There are external risks to your financial health. Many people ruin their financial health even before any external risk can, but lets say you are being responsible then what risks should you seek to protect yourself from?
| Risk | Strategy | Also |
|---|---|---|
| medical costs | health insurance | emergency fund, healthy lifestyle to reduce the likelihood of needing medical care |
| property losses (house damaged, car stolen, property damage…) | homeowners insurance, rental insurance | |
| job loss | emergency fund, unemployment insurance (provided by the government and paid for by the company in most cases - in the USA) | updating skills, maintain a career network, education, learning new skills |
| disability (which both damages your earning potential and often has medical care costs) | disability insurance, health insurance | social security disability insurance - in the USA |
| investment losses | sound investment portfolio and strategy (diversification, appropriate investments, adjusting investment strategy over time) | extra savings |
| having to pay damages caused to others | homeowners insurance often includes personal liability coverage (and car insurance often includes some coverage for damage you cause while driving). check and likely choose to pay for extra liability insurance - costs to add coverage is normally cheap. | |
| unexpected expenses | emergency fund | extra savings |
| loss of income of someone you rely on (spouse) | life insurance | extra savings |
Another protection is to be financially literate. You can risk your financial health by being fooled in spending money you should save, borrowing too much for your house, failing to buy the right insurance, using too much leverage, investing too much in high risk investments…
Related: credit card tips - personal finance tips - personal loan information
Poorer Than You posed the question: Where to Stash Your Rainy Day Fund?
Pros: Interest rate usually meets or beats inflation, transfers to checking account, separation from checking decreases temptation to spend, no minimum balance requirement
Cons: Slow transfers may hinder urgent emergencies, limited by federal law to 6 transfers out of the account per month
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Personally, I’m using a credit card/online savings account combination right now. After I graduate from college and grow my emergency fund, I’ll move most of the fund to a money market savings account, and perhaps keep a couple hundred dollars in cash as well.
Here are my thoughts:
A money market fund is where I used to hold emergency funds, but things have changed. Money market funds are paying less than inflation (especially true inflation - which exceeds reported inflation). Right now high yield savings is where I have my emergency funds. You need to not only pick a good choice but pay attention to see if the marketplace shifts and certain options are not as appealing as before.
I would use a credit card for immediate spending needs and then paying the balance in full with funds from high yield savings. But right now high yield savings accounts pay more than money market funds, so just stay with high yield savings. If money market funds pay more in the future then I would put the emergency funds there.
Related: Personal Finance Basics: Health Insurance - personal finance tips
New research confirms feeling powerless leads to expensive purchases. So in addition to learning about personal finance logically it can be important to build your self esteem in order to improve your financial position. For many people understanding human psychology helps them take more control of their own life. And can help when helping others.
In a study that may explain why so many Americans who are deeply in debt still spend beyond their means, authors Derek D. Rucker and Adam D. Galinsky (both Kellogg School of Management at Northwestern University) found that research subjects who were asked to recall times when someone else had power over them were willing to pay higher prices for status-symbol items.
“This increased willingness to pay for status-related objects stems from the belief that obtaining such objects will indeed restore a lost sense of power,” write the authors.
Instead of allowing yourself to submit to this impulse you will put yourself in a better position if you refrain from trying to buy a sense of power. Take a real look at your position and make changes that move your personal finances in the right direction.
Related: Buy Less Stuff - Too Much Personal Debt - Financial Illiteracy Credit Trap - Curious Cat Investing Library: Personal Loans
With the drastic increases in food prices recently a home garden an attractive way to save some money. I have planted a garden for several years. Frankly the main reasons I did so had nothing to do with money. I find it cool to plant a seed or small plant and then just water it occasionally and then be able to eat. Plus it is great to just go grab some fresh food and eat it. It tastes great and is healthy.
