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Don’t worry, I don’t need to borrow any money. I’m just curious to see how many people have started to use an envelope system to manage their budget categories. An objection that is often raised when discussing the envelope system is that people don’t want to carry around a ton of cash, I assume out of a fear of robbery. I guess I could understand this if I were asking you to carry around thousands of dollars in cash, though to a would-be robber, a purse with $42 in it and a purse with $4,000 in it look largely the same.

Right now, I have about $42 in my wallet, which is kind of low, but this is the last week of the month. Ordinarily, I carry around a little more than this, depending upon the time of the month and where I’m headed: when I go to the grocery store, I pay in cash, so I would be carrying around a little bit more. The main reason I don’t understand an aversion to cash is that you don’t have to bring it everywhere you go–I don’t carry around ALL of the cash in the budget, just what I might need that day. Most of the money stays at home.

But the biggest reason I like to use cash is I don’t have to think about it. It’s got the budgeting built in–when it’s gone, there’s no more left in the budget. With debit cards, you always have to go, “Well, how much have I spent on groceries so far? How much should I limit this trip to? etc.” Cash is so easy.

So how about you? How much cash do you carry around?

"How Much Cash Do You Carry Around?" was written by Anna Viele for ABDPBT Personal Finance and was originally posted on March 25, 2009. Copyright ®2009 Anna Viele for ABDPBT, Inc. and licensed for reuse under Creative Commons BY-NC-SA 3.0. All other rights reserved.

While you are on the path to financial sanity, you will need to do lots of saving and hopefully some investing as well. There is a difference between the two, and though it may seem overly simplistic, it’s worth the time to differentiate the two here. Savings should be happening all the time–right now! It is the most important thing to start doing, right up there with the zero-based budget and the debt snowball. Savings is what keeps you sane, and keeps your money sane. It helps you sleep at night, it makes you feel less tense, it makes you feel like you are accomplishing something as you watch it grow.

A good savings plan is not exciting. It is kept in regular, low-yielding savings accounts, ideally a money market account. You probably won’t earn more than the rate of inflation on your savings account. In fact, these days, you might not even earn that. That’s OK. What you have the savings there for is piece of mind. It is not going to make you rich. It is going to make you feel safe and comfortable enough so that you have the freedom to become financially independent. Your savings is not meant to stay in a money market account (or other low yield account) for long, it is only meant to be the money you plan to use in the next five years. You cannot afford to risk the money you need in the next five years, it needs to be there even if the stock market takes a dive (as has been the case lately), or if it soars.

Since savings is for the near future, you would use it for the following kinds of accounts:

• Emergency funds
• Vacation funds
• Next year’s Christmas funds
• Saving for a new car
• Saving for a new computer
• Etc.

The easiest way to organize your various savings funds IMO is to get an account with ING Direct. At ING, you can open as many different sub accounts as you want, even for short-term things like “Christmas savings,” etc. If you don’t already have an account I highly recommend them–they even give you a $25 bonus just for signing up.

So, in short, savings should be happening now–today! And always. In my next post, I will explain the difference between this kind of short-term savings and long-term (over five years) investing. Stay tuned.

"Financial Sanity 101: Understanding the Purpose of Savings" was written by Anna Viele for ABDPBT Personal Finance and was originally posted on December 23, 2008. Copyright ®2008 Anna Viele for ABDPBT, Inc. and licensed for reuse under Creative Commons BY-NC-SA 3.0. All other rights reserved.

Well, it’s Monday again, so it’s time for a list, and I had a little trouble coming up with an idea this week. I felt like I needed to talk about insurance again, but an in-depth discussion of insurance doesn’t lend itself nicely to a list. So then I thought, hey, when I was getting out of debt and trying to get my financial life in order, I felt like I needed a checklist of things to get done/taken care of so that I could officially move into the grown up category. You know, like the stuff responsible people just automatically already know, but somehow I missed? So yeah, I thought maybe that could be our list this week.

1. Renter’s Insurance/Homeowner’s Insurance. If you own a home, you probably already have this since I don’t think you can have a mortgage these days without a homeowner’s policy. But I know there are a bunch of you renters out there who do not have renter’s insurance, and this is just to let you know that you need to look into it–it is generally not very expensive, and even if you live in a place where there aren’t hurricanes, there are probably fires and earthquakes nearby or, say, airplanes that randomly crash into houses. You need to insure the contents of your apartment so that replacing everything will not totally max out your emergency fund in the event of a disaster. Now, you may be thinking, “None of my stuff is valuable!” and that may be the case, but just think about having to buy a new bed, TV, clothes, etc.–these things are going to add up fast. So go get a policy now, kid.
2. “Gap” Insurance for People Who Have Homeowner’s Policies Through an HOA. If you have a Homeowner’s Association, you might pay for the bulk of your homeowner’s policy through your HOA fees. That’s fine, but you need to check the numbers and details on these policies just to make sure you understand your coverage. For example, some HOA homeowner’s policies cover the rebuilding of the structure, but everything on the inside of the home/condo/apartment is not covered–including things like faucets, toilets, lights–so that if you don’t have another policy, you’ll find yourself with a rebuilt home that’s totally uninhabitable. You can get additional coverage by talking to your own insurance agent–they will call it earthquake insurance or contents insurance, or something similar–just make sure to explain the situation to them so that they can recommend the best policy to meet your needs.
3. Advance Directive for Health Crises Everyone remember Terry Schivo? You need to make sure you have instructions on what to do if you have a major health catastrophe and someone else has to decide what to do with you. There are a couple of ways to do this: 1) go to a lawyer, or 2) ask your insurance company for a form. I have not looked into this, but I believe you could do this kind of thing with one of those legal forms place like Legal Zoom or We the People. Personally, I would opt for the checking with your insurance company first, though, since there is no reason to pay for this.
4. Burial Instructions and Life Insurance to Cover Burial Costs. I discussed this in my article on life insurance, but provided you do not have kids yet (or other dependents), you only need enough life insurance to cover your own burial. Along with this, you will want to have instructions and a will, if you have sufficient assets to require instructions for their disbursement.
5. Emergency fund. I’ve already discussed this, but as a grown up you should aim for always having an emergency fund of 3-6 months of expenses in place. If you lose your job or have some kind of crisis, this will help you avoid going into debt. If you’re in the middle of doing your debt snowball, then you can have a smaller emergency fund, but it should always be in place, regardless of your other financial circumstances.

