Maneuvering through the insurance system can be confusing and intimidating. Which insurance coverage should I sign up for? What does it cover? Am I paying too much? How can I optimize my money in an insurance plan? Sonia’s Insurance Basics overview helped clarify these types of questions, and brought to light some important facts we had never even considered before! Please consult your local insurance agent for details pertaining to your specific situation and needs. Unfortunately, I wasn’t able to stick around for the whole meeting this time, but here are the notes I was able to get.

Feedback:

I. Career-related Insurance:
ex: physician life insurance (life insurance targeted towards physicians)

II. Life Insurance
A. Rates:
– The older you are when signing up, the more expensive the rates
– Based on health
– Lock in the better rates when you’re younger and healthier
B. Who needs it:
– Especially important if you have a spouse, kids, assets
– Good for everyone, not just the partner making the most money
C. Types of Life Insurance:
1. Term life insurance:
– Protection for “x” number of years.
– Most affordable rate, esp good if you’re younger and in good health.
– Can transfer to permanent life insurance later.
– Payout = value of the insurance policy
2. Work life insurance (offered by employer):
– Limited value.
– Only good as long as you stay with that employer and not transferable to a new job.
– Better to have your own life insurance policy in addition starting at a young age in addition or instead of work.
3. Universal life insurance:
– Invest post-tax money into market, etc
– Flat rate, guaranteed minimum return but upper limit to gains
– All earned money is tax free
– Some products offer no penalties to pull money before (because it’s your own money), and you can use this money for vacation, education, etc.

III. Car Insurance:
A. Lots of factors involved in determining rates but look around for best rates

IV. Liability insurance:
A. What is it?
– Protects assests within the coverage of the plan in case of a lawsuit or similar claims
B. Personal Umbrella Policy
– Provides coverage beyond the limits of your auto, home, boat, etc insurance policies
– In case of personal or property damage, you could be responsible for any costs above and beyond that covered by your other specific insurance policies. The umbrella policy would cover the difference.
– Examples: injuries caused by your dog, injury sustained by guest in your home or yard, slander/libel/anguish, property or personal damage caused by your child (at school, while driving, etc), tenant of your rental property has a dog that causes someone personal or property damage, etc
C. Business Insurance
– General liability insurance for business
– Depends on the type of business

V. Pet Insurance
– Health insurance for your pet

During this TMWYK session, Aarti taught us about investing and retirement planning.  It’s all about how you can make your money work for you! We covered a ton of information this session but I outlined the notes so you can just skip to the sections you’re interested in. Hopefully this overview will help you understand the basics and the value of investing early so you can get started on your path to retirement and financial freedom! Be sure to see the previous TMWYK financial sessions for more information. Please talk to your financial advisor for more in depth understanding and to help you make decisions based on the specifics of your situation.

Feedback:

What is investing?
Making your money work for you

Compounding = core concept to understand about investing
1.  Interest is calculated on original amount plus any additional interest
2.  Time is your advantage, the earlier you start investing, the better
3. Rule #1: don’t lose money! You lose compound interest advantage
4. Resources:
a. Khan Academy: https://www.khanacademy.org/economics-finance-domain/core-finance

Risk Tolerance = the most important factor of your personality to consider when investing
1. Personality tests available online for risk tolerance:
a. Financial engines
b. CNN Money
c. Mutual fund companies
– Vanguard: https://personal.vanguard.com/us/FundsInvQuestionnaire
– Wells Fargo: https://www.wellsfargo.com/investing/retirement/tools/risk-tolerance-quiz/
d. Other online:
– http://njaes.rutgers.edu:8080/money/riskquiz/
2. Diversification depends on what stage of life you are in:
a. Age (younger vs older)
b. Obligations (kids, debts, etc)

Financial advisor
a. Who should have an advisor:
– If you are not inclined/confident/knowledgable enough to do it yourself
– Don’t have the time to manage yourself
– Willing to pay someone to manage for you
b. When to begin finding a financial advisor:
– ASAP
c. How to find an advisor:
– Referrals from friends, colleagues is a great way to find an advisor
– Through your employer, some large employers work with financial advisors for their employees. May even be part of benefits package
d. What to look for in an advisor:
– Find an advisor who does not charge commission (gets paid per trade) because he may trade to get more money, even if it’s not in your best interest to make that trade
– As a general rule, roughly 1% of $500K is now a standard fee depending on how much you invest
e. Resources:
– Learn more about investing and advisors through your work, free dinners, banks/company courses
– Dave Ramsey: http://www.daveramsey.com/home/
– Suze Orman: http://www.suzeorman.com/
– Ramit Sethi: http://www.iwillteachyoutoberich.com/about/about-ramit/

