Some things you have took lots of work to acquire. You saved up for years to buy that car or home. There are yet other things you didn’t pay for, but are even more precious, like your health and strength. For the average American household, if any of these costly assets were to be seriously damaged or destroyed, the way of life for that household would suffer great loss. In this article, I’ll show you how to make insurance and emergency funds work together to help you manage financial risk.
The financial industry cooked up this thing called insurance. When you buy insurance for something, you basically pay someone else to take on the risk of the possible loss associated with that particular item. For example, you own a car. You paid $22,000 for your new wheels and you only have $5,000 cash to your name. A rich guy says, “Hey, Hot Rod, don’t you know that there are over 17,000 auto accidents per day? What would you do if your $22,000 set of wheels got totaled today?” You answer, “I’d probably be broke with a bus pass.” He responds, “If you give me $150 a month, I’ll pay for anything that happens to the car that costs you over $500.” You say, “Sounds like a deal to me! Where do I sign?”
That’s insurance in a pea pod. Most of the time, insurance is a great deal because it’s fairly cheap compared to the potential loss of the insured item. There are times, however, when insurance is not necessarily a good idea. For example, if you owned a car that was worth $1500, it wouldn’t be a good idea to pay $150 a month in premiums to cover the potential loss because the loss would not be so great that it would alter your life in a major way and you would probably end up paying more in insurance than the car is worth.
For small to medium sized items, you should self insure with an emergency fund. Every household budget should contain some sort of emergency fund. No matter how big or small your income or net worth, you should always keep enough cash on hand to help cushion the blow of most common financial calamities. Most financial gurus suggest keeping at least enough on hand to cover your living expenses for 3 to 6 months. I like to say, that’s a good starter fund. In the full blown Life Without Loans! world, I want you to work your way up to a whole 5 years worth of living expenses. I want you to Katrina-proof your finances!
I don’t want you to be silly though. Remember that there are rich people (insurance companies) that don’t mind paying for your big ticket items, if you regularly pay them a small fee. These insurance guys aren’t all the way crazy though. They usually make you foot part of the bill when something goes wrong, so make sure you have enough money in your emergency fund to cover those deductibles. For example, if you have a $1,000 home owners insurance deductible, a $500 auto insurance deductible, and a $5,000 health insurance deductible, you’d need at least $6,500 on hand to cover you if all these things were damaged around the same time. Now, if you opt for a lower monthly insurance premium, you’ll have a higher deductible, and vice versa. Be careful and know what you’re able to handle as far as premiums coming out of your cash flow, and having money sitting around to cover deductibles.
That’s an overview of how to make insurance and emergency funds work together to manage risk and help pad financial falls.
Two days ago, I wrote about how I saved 8% on home improvement by buying discounted gift cards from Plastic Jungle. After a little poking around the web, I found out that I could save another 10% at Lowe’s by going to the Post Office and asking for a “change of address kit.”
I tried it out and it worked just fine. I was in and out of the PO in less than two minutes with a coupon for 10% off my next purchase at Lowe’s. I read that some of the Post Office kits have Home Depot coupons and some have Lowe’s coupons. I haven’t tried it, but some have said that the stores will honor their competitor’s coupons.
Overall, I saved a whopping 18% on the stuff I needed in addition to the floors I picked up from a different store. So, stop by the Post Office and ask for a “change of address kit.” on your way to Lowe’s and save money. Remember, a penny saved is worth more than a penny earned.
Peace & Thanks,
Jamel Black
Personal Finance Coach
This was an easy one. I’m installing flooring in my living room. I knew I needed lots of additional items in addition to the tile and hardwood. So, I checked Plastic Jungle for discounted gift cards for home improvement stores. I found the deepest discount (8%) on a Lowe’s gift card. Then I went to Lowes.com to look around to make sure they had the things I needed in stock (because this little plan doesn’t work so well if they don’t have what you need).
They had what I needed! WhoooHooo! Then I went back to Plastic Jungle and bought the Lowe’s gift card for 8% less than face value. An easy come up. Gotta love it!
One of the first things people tell me, when they find out I’m a Finance Coach, is that they need to get into investing. They want me to show them how to make some money on the stock market or in real estate. Somehow the idea that trading stocks, flipping houses, or purchasing rental properties is a sure fire way to financial freedom.
That couldn’t be further from the truth. Although many people have made fortunes using the aforementioned methods, many more have lost the family farm doing the same things. For this reason, I never begin a personal finance session talking about investments. People think that their problem with money is an inflow issue. They think, “If only I made more money.” Then they want me to show them how they can make more money and begin to live out their financial fantasies.
