Then, very suddenly, her husband died in a car accident, and there wasn’t much life insurance money. Within months, she was back in the workplace at a fairly low paying job, her family had moved into a tiny apartment, and the house was up for sale. Then, just as quickly, she was laid off from that job and the house sold for roughly what was still owed on it. Within a year, she was back living in her parents’ basement, a single mother with three young children and few assets to her name, searching for any job in her field of expertise while working as a gas station attendant.

What surprised her more than anything was the absence of the people she had believed to be her friends. They were there at first when her husband passed away, but when it became clear that her life was going to radically change, those friends stopped returning phone calls and stopped visiting. When she really needed help, most of her friends simply weren’t there for her.

It turned out that the people she could rely on were her close family and just a few of her closest friends. All of the rest of the people that she had come to rely on in her life – confiding in them, helping them, spending countless hours with them – simply weren’t there when push came to shove.

Ellen’s story really resonated with me, mostly because it’s pretty easy for me to see how something like this could happen in my own life. If my wife were to pass away suddenly, I know that I’d need a lot of help over the short term. I’d likely sell the house we live in and move into a much smaller home with my children, likely much closer to my parents (and my wife’s parents, actually). I believe the income from The Simple Dollar would support the three of us, particularly if I were to move to a different home, so that’s not a big worry.

Then I thought of a close friend of ours, whose situation closely mirrors Ellen, and I got a sick feeling in my stomach. She’s also a stay at home mom with a two year old girl and another one almost ready to arrive. Her husband has a solid job, but one that does involve some degree of physical risk. What would happen to her if something happened to her husband? I know my wife and I would offer her some support, as would her parents and, I would imagine, some other friends and family, but her life (and the lives of her children) would change radically.

What can we all do to prepare for such a situation? There are a lot of obvious things that can be done to make such a blow easier to take.

Life insurance This is the obvious option, but it’s only the beginning. If you’re in a situation where your life would be significantly derailed by the sudden passing of a partner, then that person needs to be well insured with you as a beneficiary. If you have children, you need to have a substantial life insurance policy for both partners – several multiples of your annual salary.

Strong relationships with family Building up and maintaining very strong relationships with the key people in your life becomes even more important if you’re in such a situation. The birth of your children should be an indication that it’s time to work on your relationship with your parents and with other family members. If there are rifts, you should take the first step (and the second – and the third) to repair that rift and build a healthy relationship. This isn’t only beneficial in such a painful scenario, it’s also generally beneficial to you right now as well as for your partner and your children.

Friendships with real value and meaning It’s fine to have a circle of friends that you hang out with, but those friends shouldn’t be relied upon to help you out in a pinch unless you do the same for them when they need help. That means if you have a close friend that truly needs help, give them everything you can. True friendships are built in times of need, and when you see a friend in need, you have that opportunity. It might be hard or inconvenient or painful, but when you offer your hand when they need it, you’ll build a much stronger friendship, one that has a much higher likelihood of being there for you when you need it.

Active membership in civic and religious organizations I’ve been involved in quite a few organizations in the community over the years, and I’ve found that time and time again, when an involved member needs a hand, the whole organization comes together to help. Churches, community groups, volunteer groups – it’s true for all of them. However, just signing up and not doing anything else isn’t enough – you need to get involved and be involved over a long period of time and step up to the plate regularly for leadership opportunities, service events, and when others need help.

All of these things have some key things in common. All of them require you to be proactive – you have to take the first step to make them work. You have to give of yourself without expecting things in return. All of them also provide some level of personal joy – close friends, close family, and good organizations all provide great social situations and a lot of fun (or provide some peace of mind, in the case of life insurance).

In short, if you don’t truly give of yourself when times are good, it’s unrealistic to expect to receive when times are bad.

Good luck.

As I studied our homeowner’s insurance policy, I was surprised at how high the value of the insurance was for replacing home contents. It was one of those little things that threw up a red flag for me, and it kind of stuck in the back of my mind.

About a week later, I was still thinking about that number, so I took a very careful inventory of our home’s contents, adding up how much these items would cost to replace – and sure enough, the cash value of everything in the home was only about 40% of the amount we were insuring. Reducing that number would surely save us a significant amount on our policy, so I was about to call up and start discussing things with our insurers when my wife popped in.

She was curious as to how much value I was putting down for some of our most valuable personal items, like some of the handmade wooden artwork her grandmother made, a painting done by my great grandmother, and some mementos from our wedding.

I went through the list I’d made and rattled off a few prices, which were estimations of what they’d cost to replace with similar items. My wife shook her head and told me, flat out, that I was drastically shortchanging the items.

But was I? This has been a big question for discussion around here for a while, actually.

My wife’s position initially was that such items have a very, very high value. She propositioned it this way: how much would I accept in payment for that painting by my great grandmother? The price would have to be very high – and I don’t think I’d sell it at any price.

That’s the conclusion that many people come to when they consider insuring the property in their home. They look at those irreplaceable and personally valuable items and think about how much they’d feel was an appropriate price to let go of something so valuable. Quite often, that price is insanely inflated – but for good reason. The item has a great deal of personal value.

But consider this: would you be able to replace that item if it were destroyed? Would you even think about replacing it?

My grandmother’s painting is invaluable to me. I can’t even realistically name a price that I would sell it for. But if it were destroyed in a disaster, I wouldn’t even think of replacing it. I’d have my memories of it, and I’d probably lament that it was missing, but how could I possibly replace it?

In our new home, I would probably put up a print on the wall, or possibly an original painting by another artist, but neither one would come close to the value that I personally ascribe to my grandmother’s painting.

