insurance
Umbrella Insurance
Brokerage Account / Real Estate, etc.
529 Plan
Alternative Investments

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grabiner
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Re: Financial Priorities - List

Post by grabiner » Sun Apr 14, 2019 9:32 pm

Paisley wrote:
Sun Apr 14, 2019 9:06 pm
Thanks so much for the replies to my earlier question about financial priorities. I came across a list of them, seems to be ranked in descending order of priority.

Emergency Cash Reserve
Health Insurance
Get the health insurance first, since the most common emergencies are health-related, and they are much more costly if you don't have insurance. Also, under the Affordable Care Act, if you have low enough income that such things matter, you probably get a large positive expected return on your health insurance because of the subsidies.
Term Life Insurance
I would drop this a bit; you need to worry about your own needs first.
401(k): Up to the Employer Match      
Bad Debt: Agressive Payoff Plan
Health Savings Account
These are the three investments with big immediate returns. However, "bad" is not really the right characterization of debt; debt is good or bad to take out, but once it has been taken out, the importance of paying it back depends on the interest rate rather than why you took it out.

I would also put medium-interest debt next (5% rate or higher, except for student loans that you expect to be forgiven) in preference to retirement savings.
Traditional IRA / Roth IRA / Backdoor Roth
401(k) / Roth 401(k)
The order of these two depends on the quality of the plans. If you are in a fairly high tax bracket and have a good 401(k), it may be better to contribute more to the 401(k) in preference to a Roth IRA (unless you hold your emergency fund in the Roth IRA).
Good Debt: Reasonable Prepayment Plan
This means mortgages, low-rate student loans, and possibly auto loans with subsidized rates. Those are the loans you might keep even after you max out your 401(k), but it is usually better to pay them down before making taxable investments.

And I disagree on the order of the remainder:
Permanent Life Insurance
Long Term Care Insurance
Umbrella Insurance
Brokerage Account / Real Estate, etc.
529 Plan
Alternative Investments
Better:
529 plan (provide for the children's college before their inheritance)
Long-term care insurance (primarily to protect your estate)
Brokerage account
Umbrella insurance (needed if you have a lot of assets subject to judgement)

And the last two are not in the priority order at all; you need to know why you, specifically, need whole-life insurance or alternative investments before buying them.
Wiki David Grabiner

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Paisley
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Re: Financial Priorities - List

Post by Paisley » Sun Apr 14, 2019 10:38 pm

Insightful comments!
A few questions:
1. Where would you rank term insurance?
2. In terms of debt, just to be clarify, would you add a 3rd category = medium / average? And would you place it immediately above the Trad IRA / Roth? Any other categories of debt?
3. If you had VUL instead of Whole life, where would that go in your opinion?
4. Your insights indicate youve given this a lot of thought. Do you have your own full list?

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FiveK
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Re: Financial Priorities - List

Post by FiveK » Mon Apr 15, 2019 1:23 am

See also Investment Order for another good, if perhaps somewhat aggressive, perspective on this topic.

That list doesn't include insurance at all, perhaps because
- whole life in any of its forms, including Variable Universal Life, is usually not a good investment.
- term life either is (e.g., if you have others dependent on your income) or is not (e.g., if you don't have others dependent on your income) something you should have.

The oxygen mask analogy given there in regards to 529 plans also seems reasonable.

blackholescion
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Re: Financial Priorities - List

Post by blackholescion » Mon Apr 15, 2019 3:34 am

FiveK wrote:
Mon Apr 15, 2019 1:23 am
See also Investment Order for another good, if perhaps somewhat aggressive, perspective on this topic.

That list doesn't include insurance at all, perhaps because
- whole life in any of its forms, including Variable Universal Life, is usually not a good investment.
- term life either is (e.g., if you have others dependent on your income) or is not (e.g., if you don't have others dependent on your income) something you should have.

The oxygen mask analogy given there in regards to 529 plans also seems reasonable.
We followed this in general. Health insurance is assumed provided through work. For debts, we paid off anything close to 6% +- .5% using the “would you borrow money at x interest rate and invest it in the market” logic. The answer was usually no until that debt started creeping to the 4% range.

It’s really important to fund retirement before 529 if you have to make the choice. You can always use Roth IRA money for college or take out a student loan but you can’t always save more for retirement.

