A Challenge and a Great Website for 1099s

The average LMF4HMW reader probably underestimates her dining out and entertaining spend quite significantly. Let's do a little experiment: write down your monthly estimate for this budget -- include restaurant spend plus what you buy for entertaining purposes in your home. (No peaking at bank statements!)

Now, put a note on your calendar to check this estimate one month from now (March 17). No need to include groceries for daily meals -- just those you use to entertain others.

I'm willing to bet it will be a lot more than you guessed. And I'll check back that week with some money saving tips to help you decrease these costs.

In the meantime, there's a wonderful website business for filing 1099s online, Outright.com. It is simple, fast and low cost -- only $5 per filing. This is a useful tool for small business owners as well as anyone who employs an independent service provider to the tune of more than $600/year. Filing electronically through Outright means you no longer have to mail in the paper form nor include the 1096. Check it out!

Day Trader versus Buy & Hold

This argument is essentially hare versus turtle. With day trading, the average individual often invests a lot of emotion and relies on "hunches" (theirs or those from "experts") to make a buck.

Day trading is for some people as tempting as a Lotto ticket or Vegas get-rich-quick weekend -- a tremendous psychological pull. It's faster paced and promises a much more exciting ride. The problem is trading costs and timing typically eat away at returns and relying on hunches and emotions is a proven route to buying high and selling low.

The bottom line is the old adage, "if it's too good to be true..." All of the commercials, email and websites promoting "hot tips" "new strategies" and "fail proof solutions" are just that. My advice is to allow yourself some fun if you're determined to day trade -- limit the value of this account to no more than 5% of your overall investments and realize that you no longer have a latte account in exchange!

Emerging Markets Primer

I've often written about the importance of diversifying your investments with international equities. There can be a tendency to have home bias because the companies or funds are more familiar and psychologically feel closer. Broadly speaking from the US perspective, international investments should include holdings from a variety of countries around the world. You can think of emerging markets as an important sub-set of the broader international scope even though in the investing world they're in their own category.

The term "emerging market" is to be taken literally -- it refers to countries whose business and social environments are in a dynamic state characterized by rapid growth and industrialization. Currently these include but are not limited to Brazil, Mexico, China, India, Russia and Eastern Europe and South Africa. In comparison, purely international funds might hold Western Europe, Japan, Canada and other more established countries.

Emerging markets tend to have higher highs and lower lows -- more volatility, given the rate of change and the fact that it can be more difficult to acquire market information. This means that for investors who may see phenomenal growth or big declines in one year, there might be a tendency to either overweight or avoid emerging markets all together depending on the market direction.

As with any investment strategy, attempting to chase returns is risky business. I recommend a buy-and-hold strategy of about 10-15% of overall holdings in emerging markets so that you have a balance. And of course since it's me, I prefer index funds given low overhead and other costs. MSCI's EEM is a particular favorite.

What You Shouldn't Live Without...

If you guessed health insurance, you are correct. In the grand scheme of things, I'd group life's needs into a pyramid: The first and most critical level includes food, clothing and shelter (including utilities). The second level contains health insurance, renter's or homeowner's insurance and disability insurance (but if you have to choose one it should be health). The third level includes useful wants like cell phones, car, gym memberships, cable/Internet, etc. The fourth and final level consists of fun -- vacations, wine and dine, special clothing, gear, gadgets and the like.

The problem is that too many people forgo health insurance. There are a myriad of excuses -- "I'm healthy," "I'm young," "it's expensive", etc. If you can afford anything in my level 3, you should most definitely have health insurance. (So if you have a car and cell phone but not health insurance, your priorities are very misaligned.) Obviously there are some who do not have the buying power to get past level 1 and unfortunately that is outside the scope of this post.

Most of us now receive health insurance through our employers, who are typically paying a surprising dollar amount to cover us. But it hasn't always been this way. During World War 2, employers started offering it as a benefit to attract employees and get around wartime wage controls. This can make it difficult to leave a company or lose a position.

If you are self-employed or not currently working, you need to find the best plan for you. In general, it's a spectrum -- the most flexible plans are the most expensive (think PPO) the managed plans are less so (think HMO) and high deductible policies, which cover only catastrophic problems (think hospitalizations and major diseases), typically cost the least. Different plans offer varying levels of services and have specific policies regarding co-pay, deductible, coverage, maximum out of pocket, and premiums.

The key with choosing the right health insurance is figuring out the best option for you given your circumstances including budget, health, and any pre-existing conditions and discussing the policy fine print. If you have a working spouse, it is often possible to be added on to his/her policy. If you are solo, you may be able to get discounts through a member organization such as the small business administration, a credit union, university, etc.

It definitely pays to shop around when researching health insurance. A good place to start is this site, which offers a range of plans for individual, family and small business shoppers. Make it a major priority to attain health insurance if you're one of those LMF4HMW readers who has a closet full of shoes but would be devastated by a hospital admission for a broken leg from tripping while wearing stilettos.

Disability Insurance Primer

Insurance. A less than fun topic with potentially debilitating consequences for avoiding it. Anything involving "what if" scenarios is tough given the normal human desire to avoid challenging topics and tendency to think that "it won't happen to me".

While uncomfortable, insurance discussions are both necessary and should provide a sense of relief given the act of creating a solid plan that answers those "what if" questions. Disability insurance covers you in the event that you become disabled and unable to work. Sometimes a disability is temporary (i.e., there is an illness or accident but recovery is possible); at others it fundamentally alters your lifestyle and ability to work in the future.

The main question to ask is could live without a pay check if you became disabled? And for what amount of time? For a reader who has a hefty trust fund or is supported by her husband's lucrative job, the answer is likely "no". (Although her husband should most definitely answer yes.) For many LMF4HMWs, however, disability insurance is a both a necessary evil and a very smart move.

