Thursday, October 30, 2008

Life Insurance

Perhaps this is a topic that newlywed couples are afraid to talk about. But I urge you to start the conversation today...

It can be awkward to talk about death, but I will do my best to explain life insurance in the most general terms.

If you have a life insurance policy in place when you die, the benefactor (spouse, children, parents, siblings - it's your choice) will receive a sum of money equal to that which was agreed upon when the policy was put into place.

Like any kind of insurance, the cost of this type of policy depends on some determining factors.

There are two basic kinds of life insurance. I will explain the first, Term Life Insurance, in more detail as it is the choice I highly recommend to anyone.

If I have a 20 year term life policy for $500,000, and I die within 20 years, my wife will receive a check for $500,000. The determining factors I mentioned are the length of the term (usually 15, 20, or 30 years) and the amount the policy pays out.

For a young couple with no kids, I recommend getting a policy that pays 5 to 10 times the annual salary for the breadwinner, and at least enough to cover funeral costs and grieving time for the other spouse. After kids enter the scene, especially if one spouse is at home, I would increase the breadwinner's policy to at least 10 times the salary. For the spouse at home, consider the costs of a nanny or not working for a few years.

Obviously, the younger and healthier you are, the cheaper it will be for you to obtain this kind of insurance. I should mention that at the end of the designated term, any money you paid in is gone. But this is no reason to be upset considering you are still alive and well.

There is a second type of life insurance category called Investment Policies (whole life, universal life, variable life) where you pay into it on the same regular basis, but the premium will be higher. The premiums are invested by the insurance company and you can even take out a loan against the cash value of the policy. People see this as an investment opportunity, but I disagree. The increased premiums are not worth the high-risk investment.

With Term Life the premiums are fixed (and cheaper) and you can invest the extra money you would have paid into an Investment Policy into something more stable.

Tuesday, October 28, 2008

Baby Bills

My wife, Monica, and I have noticed a good number of couples we know are either new parents, almost new parents, or thinking of becoming so.

Some dear friends of ours recently had their first child and we were discussing with them the costs associated with having a newborn. A good portion of their doctor visits and hospital bills were covered through their employer's health insurance plan. But, not everyone enjoys the benefits of a quality health insurance plan, so it might be a good idea to know what expenses to expect if you find you are with child.

Because my wife and I both have our own businesses, we purchased a health insurance plan from an independent insurance agent who compares lots of different plans and helps us find the best fit. We have a high deductible insurance plan (aka disaster relief only insurance) because we are both young and in good health and don't have any children that may need to visit the doctor many times a year.

When we signed up for this plan we had the option of adding maternity coverage that would pay for the costs incurred during pregnancy up to a certain amount. This "certain amount" would increase every year, but ultimately doesn't add up to much more than the premiums we would pay for the coverage. Therefore, if you find yourself in this situation, it makes sense to start putting money away now, so that you will have it when you need it.

I got some information from my insurance agent, Jim, with The House of Insurance. (If you live in the Milwaukee area and are looking for any kind of insurance, do give him a call.)

For a natural birth with no complications you can expect to pay between $5,000 and $9,000. A cesarean can cost up to $12,000. Don't forget about general expenses as well (doing up a baby room, clothes, food, toys, car seat, etc.). Also, think about any time away from work the husband or wife will experience. All of these little things can certainly add up.

Sunday, October 26, 2008

What suffering economy?

I don't have a lot of time to post today, but I do want to make note of an observation I have made over the last couple weeks. Things are supposedly doing terrible in regards to our economy. The stock market is way down, foreclosures are through the roof, and personal debt is as high as ever. But drive by your local mall and you will see a full parking lot. The restaurants are full of people. Is everyone in denial? Maybe people haven't felt the effects yet?

Granted, every store in the mall right now is having some sort of sale. And don't get me wrong. I'm not bitter or anything like that -- just amazed. I was one of those people this weekend at the mall and out to dinner. I wonder what it will actually take for people as a whole to start cutting back on personal spending and dining out. I don't think we'll be able to plow through this recession without cutting back on at least some of life's luxuries.

