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Rules For Money
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“Make the money.  Don’t let the money make you." - Macklemore

 

This page lays out our rules for money, investing, and debt.  It also has tips for your personal finance toolkit.

 

Rules for Money

  1. Live below your means

  2. Invest/give the difference

  3. Avoid debt

Rules for Investing

  1. Develop an investing plan and stick to it.

  2. Choose what types of accounts to fund.

  3. Choose what accounts to open and fund.

  4. Invest in low-cost index funds.

  5. Diversify & allocate your portfolio.

  6. Be an investor, not a speculator.

Rules for Personal Debt

  1. Home

  2. Vehicle

  3. Student Loan

Personal Finance Toolkit

  1. Term Life Insurance

  2. Vehicle & Homeowners/Renters Insurance

  3. Umbrella Insurance

  4. Health Insurance

  5. Long-Term Disability Insurance

  6. Long-Term Care Insurance

  7. Last Will & Testament

  8. Identity Theft Protection

  9. Privacy - Data Removal

  10. Credit Cards

There are three simple rules Sarah and I live by when it comes to our personal finances:

 

  1. Live below our means

  2. Invest/give the difference

  3. Avoid debt

There are so many personal finance methods to follow.  All the good methods basically boil down to these three rules.  I used to overly obsess about whether we were doing our personal finances correctly or most efficiently.  It seemed like I kept adding steps to our financial plan making it too complicated.

 

Thankfully, the great words of Michael Scott echoed in my ears KISS, “Keep It Simple Stupid.”  Seriously one of the best quotes from The Office.

 

Money is such a weird and unique tool humans have created.  Getting a few things wrong with money can make your life stressful.  Getting a few things right with money can buy your freedom and help you do wonderful things for the world.

 

I believe it’s essential to know our “why” with money.  What we spend our money on shows what we value.  I believe we should have a purpose for every dollar we have because it's too easy to let our money rule us.  With some discipline, we can rule our money and have it work for us instead of control us.

 

I think building wealth and becoming financially independent is surprisingly simple and doesn’t take a high income, only these three simple rules.

 

  1. Live below your means

  2. Invest/give the difference

  3. Avoid debt

 

I only share this because I like hearing other people's financial stories.

 

⚠️ - Informational Purposes Only - Not Personal Advice

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Money - Description
Live Below Your Means
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Our first rule for money is to live below our means.  The only way we have found to do this is to have a Budget.  I only share because I’m a nerd that likes talking about budgeting.

 

How we budget:

 

  1. Calculate Income.

    • We live One Month ahead.  I started doing this in 2008 (minimum wage days) and have never deviated from it.

    • Any income we make in the current month is saved until we budget on the first of the following month.

    • This is our take-home pay (after taxes, health insurance, retirement deductions, etc.).

  2. Calculate Expenses. 

    • We start with fixed monthly expenses like your home, utilities, insurance, etc.

    • Then we determine what we want to spend on variable expenses like food, gas, entertainment, etc.

    • We have a category for irregular bills due during the year, like car tags, memberships, etc.  We divide this number by 12 and set it aside each month.

    • We also have a random/cushion category for all unexpected expenses.  We allocate a portion of Sarah’s income to it.  We don’t keep more than $2,500 set aside for random/cushion expenses.

  3. Keep expenses lower than income.

    • We try and cut monthly expenses where possible unless we feel that it adds value.  One category we don’t cut to bare bones anymore is food.

    • The leftover money after expenses is used for Investing & Giving.

 

Yes, we use the digital envelope system for variable expenses.  If you are like us, you will be made fun of using this strategy, but it’s usually from people that suck with money.

 

We use an app called Pennies for our envelopes.  Link in bio.  I’m not affiliated with Pennies.  It’s just an awesome app!

 

Our budgeting method works great if you are on a fixed income (salary).  If our income fluctuated drastically between months, we would adjust it to fit (maybe live 2-3 months ahead).

 

I am currently on a fixed salary, and we are able to base our monthly budget on my salary, like food, clothing, shelter, insurance, utilities, some giving/investing, etc.

 

We use Sarah’s Income for an even split after taxes & giving between investing & business reinvestment/random fund.

 

The first time I picked up drumsticks, I was overwhelmed.  The fact I had to control all four limbs and tell them where to go and what to do all at the same time led to a lot of frustration.  It took a lot of practice, but now I don’t think much about playing a beat.  It’s the same way with budgeting.  It might be hard at first, but it gets easier with time, and before you know it, you don’t even think about it.  It just becomes a way of life.

⚠️ - Informational Purposes Only - Not Personal Advice

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Invest/give the difference
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Our first rule for money is to live below our means so that we can accomplish our second rule for money, invest/give the difference.

