Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective

Archive for the 'Insurance' Category

Loose Ends

Creative Commons License photo figure credit: Andres Rueda

After last week’s post about Falling Back into Old Habits, I jumped right in and made a bunch of small, but important changes or updates to our automated finances:

  • I made our initial contributions to Roth IRAs for 2009.  As I said last time, it’s already February and we hadn’t contributed anything to our retirement accounts for the year.  I logged into our Vanguard accounts and contributed for January and February on both of our accounts in one shot.
  • I also set up automatic deposits for Roth IRAs for the rest of the year.  Now I won’t have to worry that I missed a payment or scramble at the end of the year to come up with enough money to fully fund the IRAs.  This is an example of one of the basic tenets of personal finance: Pay Yourself First.
  • I finally got around to rolling over my old 401k from the company I left over 4 years ago to a traditional IRA.  I wrote about how to do this back in October, but somewhat ironically had not gotten around to doing it myself.  Do as I say, not as I do?
  • I set up a low balance banking alert for my checking account.  I logged into my account last week and saw that I had a negative balance.  A series of bills got paid and I had not yet transferred the money from our Money Market account.  Luckily, the bills were in process and the balance was not “real” yet.  So I immediately transferred enough to cover the bills and then some to bring the account back into the black.  It didn’t occur to me at the time, but several days later I thought there must be a way to avoid this situation in the future.  A few minutes of poking around at the options on the website led me to the Alerts setup page.  Here I could set up all kinds of different alerts.  I chose to be notified by email whenever my balance drops below $1,000.
  • I adjusted the automatic transfers that occur a couple of times a month between our Money Market and Checking accounts to be sure that a situation, like the one described above, does not happen again.
  • I have been managing an escrow account of sorts for all of our annual expenses, such as life insurance, car insurance, umbrella insurance, our Christmas fund, etc.  So far, this money has been mixed in with our general slush fund — by which I mean money that sits in our bank account, but is otherwise presently unallocated — and tracked using a spreadsheet.  This has become cumbersome, and I have decide instead to stash the money that we put aside each month for all of these annual expenses into a new ING Direct account.  So I opened a “sub” account at ING, and then set up an automatic withdrawal from our checking account to occur once per month for 1/12 of the total amount that we have committed to each of these spending plan categories.
  • Lastly, but certainly not least, I created a new spending plan, as discussed in my last post.  This was not nearly as painful as I expected it to be.  My last spending plan, back in November, took a worst case scenario.  This scenario, fortunately, never developed, and we actually have a lot more money coming in right now than I thought.  Because I had buried my head in the sand on this, I have been worrying too much over something that wasn’t as much of a problem as I made it out to be in my head.  I hope I have learned my lesson.

So that’s it.  Each of the above items took only a few minutes, and I took care of most of them in one night.  I like that I am still able to accomplish so many personal finance improvements in one shot like this.  ”Installing” “hacks” like this in our personal finances is very satisfying, and should lead us to financial independence one of these days.

Holiday

Creative Commons License photo figure credit: muha…

Happy New Year to all!  As we close the chapter on one year and move on to a new one, I find this to be an excellent time to reflect on the state of life in general, and for the purposes of this blog, Personal Finance.  If you’re a regular reader of this blog you will know that I am a big fan of automating personal finance:

  • Our cash back credit cards get billed directly to our bill-pay account at our bank and the bank automatically pays the full balance every month.
  • ING and Vanguard both automatically withdraw pre-set amounts from our checking account monthly to cover various savings goals like increasing the size of our emergency fund, Roth IRA contributions, savings to cover annual payment to insurance, etc.
  • Bill-pay automatically pays all of our fixed monthly expenses like our mortgage, student loans, car loans, etc.

The only things that we ever have to really worry about paying on time are utility bills, gas and electric.

Given this level of automation, it’s easy to neglect our finances.  They’re not really neglected, but they’re not always getting the attention that they may deserve.  Sometimes we’re saving too much or too little.  Sometimes we’re spending more than we should and don’t realize it.  Sometimes we need to shift saving priorities because goals have been met or circumstances have changed.

