Most people could benefit from having life insurance. In a previous post, I covered a few scenarios like if you have young children, a mortgage, etc. where life insurance is probably needed, even if you’re a millennial just starting out in your career.
There are so many different types of life insurance options that it’s easy to feel confused on which policy would be the best fit for you. And if you ask an insurance agent, there is a very high chance they will recommend you get a permanent (also known as whole-life) policy because it’s the most expensive and they will get the most commission. The biggest hook they use to lure you into buying permanent insurance is the cash value savings component. They’ll tell you that in addition to buying life insurance that never expires (unlike term insurance, which will expire), you are also building up a savings account.
However, besides the the big commission they get from a permanent life insurance sale, here are few other considerations insurance agents might conveniently leave out:
1) You might not really need life insurance. Life insurance is for protecting your dependents so that when your income is lost, the death benefit (amount your beneficiaries would receive when you pass) will allow them to maintain their lifestyle or at least it’d alleviate some of the financial burden while they adjust. But if you’re single with no kids or parents who depend on you and you don’t have any large debt that needs to be paid off, then you don’t have much of a need for life insurance. It’d be like getting car insurance when you don’t drive.
2) Term insurance might be better for your cash flow needs. Let’s just say you buy a term policy with a $500,000 death benefit, it might cost you as little as $17 a month. But for a permanent policy with the exact same death benefit, it might cost you something closer to $400 a month. A lot of us millennials need that extra $383 for other financial priorities (paying off student loans, saving for retirement, building an emergency fund, etc.).
3) Investing the difference between the cost of term and permanent insurance gives you more savings in the long run. There is a popular saying that goes “buy term and invest the difference.” Using the example from above, you would buy the term insurance for $17 and invest the difference ($400-$17 = $383). Chances are, if you invest the difference in the stock market, you will end up with more money than if you had “saved” it in a permanent life insurance policy. This will, of course, heavily depend on what investments you select.
If all that was confusing, here is a shortcut: Term insurance is most likely better for you than permanent insurance if…
- you have student loans or credit card debt
- you’re not saving a lot (or at all) for retirement
- you don’t have an emergency fund
- you have large expenses coming up (wedding, car purchase, home purchase, a baby on the way, etc.)
The following post was drafted back in October but never published because it needed editing, which I didn’t get to till now…
I filed my 2013 tax return today.
The 24 hours leading up to me going to the post office was very dramatic and overwhelming. I’ll spare you the details and just get to the lessons I learned:
1. Your Tax Return is YOUR Responsibility
Ever since I started working and paying taxes, I relied on my mom to do my taxes for me. She would get together with our CPA for a day or two and all I had to do was sign the bottom of my 1040 once it was complete. This year was different. In April, when tax returns were due, my mom was busy preparing for an out-of-country trip and didn’t have time to get it done so we filed for an extension. Long story short, my tax return wasn’t ready until this morning, the LAST day of the extension. I’m not a last minute person so I was in a panicked mess these last 2 days. I wanted to blame my CPA for all the mistakes that were made/overlooked. I wanted to blame my mom for not getting together with him sooner. But at the end of the day, my tax return is ultimately my responsibility and I could’ve been more proactive and taken the time to get all the documents together myself.
2. Save Your Tax Documents As You Go
When my coworker pointed out all the deductions that were missed, I scrambled to find all the necessary paper work to fill in those gaps: receipts, bank statements, etc. If I had saved those documents as they were accrued, it would have saved me so much time and hassle.
3. IRA & 401k Contribution Deadlines
Sadly, I realized on April 16th that you have to make your IRA and 401(k) contributions by April 15th to count for the previous tax year. So in order for my IRA contribution to count towards my 2013 tax return, I had to have made the contribution by April 15th of 2014. Just because you can file for an extension to complete your tax return, it does NOT mean you can get an extension on your contribution deadline. I missed out on a key opportunity to lower my taxes.
4. Make Sure You Are Withholding Enough
I wasn’t withholding enough of my paycheck and was slapped with a bunch of penalties, fees and interest. You can estimate if you’re withholding enough using this calculator.
I started working on my 2014 tax return a few weeks ago and feel much more prepared this time around!
When Judging Financial Advisers, Look Beyond the Annual Return (NY Times) – Great article on why returns aren’t everything when it comes to selecting a financial adviser.
When Bread Bags Weren’t Funny (Bloomberg View) – I stumbled upon this article through Becoming Minimalist. In his comment about the article, he wrote “perspective”. I couldn’t have said it better myself.
