This week I want to finish up my take on personal finance. You should read part 1 of my philosophy first, if you have not already. In part 1, I discussed getting out of debt, building an emergency fund and saving heavily for retirement. In part 2, I am going to talk about insurance, saving for kid’s college and giving to others.
- Get out of Debt
- Build an Emergency Fund
- Save Heavily for Retirement
- Get Insured
- Save for Kid’s Education
- Give to Others
Part of responsible personal finance is carrying the proper insurance. This is responsibility you owe to yourself, your family and anyone that might be a beneficiary of your coverage. Navigating the world of insurance is overwhelming. Keep things simple and you will get the coverage you need without too much hassle.
So what insurance policies do you need? The answer to this question is can vary widely based on personal situation, but we will start with the basics.
Life insurance is a protection policy that attempts to cover your exit fees and prop your family up for as long as possible. A proper life insurance payout should allow your spouse enough time to secure a better job or to remarry. If you are single, you still should carry a life policy so that whoever has to take care of the situation does not have to worry financially.
I recommend 20 or 30 year level term life insurance policies. Do not go for cash value, whole life or whatever else the insurance agent may call it. If they make it sound like an investment, tell them no. If you want an investment opportunity, turn to mutual funds or real estate. The main reason is that you can get 10 to 15 times the coverage in a term policy over a cash value policy. Carrying a $1,000,000 policy for 20 years may only cost you $15,000 total in premiums. That’s a fair deal.
Make sure that you give exact information for the beneficiaries of you policy. Also update this regularly as your life status changes (marriage, children, etc.)
Look to your employer first to see what offering they have for life insurance. Then go to your bank or start researching places to buy online.
(If you don’t own a vehicle, skip this one)
You need adequate coverage for your mode of transportation. The cost of liability in an accident has skyrocketed. You have to consider costs to replace vehicles, medical costs, and any resulting “damages”.
You can get by with state minimums legally. However, if involved in a serious accident you could be putting your family and your estate at risk. I recommend carrying liability coverage of at least $250,000 per person/$1,000,000 per incident. In fact the best recommendation is just to bump this coverage up as high as you can afford. Ask your agent to give you prices for at least 3 different coverage levels so that you may make the best decision for your financial situation.
Liability is certainly the most important aspect of car insurance. Collision is probably second most. I drive old cars, so I do not carry collision. Collision coverage is to cover the cost of your vehicle in the case that you are at fault. My general rule of thumb in deciding whether to carry collision based on a vehicle value of $5,000 or more. I carry enough emergency funds to replace a vehicle under $5,000 without putting my family at significant risk.
Long Term Disability Insurance
I’ve already touched on life insurance, but the likelihood you or your partner become disabled is higher than dying young. You need to think about how much it would hurt your loved ones if you or your partner become disabled and lose your income. You need to have a way to replace most of your income.
Estimating the amount needed is much like estimating the least monthly expenses that I touched on in my philosophy part 1 for emergency fund. You need enough monthly income to cover all necessary costs (mortgage/rent, electricity, phone, water, food).
If your partner does not work, do not assume they do not need disability insurance. Think about all the things that they do, that you would be paying for if they became disabled. In my wife’s case (who is a stay-at-home mom), I would have child care, grocery shopping, cooking, cleaning and whatever medical costs associated with the disability.
Now that the basics are out-of-the-way, let us talk about what is left.
In your home, whether you rent or own, you have all of your worldly, priceless possessions. Some of these would be devastating to lose. There are many threats to their survival including fire, flood, weather, vandalism, theft, etc.
You need homeowners insurance when you own your own home. This covers the real building and all of its contents. Make sure that your policy covers actual replacement cost, as the price of building a house today is much more than the appraised value of your house.
One little known fact about homeowners insurance is that it covers you against anyone getting hurt by one of you or your family members, including your pets. This is true both in your home and away from your home. So make sure that you have good liability coverage worked into your homeowners policy.
Renters insurance is ridiculously cheap and covers all of your possessions. There is no excuse for not carrying it as the cost is usually in the $10 – $20 range. If you have any extremely valuable possessions make sure that you get a separate insurance rider to cover those items explicitly.
An umbrella policy is exactly what its name implies. It is typically a really high coverage policy that kicks in after exceeding the limits on your other policies. The premiums are usually relatively inexpensive because the policies are usually less called upon.
However, an umbrella policy can become very important in the case that you or one of your family members is the cause of a major accident or catastrophe.
Save for Kid’s Education
(if you don’t have kids, skip to next section)
Saving for your children’s education is a debatable subject. The trick is that securing your own financial stability is much more important for your kids future than preventing them from having student loans.
If you are putting away $100 a month for your kid’s college and at the same time carrying thousands in debt, your heart is in the right place. However, that $100 dollars will be much more beneficial to your family in the long run paying off debt.
So with that said, once you are comfortable in all the rest of your personal finances, start thinking about putting money away to pay for post high school education for your youngsters. The younger they are when you start, the better off they will be.
Each state has a 529 plan available for this purpose. Check with the plan specifics on whether the money may only be used in-state. Most states allow the use of the money outside of their state.
There are usually regular investment type accounts and prepaid tuition options. The prepaid options tend are typically tied to use in-state.
Research all the states’ plans to find the best ones. When I was researching, Ohio and Virginia had really decent plans. I chose Virginia over Ohio because I live there. I did not do the prepaid option because I didn’t want to restrict the money in-state.
The other college savings account option is a Coverdale ESA. I don’t know as much about these. They have similar benefits to the 529 plans, but you should research more about them to decide whether and ESA is a better option. Here is a good article on the differences between ESA and 529 accounts.
There is another option to consider. If you are not now maxing out IRA accounts for you and your partner. Consider using this as a college savings tool. You get the benefit of using the principal for tuition of immediate family members and all the tax benefits of the IRA account. On top of that, the money is not at risk if your child decides not to continue their education.
A combination of these three options is what you will end up with most likely. Start small with your contributions and build up where you can.
Give to Others
With our global population exploding at an exponential rate, the need for volunteers donating time and money grows as well. Consider your skills and look for opportunities to use these to help others. I am starting to look into Habitat for Humanity. I have acquired many construction related skills over three home renovations, and now I would love to share those skills with others.
My wife and I also put away a certain amount of money each month in a charity category. We use this throughout the year as opportunities to give arise.
Think about places that you may give help. It is not always in the form of money. Your time and skills are more valuable than you know.
In a nutshell these two articles sum up my current philosophy on personal finance. Through the years I have adapted and modified as I learn more. I am a simple person and I like my finances that way. I do not want to think about money, so I do everything I can to decrease the amount of time I spend on it.
Over the last 6 years my wife and I have made great strides to a secure financial future for ourselves and that of our children. We are continually trying to improve our process. We have gone from a family worth -$19,000 to just over $250,000 in 6 years. We live on a single income and have 3 children. I am a firm believer that your financial success heavily depends on your financial habits and not solely on the income you make. Learn how to live on $40,000 a year and you will live like a king on $100,000.