OK, how about you people? Anything to add to the grown up list?

"5 Things to Do/Have/Buy/Arrange For If You Want to be a Grown Up" was written by Anna Viele for ABDPBT Personal Finance and was originally posted on December 15, 2008. Copyright ®2008 Anna Viele for ABDPBT, Inc. and licensed for reuse under Creative Commons BY-NC-SA 3.0. All other rights reserved.

Once you’ve decided it’s time to act like a grownup with regard to personal finances, you start worrying about things like life insurance. Should I have it? Do I buy it? What kind do I buy? How much do I buy? Gaaah. This is why I like to keep my head in the sand, Anna!

Listen, life insurance sounds a lot scarier and complicated than it actually is. I suspect it’s because of the association it has with death. The reality is, life insurance should not be terribly expensive, nor should it be complicated, or difficult to get (unless you already have a terminal illness or are an X-games participant), provided you do it now, when you are young and healthy. Or nearly so.

First let’s talk about what the purpose of life insurance is, so that everyone is clear. Life insurance is meant to replace your income, should something happen to you, for your dependents. It is like attaching a monetary value to your physical being, as distasteful as that sounds. So, knowing this, when you think about life insurance, you only have to think about this one question: who is dependent upon me for their food, clothing, shelter, well-being? Who will lose their livlihood along with me, should I die?

Substantial life insurance is only necessary for people who have dependents, since only people with dependents are responsible for the financial well being of others. Persons with dependents should buy a 15-year term life insurance policy in an amount equal to approximately ten times their annual income.

What does this mean? Well, it means that if you are single, there is no reason for you to buy more than about $10,000 in life insurance, or the rough equivalent of what it will cost to bury you if you die. If you want to stick it to the man, or to your parents, or whomever, then don’t even buy that much. A lot of times people will be offered life insurance plans at work, and even though they are single, they will buy in and name a distant relative as the beneficiary. Listen, if you’re getting your life insurance for free, then go ahead and take advantage of it, even if your single. But if they ask for contributions, only contribute enough to cover the cost of funeral arrangements for yourself in the event of your untimely death. Any more than that is a waste of money.

If you are married and/or have children, then you need to think about what amount of income will be lost in the event of your death. A good estimate for this number is 10 times your annual income. Why ten times? Because the ideal situation would leave your dependents with enough principal to take out the rough equivalent of your income each year in interest–i.e. if you die and your wife is left with $1 million, then she can invest it in a decent mutual fund and take out approximately $100,000 a year from the interest (this math doesn’t work as nicely when the stock market is in the shitter, but we will talk about more conservative investments on another day). If you want to plan for even worse scenarios, then you can do twelve times or 15 times. But I think if you use the number 10, in most economies, your beneficiaries will be a-OK.

Now, say you’re married with a child, and you don’t work outside of the home. Do you need life insurance in this case? Yes. You need enough life insurance to cover what it would cost to hire somebody to care for your children while your widowed spouse is out working. So figure out what that would be, and again multiply it by ten, which should at the very least get your kids through the early years and into school.

But what kind of life insurance do I buy?
In almost all cases, you should buy a term life insurance policy for ten, fifteen, or thirty years. The exact length of the policy is dependent upon your age–if you are 20, then buy as many years as you can. If you are older than that, then you can buy a little less–it’s up to you. If you are young and healthy, you should have no problem obtaining this kind of policy for shockingly low numbers. If you are not so young or not so healthy, it might cost more. If you have serious health problems, then you will have to get a whole life policy in all likelihood, because they won’t insure you otherwise. But you should always, always try to get the term life policy first.

But my insurance agent told me about a policy that functions as a savings plan. It is called “whole life” or “cash value.” Shouldn’t I use that?
No. The whole life “savings” plans are really a giant rip-off. They allow you to cash out early from a plan, which works out to be s spectacularly low interest rate, if you make any money at all. What they will do is ask you to pay $100 a month towards a life insurance plan, whereas a term life policy will cost much less (proportionately). Then they will show you how they invest this money and make lots of money. Unfortunately, these investments rarely work out as planned. Please cf. the AIG debacle if you are unsure about this. Wouldn’t you rather pay less now and put the difference in a smart investment *of your own choosing,* rather than trust a giant insurance conglomorate to invest it? Particularly when their current income generating policy is to ask the government for a bailout?

The main thing with life insurance is to not be afraid of it. Just call up an agent and get it done, and stop thinking about it. Once your policy is in place, you can just pay your premiums and forget about it while you get the rest of your financial picture in place. In all likelihood, the only place you’ll ever need to see the damn policy is in your filing cabinet.

"Life Insurance for Dummies" was written by Anna Viele for ABDPBT Personal Finance and was originally posted on December 04, 2008. Copyright ®2008 Anna Viele for ABDPBT, Inc. and licensed for reuse under Creative Commons BY-NC-SA 3.0. All other rights reserved.