6 Easy Moves to Make in Your 30s That Will Pay Off Huge Later On (Time) – This article was sent to me by a friend. It provides some solid financial advice for us millennials.
I was listening to a sermon about finance a few weeks ago and when the speaker referenced people who manage their money poorly, he mentioned how “they just keep refinancing…”. I realized then that a lot of people might have a misconception about refinancing, assuming it’s always a bad thing.
When someone with poor money management skills is refinancing their home, they are most likely doing what’s called cash-out refinancing. This means they are taking cash out of the value of their home and using it to pay down other debt (i.e. credit card debt), while starting a new loan on their home. I found a great explanation of how cash-out refinancing can propel someone further into debt on Investopedia:
Many homeowners refinance in order to consolidate their debt. At face value, replacing high-interest debt with a low-interest mortgage is a good idea. Unfortunately, refinancing does not bring with it an automatic dose of financial prudence. In reality, a large percentage of people who once generated high-interest debt on credit cards, cars and other purchases will simply do it again after the mortgage refinancing gives them the available credit to do so. This creates an instant quadruple loss composed of wasted fees on the refinancing, lost equity in the house, additional years of increased interest payments on the new mortgage and the return of high-interest debt once the credit cards are maxed out again – the possible result is an endless perpetuation of the debt cycle and eventual bankruptcy.
Sometimes refinancing is a lot more justifiable like when you need to pay for your child’s college tuition or a large medical bill. And sometimes refinancing can even be a good thing like when you use it to lower the interest rate on your mortgage. Investopedia does a great job of summarizing When (And When Not) to Refinance Your Mortgage. So take a look when you get a chance!
A lot of us millennials are familiar with putting money into a Traditional or Roth IRA for retirement savings. When we first started working, contributing the max amount ($5,500 for 2014) into an IRA was nearly impossible for us and our entry-level salaries. But as we work our way up the corporate ladder, we will start to experience “rich people problems” such as making too much money for IRAs. Let me explain…
First, you have your Traditional IRAs. For someone who is single (for tax purposes), the phase-out for 2014 begins at $60,000 and ends at $70,000. What this means is that if your Adjusted Gross Income in 2014 is $60,000 or less, you can deduct the full amount you put into your Traditional IRA (on line 32). If your AGI is $70,000 or more, you can’t deduct anything that you put into your Traditional IRA. And if your AGI is somewhere between $60k-$70k, you can deduct part of the amount you put into your Traditional IRA. Fidelity has a simple calculator that you can use to see how much of a deduction you can take. Click “yes” under the Employer-Sponsored Plan section if you have a 401k with your employer.
Next, you have your Roth IRAs. For a single person in 2014, the phase-out begins at $114,000 and ends at $129,000. The reason why the phase-out limit is so much higher for Roth IRAs than Traditional IRAs is because with Roth IRAs, you do not get an immediate tax deduction regardless. That’s just not how Roth IRAs work. So the phase-out is for whether or not you can even contribute to the account and if so, how much. If your AGI is $114k or less, you can contribute up to the max ($5,500 for 2014). If it’s $129,000 or more, you can’t contribute anything. If you fall within the phase-out range, you can contribute up to a specific amount. You can use the calculator provided above to see what that amount is.
And lastly, you have your Non-Deductible IRAs. There is no phase-out for Non-Deductible IRAs because it works like a Traditional IRA without the immediate tax benefits. This IRA is appropriate for people who have an AGI over the phase-out limits for both Traditional and Roth IRAs but still want to take advantage of the tax-free growth. So even though you don’t get to deduct your contribution on your tax return, you still don’t have to pay taxes on your account’s earnings each year.
In Aaron’s second guest post, he shares how he gets rid of his excess stuff and how he maximizes credit card rewards. Enjoy!
I hope everyone had a great holiday season! If you’re like many Americans, you probably got a bunch of gifts. A bunch of stuff. We all have too much stuff. The concept of “less is more” in reference to physical goods had always floated around in my mind but just a few days ago Art of Manliness actually came out with an article fleshing out that idea.
From that article, “Via negativa is a Latin phrase used in Christian theology to explain a way of describing God by focusing on what he is not, rather than what he is; understanding Deity’s positive qualities is a task deemed impossible for the finite minds of humans.” The article goes on to list things like bad habits, toxic relationships, and stupid decisions as negatives in your life you should negate.
