Planning Financials | Personal Finance To Help Make You Rich » Retirement

Buying Insurance – The Good and The Bad

Chris — Mon, 20 Apr 2009 22:14:09 +0000

Insurance. It always has a negative connotation, because it is usually a protection against something bad or negative happening. As it is important to always keep a positive attitude, it is also important in measuring risks and learning how to manage those risks. Knowing how to buy insurance can be a great tool for you as well as a safeguard as you strive for financially freedom.

Nowadays, you can almost find an insurance policy for just about anything. It all depends on how much you’re willing to pay as a premium. Professional prospected college athletes sometimes purchase insurance policies as a protection in case of injury during their college year. Their premiums can be insane, but it can act as a hedge in case of injury, one of which could support them the rest of their life.

Think of it this way, there are many ways you can manage risk in your life. You can avoid risk, which would result in you keeping yourself in shape, maintaining a good diet, and avoiding risky investment opportunities that leaves you vulnerable to a lot of downside risk.

You can take on risk, meaning that you carry the full burden yourself. Many people choose to not medically insure themselves or only buy “liability” insurance for their cars. Buy doing this, you fully take on the risk yourself in case of any problems.

You also have the choice of reducing risk. Continual auto check ups as well as visits to the doctor can keep your risk at lower levels. This helps of reducing risk of a problem occurring.

The other option you have is to completely transfer your risk. You can transfer your risk by purchasing an insurance policy. By doing so, you pay a “premium” to have another company assume the risk for your potential problems.

Most likely you will eventually buy some sort of insurance in your life. When considering insurance plans and what to buy, you may want to consider the following:

Stay Big
There are many companies out there fighting for your business. It is best to stick with the larger companies who have been around for a while and have a lot of capital backing. It is not unusual for insurance companies to go bankrupt, which could be a disaster for you if you are in the middle of an emergency. Some companies may tempt you with lower premiums, but the extra few dollars a month is worth the security of a strong, reputable company.

Look For Discounts
Many insurance companies offer discounts. For instance, well performing students are often given a lower monthly rate. You may be eligible for a discount, depending on your employer as well. Those who have family who have retired from the military are most likely eligible for USAA insurance, which is a very cost-effective, private insurance company which services military families. Even if your father or even step-father was or is in the military, you are most likely eligible for USAA.

Compare Quotes
Just like any other industry, insurance is a business. As such, companies are competing for your business. Call around to several companies getting their quotes for their services. You may be surprised at how much of a discount they may be able to offer in order to win over your business.

Purchasing insurance is an important element of financial planning. All it takes is one medical emergency or one severe car crash, to put you in a pile of bills. By purchasing insurance, you transfer most of the risk liability to your insurance company, helping you to focus on other important aspects of financial planning.

Learn To Save – Create An Emergency Fund

Chris — Thu, 26 Feb 2009 01:35:05 +0000

I find it very interesting to see the different saving/spending dynamics of the older generations compared to the youth of the world today. With the help of movies and TV, much of the youth of today seek to be rich, or at least try to own expensive goods, at such a young age. Sure, it may be fun to race around in a Porsche or BMW in your 20′s, but if you stretch outside your means to buy such, you could very well end up regretting it in the end. I do think the older generation still had parenting influences that were around The Great Depression, so the principal of hard work and save for tough times is embedded in their head. Maybe it will take another depression to teach our youth these same principals or you can just choose to live by them.

One big fact is that most Americans are horrible at saving. If you are from another country, you probably already know this, but no other country comes near the debt that US consumers pile up to buy things. Hopefully, this debt is going towards useful and needful things, such as school and house loans. Unfortunately, this is not the case for most Americans. It is very normal for most people in their twenties and thirties to live paycheck to paycheck. If they reach the end of two weeks and their account balance is $0, they feel that they have done well. They feel as long as they stay out of the red, they’re doing OK. Some are even fine being in the red, as long as it remains “manageable.” This practice couldn’t be more detrimental to the principals of financial planning and personal finance.