 

Living on a budget started as a necessity that we never stopped doing.  It also allowed us to set aside money for giving and eventually investing.   Budgeting has allowed us to cut back on the things we don’t care for and spend more on the things we enjoy.

 

Another way to look at giving & investing is you are just choosing to spend your money differently.  If you strive to be charitable-minded and value financial independence, spending on these is more effortless.

 

Don’t get me wrong; budgeting also helps with selfishly spending freely on random fun things too that are not giving & do not build wealth.

 

We decide how much per month we want to set aside for giving & investing.  For the most part, we have percentages of our income in mind when it comes to investing & giving.

 

Our investing percentage is 20% of my monthly salary (including company match) & 50% of anything we make above this: E.g., Sarah’s Business Income, Yearly Bonus, Etc.

 

The 20% of my salary is based on gross income & the 50% of everything else is after-tax income.

 

We also invest 100% of our credit card cashback & 100% of Sarah’s part-time teaching job.

 

Our giving percentage is…

 

We base our giving percentage on after-tax dollars.  Setting a percentage has allwed us to view the money as not ours anymore and enables us to give freely with joy.

 

Our breakdown of percentages is somewhat weird between my income & Sarah’s income, only because I have a fixed salary from my employer & Sarah has a photography business with expenses involved & the income is not as predictable.

 

We have chosen to invest 100% in the stock/bond market for now, more specifically, in board-based index funds.

 

I only share this because I like hearing other people's financial stories.

⚠️ - Informational Purposes Only - Not Personal Advice

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Avoid Debt

Our first rule for money is to live below our means so that we can accomplish our second rule for money, invest/give the difference.

 

Our third & final rule is to avoid debt.

 

I have always been terrified of debt.  Growing up, I viewed each dollar I made as the last dollar I might make, so I didn’t want to owe anyone anything.

 

I think my hatred of debt was healthy, and I am happy I still have my hatred of debt.  After some reflection, I see the freedom the lack of debt has given us.

 

  1. Even though I only made $10 an hour at the time (2009).  I was able to buy a small house (837 sq) and marry the girl of my dreams a year later.  Sarah did not have an income at the time either, and we were able to survive without much stress.

  2. I was able to quit my job to go to college at age 27, living off of Sarah’s very high-paying Oklahoma teacher Salary.  I hated not making money, but it wasn’t a big deal because we only had our house to pay for, and the mortgage payment with insurance and taxes was $600 a month.

  3. We have never been forced to work a job just for the paycheck.  By keeping our expenses low, it’s given us the freedom to say “NO” to career moves even if that career move would result in a higher income and “Yes” to career moves we want even if that means less income.

  4. Finally, it allows us to live below our means & invest/give the difference.  Our money is not tied up in making debt payments.

  5. Bonus, I realized as I wrote this post that Sarah & I have never argued about money.  I think keeping our debt low has contributed to this.

 

Yes, we did finally get a bigger house (1,700 sq).  Our house payment with insurance and taxes as of this post is $1,225.

 

We haven’t avoided debt at all costs.  3 types of debt we have had:

 

  1. Mortgage Debt.

  2. Student Loans (for me).  We paid off within six months after graduation from selling our house.

  3. Credit Card.  We paid off in a few months.  We lived off our credit card for a couple of months after I graduated so I could study for the CPA exams before I started working.  Jokes on me because I failed the exams.

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Rules for Investing

Investing is putting your money to work for you. Meaning, your money makes you money passively (i.e., while you sleep).

 

The easiest and most simple way to do this is by investing in the stock/bond market. You can invest with as little as $1. Stocks provide one of the best returns on investment possible over the long term. The average return of the US stock market is about a 10% return.

 

If you invest $391 a month at a 10% rate of return, you will be a millionaire in 33 years and a multi-millionaire in 40 years. $391 is the average US used car payment as of 2019. Compound interest is said to be the 8th wonder of the world. Obviously, it’s just math, but none the less it’s magical.

 

Not sure what stock to buy? With the invention of the index fund, you don’t need to worry. An index fund takes the guesswork out of it.

 

Jack Bogel, the founder of the index fund, said it best, “Don’t look for the needle in the haystack. Just buy the haystack.”

 

Rules for Investing

  1. Develop an investing plan and stick to it.

  2. Choose what types of accounts to fund.

  3. Choose what accounts to open and fund.

  4. Invest in low-cost index funds.

  5. Diversify & allocate your portfolio.

  6. Be an investor, not a speculator.

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Rules for Investing Steps.
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Rules for Investing Step 1.

Decide how much you want to invest. Sarah and I invest 15% of our gross income. Pay yourself first. Do not try and invest what’s leftover at the end of the month.

 

Remember, Investing is a long term plan (i.e., longer than 5 years). Don’t invest money you need in the short term.