Investments:
1. CD:
a. Fixed term
b. Lower rates
c. Penalty for withdrawing money early
2. Money Market:
a. Savings with your bank
b. Low rate (usually less than inflation so you’re “losing” money in the long run)
c. Only $100K per institution is FDIC insured so spread out your money
3. Treasury:
a. Supposed to be safe but not necessarily if treasury has increasing debt
b. Notes: longer term maturity, marketplace determines rate, safe
c. Bills:
d. Savings Bonds: when matures and get interest, if using the money for education then you are not taxed on the interest income, can get between 4-6% return
e. Resources: (can buy here also)
– http://www.treasurydirect.gov/
4. Municipal Bond:
a. Available from state, city, or district
b. Federal tax free and if it’s from your city then local tax free (please consult your financial advisor for details)
c. Relatively safe unless the city files bankruptcy
d. Lower rate of return
5. Corporate Bonds:
a. Pay well
b. Can be short term, intermediate term, or long term
c. Usually are “callable” – if the rate decreases, then can “call” the bond and issue a new one to save money
d. Ratings given by independent raters
– Higher score = Safer/lower risk, lower interest rate
– Lower score = Increased risk, higher interest rate
6. To buy bonds:
a. Full service brokerage houses
– Meryll Lynch, Wells Fargo, etc
– More expensive but personalized service
b. Discount brokerage houses
– Charles Schwab, Trade Monster, Fidelity, etc
– Less expensive, not personalized
c. Treasury bonds can be bought from http://www.treasurydirect.gov/ or some banks

Stocks
1. You become part owner of the company you bought stock in
a. May get voting rights on annual meeting agenda
2. More risky
b. If the company goes bankrupt, they have to pay their debts before paying stockholders
3. Different types:
a. Preferred vs common stocks have different rights
– May get some guarantee of certain % payout, may get better rate
– If a company goes bankrupt, after paying off debts, they pay preferred stockholders before common stockholders
– Preferred stockholders get dividends before common stockholders
b. Value stocks
– Pay dividends if good profit
c. Growth stocks
d. Dividend stocks
4. Buy stocks through same brokers as bonds
5. How to know if a stock is growth vs dividend
a. Lots of paid resources
b. May be able to tell from free source stock screeners (Google, Yahoo)
6. Stock option:
a. The right to buy or sell at a certain price after certain vesting period

Mutual Funds
1. Pools the resources of lots of investors to buy lots of different companies (gives you buying power)
a. Example: Vanguard, Fidelity, T Rowe Price, American Funds (American funds charge more, higher risk, but good return)
b. Fund manager what companies and proportions, then they recalculate that to decide the value of a share of this particular mutual fund
c. You do not buy shares, instead you specify how much money you want to invest (ex: $2000) and based on mutual fund share value, you get a certain # of shares (# shares = investment amount / value of mutual fund share).
– Mutual fund share value is calculated once daily at end of day after market is closed
– Because of this: You don’t know how many shares you’re buying when you invest. You don’t know how much money to expect when you withdraw (sell off shares of the mutual fund).
2. Different types of mutual funds: There are > 14,000 mutual funds
a. Stocks
b. Bond: municipal, corporate, divided
c. Blended: bonds and stocks
d. Specialty based (different financial sectors) or by certain countries:
– Pharmacy, etc
– Green: only green (eco-friendly) companies
– Socially responsible companies only
3. What to consider:
a. Look at how the mutual fund did over the past 3-5 years:
– return, risk grid, fund manager
– Value, growth, blend, and risk stratification
b. Look at fees:
– Front load fees: occur at time of investment (adding money) on top of management fees
– Back load fees: occur when you withdraw the money on top of management fees
– No load: no fee either when investing or withdrawing, only management fees
– More complex funds charge more fees
4. Managing the mutual fund:
a. Active vs Passive management
– Personal style
– As you grow older, typically more conservative (safer) vs when younger (have more time to recover from riskier investments if losses occur)

