Insure For Your Future and Your Pocketbook

Get ready for the most boring blog post you will ever read... or is it?

That's right we are going to talk about insurance. Insurance may not seem like a sexy finance topic to go over, but it is one that could be costing you a lot of money if you are not careful.

When I first got my job offer out of school I was pretty much only worried about the salary. The first day at work I am given a packet of information on these things called "benefits". So here I am fresh out of school still trying to figure out how to read these things called "lease agreements" and pay for electricity and I am supposed to decide what types of insurances are best for my situation? Get out of here.

So I did what any millennial would do and did a quick Google search and just chose some stuff. Luckily I made some decent choices, but otherwise I could have been paying for a lot of stuff I didn't need. I don't want you to go through the same process so here I will lay out what insurance is and what things to consider depending on your situation.

First, let’s talk about what insurance really is.

  1. Insurance is a cost. We say that because you should not be looking to make money on insurance. This especially comes into play with life insurance.
  2. Insurance is only to transfer financial risk for events that you cannot cover with your current assets. For example, you probably can't cover a major surgery with cash, but you can probably afford (even if it sucks) to replace your phone if you drop it in a toilet one drunken night.
  3. Insurance is easy to sell to people because risk is scary, but you don't always need it.

Now that we have a better understanding for what insurance is we can talk more about the details. I will split this up into insurance you want and insurance that you don't want.

Insurance That You Want

Health Insurance - If you are living in the US then I am sure you know are aware of the current situation. As of February 2017, you are required by law to have health insurance and if you don't you will have to pay a penalty on your taxes. The political debates on this subject are heated, but what we can be sure of is that you better have it. First, let's talk some health insurance basics.

All health insurance plans have a couple basic features: they have monthly premiums that you/your employer (if applicable) pay, they generally have some type of deductible or limit at which you will have to pay out of pocket before receiving full benefits, and lastly they have some structure of who you can see and how the care can be given. There are generally three different types of health insurance plans I will list them here and let you know what type of situation they are best for:

  • Health Maintenance Organization (HMO) - The health maintenance organization plan is gaining in popularity. With this plan you will designate a primary care physician (PCP) who will coordinate all of your care. If you need to see a specialist then you need them to give you a referral to do so. Otherwise it will not be covered. This plan generally as low co-pays meaning you will pay very little out of pocket for general office visits. This is typically good for a person or family that goes to the doctor frequently either for an existing condition or otherwise.
  • Preferred Provider Organization (PPO) - This is similar to the HMO except you do not have to choose a primary care physician. Instead there is already set up a network of specialist and other care givers that you can see as needed. The other thing to be aware of is that if you want to see a specialist that is outside of the network then you typically will have to pay out of pocket. Like the HMO you will receive services within the network at a steep discount, sometimes even more than the HMO. Like the HMO this is good for a person/family that makes frequent visits to doctors or specialists, but doesn't want to go through a PCP. Monthly premiums are similar to those of HMOs if not a little more.
  • High Deductible Health Plan (HDHP) - This one has the cheapest premiums of the three. Like the name says this is a plan that has a higher deductible than the other two and usually no discount for general visits. You have to pay 100% of health care costs until you reach your deductible. The great thing about the HDHP is that you will have access to the Health Savings Account (HSA). This account is the only account in the US that gets you TRIPLE tax savings: you contribute your money tax free, you can invest the money and any gains are not taxed, then when you take the money out it is not taxed. The only way to get access to this account is the have a qualified HDHP plan. You can contribute up to $2,500 per year into it and some employers even make contributions for you. The main stipulation on this account is that the money can only be used for qualified healthcare costs. This plan is great for people who are younger and healthier who don't plan on using their insurance very much. This allows you to save for your future while at the same time paying lower monthly premiums. This is the type that I currently have.

Most people will get their health insurance through their employer. If you are unlucky enough to have to purchase on the market then you know the extreme cost that it is running right now. Here are a couple other options for relief.

  1. Consider changing plan types - Plan types can have drastically different costs. If you have the option, moving to a high deductible plan and supplementing with a Health Savings Account can be a great alternative to a higher priced PPO plan.
  2. Health Sharing ProgramsHere is a good article on what they are and how they work.

