You are going to die.
That's a fact. Sorry to be the bearer of bad news. Just because you are young does not mean you aren't going to die. But, you can be smart about your death. It's called life insurance.
Many people my age do not have life insurance. It's an extra expense, and they don't think about the costs still present after the die. Here are my top reasons to get life insurance.
1) You have a mortgage
2) Your kids are expensive
3) The average cost of a funeral is about $7500 http://www.ehow.com/about_5196905_cost-average-funeral.html
If you own a house, and you do not have the money in the bank to pay it off, you should have life insurance. It's not as if the bank forgives the debt when you die. If you want to ensure that your family doesn't get foreclosed on because they can't pay the mortgage, you should get enough life insurance to cover the mortgage.
If you have children, and you can't pay the cost of their college education and other expenses out of money you already have, you should get life insurance. A college education costs hundreds of thousands of dollars (see my posts on 529 Plans), and unless you would prefer that your child not go to college, having a life insurance policy large enough to cover their expenses is a good plan.
Finally, get enough to cover the funeral. You don't want to end up like Donny from the Big Lebowski, with your ashes covering John Goodman and Jeff Bridges. http://videosift.com/video/The-Big-Lebowski-Scattering-Donnies-Ashes
Here's the bright side. If you are reading this, chances are you are young, in good health, and have good habits. You can get a large policy, for a long period of time, for not too much money. I have a large term life insurance policy for 30 years, and I pay a very manageable amount per month. For a discussion of the difference between Term Life Insurance and Whole Life Insurance: http://www.smartmoney.com/plan/insurance/term-or-whole-life-8011/ By the end of the term of this life insurance policy, my kids will be out of college, and I'll likely have paid off most of my primary residence. Then, when I need to renew my policy, I can get a much smaller amount because I will not have large financial obligations coming down the road.
Life insurance is smart, in particular if you own a home or have children. Face the facts: You're gonna die, and life is expensive. Now do something about it.
Showing posts with label Mortgage. Show all posts
Showing posts with label Mortgage. Show all posts
Friday, March 30, 2012
Sunday, March 4, 2012
Another Piece on Home Buying
A great peice in The Atlantic on buying a home. Thank you to Jed, for bringing it to my attention.
http://www.theatlantic.com/business/archive/2012/03/getting-ready-to-buy-a-house/253927/
http://www.theatlantic.com/business/archive/2012/03/getting-ready-to-buy-a-house/253927/
Tuesday, February 7, 2012
Buying a Home
I bought a home two years ago, and it was a great experience. I learned a lot, both about the home buying process, and about what levels of frustration and confusion it can cause. Through the process, and watching a number of my close friends buy homes, here's a couple of ideas for what to think about when buying a home.
1. Forget what you think you want. Price Per Square Foot (PPSF) is what is important. My friend recently showed me some homes he was looking at on Redfin http://www.redfin.com. I asked him why he cared about having two full bathrooms when he would be living there alone with his wife, why he wanted two parking spots when he had only one car, or why he would want to live far away from his friends, public transportation, or where he or his wife work. He was thinking of amenities to the homes, but not the bottom line. What is most important is PPSF, along with location. If you buy at a higher PPSF than other comparable homes in your neighborhood, then you have done the seller a favor. It may be ok to have a higher PPSF than your neighbors, but you better be able to rationalize it with big ticket items, like modern kitchens or bathrooms, new HVAC systems, or other amenities which clearly set your home apart.
2. Location. It takes me six minutes to bike to work in the morning. It takes my wife 11 minutes. So, we get to spend a whole lot of extra time with our son. If there is an emergency, like the freak earthquake that occurred in DC, we can be home very quickly. We love our location, and are a little puzzled by our friends who moved out to the suburbs. It's ok for those people who work out in the exurbs, or people that moved for the school districts. But location is crucial. Location quality can be determined by a number of factors. Use these as they apply to you: Supermarket, School District, Public Transportation, Public Park, Crime Statistics, Travel Time to Work/School, Major Thoroughfares, Public Library. If you don't live close to these location factors which you want/need, or the crime statistics aren't good, you should pay less for where you live.
