3 Things to do BEFORE you spend your tax return


1. Create an emergency account of $1000-$2000.

If you are prepared for an unexpected financial emergency, it’s a mere inconvenience. But if you are unprepared, a financial emergency can take months or years to recover. Many financial experts suggest $1000 in an emergency fund but I’ve personally had one or two emergencies exceed that.  I have $2000 in an account that I don’t think about for fear that I will find a crafty way to repurpose the funds for something other than a true emergency.

An emergency fund with octane. My emergency fund is with a Credit Union. For 2015, I received a relationship reward and a dividend, which exceeded what I would have received at a traditional bank. Added bonus, Credit Unions also have amazing interest rates on loans and credit cards.

2. Protect your legacy.

Since my practice area focuses on Estates, I could write a book on the chaos that ensues after someone dies. A will cuts down on the chaos because it provides your instructions to the Executor, the person you select to handle your affairs after you die. Without instructions, your Estate is split under the rules your state. I’d feel some type of way if the government told my family who’s going to take my little red Corvette.

Insurance is the BMW vs. Mercedes Benz debate of personal finance. Insurance should be used to protect against loss, property or life. Not to leave a “legacy.” If you have children under the age of 25, purchase enough term insurance to at least cover your mortgage, car note, and any other miscellaneous bills. Otherwise, a small ($5,000-$20,000) whole life insurance policy should suffice.

Tip. I transferred a sizable life insurance policy from a former employer. Be mindful that there’s a short window to do this after leaving a company. Check with your employer for portability (transfer) options.

How much would it cost to replace everything you own?  We don’t think about this until a devastating event occurs. Homeowners insurance. If you own your home, you need to cover your house and the things in it.  Renters insurance. If you rent, you still need to cover your belongings. If you have anything of exceptional value- jewelry, watches, furs- you need extra coverage specifically covering those items.

3. Manage your debts.

Paying off debt is, by far, the most satisfying thing I have done financially. However, I encourage everyone to have an emergency fund and proper insurance coverage before paying off debt.  You cannot fund an emergency or protect your family with a paid off Macy’s charge card. Promise.

I believe in Albert Einstein’s advice, “You have to learn the rules of the game. And then you have to play better than anyone else.” In the game of debt management and credit, it’s important to have a good coach. The Ivy Investor loves The Frugal CrediTnista’s playbook. Check her out at http://mnhcreditsolutions.com!





Insurance- how to make it work for you

            Insurance. It’s one of the few products that we understand and why we need it. Whether it’s car insurance, health insurance, or life insurance, its purpose is to protect against your loss and transfer your personal risk to a large company.  That definition sounds good, but few know what “loss protection and risk transfer” actually means in real life terms.  Ironically, many insurance sales agents do not understand what “loss protection and risk transfer” means, and the result is insurance “solutions” that do not really solve anything and are extremely expensive.  Think of it this way. You enter a car dealership with the intent to purchase a used car and you leave with a Bentley.  How’s that for a poor fit?

When I started as a financial advisor, I quickly learned what products paid the most in terms of commissions. Insurance was, and still is, number one. Some people like to sell the dream that insurance can increase wealth and protect against risk at the same time. No. Very few financial products can serve two roles equally, and insurance is not an exception.

 Here’s an example. For Ann, a 30-year old female with excellent health in Pennsylvania, purchases a $500,0000 term life insurance policy for 30 years. It would cost her approximately $335.00 per year.  However, a $500,000 whole life insurance policy would cost Ann $3,345.00 per year. At age 65, if she decided to stop paying premiums, she could either (1) cash out, terminate the policy and take the cash value of the policy, and have approximately $174,700 or (2) use the guaranteed paid up option, inform the company that she wants to stop paying premiums, take what has accumulated as a death benefit, and have an insurance policy that would pay out $397,500.00 at her death to her designated beneficiaries.

Let’s put perspective on this example. If you put, $3,345 in a cookie jar for 30 years, you would have a savings of $100,350.00. With the above example, the whole life policy would have an increase of $74, 350 over principal, which is no a small amount. However, if you put $278.75 per month, which is $3,345.00 annually, into an investment yielding 8% over 30 years (compounding the interest once a  year), you would have approximately $378,932.34. If you notice, this number is close to the guaranteed paid up option and not the cash value, the money Ann would have in hand, if she took the cash out at 65.

Where do you start? In the above example, I used term life insurance and whole life insurance. But what are they, and what is the difference between them? 

       Term. Term life insurance pays the face value, or the death benefit, of the life insurance policy if the insured dies during a specified period of time. As long as premiums, your cost of the insurance, is paid.  From the above example, the $500,000 policy amount, is the death benefit, and the specified term is 30 years. The benefit of term insurance is that it is low cost; but the drawback is that it is not permanent at the age of 60. This individual would no longer have the protection of this policy.

