Can you insure yourself?

Question Can you insure yourself?

Answer Yes.

Complete Answer  To insure yourself is called self-insure.

The underlying principle of insurance is shared risk/loss. As an example: For every 100 people, one person will have a financial loss of $1,000 during a year. It may be you or one of the other 99, we don’t know. If everyone pitches in $10 ($10 x 100 = $1,000) there will be enough money in the insurance pool to cover the loss of $1,000 for that unlucky person. The other 99 people, each will be out $10 – shared loss. If you decide not to pay $10 to participate in the insurance pool, you instead set aside $1,000 to be used if you become than unlucky person, you are insuring yourself.

Please Note: If you choose to self-insure, you are still exposed to any potential risks and are financially responsible for damages or losses you may cause.

The most common form of self-insurance is an insurance policy with a deductible clause. Generally, the higher the dollar amount of a deductible, the lower the cost of the insurance policy. It would be prudent to set aside the amount of the deductible into a savings account to be used if you suffer a loss. As with other types of savings, I have found that having money automatically deducted from my paycheck and placed into a savings account is one of the easiest ways to save money.

Financial Literacy Knowledge/Skill

A person can self-insure by setting aside money for potential losses.

Comments or Questions

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Next week’s topic: Should personal finances be discussed before you are married?

Do you need insurance?

Question Do you need insurance?

Answer Only you can answer that question.

Complete Answer  Your answers to the following questions will help you determine if you need insurance:

 1. What are your financial responsibilities?

  • You are financially responsible for your medical care.
  • Most states will require you to carry automobile liability insurance. Liability insurance covers the medical and property loss and damages you may be responsible for if you cause an accident. Additionally, if you borrow money to purchase as car, as a condition of the loan, the lender may require you to carry collision insurance to pay for damages, including total loss, of the car you have financed.
  • You are responsible for your personal property. As a renter, most landlords will not cover the loss of your personal property caused by a fire or theft.
  • As a home owner, mortgage companies will require you to carry homeowner’s insurance which covers the loss of real property.
  • As a pet owner, your are responsible for the damages or harm your pet may do to others or their property.
  • Your are responsible for the harm you personally do to others or damage to their property.

2. How much of a potential financial loss can you afford? 

You could conceivably insure yourself against every possible kind of financial loss. The cost, however, would be prohibitive. You have to determine how much of a financial loss you could afford and are willing to take the risk.

Examples: I do not need health insurance to cover the cost of a doctor visit for a common cold. On the hand, I am certain that I could not cover the cost of a kidney transplant. I can afford the cost of a new coffee pot if mine wears out. I could not afford to replace all of my personal possessions if they were destroyed by a fire or flood. I probably could afford a new transmission for my car. I could not afford to replace my car if it was totally destroyed in an accident.

A trusted insurance agent could help you determine risks, potential losses and cost of insurance.

Words of Wisdom The best type of insurance is a policy you never use. The worst type of insurance is a policy that you need and don’t have.

If St. Peter calls you home early, will there be enough insurance, money and/or assets in your estate to settle your debts and pay for a proper funeral service? Don’t pass on those financial responsibilities to your loved ones.

Financial Literacy Knowledge/Skill

Determine if and the amount of insurance you may need.

Comments or Questions

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Next week’s topic: Can you insure yourself?

Should you lend money to a family member or friend?

Question Should you lend money to a family member or friend?

Answer No, give them the money.

Complete Answer  When you lend money to a family member or friend, you change the relationship with that person. You are now a lender and they become the debtor. Additionally, your and their values are involved, “What’s important to them may or may not be important to you” and vice versa. Remember that we tend to spend money on things that are important to us.

We all will, at some time in our lives, have a financial crisis and will need some help. When and if a family member or friend asks for help in the form of a loan, use this occasion to really help them. In education will call this a “teachable moment”.