This gets back to the original question: how much should my grandmother’s painting be insured for? Considering that it’s not something I would ever be able to replace – nor would I really attempt to – I’d argue that it shouldn’t be insured for much at all.

Then, if you apply that rule of thumb to items in your house that really only have a deep personal value, you’ll often find that the cash value of the contents of your house is not nearly as high as you might think it is. In that case, you’re likely vastly over-insuring the contents of your home – and paying an extra premium for that privilege.

Now, that’s not to say that there isn’t a good argument for insuring on the high side of what you own. You’re far better off having a little bit of breathing room than cutting your insurance down to the bone.

But when you consider the value of the property in your home, think carefully. Ask yourself whether you’re insuring the value that you personally ascribe to things – or the real value of replacing things that you would actually replace. You might just find that you’re over-insuring your contents just because of your own personal feelings – and that’s a financial leak you can easily plug.

How do you know when the time is right to downgrade your car insurance? First, let’s look at the insurance variables we’re looking at, then let’s move through the thought process of figuring it out.

Types of Auto Insurance and Basic Terminology
… just so we’re all on the same page here.

Most states require that you carry at least liability insurance on your automobile as a minimum, so we’ll assume that in all cases you’ll continue to carry liability coverage. Liability coverage takes care of any costs or damage you may do to other people and property during the course of driving, including both bodily injury to others and property damage. These insurances are usually pretty cheap – the only thing you might want to be concerned about is that your coverage limit is quite high.

What we’re mostly concerned about is comprehensive and collision insurance. Collision insurance covers damage to your car when your car hits or is hit by another object, while comprehensive insurance covers losses resulting from incidents other than collision – floods, damage caused by external forces, and so on.

For more specific details on these definitions, check out this very useful definition page from CarInsurance.com.

For each type of insurance, you’ll have a deductible, which is the portion of any bill that you will be responsible for. So, if you have a $1,000 deductible and you’re facing $2,500 in damages, you’ll pay $1,000 and the insurance company will pay $1,500. You also have a premium, which is the amount you have to pay the insurance company to maintain the insurance.

What Do You Need?
Unfortunately, there isn’t a clear and straightforward answer to this question, and it’s because of that lack of clarity that people tend to over-insure – and personal finance writers can get away with simple statements like “eliminate your insurance and raise your deductible to save cash!”

First, should you raise your deductible? From my perspective, your deductible amount should always be directly related to your emergency fund. A single car incident shouldn’t be able to entirely deplete your emergency fund – if it does, you put yourself quickly at risk of something else happening. In fact, I often encourage people to have an emergency fund at least as twice as large as your deductible.

Given that, you can quickly figure out how much deductible you need based on your emergency fund. If you have an enormous emergency fund, for example, you may not even need comprehensive or collision insurance at all, as you have enough cash to just pay for the repairs or the replacement yourself out of pocket.

The way I see it, if you have enough emergency fund that you could pay for an entire replacement car in cash and only reduce your fund by half or less, you don’t need collision or comprehensive insurance. Liability insurance should be all you need. But, of course, most people aren’t in that situation, as it demands a much larger cash emergency fund than most people have access to.

Similarly, at what point should you entirely cut collision and comprehensive insurance on an older car? It’s not an easy question to answer.

I’m currently in this situation with my pickup truck, which is more than a decade old and is approaching the 200,000 mile mark – it has a pretty low Blue Book value at this point. It’s reached a point where my family feels uncomfortable driving it any significant distance at all, so I mostly just use it for local travel within fifty miles of my home (going to the library, getting groceries, and so on). We intend to replace it by early next summer.

Given that, it may in fact make sense for us to drop down to just liability coverage on the vehicle. This would save us several hundred dollars over the winter, and if something severe went wrong with it again, we’d simply go ahead and sell it.

Ask yourself this honest question: if a significant repair needed to be done to your current vehicle, would that be the final push you need to replace it? If that’s the case, do you need collision or comprehensive coverage on that vehicle at all?

Between these two perspectives, you may find that comprehensive and collision insurance aren’t worth it to you. But you may find yourself also feeling unprotected without that insurance. Insurance does have a psychological benefit beyond any directly financial benefits – you can be confident in knowing that even if something bad happens, you’re covered.

If your signs are pointing away from needing collision and comprehensive insurance, but your gut is telling you it’s a bad idea, I recommend just raising your deductible nice and high. That way, you’ve got the security of the insurance while saving money as well. This may be the best option of all for people with used cars and a nice hefty emergency fund, but find that comprehensive and collision insurance makes them feel better about their car.

I look forward to hearing the comments of readers on this topic.

Well, I’ll let the front page of the Des Moines Register speak for itself.

Where I’m at (luckily), there’s been only minor ill effect. We’ve had some minor flash flooding in our back yard, but nothing disastrous (other than some depressing garden damage – I don’t think the rosemary and other herbs will recover). Our basement water pump has been running almost nonstop for the last two weeks. Many cornfields near my house (including the one I can see out of my back door to the east) are partially or entirely covered in water, however. Road travel in Des Moines is very challenging right now, with many, many roads closed.

I have family in northern Iowa that are being seriously affected by this flooding, and I have a lot of family in southern Iowa and western Illinois that are going to be affected by this in a week, when the high water that’s currently in northern Iowa will have reached them. Here’s the data I’m looking at that will be affecting them soon.

Part of the challenge for Iowa is that a large portion of the Iowa National Guard is stationed overseas, making it difficult for the remaining Guard to respond effectively to local emergencies like this.

