Life Insurance 101

This week was Valentine's Day, and I want to tell you what I got for my significant other:

1. A lovely potted flower
2. A lovingly prepared dinner
3. ...and a life insurance policy

Am I romantic or what?

I know, getting someone a life insurance policy as a gift might be about as exciting as getting them a vacuum cleaner, but I have to tell you, both are very much needed!  Besides, nothing says "I love you" more than making sure they are taken are of if disaster occurs.  I know those of you that are in your 20's and 30's are going to be tempted to dismiss this post and tell me that you have time to do it later, but I am going to urge you not to drag your feet on this one.  If you are in decent health right now, you will be insurable.  If you wait until later, and your health declines, you could find that you are uninsurable, or that the premiums are going to be much higher than they would be if you bought a policy earlier in life.  Also, do not think that just because your work place has insurance on you that you are fine.  It is likely enough to cover funeral expenses but little more.  You will have that as long as you work there, but not any longer.  Also, you need to give your family a little more financial peace than simply "getting you buried," right?

If there is anyone that depends on you financially, then you need life insurance.  There are primarily two things that you need to consider first and foremost:

1. How much money do you need the death benefit to be?
2. Which type of insurance should you buy?

So, the first questions "How much life insurance do I need?"  There are a TON of theories on this.  Some folks say that you need at least 20 times your annual income.  This is a million dollar death benefit for someone that makes about $50,000 per year.  Sounds like a ton right?  Well, there is another reason for this.  If your loved one gets paid out a million dollars and invests it all.  If they got a 5% return, and only lived off of the interest, they would be able to replace your salary without ever touching the original payout amount.

Is there a minimal amount of life insurance you need?  Something less than a million dollar policy?  Well, this is something that you need to really think about.  Evaluate your family's honest needs.  Do you have children?  If so, would there be childcare needs, etc?  If there are not any children, does the other adult have the ability to support themselves?

Let me tell you the manner in which I evaluated my family situation.  My family (household) consists of two adults, both of which are able to support themselves.  When only one of us is working, it is very tight but doable.  Knowing this, I have elected to purchase  policies on both of us.  The death benefit is enough to allow us to pay off our house and have two years worth of the other person's income.  I feel as though this is an amount that will safeguard my family, but I would also be pretty leery of having a death benefit that was any less than this.   This dollar amount would allow the survivor to live mortgage free, which would drastically cut down the remaining monthly expenses.

The second question is "Which type of insurance should I buy?"  There are a few basic types of life insurance:

• Whole Life
• Universal Life
• Term Life

Most people will be just fine with term life.  Term life is just a straight up insurance policy where you decide how long you need to be insured, and the dollar amount you need as a death benefit.  People with children frequently choose a term based on how long they will be financially responsible for children.  They do this thinking, "I know my spouse will be able to support him/herself once the kids are grown."  This is a pretty logical choice.  Others choose a term that relates to their retirement age.  Once their spouse will be able to collect their retirement funds, social security, pensions, etc., they feel confident that those items will take care of their spouse, and feel that they no longer need the insurance.  Remember, when the term expires, your policy is done.  Also, generally a term life insurance policy usually has a fixed premium (at least for an initial span of time), so the younger and healthier you are when you get one, the cheaper it will be.  Of course there are special types of term policies that allow you to continue coverage once your term is done.  Typically, these policies offer a smaller death benefit after certain ages (they decrease after 65, 75, etc.).  The premiums usually also increase when you switch age brackets.  When I was shopping, I notice "TERM" life and "LEVEL TERM" life insurance.  So, if you are looking at term life, be sure that the company doesn't have multiple kinds of insurance policies that fall into the "term" category.  If they have multiple types, make sure you know what you are getting.

Whole Life and Universal Life are considerably more expensive.  While a term life insurance doesn't have any "cash value," meaning they aren't worth any money unless the insured passes away.  These other types of policies carry a cash value.  It is sort of like it is half investment and half insurance.  As long as the premium is paid, you could conceivably keep this type of policy for your entire life.  Now, that does come with a price.  They have a more expensive premium for sure.  For most people, I think TERM make more sense.  I personally like to keep my investments separate from my insurance policies, however, if you feel that your circumstances warrant coverage for longer than a 10, 20, or 30 year TERM policy will allow, you should investigate this type further.

