With Low CD Rates, Where Do I Save?

by Miata on April 11th, 2014

SavingLet’s face it, as artists, we take plenty of risks with our craft. We don’t need undue risks with our investments.

Looking at CD rates last week, there’s nothing to grin about. According to Bankrate.com, the average one year CD is paying 0.23%. Looking for a higher return? If you lock your money up for five years in a CD you still are only going to earn 0.80%

To use my son’s word for lima beans, “Yuck.”

So if you’re going to save, but you don’t want risk, what do you do?

 

Your Time Frame Determines Your Investment

If you aren’t a risk taker, but need a bigger return than sub-one percent, the best idea is to take a look at how long it will be until you need the money you’re going to save.

 

If you need the money on hand for your craft or emergencies, it’s often best to look at a money market account or just leave it in cash. It doesn’t make sense to move away from guaranteed accounts if you’ll need the ability to grab it right away. On the other hand, imagine that you lock your money in a CD. Not only will you earn very little interest, but you’ll also have to pay a penalty if you remove the money early.

 

A good rule of thumb: Never risk any money in the financial markets that you might need in the next three years.

 

If you won’t need the money for at least three years, up to ten, you may want to examine bond funds. Bonds are loans to either governments or companies. Additionally, by buying a mutual fund, you’re loaning money to many companies instead of just one, lowering the risk that you’ll loan money to one company that doesn’t repay.

 

For shorter time frames (three to five years) it’s probably best to stick with government bonds or short-duration corporate bond funds. Government bonds are backed by the United States government (stay away from other nation’s bond funds if you live in the USA because not only are you investing in bonds, but you also will experience currency fluctuation). “Short duration” means you’re only loaning the money to companies for a short time. Historically these funds are safer because it’s a short term loan and mutual fund managers can easily assess whether the company will repay the loan.

 

For five to ten year periods, intermediate term and long term bond funds (often called “income” funds) may be a wise choice. These longer term loans will give you a bigger payout and because you have a few more years you can ride out any short-term volatility.

 

Historically, intermediate and long term bonds aren’t incredibly volatile investments, but remember that time reduces your risk in a fund. Between investing in many different companies and being patient, historically you’ve been rewarded.

 

Only if you have at least ten years should you look at stocks, if you’re conservative. I’m always surprised when a person tells me that they’re buying a stock fund and are hoping for an immediate return. Over the short run stocks are incredibly volatile. You’re biting off a huge risk…especially if you’re someone who wants to pay attention to your craft rather than your portfolio. What surprises people is how safe stocks have historically been if you have ten years or more.

 

I’ll explain. Between 1950 and 2012, if you bought the S&P 500 and held it for one year your return was anywhere from +51% to -37%. You’d probably have more fun just going to a casino! But if you hold on for five years, your returns were anywhere from +28% to -2%. Look at how much less risk of losing money you had if you held on!

 

But remember, we’re conservative, so we want to hold longer. Over a ten year period your best return would have been +19% and your worst was -1%. If you’d held for twenty years, your top return was +18% and your worst was 6%.

 

A good rule of thumb: Use stocks or similar investments (like real estate) if you can hold them for a long period of time.

 

So, What’s the Point?

Current CD rates can make you think that there aren’t opportunities for your savings, especially if you’re a conservative person with your money. But if you look closely at how long until you need the money you’ll increase your chances of finding returns better than CDs could pay even in better times.

Four Apps To Kick Start Your Savings

by Miata on March 28th, 2014

SavingsI often hear stories from creative professionals about their difficulties saving money. I completely understand. When faced with a project today for our art versus some far off goal, it’s hard to put away a dollar that could help right now.

Yet, I also know that the only way to financial independence is to save for the

future. Every dollar we spend now is a dollar that could have secured our dreams forever, instead of just duct taping them today.

So let’s make saving easier by utilizing technology to help reach our goals. Here are four resources to get you started.

 

4 Apps To Clean Credit, Get Out of Debt and Save Money

 

Credit Karma – Most people I coach are afraid to view their credit score. Why? It’s like a trip to the dentist. Your credit score shows all of your blemishes in the eyes of the people who’ve loaned you money.  But Credit Karma empowers you to actively manage your credit with free interactive guidance to building a better score. (another choice is Quizzle, which has similar features).