The goal of financial planning and this site is to help people find financial freedom and enjoy the things in life at their free will. Saving is an essential part to this process and can be a life saver for you during critical times in your life. I have always had a goal to try and save 20% of my paycheck. Mind you, after taxes, religious donations, and expenses, this can become a tough task. However, doing so will greatly reduce the stress of finances, knowing that you have money in the bank.

You Don’t Need Something To Save For

It’s amazing how often I talk to people who are young and living paycheck to paycheck and they say to me, “why should I save right now? I don’t have anything to save for.” Just because a new house, college, or a car is not included in your immediate future, does not mean you can’t save. You don’t need something to save for. In fact, this is the best time to save! You will be able to save more money and sooner or later, I promise, you will need to dip into those funds. Start saving now whether or not you are planning to buy something big.

Establish An Emergency Fund

An emergency fund can play a very important role in your financial planning. An emergency fund is usually a portion of cash which is set aside that if you were to lose your job, you could survive strictly on the fund for around six months. So, if you currently make $2,000 per month, your emergency fund would be around $12,000. It may seem like a lot to set aside for an “emergency”, but trust me, this fund can be a lifesaver. During good economic times, most would probably think such a fund is worthless. However, as we have seen recently, a healthy, thriving economy can be turned around in the matter of a few months. Many people I know have recently lost their job and have families and a mortgage to pay for and have no clue what to do. It is during times like these, an emergency fund could save you.

Emergency funds need not to be reserved just for job security. It can be used for cases in which a medical emergency has occurred, legal matters, accidents or disasters, etc. It is a source of funds that should be used in case of an emergency. Having such a fund, could one day make a huge difference in your life, but it starts by saving for it now.

If you do not have one, think about opening a savings account. ING Direct offers great rates for people desiring to put away some cash, you can set one up here: The Orange Savings Account. Great rates, no fees, no minimums.

By learning to save at a young age, you will find that the habit will stick with you throughout the years. By practicing good saving principals, you can reduce the stress in your life and better prepare yourself for tough economic conditions. Remember, we live in a cyclical economy. That means we go up and we go down. It will always be like that, remember it, even when it seems like things are so good. Saving and having an emergency fund will help you better weather the tough times.

Tax Planning – How Save Money

Chris — Mon, 26 Jan 2009 20:24:56 +0000

One big expense that will most likely follow you around your entire life is that of paying taxes. Effective tax planning is essential in personal finance and financial planning, as it is the single-most biggest expense for American families. In fact, as of 2008, most people do not fully pay off their tax liability for the whole year until April 23. That means you do not start putting money in our pocket until about 25% of the year is done (see below). Your tax liability is bigger than your food, clothing, insurance, and other expenses combined. By learning how to effectively plan for taxes, you can minimize this expense and learn how use the tax savings vehicles the government has provided for you. As a preface to this article, I am not a CPA or accountant, and any sort of tax planning and advice for you should be discussed with a CPA or your local accountant. However, I am going to mention a few of the vehicles I use and the benefits I receive.

First, let’s discuss how you determine either what is owed to the government, or sometimes, what is owed back to you. Computing your tax liability is very simple and can be described using this simple equation:

Income – IRS Exclusions=

GROSS INCOME

– Adjustments=

ADJUSTED GROSS INCOME

-Standard Deductions & -Tax Exemptions=

TAXABLE INCOME

(Refer to IRS table to find your tax bracket, then calculate)

TENTATIVE INCOME

-Tax Credits

TOTAL TAX OWED

-Taxes Already Paid

TOTAL CURRENT AMOUNT OWED OR ABLE TO RETAIN AS A REFUND

Using this simple formula, you should be able to roughly estimate where your annual liability should run. You can use software like quicken to help make the process easier. In any case, it is important to realize how much you roughly pay a year. By doing so, you can plan around this large expense.

