How it feels to have life insurance

Insurance companies make a whole lot of money.  That’s because literally every adult in the country has to deal with them.  Everyone with a car needs auto insurance.  Everyone with a mortgage needs home insurance.  It’s safe to say that most Americans will have one of these two at some point in life.  There are many other common types of insurance out there, like renters insurance and disability insurance.  And also some not so common ones, like ghost insurance.

What is the value of insurance?

To be perfectly honest, for the longest time I had no idea what the purpose of insurance was.  I just thought it’s something you’re mandated to pay every month to have a car.  I didn’t realize what value that money is bringing the customer.  But after reading about insurance from various sources, it is actually surprisingly simple:  Insurance is simply a transfer of risk from one entity to another.  For a price of course.

Driving a car, for example, is a risky activity.  Most drivers don’t regularly get into accidents, but they do happen at some point.  And they can be expensive.  Fixing a damaged car can be pricey.  Paying medical bills for injuries sustained in a car accident is expensive.  Most people don’t have enough money in the bank to cover an accident where their car is totaled and they have to spend a significant time in the hospital.  An incident like this would typically wipe out most people’s savings accounts and leave their lives in ruin.

This is where insurance companies come into the mix.  They offer to take on that risk in exchange for a certain amount of money.  The process of determining how much money to charge the customer is called underwriting, and it takes into account many things including age of the driver, driving history, type of car etc.  All these factors play a role in determining who is accident prone or not, and the insurance company will charge accordingly.  So essentially, insurance companies provide peace of mind and financial security in exchange for a set amount of money, which can vary between companies so it’s a good idea for the consumer to shop around.

Is life insurance worth it?

Car insurance is pretty easy to understand, but what about life insurance?  It still comes down to the same concept of transferring risk.  If someone’s death will potentially leave others in financial distress, the life insurance company will take on that risk.  Talking about death is by definition a morbid topic, but it needs to be done in a subjective manner when dealing with life insurance.  When someone dies, it is a very emotionally distressing time for family and friends.  And if that person who died had dependents, then it can become a financially distressing time as well.  If someone with life insurance dies, the insurance company will provide a previously agreed upon amount of money to the family.  This can be an enormous help during an especially trying time.

Life insurance gets a bad rap because it’s usually associated with sleazy salesmen and commercials marketed towards seniors.  But it shouldn’t be that way.  Anyone with dependents should seriously consider getting life insurance, and none of that whole life policy nonsense.  In my opinion, insurance products that include investments should not be considered.  They are usually laden with fees and take away money from where it should be going into: insuring your life.  There are plenty of ways to invest on the cheap such as your company 401(k) or Vanguard mutual funds.  Many of these insurance/investment products are difficult to understand as well, and that’s always a red flag when it comes to financial products.  So stick with a set insurance amount for a set term.  Simple and easy.

With me having a wife and 2 year old son, I figured it was time for me to get serious about this life insurance thing.  I’m actually probably overdue, because if something did happen to me, my wife and son would be in a tough spot since we rely on solely on my income at the moment.  So I decided to buck up and get the ball rolling by getting a quote.

Step 1: Get a quote

Where does one buy life insurance?  Pretty much all major insurance companies offer life insurance, and there are some companies that specialize in life insurance.  I heard a lot of good things about a website called Quotacy, so I gave it a shot.  And I’m glad I did, because it made the first step to getting life insurance so easy and smooth.  You can get a very good quote estimate in a couple of minutes without giving up any personal information.

How does the website work?  And how did it determine what rate I should be charged?  What companies were a good match for me?  I know this is a killer cliffhanger, but tune into Part 2 of this post to find out!

A smart investor

Investing is usually not very high on the priority list for new grads or young people in general.  There are other more important things to think about such as finding a job, looking for a place to live and finding some Joneses to keep up with (aka leasing a fancy luxury car, getting a nice big screen TV or two and, of course, getting an iPhone 6 Plus because the regular iPhone 6 just won’t cut it).

Many new graduates have told me that they just don’t have the time and money to invest.  They don’t want their take home pay to be any smaller, mainly because many are stretched to the limit as it is.  And they don’t want to spend time investing because they are turned off to the prospect of learning about stocks, bonds and all that jazz, though I would argue that spending some time to secure your future is well worth it.

Here’s what I say to those people: you actually don’t need much money or time to be a great investor.  I like to think of investing as becoming a better basketball player.  If you don’t know the first thing about basketball, but decide you want to put in a little time each day to get better, you will be a better player than half of the people on the planet within a month.  That’s because most people don’t even try and basketball is one of those things which is easy to learn and difficult to master.