What do you think? What have you cut back on in recent days?

Saturday, October 25, 2008

Cost to Drive

I came across this website today that calculates the cost (of fuel) to drive from one point to another. Enter the start and finish addresses and your car model and it calculates it all for you based on the distance travelled, fuel efficiency of your car, and the average price of gas in your area. It isn't exact, but it's close enough to possibly give you a new perspective on travelling across town to enjoy your favorite barbecue joint...

...then again, maybe not!

Thursday, October 23, 2008

An Excuse to Drink Starbucks

I cannot say I am addicted to coffee or ever need a Starbucks "fix". But I do enjoy a caramel macchiato every once in a while and I definitely fall for the overall atmosphere of the place.

What's more is I don't feel guilty about spending the extra $3.50 because of my Starbucks Duetto Card. It's both a Visa card and Starbucks card in one. 1% of all purchases is loaded onto the "Starbucks side" of the card. If this isn't enough of an incentive, you automatically receive $25 loaded onto the card after your first Visa purchase.

I only recommend this, of course, to someone who plans on paying off the bill every month. I certainly don't condone a credit card bill that rolls over each month. So please, use with caution.

There are obviously other credit cards with cash-back and other perks available. This just happens to be one that works with my lifestyle.

Do any readers use this card or use other credit cards with points or cash-back? Please share.

Wednesday, October 22, 2008

Yahoo Finance

As I have been talking about the stock market over the last few days, you may have had some questions about how the stock market works or wondered about some terms that were used. Please feel free to post your questions and I would be happy to answer them.

Another great resource for digging deeper is Yahoo Finance. On the top, you will see the tab "Investing". When that drops down click on "Education". There they go over a lot of basics and even further if you wish. The "Personal Finance" tab also gives a lot of good advice.

This is also a great website if you are interested in tracking specific stocks or reading articles about the financial markets.

Tuesday, October 21, 2008

Economic Downturn: Part III

The most talked-about topic over these last few weeks has been the 700 billion dollar bailout/rescue plan that was proposed by the President and passed by Congress. I must admit, I have been dreading this post because I have yet to make clear sense of it in my own mind. Even my dad, to whom I look at times to glean economic and financial wisdom, said "Good luck with that one".

The first question is, what is the need for the bailout/rescue plan? What would happen if no plan were put into place?

I should preface with the fact that the amount of money a bank is able to loan out is regulated by the Federal Reserve System (The Federal Reserve System, or The Fed, is the central banking system of The United States, headquartered in Washington, D.C.) based on the amount of cash and the value of assets owned by that bank. As I mentioned in previous posts, the value of investments held by large investment banks has fallen dramatically, largely due to foreclosures and declining home values. Therefore, banks are not able to loan out as much money as they try to balance their assets to loan ratio. When banks become more strict in their lending policies, it becomes more difficult for someone to purchase a car, get a home loan, or receive a small business loan. You can imagine how this effects the auto industry and home construction industry. But this also keeps new businesses from starting or expanding, resulting in fewer jobs being available and so on.

Add to this the general fear that people had about the future of the economy. People were wanting to pull a lot of cash out of their bank accounts just for safe keeping. Cash is an asset for banks, and when their cash levels decline, it only worsens their lending ability. This is why one of the first things done by the Federal Reserve was to increase the Federal Deposit Insurance Company's (FDIC) limit on insured cash at a single bank from $100,000 to $250,000. (Basically, what it means to be FDIC insured is when you have a savings or checking account, and the bank is shut down or collapses, you are guaranteed to receive your cash up to the FDIC insured limit.)

Without the proposal of some sort of market protection plan, the financial markets' rapid decline mixed with increased fear would have sent our country straight back to 1929.

That brings us to the second question: What do we do now, and/or how should this $700 billion dollars be spent? That question is why I have taken two days to write this post. I have been reading opinions and recommendations from all sides and have yet to form a solid argument. Generally speaking, it has been determined that the majority of these funds will be used to buy up bad mortgages. The government will hold on to the rights of these properties until the values of the homes increase and they can be sold [ideally] at a profit. But how all of this will be played out is yet to be determined.

