Sunday, April 21, 2013

Lesson 6: Insurance


Financial Planning for the Recent Graduate




You’ve heard the phrase, “offense wins games, but defense wins championships”.  Whether you’re on a football field, dribbling down the court, or talking about your finances, every good offense needs a good defense.  You need a way to protect your offense (cash, savings, investments), with a good defensive strategy (insurance).  After all, your #1 asset is yourself, so we’ll explore the best options to protect you.  There are a lot of insurance plans out there, so we’ll make sure to cover the essentials. 



Insurance, in general, is simply a way to transfer the risk off of you and onto the insurance company.  Most all insurance plans have a deductible, which is what you pay when filing a claim.  Generally, the higher the deductible, the lower the monthly payment.  The lower the deductible, the higher the monthly payment.  That’s because if your deductible (what you pay) is lower, they are taking a greater risk of paying more if you utilize the insurance, so the insurance company raises the monthly payment to protect themselves. So for example, if you have a $5,000 deductible on your health insurance and you get sick, you will pay up to $5,000 out of pocket before the insurance company has to pay anything.  I also recommend working with an independent insurance agent who can shop many different insurance companies to give you the best price for the best product.  


Health Insurance:

Often, your company will have a plan for the employees to take advantage of.  Be sure to review the details of the plan, including the deductible, how much they will cover above the deductible, and if you can find a plan on your own with the same conditions for cheaper.  Group plans are great, but you may be paying more to your group plan because someone in your office uses tobacco. 

Check out ehealthinsurance.com. They have a wide variety of health and life insurance options and it shops around for the best price for you.


Car Insurance:

I love this article from SmartMoney that explains how to shop for car insurance:

I also like CheapCarInsurance123.org, which will match you up with the car insurance providers in your state so you can shop around for the cheapest option.  In many cases, Liberty Mutual is the cheapest option.  No matter what you go with, make sure to ask for discounts you may be eligible for (military service, fraternity/sorority involvement, driving fuel-efficient vehicles, anti-theft features on the car, university discounts).

Life Insurance

Life insurance is another benefit that most employers will provide for their employees, but if they don’t, it’s another important insurance to cover.  The more you acquire in your life (car, house, significant other, kid(s), etc.), the more life insurance you will need.  I recommend term life insurance (no matter how hard the insurance agents push, stay away from whole life/cash value insurance), and I’ll let my friend Dave Ramsey explain why in this article

I like shopping Zander Insurance Group and ehealthinsurance.com to find great term life insurance policies.

Disability Insurance



Remember when I mentioned protecting your #1 asset earlier?  What did I mean by that?  You are the source of your income.  If you are unable to work, whether you get very sick or disabled, you won’t be able to work and generate income.  This is where disability insurance comes to the rescue.  Disability insurance will pay you for the time period you are out of work due to an illness or injury. With disability insurance enters in terms such as elimination period and benefit period.  Elimination period (waiting period) is the period of time you have to be disabled before you start receiving a check, and benefit period is the length of time you’ll receive your checks.  A longer elimination period means less cost on your monthly payment (vice versa).  A longer benefit period, however, means higher monthly payments.  For a more detailed explanation, here’s a great article to read: 

Typical short-term disability plans pay for 2-6 months, depending on your plan.  Long-term disability plans can pay for a very long time, usually up to the age you determine on your plan.  When shopping around for a STD plan, remember: you have an emergency fund in place, so if you have the cash, you can often afford to have a higher elimination period to lower your monthly payment.  When you’re shopping for your LTD plan, make sure your short-term doesn’t overlap with your long term, and make sure there is no lapse in insurance during that time either.  So do the math:  Elimination period for your LTD plan = elimination period of your STD plan + benefit period of your STD plan.

I like both Zander Insurance and edisabilityquotes.com to shop for short-term disability and long-term disability plans.

Disability happens all the time.  For 30 year-olds, disability is 4 times more likely than death.  As recent graduates, it’s even higher.  Here’s a chart to show you how much more likely you are to become disabled than to die.

Homeowners/Renters Insurance

When buying homeowner’s insurance, it’s important to ask the right questions.  Here’s a great .pdf from Bankrate.com, which will help you shop for the right homeowner’s insurance policy.

If you’re renting, I highly recommend renter’s insurance.  It’s cheap, and it gives you peace of mind if your apartment is broken into and all of your valuables are stolen, you’ll be able to replace your stuff.  Often your landlord or apartment staff will know who is the cheapest, but when shopping for renter’s insurance, here are a few things to keep in mind to save you some money.  Also, be sure to check with your landlord to make sure your renter's insurance complements the insurance your landlord has.  Here's a list of what renter's insurance does and does not cover.

Again, I would recommend an independent insurance agent to provide you with an unbiased opinion on your homeowner’s or renter’s insurance.  Here’s a great way to find local independent insurance agents in your area from Trusted Choice (enter in your zip code at the bottom of the page by "Find an Agent").


Have a headache yet?  Thank goodness I only covered five types of insurance.  There are even more insurance plans out there that are important to have (vision, dental), but some are a total waste of money (cancer insurance, private mortgage insurance, car rental damage insurance, flight insurance, credit card insurance, I mean the list goes on and on), and anything outside of the scope of these 5 that I recommend should be discussed with a trustworthy financial advisor who will teach you, not sell you. Getting the right insurance is like wearing a seatbelt in your car.  Fastening your seatbelt after a crash doesn't do you any good.  Buckle your seatbelt before the unexpected happens.