I could easily take their money and show them a few simple rules of trade that, if implemented, will most likely make them all wealthy. However, without laying the proper financial foundation, the vast majority of people who have the knowledge to build wealth will never come close to obtaining it.
Jesus said,
One who is faithful in a very little is also faithful in much, and one who is dishonest in a very little is also dishonest in much.
Lk 16:10 (ESV)
Through this truth and observation of those around me, I’ve learned that people who have money problems on small incomes, have money problems with large incomes. I know families who struggle on less than 30 grand a year who are thoroughly convinced that if they made 50 grand, all would be well in their financial house. I also know people with incomes north of 100k who would promise you that if they made 150 or 200 that they would be okay.
The truth is, the person who can’t seem to make it on 30 and the person struggling on 100 are the same person when it comes to financial understanding. Both are under the illusion that they have an inflow problem. Both resort to credit when things get tight. Both are overwhelmed when emergencies strike. If given good ideas on how to build wealth, both will most likely take the advise, make a little more money, and end up worse than they were before. Because they didn’t begin with a proper understanding of money and it’s intended purpose.
That’s the reason I start with showing people how to properly function on the little they have before I show them how to obtain more. Once you understand the wisdom of the time tested and proven principles concerning wealth, you will then be successful at both managing and accumulating money. It’s tempting to skip the understanding part, but having money without wisdom is a recipe for disaster.
Jesus said,
for where your treasure is, there will be also your heart. Mt 6:21 (YLT)
Handling money starts with the heart. No matter how much you can manage to come in, if you don’t have a solid understanding of how to use what you have, you will never be financially free. Learn to do right with little, then you will have what it takes to do right with much.
Peace & Thanks,
Jamel Black
Personal Finance Coach
America’s been independent all these years. Don’t you think it’s time to set yourself free? I mean, how long will you continue to live month to month, paycheck to paycheck? Really! Some of you just sighed with relief because you don’t think you live paycheck to paycheck. However, if a major catastrophe like hurricane Katrina or Alabama’s April tornadoes happened to come your way, rather than to the people on CNN, you’d be wiped out. Most people I know could not continue to pay for their food, utilities, debt payments, and rent for more than two months if they lost their main source of income. And lack of income or the high cost of goods and services is not to blame. The main culprit is lack of planning.
The vast majority of American families bring in more than enough to both supply their needs and have a reasonable emergency fund that will float them for six to twelve months in case of calamity. However, most people fail to plan for emergencies. The unexpected will happen…unless you learn to expect it. I like to think of emergencies as life that I didn’t plan for. This way, I train myself to think of things that frequently catch people’s finances off guard. For example, car repairs happen often, but how many people plan on getting a flat tire on the way to work or waking up to a bad alternator? Because I know these things happen all the time, though not necessarily to me, I choose to make sure I always have enough cash on hand to get my car fixed and get around while it’s in the shop.
But, “How do I budget for that, Mr. Black?” I’m glad you asked. Let’s use the past to give us foresight for tomorrow. If you’ve kept your auto repair receipts, this one is easy. The more records you find, the better. Follow these instructions to build an auto maintenance budget.
1. Locate all of your car repair & maintenance receipts.
2. If you have more than a year’s worth, divide the total money spent maintaining and fixing your car by the number of years covered by the receipts. For example, if you have $5,000 of repairs over a five year period, divide the $5000 by 5. This means you spend an average of $1000 per year on auto repairs & maintenance.
3. Divide that $1000 by 12 (for the 12 months in a year). This comes out to about $83.34 per month.
4. Set aside $83.34 each month to start auto emergency proofing your life.
This number will vary from person to person depending on the age of your car, how many cars you have, and how expensive your car is.
It may seem silly at first, just having money lying around doing nothing, waiting on an emergency. However, when trouble comes, you’ll be more than glad you were prepared. Best case scenario, you end up with piles of cash because your car never breaks down. Worst case scenario, you have the money needed if and when your transportation is a little less than reliable.
Remember, a budget is used to free, not to bind. Tomorrow looks good when you plan for it. Enjoy your independence!
Peace & Thanks,
Jamel Black
Personal Finance Coach
28 For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it? 29 Lest haply, after he hath laid the foundation, and is not able to finish it, all that behold it begin to mock him, 30 Saying, This man began to build, and was not able to finish. 31 Or what king, going to make war against another king, sitteth not down first, and consulteth whether he be able with ten thousand to meet him that cometh against him with twenty thousand? 32 Or else, while the other is yet a great way off, he sendeth an ambassage, and desireth conditions of peace.” Luke 14:28-32.
