One of the main goals that many people set for themselves is to better handle their finances.
This goal is becoming more and more difficult to achieve, as people usually have multiple assets in various systems and platforms – bank accounts, insurance policies, credit cards, retirement funds, investment portfolios, digital wallets, company stocks and stock options, company shares and side hustles.
Keeping track and managing all these dispersed assets is not a trivial task. There are a few steps that can greatly help you to achieve the goal of financial protection.
If you expect simple things like “spend less than you earn,” then this is the wrong article. We know that you are smart enough to know the basics (even though it’s often quite challenging to respect even the basic principles!), so we’ll focus on slightly more sophisticated recommendations.
1. Have a healthy ratio between liquid and non-liquid assets
Liquid assets are those assets which can quickly and easily be converted to cash. Apart from the obvious example of cash, other assets that fall into this category are stocks of publicly traded companies, bonds, and investments in funds, for example mutual funds.
Non-liquid assets are those assets which cannot be quickly converted into cash. In this category fall shares in private companies. As these are private companies, you cannot expect to quickly sell your shares and convert them into cash.
Real-estate is also considered a non-liquid asset because selling real estate usually takes months. You cannot count on it if you need cash fast, for example, this month.
This differentiation is very important for your financial protection. Let’s assume, for example, that most of your assets are non-liquid. Then you might fall into the trap of having high net worth on paper but suffering liquidity problems due to the lack of cash when you need it urgently.
You might wonder, then, whether it isn’t good to keep most of your assets liquid. This is also not a good strategy because liquid assets usually have a small yield. Let’s assume, for example, that you want to keep all your assets as cash in the bank. You will hardly earn anything from that. In many countries, you might actually lose money because of negative interest rates. And if interest rates are lower than the inflation rate, you’ll effectively lose money too.
Therefore, it’s very important to keep a healthy ratio between liquid and non-liquid assets.
The liquid assets will be your safety net in case of unexpected emergencies that require cash.
The non-liquid assets will be your high-return investment for the long term.
But what should be the healthy ratio?
The answer varies, depending on your net worth.
If you are just starting to accumulate your wealth, then you should focus almost entirely on liquid assets until you have built your safety net. A good rule of thumb is to have liquid assets equal to one year of your net income.
So, if you earn $10 000 per month, then your safety net of liquid assets should be $120 000.
Once you have built that safety net, you should continue building your wealth with non-liquid and high-yield assets and replenish your liquid assets as your income increases.
If your non-liquid assets start becoming significant, e.g., 10x your liquid assets, you can opt for increasing your liquid assets to two years of your net income. Obviously, at that stage, you’ve reached a stage where you can afford a bigger safety net for peace of mind while, at the same time, still earning quite a lot from your long-term investments in non-liquid assets.
2. Have the right insurances
When most people think about insurance and peace of mind, they think of life insurance.
Life insurance is definitely important to protect your loved ones in the case of a fatal event happening to you. It’s not enough, though.
While people focus on life insurance products for the right reasons, they often neglect disability insurances.
Disability insurances protect people in the event they become incapacitated.
These insurance are very important because if you suffer a major illness or injury that leaves you incapacitated, your liquid assets will support you for only one year.
Government social help is usually minimal, even in the most developed countries, and is nowhere close to the real incomes people had before they became incapacitated.
In such a situation, you would have a hard time maintaining your quality of life after your safety net of liquid assets was depleted. Disability insurance kicks in in this situation. A good rule of thumb is for your disability insurance to be at least 50% of your regular income.
You can calculate the desired sum for your individual case by calculating the gap between your regular income and what would be left of it in the event of incapacitation.
Another important step is to revisit your life insurance every few years.
The reason is simple. You might have taken out your life insurance in your 20s, with a payout sum in line with your income at the time.
In your 30s, and then in your 40s, and so on, chances are high that your income and standard of living will increase. Because of this, you’ll need better protection from your life insurance.
People typically take out an additional life insurance, with an increased payout, appropriate to their current income. This ensures that their life protection will evolve with the evolution of their income.
3. Protect your digital and financial assets with digital legacy management
First of all, let’s briefly look at why your assets need protection.
50 years ago, most people had a bank account, an insurance policy, and real estate – very static assets. These days, the situation couldn’t be more different. People have various assets in addition to their bank accounts and insurance policies: company stocks, accounts in various financial systems, such as mobile banks and online trading platforms, employee stock options, investment portfolios, digital wallets with cryptocurrencies and other digital assets, and shares in companies or businesses. And the list continues.
The situation is further complicated when they reside in different places.
It is easy to imagine how difficult it is to keep track of all these assets – what they are, where they reside, how to access them. It is extremely difficult for the asset owners, but what about their loved ones?
The loved ones of the asset owners have almost no transparency about them because of their number and complexity, and the diversity of digital storage. The risk is very high that if something were to happen to the asset owners, their loved ones wouldn’t be able to identify and locate the assets – even if they had the perfect estate planning and inheritance documents.
Digital legacy management comes to the rescue in this situation. Digital inheritance services enable users to securely catalogue their digital and financial assets and designate their loved ones as beneficiaries.
The best part of digital inheritance services is that the top class of them have a mechanism for detecting when a fatal event has happened to the asset owners and proactively notifying the beneficiaries about the assets designated to them.
The beneficiaries don’t need to worry about remembering the assets and the important information associated with them. Digital inheritance services enable the asset owners to provide that information to the beneficiaries in the event of something happening to the owners. Their loved ones are then aware of the assets, can identify and locate them, and can claim their inheritance.
4. What about estate planning?
As we’ve already mentioned, estate planning was well suited to the old world of static assets. Let’s assume that you have the best-crafted estate planning documents.
And they have a catch-all clause that captures all future assets you might possess.
If something happens to you, will your loved ones know where these assets are? Or how to access them?
All the reports of billions of lost dollars in abandoned bank accounts and cryptocurrencies in forever-locked digital wallets tell a clear story. And by the way, many of these abandoned assets are actually the proceeds of estate plans.
With these three steps – a healthy ratio between liquid and non-liquid assets, having the right insurances, and using a digital legacy management service – you’ll be much closer to your goal of protecting your financial assets.