Category Archives: Preparing for An Emergency



Climbing that High Deductible Insurance Mountain

High-Deductible-Mountain

For months now I’ve been meaning to dial up our insurance agent to see if there was anything he could do to lower the premiums on our home and auto insurance.  Michelle’s post a couple weeks ago finally motivated me to pick up the phone.

Unfortunately, our agent didn’t have much for us.  I guess I was kind of hoping he’d say something like, “Glad you called us.  It turns out we weren’t giving you the full good driver discount.  We’ll just go ahead and knock a hundred bucks off that premium for ya!”  Instead, our agent explained our rates went up mostly because of an increase in statewide claims last year.  In addition, there were a couple discounts on our homeowner’s policy that went away – new roof (it’s been a few years now) and new home (our house is not new any more).  We could get a small discount on our auto policy if we sign up for that new device you plug into your car to monitor your driving habits.  But, I’m not sure I’m comfy with the concept.

Aside from reducing our coverage amounts, which I really don’t want to do, the only other option on the table is increasing our deductibles.  Awesome!  In my post last week I talked about the benefits of going high on your insurance deductibles.  Well, going high doesn’t always make financial sense.  Here’s the thought process I use to figure out if it’s worth climbing a little further up the high deductible mountain.

1. Is it allowed?

If you’re making payments on your car, many car loans come with maximum deductible requirements.  $1000 is pretty common.  Thankfully, we own our cars free and clear, so we have some flexibility in this area.

If you have a mortgage, banks will often cap your deductible.  Our mortgage company caps our deductible at 5% of our dwelling coverage amount.  Currently we sit well below 1%.  We clearly have some room to maneuver here.

2. Can you afford to pay the deductible?

You should have enough cash sitting in savings to cover your share of a loss.  We have over 6 months of expenses stashed away, so we’re good there.

3. How many years would you need to go claim free to make up the difference?

You have to do a little math to figure out if the drop in premium is worth the deductible hike:

Deductible Increase / Premium Saving = Years to payoff

For example, raising our car insurance collision deductible $250 would save us $20 per year.  Applying our formula, 250/20 = 12.5 years.  Collision insurance covers damage due to accidents with other vehicles that we cause.  We don’t generally get into any at-fault accidents (not that it couldn’t happen), so we might push this one up.

Likewise, bumping the deductible on our home owner’s policy up by $2,000 would save us $200 per year.  This move pays for itself in 10 years.  Will there be a claim in 10 years?  Maybe.  But, Mrs. Pennypacker and I are willing and able to cover the extra $2,000 out of our own pockets.

Have you looked at your deductibles lately?  Does it make sense to push your deductibles a little higher?

 



Don’t Fear the High Deductible

Don't-Fear-the-Deductible

When it comes to buying insurance you have two choices: a) pay more per month and pay less when something happens, or b) pay less per month and more when something happens.  I like choice “b”.  Now before I tell you why, let’s look a little closer at how insurance works.

Premium

The per month part is called the premium.  You might also pay it every six months or every year, depending on your policy.  You have to pay the premium otherwise your insurance could be cancelled.  In exchange for making these regular payments, the insurance company agrees to pay you if some unforeseen event happens.  The amount they pay depends on your deductible.

Deductible 

This is the amount you agree to pay if an event happens.  The higher your deductible, the lower your premium.  Insurance companies know the odds of an event occurring and base their premiums on those odds.  They want to make sure that on average they take in more money than they have to pay out.  This is why I like choice “b” from above.  It’s cheaper in the long run.  You pay yourself a regular premium and save up your own emergency fund to cover those unforeseen events.

Go High 

Going completely without insurance is just not doable these days.  Car insurance is required in most states, medical insurance is required in all states, and most banks require homeowner’s insurance to get a mortgage.  Plus it’s just not practical for most people to save up enough money to completely replace their house if it burns down or to cover the treatment of a life-threatening disease such as cancer.  The next best thing is to look at high deductible insurance.  High deductible means you cover more of the bill yourself if an event happens.