In my own fiscal interpretation of Via Negativa, I see the benefits as two-fold. First is the negation of a negative, resulting in a positive. And second, is the resulting simplification of your stuff which brings peace of mind. Here are a couple examples:
- Smoking has got to be one of the most fiscally irresponsible things you can do to yourself. According to the American Lung Association, the average retail cost of a pack of cigarettes is $5.51, but the cost to society and the state’s economy (and your health) is $18.05 per pack. PER PACK. By getting rid of this bad habit you save plenty of cash, time, and most importantly, health. I’m glad most of my friends don’t smoke.
- Morning cups of coffee add up real fast, in both dollars and calories. I know people that get a cup of Starbucks every single day. At ~$5/cup, 50 weeks of coffee adds up to $1250 a year in post-tax…coffee. That’s about how much my entire 10 day trip, including flight, accommodation, 5 day hike, food, etc to Peru cost me. Moreover, once you start adding sugar and creamer, those things pack calories. You need to walk an entire football field length to burn off a single four calorie m&m. Have fun with the new 180 calorie flat white.
- Finally, if someone is using self-storage, they quite literally have too much stuff. I don’t think I need to go into too much detail with this one, but Rick Warren, the pastor of the megachurch Saddleback, who by the way has paid back all his past earnings as a pastor, and now tithes 90% of his earnings, once asked something along the lines of “do you know why I never have to worry about scraping the barnacles off my yacht or where to garage my sports car? Because I don’t have either of those!”
I’m sure there are plenty of other examples. Lately I’ve been selling a bunch of stuff on eBay and Amazon. A bunch of old useless stuff lying around my place that I don’t use anymore that is. eBay takes a little more effort, but they take a smaller cut. I like Amazon because you list your items, pack all your junk in a box, ship it to Amazon, and they take of all the warehousing and shipping from thereon out. They even offer Prime shipping on your items. Declutter and simplification while making money? Sign me up!
I view holding a bunch of cash, touching cash, and spending cash as bad. One way to remove this bad (and make money that I teased about in my previous post) is by using credit cards! Just the other day I had a meal with a friend. To pay, she pulled out a debit card and upon learning she didn’t own a credit card, I immediately berated her for all the free money she was missing out on! Let me explain. At minimum, credit cards give you 1% cash back, meaning for every dollar you spend, you get one cent. If you spend just $15,000 a year for the next 50 years on your credit card, you’ll have spent $750,000. 1% of that is $7,500, tax free! I personally hope to spend a lot more than $750,000 in my entire life. This is the easiest scenario. If you’re willing to diversify a bit and spend just a little brain power managing a couple more credit cards, here’s what cashback I get:
- American Express Blue Cash Preferred: 6% CB on groceries (you can buy giftcards, including Amazon gift cards at the grocery store =P) and 3% on gas
- USbank Cash+: 5% on two categories of your choice
- Citi Double Cash: 2% on everything
- US Airways Dividend Miles: (Shameless plug that I get 10,000 miles for referring someone) 50,000 mile sign-up bonus which is enough for one international round trip flight or two domestic round trips. There is an $89 annual fee, so simply cancel the card after you get your miles. $89 to fly anywhere in the world? WORTH IT.
There are people out there that go even further with this and manage to pay rent, utilities, etc with their credit cards and other blogs begin talking about time value of money and more complicated things like that. Try searching “manufactured spending” if you’re interested. I personally don’t spend too much time doing manufactured spending, but I do always offer to put a group tab on my card and collect cash later. I get credit card rewards and never need to go to the ATM!
Not only do you earn tax-free dollars and free flights from credit card usage, but it simplifies your record keeping (it’s all electronic, automatic, and often times includes spend-analysis tools), and it reduces your liability! If you’ve ever lost or had your wallet stolen, that cash is gone. When you use a credit card to buy things, you don’t have to touch dirty money, and cards often have added benefits like extended warranty, extended return period, price protection (if the price of something drops after you buy it), car rental insurance, and so much more. If you’re not happy with a purchase, complain to your credit card company; they’ll take care of you.
Via negativa: remove the bad and thus increase your good.
Click here to see Aaron’s first guest post!
Tax Information You Need to Know for 2015 (Gen Y Planning) – Great tax tips that are easy to understand.
Tax-Free IRA Rollover Done Correctly – Here’s How (Wealth Pilgrim) – If you’ve left a job recently and had a 401k there, you’ll need to roll the account over to an IRA at some point. This blog post gives you simple instructions on how to do so without paying taxes and penalties.
10 things you’ll pay more for in 2015 (CNN Money) – Guess I won’t be going to that Taylor Swift concert after all.