What Can I Do To Protect Myself?

Know your flood risk Use floodsmart.gov to find out if the property you live in now (or a property you’re considering buying) is a significant flood risk. My area, unfortunately, isn’t covered by that web site (as of just a few years ago, my home was classified as farmland, so the data hasn’t been updated), so my next step was to contact the FEMA Map Service Center to find out my risk. I have a small risk for flash flooding, but minimal risk for river flooding, which was about what I expected.

Determine your need for flood insurance If you’re in an area with some degree of flood risk, consult your homeowner’s insurance policy to find out what coverage you have in the event of a flash flood or a separate significant flood event. If you live in a flood plain that has flooded in the last thirty years or so, you should definitely have flood insurance.

Be aware of the flood control plan in your neighborhood or town if you do live in a flood plain. Know what rivers you should be watching and what signs you should be looking for that a flooding situation may be occurring. Contact city hall and ask if there is a flood control plan for your town and ask for a copy of it, so you’ll have an idea of what the “concern” levels are for the flood protection in your area.

What Can I Do To Help If I’m Not Affected?

Volunteer, if you can Many towns near major rivers in Iowa, Illinois, and Wisconsin could definitely use sandbagging help. If you’re a college student off for the summer and would like a way to use your time to help people in need, contact the city hall or town hall in some of the towns in southern Iowa and western Illinois that lie along the Des Moines, Skunk, and Mississippi Rivers and volunteer to help in exchange for shelter and food. They’ll be glad to quickly find you a host family.

Consider what’s happened here as a part of who you vote for in November. The candidate who is putting resources into FEMA and the National Guard is the candidate that’s really interested in helping America out. Draw your own conclusions on which candidate that is for each office, but keep it in mind when you vote.

How small? It’s a question that’s almost impossible to research. Almost all of the data out there on the topic was produced by the insurance companies themselves, meaning that I have to read them with a very skeptical eye.

For example, the American Council of Life Insurers claims that one third of all Americans between the ages of 35 and 65 will become disabled for more than 90 days. Intuitively, this seems like an incredibly high number, and because of the source, I have a very high degree of skepticism about that number.

Another scary industry statistic comes from the Health Insurance Association of America, who claim that 1 in 7 people can expect to be disabled for five years or more. Again, this number seems very high to me and could only be even remotely reasonable with the widest possible definition of disability.

The only real statistics I’ve seen on the subject come from the Census Bureau, which report that about 20% of Americans meet their definition of disabled, but only 23% of those disabled people actually qualify for disability benefits. Why? The vast majority of disabilities that the Census Bureau considers to be disabilities are ones that people work through – vision impairment, hearing impairment, and mobility impairment are all considered disabilities, but are ones that strong and self-motivated people can work through.

The obvious solution – the one that most Americans wind up following – is to just say forget it, believing that the risk is too minimal to bother with – and I can understand that conclusion. I know that’s the assumption I’ve operated on throughout my adult life to this point, and I’m willing to bet that it’s the assumption that many of you have operated on as well. However, as five cent nickel puts it, it makes sense to insure what you cannot afford.

The first question thus becomes could I afford the consequences of not having long term disability insurance? A quick examination of my finances says yes – but only over a fairly short term. We’d be fine over the course of a year to eighteen months. Beyond that, things would get very difficult for my family.

Next question: does my employer provide long term disability insurance? Right now, I am self-employed, so I don’t have the benefit of employer coverage. My wife does have this benefit, which would replace 60% of her salary 60 days after a disabling accident, so she’s covered. That still leaves me out in the dark, though.

Given those two questions and the thought process behind them, what I actually need is pretty clear. I need a policy that kicks in in six months to a year after a disabling incident and covers enough income that my family is able to get by, and I only need the insurance over the timeframe that I would actually need it – probably until at least my children are moved out. My impression from these criteria is that the cost of insurance would be quite low.

The next step is to get quotes on this insurance, and this is the step where I’m at. Most large insurance groups offer long term disability insurance and I’ve requested information and quotes from several such groups, including the group that handles my life insurance.

Come on… is this really worth it? This thought has crossed my mind regularly throughout this process, likely because long term disability insurance seems to be an uncommon thing outside of a job benefits package.

Any insurance you buy is a personal risk-reward analysis. Any time you choose not to insure something, you’re taking on some amount of risk. Insurance eliminates (or vastly reduces) that risk. Life insurance? The risk is the loss in income to your family if you were to pass on. Health insurance? The risk is high health care costs, especially for complex procedures. Auto insurance? Homeowners insurance? Renter’s insurance? They all insure your property against unknown disaster.

Long term disability is another risk you can insure against. If you judge the risk (long term disability where you survive but are unable to work) as being smaller than the cost (the monthly or annual premiums), then you’ll probably not take any out, but that balance is different for everyone.

For me, I’m leaning strongly towards acquiring insurance for a very long term severe disability. I can afford it, and knowing that my family would be secure if something rendered me incapable of writing is very reassuring – a risk and reward balance well worth it for me.

What’s your take on long term disability insurance?

A household inventory is a documentation of every item in your home so that you have this in the event of a disaster, such as a robbery or a house fire. It usually consists of a list of the items and/or a videotaped walkthrough of your home which captures images of the items.

Such an inventory can be very useful when dealing with insurance companies, as it provides documentation of the items that you own, thus helping your case for an insurance settlement.

Eight steps for making your own household inventory
One can make an excellent household inventory in just a few hours on a weekend. I was able to do my own home in about two hours of steady effort. It’s not too hard at all – it just takes time. Here’s the game plan.