 

Think about what your risk tolerance is. The rule of thumb is, the younger you are, the more risk you can take, and the older you are, the more conservative approach may be needed. Holding more stocks leads to greater potential returns, but it is a wild ride. Owning more bonds is more stable, but they do not produce the returns that stocks do.

 

Decide if you are on the “wealth accumulation stage” vs. “wealth preservation stage.”

 

Wealth Accumulation Stage - Is building up your portfolio (nest egg).

 

Wealth Preservation Stage - This is when your nest egg if built, and you are living off on your investments.

 

Sarah and I are in the wealth accumulation stage and have decided to go 100% on stocks for simplicity. Remember, simple is better.

 

JL Collins says it best, “You’re going to focus on the best performing asset class in history: Stocks. You’re going to “get your mind right,” toughen up and learn to ride out the storms.”

 

Your portfolio allocation is a personal choice, and you need to decide what personality you have. Whatever plan you choose, you need to stick to it. If the market drops and you freak out and reallocate your portfolio to all bonds when the market recovers, you just lost money on the recovery and on the dip. Sticking to your plan is the key to success.

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Rules for Investing Step 2.

There are three main types of investment accounts:

 

1. Roth

2. Traditional

3. Taxable Brokerage Account

 

Roth and Traditional accounts are tax-advantaged accounts. The most common account to offer Roth and Traditional is an Individual Retirement Account (IRA), but also some 401k providers offer them both.

 

Roth - You pay income tax today on what you invest, but all the ”earnings” are tax-free when you withdraw the money in retirement (typically age 59 1/2 and older). This account does not lower your tax bill today. If you are in a low tax bracket (30% or below), you may consider investing here. If you withdraw before retirement age, you pay a penalty on the “earnings” plus ordinary income tax rates. At any time, you can withdraw what you contribute to a Roth account penalty/tax-free. I do not recommend ever doing this unless you have to.

 

Traditional - You do not pay income tax today on what you invest, but you pay ordinary income tax when you withdraw the money in retirement (typically age 59 1/2 and older). This account lowers your tax bill today. If you are in a high tax bracket (35% or above), you may consider investing here. If you withdraw before retirement age, you pay a penalty plus ordinary income tax rates.

Need help deciding between Roth vs. Traditional? (Click Here)

Taxable Brokerage Account - You pay income tax today on what you invest, and you pay tax on the “earnings” when you sell the investments. If you buy and hold stocks for more than a year, you pay a favorable tax rate (known as a ”Long-Term” capital gain rate). If you hold less than a year, it is taxed at an unfavorable ordinary income tax rate (known as a ”Short-Term” capital gain tax rate). Bond interest is usually taxed at unfavorable ordinary income tax rates with a few exceptions (e.g., municipal & treasury). Investing in a taxable brokerage is a good option when you have maxed out all Roth and Traditional accounts.

All major investment brokerages offer IRAs & Taxable Brokerage Accounts (e.g., Vanguard, Fidelity, & Schwab). Sarah and I have her Roth IRA & Taxable Brokerage Account through Fidelity. I have contemplated switching these over to Vanguard because Vanguard is investor-owned. If you invest with Vanguard, you are a shareholder of Vanguard. Meaning, Vanguard has your interest at heart, since you are a shareholder.

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Rules for Investing Step 3.

It’s time to open and fund your accounts. Decide whether you want to do Roth, Traditional, or Taxable. In theory, you will eventually want to have all three, known as asset location.

For more info on Asset Location (Click Here)

 

Most common accounts to fund:

 

  1. Employer-sponsored 401k/403b.

  2. Individual Retirement Account (IRA).

  3. Health Savings Account (HSA).

  4. Taxable Brokerage Account.

 

Example:

 

Fund your employer-sponsored 401k plan at least up to your company match. The employer match is free money! There is no income limit on a 401k, and as of 2020, you can contribute up to $19,500 and an additional $6,500 if over the age of 50.

 

From there, fund a Roth IRA. As of 2020, the contribution limit starts to phase out for a Roth IRA if you are married, filing a joint tax return, and your modified adjusted gross income is over $196,000. As of 2020, the maximum annual contribution is $6,000 ($7,000 if you're age 50 or older). If married, you can open one for both you and your spouse.

 

Suppose you have an HSA (Health Savings Account) fund here too. There is no income limit on an HSA, but you have to have a high deductible health plan to qualify for one. As of 2020, the maximum annual contribution for families is $7,100 and an additional $1,000 if you're over the age of 55. An HSA is essentially a traditional account with incredible perks. More on the beauty of HSAs in a future post.

Suppose you have maxed out all these options, fund a taxable brokerage account. There are no income limits or contribution limits for a taxable brokerage account.