Ask them “What happened?” Follow up their answer with “What will you change in the future so this does not happen again?” Then, if you can afford to, demonstrate the virtue of charity12 and give them the money they need with the condition that they will not ask you again.

Financial Literacy Knowledge/Skill

Be charitable for those in need.

Comments or Questions

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Next week’s topic: Do you need insurance?

How do you get out of debt?

Question How do you get out of debt?

Answer Stop spending more money than you take home.

Complete Answer  When you have mastered the three most critical elements of managing your money; know your income and expenses, live below your means, and save (Financial Literacy Knowledge and Skills), you will be in a position to get out of and stay out of debt.

Step 1 in getting out of debt is to stop spend more money than you take home each month – live below your means.

Step 2 is to list all your debts from the smallest to largest balances.

Debt Balance
Credit Card A 300.00
Credit Card B 1,500.00
Credit Card C 3,500.00
Car 18,000.00
House 103,000.00

Step 3 is to determine the amount of minimum monthly payment for each.

Debt Minimum
Monthly
Payment
Credit Card A* 25.00
Credit Card B* 37.50
Credit Card C* 87.50
Car 500.00
House 1,100.00

*Minimum payment of $25.00 or 2.5% of unpaid balance, 18% interest on unpaid balance.11

Step 4 Pay extra on the debt with the lowest balance while paying the remaining debts at the minimum or required amounts each month.

If only the minimum amount ($25.00) was paid each month for Credit Card A, the total interest would be $33.27 and take 14 month to pay off. On the other hand, by adding an additional $75.00 each month (total $100.00), the debt would be paid off in 4 months, with total interest of $9.32.

Step 5 When the first debt is paid off, add that money to to pay off the next debt, then the next,  and so on until you are out of debt.

Please Note: The process of getting out of and staying out of debt only works if you are living below your means – spending less money than you take home. If you continue to spend more money than you take home, you will never get out of debt.

Financial Literacy Knowledge/Skill

How to get out of and stay out of debt.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: Should you lend money to a family member or friend?

How much should you be spending for a car?

Question How much should you be spending for a car?

Answer 15% of your take-home pay.

Complete Answer To clarify the question, “How much should you be spending for transportation?” The answer is the same – 15% of your take-home pay. It is important to understand that transportation is an expense – it is not an investment nor a way of saving. A car is a depreciating asset.

Each month, set aside 15% of your take-home pay into your Transportation Account. Take money out of that account to pay for your transportation expenses. Walk or use public transportation to get where you need to go. If your Transportation Account never grows in value, that is a good indication that you cannot afford a car.

On the other hand, if the money in your Transportation Account continues to grow in value, you can start considering different options for getting around. For most of us, a car is our transportation. “How to” buy a used car or new car, should I lease or buy a car, how to negotiate the price of a car, et cetera, are beyond the scope of this blog. The focus of this blog is how to plan and pay for a car you have selected.

Generally speaking;

  • You should save 15% of your take-home pay until you have enough to pay cash for your first car. It will probably be used car. This will give you the experience of realizing how costly it is to own a car.
  • You should not put yourself in a position of making car payments and car repairs at the same time.
  • In addition to carrying liability insurance, most lenders will require you to carry comprehensive insurance on a car that you finance.
  • Car maintenance is required for all cars – new or used.

I actually know two people who do not nor do they want to own a car. They walk or use public transportation to get around. For road trips, they rent a car. For each, their respective Transportation Expenses are considerably lower than 15% of their take-home pay. Conversely, I know someone who buys a new car every year. He can afford it, that is important to him, and that is how he has decided to spend the money he has earned.

Financial Literacy Knowledge/Skill

Your Transportation Expenses should not be greater than 15% of your take-home pay.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How do you get out of  debt?

How much should you be spending for housing expenses?

Question How much should you be spending for housing expenses?

Answer 25% – 35% of your take-home pay.

Complete Answer “How to” rent an apartment or buy a house is beyond the scope of this blog. This post is intended to help you determine if you can afford the rent and/or mortgage for a place to live.