The increasing price of food it makes it more attractive. I plant a few tomato plants and some pepper and cucumber plants. And then some pea and beans from seed (and I did celery this year - though I didn’t realize I was suppose to start them inside 10 weeks early so we will see what happens). I think my total cost was under $30. I would guess all the water I use will be under $5. From that I will get 10+ weeks many tomatoes and green peppers, sweet peppers, hot peppers. The cucumbers and and peas don’t seem to produce as long (if I remember right from last year). I am trying to plant some peas from seeds every couple of weeks and see if that works to give me peas for a longer period this year.
I also have a bunch of berries. I have wineberries that just grew themselves (which started as 1 plant 3 years ago and now covers maybe 20 square feet) which are the best thing of all from my garden, frankly (I have never been able to buy any berries nearly as good). And I bought a small blackberry plant 2 years ago which has grown to be quite productive. Last year I had birds eating so many berries I hardly got any. The previous 2 years I could get more than I could eat for several weeks and enough to eat for maybe 4 more weeks total. Any advice on how to keep birds away?
Even while there are some financial benefits I really think the good healthy food and fun is more important.
Related: Backyard Wildlife: Raptor - Food Price Inflation is Quite High - Backyard Wildlife: Fox - Backyard Wildlife: Turtle
This post is included in the Carnival of Personal Finance #157: Third Anniversary Edition
Foreclosure Filings Continue to Rise
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last week the Mortgage Bankers Association reported that about 2.47 percent of home mortgages were in foreclosure during the first quarter of the year, almost double the 1.28 percent rate of a year earlier, and the highest point since the group began compiling such figures in 1979. A Credit Suisse report this spring predicted that 6.5 million loans will fall into foreclosure over the next five years, reaching more than 8 percent of all U.S. homes.
There numbers really are astounding. How lame were the decisions of banks and mortgagees that nearly 1 in 40 mortgages are in default (and that number likely increasing in the next year to much more?
Related: Homes Entering Foreclosure at Record (Sep 2007) - Homes Entering Foreclosure at Record - Ignorance of Many Mortgage Holders
Graduates should put off living large after college
The key, experts say, is a simple one: Live like a poor college student for a couple more years. While you’re doing that, you can pay off your debt, start a savings plan and embrace healthy habits that will serve you well for life.
This is exactly what I did. Outside of paying for college, extra living expenses in college were small. Just retaining the spending habit of college gets your personal finances off on a good start.
Patty Procrastinator lives a little better when she first gets out of college and doesn’t start saving in the 401(k) until she’s 32. From that point, she also saves $500 a month, her employer adds $250 a month, and she earns a 9% return — just like Sallie. But at age 65, Patty will have only $1.7 million. That decade of delay will cost Patty $2.4 million.
Incidentally, Sallie contributes from her own money just $60,000 more than Patty does. The rest of the difference comes from employer contributions and investment returns.
By immediately starting to save for retirement and other needs you create a great foundation for your finances. Start saving for a house, a new car, create an emergency fund… Then you can create a situation where the only loans you need to take are for a house and maybe a new car - avoiding credit card debt or other personal loans.
Related: Personal Finance Basics: Health Insurance - Initial Retirement Account Allocations - Why Americans Are Going Broke
Squeezed by credit card companies
Over-the-limit fees aren’t the only tactic in the credit card companies’ bag of tricks. There are a slew of penalties, fees and other billing practices that can cause consumers to find themselves drowning in debt.
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But even borrowers who pay their bills on time can fall victim to deceptive practices used by the card issuers and get slammed with rising interest and hidden fees, which have become the industry norm in recent years.
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many banks calculate finance charges using what’s called double-cycle billing, a confusing practice that averages out the balance from your previous two bills. So if you carry a balance and pay a finance charge one month, you’ll get hit with a finance charge on your next bill as well, even if you’ve paid off the balance.
Then, there’s a practice known as “trailing interest” - another “gotcha” to watch out for, Arnold said. If you send in a payment according to the full amount on your statement, you may find that you still owe a small balance next month. That’s because you accrued interest between the time you sent the payment and when it was posted to your account.
As previous posts have pointed out you really need to keep your eye on your credit card company as though they will trick you out of your money given any chance to do so.