I am NOT licensed in insurance in any way.  Someone that is licensed in insurance can give you a great deal of information with regards to any policy types that you are interested in.  That being said, I would warn you against going blindly into an appointment where insurance is involved.  An insurance salesperson is exactly that, a SALESPERSON.  While they have a lot of knowledge that can help you greatly, it is also their job to sell policies.  An honest and reputable person will only help you to get into a policy that will benefit you, but still, you need to be your own expert.  You CANNOT go into an appointment having no idea what you want, or what you need.  If the sales person operates on commission, they will make money from selling you more expensive policies.  Also, no one cares more than you about your family.  You have a lot of reason to want to make sure that you know what you are getting, and that you are getting what you want and need.  Don't let someone determine that for you because you "don't know" or are too afraid to take a hands-on approach.

More to come on insurance on future posts.  Hopefully, this will get you started toward making some choices that will allow you to sleep well at night knowing you family will be safe.

Credit Cards and Credit: How many is too many?

Sometimes people contact me in order to ask certain personal finance questions.  I received one question today that I felt was worth bringing to your attention.  This person was recently denied a credit card for having "too many open accounts."  It is true that this person has several credit accounts, but is not maxed out on any of them.  Furthermore, this person has more credit available than what they have in use, and make all payments on time.  In other words, they have relatively low balances.  This person was confused about the decline because they felt as though they had been doing everything in a responsible manner.

In general, a person with "too many credit cards" presents a higher risk to the lender.  Lenders especially dislike seeing a number of credit inquiries in the past 12 months.   They look upon it poorly.  They  think to themselves, "Why does this person need so much credit?"  Let's consider this from another perspective (the lender).  Having too many credit cards is a somewhat opposite problem as that of having no credit cards, but a problem nonetheless.  When a lender sees someone with no credit cards they think "How do we know you're going to pay us back?  You have no track record."  With someone that has too many, they think "Danger, danger!  Red alert!  If this person's financial world turns upside down, what are they gonna do?  Max out all of these credit cards, then we will be one of 10 companies in line with our hands held out!  No way!  Stay away from that one!"

...And you have to admit, they have a point.  One of the risks that they take when they lend  to you is the fact that the credit card will be unsecured debt, meaning they can't come and repossess anything in order to make their money back if you fail to pay.  Quite frankly, if you were to file a bankruptcy, they very well might be out of luck! So, when they see "too many accounts," they tend to get a little skiddish.

Now for the magic question...  How many credit cards is "too many"?

Unfortunately, there is no right answer to this question.  Since there are a number of things that compose your credit, and each individual situation is different, that can't be boiled down to one simple number.  With that being said, here are a couple of guidelines.

1. If you don't need to credit, don't open the credit card.
2. Aim to have only 2-6 credit cards.

If you have more credit cards that this, don't rush out and start closing your credit accounts.  That could lower your credit score by making it look like you have a higher amount of debt compared to the credit available.  This is one of the factors involved in the composition of your credit score.  

For further information about what goes into composing your credit score, try going to the websites of FICO, Equifax, Experian, or Transunion.

2016 Social Security Game Changers!!!

It's all over the internet right now, and I hope you've been paying attention!  For those of you who are at or nearing retirement age or have family members that are, there are a few changes being made to Social Security Retirement Benefits in 2016 that you should be take into consideration.

Every year it seems that there are some changes that occur, but this year there are a couple of major game changers, so please pay attention!

1. Say goodbye to "File & Suspend"!  This is a BIG deal!  Historically, there has been a hugely beneficial money move for married couples called "File and Suspend."  This is where one person, upon the age of 66, files to claim their benefit, but suspends payment.  This means that they don't actually collect a check, allowing it to gain 8% interest per year up until the age of 70, allowing themselves to receive a much higher check when they do start to collect their check.  Then, the other spouse (lower wage earner) can claim a spousal benefit, while "filing and suspending" their own benefit (which will also start gaining approximately another 8% per year).  So, these couples have been wisely able to collect one Social Security check, while allowing their future payouts to gain interest, giving them both a higher future benefit.  This is a super smart move!  Well, this move can only be made until May 1, 2016.  Well, now, the "spousal benefit" part of that deal will go away.  You can still file and suspend in order to make your own payment higher, but while you do so, you spouse can no longer claim a spousal monthly benefit.  For further details about the official regulations regarding the "file and suspend" strategy, contact a financial planner or Social Security representative.
2. Say goodbye to "Lump Sum Payouts"!  One feature of "file and suspend" is the ability to collect more money later.  Historically, you could either collect higher monthly payments, or choose a lump sum payout.  People that chose the later frequently received checks up to half a million dollars.  This is a huge benefit for those who run into some sort of financial pickle that is highly unforeseen (think: medical bills, etc.).  Well, the lump sum payout is also going to be no longer.  Again, the deadline for this is also May 1, 2016.