 

Ready For Zero – Next we need a site/app to begin tackling debt. When I work with clients on building their budget and creating money management systems, it’s easy to send people away motivated. But the problem comes three or four weeks later when real life strikes again. I like Ready for Zero because you see your debt mountain decreasing over time. These tools give you the daily motivation to stay on the bandwagon, or to get back on if you find yourself and your budget running contrary to your goals.

 

Mint. Okay….now we have a plan to improve our credit and eliminate our debt. Next up is Mint. This app helps you automatically track your spending so you can focus on your art and identifying opportunities to save. If you’ve been through any Abundance Bound Programs, you know that having a handle on your everyday expenses is the key to finding simple ways to save money. Mint also allows you to place limits on each area of your financial life. Do you need to spend less money at restaurants or on gifts? Mint will alert you when you’ve stepped over your pre-defined lines, helping you to curb spending and stick to your plan.

 

Jemstep –If you aren’t sure about how to build your savings, Jemstep will ask you about your goals and where you’re saving. Then they’ll recommend where to move your money based on historic algorithms. While they offer services for a fee, their free tools are excellent. They aren’t affiliated with any asset management firm, so you’ll get unbiased advice about where to invest.

 

There are many tools available for financial management. While this certainly isn’t an exhaustive list, these are reliable places to start. Use these 4 apps to get a handle on your credit, begin tackling your debt, monitor your budget and wisely invest your money. Imagine how much time that’ll free up to focus on your creative endeavors!

 

Hiring Pros? 5 Guidelines To Save You From Delegating to A Scammer

by Miata on March 10th, 2014

moneyHiring Pros? 5 Guidelines To Save You From Delegating to A Scammer

When I read about young Nickelodeon star Drake Bell declaring bankruptcy, I thought immediately about how vulnerable we are as artists.

If we want to succeed we have to be able to focus on our work. That focus means that we need to become good delegators, and often it’s the financial parts of our lives that are at least partially handed off to other people.

 

Why do we hand off something as important as money? That one is easy. Finance can feel cold and calculating, or boring to someone just learning. Certain aspects of our financial lives might require the ability to decipher contracts, understand interest rates and follow obscure metrics. That can be overwhelming…and underwhelming at the same time!

If You’re Going To Delegate

When it comes time to share the keys to your financial future, follow these rules to ensure you don’t get burned and end up surprised with a financial nightmare.

1)    Always interview more than one professional. Always.

We want to trust people who make sense. But nearly every bad movie plot features some criminal mind masquerading as a good guy. Films and plays are based on real life! Sure, a particular professional may sound good, especially if you aren’t comfortable with the subject matter…that’s how unscrupulous individuals prey on your fears. Always interview several people to find the right one: you don’t want to have to go through this process again in a few months.

I love the phrase: “If you don’t have time to do it right the first time, when are you going to find the time to redo it?”

2) Credentials matter.

Ask each professional what designations they should have (and which they actually possess). Here’s another reason to interview multiple advisors: each may give you a different answer. You’ll know the truth only after you interview several pros.

Explore online to find out where people file complaints about professionals and see if any of the people you’re interviewing has had problems in the past. I remember helping one family investigate a mortgage professional only to find that he’d been in jail not too long ago!

3) Establish clear guidelines and milestones.

Don’t fall into the trap of “she’s the professional, so I’ll let her do what she does best.” People you hire work for you. It’s up to you to share what you mean by “success” and “failure” when it comes to their assignment. Often when a pro isn’t coming through it’s because they didn’t know exactly what you really wanted.

Set clear directions in writing and schedule a timeline for open and frequent communication. That’ll give them the opportunity to share in your success. If you hand them the tools to work effectively, you’ll be surprised how often they’ll impress you.


4) Ask for all contracts ahead of time.

Don’t let people sign contracts on your behalf and don’t be pressured to sign anything without reading it first. Sure, you’ve hired pros and they’re telling you it’s an important piece of paper, but you’re going to have to suffer the legal consequences of not reading any fine print that goes against what you were told verbally.