It’s strange to hear Americans, who are mostly in debt, speak about the problems of our national debt. We’re in a democracy. A system of government that allows the majority to decide how it’s run. We try our best to vote for people who share our views or paradigms. These people then make laws and spend our tax dollars based on the value system of the Americans that elected them. However, it never fails that whoever ends up in Congress or The White House, many Americans complain about how the government handles money. YOU PICKED THEM! I wonder if the choices of our government are merely a reflection of the choices of the American public? Democracy is cool. You get to make your bed and sleep in it. If you don’t like it, change the sheets…or at least clean the ones you have.
Peace & Thanks,
Jamel Black
Personal Finance Coach
Foresight Christian Financial Coaching
I know many of you think Jamel and I have some supernatural grace when it comes to debt and spending money. In your mind, there’s no way we can understand your “necessity” for debt and no way you can live this thing with the advice we hand out.
Maybe our ideas sound so radical to you that you conclude that we don’t want anyone to have nice cars and homes or stylish clothes. Well, let me give you just a little insight into the mind of half of the Black household.
First off, my lack of stylish clothes has more to do with my lack of style than my disdain for clothes. I’ve never been much for shopping and when I do, I’ve had a history of missing the bull’s-eye, even though the hubby has helped me to greatly improve in this area over the years. Nevertheless, I did struggle with busting the clothing budget a time or two while we were getting out of debt. What I found was that shopping beget more shopping. This girl that hated shopping began hitting the stores every few days because she purchased one pair of shoes. I always had to purchase something else to match the new item I bought. I remember when Jamel decided to do away with his clothing allowance to speed up the process to freedom during one of these sprees. What essentially happened was my allowance doubled for about three months before he discovered it and called me out on it. Since I lack moderation, I tend to go all or nothing to kick superfluous habits. At first, it is hard. But, as time goes by, it’s really not that big of a deal. Fast forward, years later, when I could buy just about any article of clothing/accessory I want. I’ve been meaning to buy shades for weeks to help me deal with this blinding sun and I haven’t so much as laid eyes on a pair, not because it’s not in the budget or because I’m exercising self-control or denial; the reason I don’t have a pair is I haven’t felt like shopping for anything in months now. I know: foreign to my shopaholics. I’m not saying you will ever be like me. We’re made from different cloths, but I am saying that if you have a need to cut back to meet your long-term goals, you can do it and after several months of diligence, you just may find yourself in control of your shopping for the rest of your life.
I love viewing open houses. I really do. I’ve always dreamed that one day, one of those big, brand-new houses would be ours. There was a time when I had to stop viewing houses because the temptation to borrow and buy was too great for me. I’d see one and say, “I want it now. It’s going to be sold before we have enough money buy it outright.” Thank God for a man who knows how to stay focused. I’m over it now and as the money grows and we draw closer to buying the house I’ve always dreamed of, I’ve become conflicted. Let’s say I had the money to buy my dream home in my hands right now. Do I really want to hand it over to a banker when I’m perfectly fine living in the paid-for house I’m in right now? Or do I want to let that money continue to make more money so that in a short time I could double my money? Or, maybe I could quit my job and spend some significant time traveling around the world? All of a sudden, I’m not so sure about the decision. But that’s the beauty of being debt-free: I have all the way until I release the money to change my mind. I mean, the main reason I–being debt-free for several years now–continue to work is like many of you, I want the big home, too. The difference between those who have chosen to fulfill their home dreams now through a loan and me, is that I have the freedom to abandon that dream at any moment and to pick up another. And that my dear friends, is priceless.
It’s interesting how we Americans justify our desires, and trick ourselves into believing they are actual necessities. I thought about how I used to live in a one room cell (I mean dorm room) with another full grown man and shared a bathroom with a couple dozen other guys for an extended stay at Alabama State University. Many of you have had similar living situations. You ate cafeteria food that was less than “gourmet,” even though that word was in the name of the company that served your school. You shared a land line telephone with your roommate and the two guys next door. You also walked or biked wherever you needed to go. It was the simple life, to say the least, but you managed, and even had fun in the process.
Fast forward four years (let’s get serious, five and a half). You graduated from college, struggled to find that entry level position in your field of expertise, lived in a one or two bedroom apartment, and drove a used Honda Accord. A little later you married the girl of your dreams. Now this is where the brain damage kicks in for lots of guys. Somehow getting married translates into “You need to buy a house.” All of a sudden, the same guy who used to lived in one room with one other person in college “needs” to buy a house because he now lives with one other person. Never mind the fact that your apartment, while not worthy of MTV Cribs, has a living room, a bedroom, a kitchen, and a bathroom. None of which you have to share with your neighbors. All of which makes this place at least seven times better than your previous living arrangement, wherein you dwelled for several years. So, the pretty face, slim waist, and other unmentionable delights convince you that you need to buy a house because that’s what grown ups do. You can barely afford the monthly rent for your apartment and you have no savings, so the only option to buy the house that you so desperately need is to borrow money in the form of a 30 year mortgage. A 5, 7, 10, or 15 year mortgage are all out of the question because you could never make the payments. So you take on 30 years of servitude (Proverbs 22:7) because you tricked yourself into believing you needed something that you merely desired.
