Will A will directs how you want to distribute your assets. This legal document—
when prepared, witnessed, and signed—makes sure that the courts will respect your wishes.
If you are on active duty and are going on or have gone on a deployment, you have probably prepared a will. Your will is particularly important if you have children since you certainly want to decide who will become their guardian if something should happen to both parents. Your will also determines who gets the assets that are in your name alone.
However, be aware that any assets that you own jointly (most likely your house and possibly mutual funds) or that have beneficiaries (for example, individual retirement accounts [IRAs], life insurance, etc.) do not always pass on to your heirs according to your will. Instead, the state in which you had your principal residence at the time of your death may determine how your assets will be distributed.
Risk
Management
To protect your financial resources, you must recognize and reduce the financial risks in your life. To do this you need to understand what risks you are exposed to and how they might impact your resources. You will also need to learn how to manage those risks.
The important concept to understand in risk management is that you always obtain insurance against the major financial risks in your life. The corollary to this rule is to “self insure” for the minor risks in your life.
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Financial Pyramid,
ContinuedPreparing for Financial Disaster
Risk is a part of life, especially in the military. We all face potential financial loss from death, disability, illness, accident, injury, fire, or negligence. We face property losses due to theft or vandalism.
Risk cannot be totally avoided or compensated for financially, but an adequate, effective program of risk management can reduce the impact of a financial disaster. Creating such a program requires you to
• Accept the need for managing risk
• Identify potential risk exposures
• Recognize the alternatives to managing risk—that is gambling with disaster
• Establish and maintain an appropriate risk management program by insuring against risk
Major Risk A major risk is defined as one that could seriously affect you or your survivor’s financial position. For most of us, that means the cost of a major health problem, loss of a $15,000 car, death of a primary wage earner, etc.
The major risks in your financial life are normally covered through health, disability, automobile, homeowners (or renters), liability, long-term care (nursing home), and life insurance.
Some insurance you purchase privately, while your employer may provide others. For active duty Marines, your military benefits provide all but automobile, homeowners, and long-term care insurance.
Minor Risk Although everyone must decide for themselves what their minor risk
threshold is, risk includes periodic expenses that can occur such as a repair on an appliance, automobile, or other piece of equipment. Risk management theory instructs that if you have your financial life in order, you should be
“self-insured” for these minor risks. These risks will not “wipe you out”
financially. Minor risks should be easily handled by your emergency/liquidity fund.
MCI Course 8201 4-17 Study Unit 4, Lesson 1
Financial Pyramid,
ContinuedRelative Value of Risk
Since you cannot prevent all risks, you need to determine how likely it is that a major disaster might occur and how badly it could hurt you. This is more important than how frequently something might occur. As the relative value of risk increases, the expense it would cause you increases as well.
Use the following formula to determine the relative value of risk:
Relative value of risk = Dollar amount of risk Net worth
Example Should the Davis family protect their home against the risk of fire? The house is valued at $120,000, and the family’s net worth is $145,000. (Net worth is the current market value of what the family owns minus their total debts.)
Relative value of risk = $120,000
= 83 or 83 percent $145,000
If the Davis’ house burned down, 83 percent of their financial resources would be destroyed. We can see that they should insure against this loss.
Since the chances of a house fire occurring are high for everyone, your family should carry fire insurance on its home. In fact, all mortgage companies require it.
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Financial Pyramid,
ContinuedEmergency/
Liquidity Fund
The emergency/liquidity fund is the third level up on the financial pyramid.
Seventy percent of the American public never gets above the risk management level. These Americans are never able to establish an
emergency/liquidity fund because they live from paycheck to paycheck. As a result, they have to insure even the minor risks in their lives because they cannot handle an unexpected $300 automobile repair. Such expenses would break their budget.
The liquidity of an investment is the ease with which that investment can be converted to cash without loss. An emergency liquidity fund is a cash fund that helps you avoid converting your other investments to cash.
You need to be able to get your cash quickly if you need it for an emergency.
Therefore, emergency/liquidity funds should be kept in bank, credit union, or money market funds with a check writing ability. Be sure the fund is earning a competitive rate of return. Compare the rates of return among several funds. You can obtain your money from a savings account or money market account quickly without any penalty.