When I’m especially nervous about signing something (like mortgage paperwork or a legal contract) I’ll request it the night before. That gives me plenty of time with a highlighter to read everything so that I can ask good questions the following day. I’ve also rarely found problems, but I’ve always found that my professional helpers are always impressed by the fact that I read enough to ask a few questions before I sign any document.


5) Hold surprise audits.

It’s easy to fool the boss when you know they’re coming. It’s far harder when they “drop by” to see what’s going on and ask to see the work that’s important for the goal.

Some people make think this is an unfair approach. It isn’t. There’s no need to be bossy or mean to your help. However, the only way you can make sure that the job is getting done is to make your pros aware that you’re intensely interested in results.

Remember this line that managers preach: That which is inspected is respected by your employees.


6) Never abdicate the throne.

These are your goals and you’re the king (or queen!). Don’t ever set your team adrift without checking in to make sure that everything is happening according to plan. When your professional help is silent you should assume they aren’t working toward your goals. Putting off important conversations never makes them better and avoiding confrontation doesn’t make it disappear. You have to manage the high level vision so that your people can get into the trenches on your behalf and cover all the pieces you don’t want to trudge through.

By following these five guidelines you, too, can hire help and be reasonably sure that you’ll be able to focus on your art. While you should always expect bumps in the road, I always love being able to see them ahead of time so we can set a new course around the problem 

Be Careful With IRA Rollovers

by Miata on February 14th, 2014

Be Careful With IRA RolloversMan protecting his savings

Research.

Research plays a huge role in your art. Whether you’re exploring the motivation for a character you’re about to play, scouring the net for new textures and ideas for a painting, or digging into the history of any revolution for your next book, research is at the base of most artistic pursuits.

It’s the same with your financial decisions.

I mention this because while doing research, I noticed that FINRA, the board who overseas most financial professionals, was going to focus more on retirement plan rollovers. It seems they’re worried that too many people might be making poor decisions in this area.

So, to help you with your research, I thought today we’d discuss what a “rollover” is, how it should work, and what FINRA might be worried about.

What is a “rollover”?

If you worked in the United States and have a retirement plan, such as a 401k, 403b or 457 plan, a “rollover” is the law that allows you to move the money inside this plan to an IRA without paying taxes immediately. Instead, you’ll still avoid taxes until you take the money out of the shelter.

Why would someone do a rollover?

A rollover allows you to be more flexible with your money. Instead of only relying on your old employer’s plan options for investments, you can now pick from a wide variety of instruments that you choose on your own, or with the help of an advisor.

In most cases, moving your money to an IRA allows you more freedom. Much like most artists avoid being confined, your money has the opportunity to perform better when you widen the boundaries. While most 401k plans only have several mutual funds, you may invest an IRA in anything from CDs to exchange traded funds, to individual stocks or bonds….not to mention those same mutual funds you had available in your 401k plan.

Why would someone decide NOT to perform a rollover?

There are very few reasons NOT to roll your money over to an IRA. First, if you worked for a company whose stock has soared and you held some in your 401k, a rollover IRA might be a horrible idea (check with an accountant on better strategies). Also, if you’ve left the service of your company between 55 and 59 1/2 years old, a 401k plan gives you more flexibility. Otherwise, an IRA is usually the best tool to use.

Should I Talk To An Advisor About an IRA Rollover?

Here’s the part where FINRA is worried. Some advisors have been making unsuitable recommendations for IRA rollovers. Here are a few:

  • They recommend an annuity inside your IRA. Annuities do have some attractive, but expensive options that can guarantee your money. However, annuities themselves are tax sheltered investments. So, a tax-sheltered annuity inside of an IRA tax shelter makes little sense. Because annuities often pay huge commissions to the agent, some unscrupulous agents are happy to sell you one. When to use an annuity in an IRA: you want to invest in the financial markets but also want some guarantees your money will be around. When NOT to use an annuity: An agent or advisor tells you that it’s just a grouping of mutual funds. You can buy these funds FAR cheaper outside of an annuity.
  • They advise you to buy stocks that they’ll manage in a “discretionary account. This practice is going away quickly, but some advisors like to trade stocks often to earn commissions. This practice is called “churning” and should be avoided. When to use a “discretionary account: you have a TON of money and want to invest some with a manager who you feel has a good track record. When NOT to use a “discretionary account: every time except the one listed above.

