7 Biggest financial decisons part 2

5. Protecting your assets Your most important asset is your ability to work. Disability insurance will pay you a percentage of your income, usually from 60% to 80%, if you're sick or injured and unable to work, but that income never increases. Living 30, 40 or 50 years on a fixed income is one of the surest roads to lifelong poverty. Consider the financial as well as physical risks when you're tempted to buy that Harley-Davidson or take up cliff diving.
You also need to protect the rest of your assets. That means making sure you have adequate auto and home insurance, and, for many people, an umbrella liability policy that provides extra protection against large damage awards in certain civil suits. Just about any lawyer can tell you stories about someone forced into bankruptcy by a damage award that exceeded the limits of his or her insurance coverage. See "4 ways to protect your financial freedom."
If you're self-employed, insulate your assets. Consider forming a limited liability corporation. It's easier to set up and maintain than most other corporate forms and will make it much harder for creditors and attorneys to go after your personal assets.
Example: At age 40, Joe and Dexter are each hit by a judgment in a legal case. Joe has an umbrella liability policy that pays the full amount. The judgment exceeds the limits of Dexter's homeowners insurance, forcing him to turn over the $73,329 he had accumulated in his taxable investment account and file for Chapter 7 bankruptcy protection. It will be seven years, give or take, before his credit rating recovers, but the real damage is the loss of the potential earning power of his investment portfolio. Dexter will have to start saving from scratch at age 40, and instead of a portfolio worth $546,047 at age 65, he'll wind up with just $180,220. Not having adequate insurance will thus wind up costing him $365,827 in lost principal and investment earnings.

6. How many children you have Today, there's a powerful financial disincentive to have children. Let's start by saying upfront that we all love children. They provide joy and excitement to every family, but this is intended to view them purely from a financial perspective. In the days before Social Security, there was a positive incentive to have lots of children. Not only did they perform necessary labor on the farm or in the family business, but they also were expected to care for their aging parents, come what may. According to the latest figures from the U.S. Department of Agriculture, it now costs between $145,000 and $290,000 just to raise a child through high school. (Higher-income families tend to spend more.)
Add anywhere from $60,000 to $130,000 more for a four-year college education. There are economies of scale as the number of children you have grows, of course, but there are very few multichild discounts available for college. See "6 reasons not to save for kids' college" and "Balancing kids' college and retirement savings."
The cost of a happy accident. Nobody who wants three children is going to be deterred from having that many, of course. But many people who really wanted to hold the line at two wind up with three, and sometimes more, by what is euphemistically called an accident. Just remember that this kind of accident is among the most expensive you can have.
Example: Joe has two children, which will cost him nearly $400,000 to raise to age 18 and $120,000 to send to a public university -- a total of $520,000. Dexter had planned to have two children, but a third came along unexpectedly as he and his wife turned 40. (See "Save a bundle on your new baby.") Even if Dexter scrimps and saves to spend half as much as Joe raising each child, the total tab, including $180,000 for college, will still add up to $480,000.
And because Dexter's income is half of Joe's, he can ill afford the expense. Now, instead of socking money away for retirement, he and his wife are using that money to raise their kids and send them to college.

The B-wordBudgeting doesn't have to be a straitjacket on fun. Find out how to budget your way to smarter spending.
7. Marrying for better or worse Take everything you own and divide by two. Deciding whom to marry may not seem like a financial decision, but you'll find out otherwise if you ever have to endure the pain of divorce. Bankruptcy, a legal judgment and even the IRS can't touch certain assets, such as money in retirement plans. But nothing is safe from the divorce attorneys. (See "10 steps to a money-smart divorce.")
On the positive side, getting married can double your income. Though the quaint notion that two can live as cheaply as one is dubious, it doesn't cost twice as much, either. Financial teamwork (see MSN Money's Love and Money Decision Center) early in a marriage can yield a substantial payback in later years, provided you stay together. Choosing someone whose long-term financial goals are similar to yours will reduce friction and help you stay on track.
Example: At age 65, Dexter and his wife decide to split up. (See MSN Money's Suddenly Single Decision Center.) They've tapped their retirement funds to put the last of their children through college. They've managed to pay off the mortgage on their $240,000 house, and it now represents the total of their net worth in today's dollars. They've both worked throughout the marriage, so alimony isn't an issue, but they will have to sell their home and divide the proceeds. Instead of living payment-free in the home they struggled 30 years to own, they'll be paying rent again -- on two homes.
As the examples of Joe and Dexter show, it isn't necessary to be an investment whiz to accumulate a substantial fortune if you make smart choices on a handful of life's big decisions.
At the end of his career, Joe has a net worth, including his home, of more than $2 million. He can retire in style with the security of knowing his conservative investments, with a 6% annual yield, will provide after-tax income of $91,000 until he's 95 -- and leave a $200,000 cushion.
Dexter's $120,000 in assets will give him only $4,000 in annual income after taxes. If he retires at 65, he'll depend on Social Security for a large part of his living expenses and will have only about two-thirds the income he had when he was working. Even if he works part time until he's 75, bringing home $10,000 extra each year, he'll have to save most of that money for the future and will have only $4,000 extra to bolster his income from Social Security.
By Richard Jenkins