Car Insurance - Just like health insurance, a minimum amount of car insurance is required by law. Most of the time this is called "liability" insurance. Although insurance companies spend billions of dollars per year to convince you that you need a lot more coverage. The good news is that we can use this fierce competition to our advantage.

Shopping around for insurance quotes is easier than ever and can be done almost exclusively online. Here is a great article on different ways to get car insurance. Remember that insurance is a cost, so we don't want to be paying to transfer financial risks that we can afford. Adjusting deductibles and coverages can save you hundreds of dollars per year without even switching providers. Here is more great information on sizing up your insurance coverage needs.

Long Term Disability Insurance - It's never nice to think about a scenario where you could become permanently disabled and unable to work, but these events do happen. Depending on social security to take care of you if it were to happen is a recipe for disaster. This insurance is fairly inexpensive to purchase and can often be done through your employer. Here is great information on what to look for and where to buy.

Term Life Insurance - This one really applies if you have dependents such as a children and/or a spouse that depends on your income to live in or if you have a large amount of cosigned debt. Notice how I specified TERM life insurance. You will see why down below. Term insurance is just like it sounds, it is life insurance over a certain period of time. Usually people will purchase 30-year term, but there are shorter periods as well. Here is a great broker for you to get some price quotes from.

Now we will move to some insurances that you definitely want to steer clear from.

Insurance That You Don't Want

  1. Whole Life Insurance - The premise of whole life insurance is that the policy lasts your entire life rather than just a term. The problem is that it is multiples higher than term insurance! They also will try to attach investments and other little gimmicks to it all in the name of separating you from your money while having to provide the least amount of value possible. Here is a good article that has some numbers on the subject. Overall, I never recommend anyone to purchase any variant of whole life insurance.
  2. Extended Warranties - One of the most popular of this variant is cell phone "insurance". Have you ever noticed that it seems like everything you purchase from an electronics store has the option to purchase an extended warranty? Have you ever wondered why that might be? It's mostly because they make a ton of profit from it! At the beginning I talked about insurance being to transfer financial risk for things you can't afford. This is a perfect example of paying a cost to transfer a financial risk that you can afford. Unless you happen to be using your electronics while scuba diving then this is probably a waste of money for you. Here is a good article on extended warranties when it comes to cars. Here is one on cell phones.
  3. Cancer Insurance - Like any great gimmick there needs to be an imminent danger of death. Cancer insurance is touted to cover the costs of treatment. But there question is doesn't health insurance cover that? Well, it does. Sure there could be some coinsurance and deductible costs, but health insurance will cover most of it. Here is a great article on the details.

So now is a great time to take a look at your coverage and see if you have overlaps and where you can save some money. If you can find some savings you can roll that directly into your retirement and investing accounts! See you next time.

Joshua Bird AKA The Young Analytical Mind

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Automated Financial Systems

I hope you have seen from the past articles that having a systematic approach investing is very important. The same is true for the rest of your financial life. Having an automated system removes the human emotion and psychology from the situation and keeps us from screwing our entire plan up. 

In this article, I am going to tell you everything you need to know about putting in place a fully automated financial system that automatically saves, pays off debt, and invests over time. I will be telling you about great apps that you can use to make all this super easy and can all be done from your phone. No more big excel sheets and hours of time. It will take you literally minutes to manage your finances every month.

The backbone of any automated financial system is the budget. Whether you are a Fortune 500 company or anyone else off the street you must manage and track your expenses to achieve your financial goals in an efficient fashion. Now, most people have a misplaced hatred with the budget so let's clear that up before we move on to setting up the system.

What Is Budgeting, Really

Most people think of a budget as something constricting. We have phrases like "ballin' on a budget" or people say things like "nope, can't have that it isn't in my budget". This leads some people to avoid the act altogether. A budget is just a plan of what you want to spend in a given time.