  •  They want to sell you a series of mutual funds with front or back end fees. These funds are called “load” funds, and garner a big commission for the advisor (if it’s a front end fee it can be as high as 8%!). When to use load funds: You have a trusted advisor and want to make sure he gets paid. When not to use load funds: If you have little relationship with an advisor and want to avoid high up-front or internal costs in your investments. 

There are other ways FINRA worries that advisors might not have your best interest at heart when advising you to roll over money to an IRA, but these are the biggies. If you feel like you’re being pressured by an advisor, seek a second opinion. If you aren’t sure if the recommendations an advisor is making are suitable, do what you’d do in your art: jump online and research. You’ll feel stronger as you learn more about how your money works.

Are You Winning Awards in Your Life?

by Miata on January 31st, 2014

Are You Winning Awards In Your Life?Award

The Oscars nominations were announced two weeks ago. As always, I was surprised by some picks (Emma Thompson and Forest Whitaker being ignored were big shocks to me) and had lots of fun reading the choices to discover which of the films I’ve seen and which ones I still have to hurry up and watch!

The Oscar announcements started me thinking…over the course of the last year, I’ve given you financial tips and tools to help you focus on your craft. So now, it’s award season….

What award would you deserve to win this year?

While some people roll their eyes at award season, it’s a great reminder that our time here is finite. It seems like just yesterday we were watching the Oscars, 2013 version, and we’re already checking boxes to guess who’ll win in 2014.

What did you do with that twelve months?

Read the rest of this entry »

3 Money Moves to Light a Firecracker Under 2014

by Miata on January 17th, 2014

fireworksMy husband and I were watching the new David O. Russell film American Hustle this last weekend. In one scene two of the characters are listening to a Duke Ellington piece that starts off with a dramatic flourish. Christian Bale’s character laments that nobody makes music like that anymore.

In art, there’s power in a first impression. Writers are taught to begin in the middle of the drama, not at the beginning, for maximum effect.

You can do that with your money, too.

By starting off 2014 with a financial “bang!” you can focus on your craft, your family, ways to earn a side income…whatever. You’ll have more money, more time, and less painful drama. (Although I love drama on the big screen, I DON’T love it in my personal life.)

Let me teach you three great ways to start 2014 like you’re in the middle of the action, with your income, your budget and your savings:

  1. One Big Income tip: Put the ball in someone else’s court.Think of three opportunities to make money that involve others, and send them an email or make a quick phone call to get the ball rolling. Why? You’ll be amazed at what happens when you take action and move the ball to someone else.To quote my high school science teacher, “Objects in motion tend to stay in motion.” By making that first call or sending that first email, you’re setting up a chain of events that didn’t exist moments earlier.

    Consider the game of tennis. When you hit the ball over to the other side successfully, you don’t have to worry about it until (and IF) the other player hits it back to you. In fact, you can’t score points when you have to hit the ball…only lose points. It’s when the other person has the ball that you score in tennis. It’s the same in life with your income. You can’t make anything happen with your income if you don’t force others to consider a proposal.

    Big Idea #1 for 2014: Reach Out To Others With Ideas That Involve You

  2. One Huge Budget tip: Begin tracking your expenses in 2014…and review it regularly.If you’re old enough to drive a car, you know how valuable the dashboard is when you’re trying to go anywhere. It’s the same for your goals…you need to create and pay attention to your dashboard to successfully navigate 2014.You’re going to need to know where your money is going to find ways to save…but who has time for a budget? Not me. So, I use tools like Quicken, Mint.com, or even a spreadsheet, to track how I spend money (even some big banks and credit card companies now offer tools to help you track your money).

    Set up weekly times to review your expenses. If you budget with a partner or spouse, review everything together. Good budgets are about everyone in the family knowing how money is spent and living the next week toward your goals, not against them.