Questions/suggestions?  Leave a comment below or email me at finance4therecentgrad@gmail.com.

Images courtesy of freedigitalphotos.net by Vichaya Kiatying-Angsulee, image ID: 10071483, bdigitalartimage ID: 10044866, bKittisakimage ID: 10094648, and bJeroen van Oostromimage ID: 10036075

Sunday, April 7, 2013

Lesson 5: Investing


Financial Planning for the Recent Graduate 




Well this one is a packed lesson, so get ready.  Investing is overwhelming. Currently there are more than 7,000 different mutual funds, more than 8,500 stocks listed just on the New York Stock Exchange, and those investments are just barely scratching the surface.  Where do I invest?  Stocks, bonds, mutual funds, ETFs, iShares, what’s a 401(k)?

The three most important things you can learn from investing is immediacy, consistency and diversification.  After you’ve completed the first four steps, start investing immediately (personally, I combined step 4 and step 5, but focused more heavily on completing step 4 first).  Consistently put money away (15% of your paycheck) into your retirement account every month.  Diversity your portfolio, meaning spread your investment to many different styles of investments (different industries, big companies, small companies, mutual funds, stocks, bonds, cash), and you’ll really set yourself up for success when you’re ready to retire. This Investopedia article does a great job of explaining the different types of investments.



The best part about this lesson is that we’re young.  We have an incredibly unfair advantage of retiring wealthy compared to people older than us.  Why?  Compounding interest.  The younger you start investing, the less you have to invest, and the more you end up with in the end.  How cool is that?! This website by Dave Ramsey shows just how much of an impact starting early has on your chances of becoming wealthy.  For example, if you only put 100 dollars a month into a retirement account and it has a 10% return every year from now until the time you retire (assuming monthly compounding), after 40 years, you’ll have $637,675.96!!  If you double that, and do $200 a month, you’ll end up with $1,275,355.58.  Wow! 


A lot of people contend that you should start investing before you pay off your debt, to which I kindly coach them: have you ever heard of a stock that earns 6.8% every year, consistently, without ever losing value?  I haven’t either, but a student loan sure does a good job of consistently charging you 6.8% interest every month without fail, doesn’t it?  Let's not even talk about how much you're paying the credit card company if you're paying late fees and interest on your credit card (ahem, 15-25%).  Crapital One, American Depressed...man, I can't wait to get to that lesson...“But I can deduct my student loan interest on my taxes, right?”  Yes, but let me give you a better scenario: Do you know what else you can deduct 100% on your taxes?  Pre-tax 401(k) contributions.  Plus, in 2013, filing single, you can deduct up to $5,500 in IRA contributions, whereas you can only up to $2,500 in interest for your student loans.  Solution: target getting debt free, get your savings built up, then you can really focus on investing.  

401(k) vs. Roth IRA


A 401(k) is funded with pre-tax dollars (meaning you’re taking money out of your paycheck before taxes are taken out and reducing your income) to fund your 401(k).  This lowers your taxes for the year, but down the road when you retire (after 59 and ½ years old), you have to pay the current tax rate at the time when you withdraw your cash.  Let’s be honest, taxes are going to have to go up in the future, so:

I highly recommend Roth IRAs.  You contribute to a Roth IRA with take-home pay (after tax) dollars.  The cool thing about a Roth IRA is a Roth grows tax-free.  That means if your Roth IRA kicks butt and you have millions of dollars in your Roth IRA, you don’t have to pay the government anything when you withdraw at retirement.

If you have an employer that matches 401(k) contributions, TAKE ADVANTAGE OF IT. There is no excuse for you not to contribute something so your employee can match it or add to it.  Every company is different, so ask your employer about all of the details of your company’s program so you can make the best decision about your 401(k).  



Tip 1: If you're confused about investments, seek investment advice from a professional financial advisor.  Make sure you find someone you feel good about and has your best interests at heart, and can teach you, rather than sell you.  If you ever feel over pressured or uneasy about a financial planner, it's probably for a good reason.  Don't do business with them.  You won't hurt their feelings.  As soon as they get off the phone with you, they're probably calling the next person down on their spreadsheet to say the same thing anyways.  You can always check on their credentials for free and check to see if they've had any complaints about their business from customers, felonies, etc. http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/

Tip 2: Don't ever buy anything you don't completely understand.  If you're personally investing without an advisor, make sure you check on the track record and history of the stock/fund you are buying, and read into the company that you're going to invest in.  

Tip 3: Use other's research to guide your investment strategies.  Websites like Zacks.com, Morningstar.com, Seeking Alpha and Investopedia.com are great resources to utilize.  


Tip 4: Slow and steady wins the race.  The tortoise beats the hare every time I read the book.  No trick or hot stock is going to get you further ahead in the long run.  Don't try to beat the market.  Stay consistent with your investing month after month, whether the market is up or down.  The only people that don't finish the race are the ones that stop running.  

Thanks for reading.  Lots of material covered, so please leave a comment below if you have any questions.

Images courtesy of freedigitalphotos.net
By Ambro: Stock photo - image ID: 10066523 and image ID: 100103866, bStuart Miles: image ID: 100146099 and image ID: 100123071, and bdigitalart, published on 10 June 2011
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