        Whole. Whole life is a type of permanent insurance. It provides lifetime protection, which you pay a predetermined and level premium. The cash value usually has a minimum guaranteed rate of interest, and the death benefit is a fixed amount. Most whole life policies allow you to take loans from the cash value. Whole life insurance is the most expensive life-insurance product available for its permanency, level premiums, the building of cash value, and the ability to take loans from the cash value.

           So what to do?

 The point of insurance is to transfer the risk of the loss of your earning potential, as a result of your death, from your family to a big insurance company.   Insurance is not meant to build wealth for your family; and by doing so, as seen above, it can be a costly proposition.

 Ideally, if you have minor children and a mortgage, term life insurance in the proper amount would work well.  Consider what it would take to pay off the house and make sure the children are taken care of. You could, as in Ann’s case, take the other thousands of dollars and invest it, or use it to pay off debt. And consider this, if for some time, you cannot afford your premiums, your policy will be cancelled.

I even appreciate whole life policies in small amounts, i.e. $25,000, to cover your burial and related expenses. I do caution against using insurance for wealth building when there are other, more appropriate tools to do that.

I’ve said this before and I will say it again. Not everyone may need a life insurance policy, but EVERYONE needs a will. But if you are wondering if you need life insurance, ask yourself this question, “Would my death cause a financial hardship for anyone?” If the answer is yes, then you need to get moving on finding a policy that works for you and your loved ones.

How would your family know your wishes if you were no longer around?

The topic of this week’s blog post is not fun. But I can assure you that it’s even less fun dealing with the emotions of a major family crisis and then adding the stress of not knowing how to begin piecing a loved one’s life together in their absence. If you organize your financial information and provide instructions for loved ones now, it can save a lot of time, frustration, and money for them later.

            “But of that day and hour knoweth no man…” Matthew 24:36 KJV.  Because of this, it is so important that in the case of death, your loved ones, or responsible friends, know where your information is, how to access it, and what your wishes are.

1. What are your wishes?

           The only way for your wishes to be known after death is through a will.  Without a will, any assets upon your death will be distributed through the intestacy laws of the state. (Testate means dying with a will and intestate means dying without a will. The person who makes a will is known as a “testator.”) Allowing your assets to go intestate, without a will, tends to cause a lot of confusion and family in-fighting. As a result, it is usually advisable to have a will.

A will is a document which transfers your property at your death to designated people. It can be changed until your death and is only effective upon your death.

Wills are governed by state law. Most people go to an attorney to have a will drafted, which is by far the best way. However, in a pinch, it might be better to have something rather than nothing. Luckily, half of the states allow a will written completely in the handwriting of the testator otherwise known as a holographic will. See if your state is one of them, here.

            A holographic will allows some of the formalities of a formal will to be waived, i.e. the requirements of having witnesses. It should be noted that having the will completely in your handwriting is important. With the advent of online legal websites, there has been a lot of debate regarding typed wills and in at least one case, a typed will was held not to be valid. In writing a will, you must declare it to be your “Last Will and Testament.” It must be in your writing and signed by you. You should also name a personal representative, who is known as an “Executor.” The executor is the individual in charge of carrying out the terms and conditions of your will.

2. Where is your information?

I am a huge fan of investing in a Safe Deposit Box. Safe Deposit Boxes are available at most banks for a nominal yearly fee. It can help secure important personal documents and collectibles. How do you decide what to put in the box? Use this thought as your guide: If I lost this document, it would be impossible, costly, or very difficult to replace.

One thing that shouldn’t go into your safe deposit box, believe it or not, is your will. Many states have rules about who and how a safe deposit box can be accessed after one’s death. The worst case is that your loved one would have to go to court to have the safe deposit box opened which can be costly and time consuming.

A good place for your will is in a fire-proof safe in your home or other safe place; however, wherever you place your will for safe keeping, you need to let your Executor know.

Additionally, you should have a list of information available either in your possession where a trusted family member or friend knows how to find it, or better yet, with a trusted third party, such as an attorney or accountant.  I have provided a good starting point for you to use to begin your information collection process, PersonalInventory. Please note that each section is not exhaustive, some sections may apply to you and you may need to add others as you see fit. For example, many people like to have a listing of important property such as a watch or coin collection or a listing of firearms.

3. How would a loved one access your information in your absence?

Let a family member, or trusted friend, know how and where to find your information. For example, tell them  “my safe deposit key is in my top drawer in a blue envelope” or “my safe is in the basement and the code is my wedding date.”

With all the formalities of a will and the different requirements of each state, it is probably the best and safest bet to have an attorney draft a will for you. Many states have law schools with legal clinics with law students willing and able to help you for no fee.

Final Thoughts

I will discuss some of these topics in more detail in the future. I wanted to provide a primer to get you started in getting your “house” in order. My favorite quote is with regards to these matters is, “My people will perish for a lack of knowledge.”

Today’s post provides information about the law designed to help readers cope with their own legal needs. However, this information is not the same as legal advice. Although I have gone to great lengths to ensure accurate and useful information, I do recommend that you consult a lawyer if you want professional assurance that the information provided is appropriate for your particular situation.