    Big Idea #2 for 2014: Find tools to make income and expense tracking easy and then monitor them against your goals so you’ll rock at saving money.

  3. One Tremendous Savings Tip: Save money without thinking about it. According to the US Bureau of Labor Statistics, personal productivity has increased over 23% in the last ten years. That means the average person is accomplishing nearly a quarter more work today than in 2003.While that’s amazing, it also uncovers a truth that you already know: you’re overworked and short on time. At the end of a long, stressful day, who wants to think about saving? Yet, if you don’t save, you’ll never be able to own your future.

    So, the key is to save without thinking about it.

    Inquire if your bank will allow you to direct deposit money into a separate account for emergencies and holidays. You’ll be better off if you don’t have to touch the credit cards when your dishwasher breaks down or you need a vacation.

    Set up an automatic deposit into a mutual fund. Most fund families will allow as little as $100 per month into a fund. If it’s automatic, you won’t have to think about writing a monthly check.

    Sign up for a Roth IRA or 401k plan. If your workplace has a 401k or similar plan, by all means, use this for retirement because it’ll give you tax deferred money. Outside of work, check into a Roth IRA. Money grows tax free in a Roth, so although you’ll pay taxes now, you’ll always have this money (and the growth) without tax repercussions later. (There are some specific rules to Roth IRA contributions and withdrawals. Here’s the IRS web page to give you the details.

    Big Idea #3: You’ll save TONS of money in 2014 if you make it automatic.

There they are! My three big ideas to help you light a fire under 2014.

Happy New Year, Abundance Bound family – let’s make this a great one!

What Did We Learn in 2013?

by Miata on January 3rd, 2014

Newyear fireworksI love looking back at the prior year to find lessons I should have learned from the previous twelve months. Maybe it’s just my love of reminiscing, but even if you’re just starting out on your investing journey I think this is a good time to search for ideas to remember later. History often repeats itself, so you’ll be a better saver if you keep in mind some of the pitfalls others may have stumbled over.

This doesn’t just apply to investing. I’m sure you learned from the masters about your craft during your formative years, didn’t you? It’s the same with current events….

Here are my top 3 financial lessons from 2013:

 

#1 – Don’t Pay Attention To The Media

All year long doom-and-gloom seemed to be just around the corner. As world events unfolded and Washington appeared poised for meltdown after meltdown, if you listened to the media, you probably would have withdrawn any money you’d saved and hidden it under your pillow. As of this writing, the United States stock market is up about 25 percent for the year. Had you moved your money, you would have lost out on some significant gains.

The lesson? Pay attention to your goals, not media hype.

Creative people especially know what I’m talking about with this lesson. While none of us want to compromise our art, at some point, there’s someone in every theater who is only thinking about selling tickets. In the media, magazines need advertising. Television needs ad buyers. Newspapers need subscribers. If you’re going to listen to the media, you should expect a stream of attention grabbing, “MUST READ THIS UNBELIEVABLE STORY RIGHT NOW” headlines.

Why was there doom-and-gloom all year long? Because it sells

 

#2 – Even Bonds Can Lose Money

People often will describe bonds as a “safe” investment. This year we learned that even “sure things” weren’t always safe. Bonds, which historically haven’t been very volatile, experienced a pretty rotten year. Many long-term bond funds ended the year down double digits.

Ouch.

I think about bonds losing money differently than most. While I expect 2014 to continue to be difficult for the bond market, I’m thinking only about how to buy more. At the very least, I need to remember to stay invested and not panic. Historically, investors sell at rotten times.

At best, I’d like to place more money in this area to take advantage of the downturn. Here’s what’s on my mind: I don’t want to try and time the market, but I should try and keep the percentage of my investments in bonds consistent…even if it means investing more money. So, if I lost 10% of my money that was in my bonds, I want to buy that back while prices are low.

This isn’t a move to load up on bonds….it’s about staying diversified and not chasing last year’s “winners.”

Whatever your art may be, you know that investing in any craft is about diversification. If something isn’t selling, that doesn’t mean that it won’t sell later. By diversifying your efforts, you’re more likely to strike on something that sells than if you place all of your effort behind one approach.