There are four main strategies to try and utilize when planning for taxes. These can help minimize your liability and in the end, keep more money in your pocket at the end of the year. These four strategies are:

1. Receive Tax-exempt Income

You can use medical savings accounts (flexible savings accounts) to pay your medical bills. This allows you to pay your bills with pre-tax dollars. Also, look for tax free investments. Many municipal bonds are tax free. However, depending on your marginal tax rate, it may not make sense for you to use these vehicles. You can also contribute long-term, appreciated assets to charitable organizations. Using stock can be a great way to donate to charity. In fact, many churches or charitable organizations will now accept stock transfers as donations. By doing so, you get the full tax credit for the donation and do not have to pay the taxes on the gains of the asset. See when you give, you shall receive.

2. Make the Most Out of your Deductions

Be charitable. By giving more, you can save more. Sure, we do not give just to save in taxes, but this can be a great added bonus. Also, use your house as a tax shelter. Your interest payment can be a great deduction for your taxes. Adjust your deductions to get the maximum savings on a given year.

3. Use Long Term Capital Gains

Look to invest in long term investments. Usually, long term capital gains is taxed at a lower tax bracket than short term capital gains. Long term gains are usually referred to assets being held for 1 year or more. Your tax rate can sometimes be 20% lower in a long term case. Think about this when choosing your buy and sell strategies with your stocks.

4. Learn to Defer or Pre-pay Taxes to Help Save Money

Use tax exempt or tax deferred vehicles as much as you can. 401ks and IRAs are great vehicles to use to avoid paying taxes. Try to contribute as much as possible to these retirement accounts. Save for children’s educations using Education IRAs and Series EE or Series I savings bonds. You can pay for education using pre tax dollars and can end up saving you a lot of money in the end.

I just cracked the service of some of the vehicles you can use in tax planning. Be sure and talk to a good accountant or CPA to find out how you can best keep as much savings in your pocket every month that you can. Remember, tax expense is most likely by far your largest annual expense. By effectively planning for taxes, you will be able to save more money and become that much closer to achieving your goals to financial freedom.

Time Value of Money – Become Rich

Chris — Wed, 24 Dec 2008 18:08:09 +0000

Many wish that money grew on trees or that they can make money while they sleep. I will leave the first wish up to scientists and the government, but the second is easily attainable. This can be done by understanding the Time Value of Money. What is the time value of money? How does it affect me? You may have asked yourself these questions before, and hopefully I can shed some light on this very important principle.

The absolute first element of understanding the time value of money is understanding compound interest. Albert Einstein considered compound interest as the eighth wonder of the world. Compound interest simply means continuing to receive interest on interest. Over time this simple principle can be very profitable. Most everyone has experienced compound interest. If you have ever had money in the bank, then you have. In a sense, people are willing to pay you interest, in return to borrowing your money for a period of time. As time goes on, that interest payment goes up more and more. Interest can be compounded on a variety of different time frames. Annually, monthly, quarterly, or even sometimes daily. Knowing how compound interest works, will help you to appreciate it and utilize it in your planning. See below a basic example of a short term view of what compound interest can do in a short period of time.

Another important thing to know when dealing with the time value of money, is that a dollar today is worth more than a dollar tomorrow. Due to continual increasing cost of goods and the saturation of printed money (inflation), the worth a dollar will go down as time goes on. The value of money today is known as Present Value. The value of an investment in the future is called Future Value. With the help of some equations or a good financial calculator, you can roughly calculate what a sum of money today will be worth in 10 years. This is a vital step in understanding investment and what vehicles to use to increase your reserves.

You can really see the magic of compound interest work in your retirement accounts. Since these accounts usually are not touched for several years, you can take advantage of compound interest and watch your money grow into a very healthy retirement, because you made the right investment. By understanding the time value of money, you will be able to better evaluate potential investments and plan for the true value of your money in the future. Remember, a million dollars today will be worth significantly less than a million dollars in 2060. So take some money from under the mattress and start by finding a good savings account with a healthy compounded interest rate to start making money in your sleep.