Broken Windshield 

I overheard a conversation the other day about a woman whose car windshield broke.  For the purposes of this blog, let’s call this woman Diane.  This mini-crisis was covered under Diane’s comprehensive policy, but she still had to pay the $500 deductible.  And, since the new windshield was going to cost less than the deducible, Diane was responsible for covering the entire amount herself.  Unfortunately, Diane had no savings.  So that $500 hurts.  Her solution?  Put it on the credit card and get rid of that nasty deductible.  Next time her windshield breaks, the insurance company would foot the entire bill.  Great!  Except this change isn’t free.  Diane’s premium will go up and the math will not work in her favor.  It would be cheaper in the long run for her to pay a lower premium and use the difference to save up that $500 deductible herself.

Dinged Knee 

Another person, let’s call him Jack, hurt his knee.  He thought it might be something serious, but he didn’t want to go to the doctor to get it checked out because his health insurance plan had a $2,500 deductible.  Jack was gripping about how expensive health insurance is and how a normal person can’t afford $2,500.  Jack thought that only a high income earner could afford such an expense.  Grrr. Ok, I agree with the part about healthcare being expensive.  What I don’t agree with is the part about needing a high income to afford a $2,500 deductible.

The only thing required to pay a high deductible is a plan to save and the discipline to stick to that plan.  If you’re income is below average it might take you longer to save the money for that deductible, but that’s okay.  If you make saving up for that emergency a top priority in your life, you’ll keep more of your own money in the end.

Do you prefer high deductible insurance policies like I do?



Wait…Most People Don’t Have an Emergency Fund?

Where’s your rainy day fund?

More than 60% of Americans don’t have a sufficient emergency fund to cover unexpected expenses. At least according to the people who responded to the December BankRate Money Pulse poll.

This is crazy to me.  What happens if someone in your household loses their job, or has to go to the emergency room?  The article also mentions an unexpected car repair, but I actually think that car repairs not emergencies, but expected events, and should already be part of your budget.  I would also add natural disasters and emergency trips to see family members who might be sick or dying.

Not to be a Debbie Downer, but emergencies are going to happen.  Having the money to deal with that emergency sitting in a place that’s easily accessible makes the emergency far less stressful.

Do you have an emergency fund?  If so, how much do you have?

How do you budget?

Another survey question asked as part of BankRate’s Money Pulse poll is, “How do you keep track of how your income and spending match your budget?”   I’m amazed that 36% of the respondents keep a budget with pen and paper and 18% keep track in their heads.  I suppose, if it’s working, it’s better than nothing.

Do you keep a budget?  If so, what do you use to keep a budget?



So You Paid Off All Your Debt…Now What?

Square four is here.  It may have taken a while, but if you followed the instructions from last week, all those credit cards, cars, and student loans are paid off.  Now that you don’t have all those payments to make every month, you should have a good chunk of extra cash coming in every month.  Now, you may be tempted to run out and buy the latest LED television or a whole new closet full of clothes, but I have a different suggestion.  How about dumping a bunch of coins in a large room and swimming around like Scrooge McDuck from Duck Tales?

Scrooge McDuck Swimming In Money
Scrooge McDuck Swimming In Money

Okay, so maybe the swimming part is a bad idea, but you should still take a queue from Uncle Scrooge and start hoarding your money. In real life you need to be ready for anything, and a large pile of cash is the best way to be prepared.

So how much do you need?  Well, that’s up to you.  I good guess is somewhere between 3 and 12 months of expenses, but it’s going to depend on your personal situation.  Does your household have multiple sources of income and could you survive for a while if one of those incomes vanished?  If this is the case, you could probably get away with 3 months of expenses.  If you only have one source of income and you live pay check to paycheck, you might be better off putting away around 6 months of expenses.  If your job is shaky, you have large medical expenses looming, or you just feel a general insecurity about the future, you may be able to sleep better at night with 12 months worth of expenses set aside.

Where should you put this pile of cash?  A simple checking or savings account is fine.  Under the mattress at home is fine too, although maybe not the most secure.  The idea is not to invest this money and expect a large return.  Your main priority is liquidity – the ability to get to that money fast when you need it.