It doesn't have to be constricting. It is simply being an adult and planning your expenses. John Maxwell describes a budget as telling your money what to do instead of wondering where it went. If you read anything into this paragraph it should be this: we need to separate the act of budgeting/planning our expenses from cost cutting. These are two separate acts that are based on different things. EVERYONE can plan their expenses. If you are a crackhead and you wanted to spend 70% of your income on crack then your budget could look like this:

  • Crack: 70%
  • Food: 10%
  • Cardboard Box to live in: 1%
  • Other: 19%

It doesn't have to be about cutting your expenses. Should this person spend 70% of their money on crack? No of course not. But for doing a budget it doesn't matter. It is just the plan. Cutting costs is optimizing this plan. If you don't have a plan to begin with then how are you supposed to cut costs?

You can't efficiently cut your costs, save money, and invest if you aren't doing a budget. It is just that simple. Think of all the fortune 500 companies out there. They all have INSANELY accurate budgets. They have a very good idea of what they are going to spend in each year.

Now, these are money making machines. They don't spend time and money on things unless it has a real impact on the business in some way. So why do they spend so much time and money paying people to keep meticulous budgets on all expenses? Because they know that is the only way they can run their businesses well and help streamline what matters. Your personal finance is no different. It is the ONLY way you can truly get a grip on your finances and take advantage of the awesomeness that is investing and compound interest.

Automated Budget Basics

There are some fundamental characteristics of a budget that we must have:

  1. Must be unique to every month. None of this "let me set some goals and see if I hit them" type shit. That just doesn't work over time. Each month is different and you need your budget to reflect that.
  2. Must plan every dollar of income. That is the most effective way to plan your expenses. I will show you some apps to help you do this.
  3. Must automatically download transactions (Apps). This is one of my personal preferences. I make just about all my purchases using by debit card. Many budgeting apps require you to manually enter your transactions. While that is all great and very easy to do, I just simply don't keep up with it. It is mandatory for me that have my transactions download automatically. Some people like the manual, I just know I won't do it.

Next, we talk about finance apps.

Financial Apps

With the dawn of the information age, budgeting has only gotten easier! There are some fantastic apps out there that you can use to not only budget, but also to track all of your accounts and net worth. I will show you some apps that we can use to make this whole budgeting thing super quick and painless.

I separate my apps into two separate categories: budgeting and net worth/investment tracking. So far I haven't found an app that does both effectively. Some will track your net worth and investments well and have a budgeting tool, but it just isn't that good. Some are great with budgeting and do decent in tracking your total financial picture, but just not very well.

Budgeting

EveryDollar Plus

This is the app I personally use for budgeting. Here are some pros and cons:

Pros

  • Very easy to categorize expenses on the go. Just drag and drop into the budget category from your iPhone.
  • Automatically syncs to your bank account and downloads transactions.
  • Has decent trends you can look at to track month over month spending.
  • Easily set up a budget using the previous month.
  • Easy to manage on the go with the added feature of editing and adding budget categories from your phone.
  • Encourages you to budget your income down to 0.

Cons

  • It does cost $99/year for the feature to connect to your bank account. I think it is money well spent as I hate manually tracking expenses.
  • Transactions are sometimes slow to load. Occasionally, I have to close the app and reopen it to get them to download.
  • It is only supported on the iOS (iPhone) platform. They say it will be available for android in 2016.

Mvelopes

I have just started trying this app out. Here are my observations so far:

Pros:

  • Easy to set everything up. It creates a budget from national averages and goes from there.
  • Automatically syncs to 4 bank accounts for FREE. They have an upgrade version for $95/year that has unlimited.
  • Easy to adjust everything from your phone.
  • Is supported on both Android and iOS devices.

Cons:

  • With the free version, they have some ads that are around online and it pings you a lot to upgrade.
  • Does not have any trends to look at that I can find.
  • Is a bit confusing at first. I am sure once you learn how to navigate it will be fine, but it is just not intuitive.
  • Doesn't seem to easily track your month over month budget like EveryDollar does.
  • Seems to be a bit more cumbersome to move transactions rather than EveryDollar's drag and drop.

Summary:

If you have an iPhone I suggest the paid EveryDollar app. It is super easy to use and navigate. It has good trending and it is easy to go from month to month. I believe it is well worth the money. If you have an Android or are against paying for EveryDollar then go with Mvelopes. It still works very well and I am sure once you get the hang of it there will be no problems.

