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Money 401: Investing
The entire purpose of insurance is to transfer risk
- There are other ways to be prepared for certain emergencies
- Certain losses without insurance will bankrupt you
- It is a defensive strategic method
- Only pay insurance on risks you cannot handle losing
- It is not a good way to gain investment income
Before you pay for insurance, make sure you have several highly qualified professionals
- Since insurance is about transferring risk, the most affordable insurance is to have competent people guiding you
- These professionals are necessary for any financial decisions, and they are the safest protection of your wealth
- The money they save you in the risks they protect you from are the greatest per-dollar protection
- Always have your paperwork in order and categorized when you walk in, or you’ll get charged for them to organize it
- Make sure you have ALL your paperwork beforehand, since it will often slow down the entire process
- You need to understand everything that professional is saying, so don’t be afraid to ask questions
- Even if you’re a professional in one of them you’ll need the others
- Financial advisor (must be an IFA, or Independent Financial Advisor)
- Research them through FINRA
- A bad financial advisor will cost you a significant amount of gain, and the worst ones are con artists
- Agree on how you’ll work together and on both of your expectations
- Gather the relevant information and set goals
- Evaluate your financial status and create a strategy
- Understand their recommendations and possible alternatives
- Have them carry out what you both agreed upon
- Periodically, maintain your progress with them and re-evaluate your goals and the arrangement with them as necessary
- If you ever have any uncertainties about any potential investment product, take their marketing materials to a certified IFA
- Research them through FINRA
- Accountant (should be CPA certified, or Certified Public Accountant)
- Find an accountant and a tax preparer that works with a reputable firm
- A bad accountant or tax preparer will cost you thousands in either missed tax benefits or a discrepant audit later
- When you are filing your taxes, consider having a professional preparer (which isn’t always a CPA) do your taxes if you want to save some money
- Make sure you have a reputable tax preparer and not a chop-shop speedy-tax preparation service
- Have a healthy understanding of how taxes work to avoid some common mistakes
- Time your December/January activities to land in the best tax brackets for a given tax year
- Be sure to report ALL income, including stock sales
- Find out before you go in what you can claim, and only claim deductions and credits that you are certain you qualify for
- Coordinate with your spouse to see what your options are
- If you have children, you can claim multiple deductions and credits
- You can deduct job search expenses
- Any legal fees relating to alimony can be deducted
- There are tax deductions and credits if any of the filers or dependents are going to college or a trade school
- There are multiple renewable energy credits
- Reinvested dividends can be taken away from taxable income
- Increase your itemized deduction by donating to a charity
- Sell a loss on securities to offset your capital gains income
- Some government bonds’ dividends are not taxable
- There are many things that are tax-deductible if you have a business, which may be worth starting for deduction reasons
- Accounting fees
- Advertising
- Automobile & transportation expenses (partially)
- Bank charges
- Commissions and sales expenses
- Consultation expenses
- Continuing professional education
- Contract labor
- Credit and collection fees
- Delivery charges
- Dues and subscriptions
- Employee benefit programs
- Equipment rentals
- Factory expenses
- Gifts (partially)
- Home office (partially)
- Insurance
- Interest paid
- Internet subscriptions, domain names, and hosting
- Laundry
- Legal fees
- Licenses
- Maintenance and repairs
- Meals and entertainment (partially)
- Office expenses and supplies
- Pension and profit-sharing plans
- Postage
- Print and copy
- Professional development and training
- Professional fees
- Promotion
- Rent
- Salaries, wages, and other compensation
- Security
- Small tools and equipment
- Software
- Supplies
- Taxes paid in the prior year or current year
- Telephone
- Trade discounts
- Travel
- Utilities
- Coordinate with your spouse to see what your options are
- Have your taxes prepared off-season (February and March) to have an easier appointment scheduling with your tax preparer and have more time to get paperwork you missed
- Though you can file for an extension, you will still have interest incurred on any unpaid taxes
- Every year have the accountant or tax preparer review your income taxes
- Ask for advice about the coming tax year to maximize tax benefits
- Continue updating them on any major financial decisions that you have made
- Find an accountant and a tax preparer that works with a reputable firm
- Attorney(s) (passed the bar exam)
- Look for a general attorney and an attorney focused on your specific needs
- Find a reputable attorney by looking online at their other clients’ reviews
- A bad attorney will cost you immeasurably if they are not paying attention to the legal environment that you or your business is in
- High-profile attorneys will charge for the initial consultation, but younger attorneys that need to build clientele will provide a free consultation
- Bring your entire situation to them during the consultation
- If they are knowledgeable for what you want, consider paying a retainer for them to help you later
- Keep them updated about any legally-affecting decisions you make, including other legal counsel
- Banker (affiliated with a bank)
- This person allows you to make more complex banking decisions more easily
- Realtor (licensed and able to access the MLS, or Multiple Listing Service)
- This isn’t only vital if you want to buy a house, but also if you want to purchase business property
- Insurance agent (sells insurance)
- By having an actual agent, you can often get better service than online-only insurance