1. Get a video recorder. If you don’t own one already, borrow one from someone. A video recording is a great way to document all of the items in your home, even the ones you forget to list.

2. Get a laptop – or a very good note taker. When we documented our home, we found it easiest to take a laptop from room to room in our home to jot down all of the information. If you don’t have a laptop, designate someone to be a note taker (maybe yourself, if you’re doing it alone).

3. Do one room at a time. Go to each room in your home and document all of the significant items in it. It’s not necessary to document individual foodstuffs and individual toiletries, for example, but I’d document things down to silverware and plates – my rule of thumb is that if it’s worth more than $10 and easily replaceable, or if it’s not easily replaceable no matter what, it gets documented.

4. Record as much information as you can about each item. Make, model, serial number, purchase date, and so on are all good pieces of information to have, especially for larger items. For smaller items, just list what they are and make sure that some video is taken.

5. Be sure to videotape or photograph any personal valuables. Jewelry and family heirlooms fall into this area. These are items that are not easily described and are best noted with visual proof of their existence.

6. Store the list/video in a secure place not in your home. This is a perfect item for a safe deposit box at your bank, for example. Just make sure it’s not in your home, as this is an item you’ll only need if there’s significant damage to your home or to the property in it.

7. Update the list semi-regularly. There’s no need to do this monthly, but an annual updating of the list can be useful. You can tack addendums on the end of your earlier lists or videos if you wish, covering any new purchases you’ve made.

8. Make sure that everyone knows where the list is, including a person or two who doesn’t live in your home. That way, if a real disaster strikes and you’re incapacitated, others can retrieve the list and help with insurance issues while you’re recovering – or can help your survivors get the insurance settlement that they’re due.

Over the last few months, I’ve received many, many emails from people thinking about a career change, usually towards starting their own business. In most cases, they’re not too worried about the money aspect – they tend to be much more concerned about health insurance.

Health insurance is the 800 pound gorilla in the room for decisions like these. For some, the risk of devastating illness or injury isn’t worth it and they try to stick with their primary job while building the business on the side. Others believe in the adage of you only live once and go for the gusto. Here’s the argument for both sides.

No, Don’t Abandon Health Insurance

Your personal health is your most valuable asset. A healthy body and mind enable you to get up in the morning and go through your tasks for the day and enjoy your life. Health insurance is your safest bet for making sure that you’ll continue to enjoy good health, by taking most of the financial burden for medical care off your shoulders.

Furthermore, if you have children or other people depending on your health and continued ability to earn money, a severe medical crisis without health insurance can utterly devastate your family. Health insurance enables an unexpected situation, like a serious illness or a car accident, to not completely transform the way of life of your family in a negative fashion.

If you value your own health and have a sense of responsibility to others, health insurance is a must. Don’t take the leap into an area without health insurance. That doesn’t mean you can’t investigate other options, like COBRA or self-insurance, but you shouldn’t take the leap into the unknown without a safety net if others are relying on you.

Yes, Go For The Gold!

When a truly great opportunity comes along in your life, one that fills you with joy and passion and drive, you should never let it pass by. Sure, there may be risks – and one of them may be a period without health insurance – but the sense of personal fulfillment and accomplishment and the possibility of great successes more than makes up for it.

First, the opportunity to do something with your life that fills you with excitement and energy is something rare and beautiful, and if there’s any way to take it without throwing away your most important responsibilities to others, you should always jump on board. A fulfilled life is a great life, and doing something that fulfills you can completely transform your life. Plus, when you let that opportunity pass, you’re bound for a great deal of regret.

Even more importantly, doing something you’re truly passionate about holds a far greater chance for success than doing the same old thing. If you take that leap, you have a chance to do something truly great with your life, something transformative. If you have that chance to do something amazing, you shouldn’t let it slip by because of a temporary lapse in health insurance.

Obviously, if you have the opportunity, use programs like COBRA and self-insurance to acquire health insurance, but don’t let a period without insurance cause you to not take the leap for your dreams. The risk of a major incident over a short period is much less than the continued pain of a great opportunity left untaken.

My Take

If you’re single, have no one relying on you, and are in reasonably good health, I say go for it. You aren’t responsible for the lives of others, only your own, and if it’s an opportunity you’re passionate about and believe in, it’s a path you should always take. If you don’t, you’ll regret it for a very long time, likely the rest of your life.

On the other hand, if you’re in poor health and have children to support, stick with the safety net. Those children depend on you, and if you were to fall into a dangerous health situation, they would suffer as well. The future of a child is not something one should play ball with – a childhood should be filled with relative safety, positive reinforcement, and opportunities for growth, not with the apocalyptic situation that a severe illness of a parent without health care would bring.

If you’re really on the fence about it, though, you should probably make the leap, provided your bases are as covered as you can make them. When a great opportunity passes you by and you make the “safe” choice, you’re often left with only one thing: a belly full of regret.

What’s your take?

Sometimes these things just happen – they’re devastating, and often they tear asunder things you’ve been planning. There’s not too much you can do to really prevent them, but there are a lot of things you can do to minimize their impact on your life.

First of all, don’t panic. If you find yourself getting extremely upset and losing control, separate yourself for a little while and calm down. If you really can’t handle the emergency yourself, call 911. That’s what they are there for.

Second, don’t avoid it. As soon as you’re in control of your faculties, start dealing with the situation. Find out all of the resources available to you that can help, and start using them to correct your life. If you lost your job, don’t sit around for three weeks playing video games in the basement – polish up your resume and start hitting the pavement now.

