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law offices of merwyn j. miller
191 calle Magdalena, suite 270 • encinitas, San Diego County, ca  92024 • 760-436-8832

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Three Financial Moves for Generation Y’s

Introduction
Flood Insurance
Self Insure
Paying for Insurance
Insurance You Can Probably Do Without
Some Insurance You Should Have that You May Not Have Considered
The Post Paid Vacation
The Finance Charge
How to Prepay
Social Security
Social Security Planning
Conclusion

Dear Mr. Miller:

Introduction: My Mom is your client and she sends me your newsletters. I thought I would ask you whether you have any good tips for us Generation Y’s. My husband and I are in our 30's and bought our first house last year. We have one child who is 3.

Daughter of Client

Dear Daughter:

As I get older I realize just how many learning experiences I have had that can be passed on. Here we go–and it's good for a variety of generations.

Flood Insurance: I recently purchased flood insurance. I live in San Diego County about 2 miles from the beach. My house is about 160 feet above sea level. It is unlikely that the sea is going to rise that far or that a heavy rain is going to flood out my land. When I told my wife I thought we should purchase this product she was surprised, to say the least. “Why,” she asked. “The probability of us getting flooded is incredibly low,” she said. (back to top)

Self Insure: Her comments caused me to think and question. And then I realized. This was exactly the same quandary I went through when I first decided to purchase earthquake insurance for my first house so very many years ago. The issue isn’t whether the probability is low (that simply determines that the premium you pay will be low), the issue is whether you can “self-insure” this risk. Self insure means you have the resources to pay the loss without jeopardizing your life style long term if you actually have to cover the loss. Although the average loss for flood is $30,000 (according to a recent article I read), a total loss is much more. Most people can’t self insure a $30,000 loss. Far fewer can self insure a larger loss. So if you can’t self insure against this loss and, if you are a homeowner, you certainly can’t avoid the risk entirely, then you have to transfer the risk (i.e. transfer it to an insurance company by purchasing insurance). (By the way, most “floods” are not covered by your homeowner's insurance policy.) So I felt good about my decision and went ahead with the purchase. (You purchase this product through your homeowner's insurance company agent.) (back to top)

Paying for Insurance: How do you pay for this new expense? Obviously with a limited resource, i.e. your income, you have to make choices. The first thing you have to realize is that the cost to you to self insure is almost always going to be less than what you pay the insurance company. After all, they have the pure cost of the insurance (how much, on average, it costs per year per insured), a number that should be about the same as your cost to self insure. But they also have expenses that you don’t, expenses that have to be built into the cost of the insurance. Administration expenses (someone to answer the phone when you call with a question or claim, phone line for that person, retirement plan for that person, manager for that person, etc. etc.), then they have the sales commission (you thought the agent was working for free?), and profit on top of that. So it is going to be less expensive to self insure, if you have the resources to do that (see my above comment on that). (back to top)

Insurance You Can Probably Do Without: You can buy auto towing insurance and uninsured motorist property damage, two risks that you probably can self-insure. Or you can take that money and put it toward flood insurance (or other essential insurance coverage). The same with the extended warranty for the $250 electronic device you just purchased. Surely you can self insure for that. And what about the replacement insurance for your cell phone. Verizon sells “Total Mobile Protection” for $11/month for an iPhone 6, a product that retails for approximately $650 through Verizon and maybe less elsewhere. That’s $132/year, or about 20% of the cost of the phone, for that coverage. I don’t know about you but I’ve never had a cell phone need warranty service in 20 years of using cell phones. Certainly, I have never lost one and although I have dropped them occasionally, they seem to always be ok. Sure, sooner or later, I am going to drop one and that will be the end of it. Let’s do the math: $11/month for 20 years = $2640 less having to buy a new phone at the full retail price of $650. I think I’m still ahead. And even if you dropped that phone in the first year of using a cell phone, most of us can self insure a $650 risk. Yes, I’ll cry about it that day, but it won’t cause me to have to change my lifestyle. (back to top)

Some Insurance You Should Have that You May Not Have Considered: So that’s how you afford earthquake insurance, flood insurance, Long Term Care insurance (when you get older, probably), long term disability insurance, and high policy limits on your various coverages. (Speak to a good insurance agent to determine what coverage you should have.) (back to top)

The Post Paid Vacation: And then there’s this other money saving (or money draining) technique. I was speaking to a friend, also in his 30's and also married. He told me that he and his wife take a big vacation (2 weeks to Hawaii or Europe) every year. They put the price of the trip on the charge card and then pay it off over 12 months until the next trip comes around. Then they repeat. When he told me it took me a little bit off guard because I didn’t really think anyone with a decent job actually did that. (back to top)

The Finance Charge: From a financial standpoint, this is akin to taking money and simply dumping it down the sewer. Think about it; you shop around on the internet for the best airfare price, you do the same to get the best hotel rate, trying to save at every juncture. If you managed to cut the cost 10% on each of these expenses you’d be ecstatic. The trip might cost you $5000. Now you pay that off over 12 months on your credit card at probably 20% or higher finance charges. Your finance charge over 12 months will be $562. You have essentially increased the cost of the vacation by over 11%. And there went the savings you generated by doing all of that great shopping for airfares and hotel. (back to top)

How to Prepay: Why not, this year, take a one week vacation, and maybe next year delay the vacation by 2 months and decrease the cost of it only slightly. If you do that, you should have enough to pay off the charge card bill when the vacation costs first come in. If you do that you’ve reduced the cost of the vacation by 11% (or you have an extra 11% to spend on the vacation) for your annual vacations for the rest of your life. After that just continue putting money away for the vacation before you take it. (back to top)

Social Security: Again, I was speaking with a friend who related to me his huge mistake. He went into the social security office to apply for Medicare at age 65. He was born early enough that 65 was his “full retirement age.” The social security rep asked him if he’d like to apply for social security at the same time. Not wanting to come back to the government office (a little like going to the DMV) at a later time, he agreed. By his own admission he didn’t need the money as he was still working. Several years later he discovered that had he waited until age 70 (which he easily could have done) his pay out from the government would have been about $1000/month higher (about 40%) for the rest of his life. (back to top)

Social Security Planning: Social security is a hugely complex program. But a growing number of financial advisors now are offering social security planning as one of their services. I have told my daughter that when she and her husband reach age 62 (the earliest one can currently qualify for social security retirement) that they should hire someone to help them figure out the best plan for them-even if it costs $1000 or so (and I have never priced it out so I really don’t know). (back to top)

Conclusion: I’m sure these thoughts just scratch the surface. But the key to financial security is to read, read, and read some more. Remember, no one cares more about your money than you! Then get qualified help. (back to top)

March 15, 2015

   
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