From the post of July 25, 2016, the recommended amount for monthly housing expenses is 30%, it may vary between 25% and 35%, of your take-home pay. Housing Expenses include all the expenses for a place to live. In addition to the amount you pay for rent or a mortgage each month, it includes the monthly cost for utilities, cable/satellite/Internet service, cell phone, insurance, repairs/maintenance, parking, et cetera.

Please Note: Being “homeless” is just as bad as it sounds. In times of financial crisis, your home should be the very last thing that you give up. If you have to live with a friend or family member until you are back on your feet and can find a place of your own, you should offer to pay them 25% of your take-home pay. Most likely, your friend/family member will refuse. If they accept your offer or not, you should keep them informed of your progress of saving money and finding a place of your own and when you plan to move out.

Long-term Goal: If you decide that you want to be a home owner, your long-term goal should be to pay off your mortgage before you retire. Please note, that even if you have a home that is paid off, you will still have property taxes, insurance, and maintenance and repair expenses.

Financial Literacy Knowledge/Skill

Your total Housing Expenses should be between 25% and 35% of your monthly take-home pay.

Comments or Questions

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Next week’s topic: How much should you be spending for a car?

What banking services do you need?

Question What banking services do you need?

Answer A checking account, savings account, debit card, and a credit card.

Complete Answer  As with the purchase of any good or service, shop around for cost, features, and convenience.

Your checking account is your operating capital account. Deposit all monies received into this account. Use this account to pay all monthly bills on time and withdraw spending money, cash, as you need it. You will need a checking account that allows you to deposit money (checks and cash), write checks, both electronically and manually and access to your account using an ATM for both deposits and withdrawals.

The first expense to be paid each month is to you. Deposit 10% of your take-home pay (Pay Yourself First) into a savings account. If you have money left over at the end of the month, put that amount into your savings account. Use your savings account if you must as explained in the posts of October 10, 2016, but always pay yourself back. You will be pleasantly surprised how quickly the amount grows and how much will be in your savings account at the end of the year.

Helpful Hint  Through no fault of your own, you could be the victim of identity theft and or bank fraud – unexpected financial emergencies. Because of the threats of identity theft and bank fraud, use two completely different banks (not affiliated with one another) for your checking account and your PYF Savings Account. If an account is compromised, you will still have access to some money from the second bank until the problem is resolved.

With a debit card you do not have to carry a lot of cash. It is an option you have with most checking accounts. A debit card, also known as a check card, may be used to make purchases, pay bills, and make cash withdrawals from an ATM. A debit card is especially handy for making purchases when you don’t know the amount of the purchase in advance, weekly groceries or a tank of gas for example.

In reality, a credit card is a short-term loan to make a purchase. As such, interest is charged for credit card balances that are carried for more than the one month billing cycle. A credit card is ideal for Internet purchases and a must when traveling. In most cases, you will also need a credit card to rent a car. I personally use my credit card for automatic payments, and pay off the balance each month. It gives me a record of the date of the payment and I have more control over the automatic payment process.

Financial Literacy Knowledge/Skill

A checking account, savings account, debit card, and a credit card are the basic banking services you will need to manage your money effectively.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How much should you be spending for housing expenses?

Is a credit score important?

Question Is a credit score important?

Answer Yes.

Complete Answer  A credit score is a numerical value based on the information contained in your credit report which is a detailed report of your credit activities. Your credit score, also known as your FICO score, tells a potential lender your credit worthiness, the likelihood that you will pay back a loan. The higher your credit score, the more likely you will pay back the loan, less risk for the lender. Conversely, the lower your credit score, the less likely you will pay back the loan, more risk for the lender.