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MCI Course 8201 4-19 Study Unit 4, Lesson 1
Financial Pyramid,
ContinuedUse of
Emergency/
Liquidity Funds
Three major reasons for emergency/liquidity funds are that they
• Allow you to self-insure for minor risks
• Provide living expenses if you lose your job
• Enable you to never carry credit card balances from month to month
The table below explains the benefits of emergency/liquidity funds.
Major Benefit Explanation
Allows you to self-insure for minor risks
• As your own insurance company, you save insurance premiums.
• You can opt to
• Decline maintenance contracts
• Raise deductibles on insurance (automobile, homeowners, etc.)
• Drop collision insurance on old automobiles
Provides living expense if you lose your job
• Normal recommendation is that the fund should equal three to six months of essential household expenses
• A secure job might enable you to keep this balance to three months of expenses Enable you to never carry
credit card balance from month to month
• Paying off your credit card debts is the best investment you can make
• You can make 12 to 21 percent
(guaranteed) on your money after taxes without taking any risk. When you pay off your credit card, you pocket the interest that you would have paid on the balance.
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Financial Pyramid,
ContinuedObtaining
Investment Dollars
Setting aside money for a rainy day is never a mistake. Instead, it is a
practice that will help you find money to invest. For example, if you buy a 2-year old car instead of a new car, you will let someone else pay for the depreciation in the first two years and use the extra money for investing.
Here are some other tips to help you obtain dollars to invest:
• If you must go on a vacation, go locally by car instead of flying to an exotic location.
• Rent or buy reasonable housing instead of obtaining the largest residence you can get. Consider living on post when housing is available.
• Pay yourself first. Paying yourself first means depositing money into savings at the beginning of the month instead of at the end when you have no money left. Electronic transfers or allotments are an excellent way to pay yourself first.
Once you have your financial plan in order, including your emergency/liquidity fund, you are ready to start investing.
MCI Course 8201 4-21 Study Unit 4, Lesson 1
Lesson 1 Exercise
Estimated Study Time
10 minutes
Directions Complete items 1 through 8 by performing the action required. Check your answers against those listed at the end of this lesson.
Item 1 After gathering the relevant data, what is the sequence of steps to calculate your net worth?
a. List the current value of all of your fixed assets. List all of your liquid assets. List the current value of all of your jewelry, furniture, and
household items. Add the above values and then divide all of your debts b. List the current value of all of your fixed assets. List all of your debts.
Subtract your debts from the value of your fixed assets
c. List the current value of all of your fixed assets. List all of your liquid assets. List the current value of all your jewelry, furniture, and household items. Add the above values and subtract all of your debts
d. List the current value of all your fixed assets. List all of your liquid assets. Add the above values and subtract all of your debts
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Lesson 1 Exercise,
ContinuedItems 2
Through 7
Matching: In the space provided, place the letter of the financial term in column 2 that matches each definition in column 1. The answers in column 2 may be used only once.
Column 1 Definition
Column 2 Financial Term ___ 2. Building blocks for attaining
long-term financial security ___ 3. The means to reach
long-term goals
___ 4. What you hope to achieve ___ 5. Those expenses that are the
same or almost the same every month
___ 6. Those expenses that vary from month to month ___ 7. All monthly sources of
income
Item 8 A financial pyramid is a concept or tool used to
a. keep complete and accurate records that consider all known foreseeable expenses.
b. help you set goals for spending and saving your money.
c. determine your net worth and financial status.
d. evaluate where you stand in achieving short-, mid-, and long-range financial security.
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MCI Course 8201 4-23 Study Unit 4, Lesson 1
Lesson 1 Exercise,
ContinuedSolutions The table below provides the answers to the exercise items. If you have any questions, refer to the reference page listed for each item.
Item Number Answer Reference Page
1 c 4-5
2 c 4-6
3 b 4-7
4 g 4-6
5 h 4-10
6 d 4-10
7 e 4-10
8 d 4-14
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MCI Course 8201 4-25 Study Unit 4, Lesson 2