 

Remember, funding these accounts is the first step. You still need to invest the money inside these accounts (e.g., index funds)

 

A quick internet search will give you the latest income and contribution limits on any of these accounts. All major investment brokerages offer IRAs & Taxable Brokerage Accounts. (e.g., Vanguard, Fidelity, & Schwab).

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Rules for Investing Step 4.

Now that you have funded your investment accounts, it’s time to invest that money. My preferred method of choice is the fantastic “index fund.” Instead of trying to find a needle in the haystack (i.e., the winning stock), with an index fund, you buy the haystack (This idea is from Jack Bogel, the founder of the index fund).

 

An index fund is a portfolio of investments that pools money together from multiple investors and invests in securities (e.g., stocks & bonds). Index Funds are a passively managed mutual fund that tracks a market index (e.g., the S&P 500, which is the 500 largest US companies or Total US Stock Market, which is virtually every publicly traded company in the US). Index funds are not actively managed (subject to human error), meaning there is not a manager trying to beat the market. An index fund mirrors its market index. Historically, the US market returns, on average, 8-12 percent per year. Index funds also have extremely low expense ratios, practically free. They are tax-efficient since securities are not continually being sold and reallocated to try and beat the market.

 

Research shows that on a year over year basis, index funds beat over 80% of active managers. When you stretch that length out over 20-30 year periods, index funds beat virtually 100% of actively managed funds.

 

Finally, most index funds are cap-weighted, meaning the larger the company, the bigger piece of the pie they take up. For instance, at the time of this post, Fidelity's Total US Stock Market Index Fund (FSKAX) invests in 3,428 companies. The top ten biggest companies take up 22.63% of the total index fund (Companies like Apple, Microsoft, & Facebook). All this means is that Index Funds are self-cleaning.

 

I’ll end with a quote from “JL Collins” talking about Vanguards Total US Stock Market Index Fund (VTSAX). “Because VTSAX is an index fund we don’t even have to worry about which will succeed and which will fail.  It is ‘self-cleansing.’  The failures fall away, and the winners can grow endlessly.”

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Rules for Investing Step 5.

It’s time to diversify & allocate your portfolio.  

 

Diversification means don’t put all your eggs in one basket (e.g., don’t invest all your nest egg into Tesla or Apple as tempting as that might be).

 

Allocation means how much money you have invested between stock and bonds (e.g., 80% in stocks and 20% in bonds).

 

Stock = ownership of a company

Bond = loaning a company your money

 

Sarah and I prefer investing in a Total US Market index fund or an S&P 500 index fund; both are stock (equity) funds.  Owning either of these funds diversifies your portfolio. Both of these funds also give you international exposure since many of the companies in those funds do significant business internationally.  These funds are good for the “Wealth Accumulation Stage” (building up your nest egg).

 

Sarah and I will add a Total US Bond Market index fund eventually.  A Total US Market Bond Market index fund fully diversifies you in the bond market.  Bonds help protect your nest egg in financial downturns but don’t result in the high returns stocks can produce.  This fund is good to have in the “Wealth Preservation Stage” (when your nest egg is built, and you are living off on your investments).

 

We are currently invested 100% in stocks because we do not plan on touching our investments for at least 25 years.  We will eventually add bonds to the mix, but we don’t intend to add more than 25% bonds.  If we were living off our investments, we would keep 3-5 years of living expenses in cash.

 

If you use a two fund approach, it’s a good idea to rebalance your portfolio about once a year or if there is a significant swing up or down in the market (around 20% or so).  For example, if your portfolio is allocated 90% stocks and 10% bonds, rebalance to keep this allocation consistent.

 

Keep in mind; if you are rebalancing in a taxable brokerage account, this will trigger a taxable event; use caution when rebalancing inside a taxable brokerage account.  A taxable account is separate from your 401k, Roth IRA, HSA, etc.

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Rules for Investing Step 6.

Being an Investor is a long term plan (time in the market), and being a speculator is a short term plan (timing the market) that more often than not leads to destroying your finances. Time in the market is the tried and true way to build wealth, not trying to time the market (a fool's game). The key is to automate your investing as much as possible and forget about it. Consistently invest through the ups and downs of the market (i.e., dollar cost average). Also, it’s good to not listen to the media about the market because they are just after a catchy headline to get your attention.

 

One of the main reasons to make an investing plan is to weather the storms that come. Earlier this year, my 401k was down 32% because of COVID-19. As gut-wrenching as it was, I didn’t panic because I had a plan in place. Sarah and I kept investing in the bear market. This was easy because all our investing automatically comes out of our paychecks and bank account every month. If we had rebalanced to be more conservative at the market bottom, we would have lost out on the market recovery. Those shares we bought when the market was 32% down, as of this post, have returned about 37%.