If you decide you want to join the NBA, that will require considerably more work and is probably not going to happen unless you perform and practice at a high level from a very young age.  If you’re in your 20’s and just think about how hard it will be to make the NBA, you will get discouraged and not even try to play basketball at all.  Similarly, many beginner investors just think about how hard it is to make billions of dollars like Warren Buffet or Carl Icahn and give up starting all together, which is a huge mistake.

People early in their careers should realize there are only a few things to remember when starting your investing journey, and they don’t cost much time or money:

1. Start early.  In my opinion, this is the most important factor to become a successful investor.  Even if you start early and do something dumb, you’re still better off than the person who started investing late because you know what not to do.  But don’t be like that.  Start early and start smart.  Time is your biggest friend and your biggest enemy when it comes to investing, and you need as much of it on your side as you can.
2. A 401k is a great place to start.  While not as “guaranteed” as traditional pension plans once were, a 401k can potentially be better for your retirement if you use it correctly.  And the best way is invest early and keep increasing your contributions.  The goal is to max out your contribution, as this will decrease your taxable income which can potentially be very favorable during tax time by making you eligible for even more deductions and credits.  And since the contributions are pre-tax, you won’t feel as big a pinch in your paycheck.  A contribution of 10% of your salary does not decrease your take home pay by 10%, but 7 or 8 percent depending on your tax bracket.  Add on the matching contributions that many employers give and your returns will be pretty stellar over the long term.
3. Make simple investment choices.  There are tons of companies to invest with who all have tons of investments to choose from.  There are stocks, bonds, mutual funds, ETF’s and many other types of investments.  I believe this is what turns most people off to investing because humans don’t do well when there are lots of choices.  401k plans usually offer a much more palatable number of choices, but even this can be too many for some.  For young people just starting out, it’s pretty simple.  You’re saving for retirement, which is probably a few decades away.  Since you have time on your side (see step 1), you want to be aggressive, so a mutual fund that follows the S&P 500 or the general stock market is a great place to start.  They usually have low fees and will keep your money growing.  As retirement gets closer, you determine how much less risk you want to take and adjust from there.  But an S&P 500 fund is a great place to start.

I sincerely believe that following just these three steps will make you a great investor.  But I will add a fourth step which is to keep on learning!  Read an investment book or two and follow some quality blogs.  You want to be the best investor you can, so it takes a little bit of work over a long period of time to get there.  These three steps are a great start, but the investing world changes every so often and it’s important to keep up with that as well.

Yeah, I just filed my taxes.

Can you smell it in the air?  The sounds of tax software commercials wherever you turn, citizens squealing in delight at getting their tax refunds and other citizens pulling their hair out because they owe the government money.  It’s tax time!  The time where you will be inundated with commercials, articles and people on the corner flipping signs that say you’ll get a free pair of headphones for doing your taxes with them.

They all talk about maximizing your refund and getting the money into your checking account FAST!  While this is all well and good, other than topping off some retirement accounts and fiddling around with your investments, there’s not really much we can do about our 2014 taxes.  If your taxes are done correctly, you’re going to get the same refund if you go with the latest tax software or your friendly Walmart parking lot tax preparer. The only thing you can really do is get all your tax papers organized and try not to pay too much for a preparer.  That’s it.  There’s a lot of hoopla this time of year about tax tips, but 2014 is gone and there is not a whole lot you can do.

There should be more hoopla about saving on your 2015 taxes.  Paying less taxes is all about being smart about them every month of the year starting in January.  In essence, it boils down to one of two things.  Whether you own a business or are a high schooler working a part time job, there are only ways to pay less taxes:

• Decrease gross income
• Increase deductions or credits

That’s it.  These are the only two ways.  The whole crazy US tax code stems from these two things.  Even people who cheat on their taxes do one of these two things, just illegally.  It’s important to know this so you can practice working on these throughout the year in order to decrease your tax burden.

Decrease gross income

When someone says they make $100,000 a year, they don’t simply calculate their taxes based on that number.  It’s based on “taxable income”, which is essentially what you made from all sources minus your deductions.  This number is what you want to get as low as possible and one method is to decrease your gross income.

There are also certain credits and deductions that you can only get if you have a low enough income, so not only will decreasing your gross income decrease your overall taxable income, it can open the door to more credits and deductions.  For example, for a married couple filing joint taxes, the child tax credit starts phasing out for couples whose adjusted gross income is above $110,000.  By keeping your income lower, you can get the full benefit of the credit.  Obviously, consult a tax professional for your specific situation.