Don’t get me wrong, I’m not suggesting you never buy a house. But I am suggesting you consider the true reason you’re making such a huge move. If you and the girl of your dreams can’t manage to live in close quarters for a few years while you build a firm financial foundation, you’re probably going to have bigger problems once the financial grizzly bear of a mortgage hugs the honeymoon out of you. Think about it. You lived with some random stranger for four or five years in a dormitory. How much easier should it be to live in a small apartment with the most precious gift God has given you since the crucifixion? And again, I’m not suggesting you do it forever (although I’m not against it). What I suggest is using your young adult years to set yourself up for an unbelievable financial journey through middle age to a money-is-no-object retirement.
I can’t tell you how many times I hear people in their 40s, 50s, and 60s, telling me they wished they were in my current financial position (in my low 30s). The majority of these middle-lifers regrettably spent their 20s and 30s overspending on the desires that they duped themselves into believing were needs. Every year they dug deeper holes of debt by buying bigger houses than they needed, nicer cars than what would get them there, fancier clothing than was necessary, and spoiling their children in the same manner. In hindsight, they see the foolishness in their decisions. Young people, learn from your elders, even when they mess up.
If you work hard, have some foresight, and spend on the basics on the front end, home stretch will prove to be a much easier ride for you than it will be for normal people. Don’t be broke. Be different.
Today my wife learned that her government job would be deemed “non-essential” if the government can’t get their acts together before the weekend. That means she would be indefinitely laid off without pay. What was her reaction? “Good, I can get some things done with the downtime.” It’s usually in situations like these when the sagacity of Life Without Loans makes a tangible difference in our lives. To hear people discuss how they were going to pay the bills, fend off lenders, and make it through a possible furlough, seemed almost like watching a movie. You understand the seriousness of the situation that the people are in, but you don’t have the same worry, doubt and fear because you know that their lives is not your reality.
While it may seem insensitive to use such a time as this for a teaching point, it’s in times like these that people perk up to the truth. Proverbs 22:7 says, “The rich rules over the poor, and the borrower is the slave of the lender.” People don’t see the truth of that statement until hard times come. In times of plenty, I hear people telling me how silly it is to pay cash for cars, college, and cottages. They tell me it’s impossible to live without loans, and how much further they would be if they used “leverage.” But in times like these, the wisdom of God makes all other advice seem as foolish and risky as it really is. Sure, we don’t live in a half million dollar house, we don’t drive the fanciest cars, or wear the finest rags. However, we could do so if we lived like most Americans with similar household incomes. Instead we choose to live within our means. That means, if we don’t have cash, we don’t have. Simple and plain. We store up in times of plenty, so we can have in times of famine. We learned that from a guy named Joseph. He used that strategy to lead a government into prosperity through seven years of famine. But Joseph had the privilege of knowing which years would be plentiful and which would be lean. However, I haven’t seen the future. I didn’t see a government furlough coming, and I have no idea of how long it may last if it does come. But what I have seen is that when people borrow money, and they depend on weekly or monthly paychecks to keep their lifestyle afloat, the ship often sinks when an emergency strikes. Seldom can an American family make it through a month without a paycheck. In one of the richest societies in history, most people are two paychecks away from bankruptcy. The $900 dollar mortgage payment, the two $400 car notes, the $200 dollar student loan payment, and the $200 dollar credit card payment quickly eat away at a $3,000 take home pay. And you haven’t even eaten, put on clothes, or kept the lights on! It’s already tight with your “faithful” paycheck from your “secure government job,” but how is it going to look without it?
I want my beloved wife to have the time off she desires to take care of some things away from the office. However, there is a part of me that wants to see the government get their acts together and pass a budget so the children of the over-leveraged family won’t have to suffer the consequences of conventional American wisdom. I also have a part of me that wants people to go without for a minute so America can get a much needed wake-up call to financial responsibility.
As you can see, I have mixed emotions on the issue. And that’s probably because, for me and my house, it’s business as usual. No matter what happens, we trust God to supply today’s needs. And if we wake tomorrow, we do it again.
Peace & Thanks,
Jamel Black
Personal Finance Coach
It’s been a little while since my first post on this topic, but I came across an article on Yahoo! written by a guy currently living what Lenny and I discussed in our interview. I won’t do any commentary here, but read it and get out of it what you can. Click here for the Yahoo! piece.
Peace & Thanks,
Jamel Black
Personal Finance Coach
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