 

Market volatility is your friend when you are in the wealth accumulation phase. Buying shares when the market is down is basically buying shares at a discount.

 

Fun fact, this was the shortest bear market in history, which helped us not panic too much. If you struggled to not react during this last bear market, consider allocating more of your portfolio towards bonds to smooth out the volatility of the market. Your overall return, in the long run, will be less, but that is better than panicking and selling at the bottom and trying to time the market.

Keep this in mind; previous returns do not guarantee future returns. No one knows what the future holds.

 

Finally, I do think it’s fun to be speculative and extra risky from time to time, but only with fun money, you are willing and able to lose that’s above your 10-20% nest egg. Sarah and I currently own individual stocks from 3 companies.

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Rules for Pesonal Debt

Personal debt rule of thumb:

 

Do not let your “debt-to-income” ratio go higher than 35%. If your salary is $2,500 a month, your total debt payments should not exceed $728. We base this off our take-home pay (after taxes & other deductions). Also, I think you should include rent in this calculation because your mortgage is included, and we all pay for the roof over our heads.

 

The point of debt is to leverage your income. Debt is risky and should be used with extreme caution (avoided if possible). The only “good debt” is no debt. That doesn’t mean you shouldn’t use it. I believe, if you take out debt, it should be your mission to pay it back as fast as you can (but in the correct order) and then avoided once it’s paid off. The goal is to get to a spot where you can pay cash for everything.

 

Debt that you can consider leveraging:

  1. Home

  2. Vehicle

  3. Student Loan

  4. Do not let the total of all these exceed 35%.

 

Any other consumer debt needs to be paid off as soon as possible and avoided at all costs (e.g., credit cards & installment plans).

 

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Debt Leverage
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Home

Mortgage rule of thumb:

 

Follow the 25% rule if you want to avoid becoming house poor.

 

The 25% rule simply means not spending over 25% of your after-tax income on your mortgage payment. If you bring home $4,100 a month after taxes, you should spend no more than $1,025 on your mortgage.

If you want to be extra conservative (like me), add in your utilities as part of the 25%. Using the example from above, your mortgage plus utilities (city, electric, & gas) should not exceed $1,025.

Using this model will help you not drown in a house payment. This is also a good rule for renting.

 

One of the most common reasons for divorce is finances. Getting your finances in order helps relieve unneeded stress and leads to a happier, healthier life. It also makes it way easier to set money aside to be a cheerful giver. Studies show generous people are happier people - soapbox over.

 

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Vehicle

Financing a vehicle rule of thumb:

 

It’s called the 20-3-8 rule

- 20% down.

- 3-year note.

- No more than 8% of total income.

 

If you need to finance multiple cars, make sure the total combined amount is no more than 8% of your total income.

 

One exception is if it’s a luxury car, the note should be no more than one year.

 

Obviously, if you can pay cash for a vehicle, do it! Reality is, not everyone can make this happen. Having some guidelines helps make the decision easier on what you can afford. It also helps with not overextending yourself.

 

I heard about this rule from “The Money Guy Show.” Check out their Podcast or YouTube channel! They are awesome!

 

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Student Loan

Student loan debt rule of thumb:

 

Do not take out total student loan debt higher than what your projected starting annual salary will be.

 

I took out around $30k. My projected salary was 50k. My first job out of college as a tax accountant was $46k. I took a lot of courses at a community college to keep costs down.

 

Unfortunately, schools will let you take out a surplus of debt for degrees that are known for not having a career path. If your college is trying to talk you into more debt, you need to run for the hills. Remember, your college is a business, and they make money by you attending.

 

I worked every other year of my college journey and threw all our extra money towards loans (Yes, when I worked, my grades suffered). I have always been terrified of debt. I don’t regret paying off the low interest 3.875% loans fast for one second.

 

If you can pay cash for college, you should. If you are like me, I wanted to get through college as fast as possible, and I wouldn’t be able to do so without taking out loans. I was able to finish 150 hours (needed to sit for the CPA exams) in 3 1/2 years due to being able to take out loans. Then we went HAM on paying them off.

 

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Personal Finance Toolkit

Having the right tools in place can go a long way in protecting you and your family's finances and stretching each dollar to its maximum potential.  Keep in mind, you don't want to spend so much on getting the best insurance and protection that it leaves you lacking.  Insurance and protections are meant for catastrophic events only.

 

Here are some things to consider adding to your Personal Finance Toolkit:

 

  1. Term Life Insurance

  2. Vehicle & Homeowners/Renters Insurance

  3. Umbrella Insurance

  4. Health Insurance

  5. Long-Term Disability Insurance

  6. Long-Term Care Insurance

  7. Last Will & Testament

  8. Identity Theft Protection

  9. Privacy - Data Removal

  10. Credit Cards

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Toolkit
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Term Life

If you don’t have anyone depending on your income (e.g., you are single), you don’t need life insurance.  You would be better served by investing the cost of life insurance.