Here are some easy ways to decrease your gross income:

Contribute more to your 401k.    This would be my first option, as it has the effect of decreasing your gross income and helping ensure your retirement.  If your company matches some contributions, even better.  Contributing to a 401k seems daunting for some people, but there are only a few decisions you have to make.  The bottom line is that contributing to your 401k is a surefire and powerful way of decreasing your taxable income.

Contribute to a Traditional IRA.  A Traditional IRA works similar to a 401k in that eligible contributions can be deducted from your gross income.  There are income limits, however.  For 2015, a single filer must have an adjusted gross income below $61,000 to be eligible for the full contribution deduction, which is $5,500 for those under 50 years of age.  Some people prefer a Traditional IRA to a 401k because you can choose to open it with any company and are not limited to the choices only your employer gives you.  If you meet the income requirements, this can be another powerful way to reduce your gross income.

Contribute to a Health Savings Account.  Yet another great way to decrease your gross income and help your future at the same time is to contribute to an HSA.  HSA’s are available to those who have a High Deductible Health Plan, and allow you to contribute money pre-tax for health related expenses.  This money also has the bonus of not being taxed upon withdrawal if used for health care expenses, which is an amazing benefit.  Money contributed to an HSA also avoids FICA taxes, which are the Social Security and Medicare taxes.  I don’t think you can find an account anywhere that allows you to escape taxes totally.

Many HSA providers also have investment options, which is great since any gains or qualified withdrawals are not taxed.  In order to provide an incentive to contribute to an HSA, some employers will throw in some free money as well.  Definitely worth checking out if you haven’t already started contributing.

Contribute to a 529 plan.  Many states allow a state tax deduction for contributions to their college savings plans.  Find out if your state is one of them, and get a little break on your state taxes while helping with your child’s future college expenses.  Read about my thoughts on 529 plans here.

Work less.  Not the ideal solution for most, but if you worked really hard last year and it caused lots of unnecessary stress, it may be an option.  Also, if you have a really long commute and have high workday related expenses, it may not be the worst thing in the world to take a day off here or there.

Increase deductions and credits

Deductions and credits are the other way to decrease your taxable income.  Deductions work to reduce your taxable income while credits reduce the actual amount of tax you owe after it is calculated.  Thus, credits are definitely more valuable but can be tougher to qualify for.  You don’t think the government would make this easy now do you?

While the list of deductions and credit available is huge, I’ll just mention a few of the easy ones that most people can get.  As always, consult a tax professional for your specific situation:

Have a kid.  The Child Tax Credit can be great, especially for those with lots of kids.  For those who meet the income requirements, it can reduce your tax bill by $1,000 per child.  While having a child just to get a tax break is generally not a good idea, it’s a nice little break nonetheless.

Go back to school.  There are a number of different credits and deductions for education.  The big ones are the Lifetime Learning Credit, the American Opportunity Tax Credit and the Tuition and Fees deduction.  They all have different requirements and effects on your taxes, so it’s best to have a tax professional guide you on which one you can claim.  Lots of people want to go back to school to get another degree or need some help for paying their child’s tuition, and these education credits and deductions provide just that.

Give to charity.  If you are able to itemize your deductions, which means you can claim certain deductions which will exceed the amount of the standard deduction that everyone is eligible for, then increasing your charitable contributions is an option.  I know, I know we should give to charity out of the goodness of our hearts, but if we get a tax break for it too, then why not?

A strategy that some people do is that if they know they won’t be able to itemize deductions next year for whatever reason, they will double their charitable contributions for the current year, essentially giving their next year’s contribution as well which can maximize their deduction.  It’s also a good practice to donate any unused clothes at some point in the year so you can take advantage of the deduction while de-cluttering your home.

Business expenses.  Owning a business or having a profitable side hustle can lead to a plethora of possible deductions, which I can’t possibly go into because there are so many deductions available and I don’t know too much about them.  This is definitely something to talk about with a tax professional.

The time to get serious about taxes is the year before they are due, not when you have to file them.  Unfortunately by then, the ship has already sailed as far as getting deductions and credits.  The deductions and credits listed in this post are kind of the easy low hanging fruits, but any serious discussion about your specific situation should be made with a tax professional.

Please. Take our money.

Most people watch movies to pass time or just let off some steam.  When I watch a movie, I make it worth my while.  I like thinking about the characters and their relationships, and what values or morals the movie was trying to get across.  For all the talk of Hollywood being a soulless money making machine, which it essentially is, most movies do have a beneficial lesson or two in them.  You just have to look for them.