Other changes being made are important, but much more typical.  They include:

1. Social Security payments will not see any raises in 2016.  Frequently, there is an increase for the cost of living, etc.  Well, not this year.
2. Medicare Premium adjustments are also typical.  If they are taken out of your check, you will likely not see a difference, but please check with Social Security via their website, or a representative for individualize information.

If you or a loved one rely on Social Security, it would be wise to investigate any upcoming changes, and how they might impact your individual situations.  It seems that there is still time to take advantage of some of the Social Security features that are going away, but you will need to act quickly.

If you are reading this, and have a family member that is impacted by Social Security changes, please don't be afraid to talk with them about it.  Sometimes, it is necessary to show people in our lives that we love them, by not "minding our own business."  Besides, if they don't want to talk about it, they don't have to do so.  At least you will have done your part!

Roth IRAs and Emergency Savings a Clever 2-in-1

Sometimes, I feel like I'm being pulled in too many directions when it comes to deciding what to do with my money.  It feels like there is not enough money coming in to contribute to all of the places that I need to be.  I've paid off all of my credit card debt, but I still have student loan debt that I'd like to eliminate.   I haven't obtained an 8 month emergency savings account yet, and I'm concerned about saving for retirement.  I feel like I have to choose, but I'm torn.  On the one hand, the more debt I have, the more income I need, so eliminating that will free up some money.  On the other hand, my retirement isn't going to pay for itself, and right now, I have 30 years until I retire.  That makes this the perfect time to allow my money to really compound and grow for retirement, but if I delay contributing, I will just end up having to save EVEN MORE money later in order to catch up.  Still there is a THIRD side to my conundrum.  If I don't have a properly stocked emergency savings, any disaster that comes upon me will require me to wrack up a credit card balance.  I REFUSE to let THAT happen!  So, what's a person to do?

Kill two birds with one stone, that's what.  Open a Roth IRA and start contributing the max (or as much as you can).  In 2015, as long as you are earning income, and make less than $116,000 (or $183,000 if married) you can open one.  You are allowed to contribute $5500 per year ($6500 if you are 50 years of age or older).  That's $458.33 per month.  If you can pull it off, the benefits will be tremendous.

Now, I'm sure a few of you are confused about how this relates to your emergency fund, right?  In a Roth IRA, you are allowed to withdraw any money that you contributed without a penalty.  You just have to be sure that you don't dip into any of the interest that it earns.  The interest earned in your Roth IRA must be left very well alone.  Well, actually, there are circumstances where you can also take the earnings, but that is considerably more complicated.  My recommendation is to simply leave that part alone.

So, if you are strapped for cash, but feel the need to do SOMETHING to start saving, I recommend opening a Roth IRA and funding to the max (or as much as you can).  This can double as an emergency savings as long as you only withdraw the contributions (not earnings).  You are to avoid having to do this at all costs.

Part two of this strategy is to consider where you will open it.  If you open it at a discount brokerage, you can invest in a manner that will likely grow your money much more quickly, but if you need access to the money, it will take longer (3-4 days) for them to transfer the money to your bank account.  My strategy is to open a Roth IRA savings at my local credit union.  Right now, the interest rates are terrible, but I can get the money into my checking account the very same day that I call them.  In a true emergency, this is a bonus.  I will only fund this one up to 1 month of my expenses.  Then I will switch over to funding one at a discount brokerage to maximize my money's growth.

Eventually, I will be able to fund both of these things separately, but until then, this is a good strategy.

Update:  It is also important to note that you can contribute to your IRA for the PRIOR year all the way up to the day that year's taxes are due!  For example, I am writing this update in Feb. of 2017.  Right now, since I haven't maxed out my IRA for 2016, I can make a contribution, and have my financial institution apply it to the 2016 tax year.  This is perfectly legal.  If you didn't contribute to it at all last year, you can use this strategy, and it will allow you to take the Retirement Savings Credit, which could be a HUGE benefit on your taxes!