Third, it is often useful to let down your guard a bit and contact someone you really trust to help you; for example, if your spouse is in dire straits or just passed on, you may need someone to step in and help you with the affairs of the moment. If you don’t have anyone, contact a local church (preferably the one most similar to your faith and upbringing) as most pastors are glad to help out someone truly in need.

There are also a few simple ways you can prepare now so that when the bad thing happens, you’re ready.

The first (and perhaps most important) thing is building up an emergency fund. Each week, you should have an automatic withdrawal from your checking account into a savings account – say, $25 or so. This money should just sit there in that savings account until a disaster strikes. That way, if the transmission dies in your car, it’s not panic time – it’s just time to go get money out of your savings account. This will help for smaller emergencies that can mostly be dealt with with cash.

The second task is to cover yourself and your spouse with life insurance, especially if you have children. This is especially true if you are in a two-income home, where both people work and both incomes are required to make payments – life insurance will help to prevent a financial disaster later on. A term policy for a person in their twenties is quite inexpensive – this should be a precaution that many people take.

Most states require some form of automobile insurance and many employers (though not all) provide health insurance. If your employer does not provide health insurance, it is well worth your time to seek out an employment situation that does provide it, as it is incredibly valuable. If you are self-employed, you may need to insure yourself, but there are many plans available for this.

If you take home nothing else, though, it’s this: build an emergency fund and don’t be afraid to use it when you need it. It will serve you well time and time again when life, well, kicks you in the teeth.

While it’s fine to spend some money, a bit of careful planning can ensure that “bad luck” comes around less often. Here are thirteen (ooh… unlucky!) tips for reducing the impact of unexpected expenses of all kinds in your life.

Build an emergency fund This is the best thing you can do. Each week, deposit a little bit of money into a savings account that you designate as an emergency fund. Then, when a disaster strikes, you can calmly pull the money from your emergency fund and take care of the disaster. How much should you have? Many people offer a “cap,” but I generally believe that it’s a good idea to put that small amount in weekly forever – if you ever get “too much” in the account, then pull out some for other purposes.

Make your investments diverse Don’t make the mistake of putting all of your money in the same investment – or the same types of investments. When you start investing, make sure that your money is in several investments that don’t have significant overlap. For example, you might want to own some domestic stocks, some international stocks, and a few bonds. A great way to diversify yourself is to use broad-based low-cost index funds.

Build up multiple streams of income This can defend you against job loss or other unexpected changes in income. How can you do it? Start a side business. Buy investments that continually earn a reliable income. Produce a one-time item that can earn an income over a long period, like a book or a detailed website. There are lots of possibilities.

Back up your data regularly If you keep financial or other important data on your computer, back the data up regularly. I keep most of my important stuff backed up on two separate 4 GB Flash drives that I keep in the safe – I back data up to this weekly and it’s saved me at least once.

Change your passwords on occasion If you use online accounts significantly, changing your passwords occasionally can protect you against identity theft. I change my passwords every three months. If you’re ever suspicious that anyone may have access to an online account of yours, change the password immediately.

Ensure your checking account offers some overdraft protection Everyone makes little mistakes sometimes, but if you do the math wrong on your checking account, you might just get dinged with a big unexpected fee. Once, with my old checking account, I got dinged with an ATM fee and an account maintenance fee – together, they overdrafted the account and cost me a lot of money. Make sure your checking account offers some form of overdraft protection – I particularly like ING’s overdraft protection on their online checking, which basically covers the overdraft, doesn’t charge you a fee, but charges you a low interest rate on the amount of the overdraft.

Get some insurance If you rent, renter’s insurance will protect your possessions in the event of a fire. If you own a car, look at comprehensive insurance options. If you have a young family, you should definitely look at life insurance. These all reduce your personal risk and, in most cases, are worth it.

Don’t speed or blatantly break other traffic laws Every time you speed, you’re basically taking a chance that there won’t be a police officer with a radar gun to catch you. Remember that each time you drop the pedal to the floor – it could seriously cost you. Besides, speeding is expensive for your gas mileage – most cars are optimized to go the speed limit and they get far worse gas mileage if you speed.

Keep an updated list of your possessions in a place not inside your living space This is a very important protection to have in the event of a disaster in your living quarters. List everything of value in your home, along with as many serial numbers as you can find. Be specific with the model numbers, too. This way, if something disastrous does happen, you can use this list with your insurance company to get replacements on the items.

Put a high value on reliability in your purchases – use “total cost of ownership” Don’t just go for the cheap items when replacing an appliance or an automobile. Instead, do some research and look at the total cost of ownership. For example, quite often the most expensive options end up being the cheapest if you look at energy costs and lifespan into account – if you spend $1,200 on a washing machine, for example, it might use half the energy and have twice the lifespan of the $200 model, meaning that it’s actually cheaper over the lifespan of the machine than the other one – plus, you’re less likely to have an unexpected nasty surprise.

Don’t put your money in speculative investments I get tons of emails about various hot stocks, and I hear lots of “tips” from various people on hot investments. Ignore all of them. Most of those investments are either highly speculative or are set up for you to fail at them. Don’t ever put your money in an investment based solely on one person’s unsolicited recommendation or on one article you read in some investment magazine. Play it safe with your money and it won’t fly away.

Make every payment well in advance of the due date Every bill I have dings me significantly for being even one day late. In order to avoid that unexpected expense, which sometimes happens even if I mail the bill a day or two early, I make sure to get my bills in the mail at least a week before their due date. Don’t let your utility bills ding you with unexpected fees – keep up with your bills.