I recently watched The Wolf of Wall Street (I know I’m like a year late to the game).  And being a personal finance blogger, this movie REALLY resonated with me.  It takes place in the 80’s and is about a man named Jordan Belfort.  Mr. Belfort (who ironically is currently a motivational speaker) is a Wall Street broker.  Which means he manages investments for people and gets a cut via commissions.  He got an entry level job with a firm and was idealistic to the core.  He just wanted to help people make money, and make a little bit himself in the process.

As the story usually goes, he let the money get to his head.  He eventually founded his own brokerage firm, which was doing some very shady stuff.  They were essentially cheating people out of their money and getting fat on commissions.  The FBI finally caught wind of this and he got some jail time, though not nearly enough in my opinion.  The movie pretty much chronicles his career.  It’s a very entertaining movie, but be warned it’s pretty vulgar so make sure there are no kids in a 50 foot radius.

But this post is not just a movie review.  It also contains some financial lessons I picked up from watching:

1.  There are some bad SOB’s out there trying to take your money.  Mr Belfort and his cronies had one goal and one goal only:  make lots of money.  And they would do it by any means necessary.  This included super high pressure sales tactics, misleading investors and lying to the SEC.  The biggest thing I noticed from their methods is that they wanted to make the investor feel that this one investment decision is the most important one of their life.  That if they don’t agree to investing with them, they will regret it for years.  Because they seemed like a very legit and professional company, many investors complied.

Lesson learned:  Never work with someone who wants you to make a decision right away.  Any major life or investment decision takes time and thinking.  If the salesperson wants you to make a decision on the spot, take your business elsewhere.

2.  There are a lot of gullible people out there.  As the saying goes, there is a sucker born every minute.  I’m not sure who said it, but it was probably Albert Einstein or Ben Franklin.  Mr. Belfort and friends defrauded a LOT of people out of their money with their antics.  I was actually surprised that so many people were willing to invest so much money on a whim.  It shows that as long as you have a good pitch, you can get a lot of people to buy your product.

Lesson learned:  Marketing is key.  If you can effectively (and honestly) market yourself and are diligent about it, you should be able to get what you want (money, clicks, ratings etc.) eventually.

3.  No one knows what the market is going to do.  There’s a scene early in the movie where Jordan is having lunch with his first boss (played hilariously by an old looking Matthew McConaughey).  The boss tells Jordan that no one knows if the market is going to go up or down, that it’s a losers game to time the market.  But as long as you make the investor think that it’s going up, and as long as you make them rich on paper, they will keep investing and the brokers will keep getting rich off of commissions.

Lesson learned:  Don’t try to time the market.  Stick with index funds that have low expense ratios, keeping more money in your pocket and out of the broker’s. 

4.  Technology is awesome.  Since the events of the movie took place in the 80’s, most of the transactions were done over the phone.  This made it easy for the brokers to employ their high pressure tactics and make the investor seem like they had no other choice.  Online trading wasn’t really an option back then so investors were at the mercy of the broker.  It was also harder to get the latest business news so when the broker is telling you something big happened, you had to believe him.

Lesson learned:  Do your research online.  It’s easier than ever to find which funds are the cheapest and what is the right asset allocation for you.  Online transactions are cheaper than phone transactions as well.

5.  There is never enough money.  The main characters of this show totally gave themselves over to money.  It was all they thought about day and night.  This eventually landed them in lives of debauchery fueled by booze and sex, day after day.  No matter how big their houses got, how fancy they traveled or how lavish their parties, they just wanted more and more.  Until the FBI got them.

I sometimes believe I think about money too much,  but then I realize that I want to make money to keep my family secure and help those in greater need than myself.  I wouldn’t say I’m the most noble person out there, but there’s a difference between wanting money for the sake of wanting it and wanting money for higher purposes.

Lesson learned:  Money is not an end, but a means.  It’s up to you to decide what ideal end is.  

“Don’t mind if I do” said the broker.

Depending on who you ask, investing can be many different things.  Talk to a young day trader, and investing is a heart wrenching, gut busting and sweat inducing race that never ends.  Ask a guy in his fifties who has been passively investing in his 401k throughout his working years, and he might tell you he checks his investments once a month.  Some people enjoy the number crunching and up to the millisecond information they can get from day trading, while others enjoy doing other things in life and let their investments grow on their own in the background.