Credit scores are important because they are used:

  1. To determine if you will be granted credit for a mortgage, car loan, credit cards, et cetera and the interest rate that will be charged. Generally, the higher your credit score the lower the interest rate.
  2. To determine if and the amount of a down payment and/or security deposit will be required for an apartment rental, cell phone purchase, et cetera.
  3. To determine the cost of insurance; car, renter’s, or home owner’s. The higher your credit score, the lower cost of certain types of insurance.
  4. By potential employers who may view a poor credit score as an indication that a person is living beyond their means which could negatively impact your ability to get a new job.

If you follow the three most critical elements of Financial Literacy, knowing your income and expenses, living below your means, and saving, you will have a respectable credit score.

Please Note: You should get a credit report at least once a year and review it for accuracy. The three major credit reporting agencies are Experian, TransUnion, and Equifax. You are entitled to receive a free credit report once a year from each agency.
Contact Information:  Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281; www.annualcreditreport.com; (877) 322-5281.

Financial Literacy Knowledge/Skill

A credit score is important not only because it is an indication of your credit worthiness, but is used to give some indication of your ability to manage your finances in a responsible manner.

Comments or Questions

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Next week’s topic:  What banking services do you need?

How do you fund your retirement account?

Question How do you fund your retirement account?

Answer  Use your PYF Savings account for retirement.

Complete Answer  Although retirement planning is beyond the scope of this blog, the following guidelines will point you in the right direction. If you save 10% of your take-home pay each month, your PYF Savings Account, the following things will happen:

  1. You will have enough money in your checking account to pay all of your monthly bills on time (post of post of October 10, 2016),
  2. You will have money for unexpected financial emergencies (post of October 17, 2016),
  3. You will have money to leverage your buying power for big-ticket goods and/or services (post of October 24, 2016), and
  4. You will have money to fund your retirement.

Retirement Guidelines

  • Start NOW! If you are putting 10% of your monthly take-home pay into your PYF Savings Account for your working life, you will have a substantial amount of money for your retirement. Will that be enough to fund your retirement? Only you can answer that question. A good place to start is to look at your monthly Spending Plan. How much money do you need each month to maintain your current life style?
  • Diversify your retirement funds.
  • Take full advantage of your employer’s retirement and/or pension programs.
  • Only withdraw money from your retirement account(s) as a last resort, then make paying yourself back a priority.
  • Because each of us have unique financial situations, you should seek the help from a trusted, licensed financial adviser.

Financial Literacy Knowledge/Skill

How to fund your retirement account.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: Is a credit score important?

 

How do you leverage your buying power to pay for big-ticket goods or services?

Question  How do you leverage your buying power to pay for big-ticket goods or services?

Answer  Use your PYF Savings account to leverage10 your buying power to pay for big-ticket goods or services, then pay it back.

Complete Answer  Although “leveraging your buying power” may sound like a complicated financial concept, it is really quite simple. An example is a gas station offering a gallon of gas a few cents cheaper if you pay with cash instead of using a credit card.

The term “big-ticket” is normally used to describe expensive purchases. For the purpose of this blog, I will use the term “big-ticket” to describe things that cost $1,000 or more and cannot be paid for from a typical monthly Spending Plan.

Example My car insurance for two cars, a pickup, and a scooter all come due the same month each year. The total bill is more than I can pay for from my Auto Expense account in my Spending Plan. I use money from my PYF Savings account to pay the total bill all at once. By paying the auto insurance bill for one year, I take advantage of available discounts. I then amortize the discounted cost of one year of auto insurance over the next year.

Using rounded numbers as an example: The discounted cost of car insurance is $1,200.00. It is more than I can afford in one month from my Spending Plan for Auto Expense. I borrow the $1,200.00 from my PYF Savings account, then divide the $1,200.00 by 12 months and pay back $100.00 a month. This expense is part of my monthly Auto Expense. Please note; my monthly Auto Expense including the amortized auto insurance of $100.00 does not exceed the total recommended amount, 15%, for Auto Expense.

Financial Literacy Knowledge/Skill

How to use a PYF Savings Account to leverage your buying power to pay for big-ticket goods or services.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How do you fund your retirement account?