Phew! I think tomorrow's post will be a little lighter.

Saturday, October 18, 2008

Economic Downturn: Part II

Following the government rescue of Fannie Mae and Freddie Mac in early September was the collapse of some of our largest investment banks in the country. On September 15th, Lehman Brothers, a global financial services firm, filed for bankruptcy. This was the largest bankruptcy filing in U.S. history. The biggest factor contributing to Lehman Brothers' collapse was the increasing number of failed home loans that I discussed in yesterday's post. Because of the incredible size of this company and the large effects it had in the financial market, stock prices fell dramatically on that Monday morning. Not only the stock price of Lehman Brothers, but a lot of other financial firms as well. If Lehman Brothers went under, who could be next?

And because the stock market's ups and downs are largely determined by the optimism or pessimism of where the economy is headed, the entire market took a huge hit that day and the days to follow. Every morning for two weeks I was looking at the paper to see which bank might be the next to go.

One financial firm that was suffering was AIG, one of the largest insurance companies in the world. You might ask how an insurance company is involved in mortgages and investments. Good question. In order for an insurance company to maximize its profits, (besides mailing you little pamphlets on how to be a safer driver) they invest the money they receive from their insured clients in many different ways - mortgages being one of them. Apparently, AIG could not find private funding to help them through their hard times, so the government loaned them up to 85 billion dollars for an 80% stake in the business. This is why you, as a taxpayer, now own an insurance company, and why it should bother you that a lot of wasteful spending is going on within the business.

Don't get me wrong. I'm all for private business and for the right of those businesses to pay their employees any salary they choose. But if you don't play by the rules, you're going to get kicked out of the game.

Next time, I will talk about the 700 billion dollar proposed rescue plan and what that means for us as taxpayers and citizens.

Friday, October 17, 2008

What's going on?!

In light of the recent economic downturn, I felt it necessary to return to this blog and help out those who are seeking to make the most of these times. More so, I was encouraged today when I found out that a gentleman I had just met yesterday has been following The Dave Ramsey plan with his wife--all because of this blog.

Some may be wondering how our country has gotten into this situation, why the stock market keeps falling, who is Freddie Mac and Fannie Mae, and how will one be effected by all of this if he does not own a single share of stock.

Let's start with Freddie Mac and Fannie Mae. Say I have some money that I want to invest, while at the same time, you are looking to buy a house. I know you, you have a decent job, and you seem relatively trustworthy. I decide to loan you $150,000 at the going interest rate. You make a payment to me every month, and we are both happy. As you probably know, with every investment comes risk. I am taking on the risk that you might not make your monthly payments. Maybe you lose your job or come down with a fatal illness. In order to reduce my risk as an investor, it would make more sense for me to invest in 10 homes instead of one. If one home defaults, it isn't the end of the world.

Essentially, this is what Freddie Mac and Fannie Mae do. They are both government sponsored enterprises which mean they were charted by the government, but are actually privately owned. A mortgage company will sell its signed mortgages to Freddie Mac or Fannie Mae, who will then package them together (say 100 of them), and then sell them to investors in the secondary market. They refer to these investments as "mortgage-backed securities" because they are worth the values of the homes they represent.

Naturally, some of the mortgages in the pool of 100 will default, or at least be behind in their mortgage payments. But, the decline of Freddie Mac and Fannie Mae started when more and more people fell behind in their payments than usual and foreclosures became much more common. Add to this the decline of home values. For so long, home values were on the rise. $150,000 was paid for a home that is now worth only $125,000.

For a while, interest rates were so low that everyone was buying a new home (or 2 or 3). There were also mortgages put into place that start the home buyer at a low interest rate, only to increase that rate to 8 or 10 percent after three years. (These are referred to as Adjustable Rate Mortgages, or ARMs) And on top of that, government policies were put into place that made it possible for people to buy a home with little to no money down for a deposit.

Unfortunately, this was all spotted too late in the game. The government paid a large sum of money to help Freddie and Fannie during this time. If the government did not do this, a snowball effect would have occurred, and the entire financial system would probably have tanked by now.

I just hope we have all learned our lesson on this one.