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Oct 62016

Why I Decided to Get Life Insurance

By |October 6th, 2016|General Personal Finance|Comments Off on Why I Decided to Get Life Insurance

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This article was sponsored by SelectQuote and was written by fellow blogger, Emilie Burke. All thoughts and opinions are her own.

If you’ve ever experienced the death of a loved one, you’ll know how difficult it is. Loss is always unexpected, and while my family would be grieving my loss, I don’t want them to worry about the financial burden losing me will make on them. I don’t want to leave them with another worry in an already difficult and stressful time.

As a single, 23 year old woman, I chose to buy life insurance for myself and make my sister the beneficiary. When I told friends and family of my decision, they questioned why. After all, I don’t have a husband or kids who would be impacted by my death. There were 3 main reasons why I chose to take out life insurance now instead of waiting until later.

I don’t want to put any additional burdens on my family.

I’ve heard that funerals in America today cost roughly $10,000. I don’t know about your family, but mine does not have that kind of money sitting around in a bank account. I remember when my Nana passed away listening to my dad and aunts talk about how expensive it was going to be and they had five siblings amongst whom to share the cost. If we were ever in that situation, my family would need some way to fund my burial expenses. This is where life insurance from SelectQuote comes in.

Also, I am planning to buy a house soon, and my family would need some way to make house payments without impacting their own finances (or until they were able to sell it.) I’m currently working to pay off my remaining $15K of debt. Although in my situation, if I were to pass away the debt would be dissolved, that is not always the case. If I had any co-signed loans, the co-signer would be responsible for the full payment of the loan. Additionally, If I were married, the debt would automatically transfer to my husband, who I would not want to burden with my loans either. I do not want to burden anyone with my financial mistakes when I am gone.

I want to help my family members after I am gone.

Although I am not rich by any stretch of the imagination, I try to help my family when I can. If something were to happen to my family after I am gone, they would have the life insurance money to help them out in a tough situation, such as losing their job. I want my family to know how much I loved them, and financially helping them is the only way I can help them after I am gone.

It’s low-cost and high return.

Right now, I can get a life insurance policy for cheaper because I’m young and healthy. Rates generally go up with age, especially as health issues develop. If I were to wait until I have a spouse and children, in say 10 years, to take out a life insurance policy, it would be more expensive, especially if any health issues were to arise between now and then. Hopefully in 20 years, when my life insurance policy term is up, I will be in a position to self-insure. Until then, it gives me peace of mind that my financial expenses will be taken care of after I pass away.

Traditionally, experts recommend buying life insurance with a death benefit that is 7 to 10 times your annual income. However, this could leave you under-insured. When determining how much insurance you’ll need, take into account how much debt you currently have and any future expenses like college or paying off a mortgage.

Consider also how you’d like your loved ones to live after they are gone. For instance, I’ve always wanted to take a trip to Europe, and when I pass away, I want my loved ones to go on that dream trip to Europe in my memory. Do you want to leave a legacy to your nieces and nephews or favorite charity? If so, you may want to consider that when determining your amount of life insurance. For me, a $400,000 life insurance policy is fine, but for someone who is a stay-at-home parent or takes care of aging parents, you’ll most likely want to insure yourself for more.

When I was pricing life insurance policies, I went online to SelectQuote. It took only 5 minutes to fill in the requested information. An agent was then given my information to price the most accurate quotes available, and within 5 minutes he called me with the quotes. SelectQuote also has options to price auto and home insurance, which was so convenient. After receiving quotes for auto insurance, I switched policies and was able to save a fair chunk of money per year!

One of my mentors always said “When you don’t make a plan, you plan to fail.” Regardless of your family situation, if you are not in a position to self-insure, you need some sort of life insurance. They say that two things in life are guaranteed-death and taxes- and I want to be as prepared as possible.

Oct 42016

Pay off your student debt

By |October 4th, 2016|Blog|1 Comment

You and your debt.

Getting rid of this guy.

You have to spend less than you earn. If you have $20,000 of student loans you have to spend $20,000 less than you earn plus an additional amount for interest. If you have a high interest rate (anything over 10%) this is an *emergency*. Debt that compounds at 10% or greater will double in seven years or less, left unchecked. Got $20,000 in debt and an interest rate of 15%? That’ll be $80,000 in 10 years.