#3 – The Federal Reserve Matters

Much of the reason that the bond market suffered in 2013 was because the Federal Reserve has been buying bonds. While this seems like a good opportunity for investors, the smart money knows that this practice won’t last forever, so investors were in a hurry to sell before the Fed begins their process of selling bonds (or at least discontinuing the buying process).

I know many people who read this blog don’t actively follow the financial markets, but there are a few great phrases to remember. Here’s one: Top investors for a long time have said, “Don’t fight the Fed.” What this means is that you should make sure your actions aren’t the opposite of what the Fed is trying to achieve. Chances are good that you’ll lose this fight.

So, what is the Fed doing? They’re trying to keep interest rates low.

What does this mean for you? It can help you in quite a few ways. Here are three:

  • If you have a mortgage and haven’t refinanced to a lower rate, you should do the math and refinance soon. If interest rates begin rising, you may lose out on one of the best opportunities of our lifetime to secure a low long-term interest rate on your debt.
  • Buying a car? Look at the interest rate on a loan against paying cash. While I usually don’t like taking out a car loan if possible, they’re so low now that you might not be able to pass up cheap money.
  • If you want to eliminate your credit card debt, you may be able to secure a low rate consolidation loan.


I love working with creative people because we’re used to changing gears with the flow much more quickly than the public in general. We know that things change often and to stay on top of our art, we need to be aware of shifting trends. By making sure you know the lessons you should learn from each year, you’ll find that the next year your decision-making is better than ever before.

Hope For Rainbows But Plan For Rain

by Miata on December 13th, 2013

When I first begin a new relationship with someone ready to begin building their financial house, I find one scenario repeats itself over and over: most have experienced some severe money problems that don’t seem to let up.

It’s like a nightmare where a tornado goes through town, followed by a hurricane, and then the overdue tax bill (that you didn’t know you owed!) arrives.

The truth is that it can sometimes be that bad in real life. Recently, I worked with an individual who had lost his job, then his car, and finally his home. A second had been the victim of an auto accident that kept her out of work for weeks, and then she had her wallet stolen.

It all seems so random.

Yet at the same time, it’s predictable.

A wise person once said that life isn’t about what happens to you; it’s about how you handle life’s challenges.

The meaning is powerful: We can choose how we respond to the adversity life throws our way. Instead of just letting bad things happen to us, we can use this knowledge to our advantage.

“What do you mean?” I’m sure you’re asking yourself. “That woman in your earlier story couldn’t help it that her wallet was stolen!” Absolutely true. She couldn’t help it that bad events happened to her.

However, she could build her plan ahead of time with the understanding that challenges, (sometimes quite painful ones) will always be a part of life’s adventure.

Most people spend their time thinking only about what they’ll accomplish if everything happens perfectly. But how often does that happen? I know in my own life, it’s never followed whatever script I laid out for myself ahead of time. Life has a way of throwing curveballs.

So here’s the question: If you were to plan with the expectation of some seemingly “random bad events,” what would you do?House Piggy Bank

1)    How would you plan your work schedule if you knew life’s difficulties could happen all at once? You’d learn to appreciate the value of your time and ask for raises whenever possible. If you’re in a dead end job, you’ll realize that life is short and now (not tomorrow!) is the time to begin looking for your next great opportunity.

2)    How would you plan your savings? You’d build a cash reserve. Sure, maybe your auto insurance will cover the accident, but will it also cover all the costs of not having reliable transportation while yours is being repaired? Also, will it cover the threat of “the next bad thing” happening? By having an emergency fund in place, you’ll deftly handle any second threat to your financial picture once the first one has arrived.

3)     On that note, what would change about your insurances? Are your insurances up-to-date? Do you have reliable coverage? What would it take for you to purchase some?

Perhaps you already have reliable answers to each of these three questions. If not, now’s the perfect time to begin working toward a plan to cover that glaring Achilles heel. It’s never easy when bad things happen, but it will always be far less painful if we’re prepared with that second line of defenses, instead of closing our eyes and hoping life is always perfect.