What should you use the money for?  It’s mainly there to help you through a period of financial hardship.  Whether it’s a job loss, a medical issue, a natural disaster, or the fridge suddenly dies.  The idea is to borrow the money from yourself, instead of looking to a bank, credit card, or family member.

Hopefully you never have to use the money in your emergency fund.  But, if you do end up using some money, your top priority should be to refill the fund as soon as the emergency ends.  You’re essentially acting as your own credit card, so don’t be dead-beat.  Pay yourself back as fast as possible!



What Comes After Square One? Square Two

Last week we talked about square one – creating a monthly budget.  What’s next?  Square two, of course!  Starting an emergency fund.  An emergency fund is a pile of money sitting in a savings account that you never touch unless there is an emergency.  Emergencies are such things as an urgent car repair, the roof has a hole in it, your child broke a leg, or the heat went out and it’s winter time.  Things that do not qualify as emergencies include: a towel sale at Kohl’s, you need a new IPhone, your Dad needs a new IPhone for his birthday.

So, how much do you need?  Most experts will say you need anywhere from 3 to 12 months of expenses set aside for emergencies.  I say start small and shoot for a month.  Once you’re consumer debt is paid off, you can start padding that fund some more.

But, I live paycheck to paycheck!  How am I going to save a month’s worth of expenses?  Start by cutting your spending.  Cut out restaurants.  Cut cable TV.  Cut your subscription to National Geographic.  Buy generic brands from the grocery store.  These cuts might be painful, but realize they are short-term sacrifices that will pay off in the long-run.  While you’re living paycheck to paycheck, it can feel like you’re spinning your wheels in the snow and not getting anywhere.  You have to do something to get some traction and making cuts like these can be the kitty litter that finally helps you break free.

If you can’t find a penny more to cut, look for things to sell, either online or at a garage sale.  Maybe those old tools you never use, maybe some clothes that have been sitting in the closet since high school, or maybe some furniture that you’ve never really liked.

If you still find yourself struggling or you just feel like speeding up the process, it may be time for another source of income.  I’m not saying quit your current job, but do something else on the side.  Do yard work for your neighbors, sell things online, deliver pizzas on the weekends, be a greeter at Walmart.  Whatever you think you can do in your off time to bring in some more cash.

Once you have that extra cash, add a new item to your monthly budget called “Emergency Fund” and write down those new-found dollars.  Then follow through.  Set up a savings account that’s separate from your everyday checking account and commence filling it with money.  Every month, take that amount you’ve budgeted and transfer it to your new emergency fund savings account.  Make this your top money priority.  If you have to go without paying for a haircut this month, so be it.



Life Insurance is for the Not-Rich

This morning I heard an ad on the radio for AIG Direct Life Insurance.  The voice in the ad said something like, “Life insurance isn’t just for the rich.  So, you should really buy our insurance.”  I would take it a step further and say that life insurance is never for the rich.  It’s really for the not-rich.  Insurance in general is meant to be a safety net to cover unforeseen expenses that you couldn’t otherwise afford out-of-pocket.  The wealthy have enough money to insure themselves against most financial tragedies.

Are you wealthy enough to get by without life insurance?  If there are people in your life that depend on your income and could not live without it, then the answer is no.  But, hopefully you’re on track to not need it in ten to twenty years.  Life insurance becomes a lot more expensive when you start getting into your fifties and sixties.

There are several different flavors of life insurance: Term,  whole, universal, and cash value to name a few.  Term life insurance is the s’mores of the bunch.  I should note here that s’mores is my favorite flavor of anything.  The other choices try to combine insurance with investing, but the investing part is almost as bad as stuffing cash under your mattress – the return is terrible.  Insurance should really be separate from your investments as they are two products with two different purposes.  Insurance protects you from loss, while investments make you money.

If you buy a ten or fifteen year term life insurance policy, you should do so in combination with a plan to pay off your mortgage and grow your investments enough so that you don’t need life insurance after the term is done.  Whether you need life insurance or not, it’s wise to have a plan in place so your family  doesn’t have to struggle financially in the event you and a city bus have an uncomfortable meeting in the middle of the street.