Friday, September 15, 2017

Today Only: Free Stock

Have you always wanted to stock, but never had enough money to invest?  Have you heard about people getting rich via Apple?  Do you love your iphone and want to buy the company?  Well, today is your lucky day.

Stockpile, an online stock broker I wrote about earlier this year, is giving away $5.00 worth of Apple stock. Today is the last day, so get yours while the getting is good.  Is there a catch?  Well, when you go to sell the stock, you will pay a $.99 sales commission, but other than that, nope.

I got my Apple stock.  Click here to get yours.

Is It Too Late To Save?

Many of us have read about how "John" saved an amount of money every year from the time he was twenty until the time he was thirty, and then never saved another penny, but, when ready to retire, he had more money than "Mike" who saved the same amount of money every year from the time he was thirty until the time he was sixty.  That definitely makes you think that saving earlier is better than saving later and makes you wonder if you should even bother saving  if you aren't young any more.  However, there is another side to that story.

How Much Will I Have?

According to this compound interest calculator, if you save $1000 per month for ten years, at the end of ten years you will have $155,929.29 if your return is 5% per year.  If you then quit adding money and let it continue to compound at 5% per year, at the end of thirty more years, you'll have $ 696,652.20.  On the other hand, the person who saves $1,000 per month for thirty years at 5%, will have $835,736.38.  

If you change the return rate to 8% the person who saves for 30 years ends up with $1,500,295.18, while her earlier saving sister ends up with $2,013,986.09.  The moral of this story is that you only end up with more money in the end if the return rate is high enough.

Is There a Catch?

At first blush the idea of funding your retirement in your twenties, and never having to worry about it again sounds great, but is it as wonderful an idea as it seems? Is there a catch?  

Yes. Actually there are two:

First, inflation means that the money you save in your twenties is worth more than the money you save in your fifties.  

Second, most people get promotions, raises or better jobs as they get older.  Even without inflation, $1,000 is a bigger part of your paycheck in your twenties than in your fifties.

Third, for many people, their twenties and thirties are high expense years.  


My first adult job was in 1983.  I was a first year school teacher so you know I wasn't getting rich, but I wasn't poor either. I made $14,300 per year.  To buy the same standard of living today would cost $35,144.98.  Using that $1000 per month figure, in order to not have to save today I would have to have saved more than I made (I don't remember exactly what my paychecks were back in the day, but I remember the first number was a "4".  Assuming that job has only kept up with inflation, then $1000 per month today would only be 1/3 of my income.  Big difference.

Increased Income

As I said, my first job was as a teacher.  Checking the salary schedule for that district, teachers get a $600/year raise for 25 years, so that the career teacher in her 50's makes about $16,000 more than the rookie.  Again, all things being equal, it is easier for the older teacher to save.

Different Expenses

Some people graduate from college with no debt, get a high-paying job and continue to live rent-free with Mom and Dad throughout their twenties--and they should be ashamed of themselves if they don't save.  However, many people today spend their twenties paying off student loans while toiling in jobs that aren't quite what they want either career-wise or salary-wise. 

Others have children and the expenses that some with them, especially when they are young--generally either daycare bills or reduced parental income due to reduced hours working. 

Young adults are either paying market-rate rent or buying houses at today's cost while many fifty year olds have either finished paying off the mortgage or are paying a much lower mortgage than is normal today.  

The Bottom Line

The bottom line is that compound interest is a wonderful thing.  The more you have, the more you make.  The stock market has been on a huge roll this year, and our net worth has increased by and amount that is about what our paycheck are--and we've been spending those checks.  

However, by the time the average person/couple reaches their 50's they are earning their biggest paychecks and they have most major child rearing expenses behind them.  If they are smart, their housing expenses as a percent of income are way down.  

How Much Does It Take?

Going back to the numbers in the first paragraph, if I had been able to save $1,000 per month at 5% for the first ten years of my working life (when I was making under $25,000 per year), and had never saved again, I'd have almost $697,000.  If I had started with nothing at 50, and was aiming for retirement at 65, with a nest egg of $697,00 and got 5% per year on my money, I'd have to save $2625 per month.  To put that in perspective, I've changed careers, but if I was teaching, I'd be earning $56,549 per year now.  While saving $2625 on that salary would be hard, it is at least less than the salary--and hopefully I wouldn't be starting at nothing in my fifties. 

