Insurance & Taxes
"Risk comes from not knowing what you're doing." - Warren Buffett
While insurance and taxes aren't our favorite topics to talk about they are certainly relevant and important in personal financial planning.
Insurance
Insurance by definition is simply protection from financial loss. You pay an insurance company a set amount for coverage or protection from loss. The most common types of insurance are the following four, but the list continues with catastrophic, travel, pet, unemployment, hurricane, fire, flood, etc. and even more for business owners. The general rule is protect yourself from the unexpected rainy day.
- Auto (comprehensive, liability)
In the United States all car owners are required to have liability car insurance. But should you pay more for full-coverage? The simple answer is it depends. If your car is worth 10K or more, probably so. If it's less than 10k and you have a fully-funded emergency fund you might be better off self-insuring against the loss. The right answer to that question 100% depends on your risk tolerance and ability to self-insure.
- Health (medical, dental, vision, disability, etc.)
Health insurance is important especially if you have ongoing medical conditions that require consistent care or medication. Even if you don't have current health concerns, no one should have to worry about how they are going to pay for unexpected medical bills. While employers are the most common provider of health insurance, there are plenty of direct insurance options as well for those who are self-employed. Find out what options are available in your state and choose a plan that works for you. If choosing a plan with a higher deductible keep in mind you might want to increase your emergency fund to cover the addition.
- Property (home-owners and renters)
What would you do if your house was robbed? Of course that's not a pretty thing to think about, but the possibility is real and thinking though the what-ifs will help guide to you finding the right protection for you.
- Life (whole life, term, etc.)
Life insurance is simply insurance to protect your dependents if you died. UNLESS you have young children or disabled spouse or dependents DO NOT purchase life insurance. If you don't have dependents there is no reason to purchase.
The two most common forms of life insurance are term and whole-life. The difference being is that one is for a set amount of time and the other is life. Whole-life insurance is a BAD IDEA! Take the money you would spend on a silly policy like this and invest it and your heirs will be much better off.
Taxes
"The only certain things in life are death and taxes." - Benjamin Franklin
Everyone must learn about taxes. In the United States everyone with earned income must pay a federal income tax (and where applicable, state and local tax as well). In addition there is property tax, sales tax, tourism tax, self-employment tax, estate tax, capital gains tax, gift tax, inheritance tax, the list goes on and on.
Effective tax planning is essential and involves understanding the current tax laws and regulations and maintaining good records.
Personally we benefit from living in Florida as Florida is one of nine states in the United States that does not have state or local income taxes. As a result we save money as we only have to file a federal tax return. We utilize the free online software TaxHawk when preparing our taxes each year. It is a clear-cut process and eliminates frustration.
If you don't feel comfortable filing your own taxes, there are a ton of free resources available with tax help. Check your local library or university accounting club. They are an excellent resource.