The good news is that many employers offer a policy as an additional benefit. Sometimes it is automatic; at others you need to opt in. If you are covered, the next step is to figure out the amount of coverage, which is often less than you would truly need -- for example, 60% of your salary. With a supplemental policy, you can cover more, closing the income gap, but no policy will cover 100%. (This would remove any incentive to recover, right?)

Another important aspect of a disability benefit is the coverage time frame, which is typically a set number of years or until retirement. You should also figure out if there is a tiered system whereby you have short-term coverage for the first weeks or months and then long-term coverage, and what the payment differences are, if any. The amount of time for which you are seeking additional coverage will affect the policy premium, so if you have adequate short-term through work, there is no reason to double up with supplemental.

For the pioneering self-employed, the only option is an individual policy. You'll want to be sure it adequately addresses short-term needs, if any (perhaps you have cash savings which could cover these), and long-term benefits.

Below are some websites on which to do some initial research:
http://4-disability-insurance-quotes.com/
http://www.disability-insurance-update.com/

In closing, I may be pointing out the obvious, but the time to seek coverage is before there is a problem -- while you are healthy and working!

WINE PAIRING: How about a zippy Garnacha, A.K.A. "Grenache", the most widely planted grape in Spain and a major contributor to Rioja. With black fruit flavors and toasty notes common from oak aging, they are usually best enjoyed in their healthy youth.

Program Interruption...

DISCLAIMER: If you aren't mad when you watch the below linked video, you are seriously deranged. And may suffer from "over feeling syndrome", lack of logical reasoning, and general inability to separate ideals from reality.

This week I'm supposed to focus on disability insurance. While it's an important topic, I just can't shake one of the more stupid and shocking comments I've heard from a reporter in the last year. While driving to a meeting listening to Portland area's more conservative (yes, that's a rarity on the West Coast) morning radio show, a "financial reporter" commented that he "wasn't sure how to read the economy given conflicting data. He went on to offer surprise that "despite gains in the Dow Jones, housing foreclosures are at a high".

There are so many flaws with this report that I'm not sure where to begin. First and in general, economic reports tend to be backward looking -- i.e., they report on findings, or what has been viewed in the past, so therefore they aren't necessarily indicative of future performance. Second, he tries to base economic outlook on two uncorrelated measurements -- the DJIA, a poorly constructed index measuring performance of 30 stocks (hardly representative of the US economy), and housing foreclosures, a problem exacerbated by over zealous lending policies and... you didn't guess it... uber liberal policies that increased in the Clinton era but began years earlier... (FYI, I don't post this link as a political statement, just providing some background and another angle that by the way never was and never will be reported in the mainstream media).

As someone who has lived abroad in one of the world's more liberal countries -- France, I'm still dumbfounded on an almost daily basis when I watch French News and see a less biased, more fact-based reporting style in the media. Now I'm not blaming the US media for problems -- that's too generalist and doesn't recognize the good reporting that is done, but I am arguing that politically, we tend to have one view and that anything else is "fringe" and relegated to the Fox network.`

I'm not blogging as a politico but I am suggesting that we all take responsibility for the news and educate ourselves so that stupid, uneducated reporting -- whether it be on conservative, non-partisan, or liberal channels be recognized as such.

WINE PAIRING: Nada. we all need to sober up to this problem. Why is it that math, science, art and English are required but that someone can be graduated from high school and college without any financial education?!!

Life Insurance

I recently heard yet another story of a family's tragedy being compounded due to lack of life insurance coverage. In this terrible story, a father committed suicide, leaving his wife and son without a policy and piled high with debt. I don't want to get into a post about the morality of suicide, but I do want to use this example to highlight the importance of insurances in a several part series. Today's post is on life insurance.

A LMF4HMW reader may or may not have a need for life insurance depending on the stage of life she's enjoying. When I was single, without children and had no debt, I had no need for life insurance. (My 401(k) assets would have covered my debts and funeral costs.) Since I am now married (still no kids) and contributing to a household, I should consider a life insurance policy if my husband would suffer financially should I pass (i.e., his income alone wouldn't cover the mortgage, etc.). At this point it still doesn't make sense for us, but every situation is different.

The time to truly consider life insurance is when a family welcomes a child so that should the unthinkable happen, there are ample funds available. (There are exceptions if a significant amount of wealth has already been accumulated -- i.e., the child has a trust fund, but for most people that's sadly not the case!) Another case would be having a dependent who isn't a child such as a sibling or parent. There are a multitude of myths surrounding life insurance, one being that you "should get life insurance while you're young" since it's less expensive. While the statement is technically true, on this note I would have paid into a policy for the past 10 years which would have easily rendered any savings in my 30's moot.

There are two basic types of life insurance, whole and term. Whole is a combination of insurance plus an investment. Upon the death of the holder, the contract will pay the stated amount. The investment portion may be borrowed against or used in other ways. Term life insurance has a duration limit on the policy period and pays the amount unless it first expires. Some term policies will let you renew. The key with all types is to evaluate your particular situation and needs -- here's a good starter article.

Many insurance purveyors will try to sell you whole policy stating that having an investment plus insurance policy is a better benefit. The truth is that these are much more expensive policies and that insurance needs change over time. The key is buying what you need - not what someone is trying to sell you. For most people, term life insurance is all that is needed.

Dave Ramsey, a bright and straight-talking radio show host, has a website recommending endorsed local providers. Check it out and call someone this week to discuss your needs:
http://www.daveramsey.com/sa/insurance/

Next we'll cover disability insurance.