If your student debt is an emergency you get it under control in three steps. If you have a credit card

  1. Figure out the exact amount of money you need to pay for food (more than $10 a day is far too much), shelter (more than $500 a month is too much), and only those things which you need to keep your job (I figure a cell phone plan? If you spend more than $40 per month you’re getting robbed.) The rest of the money gets sent as a payment toward your debt the same day.
  2. Sell everything you no long want. Be tough.
  3. Sell everything else if you could repurchase it for no more than 2x what you are selling it for, and you don’t need it to survive. Got a couch that you could Craigslist for $400?  Could you get a similar used couch for $800? Put it on Craigslist tonight.

This should pay down your high interest debt quickly. Of course *any* debt over 10% is a disaster, not just student loan debt. See if it is possible to refinance the debt at a lower rate as well.

If you don’t have a credit card also make sure that you save two months of expenses before making extra payments on a student loan. If you have to give it to someone trustworthy to hold because you can’t control your spending, do it.

If your student debt is between 4% and 10% you should pay it off as soon as you reasonably can. This isn’t a disaster, you don’t have to sell your couch. Keep your expenses to a minimum but don’t weep over every coffee you spend money on. Make sure that your payments to your student loans are more than the minimum. Preferably as much more as you can handle.  This is just about one of the best investments (besides going to college in the first place, college is usually a great decision, even with loans) that you can make.  All in all put aside no less than 30% of your income towards this.

If your student debt is less than 4% basically don’t worry about it.  

 

…What?

You need to make your payments, but 4% is long run inflation.  It’s certainly debatable whether your better off paying off the loan or making some other investment.  That other investment probably shouldn’t be sit it in a bank account, but if you aren’t contributing the maximum to your IRA or 401k you could completely reasonably fully fund those before wiping out your student loan.

 

But why?

Perceptive debtors may notice that there is a huge difference between how I think you should treat high interest debt (Sell the furniture, Never eat out, asceticism-good) and low interest debt (who cares?).  

That’s simple because of how interest rates work. When someone says that a thing has exponential growth they often just mean it as a stand-in for really fast, and that’s kind of true and kind of false. Exponential growth can start fast or slow, but at some point it can always get out of control. Anything with compounding interest grows exponentially.

To get an idea of how fast a balance will grow, a quick useful estimate is the rule of 72. If you divide 72 by the interest rate you get the number of years it takes for a balance to double for a given interest rate. For example, if you have $2000 and it is growing at 12% interest it will take 6 years to become $4000. This works for any balance. If you have $150,000 growing at 12% it will take 6 years to be $300,000.  This is why it is important to start saving for retirement early. Even $10,000 saved at 8% interest doubles every 9 years, after 45 years (5 doublings) you end up with $320,000.

This is also why it’s important to squash high interest rate debts fast. Left unchecked they can get out of control. That’s also why it can be worth it to sell your $400 couch today even if you will have to spend $800 to buy it back later. Of course, how much later matters, as well as how high the interest rate is, but have a graph:

couchyears

Above the line means it’s worth selling the couch, below the line it’s worth keeping the couch. You’ll notice for low interest rates its basically never worth it. You’ll notice that for 10% interest the graph the turning point is 8 years. If you can your loan paid off faster you don’t have to sell your couch. If it will take longer, start taking pictures of the thing.

Quick tips and tricks

  • Always make your student loan payments on the same day, preferably a good amount of time before the due date, and check before the due date that the payment processed. Sometimes if you make multiple payments during, like, October, it’s easy to get confused next month and think that you’ve already paid for November. Most missed payment stories I’ve heard are some version of this. It pays to be organized.
  • If you’ve set up automatic payments make sure to check every month that the payment went through. The benefit of automatic payments is that most of the time you will be fine if you forget one month, after all the system makes the payment for you, it isn’t an excuse to check-out from the process entirely.

 

brokeGIRLrich
Sep 202016

You’ve Come into Money

By |September 20th, 2016|Blog|4 Comments

So what happens when you suddenly come into a large sum of money?  Perhaps you were on the receiving end of an inheritance, got lucky in the lottery, or you found a bunch of Aztec gold in your basement.  How  you got the money doesn’t really matter, but for the purposes of this discussion I’m referring to some sort of one-time lump sum that you received.  If you suddenly got a big bonus at work, that qualifies for this discussion, if you suddenly got a big raise it doesn’t.

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Thanks to 401kcalculator.org for the picture.