I’m apparently such a work-a-holic that I had to take the last several days of the year off in order to burn, rather than lose, vacation time.  I spent the better part of one day and small parts of others catching up on our finances — a Personal Finance Holiday of sorts.  I’m not by far the first person to propose such a concept, and I’ve thought about taking a Personal Finance Holiday for a long time, but didn’t think that I had enough personal finance “stuff” to do to fill up a whole day.  Well, after neglecting to even open Quicken since mid-October, it turns out I did have a whole day of catching up to do.

Usually a Personal Finance Holiday is used to get going on all of the little things that you’ve been meaning to do, but haven’t found the time for (you have been meaning to do these things, haven’t you?):

  • creating a Spending Plan
  • opening a new Savings Account
  • starting an IRA savings account
  • buying life and disability insurance
  • opening a 529 account for your child(ren)
  • writing down or benchmarking your Personal Finance goals

Reading any of the myriad of Personal Finance books available can leave one overwhelmed by the number of things that you realize that you should be doing with your finances.  Taking a PF Holiday gives you the perfect opportunity to sit down and bang all of these items out in one shot.  It also gives you time when you would otherwise be unavailable to do all of the little things that might distract you from actually getting this stuff done, without feeling guilty about it: Can’t do it on Saturday because you have to spend time with the kids; Can’t do it on a holiday because you have to spend time with grandma; Can’t do it on a vacation day because you have to run all those other errands that you’ve been neglecting; Can’t do it on a sick day because, well, you’re sick (right?).

Maybe you’re thinking that you can’t possibly take a PF Holiday because you don’t have any vacation time.  Well, take it unpaid.  That’s right, it might not sound very frugal or financially prudent to do so, but let’s look at what a PF Holiday is worth:

  • If you use your PF Holiday to open an IRA and put just $100 per month into it, you’ll have $1,227 in one year at a modest 5% average return, and $15,528 in 10 years.
  • If you setup a disability insurance policy, you and your family will likely be able to maintain your standard of living should you become disabled.  If you can’t work for 10 years, this might be worth a quarter of a million dollars
  • If you set up an emergency fund, and use this fund instead of a credit card when a true emergency rolls around, you might save $1,400 in interest on that credit card.

If the average person makes $40,000/year or about $20/hour, then the cost of a PF Holiday on unpaid time is just $320.  It’s actually even lower than that since you won’t have to pay taxes on money that you don’t make (or conversely, if you had worked the 8 hours you would have brought home closer to $250).  So a small $250 investment could be worth tens or even hundreds of thousands of dollars over the next decade, and even more beyond that — perhaps even enough to vacation at the beautiful looking spot in the photo above!

In our case, we already have most of our Personal Finance stuff under control, or so we’d like to think, so the PF Holiday was used to catch up on what’s been going on, make sure that everything is going the way it should be.  It was also used to tweak and steer the various Personal Finance vehicles toward their respective goals.

Have you ever taken a Personal Finance Holiday?  Do you need to take a Personal Finance Holiday?  Do you have any new or redoubled goals for 2009?  Let’s hear about your experience in the Comments Section below!

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08.23.2008
Hay is for Horses!

Creative Commons License photo figure credit: law_keven

It’s been a few weeks since I’ve had a chance to compile some of the best things I’ve read lately.  The list below is pretty long, so let’s jump right into it:

I participated in the Carnival of Financial Goals earlier this month with my post on declaring a Financial Independence Day.

NCN wrote about a major motivation for keeping his financial house in order.  As the parent of a young daughter myself, my perspectives on what really is important have changed a lot in the last 2 years, and I certainly can empathize.  It’s great that NCN is in a position that frees him up from having to worry about anything other than family at this time. I hope Baby Girl is doing well.

The Freak-est Links points us to a website run by the Maine State government on how to calculate the value of your public library.  I calculated a $260 annual value of our local library.  Not bad!