ETF (Exchange Traded Funds)
1. Like a mutual fund, in that it pools resources to buy lots of stocks of companies within a particular financial sectors or countries (gives you buying power). Fund manager decides which companies to include and what proportion
2. Traded actively like stocks on stock exchange
a. Like stocks, you pay a commission per trade
b. You buy shares of ETF and have real time fund share value, so you know immediately how much it will cost you to buy that many shares, and when you sell, you know immediately how much money you make
3. Advantages compared to mutual fund:
a. Mutual fund: most have minimum investment amount, capital gains/dividends are taxed, value determined by portfolio manager
b. ETF: Can no minimum investment required, time sales to avoid capital gains/losses
4. Disadvantages compared to mutual fund:
a. Mutual fund can have an automatic investment plan (you can set up auto deposit of particular dollar amount into fund on a schedule)
b. No automatic investment plan with ETF b/c buying individual shares

Index fund
1. Can be mutual fund (invest dollar amount) or ETF fund (buy # shares)
2. Generally are broader based (it is not only companies from a particular financial sector) so more accurately reflects the market as a whole
a. Ex: S&P 500, Russell 2000, etc
3. Generally safer because more diversified, lower gains
4. Buy through a brokerage company or mutual fund company or your bank.
5. Fee structure is like a mutual fund or ETF

Hedge Funds
1. Aggressive portfolio, complex funds, expensive
2. High risk investments but use various strategies to “hedge their bets” and protect investment
3. Require large minimum investment, limited to certain investors, money is not liquid (often require longer term that your money stays in the fund)

Commodities or Commodity Funds
1. Have a separate exchange for trading
2. Commodities are tangible objects that go up and down in value (oil, precious metals, corn, weather, etc)

Other ways to invest
1. Options
a. Call option: right to buy at a certain price after certain time period
b. Put option: right to sell at a certain price after certain time period
c. Can make a lot of money trading options but are more risky because need lots of attention and are more volatile
2. Futures
3. Currency trading
4. Real estate investing
a. Real estate investment trusts (REIT)
– Good option if you don’t want to be a landlord or flip property
– Residential vs commercial option
– You pay a % for them to do the work for you
– No tax advantage to investor

Retirement planning
1. Place your money into these types of accounts in this order for maximum benefit:
a. 401K: If your company provides a match, put however much money they match (free money!)
b. Roth IRA: best option if you’re eligible
c. Traditional IRA:
– If not eligible for Roth, this is next best option
– Forced to take minimum 4% out after age 70.5 years
d. Max out 401K if you still have money left over after above and investing
e. Other options:
– FSA (Flexible Spending Account): use if you know you’ll use the money, pretax money so it reduces your total income amount that gets taxed
– Dependent care accounts
– Education savings accounts: different with different states
– SEP (simplified empoloyee pension IRA): for business owners to cover selves (self-employed) and their employees, certain rules apply, contributions are tax deductible, generally function/taxed as traditional IRA

For the first TMWYK, Sneha covered an overview of personal finance basics, explained important terminology and concepts, and introduced topics within finance which will be discussed throughout the series. It’s a lot of information, but hopefully you can quickly scroll through and pick out the sections you’re interested in for a brief overview. This information is shared to introduce you to and help you understand the concepts of finance. Please consult your CPA or financial advisor for advice regarding your specific financial situation, and for the latest rules and information.

Led by:  Sneha

Feedback:

Budget/Savings Planning:
1. Know your fixed expenses vs income: know where your paycheck is going
a. Have a system:
– spreadsheet
– mint.com
– use credit or debit card that will track and categorize your expenses
b. Checking:
– Don’t stick all your money into your checking account and lose track
– If you have autopayments, be sure to check your monthly statements regularly for errors, unauthorized purchases, price hikes, etc
c. Divide your expenses into percentage of income:
– less than/= 25% Mortgage
– 25% Recurring/fixed expenses (car, student loan, cable, phone), Variable (utilities), or Unexpected expenses (illness, car or home repairs)
– greater than/= 25% Savings/Investment/Retirement (if able after expenses)
– less than/= 25% Spending (if able after expenses & saving)

2. Determine the percentage of money you want to spend and how
a. Know where you want to spend your money, don’t spend money you don’t have or waste it on things you don’t care about
b. Set aside money for savings, short term goals, long term goals, etc
c. Set your goals
– Short term: 5 years, always changes based on life stages (new car, vacation, wedding, etc)
– Long term: retirement
– Revisit your goals regularly and adjust based on life/financial situation changes

Credit/Debt Planning:
Understanding when to borrow funds to make your purchases, analyzing the market interest rates.