Don’t carry a balance on your credit card If you can avoid it, don’t put anything on your credit card that you can’t immediately pay off. As soon as you start carrying a balance, you start getting eaten with finance charges, which make it harder to get the debt paid off. When it starts piling up – which it easily can when you start carrying a balance – you’re putting yourself in a dire financial position. If a big unexpected expense comes up, first try to find other ways to pay for it – clean out your media collection, for instance, or sell a few savings bonds. Use your credit card only as a last resort because it will bite back – hard.

Look at a combination home and auto insurance policy. We did this (because we happened to be moving at the time as well) and found that a combination package that covered both of our vehicles as well as our home was substantially less expensive than the independent insurances would have been. If you’ve got home and auto insurance through separate companies, call up your agents and ask for quotes on combination packages – likely, that will save money.

Take a defensive driving course. If you have a speeding ticket or other minor violation on your record, it generally boosts your premiums on your auto insurance. Most states keep track of your violations through a point system – each violation earns you a number of points and each year sees a small reduction in points. Your point total is what insurers use to adjust your premiums upward – the more points, the more you pay. Taking an optional defensive driving course offered by your state for a small fee (some states, like Idaho, even offer these online) can net you a reduction of a few points, directly saving money on your insurance. A $30 course and a few hours can see as much as a 10% reduction in your premiums over the next few years.

Increase your deductibles. If you’re in good financial shape with a well-built emergency fund, look at raising your deductibles. This will directly lower your premiums, but still cover you in the case of a major accident. I found that if I raised my deductible from $500 to $1,000, that $500 difference is paid for in just over a year by letting me put that $500 in my emergency fund instead. After that, it’s just cheaper monthly bills.

Work on improving your credit. If you have some dings on your credit report, this can negatively influence your premiums. Insurance companies use as much information as they can get to estimate how risky of a driver you are, and if you have lots of credit issues, you’re much more prone to risky behavior. Keep all of your bills paid on time and work on lowering your credit card debt.

If your car is old, remove collision coverage and just go with liability coverage. My rule of thumb is that if a car’s cash and/or trade-in value approaches $1,000 (or less), you should just go with liability coverage. A car in that state is nearing the point of replacement anyway, so if you get in an accident, it’s probably going to simply need replacement and the cash value of the car is negligible – you’ll probably not get much less selling it for scrap. So don’t throw out good money in this situation – move to just liability coverage.

Buy a car that’s less prone to theft or accident. Insurers also take the type of car you’re buying into account, even down to the color. A flame-red Mustang is going to have far higher premiums than a silver-colored Honda Odyssey, for example. Why? Aggressive colors are often linked to aggressive drivers, and vans are often a sign of a stable and secure situation (what kind of person drives a minivan versus what kind of person drives a Mustang). Consider the statement that your car makes about you – and consider that same statement is being made to the insurance company.

Pay your annual premium all at once. If you pay semiannually, quarterly, or monthly, you’re likely paying a fee each month for this “convenience.” Instead, just save up the premium in a savings account and pay it once a year. Let’s use an example of a person whose annual premium is $900 a year, and each payment plan charges a fee of $8.95 a payment. If one pays monthly, that means a monthly bill of $83.95 every month. Instead, a person could put only $73.50 a month into a 5% APY savings account and pay the whole thing once a year without payment fees. That’s a savings of more than $10 a month.

Remember, if you do all of these things and your premiums don’t budge, it may be time to shop around for new insurance. Don’t hesitate to get quotes from other insurers if you suspect your current insurance is way overpriced.

First of all, unless you are a financial train wreck, you should never buy anything but term life insurance. Insurance as an investment is a great investment for the insurance company but a terrible one for you. If you want insurance, get insurance; if you want to invest, buy an investment. Don’t mix the two – it’s akin to buying a box of bad cereal to get the cheap plastic toy inside. Why not just save a buck and get a better box of cereal, then spend the buck to get a better toy?

Second, if you have no dependents and no spouse, don’t buy life insurance. Ever. Don’t let a salesman talk you into it.

Next, the more net worth you have, the less insurance you need. This means that before you start thinking about life insurance, know what your net worth is. This is an important number for figuring out how much net worth you’re going to need.

After that, think about your family’s needs carefully. Look at how many people are in your household (spouse plus dependent children) and multiply that by five, or maybe a bit more if your children are very young – this number is the number of years worth of your salary that would be needed to support each person in your house should you pass away. He suggested multiplying it by six in my situation, but I wanted plenty of security for my kids, so I used eight. I then multiply it by the number of people in the household, four. That gives me thirty two. This number is the number of “salary years” that I should leave behind.

Then, multiply your calculated “salary years” by your current salary (or reasonably expected salary in a few years) to see how much net worth you should leave behind. Let’s say I make $50,000 a year; times thirty two, that means I need to leave behind $1.6 million. Ouch. That’s a lot.

However, one should subtract from that their net worth. I would make a little dent in that number, but not a big one, leaving me with still quite a sizeable policy. If I went with a lower multiplier (say, my friend’s recommended 6), I could reduce the policy quite a bit.

Once you have your magic number, get a relatively short term policy for that amount, usually long enough for your children to have left the nest. For my example here, that means I would get a twenty year term life insurance policy for $1 to $1.5 million. The premiums on that would be $600 to $800 a year, or $50 to $65 a month. He suggests doing this so that one can potentially get a better rate with a twenty year policy instead of a ten year one, but that policies that extend past the children leaving the nest are a fool’s game.

