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Personal umbrella liability insurance: what you need to know

Dollar Bag Under Umbrella
KJ: If you are like us, you’re working toward your goals. And working toward your goals (be it children’s education, retirement, or just financial independence) means saving money. Over time, you want to see that your money is protected in the event something happens. Most of the time, you have insurance for that – health insurance, disability insurance, etc. All of this to say that there’s a lesser known type of insurance that can help cover pesonal liability above and beyond what’s already on your home or auto insurance (plus some additional coverages), and it’s called umbrella insurance. Umbrella insurance isn’t as the name implies. It’s not coverage for when it rains – though it may be thought of as a protector for a very rainy day personally!

As you build your wealth (or maybe you’re already there!), this can be a critical component of your overall financial well-being. Personal umbrella coverage basically serves as an umbrella over your homeowner’s insurance and car insurance, kicking in extra coverage amounts above and beyond your homeowner’s and car policies. Plus, liability coverage amounts are significantly higher than under your existing policies (i.e. with coverage amounts $1 million and greater).

How it works
So, let’s say you have $300,000 worth of liability coverage on your homeowner policy and $1 million of coverage with your umbrella policy. If someone trips and falls on your property and has a massive claim against you (yes, it was that bad of a fall!…who knows!) for $500,000, then generally the homeowner policy would pay the first $300,000, then the umbrella policy will step in to kick in the other $200,000.

It’s cheap
Relatively speaking, it is a very cheap insurance to have for significant amounts of coverage. As with all insurance policies (and companies), there are a few things that could impact your coverage costs – pool, lots of land, and potentially other factors – but for around a couple hundred dollars per year, you can obtain $1 million in coverage. So, why not cover your family in the event of a catastrophe for such a cheap insurance?

It provides additional coverage
Additionally, umbrella insurance actually covers several scenarios that are NOT part of your standard homeowners or auto policies. In fact, they often cover slander, libel, false arrest, and many other personal liability scenarios (note: not business liability).

Some assets may be protected
Keep in mind that all states vary based on what is considered protected in the event of a bankrupty, but generally, some (or all) of your house can be protected and your retirement assets may be protected too. However, for a lot of your other assets, you may need some additional protections.

So, call your financial advisor and/or your insurance agent to discuss the coverage to see if you may need additional protection.

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Personal umbrella liability insurance: what you need to know is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

The oh-so-simple secret to building long-term wealth

Deadline Calendar Means Target and Due DateKJ: And…the oh-so simple secret to building long-term wealth boils down to a few basic concepts: time and patience. That’s it. Take patience, and add in a little bit (or a lot a bit) of time, and voila!

The inspiration for this blog came when we stumbled across a Motley Fool video some time ago that really emphasizes this point in further detail, but the reality is that it is that simple.

Time
The longer time frame you have to accomplish your goals, the more comfort you can have in knowing whether you will accomplish them. Not only do you have a longer period of time to actually save TO your goal, but if you’re investing your money, then it means you have time to weather the markets.

We’ve written about this concept a few other times too on starting your savings while you’re young. Check out one of our prior posts for some startling numbers on why it’s so important to save early and let time be on your side!

Patience
Most goals you set are not very short-term. In fact, most of them are probably very long-term goals when you think of purchasing a home by building up a down payment, retirement (that could be 20+ years away), children’s education (that could be 15+ years away). Keep in mind that getting to those goals takes years, so don’t get frustrated if you’re making what seems like slow progress. Check up on your goals periodically and how you are doing: it’s a good way to not get discouraged and to actually see the progress you are making.

If there’s one thing that markets do, it’s that they ebb and flow. Some years will be great, some will be terrible, and others will be middle of the road. In fact, you probably will have very few “average” years. Learn early to take the panic out of investing and try to keep as level-headed and analytical a view as you can. Endure the ebb, so you can be part of the market’s subsequent recovery (flow)!

Making any investment should not be a whimsical decision. Whether you’re investing in your own “human capital” (i.e. an investment in yourself), buying bonds, or buying stocks it can take some time to realize the fruits of your labor/analysis. Keep patient and don’t react instantly. Sure, if fundamentals change or new information comes to light it may make sense to change course, but if your thesis hasn’t changed and the fundamentals are still there, don’t panic in a moment of uncertainty!

Get Your Plan on Track
With such a simple solution to build your wealth over time, why wait? Start creating those good saving habits early in your life, and it will have a compounding effect over very long time periods. The younger you start saving and investing, the better! There’s always going to be something that you could say “let me get past this month, and we’ll start next month.” Learn to get your expenses in check with a handy-dandy budget tool, and start maximizing what you save each month.

So what’s stopping you from getting your wealth kick-started?

Image courtesy of Stuart Miles / FreeDigitalPhotos.net.

The oh-so-simple secret to building long-term wealth is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

Is your time worth as much as you think?