3. Down Payment. Many many friends of mine have put down less than 5% on their homes. While this may be beneficial for tax purposes (it means you pay more in interest, which you can deduct on your federal return), it generally increases your monthly burden. If you keep money in a rainy day fund, and your mortgage is high, you will be limited in case an emergency comes up or you need enhanced cash flow. Personal Finance Personality Dave Ramsey recommends a 20% down payment http://www.daveramsey.com/article/how-much-house-can-you-afford/100362/, and some bills in Congress will penalize you on your interest rate for putting less than 20% down. http://www.washingtonpost.com/business/economy/housing-regulators-propose-20percent-down-payment-for-best-rates/2011/03/29/AFIRw5vB_story.html. Save your cash, and make a strong down payment. Remember, you can tap your IRA for up to 10k in earnings to buttress your down payment if it is your first home. Failing make a strong down payment could leave you in a potentially dangerous situation.
4. Do Your Research. Find out about the neighborhood. This is likely the biggest purchase of your life and you should make sure you're not getting into anything unexpected. Redfin can show you prices, and local blogs or websites can give you a neighborhood feel. Discount your first impression at your first open house because part of what you're feeling is pure excitement. Don't go live in a neighborhood which doesn't suit your interests or passions, because you will be spending an inordinate amount of time there, and why would you want to spend that time disappointed.
Buying a home should not be something which occurs in a state of passion. It is a very serious, analytical decision, which requires years of preparation and research, personal reflection and analysis, and questioning the knowledge you think you have gleaned. If for one second you question your own knowledge on the subject, seek out a friend who has bought before, and find out what they did and what they hate about their current home so you can add it to your checklist of what you are looking for in yours. Talk to your parents about what they would change as well. Through careful research, saving, and investigation, you'll be able to find a home you love and save a ton of time and money.
1. Forget what you think you want. Price Per Square Foot (PPSF) is what is important. My friend recently showed me some homes he was looking at on Redfin http://www.redfin.com. I asked him why he cared about having two full bathrooms when he would be living there alone with his wife, why he wanted two parking spots when he had only one car, or why he would want to live far away from his friends, public transportation, or where he or his wife work. He was thinking of amenities to the homes, but not the bottom line. What is most important is PPSF, along with location. If you buy at a higher PPSF than other comparable homes in your neighborhood, then you have done the seller a favor. It may be ok to have a higher PPSF than your neighbors, but you better be able to rationalize it with big ticket items, like modern kitchens or bathrooms, new HVAC systems, or other amenities which clearly set your home apart.
2. Location. It takes me six minutes to bike to work in the morning. It takes my wife 11 minutes. So, we get to spend a whole lot of extra time with our son. If there is an emergency, like the freak earthquake that occurred in DC, we can be home very quickly. We love our location, and are a little puzzled by our friends who moved out to the suburbs. It's ok for those people who work out in the exurbs, or people that moved for the school districts. But location is crucial. Location quality can be determined by a number of factors. Use these as they apply to you: Supermarket, School District, Public Transportation, Public Park, Crime Statistics, Travel Time to Work/School, Major Thoroughfares, Public Library. If you don't live close to these location factors which you want/need, or the crime statistics aren't good, you should pay less for where you live.