It is your decision to make on 401k maxing and Roth/IRA contributions. It all depends on your 401k setup. We focused on the 401k because our funds were good (vanguard) and expenses low. As a result we have smaller IRAs but the 401k is sitting very healthy.

Also get an umbrella if your assets exceed your regular insurance policies (home and auto) outside of what you can be sued for in your state in case of injury. For example, your state may have rules against retirement funds, saying a creditor can’t come after them. They are like $200 a year. Not expensive at all and give you peace of mind.

I agree with other posters on the insurance thing. You generally don’t need it unless you have dependents who rely on your salary alone or want to set someone else up. It’s usually not as good as taking that money and funneling it into a brokerage. Also check what policies your workplace has. Ours is pretty generous and included (we don’t pay for it and it is 3x salary) so it’s a nice chunk of change should anything happen to either of us. While we are younger, we felt like we didn’t need more since that money would cover the other person (god forbid) in the short term and in the long term they still have their earning power.

For a coworker of mine, he had twins and bought term life for his peace of mind on the future. He’s the sole breadwinner (his wife has higher than average earning potential but isn’t working to take care of the kids). It may not be the best financial decision since he’s barely over 30, but it lets him sleep at night. That is more important than a couple thousand dollars a year.

Our order was this:

Emergency Cash Reserve (6 months expenses)
401(k): Up to the Employer Match (while building emergency fund, max after)
Bad Debt: Agressive Payoff Plan
Traditional IRA / Roth IRA / Backdoor Roth
Brokerage Account / Real Estate, etc.
529 Plan

We are not eligible for HSA or mega Backdoor Roth , keeping mortgage at 4% and car at 2%, have umbrella but probably not necessary right now since taxable isn’t that high.if I was getting life insurance, I would have bought it the day we had our first kid regardless of the above order for peace of mind.
Last edited by blackholescion on Mon Apr 15, 2019 8:25 am, edited 1 time in total.

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ankonaman
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Re: Financial Priorities - List

Post by ankonaman » Mon Apr 15, 2019 5:14 am

The life insurance portion may depend on your age, your assets, family makeup and how you wish to leave money to heirs.

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Nate79
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Re: Financial Priorities - List

Post by Nate79 » Mon Apr 15, 2019 6:43 am

Permanent life insurance of any flavor belongs in the trash can. Did an insurance salesman put that list together?

smitcat
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Re: Financial Priorities - List

Post by smitcat » Mon Apr 15, 2019 7:11 am

Paisley wrote:
Sun Apr 14, 2019 9:06 pm
Thanks so much for the replies to my earlier question about financial priorities. I came across a list of them, seems to be ranked in descending order of priority.

Emergency Cash Reserve
Health Insurance
Term Life Insurance
401(k): Up to the Employer Match      
Bad Debt: Agressive Payoff Plan
Health Savings Account
Traditional IRA / Roth IRA / Backdoor Roth
401(k) / Roth 401(k)
Good Debt: Reasonable Prepayment Plan
Permanent Life Insurance
Long Term Care Insurance
Umbrella Insurance
Brokerage Account / Real Estate, etc.
529 Plan
Alternative Investments
I do not see disability insurance on the list - if you have a family this may also be important.

Strayshot
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Location: New Mexico

Re: Financial Priorities - List

Post by Strayshot » Mon Apr 15, 2019 7:39 am

smitcat wrote:
Mon Apr 15, 2019 7:11 am
Paisley wrote:
Sun Apr 14, 2019 9:06 pm
Thanks so much for the replies to my earlier question about financial priorities. I came across a list of them, seems to be ranked in descending order of priority.

Emergency Cash Reserve
Health Insurance
Term Life Insurance
401(k): Up to the Employer Match      
Bad Debt: Agressive Payoff Plan
Health Savings Account
Traditional IRA / Roth IRA / Backdoor Roth
401(k) / Roth 401(k)
Good Debt: Reasonable Prepayment Plan
Permanent Life Insurance
Long Term Care Insurance
Umbrella Insurance
Brokerage Account / Real Estate, etc.
529 Plan
Alternative Investments
I do not see disability insurance on the list - if you have a family this may also be important.
I think you really need 2 lists: one for individuals and one for those with dependents per smitcat’s comment. With a family, term and disability are a higher priority than saving for own retirement because the death or disability of the primary earner spells catastrophe (at least until the family hits a level of self insurance). Whereas a single person or even someone with a spouse who earns a reasonable amount may have absolutely no need of term insurance at all.