Time is MoneyKJ: Have you ever sat down to actually figure out what your time is worth? Time is one of the scarcest resources, and it’s one that you can never get back. Knowing the trade-offs of what you are missing out on (often called an “opportunity cost”) can go a long way in understanding how you bring balance to your life and evaluate a purchase (whether significant or not). Let’s start with a simple calculation:

What is your yearly take-home (or family’s take-home)?
This should be relatively easy. For those of you that are salaried, the number is pretty easy to calculate – just add up your income from this last year.

For people with irregular incomes and uncertain bonuses, don’t put a whole lot of weight to those lumpy income payments. Instead, try to take a 6-18 month average (depending on just how variable your income can be) leaving out some of the larger bonuses/commissions/irregular income payments as applicable.

The 2,000 hour rule of thumb
Under both of these methods, simply divide the income number by 2,000 (the approximate number of hours worked by someone who is full-time at 40 hours per week). So, if you made $20,000 last year, your hourly rate is about $10 per hour. If you made $50,000 last year, your hourly equivalent is closer to $25.

Back out taxes
Now it’s time for the not-so-fun part. Take your number from above (sounds nice, doesn’t it?), and subtract out your taxes – boo! If you’re in the 15% tax bracket, then simply take the number from above and multiply by 85%. So, if you made $25/hr then your after-tax would be $21.25. If you’re in the 25% tax bracket, multiply by 75% ($18.75 if we continue our example). Don’t forget the impact of Social Security, Medicare, and state taxes (if that applies!) which could all take another 10%+ off your take-home pay! What you thought was your real take-home pay per hour could be significantly lower.

DIY or hire-it-out
Now that you have a quick rule-of-thumb of what your typical hourly-equivalent rate is, it might help you think about purchases in a different light – or hiring out that project instead of DIY. While I’m all for doing as much as you can yourself, there are definitely times when your time may be better spent hiring out a professional who will (1) have a better idea what to actually do, (2) has experience in doing it error-free (or as near error-free as you can get), and (3) who can do it far more quickly than you could accomplish it.

Even if the project is quite basic, maybe you would spend $400 worth of your time when you could have hired it out for $300. If instead the numbers were flipped, and it would have taken $200 worth of your time, yet you would have had to hire it out for $300 then maybe the hire-it-out option doesn’t make as much sense.

Money you have is different than money you could have
Clearly not all decisions are based on the fact that you could be working and generating income while the person you hired is completing the task. You may need to factor in some non-monetary considerations as well like needing a break – there are only 24 hours in a day!

Particularly if you live in the salaried world where extra work doesn’t quite relate directly to your take-home, the decision might not be quite as easy. It could boil down to whether you could be building your marketable skills for future (unknown) income opportunities – i.e. investing in your human capital – to be able to increase your hourly-equivalent rate in the future. Surely that’s worth something!

Use this to calculate any purchase
If the purchase of [insert product name here] is going to set you back $200, and you’re hourly equivalent after taxes is $20, then it would cost you 10 hours of work to pay for said item. It’s a good way to ask “was my hard-earned time for 10 hours really worth this purchase?” That’s about 25% of your entire week’s work…framed that way, your answer might differ.

This can be an exceptional way to really balance your wants and your needs for that good old budget of yours.

    Have you thought about how many hours it would take you to pay off something?
    Did it sway you into making the purchase or did you realize the purchase wasn’t worth it?

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Is your time worth as much as you think? is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

Is it more stressful to not have an emergency fund or to spend one you already have?

Locked Piggy BankKJ: If you don’t have an emergency fund, the answer to you may seem simple, but once you’ve built up that emergency fund, then when it comes time to actually dipping into it for an emergency – yes, that’s right, an emergency – you may find that your answer to the question isn’t so simple!

Before we go any further, if you don’t have an emergency fund (or don’t have an adequate one yet), then read our prior post on why you need an emergency fund, so you can get on track sooner rather than later. That’s priority numero uno.

If you do have an emergency fund – go ahead and pat yourself on the back whether you’ve made it all the way to build it up or you’re still working on it! – then the chances are you have been faced with this question before. A tree falls on your house, your car breaks down on the side of the road, or you have a sudden medical complication that has your head running in a tailspin as you try and calculate all the numbers and expenses that are coming your way.

Spending your hard-earned savings can be stressful
It can be quite difficult to psychologically part with any of the money you’ve built up. You spent your hard earned time building it up, so when it comes time to deal with the actual emergency itself, you may find yourself cutting your expenses further for the month rather than wanting to dip into your savings. I mean, if you can still make it work and not really cause your budget to be completely turned upside down, then why not? The sense of accomplishment of making it work within your month is quite rewarding to know that you were able to take the challenge head-on.

Once you spend it, you have to work to build it back up
An obvious issue, but part of the reason why it can be so difficult to spend that hard-earned cash. Hopefully if you’ve been good about your emergency fund, once it’s built up, you just redirect the savings to additional retirement savings or to other longer-term investment savings. So, if you have to build back up the emergency fund again, then you may just need to revisit your priorities on whether other savings amounts will need to be adjusted.

It’s always a moving target
Hopefully over your career you are increasing your income as you build up your skill-set in making yourself marketable to employers. If you simultaneously increase your expenses while your income soars, then you’ll find that your emergency fund needs will soar to new heights as well! All the more reason to just keep your expenses low and to ratchet up your savings, not your lifestyle.