 

If you have people counting on your income (e.g., spouse or children), it’s a good idea to get life insurance to supplement your income in the case of your death.

 

I recommend Term Life Insurance for its low cost & simplicity.  Term Insurance gives you coverage for a certain period of time.  For example, Sarah and I have a 20-year term policy for each of us.  This means our premiums are locked in for 20 years.  We have about 15 years left on our policy.  Our goal is to have enough invested at the end of 15 years to not need life insurance at all.

 

A good rule of thumb to use when deciding how much insurance to take out is 10 times your annual salary plus any outstanding debt.

 

I went a little overboard on my policy, doing about 15 times my salary plus enough to pay our house off.  Sarah will get close to $1,150,000 if a die tomorrow.  She should have about $1 million after paying our house off.  If she invests that amount, she should be able to withdraw $40,000 a year for forever without ever running out of money.  Her initial $1 million investment will grow even though she is taking a $40,000 a year distribution.  That’s the beauty of compound interest working for you.

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Vehicle & Home Insurance

The point of insurance is to protect your financial life if disaster strikes.  You need a reasonable amount of coverage to protect you, but you don’t want to go overboard, preventing you from being able to invest your money.

 

Remember to have at least enough in your emergency fund to cover your deductibles.  Save this amount before paying off high-interest debt or investing above your company match.  It’s essential to have some level of cash on hand to keep you from taking on debt in an incident.

 

Below are the primary purposes of Vehicle & Homeowners/Renters Insurance.

 

Vehicle Insurance - Protects you in the event you damage someone else’s property or injure or kill someone in a vehicle incident. 

 

Homeowners Insurance - Protects you if someone is injured on your property and also helps pay for repairs or replacement of your home and personal belongings if they are damaged or destroyed from things like hail, fire, or theft.

 

Renters Insurance - Helps pay for repairs or replacement of personal belongings after theft or certain types of damage.

 

I used to get so confused about what insurance policy to get.  It helps me to remember the basics of what insurance is.

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Umbrella

Umbrella Insurance is extra liability protection above your vehicle & homeowners insurance.  It’s the umbrella that covers your vehicle & home during a financial storm.

 

Its purpose is to protect you from incidents you have caused and protect your future income from being garnished.  Umbrella Insurance kicks in after your vehicle or homeowner's policies have been exhausted or if the incident is excluded from your vehicle & homeowner's policies.

 

Umbrella insurance covers costs related to damage to someone else’s possessions or injury to someone else.  Umbrella Insurance does not protect your (the policyholder’s) property.

 

Umbrella Insurance is among the most affordable insurance out there.  A $1 Million policy is between $150-$300 per year.  Remember, Umbrella Insurance is a separate policy from your vehicle & homeowners insurance.

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Health Insurance

What health insurance plan to get?

 

If you are healthy and don’t have a medical condition requiring a lot of medical treatment, a “High Deductible” health plan may be a good idea.  A high deductible plan equals lower premiums and qualifies you to open a Health Savings Account.  You can contribute the money you save on premiums to your Health Savings Account.  A Health Savings Account is a fantastic tool used for paying qualified medical expenses.

 

A Health Savings Account (HSA) is a triple tax-advantaged account.  You get a Tax deduction when you contribute.  You can invest the money within your HSA to grow tax-free.  If you use the money to pay for qualified medical expenses, you do not pay income tax on the distribution. Plus, you can take distributions from it penalty-free at the age of 65 or older and use the money for whatever you want.  You will pay ordinary income taxes on the money just like your traditional 401k or IRA, making health savings account’s an additional tax-advantaged retirement account.  

 

If you usually have many medical expenses or have a medical condition requiring a lot of medical treatment, a “Low Deductible” plan might be the way to go.  Your premiums will be higher but could end up saving you money in the end.  One drawback of a low deductible plan is you do not qualify for a Health Savings Account.

 

Remember, try and have enough money in your emergency fund or Health Savings Account to cover your deductible.  It’s a good idea to try and have your maximum out-of-pocket from your medical plan in savings.  Sarah and my maximum out-of-pocket is $7,500, so this is what we need to have either in cash or our health savings account.  This is a good rule of thumb to have even while aggressively paying down debt to avoid going into more debt when an emergency comes.

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Long-Term Disability Insurance

Long-Term Disability Insurance can protect your financial well-being in the event of a non-work-related injury impairing your ability to work.  It is a type of income protection.  It replaces between 40%-70% of your income, depending on your policy.  If you have an illness or severe injury that prevents you from working 3-6 months or longer, Long-Term Disability Insurance can save the day.  It covers permanent disabilities too.

