In preparation for the release of the audiobook version of Live Well, Grow Wealth, I'll be sharing excerpts each week on this blog.
This
excerpt is from Chapter One, Live Within Your Means. I suggest categorizing
your expenses as absolutely necessary, necessary but reducible,
discretionary but important, and totally unnecessary. This post discusses
expenses deemed absolutely necessary, such as housing, taxes, and insurance.
The absolutely
necessary category should contain fixed expenses like your rent or mortgage
payment, which are hard to reduce, but not impossible. You might be able to
refinance your mortgage or move to a less expensive dwelling; however, while
those actions can save you money over the long term and may be warranted, they
can result in added short-term expenses.
Taxes belong in this fixed-cost category, as they
usually are not negotiable. But if the value of your home has dropped
significantly, you have the right to contest your property tax assessment with
the county. (You can do it yourself; you don't have to hire one of those
companies who offer to do it for you—for a fee that eats up most of your
savings.)
F.I.C.A. is a fixed part of your payroll tax, but if
you work more than one job and earn a high income, don't forget to re-claim the
excess at the end of the year. Review your pay stubs and ensure you have not
paid more than the maximum.
If you received a large income tax refund last year,
or if you need more money in your pay check now, change the amount of federal
tax your employer withholds by adjusting your W-4 form. You still have to
reconcile next April 15 when you file your tax return, but do the research to
ensure you are claiming every deduction to which you are entitled.
Insurance is another fixed cost that is hard to
reduce. But if you haven't done any comparison shopping lately, obtain quotes
from competing companies to ensure you're getting the best possible rates for
the coverage you need. If you do find a lower rate for the same coverage from a
different provider, your current provider may be willing to match it in order
to retain your business.
Consider raising your deductibles to save money on
premiums. Set the savings aside in an emergency fund in case you have a claim.
Look for unnecessary line items. Do you have a
teenager on your policy who is no longer driving your car? Are you carrying
collision insurance on an old car whose blue-book value is less than the
deductible? Are you paying for towing insurance when you're a member of the
Automobile Association?
If your net worth is high, do you have an umbrella
policy? For a small surcharge, this additional liability coverage can provide
good value. Are you getting all the discounts that apply to your situation?
Some people buy more insurance than they need. Life
insurance is important if you're the main breadwinner and you have a family
dependent on your income. But if you're single, who will suffer financially
when you die? If the answer is "no one," why do you need to pay for a
lot of life insurance? My husband and I each carried supplemental term life
insurance while we had a mortgage. After the mortgage was paid off, we dropped
the life insurance coverage. Because we both worked and had accumulated assets,
the death of one of us would not have caused undue financial hardship for the
other. Those premiums were better spent building up our assets.
Think carefully before letting an insurance agent talk
you into buying a "whole life" policy, which is sometimes marketed as
a savings plan. Unlike term life, which covers a specified period of time when
it's needed, whole life covers the insured's entire lifetime, provided the
premium is paid. Premiums for whole life insurance are generally higher than
for term life, and the policy builds up a "cash value" as well as
having a death benefit. My parents purchased whole life policies for my brother
and me when we were babies, which carried a $1500 death benefit. Now that our
parents are gone, my brother and I each own our paid-up policies, and the cash
value exceeds $1500, but the money our parents spent on premiums could probably
have grown a lot more had it been invested in something else.
Even if you don't need life insurance, you might,
however, need disability insurance to help support yourself if you can no
longer work because of illness or an accident, and you need your wages to cover
your expenses. On the other hand, if your income is not dependent on your
ability to work, why buy disability insurance? I discovered that my 94-year-old
mother-in-law was paying $19.00 a month for an accidental death and
dismemberment policy; unlike wages, her pension and Social Security would continue
even if she became disabled, so why insure her income against disability? She
had stopped driving, and even if she died in an accident, I believe it would
have been hard to convince the insurance company that her death was not at
least partially attributable to natural causes. The fine print on the policy
read that the death benefit would be cut in half "once the insured reaches
age 70"; she was over 80 when this totally inappropriate policy was sold
to her through her credit union. When purchasing insurance, consider your age
and what risks you face. What's the probability and the impact, versus the cost
to insure against that risk?
Think carefully before you purchase travel insurance
or all the add-on coverage the car rental agencies try to sell you. What risks
might you face, and what would it cost you to deal with that situation without
insurance? Check your existing policies (auto insurance, medical) to ensure
you're not duplicating coverage you already have. Some credit cards offer
certain protections when they're used to pay for car rental, cruise, or plane
tickets.
A word about travel insurance. For years, my husband
and I passed up purchasing travel insurance when we booked cruises at the last
minute, often at a very low rate. We figured the odds of our canceling and
losing our cruise fare were slim. Also, working for an airline, we'd fly space
available, and missing our cruise because we couldn't get a standby flight—the
biggest risk we faced—was not a covered loss.
I also had a bad memory of my mother's experience with
travel insurance. Her companion dropped dead of a heart attack a few weeks
before their planned trip. While the company refunded my mother's money because
"death of traveling companion" was covered, they refused to refund
his portion because his death "must have been due to a pre-existing
condition." And dealing with travel insurance bureaucracy, providing proof
that his "pre-existing condition" was cancer, not heart trouble, was
the last thing his bereaved family wanted to do.
My attitude toward travel insurance changed when we
took a Panama Canal cruise, with a stop in a small Central American port that
our airline does not serve. A woman from our ship collapsed and died during a
shore excursion. The cruise line put her husband off at that remote location
and left on time. Fortunately, the couple had purchased travel insurance to
cover those many unanticipated expenses: hotel accommodations while dealing
with the death and securing release of the body, transportation of human
remains back to the United States, etc. Now, my husband and I usually purchase
travel insurance when our itinerary includes remote destinations.
Final thoughts about all types of insurance: don't buy
more than you need, but don't skimp where it’s most important, or you could
leave yourself vulnerable to catastrophic loss.
Review each of your expenses carefully, decide which
ones are truly necessary, which ones can be eliminated or reduced, and then make
a fiscal plan. The sooner your outgo becomes less than your income, the sooner
you can start building wealth and enjoying financial security.
To learn more, read Live Well, Grow Wealth by Sharon Marchisello.
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