- Try an independent insurance agent who has the freedom to look at different companies’ insurances
- Financial advisor (must be an IFA, or Independent Financial Advisor)
Insurance that you can purchase is made of several parts
- Deductible – the amount you have to pay out-of-pocket before the insurance company starts paying
- Do a break-even analysis to find out how much you should pay
- Premium – the payments you’re making every month to keep the insurance
- Limit – the most that the insurance will cover, given the circumstances the policy covers
- Copay/copayment – a certain percentage or amount that the insurance company will pay, which is technically a type of deductible
- Every insurance policy makes their pricing the same way
- Takes many legally measurable circumstances that can affect the risk of them paying out including
- Body type
- Age
- Health history
- Accident history
- Ethnicity
- Religion
- Calculates the probability and cost of loss(es) across a duration of time
- Adds a little extra to increase the chances of a profit
- Divides the total amount out into month payments
- Takes many legally measurable circumstances that can affect the risk of them paying out including
Keep your insurance information in order in a single document
- Type of insurance
- Company
- Plan ID#
- Coverage amounts
- Agent’s phone/address
- Monthly premium
Try to save on insurance
- Avoid features like
- Extended warranties
- Low deductibles
- Savings plans
- Features you don’t fully understand
- Shop around for it every year or after every policy ends
- Try to find discounts for the group insurance policies your workplace offers
- Bear in mind that staying with an insurance company for a few years can sometimes give a discount
- Online-only insurance companies are generally cheaper
- Try to have multiple policies from the same company
- Pay the premium up front to get a discount or avoid admin/interest charges
- Buy insurance with after-tax dollars to ensure that the payouts are after-tax
- Sign up for automatic payments to get a discount
- Outside of what the law requires, insurance never has to be a permanent solution
- Always do your own research before starting or ending a policy
- Be sure there are no gaps in coverage across time
- Don’t buy what you don’t understand
Types of insurance
- Auto insurance
- If your emergency fund is full, raise the deductible
- Carry an adequate amount of liability
- If it’s an older car, think about dropping collision coverage
- There are sometimes discounts
- Hybrid/electric vehicles
- ABS, passive restraints and other safety features
- GPS trackers, anti-theft box and other anti-theft devices
- Keeping the vehicle garaged overnight
- Low mileage
- Good GPA in school or staying in the education system
- Not getting a ticket or in an accident
- Defensive drivers who prove themselves by going through an authorized course
- Welcome bonus for leaving a current issuer before the policy expires
- Homeowner’s/Renter’s Insurance
- On homeowner’s insurance, guaranteed replacement cost if at all possible
- Have the coverage include the natural disasters common in your area
- Get renter’s insurance, it is unbelievably cheap
- If you rent a home that burns down, the owner’s insurance will not cover you!
- Consider an umbrella policy once you really start acquiring wealth
- On homeowner’s insurance, guaranteed replacement cost if at all possible
- Identity Theft Protection
- Avoid paying for ID theft protection that only monitors credit reports
- Good protection services assign a counselor to clean up the mess
- It takes an average of 800 hours to clean up identity fraud
- Health Insurance
- The number one cause of bankruptcy in the West is medical bills
- Try to bring the insurance costs down if you’re healthy
- Increase your deductibles/copayments/stop-loss
- However, never decrease the maximum pay as it would be too much risk
- You can usually have a health insurance company completely reimburse the cost of a gym membership
- Disability Insurance
- Designed to replace income lost due to a disability
- Aim for 65% of your current income
- Based on occupation, but doesn’t consider age
- Buy it if you run the risk of becoming disabled at doing the job you were trained to do
- Lower your premium with a longer elimination period (time to start getting paid out)
- The best disability insurance will come through the workplace
- Usually called occupational insurance, and is usually only available in 2 year policies
- Don’t pay for policies that last less than 5 years
- Designed to replace income lost due to a disability
- Long-Term Care Insurance
- Will pay for nursing home, assisted living facilities and in-home care
- Absolutely necessary for anyone over 60
- There is a 69% chance of needing it
- Get it the day you turn 60
- This is safer to get than not, especially as you age
- Medicaid and other government programs are dicey at best in their reliability
- The last 6 months of a person’s life is where 80% of the medical expenses of their entire life go toward
- Life Insurance
- Technically, it should be called death insurance as it replaces income lost due to death
- Most people are unaware of what their life insurance policy is
- Term Insurance
- Significantly less expensive
- For a specified period
- No savings plan built into it
- Whole Insurance
- Much more expensive
- For life
- Funds a savings plan
- Term Insurance
- As stated before the need for life insurance, contrary to insurance salesmen, does not have to be a permanent solution
- Whole insurance is a complete waste of money because insurance returns are always lower than pretty much everything else
- The additional costs can more effectively fund a personal savings plan
- Children only need burial expenses
- Other Insurances
- Credit Life Insurance & Credit Disability Insurance – a waste of money because that money is better spent actually paying off creditors
- Supplemental Health Insurance – that’s the whole point of the health insurance itself
- Accidental Death – a gimmick
- Prepaid Burial Policies – saving should be ready for that
- Mortgage Life Insurance – pay off the mortgage instead
- Weird gimmicks
- Return of premium
- Waiver of premium
- Generally, the more complex the insurance the less useful or beneficial it becomes for the price you’re paying
