Make a Budget Pt. 2 – Investing and Life Insurance

dollars that have been planted in soil

If you read the first part of this series on the basics of how to make a budget, congratulations! You’ve taken the first step of true adulting. High five! Now prepare yourself, part two is a lot harder to think about, and even harder to motivate yourself for. We’re talking about investing and life insurance.

The Value of Investing

Out of the two topics we are going to address here, investing is the easy one. I mean, most of the time investing is seen as something wealthy people do, and you want to be wealthy, right?

It’s all about your preference, how you want to manage it and the amount of risk you’re willing to take.

There are many different ways to invest your money and some decisions you make about investing will just be based on your preference. We want to give you a couple considerations to get you started, but first, what kinds of investments are there?

  • Stocks.
  • Retirement funds.
  • Bonds.
  • Mutual funds.

And a whole bunch of other types and variations. The point is, there are a lot of ways to invest your money, and they range from high risk to low. The stock market isn’t the only way to invest, though it’s tied into a lot of other types of investments. It’s all about your preference, how you want to manage it (or if you want your investments managed for you) and the amount of risk you’re willing to take.
So what are some other things you should consider when you’re thinking about investing? Here are just a few.

  • First, pay down your debts, especially ones with a high interest rate, like your credit card.
  • When you start investing in your 20s you are allowing your money more time to grow. Fidelity illustrates just one example when you begin contributing to your IRA in your 20s and how much more potential you have compared to if you wait until you’re older. Remember, investments grow exponentially. That means that the longer they’re in there, the more they’ll grow.
  • There are risks with investing. The market goes up and down and sometimes you’ll lose money. But the best part about investing while you’re young is that you can leave that money in there and wait for the market to recover. It’s because of a fancy thing called dollar-cost averaging, which helps you mitigate a lot of risk. Basically, instead of trying to guess what the market is going to do, you constantly invest. This allows you to buy more stock when the market is down (like buying something on sale and then reselling it later) and less when the market is up, smoothing out the inevitable ups and downs that will come. The nytimes has a great write up on this concept so if you want to know more, check it out.

So that’s a brief summary of why investing is something you should strongly consider when you’re building your budget. Now, on to the more difficult concept – life insurance.

Life Insurance – Look Forward

Life insurance, for many reasons, is not something people generally like to think about, much less budget for. It not only involves looking wayyyyyy into the future but, let’s be honest, you’re investing into something that’s going to benefit a lot of people who aren’t you.

There I said it.

Life insurance covers the expenses that your loved ones will be left with after you die. At the very least, it will cover the burial and funeral costs which average between $7,000 and $10,000 in North America. More than you thought? Funerals and everything that goes with them are expensive, and the cost goes up every year.

So ask yourself, who is going to pay for all of that when I die? Will it be your parents? Your spouse? Your kids? Life insurance can cover this cost, and prevent your loved ones from having to pay.

The next thing you need to know about life insurance is that there are two major types: whole life and term.

Term Life Insurance

Term life insurance is purchased for a certain amount of time, and you only receive coverage while you’re under the policy. It is generally very affordable, because it offers no cash benefit.

Permanent Insurance

Permanent insurance means that it covers you your whole life. The biggest advantage is, if you purchase a policy while you’re young, your premium will be very low and will stay the same the entire life of the policy. There are many different typs of permanent life insurance, the most well-known being “whole life” insurance. Do your research and decide what’s best for you.

Life Insurance Protects Your Love Ones

Life insurance basically prevents your loved ones from taking on a great deal of debt and financial hardship after you die.

When you die, someone else becomes responsible for most of your debts. If you have a home, you want your life insurance to cover the mortgage or at least some of it if you die. Otherwise, your spouse will have to pay the entire payment on his or her own salary. If you have federal student loans, those will be forgiven when you die but private loans must still be paid. Life insurance basically prevents your loved ones from taking on a great deal of debt and financial hardship after you die.

Don’t forget investments and life insurance when you make a budget.

It’s easy to forget (maybe intentionally) long-term things like life insurance and investments when you go to make a budget, but don’t. Setting aside a little money to go towards these things while you’re in your 20s will save you massive amounts of money in the future.

In Part 3 we’ll give you some tips and tricks on being successful in your budgeting.