Related: Don’t Let the Credit Card Companies Play You for a Fool - Managing Your Credit Card Successfully - Sneaky Credit Card Fees - Legislation to Address the Worst Credit Card Fee Abuse, Hopefully
The best method to avoid problems with debt collectors is to avoid debt problems (Create Your Cash Reserve - use your credit card responsibly - Buy less stuff). But if you do run into problems and get stuck dealing with debt collectors in addition to the financial trouble you may find yourself very frustrated and stressed. The Fair Debt Collection resource of the Federal Trade Commission provides useful information:
Debt collectors may not harass, oppress, or abuse you or any third parties they contact. For example, debt collectors may not:
- use threats of violence or harm
- publish a list of consumers who refuse to pay their debts (except to a credit bureau)
- use obscene or profane language; or repeatedly use the telephone to annoy someone
Debt collectors may not use any false or misleading statements when collecting a debt. For example, debt collectors may not:
- falsely imply that they are attorneys or government representatives
- falsely imply that you have committed a crime
- falsely represent that they operate or work for a credit bureau
- misrepresent the amount of your debt
- indicate that papers being sent to you are legal forms when they are not
- indicate that papers being sent to you are not legal forms when they are
Why is such a resource needed? Because many debt collectors have behaved unethically and illegally. To file a complaint use that link or call toll-free, 1-877-382-4357.
FTC 2008 Report on Fair Debt Collection Practices Act
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Much of personal finance is not amazingly complex once you take some time to lay out the basics. We have covered some important topics previously: tips on using credit cards, retirement saving, creating an emergency fund… One of the most critical factors is to insure yourself against possible catastrophic events.
Some personal finance mistakes can set you behind, say falling to save for retirement when you are 28 or cashing in your 401(k) when you switch jobs at 27. Those mistakes however are most often manageable. You just need to save more later. For health insurance the critical need is to protect yourself from huge costs.
Bankruptcies are a huge problem due to health costs. If you have done everything else right and have saved up say $150,000 in mutual funds (in addition to retirement savings and a house) at age 40 but have no health insurance there is little I can think of more likely to result in your losing that saving than a health crisis when you are without coverage (disability insurance is another critical personal finance need that I will discuss in another post and the another such risk - as is an uninsured home). The costs of health care are just too large for any but the richest to survive a major cost without either ruining an entire lifetime of smart financial moves or coming close.
There are certain things that cannot be compromised in your personal financial situation. Health coverage for significant costs is one of those. If you can afford a $5,000 (or higher) deductible that is fine. The critical need for health insurance is not the first $2,000 or $20,000 but the 2nd, 3rd, 4th… $100,000 bill. A bill for $2,000 you can’t afford is a challenge but a bill for $100,000 you can’t afford can ruin decades of smart and diligent financial moves.
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Lazy Portfolios update by Paul Farrell provides some examples of how to use index funds to manage your investments:
I think the article is a bit misleading in showing the out-performance of the S&P 500 index (during periods where the S&P 500 index does very well these portfolios will under-perform it). The out-performance shown in the article is largely due to the great performance of international markets recently. Still the strategy is well worth reading about. The strategy is based on using index funds from Vanguard (very well run mutual funds with very low fees). But don’t get tied into Vanguard, if they start to focus on lining their pockets by increasing your fees look for alternatives.
Overall, I give this concept high marks. Dollar cost average appropriate levels of money into such a strategy and you will give yourself a good chance at positive results.
My preference would be to include significant levels of international and developing stocks. For aggressive long term investing I like something like:
40% USA total stock market
15% Real Estate
25% international developed stock market index
20% developing stock market index
When aiming for more security and preserving capital (over growth) I favor something like:
30% USA total stock market
10% Real Estate
25% international developed stock market index
10% developing stock market index
10% short term bond index
15% money market
Of course all sorts of personal financial factors need to be considered for any specific person’s allocations.
Related: Allocating Retirement Account Assets - Why Investing is Safer Overseas - Saving for Retirement - 12 stocks for 10 years - what is a mutual fund?