How to Choose Life Insurance

by Miata on November 15th, 2013

How to Choose Life Insurance7281530508_ded054db16

While your art may be about freedom and creative expression, our lives are full of responsibilities and commitments. That’s what makes life insurance so important: if we can’t fulfill our responsibilities, do we want to leave a pile of unpaid bills and unfinished goals to our heirs?

I was making this argument to a friend recently, who replied, “What do I care, I’m dead!”

While that’s true, is that the legacy you want to leave? I like to think most of us hope for more.

Choosing insurance isn’t easy, but it also isn’t simply “an art.” There is some science we can apply to life insurance decisions to find out whether we should purchase some or not, and then—if we should purchase insurance—determine just how much we need to buy.

Miata’s 5 Steps to Good Life Insurance Decisions

1) List what you’d like to have happen when you pass away.

  • Are there bills that need to be paid?
  • Are there survivors you’d like to care for, such as children?
  • Is there a specific bequest to a charity or artistic group that you’d like to make?

2) Add together what these bequests will cost.

Add together:

  • Amount of your debt
  • Total needed to support others
  • Sum you’d like to leave for charities or groups

Finding the sum of your debts will be easy. Deciding how much you’ll need for survivors is a little harder, but still can be done. How? Use calculators on sites such as Yahoo! Finance to figure out how big a barrel of money you’d need today to accomplish whatever goals you might still need to fund (college for children or retirement for a spouse are two goals I often hear).

3)    Compare the amount of money you have with your need.

If you have enough money in assets, you don’t need life insurance at all to meet these challenges! If you have a shortage, then life insurance is the most cost effective way to meet these challenges.

4)    Decide which type of life insurance is best for your goal.

This is the hardest step.

Finding the right insurance isn’t difficult because there are many types, but because there are so many biased people in the market pla

ce. Some marketers only sell certain types of insurance (or they receive a much bigger commission to only sell one type) so they focus on this arena, calling all others bad. On the other side, there’s an equally vocal response from advocates who automatically see the insurance salesman’s profit motive as “bad” and without analysis immediately point to “best” as the most inexpensive type today (regardless of overall cost down the road).

While I won’t be able to thoroughly cover all the types, let’s give you a good head-start on the process:

Term insurance is best for short-term needs. The cost of term is based on your current age, so the cost rises as you grow older. If you think you’re going to need it past age 65, term insurance rates skyrocket quickly. Buy term if you’re sure not to need insurance after you’re 65.

Whole life coverage takes away the threat of insurance running out before you do. However, because the internal policy costs are also high on older people for this type of insurance, you’re going to pay through the nose while you’re young to subsidize a low cost when you’re older (think of it as prepaying). While whole life insurance has a savings component, don’t be fooled into thinking of this as a savings account: the rates of return on these policies can easily be beaten by outside investments over time.

Universal life insurance uses internal term insurance costs while allowing you to vary the amount of money you contribute to the policy. Here’s what you pay: the term cost of insurance plus extra to make sure you don’t have to pay as much later. You can also lower the insurance death benefit over time, which can reduce the overall cost of the policy. This type is more cost effective than whole life but because it’s guaranteed to last until you die, is still significantly more expensive than term insurance. Universal policies lapse far more often than whole life policies because the owners usually don’t understand the complex relationship between funding the policy and increasing rates of insurance cost inside the plan.

Miata’s quick low down: If you need insurance for a short time that ends before you’re 65, choose term. If you need longer term covera

ge, decide how important guaranteed coverage is to you. If you don’t mind flexibility and a little complexity, research universal life policies. If you want so

mething guaranteed to last forever and don’t mind paying for it, whole life is for you.

5)    Research only the type of insurance you need. Why do you want to be confused researching three different types of insurance when you only need one? Use online shopping  tools to make the process of comparing several different insurance companies easier. Here are a few things to watch out for when shopping:

  • Don’t just compare prices. Sometimes a clever agent can make a policy less expensive by removing what are called “riders” on a policy. These “riders” are additional coverages. Compare apples to apples before looking at the price tag.
  •  Check out the insurance company. Ask about the company’s rating. You don’t buy insurance to pay less….you buy it to be there when you need it, right
  • Ask about discounts. Some companies offer discounted policies if you’re super healthy, live an active lifestyle, or for other considerations.