You get accustomed to your new normal
You get used to watching your emergency fund as a nice little addition to your net worth. Whether that’s $5k, $10k, or $20k+, parting with any portion of it means your net worth takes a hit. And who likes to see their net worth decline? You get used to seeing it build over time that you hate to have a period of time where it dips some. Sometimes though it can be the push you need to try and find creative ways to make money the weird way like we did this last month. I mean, everyone needs a little inspiration here and there to innovate, don’t we?

    Have you had to dip into your emergency fund before?
    Did you have to fully-fund the expense from the account or did you cover some of it from your budget?
    Was it difficult to build up the emergency fund again?

Image courtesy of Vichaya Kiatying-Angsulee / FreeDigitalPhotos.net.

Is it more stressful to not have an emergency fund or to spend one you already have? is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

The misconception of UTMA and UGMA accounts: what you need to know

KJ: A bit shocking of a headline I imagine for anyone who has setup an UTMA or UGMA account for their son, daughter, niece, nephew, grandchild, cousin, whomever. In theory, I like the concept of an UTMA and UGMA account, but in reality, I think they are highly over utilized for what their intended purpose is.

Short for Uniform Transfer to Minors Act (UTMA) or Uniform Gift to Minors (UGMA), it even says it in the name that it’s a gift or transfer TO the minor.

So, what is the misconception? With an UTMA or UGMA account, any money you gift to the account is considered an irrevocable gift to the beneficiary. That’s right, it is a gift of money (or investments) that you have given to a minor, and it’s up to a designated ‘custodian’ (i.e. generally the parent) who oversees the account on behalf of the minor until they are of age.

Sure, it’s a great way to potentially help set aside some designated funds for a minor, but once the minor reaches the age of majority (depends on the state, but it is either 18 or 21), then they legally have full control of the account to do whatever they may want to do with the account. Woah. Anything? Yep!

One nice feature is that you can use the funds for the benefit of the minor at any age (can be junior high, high school, college, etc.) for living expenses unlike a 529 plan that must be used for qualified higher education expenses. See also our post on into to funding education where we also talk about other higher education funding accounts and their pros/cons.

Figure Sitting And Reading Book With Idea Bulb Stock Image

An UTMA/UGMA becomes the child’s account
While traditionally common to help set aside some funds for education for a child, many parents don’t often realize that the account is legally the child’s to use however they would want once they reach a certain age. Plus, if the parent wants to recapture some of the funds (say it wasn’t all used for education or other support for the child), then it is up to the minor to actually gift the money back to the parents! Sure, a saving grace is often that the child probably has no idea how to access the funds unless the parent discusses it with them, but still. They might begin to wonder why they have a 1099 for an account in their name!

Taxation implications
There really aren’t too many positive income tax implications for an UTMA/UGMA. The first $1,000 of gains/income each year (for 2014) is tax-free, and the second $1,000 is taxed at the child’s tax rates (typically very, very low), but any gains above that are taxed at the parent’s income tax rates. It prevents parents from being able to shift a lot of assets to their child to avoid a higher income tax bracket.

Know the restrictions
While I’m not 100% anti-UTMA and UGMA accounts – in fact, we have one setup for my nieces – the person setting them up often doesn’t quite realize the implications for how the account can be used. For us, Angela and I wanted it to be used for whatever K&G may want when they get to a certain age – be it school, help with a car down payment, help with a house down payment, etc. We knew the implications of setting up the account and how it may ultimately be used beforehand.

Consider other options
Sure, these account types CAN be appropriate from time-to-time to help fund education for a child, and they can be appropriate for a parent truly wanting to gift some funds to their child to use however they want.

However, for those parents hoping to exclusively use it for higher education costs and to potentially “recapture” whatever may be left, there are much better uses of the funds. Maybe a 529 plan would be more suitable (where the donor continues to control the account after the beneficiary is of the age of majority), and if you wanted to gift the account back to yourself at the end of the time period, you generally can find a way to do so much easier (noting there could be some gift tax and income tax implications for earnings in the 529 plan account not used for higher education).

With a 529 plan, you can also reassign the beneficiary to another child, relative, etc. if the first child either doesn’t go to college or attends a less expensive college than you planned (woohoo for your budget!). Something you don’t have the ability to do with an UTMA/UGMA.

UTMA/UGMA accounts may impact financial aid options
One factor impacting your out-of-pocket education costs is eligibility for financial aid. A downside to the UTMA/UGMA accounts is that the value of an UTMA/UGMA account may reduce the child’s ability to receive financial assistance in college. In fact, it isn’t uncommon to see financial aid reduced by 20%+ of the value that is owned in an UTMA/UGMA.

    Do you have an UTMA or UGMA setup for anyone?
    What made you decide to open that account type?
    If you chose a 529 plan, why?

Image courtesy of Master isolated images / FreeDigitalPhotos.net.

The misconception of UTMA and UGMA accounts: what you need to know is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

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