Jags4186
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Re: Financial Priorities - List

Post by Jags4186 » Mon Apr 15, 2019 7:58 am

Paisley wrote:
Sun Apr 14, 2019 10:38 pm
Insightful comments!
A few questions:
1. Where would you rank term insurance?
2. In terms of debt, just to be clarify, would you add a 3rd category = medium / average? And would you place it immediately above the Trad IRA / Roth? Any other categories of debt?
3. If you had VUL instead of Whole life, where would that go in your opinion?
4. Your insights indicate youve given this a lot of thought. Do you have your own full list?
1) Term should rank according to your need. If you are a single income household with a spouse who has low to no earning potential and children then I would put it high on the list. If you are a dual income household where both spouses could sufficiently support a family, it is medium/lower on the list. If you are single it doesn’t belong on the list.

2) I am against having gradients of debt. Debt needs to be serviced and adds risk to your life. Now there are some debt that is easier to hand than others. Low interest mortgage debt that is easily affordable would go low on the list. 5%+ interest debt should go high on the list.

3) You shouldn’t have VUL. The only reason I can think of that one might want permanent insurance is if you are very very wealthy and you are looking to protect assets from inheritance tax. Most people don’t have to worry about federal inheritance tax and most states exclude inheritance tax for children/parents.

4) My list is very short:

Emergency fund: done
Term life: done
Max out HSA: done
Max out retirement accounts: done
Invest excess into taxable accounts: done
Pay off low interest rate mortgage according to schedule: in process

If I ever am in a position where I have a lot of money I would pay off the mortgage regardless of the interest rate in order to simplify. I try to live my life without monthly recurring expenses. I want to consciously spend every dollar. It’s too easy to say “well XYZ is $10 a month”. I’d rather pay $120 for the year and then decide whether or not I am going to continue with that the following year.

smitcat
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Re: Financial Priorities - List

Post by smitcat » Mon Apr 15, 2019 8:05 am

Jags4186 wrote:
Mon Apr 15, 2019 7:58 am
Paisley wrote:
Sun Apr 14, 2019 10:38 pm
Insightful comments!
A few questions:
1. Where would you rank term insurance?
2. In terms of debt, just to be clarify, would you add a 3rd category = medium / average? And would you place it immediately above the Trad IRA / Roth? Any other categories of debt?
3. If you had VUL instead of Whole life, where would that go in your opinion?
4. Your insights indicate youve given this a lot of thought. Do you have your own full list?
1) Term should rank according to your need. If you are a single income household with a spouse who has low to no earning potential and children then I would put it high on the list. If you are a dual income household where both spouses could sufficiently support a family, it is medium/lower on the list. If you are single it doesn’t belong on the list.

2) I am against having gradients of debt. Debt needs to be serviced and adds risk to your life. Now there are some debt that is easier to hand than others. Low interest mortgage debt that is easily affordable would go low on the list. 5%+ interest debt should go high on the list.

3) You shouldn’t have VUL. The only reason I can think of that one might want permanent insurance is if you are very very wealthy and you are looking to protect assets from inheritance tax. Most people don’t have to worry about federal inheritance tax and most states exclude inheritance tax for children/parents.

4) My list is very short:

Emergency fund: done
Term life: done
Max out HSA: done
Max out retirement accounts: done
Invest excess into taxable accounts: done
Pay off low interest rate mortgage according to schedule: in process

If I ever am in a position where I have a lot of money I would pay off the mortgage regardless of the interest rate in order to simplify. I try to live my life without monthly recurring expenses. I want to consciously spend every dollar. It’s too easy to say “well XYZ is $10 a month”. I’d rather pay $120 for the year and then decide whether or not I am going to continue with that the following year.

"4) My list is very short:

Emergency fund: done
Term life: done
Max out HSA: done
Max out retirement accounts: done
Invest excess into taxable accounts: done
Pay off low interest rate mortgage according to schedule: in process"

Missing some key items in most lists such as health insurance , home insurance and umbrella policy.