There is one thing in common in both these scenarios, however, and it presents itself in different ways.  And that is investment fees.  Everyone knows there is a cost to do business.  When you get the dinner bill, you’re not just paying for the food.  You’re paying the restaurant employees’ salary, the rent and utilities.  The same goes for investing.  When you invest in a stock or a mutual fund, you’re not just paying for the privilege of investing.  You’re paying the company that facilitates the trade, the manager who manages the mutual fund and everyone in between.  This means that every time you make a trade, you automatically generate negative returns because your investment needs to make up the cost of your transaction just to get back to square one.

While we can’t avoid all fees, there are two types fees that we can try to minimize:

Trading fees

Any time you buy or sell a stock or mutual fund, there is a trade involved that costs you money.  Here are some ways to minimize this fee:

Trade less.  This is more or less what is known as “no-brainer.”  In order to minimize the fees racked up from each trade, try to trade a little less.  This is not feasible for some investors like our day trader friend, but for someone who is investing for the long term, it doesn’t make much sense to make frequent trades because it doesn’t give the investments time to grow and the fees will just eat at your returns.

Consider an online brokerage.  There was once a time when trades were made over the phone.  This was expensive because there was a broker involved, and anytime a middle man is involved, you gotta pay.  The vast majority of trades nowadays are done online, which makes things easier for the investor and the broker.  Scottrade, for example, is an online broker known for its low trading fees.  It costs $7 per trade when you use the internet.  Making a trade over the phone costs $32.  Almost five times as much!

Trade big.  If you buy one dollar worth of Apple shares, you will pay a flat trading fee.  If you buy $1000 worth of Apples shares, you will pay the same flat trading fee.  You want that fee to be as small of a percentage of your investment as possible.  Making 10 separate stock purchases of $100 each with a 7$ fee will cost you $70 in fees.  That’s 7% of your money already going towards fees.   Making one single purchase of $1000 will cost $7 in fees, 0.7% of your money going towards fees.  Another no-brainer.

Expense ratio

An expense ratio is what it costs a company to operate a mutual fund.  It’s usually expressed as a percentage, as in what percentage of your money the company takes.  Expense ratios vary wildly from fund to fund, and a higher expense ratio doesn’t mean you’re getting more expertise.  It just means that you’re paying more for the privilege of investing with that fund.  In fact, having a higher expense ratio just means you have to earn that much more in returns to get back to where you should be.

Here are a few ways to keep that expense ratio low:

Look at it.  It’s that simple.  As of last year, mutual funds are required to make their expense ratio front and center, not hiding behind an avalanche of fine print.  This makes it easier than ever to avoid fees.  If you’re looking for a great Target Retirement Fund, a mutual fund that shifts its asset allocation over time, you can easily see which one has the lowest expense ratio.  Recent returns may or may not give an accurate picture of the fund’s performance, but a low expense ratio can assure that more of your money will be going towards your investments.

Consider individual funds.  Many people love the aforementioned Target Retirement Funds.  They automatically shift your asset allocation towards “safer” investments as you near retirement.  This will help avoid any major aftershocks to your portfolio like the one that occurred after the 2008 crash.  Many almost retirees who were heavily invested in stocks lost a lot of money, and either had to put off retirement and continue working or try to live off of less money.  A Target Date Fund will automatically adjust your portfolio as time goes on, making it almost idiot proof.

Almost.  There are many out there who are not fans of Target Date Funds, and one reason is that they carry relatively high expense ratios.  Vanguard, which is the bastion of mutual funds with low expense ratios, has a Target Date Fund called Vanguard Target Retirement 2050.  It’s for those investors who predict they will retire in the year 2050, when flying cars will obviously be the norm.  The expense ratio for this fund is 0.18%, a very low ratio by most companies standards.  The Vanguard Total Stock Market Index Admiral fund, a fund that simply invests in the broad US stock market, has an expense ratio of 0.05%, almost four times less than the Target Fund.  The Vanguard Total Bond Market Index Admiral fund has an expense ratio of 0.08%.  Both of these funds have a much lower ratio than the Target Date Fund.

The point is, Target Date Funds are great and have relatively low expense ratios, but you can do better.  Investing in an overall stock and bond fund and adjusting your allocation yourself takes a little more work, but will save you money in fees.  Again, you can do a lot worse than a Target Date Fund, but we want to be the best don’t we???!!!

These are just two types of fees that any investor can try to minimize.  We all try to save money on things like car insurance, electricity and cable.  No one likes paying more for something if they don’t have to.  The same thing applies to investment fees.  Remember, any amount you pay in fees is money that is working for someone else and not for you.