Don’t shout about it on Facebook

Something like 40% of the population considers themselves to be the world’s foremost expert on how you should spend your money.  Almost 100% of the population has a problem they think can be solved by applying more money to it.

If you suddenly come into some money people may overcome their sense of propriety and start bugging you about it.  The larger the amount is the worse it will be.  The more it appears that you didn’t “work” for the money (inheritances and lotteries for example) the worse it will be.  Depending on how you came by the money some people may already know that you came into some money.  That’s really too bad.  You get permission to tell your CPA, and your spouse.  (The rule for spouse’s and CPA’s is that if you can’t trust ’em, replace ’em.)

I know a number of 20 somethings whose own parents don’t know that they are sitting on a six figure net worth.  Ultimately, there just isn’t any reason for most people to know about your financial situation.

Additionally, if you haven’t told anyone about the priceless treasures you dug out of the dirt in your basement, I estimate that it lowers the chances that you’ll be visited by the vengeful spirits of the restless dead.  How would you like it if people started showing off treasure you hid long ago?

Taxes!

Make sure that you understand the tax implications of your windfall!  Gifts generally avoid taxes and the taxes are generally the responsibility of the giver.  Inheritance can have a tax associated with it depending on the size of the inheritance.  Bonuses are taxable at your regular rate, and could possibly push you into another tax bracket. (Which only matters for the extra money).  You want to make sure that you account for the taxes ahead of time and set aside to enough money to pay them.  You don’t want to pay off a bunch of debt, or your house, and then realize that you owe the IRS $250,000 in taxes. It can help if you increase your 401K contribution substantially and use the windfall money to eat, rather than your salary.

Even the Aztec gold gets taxed.  If you found a lot of it you might even end up giving up roughly half to taxes.  You might feel inclined not to report this found gold on your taxes, but I wouldn’t take that risk.  The curse of a doomed civilization is enough to worry about, you don’t want to wake up in a cold sweat over the IRS too.

Pay off Debt, Save and Invest

If you have high interest debt paying it off is the top priority for any money that isn’t earmarked for “makin’ sure you don’t die”.  Just because this is “found money” doesn’t change anything.  If you’ve ever played a real time strategy game you should know this.  The first thing you do is get your economy stable.

We Require More Minerals

If you don’t have any debt, great!  You should strongly think about investing the windfall?  While, you could go ahead and simply stick it all into the index fund of your choice all at once.  Instead I recommend parceling the money out into 12-24 equal pieces and only investing one piece per month until you are fully invested.  This will average your money into the market and reduce your risk of buying at a market top.  This is called dollar cost averaging if you’d like more information on the subject.

If you came into Aztec gold you may want to do this as well.  Rather than selling it all as a lump sum, instead sell some every month and transfer it into the market.  This way you reduce your risk of selling it all at a particularly low price.  Investing your filthy lucre is probably a better idea than sitting on it.  The antediluvian ghosts which haunt you now have been around long enough to appreciate the power of compound interest. Investing wisely will make those unearthly horrors far less likely to vent their frustration on you.

Sep 142016

How much should I save by 25?

By |September 14th, 2016|Blog|6 Comments

The answer here is obvious. It depends, or variously as much as you can.

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Alright.  Probably what you care about is how much your peers have saved by this point? Well according to the US census bureau the median person between the ages of 25-34 has $6,676, in Net Worth.  This is possibly due to a significant amount of student debt overhang.  The problem with this is that the number is either too low or too high depending on the context of your individual situation.

Let’s say you graduated with a high school diploma and skipped college going straight to work.  That gives you roughly 7 working years by the time you are 25.  If you obtain a job making roughly $12 per hour, or ~$24,000 annually you need to save roughly 20% of that (~$4,800).  Over 7 years that adds up to $33,600.  You don’t have any reason to have student debt, a car payment, etc so that should leave you with a net worth of $33,600.  If you’ve been clever with your retirement accounts the way taxes work could have netted you an additional $1,000 per year, putting you at $40,000.  If the money has been invested over the last seven years in an S&P 500 index fund then you should have something more like $55,000, so that’s your answer.  You should have $55,000.