Jags4186
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Re: Financial Priorities - List

Post by Jags4186 » Mon Apr 15, 2019 8:09 am

smitcat wrote:
Mon Apr 15, 2019 8:05 am
"4) My list is very short:

Emergency fund: done
Term life: done
Max out HSA: done
Max out retirement accounts: done
Invest excess into taxable accounts: done
Pay off low interest rate mortgage according to schedule: in process"

Missing some key items in most lists such as health insurance , home insurance and umbrella policy.
Health insurance is through employer. Home insurance is required from my mortgage holder. I have sufficient insurance to not need umbrella.

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dccboone
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Re: Financial Priorities - List

Post by dccboone » Mon Apr 15, 2019 8:20 am

Paisley: You mentioned in your post you came across this list. Can you tell us who the source was? I’m curious if it was someone in the financial services or insurance business. My list would be very different. Among the most important omissions is a budget.

TheDDC
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Re: Financial Priorities - List

Post by TheDDC » Mon Apr 15, 2019 8:22 am

Paisley wrote:
Sun Apr 14, 2019 9:06 pm
Permanent Life Insurance
Long Term Care Insurance
Umbrella Insurance
Brokerage Account / Real Estate, etc.
529 Plan
Alternative Investments
Wow. Your insurance salesman will love you based on this list. Why not term life instead of "permanent life"?

-TheDDC

UpperNwGuy
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Re: Financial Priorities - List

Post by UpperNwGuy » Mon Apr 15, 2019 8:28 am

I find it counterproductive to try to prioritize long lists of such things. Instead I divide my finances into needs and wants. Needs are needs and mostly have the same priority. Wants can be ranked or at least grouped into categories.

Broken Man 1999
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Re: Financial Priorities - List

Post by Broken Man 1999 » Mon Apr 15, 2019 8:54 am

I would suggest LTD insurance; if you became disabled, and have no LTD, many of the items on your list would probably be out of your reach. You really, really don't want to have to base your lifestyle on Social Security Disability Income.

And, remember your priorities aren't unimportant, but, life generally happens, despite our detailed planning.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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Paisley
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Re: Financial Priorities - List

Post by Paisley » Mon Apr 15, 2019 9:25 am

Fantastic input. This is an amazing community. A couple of questions regarding insurance:
1. Since for the general population (there are always outliers of course) term is pretty cheap, for that reason alone does it make sense to keep it near the top?
2. Is Perm Life helpful because it frees up retirement assets that would otherwise be earmarked for inheritance?

A general follow up to the overall list: if there is a ranking of the "use" of funds, then is there a corresponding ranking of the "source" of funds for these uses? For example, is there an appropriate order for using sources such as income, savings, low interest debt / lines of credit and sale of assets to fund these various items?

Dottie57
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Re: Financial Priorities - List

Post by Dottie57 » Mon Apr 15, 2019 9:36 am

Paisley wrote:
Mon Apr 15, 2019 9:25 am
Fantastic input. This is an amazing community. A couple of questions regarding insurance:
1. Since for the general population (there are always outliers of course) term is pretty cheap, for that reason alone does it make sense to keep it near the top?
2. Is Perm Life helpful because it frees up retirement assets that would otherwise be earmarked for inheritance?

A general follow up to the overall list: if there is a ranking of the "use" of funds, then is there a corresponding ranking of the "source" of funds for these uses? For example, is there an appropriate order for using sources such as income, savings, low interest debt / lines of credit and sale of assets to fund these various items?
Permanent life insurance is helpful to the salesman. He or she receives a large upfront commission. Don’t purchase permanent life insurance. Do purchase term life insurance.

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Paisley
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Re: Financial Priorities - List

Post by Paisley » Mon Apr 15, 2019 9:39 am

I have heard that insurance products like whole life are expensive and not necessarily all they are cracked up to be.

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Nate79
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Re: Financial Priorities - List

Post by Nate79 » Mon Apr 15, 2019 10:33 am

Paisley wrote:
Mon Apr 15, 2019 9:39 am
I have heard that insurance products like whole life are expensive and not necessarily all they are cracked up to be.
Understatement of the century.

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