1. Understanding compounding interest:
a. You pay interest on the interest, not just on the initial loan amount (principal)
b. Example: if you borrow $100 at 10% interest/year
– after 1 year, you owe $100 + 10% of $100 = $110
– after 2 years, you owe $110 + 10% of $110 = $121
c. APR = the actual rate you end up paying and is higher than the advertised interest rate (compounded monthly)
d. For more information on compounding interest, KhanAcademy.org has some great short videos to explain it:
https://www.khanacademy.org/economics-finance-domain/core-finance/interest-tutorial

2. Credit cards:
a. Use one that gets you the most bang for your buck
– On average, should be able to get approximately 2% back either through cash-back program or miles/points
b. Pay off higher interest rate cards first
c. Pay more than the minimum payment (ideally the full amount due) rather than just the minimum. You will end up paying a ton more money just on the interest otherwise.
d. Example of importance to pay off debt: $1000 purchase with minimum pay off of 1.5% each month with 15% interest leads to total payments $2,163.43 over 144 months. You’re paying more than double what it was actually worth!

3. Car financing:
a. Avoid financing a car if possible because you will be paying interest on something that immediately depreciates in value
b. Financing can be worthwhile if you get 0% interest or low rate such as 1% because that is essentially free money
– Using a free loan to finance your car payments can free up your savings money to pay off more expensive loans or invest and get a greater % return
c. Leasing your car can be a good option if you have a business and can expense the payments for greater savings

4. Home:
a. Tax benefits when paying mortgage
b. Fixed mortgage vs ARM:
– Fixed: same payment monthly, best rates are for 30 year fixed
– ARM: adjustable rate that depends on the market rate, good for shorter term. Usually is fixed for 5 or 7 years, then changes yearly afterwards (5/1 ARM or 7/1 ARM). Usually has a limit to how much rate can go up per year and overall rate limit (but still high, usually approx 12%)
c. Refinancing: if interest rates drop, could be worth the cost of refinancing to reduce your rate and payments
d. Rate renewals: less commonly available, but is cheaper than refinancing. Option to change your rate during fixed period if market interest rate drops

5. Education:
a. Tax benefits when paying student loans
b. Worth borrowing if low rates

6. Home Equity Loan vs Home Equity Line of Credit (HELOC)
a. Borrowing money against your house, essentially a second mortgage: If lower rate than your other loans, worth borrowing the money so you can free up your money to pay off higher rate loans
b. Home equity loan: borrow a lump sum, pay off fixed amount each month for a predetermined time period
c. HELOC: more like a credit card in that you draw what you need as you need it (up to predetermined limit) and pay back minimum amount (but can pay more at a time), eventually need to pay back full loan + interest owed. May be easier to obtain.

7. Resources:
a. nerdwallet.com – site that helps you to compare credit cards, bank accounts, mortgages, etc to find best deals
b. I Will Teach You to be Rich by Ramit Sethi and blog website of same name

Tax Planning:
1. If it’s just you and your job, easy to do taxes yourself.
a. TurboTax and other similar resources

2. Important to have good CPA or financial tax advisor once you have assets, investments, etc
a. Taxes are single largest expense in a household
b. It’s complex: Two ppl can make the same amount but pay two different amounts in taxes
– They are up to date on latest details and laws
– Can help you find how to reduce your tax liability in legal way
– Can be worth the few hundred they charge if they can save you more

Insurance Planning:
1. Assessing your risk to protect assets

2. Types include Life, disability and long-term health care insurance
a. Disability may be offered by your job, but depending on your occupation, may be worth getting supplemental because standard coverage may not pay well
b. Long-term health insurance is cheaper if you pay for it sooner rather than later

3. May not be FDIC insured like banks

Investment Planning:
1. Understanding where to invest your money depending on your situation

2. Types of investments: stocks, options, mutual funds, bonds, CDs, money market accounts, Treasury stocks and bonds

3. Understand risk vs return

4. Rule of 72: how long it takes to double income
a. Divide 72 by percent rate to get # years
– example: rate is 10%/year, investment of 50K will double in 7.2 years (72÷10)
– example: want to invest 50K and double it in 5 years, need to find an investment option that gives at least 14.5%/year (72/rate=5 years so 72÷5=rate = 14.4%)

5. Resources:
a. Investopedia.com
b. YahooFinance
c. Google Stock screener: find long-term fundamentals to calculate ROIC

College/Health Savings Plans:
1. Education savings plans: 529 plan
a. 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs
b. Typically each state’s plans invest in mutual funds
– Only drawback is cannot pick how the money is invested
– Compare the type of investment each state has to offer before choosing
– Grows tax-free and no taxes paid when used for educational purposes
– Only 10% penalty to remove prematurely or for non-educational purpose
c. Rolls over from child to another if unused
– Contributions count as gifts limit of $14k annual per individual