How finding my "holiday magic" lead to starting a new holiday tradition

In my house, we are gearing up for the holidays.  We had already decided to stuff stockings for each other, and only to give one gift per person.  Furthermore, we set dollar caps on the amount to be spent.  That being said, I feel that we have done a terrific job of taking care of our monetary selves, but to be honest, I feel as though we were neglecting our emotional selves.

As a little girl, I always looked forward to Christmas as a magical holiday.  I'm not even referring to the myth of Santa Claus, or even the sheer amount of gifts under the tree.  I am referring to an emotional well-being that I've always felt as a result of the time I've spent with people I love and the sharing of stories and traditions.

When I reflect on that time, I realize that the gifts that I looked forward to were largely based on time spent with people, and traditions.  The problem is that many our holiday traditions are intertwined with a culture of overindulgence.  In order to replicate the "magical" feeling I had as a child, I felt the need to be honest in pinpointing that which created it.  My fondest, most magical holiday memories are watching a holiday program (children's play, ballet, singing Christmas tree, bands, choirs, or a holiday movie...), baking something with my mother or grandmothers (frequently something Norwegian, as that is my cultural background), music, and staying up late, in my pajamas, watching a movie with my family.  There are very few times, when the memory involved a gift.  When that did occur, it was usually a give that was the kind you cannot buy in a store:  the blanket my grandmother crocheted when I was an infant that was given to me as a teen, the wedding ring that my late father had given my mother, etc.  Really, if I am honest with myself, it was never about the money.

We have discussed this at my house, and have decided to try out a new holiday tradition.  The one gift each of us will be getting is a box with new pajamas and our favorite movie snacks.  We are going to decide on a favorite holiday film (possibly more than one) to watch, pop popcorn, and sit with our beverages and snacks of choice, and enjoy some time together.  I am already feeling the anticipation of my new PJ's, and hope very much that sour patch kids make the box.  I'm voting for Home Alone, and possibly some cartoons from my childhood.  Prior to the holiday itself, I think I want to make some Norwegian edible, and go see something live (maybe the Rockettes).  Even with show tickets this should cost us $200 or less, and the idea of it provides me with more happiness than the idea of expensive gifts.

I know that this has been a slightly different kind of post because it is less about advice, and more of my personal story, but there is a reason for this.  I want to challenge you to consider the source of holiday magic for you.  When you get to the root of it, does the source of your holiday bliss need to set you back financially?  I've discovered that mine does not.  My goal right now is to achieve financial freedom.  I want the freedom to choose what I am going to do with each and every day of my life.  I do not want to do anything out of obligation, and that is worth so much more than becoming intoxicated by December, and experiencing "holiday hangover" in January.

Why you should contact your Tax Accountant now!

It's October, and I've been thinking about my potential tax bill.  You may find it strange that I am thinking about it now, when the calendar year hasn't even ended yet, but actually, now is the perfect time to consider it.  Let me explain.

If you have had an increase in your income in the past year, you may find yourself in another tax bracket.  Also, if you've had any "life changing" events, it could also impact your tax situation.  My situation is that my income is higher.  While I have enjoyed the higher income this year, I realize that it could make my tax situation drastically different.  Typically, I get money back, but this year it could be different.  So, I am going to contact my accountant.  

October 15th is the date that taxes are due for people that filed extensions.  Wait until after that date by a week or two in order to contact your Tax Accountant because they may be very busy right around that date.  If you have experienced any of the following:  income increase, inheritance, property sale, marriage, added dependent, less dependents, divorce, or other life changing event, you should consider checking in with your Tax Accountant  sometime in the next month.

Your tax professional can  help you assess whether or not you will owe the government come tax time.  It will be an estimate, but a fairly close one.  There are a few things that can be done during the course of the remainder of 2015 to help you minimize any potential tax bill, but first you have to know if you are in that situation or not.

The first step might be to make some transactions that make your Adjusted Gross Income (AGI) lower.  You see, your Gross Income is the amount you are being paid before taxes or any other withholding are taken out.  Your AGI, is the amount that the government is actually taxing you on.  The lower your AGI, the smaller the amount you are responsible for in taxes.  After that amount is set, there are an additional series of things that you get credit for.  These "credits" go toward your tax bill, lessening the amount you actually pay to the IRS.  Your tax accountant might tell you to donate more to a charity, contribute to a traditional IRA, tax-deferred annuity contributions, health savings account contributions, maximize any educator expense deduction, and several more.

