Podcast #7 All About Insurance

Insurance is often discussed as something that is complicated and difficult to understand… Let’s fix that!

Remember what insurance is for: Risk Transfer!

When you think about the things you could insure, several things might come to mind: Home, auto, life, and personal property. There are different types of risk associated with each of these.

Some risk you might want to:

· Retain (the risk is infrequent in occurrence and minimal in scope)

· Avoid (the risk is frequent in occurrence and the significant in scope) – ex. lifestyle choices such as smoking that leads to premature death

· Transfer ( the risk is infrequent in occurrence but significant in scope) – ex. Death of a loved one.

When you buy insurance you are transferring the risk to the insurance company!

When you buy insurance remember the risk you are trying to transfer and the dollar value of that risk

· Your annual premiums should be less than the risk value for it to make sense!

· It has to be an actual risk for you to want to transfer it.

What are the most important insurance policies that most people should have?

· Term Life Insurance

· Long term disability – much more likely to be disabled than to die

· Homeowners/Renters Insurance

· Auto Insurance – it’s the law

· Health Insurance – it will be the law

· Personal Umbrella Policy

Andrew recommends websites like www.zanderins.com for life and disability and www.insurancequotes.com for Auto and Property.

Jim’s Twitter: http://twitter.com/#!/jcollison

Andrew’s Twitter: http://twitter.com/#!/AndrewDHunt

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I Should be Saving How Much?! by John D Buerger, CFP®

How much of your income should you be saving?
A common rule of thumb answer used to be that 10 percent of income should go into savings.
"But 10 percent of income is a lot!" is a common response. Saving that kind of money seems so daunting that most people don't even try, which is why the national savings rate ended up actually being negative in the mid-2000's. Today, consumers are spending less and saving more, but the national savings rate is still in the low single digits - well below the 8 to 10 percent rate in the 50's and 60's.
10 Percent Is Not Enough
Here's the real kicker: based on recently published research, the average savings rate really should be 16 to 20 percent of household income... not 10 percent.
Sixteen to 20 percent?! Ouch!
If 10 percent was so difficult that most Americans didn't even try, how likely is it that you will take a shot at 20 percent savings? It's almost too depressing to think about.
Mission Impossible
Hang with me for a few more minutes, though, and let's see if we can make a dent in this seemingly impossible 20 percent savings target.
As a Certified Financial Planner™, I've reviewed lots of client cases over the years. Since I believe true wealth is built out of cash flow management (not investment management), I have paid closest attention to the successes and failures of various savings strategies.
Here is what works:
Step #1: Trim the Fat
Almost everybody can identify 5 percent in cash flow savings just by paying attention to expense details. Use an online budget planner to chronicle every dollar that you spend.
When you see an expense you don't recognize or is surprising, you will have found an easy place to trim your expenses. Spending your money on that item obviously didn't register as much of an experience. Otherwise, you would have remembered it.
Step #2: Understand Value
Take a moment to think about the most important things in life to you. These are your values. For most people, top tier values include relationships, family and special experiences. They almost never include “stuff” (i.e. tangible items). Humans are hard-wired to be attracted to shiny new things, but that attraction doesn't last and the item is soon forgotten.
Here's an example: remember the new shirt you "had to have" back in 2002? Me neither. Same thing goes for most restaurant meals - they just aren't that special to remember.
In the grand scheme of things, the phrase, "He who dies with the most toys wins," is rarely what's going through the mind of a person on their death bed.
Step #3: Pay for Value
Every time you are faced with a spending decision, take a short pause to ask yourself, "Is having this really important to me? How important is it?"
Compare your answers to how important having something different that you would really treasure would be in your life. Understand that every dollar you spend on one thing is a dollar that cannot be spent on something else that you might value more.
Step #4: Shift Your Framework
The last trick is to change the perspective with which you view each purchase decision. Our tendency is to view expenses in comparison to our annual personal income: "I make $40,000 a year. This is a $20 purchase. Twenty bucks is nothing compared to $40,000, so the cost is insignificant." Or, "The cost is zero and I want it."
When your brain does the cost-benefit analysis - you end up making the purchase.
But what if you compared that $20 purchase decision to the money you REALLY have control over. For most people that "control income" ends up being $100-150 per week for everything including food, clothing expenses and entertainment - truly discretionary expenses. The rest of the money you spend each week is to pay taxes or fulfill previous obligations like rent or mortgage, utilities, loan payments and gas for your car.
Now that the $20 decision IS significant (compared to $100 you have to spend all week), you might be tempted to think twice about dropping the cash.
You Can Do This
Implementing each of these four steps can easily trim 10 to 15 percent of your current expenses without giving up anything that is really important to you. You're just spending less money on the stuff that doesn't matter anyway.
I have seen many cases where clients have actually been able to exceed the 20 percent savings rate target and in every case they have said they have never been happier.

The A/C Always Breaks When it’s Hot Outside

I am in New Jersey right now and it is pretty warm, about 95 degrees today! And earlier this week in Nebraska it hit the triple digits for the first time of the summer season. So what happens when it gets hot? Of course, the air conditioner breaks!

It seems to be the natural order of things. When the weather changes and you start turning on appliances that you have not used for several months, they never work properly. The air conditioner has a hard time in the summer, the furnace has a hard time in the winter and the car has a hard time every time the seasons change!

If you have heard me speak in the past or read this blog for any amount of time; you know I am a huge fan of  having  an emergency fund. In fact, I am such a big fan that I think an emergency fund is the single most important thing you can do to improve your financial wellbeing. So when the appliance breaks down, some of you who have an emergency fund might initially reach to that account to cover the cost. But is it really an emergency? Well, I think that is a question worth considering!

Here’s the deal… I would argue that events which occur with some sort of frequency and certainty are not emergencies. Case in point: Christmas. Some people might like to argue that Christmas sneaks up on them every year and forces them to incur credit card debt. It happens every year people! You can plan for that, it’s not an emergency.

If there another thing I know for certain it is that cars simply exist to get us from point A to point B and break down all along the way - which in turn sucks money straight from our wallets.

There is a certain level of certainty that if you live in the Midwest you will have to make car repairs and eventually purchase a different vehicle.

So things that have frequency and certainty should be saved for in my humble opinion. However, you have to decide what qualifies as an emergency for your family. I would actually encourage you to literally make a list of the things that are emergencies to you. There is something psychological about physically writing things down. I think it forces you to actually commit to it – after all you wrote it down!

So what about the random home appliances, decks, siding, windows, etc.? I would suggest saving for those costs since we know they are going to happen! A few months ago I wrote about a little rule of thumb that I would like to bring back to the forefront of your memory. If you own a home you should consider saving 1.5% of the value of your home each year. Then simply earmark this account for up-keep expenses. As you might remember, I am a new homeowner and I’ll tell you that so far in the first 6 months I have had to call both a plumber and and an A/C repair man. That 1.5% savings account is coming in handy!