 

If you get in a vehicle accident and incur injuries that prevent you from working the rest of your life, Long-Term Disability Insurance will pay 40%-70% of your current salary for the rest of your life.  It also covers cancer, heart attacks, etc., that prevent you from working for an extended period. It typically kicks in around 3-6 months.

 

The price for Long-Term Disability Insurance usually varies between 1%-3% of your yearly salary.  If you work for a good employer, it can be cheaper, and some employers cover the cost.  If you don’t have Long-Term Disability Insurance, start by asking your current employer if they offer it.

 

My Long-Term Disability Insurance at the time of this post is $10 a month, and Sarah’s is covered by her employer.

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Long-Term Care insurance

Long-Term Care Insurance is separate from health insurance and covers services like dressing yourself or bathing as one becomes ill or due to age.  Think nursing home or assisted living when thinking about Long-Term Care Insurance.

 

Don’t confuse Long-Term “Care” Insurance with Long-Term “Disability” Insurance.  Long-Term “Disability” Insurance has to do with replacing your “income” if you are impaired from being able to work.  Long-Term “Care” Insurance is when you need to bring in help to take care of yourself (e.g., bathing or dressing).

 

Traditionally, in your 50s is when you want to consider purchasing Long-Term “Care” Insurance.  The chance of you needing it before age 60 is meager.  Keep in mind; premiums get higher the older you become.

 

I would rather wait to purchase Long-Term Care Insurance and invest the money I save in premiums in hopes of not needing ever to purchase it.  If it gives you peace of mind having it and you can afford it, then purchase it in your 50s.

 

The reason to purchase Long-Term Care Insurance is to have protection for taking care of yourself and protection for your financial assets if you want to leave an inheritance.  Consider getting rid of or forgoing Long-Term Care Insurance if you are financially independent or have enough assets to cover yourself.

 

Rule of Thumb to consider when purchasing Long Term Care Insurance:

 

If you have less than $1 million in assets, you might think about not purchasing Long-Term Care Insurance because the premiums aren’t the most affordable.  Don’t forget there are things like Medicaid to help if you fall into this category.

 

If you have $1-$3 million in assets, you may want to purchase Long-Term Care Insurance for extra protection.

 

If you have over $3 million in assets, you can most likely self insure and forgo purchasing Long-Term Care Insurance.

 

These numbers are just an estimate and will change with inflation or if premium amounts change.

 

Remember to do your research before purchasing Long-Term Care Insurance.

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Last Will & Testament

Do you need a Last Will & Testament?

 

If you have very few Assets, no kids, and don’t care where your belongings/pets go after you die, then chances are you don’t need one.

 

Financial Assets like your 401k, Roth IRA, & Life Insurance Policies allow you to designate a beneficiary and co-beneficiaries.  To my knowledge, these designations trump what’s in your Will.

 

A Beneficiary is the first person(s) in line to receive your assets.

 

A Co-Beneficiary is the person(s) that receive your assets if your beneficiary is no longer living at the time of your death.

 

Sarah and I didn’t put together a Will until we had children.  We most likely still wouldn’t have one if we didn’t have children.  We wanted to designate who would be the caretaker of them in the event we both passed away.   The last thing we would want for them is a custody battle.  A Will solves this problem.

 

If you want a free template from doyourownwill.com click here.  This is the service we use.  I am not affiliated with them; I just like their free service.

 

Main Takeaways:

 

     1. A Last Will & Testament is a legal document that conveys your wishes for your children and assets after your death.

 

     2. Failure to prepare a Last Will & Testament usually leaves your estate in the hands of state officials or judges.

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Identity Theft Protection

Identity Theft Protection or Identity Theft Insurance is simply a service aimed at giving you protection against identity theft and fraud.

 

These companies usually provide 3 primary services:

 

  1. Credit Monitoring

  2. Alerts - You receive alerts if an account is opened in your name.

  3. Recovery - Help you recover lost money and fix credit in the event your identity is stolen.  Most companies offer insurance up to $1 million in “recovery fees,” not damages.

  4. Bonus - Some companies monitor your personal information (i.e., email, driver’s license, & passport) and send you updates of any data breaches.

 

Usually, Identity Theft Protection costs around $20-$40 a month.

 

Identify Theft Protection is not 100% necessary.  They usually DO NOT pay you for money stolen. Usually, they will reimburse out-of-pocket expenses you pay to recover your identity (e.g., lost wages, travel, postage, copying, and notary fees).  When choosing Identity Theft Protection, look for the “Service Guarantee” or the fine print to see what you are paying for.

 

These are some ways you can help protect yourself from Identity Theft:

 

  1. Monitor your credit yourself with companies like Nerd Wallet or Credit Karma.  Most credit card companies offer free credit monitoring as a perk.

