A Checklist of Financial Planning Staples

Time To Read 5 MIN READ

There are essential items you probably put on your grocery list every week—including bread, eggs and paper towels. There are also financial planning staples every family needs. Here’s a breadwinner’s checklist of seven financial essentials:

1. A will

This is where you name a guardian for your children and direct how your assets should be distributed when you die. If you don’t have a will, state law decides who gets your estate, and it can often take years for it all to wind its way through the legal system.

This can create problems for your survivors. In many states, for example, your surviving husband or wife would get only one-third to one-half of the assets that were in your name alone. Your children would get the rest. But if they’re minors, their share is administered by a court-appointed attorney until they turn 18 or 21, depending on when your state’s law says they’re adults.

If you don’t want to hire a lawyer to write your will, Quicken WillMaker can help you create the legal documents you need to protect your family and assets.

2. An emergency savings account

This is money you’ll need if you’re laid off from work or confronted with unexpected home repair or medical bills. Your priority for this money is safety! It belongs in a bank account or a money market fund, not in the stock market. Your emergency account should be big enough to cover at least six months of living expenses.

3. An employer-sponsored retirement account

If you have access to an employer-sponsored retirement account, it should be your first choice for your savings. Your company may also match your contribution—or part of it. The most common plans are the 401(k), the 403(b), which is used by nonprofit organizations like churches, schools and hospitals, and the 457, used by governments and municipalities.

You owe no taxes on your contributions or on their earnings until you withdraw them. Every plan has its own rules on what percentage of your salary you’re allowed to save each year. Federal law limits the dollar amount of your contributions. In 2010, this limit is $16,500 ($22,000 if you’re age 50 or older.)

4. An Individual Retirement Account (IRA)

The maximum 2010 contribution you can make to either one (or to both together) is $5,000; $6,000 if you’re age 50 or older. Your traditional IRA contributions may be tax-deductible, depending on your income and on whether you (or your spouse) are covered by a retirement plan at work.

Roth IRA contributions are never tax-deductible, but your withdrawals will be tax-free after you’re age 59-1/2 and have owned the Roth IRA for at least five years. You'll find more information on both types of IRAs here.

5. Homeowner's or renter's insurance

If you’re a home owner, your policy should cover the cost of rebuilding your house if it burns down. That’s its replacement value, which isn’t the same as its market value.

If you’re a renter, your policy should cover your possessions for their replacement value, not their “actual cash value.” The two sound alike, but their meaning is very different. For example, if you sold your living room couch, you’d get its actual cash value. But that’s probably a small fraction of what it would cost you to replace it with a new couch.

Whether you own or rent, make sure your policy includes adequate “loss of use” coverage. This reimburses you for your hotel and restaurant bills and other living expenses if you’re forced out of your home by an uninsured event, such as a fire.

6. Health insurance

Group coverage is less costly than an individual policy. So if you're not covered at work, your first step should be to find out if you're eligible for a group plan through a trade or professional association.

Until recently, the cost and availability of individual coverage has depended on where you live. In some states, you can't be turned down for health insurance. In others, you may be uninsurable if you have serious health problems. But with the enactment of federal health care reform on March 23, 2010, this is a rapidly changing landscape. Within six months, insurers will no longer be able to exclude children from coverage due to pre-existing conditions and dependent children will be able to stay on their parents’ policy until age 26. (Under state laws, children had usually been eligible for coverage as dependents only until age 18 or 21.)

The new law won’t require insurers to accept adults with pre-existing conditions until 2014. But between now and then, it requires the establishment of temporary ‘high risk pools’ to insure people with pre-existing conditions who can’t find coverage elsewhere. These ‘high risk’ pools won’t be permitted to charge more than standard insurance rates. You'll find more information about the health care changes that will be phased in over the next four years at newyorktimes.com, ehealthinsurance.com and insure.com.

7. Life insurance

If you have dependents, this is a must. For the biggest policy at the smallest cost, buy term insurance. It’s pure coverage, with no investment component.

How much life insurance do you need? A commonly used rule of thumb is that your policy should be five to ten times your annual income. More precisely, it should be big enough to generate sufficient income for your survivors when they invest the proceeds. If you assume they can earn 4% a year after taxes, a $500,000 policy, for example, generates $20,000 a year. (Remember, your insurance need is reduced by any sources of income your family will have from your savings, investments, spouse’s salary and Social Security survivors’ benefits.)

You can comparison shop online for a term policy at sites like selectquote.com, accuquote.com and efinancial.com.

If you’ve taken care of everything on this list, congratulations! Your financial house is in good order.