When your policy expires, don’t renew it immediately – recalculate. Let’s say that in twenty years, my children have left the nest, leaving my wife and I home alone together. We’ve built up some serious savings, our home is paid for, and thus our net worth is in pretty good shape. I sit down and recalculate and discover that in fact my net worth now exceeds ten times my salary (five times the people in household, which would be two), so I just don’t bother with life insurance again, leaving me with $50 a month more to enjoy or invest.

We lived on a hill about a half-mile from the normal flow of the river, but many members of my extended family, including my grandmother, two sets of aunts and uncles, and several cousins lived on lower ground in a small town protected by a levee system – effectively a large mound of dirt to hold back the water.

In April 1993, it started raining, and on my parents’ property, we had measurable rainfall for 108 straight days, through to mid-July. My father, being an avid gardener, carefully measured the rainfall every day and recorded it in his gardening notebook, and we watched the river, from April to mid-June, stay quite high.

On about June 20, disaster began to strike. We had a five inch rainfall on the 20th, as did many locations north of us (as the river flows north to south), and it was followed by several long, drizzly, wet days outside. And the river began to rage and roar. It started rising about eight inches a day for a week, and by July 2, it had set an all-time high. On July 10, after three weeks of eighteen hour days of sandbagging and some memories that I almost can’t bear to repeat to you, the river finally crested at 28 feet. The previous all-time record was 21 feet. That very same day, the levee collapsed; the river’s level had been over the top of it for several days and only piles of sandbags had been keeping the water out of town.

My grandmother, my aunts and uncles, my cousins – they all lost their homes. My parents invited all of the refugees to live with us and our property looked like a campground for several weeks. We had so many people on our land that FEMA designated my parents’ property as a disaster relief center, meaning that one day we had a semi pull up to our house and start unloading stuff: hundreds of bars of soap and so on.

Let me tell you two brief stories so that you might be able to visualize some of it in your mind.

My hometown was surrounded on three sides by large mounds of dirt that under normal conditions (a river stage of about 8 to 10 feet) kept the town nice and dry. As the water rose, though, these dirt levees began to feel some serious stress. One major task in fighting a flood is to walk along these levees and look for leaks – they’re often referred to as “boils” because they look like muddy, boiling water as they bubble through. If you spot one, you were to immediately radio the trucks and people nearby and they would come with truckloads of sandbags that you would use to stop the leak.

On the day before the levee broke, I was walking along the top of the levee, which meant at that time that you were mostly walking along a pile of sandbags that were there making the levee taller, because the water was higher than the original levee. I came to one point where the levee was higher than in other places and it appeared to be just normal dirt, so I started walking along it. About five steps in, I took a step and hit nothing but mud. My leg sunk in up to my hip bone (with my other leg outstretched) and I could feel the force of the river swirling my leg around. I started yelling, but I managed to radio for help – I was having a lot of trouble pulling my leg out again because of a suction force. I was eventually pulled out by five people and by some miracle I didn’t injure my leg at all, but the scariest moment was when the first sandbag truck arrived and they started blocking the water off with me still in the hole.

Here’s another story. The day after the levee finally gave way, morning rose and we could look down the road from our house. Less than an eighth of a mile away, it was covered in water, and beyond that the entire town was underwater. My father and I went out on our fishing boat down the main street of my hometown. At one point, we actually went over the roofs of several houses and I could just make out their murky outline in the water below.

What personal finance lessons did I really learn from all of this?

Know your insurance Many people who lived in the town did not get a dime from their home insurance policy. Why? It didn’t cover floods. Read the policy, know what it covers, and if you’re facing any extra risk (like living in a flood plain), make sure that the risk is covered.

Know your community A situation like this showed the power of knowing everyone in your community. The network of people in the community gelled and managed to almost fight off this terrible flood – and that same network ensured that everyone got out of town safely. It was those connections that saved many of my grandmother’s belongings and alerted a lot of my family members when it was time to leave. It was those connections that got everyone organized and ready to go when the time came.

Emergency funds really come in handy My grandmother’s emergency fund was a giant jar full of quarters and dollar bills. When the flood happened, she took it to the bank, got some cash, and rolled through it without skipping a beat. Meanwhile, others were living in tents in our yard and very relieved that we were giving out free meals. Where would you want to be in the event of a disaster?

All I can say is that I hope it never happens again.

However, my readers (as they often do) took the post into a completely different direction that I didn’t even consider when writing the post, perhaps best summed up by Dave about twenty comments into the thread:

I think that we all understand that we should be checking our policies in the event we need to. However, I think the larger issue that should be covered here is the fact that he has full comprehensive on a vehicle that is worth far less than 3100 dollars. He’d be better off switching to liability and having a couple grand to go buy another junker when something like this happens. You never put a substantial amount of money into something that you can’t get that money back out of it later. Anyone agree?

Dave is absolutely correct: once the value of your car has depreciated enough so that the cost of significant repairs can potentially add up to the cost of the car, you should switch to just liability insurance on that car. This is a valuable tip that anyone should follow, particularly anyone who regularly buys late model used cars as their primary vehicle (as I do).

I am currently in a position where the value of my primary vehicle is significantly higher than the cost of a major repair job, but the vehicle is steadily depreciating, and I’ll probably make the move to liability insurance within a year or so and stay with that.

For those who would like to see the big picture, here’s what I do with my auto purchases to maximize every dollar.

I buy a late model used car that still has a significant value to it. For the first few years, I keep comprehensive insurance on it because the car still has value much higher than the cost of a major overhaul, but with each passing year, the car’s value gets lower and lower. At a certain point (just wait for it), I switch to liability insurance because the car’s value is low enough that comprehensive doesn’t have a big benefit anymore. Then, I can take the difference in insurance costs and bank it so that I can afford a better car the next time around – or invest it in something else.