It's Not Too Late

While saving earlier gives your money more time to compound, most people have some high-earning, low-expense years at the end of their career that allow them to bulk up retirement savings.  While you should save what you can for retirement throughout your career, know that you will likely have some "catch-up" years to put you over the top.  

*Part of Financially Savvy Saturdays on brokeGIRLrich.*

Friday, September 8, 2017

Should I Buy Insurance?

It seems that every time I turn around, someone is trying to sell me insurance of one type or another.  It doesn't take a genius to figure out that the ones selling are making money--why else would they do it--but does it make sense for me?

What Is Insurance?

No matter the type or who sells it, insurance is a risk management tool.  Insurance takes an unknown and turns it into a known. 

You don't know if you will require medical care next month, or if so, how much.  It could be that you won't require any care; it is possible that you will be diagnosed with and treated for a long-term very expensive illness.  It is possible you will have no medical bills; it is also possible you will incur hundreds of thousands of dollars in medical bills next month.  Health insurance can't keep you from getting that serious illness, but it takes those unknown bills and turns them into a known premium, plus co-pays and deductibles.

In the same way you do not know if your cell phone will spend the next year right where it belongs, or whether it will land in the washer or toilet.  The insurance on the phone turns the unknown (will I have to replace my phone) into a known--the premium you pay.

Why Do I Need Insurance?

You need insurance to protect  you from things you cannot afford to have happen.  You'll note that I said "things you cannot afford" as opposed to "things you'd rather not do".  

Insurance companies are not charities.  If they pay out more in claims than they collect in premiums, they go broke.  Most people who are paying the full cost of their insurance (health insurance is different because employers and the government kick in so much of the cost) will pay more in premiums than they will receive via claims.  

What Are Some Types of Insurance?

Life Insurance

Life insurance is money paid to your designee when you die, if you die when the policy is in effect.  As more fully explained in this post, it is either good for a certain term, or something that is maintained throughout your life.  

The purpose of life insurance is to make sure no one suffers financially if you die.  If the only hardship your death would cause loved ones is emotional, then you do not need life insurance.  

Burial Insurance

Burial Insurance is basically a type of life insurance that pays the proceeds of the policy to a funeral home rather than to he heirs.  Reality is that we will all die one day.  If you do not have enough assets to pay for your burial, and you are one of those people who will find a way to pay a bill, and a way to spend any extra cash, then burial insurance may be a good idea.  Unless you die prematurely, the chances are very good that your family can bury you for less than what burial insurance ends up costing you.  

Disability Insurance

Some type of disability insurance is a common fringe benefit.  Disability Insurance replaces part of your income if a medical or psychiatric condition makes it impossible for you to work (some policies specify unable to work at your current job).  

While Social Security offers some disability benefits, the standards for being considered "disabled" are generally higher for Social Security than for private insurance.  Also, particularly for high earners, private policies can pay higher benefits.

Disability insurance is usually divided into two types:  Short-term disability cuts off after a few months, but generally kicks in after a few weeks.  This insurance is designed to pay your family's bills if a breadwinner is sidelined with something from which they are expected to recover. 

Long-term disability generally has a longer "elimination" period--the time you have to be disabled before which you can collect on the insurance--but it can pay out for years.

Health Insurance

Health insurance is designed to help pay medical bills.  As we all know, health insurance is a common fringe benefit of middle and upper income jobs.  Health insurance obtained via the Affordable Care Act is subsidized by the government.  Because of these subsidies and they way our healthcare system has developed, health insurance is involved in most healthcare transactions.  This article talks more about healthcare and health insurance, but suffice to say that for many of us, our health insurance bill is one of our biggest. 

Homeowners'/Renters' Insurance

Your homeowner's policy pays to repair the damage done to your home by a covered peril.  Covered perils include (usually) wind, fire, hail, lightning, snow or other "sudden emergencies" such as broken plumbing. . Homeowner's insurance policies do not cover floods, and in some areas they do not cover wind.  

Your homeowner's policy will also, if you choose, cover the cost of the contents of your home.