Living Almost Large writes about Dreading the Envelope — you know, the one that gets passed at work when someone has a baby or something like that?  This article really changed my perspective on this practice.  I work in a relatively small office (~20 people).  A few months back a co-worker’s house burned to the ground.  He lost everything.  This was the only time that the envelope has been passed in the 3 years I’ve worked in this office.  I was torn on if and how much to give.  On the one hand, I can’t even begin to understand how devastating a loss this must have been.  But on the other hand, we’re responsible and have insurance (and so did he), so why should we need to give any money at all?  In any event, this situation is a true need compared to a birthday or baby shower, and in that light I will not hesitate to give more should the occasion ever present itself again.

Glbl asks for reader input on whether money earmarked for college should be given in one lump sum or allocated over time.  Many argue that young adults are still too immature to handle large sums of money responsibly (ie not blow it all in Vegas instead of using it for tuition…).  My argument, however, was that most young adults are “too immature” because they haven’t had the proper training on how to handle money.  So use this opportunity as a chance to educate the recipient on how to be financially responsible, budget, etc.  Otherwise you’re putting the cart before the horse.

J.D. writes about how to support your favorite bloggers (cough, cough).  While I don’t have any ads on Don’t Feed the Alligators at this time, most of the suggestions are still apt:

  • Participate in the discussion — really, please do! You can do so anonymously, and I never share or reveal email addresses, even if I know who you are.
  • Tell your friends — word of mouth, or email both work great!
  • Click on ads that truly interest you — not applicable here, but works well elsewhere
  • Link to stories that you like — if you’ve got your own blog or website and see a story you like, how about a linkback?

Madison writes about how to earn free money using the US Mint.  While this scheme is not for everyone, it certainly piqued my interest.

A spirited discussion follow David’s post on the large percentage of American corporations that pay no federal income taxes.  The biggest point that I would like to make here is that if you’re going to argue with someone and cite a fact, you have to be able to back up the fact with something other than the equivalent of saying, “It’s true, look it up!”  I never took debate classes, but it seems to me that it is the arguer’s job to look it up, not the audience he is trying to convince.  At the very best case, it doesn’t make for a very compelling argument.

Lastly and just for fun, J.D. links to a video made by two average guys who “compete” in a number of Olympic events and compare their results to those of Olympic caliber athletes.  This really underscores how incredible Olympic athletes are.  Hats off to all competitors and especially to US Gold Medal winners!

Tune in next time for a very special blognouncement!

08.18.2008
Hiding

Creative Commons License photo figure credit: fazen

Unintentionally, my review of Nudge continues again here with a look at using nudges for non-paternalistic purposes.

A year and a half ago, ScrapperMom and I went to buy a new laptop computer.  We did the research, picked the model we wanted, checked online store inventories, and set out for the store.  At the store, we zeroed in on the model we wanted, having brought print-outs of the exact model number and specs.  After some time, we finally managed to flag down a salesperson who said he would have to go into the back to see if they had that model in stock.

The salesman returned after some time with a clipboard in his hand.  “Would you like the 3 year or 5 year warranty?” he asked.  “Which one comes with it?” I asked.  “Neither,” he said.  Then went on to explain that the laptop comes with a 1 year parts warranty only.  I told him that I didn’t want to buy anything extra.  An argument ensued centering on what would happen if the laptop broke.  I calmly tried to explain that I was willing to take that risk.  Eventually, I managed to persuade him to sell us the laptop without any extended warranty.

Fast forward to last week:  I was in a rental car office in Toronto while visiting on business.  I had booked my rental car through an online travel service a few days earlier, so I wasn’t paying much attention to the questions being asked.  “Do you want the premium insurance or the basic?” the desk clerk asked.  “Basic,” I said.  It wasn’t until I returned the car 6 hours later that I realized I should have said, “I don’t need any additional insurance.”  (The combination of my regular car insurance and the credit card I used for the rental cover all my insurance needs for rental cars.) This small inattention to detail doubled the cost of the rental.  I’m glad that I can pass this cost along to work, but the trick still irritates me.