So where’s that magic point where one should switch? It’s largely a personal judgement call – there is no magic formula for deciding when you should make the switch. My general rule of thumb is that I switch to liability when a $4,000 repair bill would make me simply call the car a loss and trade it in for what I could get out of it; this usually occurs around the $5,500 mark for me in terms of book value. My truck will pass that line in about eighteen months.

Different people will give you different advice on this point, but there are so many variables involved here that it largely comes down to the amount of risk you feel comfortable with in your gut.

My entire engine is going to have to be replaced and the cost of it is more than the remaining monthly payments on my car. Should I try to sell off the car now or should I pay for the repair?

I asked him how much the repair was and he reported that the lowest estimate he had received was $3,100, which is certainly a pretty penny.

The first question to ask here is how reliable the car has been otherwise. I found out that there had been two other minor repairs done to it as well, but these were more typical accidental situations, nothing that indicated a severe problem with the car.

However, when I asked about these in detail, I found out that he had paid cash in full for both of the older repairs as well, when something occurred to me: I was assuming that he had collision insurance only on his car, not comprehensive insurance.

For those unaware of how this works (in the United States at least), most insurance carriers carry both collision insurance (which covers accidents – damages due to collision) and comprehensive insurance (which covers almost everything else that could go wrong with your car, like environmental damage and so forth). For some insurers, comprehensive will include collision insurance; for others, you would have to get them both separately.

I was shocked when he went and got his policy, checked it over, and reported that he did in fact have comprehensive insurance. I told him that I thought that the engine repair would likely be covered by the insurance and that he should check his policy. He leafed through it and found a key sentence that confirmed it: the engine repair is completely covered by his insurance. His bill would only be $250, not the $3,100 he was expecting, a savings of $2,850.

His excitement, even through the IM window, was amazing.

The moral of this story is if you’re paying for insurance, know exactly what that insurance will cover. If you’re about to pay out of pocket for something you’re paying to insure, make absolutely sure that your policy doesn’t cover what you’re paying for.

I keep a small pile of twenties in my home as my ultimate emergency fund. I keep this money on hand for the sole purpose of being available if I have no access to funds in any other way – in the event of an absence of electricity or some other essentials, a cash economy will dominate and I do not wish to risk being in that situation with no leverage to make sure my family has food, water, and protection.

Even though it’s not earning anything, I view this money as an investment. It’s an investment against the unexpected – situations where everything else has failed and I have no other options to turn to. Knowing that it is there provides a certain level of security that money sitting in a bank account somewhere can’t quite provide.

Is this necessary? Let’s step back to Labor Day 2005, when Hurricane Katrina basically wiped a major city off of the map in the United States. Let’s step back to the summer of 2003, when much of the northeastern United States blacked out, many areas for weeks. What about the San Francisco earthquake of 1906 – I do live near the New Madrid fault line, after all. I’m only mentioning domestic disasters so far – what about the tsunami of 2004? The dozens of devastating earthquakes in recent years?

The fact is that such disasters happen, and quite often you have no way of knowing these things are coming. To not be prepared for them on some level is a poor choice, the type of choice that leaves people in situations of desperation, like those poor souls who inhabited the Superdome after Katrina.

I view the pile of bills under my mattress as an insurance policy against such a disaster, so that I can get my family the things that they need or at least get us to a place where we can get the things we need. Is this the right thing for you? That’s a question you’ll have to ask yourself – it comes down to whether or not you feel that such preparation for a relatively slim possibility is worthwhile. Is it? Give it some thought today as you go through your activities – and put a few twenties under the mattress tonight if if feels right to you.

Instead, I am covered by a thirty year term policy which cashes out to a very nice amount in the event of my death. The premiums each month are really small – I’m young, healthy, a non-smoker, and I only drink a couple glasses of wine a week (which is actually a health benefit, apparently) – and thus I just pay it for the peace of mind.

At first, my parents thought this was reckless. They both have whole life policies for themselves and they wondered what I would do for life insurance when I got older. “Your term insurance will go away when you’re 58 and you’ll have nothing to show for it!” they shouted from the rooftops.

You know what? That’s just fine by me. And here’s why.

First, the monthly premiums on a term policy are substantially cheaper than a whole life policy. This is especially true at my age, where insurance companies are glad to offer me a term policy for a tiny premium: there is very little risk for them having to pay out by the time I’m 58. Statistically, I’m pretty close to money in the bank for them.

Second, the difference in premium prices can be invested. I pay about $60 less per month with my term policy than I would with an equivalent whole life policy ($500,000). If I invest that at an annual 10% return, I’ll have $137,003.40 when my term insurance expires. If I stop investing then and just let it build, on my 72nd birthday, the investment will exceed the value of the insurance. After that, it just goes on to the moon.

Third, my “excess premium” investment and my other investments will be enough to be my “insurance” in my dotage. I’m currently living a fairly frugal lifestyle that is enabling me to save and invest significant amounts of money each year. When I reach the age when my term life policy expires, I won’t need it. I’ll have more than enough money in my estate to pay for any expenses my family would incur in the event of my death, plus I’ll be able to leave a chunk of change to all of my children and grandchildren.

For me, whole life insurance is a poor deal; although it does build up some real value, the premiums are significantly higher and I have limited control over the investments – and the investment return. My feeling is that anyone under the age of forrty who is committed to a good financial life plan shouldn’t invest in whole life insurance, but that’s just one man’s opinion – don’t use it as the basis for your decision. Do your own homework.