In most states, a homeowner can choose between replacement cost or the depreciated value, but in no case will the policy pay more than the face amount.  What that means is that you (or your mortgage company) decides how much you want to insure the house for.  If you select $200,000, then $200,000 is the most the insurance company will pay, absent some special provision that says otherwise.  If your policy pays depreciated value, and the 20 year roof you put on the house 19 years ago is damaged in a hailstorm, they will only pay 1/20 of the cost of a new roof.  If you have replacement value coverage, they will pay to replace the roof, providing that replacement cost does not exceed $200,000.

While I do not know about policies in other states, Louisiana has a "value policy" law.  Basically, if damage exceeds 50% of the cost of the house, state law requires the insurance company to pay the face value of the policy.  The purpose of the law is to keep insurance agents from over-selling policies.  For example, if the cost to rebuild your house from scratch would be $200,000 and the house was 75% destroyed in a fire, in Louisiana, the insurance company would be required to pay you your policy limits, whether your policy was for $20,000, 200,000 or $2 million.  

You (with the approval of your mortgage company if you have one) can select a variety of deductibles, besides deciding whether your policy will cover replacement cost or depreciated cost.  Of course, the more you would pay out-of-pocket, the lower the premium.

While homeowners' insurance generally covers both the structure and the contents, renter's insurance covers the contents--generally the structure is the landlord's problem. 

The other thing that homeowers' and renters' insurance offers is personal liability protection.  Basically if you get sued for many of the common things people get sued for, other than automobile accidents or business disputes, your homeowner's policy may pay for an attorney and cover any judgment.  

Flood Insurance

Floods are not covered by standard homeowners' policies.  If you want coverage for floods you have to buy a separate policy.  While these policies are sold by the same agent who sells your homeowers'/renters' coverage, they are underwritten by and covered by the US Government.  While Allstate and State Farm probably charge different amounts for your homeowners' coverage, if they are quoting the same limits, both will charge the same for flood.  Flood insurance policies are serviced by the company that sold them--my flood insurance bill comes from Allstate and if my house floods I'll call Allstate, which will send an adjuster. 

Umbrella Policy

These policies may be called "umbrella" "excess" or "personal liability" but what they all do is provide another layer of coverage over your homeowners or automobile policy.  Because the other policy pays first, these policies are able to offer a lot of coverage for a little money.  They are primarily purchased by people with high net worths or high earnings. 

Extended Warranties/Product Insurance

When you buy an appliance, a car or even electronics, you are usually offered the opportunity to buy an extended warranty which covers defects or some repairs.  Sometimes (like with phones) you are offered the opportunity to insure it against things like dropping it.  The thing to remember about these warranties is that you are betting against someone who knows the odds.  If the warranty company pays out more in claims that it makes in premiums, it goes broke.   In short, if you can afford to replace the item if it breaks, the odds are you will be better off not buying the extended warranty.  

Automobile Insurance

Your automobile insurance policy, at a minimum, pays me if you cause an accident between us.  You can also get insurance to fix your car if you are in an accident, to pay your medical bills if you are in an accident and to pay you if I cause an accident and do not have enough insurance to cover your damages. I wrote more about auto insurance here.

Should I Buy Insurance?

If you have a mortgage, your mortgage company requires you to buy homeowners insurance, and sometimes flood insurance.   The law requires you to have health insurance.  Other forms of insurance are optional, so people wonder if they should buy them.

As noted above, when you buy insurance, you are betting against someone who has spent a lot of time and money calculating the odds.  Most people are not going to make money from their insurance company.  

You should buy insurance to protect you from things you cannot afford to have happen.  If you are struggling to make the payments on your new car, you not only need standard auto insurance (with a deductible), you probably need gap insurance to allow you to pay off the car on which you are "upside down" so you can get another one.  If you are driving an old car that isn't worth anything and you have money in the bank, comprehensive/collision coverage is probably overkill. 

If you are able to save money and have an emergency fund available, and are paying the full cost of your health insurance, the odds are you will be better off with a high-deductible plan.  However, if lack of first dollar insurance coverage is going to keep you out of the doctor's office when you need to be there, you may need a lower deductible, especially if you are the type of person who will pay monthly obligations but who has trouble in unexpected bills. 

As I said earlier, the purpose of insurance is to protect you from things you cannot afford to have happen.  It is not there to meet routine expenses and if you try to buy insurance to use for routine expenses all you do is increase the cost of those expenses. 

Disease Called Debt