What’s going on here?  As I learned in Nudge, choice architecture plays a huge role in what choice ultimately gets made.  In the cases above, the default options were arguably not in the best interest of the customer, and furthermore, the whole range of choices was not presented — in neither case was I presented with the option to do nothing, even though this was an option.

Insurance is, unfortunately, a necessary part of modern life. However, people tend to buy insurance in areas that are really not required, such as on consumer electronics, while forsaking it in areas that are important, such as disability insurance. Over the last several years, retailers have made huge profits by selling insurance on things like TVs, DVD players, and computers, and their salespeople have been incentivized to sell this insurance. But, insurance should be purchased for items that would represent true disasters if the insured item is damaged, lost, stolen, gets hurt, or dies. While it sure would be a bummer if your TV died, it wouldn’t be a disaster.

Have you experienced any “missing options” lately?

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06.14.2008
Skydiving

Creative Commons License photo figure credit: ctsnow

  • Yesterday I was chatting with one of my company’s summer interns about his plans for the weekend. He told me that he was going skydiving. Wow! I thought, that’s awesome. I’ve always wanted to go skydiving, but never got around to it before I got married and became a parent. I explained to the intern that the second thought that went through my head after “Wow” was “life insurance policy.” I have a sizable life insurance policy in place already, but I’ve been meaning to read up on the fine points of it to figure out exactly what coverage I have. I find that I have many insurance policies, but don’t know what insurance I actually have. You always hear horror stories about people having insurance, but not being covered for some bizarre sequence of events. So back to the top of my to do list goes: Read and understand current insurance policies.
  • A short phone call this week earned me about $150. I have been engaged in a kind of progressive credit card arbitrage. We got a cash back rewards credit card last summer that came with a high limit and a 0% APR on purchases for a year. We’ve been making minimum payments to the card while stashing the rest of the full payment in a high interest savings account. I had written in my credit card notes that the 0% offer expires in July. I called the credit card issuer to ask specifically when the offer expires. The answer is that the offer is good until the END of my August billing cycle, which means that I don’t have to settle up until the middle of September. I estimate that I should be able to earn about $150 dollars in extra interest on the money that is sitting in my Vanguard Money Market fund.
  • We finally received our tax refund this week, which isn’t bad considering that we didn’t file until about 3 weeks ago. It took longer than expected to file this year due to some Traditional to Roth IRA conversions that we ended up being ineligible to make. So it took a while to figure out how to undo the conversion and then how to record that on the tax return.
  • In case you’re wondering: this tax refund will be used to bolster our emergency funds which currently total $10,233. This is far short of 6 months worth of expenses, but we’re getting there.

Some articles that I enjoyed over the last two weeks:

  • Gather Little By Little investigates the fine art of hypermiling — eking every possible mile out of a gallon of fuel for your car. We have been de facto hypermilers since 2001 when we purchased a diesel car that easily gets 45 miles per gallon. However, I have been independently implementing some of the suggestions that also appear in GLBL’s article and anecdotally seem to have improved city mileage to previously unheard of heights. I won’t know for sure until the next fillup, which may still be weeks away.
  • The Boston Globe reports that People in Debt Feel Literal Pain. Wow! Debt troubles are pervasive! The lesson here: If you want to improve your health, get out of debt.
  • Gametheorist writes about his children’s entrepreneurial teamwork in selling candy bars for their sports club fundraiser. What fascinated me about this was the posturing of the pricing in order to induce people to buy more. What further fascinated me is that it worked so well!
  • Lastly, PaidTwice had another rough week in homeownership. Her week went from dreams about a more luxurious bath experience to a shorted circuit breaker to a major, necessary home repair. Isn’t it nearly always the case that just when we start to feel secure, comfortable, and in control of our lives Mr. Murphy comes knocking? This happens to me at work, with our finances, around the neighborhood, on the highway, etc. The best guard against Mr. Murphy is a healthy emergency fund, both in literal and figurative senses. Always try to foresee alternative outcomes and plan around them or hedge against them. We can’t foresee or prepare for everything, but a little planning can go a long way — see Point 1 at the top of this entry.