  2. Freeze your credit.  You can freeze your credit for free with all three credit bureaus (Equifax, Experian, & TransUnion).  Some Identity Theft Protection services offer the ability to freeze some of the credit bureaus.  You need to remember to unfreeze your credit if you need to use it.

  3. Use strong passwords and set up “2-factor authentication” for any account that allows you to.

  4. Apps like “1Password” monitor website vulnerability information and alert you if you need to change your login information.  Click Here for 1Password.

 

If you choose to purchase Identity Theft Protection, check to see if your credit card company offers it as a perk.  Also, you may have it included with your homeowner's insurance.

 

Also remember, to check with your employer to see if they partner with a company for a discounted rate.  My employer's discounted rate is $17 a month for Sarah and me.

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Privacy - Data Removal

Not sure what this beautiful bat has to do with “Data Removal,” but I wanted to post this pic anyways.

 

Our personal data is everywhere these days, and the most advantageous way to protect ones-self from attackers is to be less visible.  Removing your sensitive information from the internet can be complicated and time-consuming.

 

Thankfully, there are companies that offer services to remove your private records from the internet.  Personal Records like:  Your birthday, personal email, personal mobile phone number, and childrens' names.

 

Paying for these services can save you a lot of time and frustration.  They work in the background deleting your data keeping your data from reaching people with malicious intent.  Kind of how bats fly around eating their weight in mosquitoes every night.

 

Sorry, I had to try and make an analogy with this bat.

 

If you are interested in paying for a “Data Removal” service, I would check with your employer to see if they offer this as an employee benefit.  My employer provides it as a free employer benefit.  Employers want to keep their employees safe because, in turn, it keeps the company safe.

 

I wouldn’t put your finances in jeopardy paying for a “Data Removal” service.  We wouldn’t have this service if it weren’t free from my employer.

 

A couple of ways you can help protect your data from leaking out:

 

  1. Use a Search Engine Like DuckDuckGo

  2. Use Browser Blockers

  3. Use a VPN 

  4. Never Click on Sketchy Links

  5. Use Apple products 

 

I know the last one makes me a fanboy, but I don’t care.  They make great products.  I have been an Apple user since 2004.  Apple is cracking down on privacy.  They always have been privacy-focused, but lately, they are taking it to the next level.  They are always adding safeguards to keep your data private. 

 

Apple doesn’t subsidize their products by selling your personal data.  That’s why you may pay more for an Apple product compared to their competitors.  But honestly, this really isn’t the case anymore.  They have started offering more reasonably priced products since about 2016.

 

⚠️ - Informational Purposes Only - Not Personal Advice

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Credit Cards

Disclaimer - If you do not pay off your credit card balance in full monthly, do not use credit cards!

A credit card can be a valuable tool in your personal finance toolkit.  They can serve you if used correctly.  I have three rules I follow when choosing a credit card.

  1. No Annual Fee

  2. Cash Back Rewards

  3. Additional Perks

 

I’m not too fond of an annual fee because you have to spend too much before seeing any benefit from the card.  If you get 2% cashback with an annual credit card fee of $100, you have to spend $5,000 to make up for this fee.

Cashback rewards are the only way to go.  I wouldn't say I like airline miles nor obscure point systems.  When you dig into these schemes, you realize they are overly complicated and confuse you to make you think you are getting a good deal.  Plus, cashback cards you can spend on whatever you want, including airlines.  An additional bonus is Cash Back is considered by the IRS as a discount (aka tax-free cash).

You should pick a credit card with additional benefits, such as no foreign transaction fees or extended warranty protection.

 

One card checks all the boxes for us, and it’s the Amazon Chase Card.  We have prime, so the benefits are even better.  This is the best all-around card I have found, and it’s the one card to rule them all.  I used to have serval cards that would get higher cashback at certain places, but that’s too much work to save only a few dollars.

 

Prime Card Perks (as of 09/21):

 

1) No Annual Fee

2) Cash Back

  • 5% Amazon & Whole Foods

  • 2% restaurants, gas stations, drugstores

  • 1% all other purchases Benefits

 

3) Additional Benefits

  • No foreign transaction fees

  • Lost Luggage Reimbursement

  • Baggage Delay Insurance

  • Travel Accident Insurance

  • Auto Rental Collision Damage Waiver

  • Extended Warranty Protection (Extends US Manufacturer’s warranty by one year)

We also have a Target Debit card linked to our bank account for our groceries. It’s free and saves 5% at Target.

 

Sarah and I only use our credit card when we have money in the bank to pay for the purchase. The last thing we want is to pay interest on a credit card balance.

⚠️ - Informational Purposes Only - Not Personal Advice

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