3. Down Payment. Many many friends of mine have put down less than 5% on their homes. While this may be beneficial for tax purposes (it means you pay more in interest, which you can deduct on your federal return), it generally increases your monthly burden. If you keep money in a rainy day fund, and your mortgage is high, you will be limited in case an emergency comes up or you need enhanced cash flow. Personal Finance Personality Dave Ramsey recommends a 20% down payment http://www.daveramsey.com/article/how-much-house-can-you-afford/100362/, and some bills in Congress will penalize you on your interest rate for putting less than 20% down. http://www.washingtonpost.com/business/economy/housing-regulators-propose-20percent-down-payment-for-best-rates/2011/03/29/AFIRw5vB_story.html. Save your cash, and make a strong down payment. Remember, you can tap your IRA for up to 10k in earnings to buttress your down payment if it is your first home. Failing make a strong down payment could leave you in a potentially dangerous situation.
4. Do Your Research. Find out about the neighborhood. This is likely the biggest purchase of your life and you should make sure you're not getting into anything unexpected. Redfin can show you prices, and local blogs or websites can give you a neighborhood feel. Discount your first impression at your first open house because part of what you're feeling is pure excitement. Don't go live in a neighborhood which doesn't suit your interests or passions, because you will be spending an inordinate amount of time there, and why would you want to spend that time disappointed.
Buying a home should not be something which occurs in a state of passion. It is a very serious, analytical decision, which requires years of preparation and research, personal reflection and analysis, and questioning the knowledge you think you have gleaned. If for one second you question your own knowledge on the subject, seek out a friend who has bought before, and find out what they did and what they hate about their current home so you can add it to your checklist of what you are looking for in yours. Talk to your parents about what they would change as well. Through careful research, saving, and investigation, you'll be able to find a home you love and save a ton of time and money.
Monday, January 2, 2012
Individual Retirement Account
The first piece of advice I'd offer is to start an individual retirement account. There are two options in this arena. A traditional IRA has current contribution limits of 5000 dollars per year. If you contribute to one of these (which you can start at virtually any brokerage firm (mine is at Vanguard)), you can deduct the amount you contribute (up to 5000) from your tax liability. Also, you don't get taxed on the earnings until you take the money out of your account (like when you are in your fifties or sixties or later). The alternative, a Roth IRA, has the same contribution limits, but you can't deduct the money from your tax liability. However, when you remove the money later in life, all the money is tax-free. Basically, on a Roth, you pay the taxes now, and on a traditional IRA, you pay later. You don't pay taxes on the earnings on either. You can't contribute to a Roth if you make more than UPDATED 107,000 per year. For more details, on things like if you are married filing jointly, check out: http://www.rothira.com/tools/income-limits.php
Now, you may be thinking, why, as a 16 year old, should I think about retirement? First, you should think about lowering your taxes. Second, you can take the first 10,000 of earnings out of your IRA without paying a penalty if the money is for a down payment on your first home. 10,000 in tax free earnings towards the biggest purchase of your life. The third reason is that the longer you save for your retirement, the less you need to save per year. Remember, in retirement, you will be paying less in taxes because you will likely need less money, because large expenses in life like education and a mortgage will be paid off. So, your taxes will be lower. All in all, starting an IRA as early as possible sets you up when you want to buy a home, and when you want to retire.
http://money.cnn.com/retirement/guide/IRA_Basics.moneymag/index.htm
http://www.bankrate.com/finance/money-guides/irs-rules-for-early-ira-withdrawals-1.aspx
Now, you may be thinking, why, as a 16 year old, should I think about retirement? First, you should think about lowering your taxes. Second, you can take the first 10,000 of earnings out of your IRA without paying a penalty if the money is for a down payment on your first home. 10,000 in tax free earnings towards the biggest purchase of your life. The third reason is that the longer you save for your retirement, the less you need to save per year. Remember, in retirement, you will be paying less in taxes because you will likely need less money, because large expenses in life like education and a mortgage will be paid off. So, your taxes will be lower. All in all, starting an IRA as early as possible sets you up when you want to buy a home, and when you want to retire.
http://money.cnn.com/retirement/guide/IRA_Basics.moneymag/index.htm
http://www.bankrate.com/finance/money-guides/irs-rules-for-early-ira-withdrawals-1.aspx
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