Net Worth and Investment Tracking

Most of these apps are free. I will talk about two very powerful ones

Mint.com

Mint is the most popular financial app by far. It does have a budget feature, but I don’t like it. It is basically you setting goals and the software then automatically categorizes your expenses. Here are some observations from using the app for about 2 years before switching:

Pros:

  • It is free to use.
  • It has great trending tools to see the breakdown of how much you are spending on average every month.
  • It connects to most institutions and helps keep track of all your accounts.

Cons:

  • It does have quite a good number of ads all around the website and app. There is no doubt how they make money.
  • The software is supposed to automatically categorize your transactions into their respective categories, but it doesn’t always do a great job. It is quite a chore to go in and make sure it is assigning everything correctly if you want a good idea of what your spending is. If you use EveryDollar they have trends you can look at that you don't have to do any extra work to know they are correct.
  • It will track your investments but doesn't have very much analysis around it.

Personal Capital

This is the app that I personally use. It has a great interface and has some great features that I haven't found on many other apps.

Pros:

  • It is also free to use.
  • It also has great trending tools to look at your spending.
  • It has a fantastic investment checkup tool that shows you what you are paying in fees. I haven't found this feature in any other free app.
  • Easily track net worth as you pay down debt and invest over time.
  • No ads whatsoever.

Cons:

  • Could do a little better with the trends.
  • Has a similar issue as with Mint above where it doesn't always categorize your expenses correctly.

Summary:

Both apps do a good job, in general, with tracking your net worth and investments. If you value the trending functions more that investment analysis then I would go with Mint. If you like the investment analysis more then I would go with Personal Capital. I have both Mint and Personal Capital and I almost always use Personal Capital. It just works better for me.

Creating Your Automated System

With budgeting, and most other financial things, automation is key. Having an automated system that requires minimal work month over month is the easiest and most effective way to reach your goals. I know this first hand. Before I found great budgeting apps like EveryDollar, I struggled with budgeting.

Some months I would do it and some months I wouldn't. I can tell you one thing, every month I didn't do a budget I always spent more and didn't get much for it. Also, you will find that you are much less stressed about your financial situation when you know the details and are managing them. So how do we create an automated system? Well, I will show you step by step exactly how I manage my finances every month and how you can do the same. 

1) Set up your apps

First thing you need to do is get your apps set up to get the whole thing rolling. From the above list or from your own research find an app that works for you. Like I said, I personally use Personal Capital and EveryDollar Plus so that is what I will be talking about here. The basics will not change even if you are using different apps. Get your apps set up and get all your accounts loaded in.

2) Determine your net worth

Once you get your apps loaded up, you need to make sure you gather your entire financial picture. Include all accounts and debt that you have. Your net worth is simply your cash (equity) minus your debts (liabilities). For many people, this can be kind of scary at first, but realize that making this first step is the only way it is going to get any better.

Financial problems don't just go away over time. They take work and you must be intentional. Even if you don't have any debt right now it is good to have all your accounts in one place so you can quickly see where you are at.

3) Determine your fixed expenses and put them on AUTO-PAY

Now that we know where we are at we can set goals and start working towards them. First step in automating your life is making sure that all your fixed expenses are paid on time automatically. Fixed expenses are things like rent/mortgage, utilities, debt payments (cars, etc.), and insurance.

These are usually paid all at once and happen at the same time each month. These are easy things to automate and make a huge difference. Most companies now offer automated bill pay through their own systems using a debit/credit card or a bank draft. I HIGHLY encourage you to set these up.

Some things, however, still do not have this option. For these you can use the bill pay feature from whoever you bank with. I personally use Chase and use their bill pay feature to pay the minimums on my student loans (which are getting close to being paid off, I will post about that later). The way they work is simple.

First you will need to call whatever company you are trying to pay and ask them for a bank account number and zip code to set up auto-pay. Once you have that it is easy to set them up as a "payee" in your bank's system. Then you can set up a reoccurring payment every month. Allow time for payments to process before their due date.

For example, if you have a bill that is due on the 15th of every month, set up the bill pay to go out on the 10th or 9th. That gives time for everything to go through so you don't have to pay late fees. Once you set everything up on autopay you will know that every month you don't have to worry about missing payments.