Choosing insurance can be an unnerving task if you’re talking to an insurance agent. Instead of focusing on whatever product a salesman is offering, use this five step process to decide which type is best for you AND THEN involve agents, if necessary. You’re more likely to enjoy the experience and come out of it with the right type of coverage.

Leave Your Emergency Fund Alone!

by Miata on November 1st, 2013

Leave Your Emergency Fund Alone!

An artist friend named Linda (we’ll call her that to protect the guilty) has a problem. She’s incredibly talented and creates giant, sweeping paintings that, on average, each sell for more than $2,500.

That’s the good news.

The bad news? She never knows when she’s going to sell the next one AND she’s a “frequent abuser” of her emergency fund.

Linda said to me over coffee recently, “I’m hoping I sell a painting soon. Robert and I decided last night to vacation in Aruba and I have to buy the tickets.”

“That sounds fun,” I responded. “But what if you don’t sell one ahead of time?”

Linda sighed, and said a phrase I’ve heard many times before, “I guess we’ll dip into the emergency fund.”

Emergency Funds: How Much?

First, congratulations to Linda for even having an emergency fund. According to Pitney Bowes in a 2012 study, the average family in America only has around 5,923 in savings. Because of her volatile career/passion, Linda has considerably more. Experts agree that you should examine your income sources to determine how much money to place in your emergency account. If you have a steady pay check and little chance of an emergency, three months of expenses may be sufficient. For Linda, she keeps closer to nine months.

It makes sense: Because as artists we don’t know when we’ll book a job or sell one of our pieces, if we aren’t regularly supplementing our income with a day job, we need to know where our meals are coming from for an extended period of time.

Linda’s Problem: How To Use Your Fund

I asked Linda, “What happens if you spend the money on your trip and then you still don’t sell a painting?”

She waved her hand. “I don’t know. We’ll figure it out.”

Sadly, many artists don’t “figure it out.” The reason people have to give up on dreams is because they run out of funds. If Linda isn’t able to sell a painting, she may have to close her studio, find other work, and limit her time painting….in this case, all for an expensive vacation.

Your emergency fund is your life net. For many people, they’ve never saved this much money in their life, so they look at it as a way to purchase items they’ve wanted or buy experiences that they could never afford without it. Using your emergency fund this way, though, is a trap.

The Solution

To avoid using your emergency fund for everyday expenses, separate it from your everyday budget money. Build up a different account. If possible, try to save money toward it every pay check, or in Linda’s case, contribute a portion of the commission from every painting.

In fact, if you have a spender personality, go one better: save your emergency fund at a completely different bank.

A funny story: One client picked an institution across town from her home (about a forty minute drive) and limited her online, check writing and debit card access. Why? She said that if it was really an emergency, she wouldn’t mind the long drive to retrieve funds. If it wasn’t important, she’d have forty minutes to talk herself out of sabotaging her long term goals.

She never touched the fund.

The Real Point of An Emergency Fund

Emergency funds are all about security.

If Linda decides to use her emergency savings for Aruba, imagine that trip; she may spend the entire time wondering, “What if I don’t sell another painting?” Because she shortened her ability to survive, taking money from her emergency fund may give Linda exactly the opposite of the stress free vacation she desires.

For some of my clients, misusing their emergency fund makes them jittery, nervous, and afraid.

If you don’t yet have an emergency fund, you might be thinking, “I’m used to flying without a net!” You know inside, however, that you have to spend far too much energy and time thinking about today and not enough time planning your future. Most people without savings have difficulty with long term successful planning because they’re too busy looking for their next meal. How many opportunities have come around and you were so busy paying yesterday’s bills that you didn’t even notice?

That’s why it’s so important to build your emergency fund and establish your debt plan, providing the stable foundation of your financial life.

Hopefully Linda doesn’t use her emergency fund for Aruba (I’ll try and let you know what she decides…). However, her story is great in one respect; it reminds us to leave our emergency fund for emergencies.