2. Health Savings Plans:
a. FSA (flexible spending account)
– Pretax money (good for tax savings)
– Maximum contribution of $2,500 a year
– Funds don’t roll over if unused. They get absorbed back into your company’s fund if unused
– Very strict and need to submit all documentation
– Can use with any deductible plans
– Greater risk option for employer and for employee
b. HSA (health savings account)
– Pretax money (good for tax savings)
– High deductible of $1,250 as an individual or $2,500 for a family
– An individual can contribute up to $3,300 a year, while a family can give a maximum of $6,550
– Funds rollover
– If not offered through your job company can set up as an account with a bank
– Can be used for medical, dental, surgical, pharmacy
c. There’s a 20% penalty for using HSA or FSA funds for non-qualified expenses)
d. Savings accounts for dependent care: child or elderly parent
– Pretax (good for tax savings)
– Limit is approx $5000
– Can be used for aftercare, health, etc

Retirement Planning:
10% penalty to liquidate retirement accounts early

1. IRAs traditional
a. Contributions are often tax-deductible
b. Limit $5.5k
c. Taxed on back end

2. Roth IRA
a. Contributions are made with after-tax assets
b. Grows tax free and removed tax free if not prematurely
c. Can’t make more than $127,000 if you’re a single filer or $188,000 if you’re filing jointly

3. ROTH rollover:
a. Last couple of years, taxpayers at any income level can convert traditional IRA to roth IRA
– Pay the tax on the amount of any untaxed amounts in traditional IRA, but since Roth IRA income is tax-free, it might be worth paying tax now to save more later.
– Contribution limit $5500
b. Rollover IRA or 401K from previous companies
– Easier to manage
– More investment options

4. 401k/403b
a. Company sponsored
b. Contribute up to what the company will match, contribute the the rest into a roth account
– Fewer investment options in 401K than IRA and you don’t get to manage. IRA = more flexible investing
– Harder to access the money in 401K than IRA
c. 403b is a government sponsored, retirement account offered by public schools and certain tax-exempt organizations to their employees

5. SEP (Self-employed Plan)
a. Typically a small business or self-employed individual to provide or match contributions
b. Like IRA but under company name

6. Social Security
a. Approx 14% of income: 7% employer and 7% employee
b. Don’t bet on it to support your retirement. Low return and not reliable as a source of income with retirement.

7. Understand how you get paid, how company contributions are set up
a. Company contributions may be vested over several years instead of up front
– Example: only 20% of contribution available after first year, 40% after second year…100% after 5 years
– May be worth sticking around a job if amount vested is significantly increased after another year.
b. 1099 vs payroll employee
– As an employee, your company pays a certain % of payroll taxes on your behalf (not taken out of your salary) so you pay less overall
– With 1099, you’re getting paid as a consultant. You pay all payroll taxes
– No additional benefits with 1099: 401K, insurance, etc
– Payroll taxes include: FUTA (federal unemployment tax act), SUTA (state unemployment tax act), FICA (Social security, Medicare)

Estate Planning:
1. When you pass away, you don’t want the government to decide how your assets will be divided and sold

2. Beyond certain limits ($5 million), an estate tax (“death tax”) applies to your kids (40% tax).
a. It is double taxation, your post-tax assets are taxed again when left to your kids.
b. Your kids have a short time (1 year) to come up with the cash to pay the taxes on your assets (cash or otherwise) you gifted them. May leave your kids with only a very small portion of what you left them. Or they may even have to sell your home at low value to come up with the cash so they don’t even get the home!

3. Talk to your lawyer and accountant to find out how best to manage and plan. You want to ensure the proper beneficiary receives the assets and to limit the liability you pass on.
a. Gift 14k/yr, 5 mil total and estate tax 40%
b. Wills
c. Title set ups
d. Value is determined by current fair market value

4. Generation skipping tax: no longer available
a. For assets valuing > 2 million, kids were taxed 40% but grandkids were not taxed
b. If it ever comes back, would be a great way to manage your estate!

More Resources:
1. Some popular Finance websites: Yahoo Finance, Investopedia, CNN Money, MSN Money Central, Google Stock Screener.
2. https://www.khanacademy.org/economics-finance-domain/core-finance
3. I Will Teach You to be Rich by Ramit Sethi (book and website of same name)
4. www.nerdwallet.com