4) Set up the rest of your budget

Apart from your fixed expenses above, everything else can vary from month to month. This is where the budget and budgeting app comes in. If you set this up correctly this can be a simple and effective way to track where you are at any point during the month and plan for your goals. The hardest part of this is setting up the first budget.

If you have never tracked your expenses before then it can be overwhelming to try to figure out how to start. Not to worry, that is where apps like Personal Capital and Mint come in. These apps, once you load your accounts, will automatically go in and categorize each transaction.

Although it can take a little more work to check and make sure it does it correctly, it is an easy way to see what your spending habits are. I recommend you go back 3 months and find your average in each category. Once you do this, it is easy to set up your first budget. If you are using EveryDollar then you can go online and easily enter your income, your fixed expenses from above, and your 3 month averages.

Here are a couple of very important things about setting up your first budget:

  • Make sure that ALL your income is accounted and budgeted for. This is the most effective way to budget and forces you to plan your expenses. Trust me this is not as hard as it seems. If you find yourself where you have some money to save, then just put the balance in savings. If you are spending more than you making, then focus on simple ways to cut expenses so it can balance out.
  • Don't try to do too much cost cutting the first time you do your budget. For many people the first time they look at the expenses it will be a bit shocking. I have no doubt you will find you are spending more than you thought on different things. A lot of times people will react and attempt to cut too deep the first budget and will bust it or get frustrated and give up. This is unfortunate. For the first time just focus on PLANNING not cost cutting. Once you get a grip on what you are spending and have your system in place it is easier to adjust.
  • Don't get discouraged if you bust your budget at the beginning. Many people who are new to budgeting often underestimate the time it takes to get used to managing your budget. They will go over the first month and get discouraged and just go back to doing whatever. I know because I have been there. Realize that is takes a solid 3 MONTHS to really get it down. Even for the most disciplined person. It's just the way it is.

Once you get your budget set up in whatever app you choose then start tracking your expenses. Hopefully, you will see how easy it is to do.

5) Automate your saving and investing

This is HUGELY important. I would be willing to say that most people do not save consistently because they are relying on their own willpower to physically move money from checking to savings at the end of each month "if there is any left over".

This is exactly opposite of what you should be doing. I know you have heard it 1000 times, but "paying yourself first" is the only way to do it. Having your savings automatically come out of your paycheck without you seeing it is the most underrated idea in all personal finance. It is hard to explain except for saying that in most cases if you don't see the money in your account you don't miss it. It is as simple as that.

Once you have your budget set up from above you should know exactly how much you should save and invest. It can be scary at first to not have this in your checking account "just in case", but trust me that idea is doing more harm than good. I personally have my savings account with Chase along with my checking.

I automatically save each time I get paid. If I need to make a big purchase that month I can transfer over so it is not like the money is gone. It is just a different feeling when you don't see it in your checking account. Just like setting up bill pay it is insanely easy to set up automatic savings. Just have your account and routing numbers. Once you set it up it the bank will go through a verification process to make sure you are the account owner.

At that point, you will be able to set up your automatic transfer. It is similarly easy to set it up for an IRA, 401k, or any other investment account.

6) Plan for future purchases and goals

Once you have your automated system set up it is easy to see where you are going and how long to get there. Also, it gives you a clear path of what your money is doing always. You can now set realistic financial goals and know exactly what you should do to reach them.

Since it is all automated it won't take much work at all to keep everything on track and you can spend more time living your life! Whether it is a big trip you want to take or a down payment on your first home, it can all be within reach if you stick to your system.

Here is a diagram that explains how the system works:

As your income comes in you have already automated your saving and fixed expenses so those will just pay as they need to. From your checking account, you can make all of your purchases and they will be tracked through the budget which is on one of your apps so it is very easy to manage.

Summary

Once you have your automated system set up you will see how much easier your financial life is. I have done it both manual and automated and I can tell you that automated is SO much more efficient and effective. I hope you find this guide easy to use and implement. What does your financial system look like? Let me know in the comments below. Next post we will talk about how to cut costs.

Joshua Bird AKA The Young Analytical Mind