The point is, if you've had an event that could change your tax picture, contact your preparer or accountant.   Your email should basically go something like this:

"Dear so-and-so, I wanted to check in with you before the end of the tax year.  I have had _____________ event come up this year, and I am not sure how it will change my tax situation this year.  Is there anything that I should do before the end of the year in order to plan accordingly?"

Then, they will have a few questions (most likely), after which you will have a solid game plan to complete within the calendar year.

Of course, there is one additional thing to be prepared for...  Paying the preparer.  It is possible that if it is just a quick check in, that they may not charge you, but if your tax planning takes them some time, you may have to pay a fee.  Don't let that possibility detour you.  Tax planning can save you a good deal of money.  Even if you have  fee for the consultation, the information is too valuable to pass up.

Until next time,
Happy Planning!

Weddings: Saving money on out-of-town events..

Have you ever noticed that other people's lives tend to cost you a lot of money?  People graduate, have birthdays, anniversaries, and weddings.  You want to participate.  Some of you agree to the festivities without thinking of the cost because you can't imagine missing their event.  Others reluctantly agree to join the festivities, but secretly cringe, not knowing how you will finance your end of the obligation.

This month, I am attending an out-of-town wedding.  Out of town weddings come with a lot of expenses, some that are easy to overlook.  Planning ahead, and using these simple tips can help save you hundreds!

1. Transportation:  Consider driving. While this won't work for events across the country, things that are in your region may be a drive-able distance.  I live in New York City.  The wedding I am attending is in Virginia.  In order to fly to this wedding, I would need to purchase two adult airfares plus rent a car at the other end (the wedding is not in a city with an airport).  Instead, I rented a car.  I got a cheaper rate by renting out of New Jersey, so I will spend the 30 minutes on public transit to get there.  I am paying $126 for the car rental for the entire weekend.  This is way cheaper than flying.  The miles are unlimited.  I will have to pay for gas.
2. Transportation:  Consider a ride share.  Find out if there is anyone else in your area that is traveling to the wedding.  If so, they may want to consider a ride share.  I found a gal in Brooklyn that is also going.  She is going to ride with us, and contribute to the car rental and gas.
3. Hotels:  Typically the bride and groom get a "block" reserved at a local hotel or two.  The hotel will set a price for all rooms in that block, and you have to reserve by a certain date in order to get a room at that rate.  You would think that this would be a discounted option, and it very well may be.  That being said, do some of your own hunting.  Check online well enough before that "reserve by" date.  See if you can find something near where the other hotels are, but less spendy.  The rates for the "reserved block" in this Virginia town were roughly $150 per night.  I did some searching, and found a hotel on the same street that looked nice enough for half that price.  I will be staying for two nights, and paying only about $150 for that entire time.
4. Breakfast Counts:  When you are looking for hotels, look for one with free breakfast.  Don't pay a higher rate in order to get one, but you will likely find some choices that include breakfast.  Hotel breakfasts are typically not gourmet, but they have come a long way since the doughnut and coffee trend of the 1980's.  If you stay in the hotel two nights, and breakfast is included, you are saving the cost of two meals out.
5. What to wear:  There is a good deal of pressure in this department.  Weddings are a time when people size you up to see if you look good, or have "let yourself go."  Don't get sucked into this madness.  Ask the bride and groom what level of formality it is, and select something from your closet accordingly.  Most likely you have something that is appropriate that you have ALREADY paid for.
6. The Gift:  You are not to look at the registry until you set a dollar amount.  Mine is $50.  Once you have set your budget, you may look at the registry.  Personally, if I don't find something I like for my set amount, I will give them the cash.  People feel strange giving cash, thinking that it is "impersonal."  The truth is, the couple will appreciate it.  They will appreciate it for two reasons.  First, they will not get everything on their registry.  Maybe they asked for 4 bath towels, and got 2.  Things like this happen.  If a few thoughtful people have given them cash, they can use it to purchase items that were not selected by their guests.  Secondly, they might want to use the money for their honeymoon.

The above list represents what I plan to do to make it through this wedding in style, and without spending too much.  I will spend about $65 on the car rental, $150 on hotel costs, $40 for gas, $60 for food (2 lunches, 1 dinner for two of us), $50 for the wedding gift.  This brings my grand total to $365.  This is great compared to my original estimates.  When I priced this out for two people to fly, stay in the hotel that had the blocks reserved, etc. the price came out closer to $1500,  a definite budget buster!  My way creates a relaxing, stress-free, mini-vacation that I can fully afford!

Feel free to add any money saving tips of your own when it comes to out-of-town events!