If you went to college and ended up with the median student debt of $15,500 and the median income of $50,000 you’ll wake up 22 with a net worth of -$15,500 and the interest clock ticking.  Fortunately you should be able to pay that off in two years saving about $10,000 per year.  The amount of debt interest adds at this point isn’t super significant for small payoff periods (like a few years).  You should end up 24 with between $2,000 and $4,000 of net worth and no debt.  That just leaves one year to catch up to the high-school diploma, but you won’t, you save only $10,000 this year.  You should have $13,000, adjusted by whatever your student debt actually was.  

Interesting point, it’s actually a little hard for the dude with the college degree to catch up with the high school degree dude. Assuming that each of your investments earn 10% in the future and you each save 20% of your income, high-school dude saves about $5000 and earns another $5000 from investments for a total of $10,000 being added to his net worth annually.  College guy saves about $10,000, but is only earning $1,300 from his investments, adding $11,300 to his net worth annually.  Sure, college guy catches high-school dude eventually, but it’s sure harder than you’d think.  

If high school dude had saved just a little bit more, or had an extra year of work college guy might never have caught him. Investment earnings matter!

How do you make sure you do all of this saving and investing sensibly?  Well, first off you’ll want a Roth IRA (contribution limit currently $5,500).  High school dude has been almost maxing his for the last 7 years.  College guy just got started, and needs to also be putting the money in a 401k. Now these are generally accepted guidelines to retire at 65 and they also depend on investment returns in the future looking a lot like the investment returns of the past.  That may or may not be true, adjust your savings accordingly.

brokeGIRLrich
Sep 32016

Best Books for Beginning Investors

By |September 3rd, 2016|General Personal Finance|Comments Off on Best Books for Beginning Investors

 Nowadays, it is encouraged for young adults and professionals to start investing early. This allows his or her assets to generate more returns over time. Investing just a few years early can translate into thousands on additional funds that you can put into your retirement funds to make your future more secure.

While it’s important to invest early, it’s also important to invest wisely. Let’s take a look at several investing books that can give essential financial insight for young investors. These are extremely informative and it will leave a good impact on you.

The Intelligent Investor

This is described as one of the best books on investing per Warren Buffett. Investors can gain impertinent knowledge when reading those chapters and they can reread this book especially when the stock market goes weak or strong.

The Little Book that Beats the Market

Investing is quite simple but it’s not easy all the time. This book focuses on the simplicity of investing and it uses 6th grade math and plain language. However putting it into practice is another story.

Beat the Crowd by Ken Fisher of Fisher Investments 

This is a straightforward guide for a think-it-yourself investing. This book shows you how to consider thinking out of the box to find real opportunities that are at play. A lot of people believe that by doing the opposite of everyone else is the key to avoid faulty investment decisions – although there’s more – this book will provide you knowledge to filter the noise and avoid common investment pitfalls. Find out more about Fisher Investments Beat the Crowd.

Rich Dad, Poor Dad 

This is a classic must-read for young investors. This book advocates investments that produce periodic cash flow for the investor while providing equity value. It also stresses the importance of financial literacy and financial independence as the goal to avoid the race of corporate America.

The Most Important Thing

This is a very useful book as it teaches you the keys to a successful investment and it will also teach you about critical thinking that is important to be able to keep up with the trends in the stock market.

The Dao of Capital 

Looking to have a positional advantage in the world of investing? The methodology of Austrian investing might just be for you. This is a book by a real risk-taker practitioner in the stock market.

Buffett: The Making of an American Capitalist

Discover the value of investing. This book has changed a lot of lives of investors.

The Misbehavior of Markets: A Fractal View of Financial Turbulence

A realistic financial book ever published, this book talks about the criticism against the modern finance theory which is usually built on the underlying assumption that distributions are just normal.

The most successful investors did not achieve what they are experiencing overnight. It takes years wherein they honed their skills through research and practice. Reading these books will help you on your investment journey. Add these to your reading list – they are definitely a good read to improve your investment skills and also a great guideline for you.

Aug 312016

How You can Build the Perfect Investment Portfolio

By |August 31st, 2016|General Personal Finance|Comments Off on How You can Build the Perfect Investment Portfolio

Black MoneyInvesting isn’t for the faint of heart. Markets go up and down – historical trends have proven that the stock market moves this way. There is no such thing as achieving a “perfect performance” through market timing or even just picking out what you think are the best stocks to add to your investment portfolio, however you can definitely build a solid portfolio that allows you a margin for success and generally avoid the stress and worry that goes along with the market volatility.

Here are several considerations to keep in mind to build that investment portfolio just for you.

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