Everybody Loves Your Money

It’s a question I have asked myself a hundred times.  Is earthquake insurance worth the money?  I used to ask that question when I didn’t have earthquake insurance.  I finally decided to buy it because I live in a high risk area for earthquakes.  I’ve had the insurance for just over a year now and I still find myself asking whether it is worth it or not.

Here are the details of our insurance:

2700 square foot house

$460,000 valuation

Two story, wood built home on a flat lot

Insurance cost: $365 per year

Insurance deductible: $50,000  (yes you read that right)

As you can see, I’m not buying insurance to cover every little possible crack in the drywall that might happen.  I’m really just insuring our home for the big one.  If we were to experience a smaller quake, we wouldn’t even bother calling the insurance company.  With such a high deductible, they wouldn’t even want to hear from us.  I looked at policies with a lower deductible, but the lowest I could find was around $20,000 or so.  I figured that I might as well drastically lower the premiums by choosing the higher deductible.

So, that begs the question.  Is it really worth buying earthquake insurance?  I’m basically paying about $30 per month for the peace of mind that if we were to have a massive quake, I’d still end up with a house after it was all done.  After watching the catastrophe in Louisiana and the gulf coast and hearing first hand from my inlaws what it’s like to experience such a huge loss, I just don’t want to lose so much.  We have a lot of equity in the house and I’d hate to lose it all due to a natural disaster like an earthquake.

What is your opinion?  Do you have insurance that covers natural disasters?  (In addition to your standard homeowners policy)

I’ve often wondered why people have such radically different relationships with money.  Certainly the way their parents handled money impacts how they handle it but I believe there are other things that also affect how each of us deals with money.  I think that there is a strong correlation between people that worked as young children and those of us who choose to save as adults.

I started earning money when I was pretty young.  I would earn small amounts of money helping neighbors with chores when I was between 7 and 10 years old.  I learned to love the satisfaction of helping someone and getting something in return.  By the time I was 10 years old I was dying to have my own paper route.  I didn’t fulfill that dream for another two years, but when I finally did start earning money from a paper route, I was thrilled.  Unfortunately, I didn’t save a cent of it.  Every month I would go around and collect the money from each customer and then, after I paid the newspaper company, would then proceed to blow every last cent of it.  At the time it didn’t appear that I learned anything but I did.  I learned that in order to have the things I wanted, I needed to work hard for them.  After about a year of having to wake up early 3 days a week to deliver newspapers, I decided that I wanted more so I started delivering an afternoon paper as well.  I had to deliver the afternoon paper every day.  I can still remember the weight of all those newspapers hanging on my shoulders as a 13 year old kid.  I would pack my cloth newspaper carrier as full as I could and then carefully get on my bike and start pedaling.  More than a few times I had to walk my bike around until the load was a little lighter.  On those hot summer days, I can remember wishing that I had chosen another type of work, but no matter how badly I wanted to quit, I kept going.  I had a responsibility to deliver those newspapers and I took it seriously.

In the summer months, on top of delivering newspapers in the morning and afternoon, I would also mow lawns in the neighborhood.  I had a route that wound through my neighborhood and during the peak of the season, I would mow about 6 lawns a week.  I must have pushed that lawnmower at least 50 miles each summer going from lawn to lawn.  I can still feel the heat of the pavement as I pushed that lawnmower up and down the hills around my neighborhood.  Unfortunately, I was also cursed with terrible grass allergies.  I had to take a pocketful of Kleenex in order to make it through each lawn.  By the time I was done with the lawn, my eyes were red, my skin itched and my nose was running like a river after a tropical storm.  It was pure misery, but I never dreamt of quitting.  If I wasn’t mowing lawns or delivering newspapers, I wouldn’t have had any money to spend and would have just sat around the house.

All these years later, I don’t yearn to mow other people’s lawns or deliver their newspaper.  I yearn for the day that I can sit back and make money without lifting a finger.  It only took me 30+ years to realize that what I really want to do is work smarter, not harder.

Just in case you were ever considering investing your hard earned money with the promoter of boy bands, this story is for you.  Lou Pearlman, who is best known for his creation of boy bands, ‘N Sync and the Backstreet Boys was also apparently quite the smooth talker.  Over the years he has been taking money from unsuspecting investors in a massive pyramid scheme.  Pearlman disappeared a couple weeks ago and there is no money to be found.  Well, that’s not entirely true.  Officials just froze $250,000 that Pearlman was trying to transfer to Germany.

Here’s the thing.  I don’t think I’d ever consider investing money with someone like Pearlman.  If there is one thing I’ve learned in life so far it’s that just because someone might be good at one thing, it doesn’t mean they are good at everything.  Pearlman got lucky with the boy bands.  He figured out a formula that was hot at the time and made some money at it.  So, there are lots of people that lost hundreds of thousands of dollars to this crook.  A lot of them crowded a Florida courtroom on Monday to hear that the chance of recovering their money is very small.  Pearlman has been living a pretty comfortable life at the expense of others and officials think that either he has spent most of it, or has it hidden in offshore accounts.  Luckily one of the victims did receive an autographed edition of Pearlman’s book called “Bands, Brands and Billions – My Top 10 Rules For Making Any Business Go Platinum.”  I’m sure that’s got to be worth at least .99 if they sell it on Ebay.

I need to keep an eye on that Charles Schwab character.  If he ever starts really living high on the hog, I’m going to take my money back.

I’ve always like Ben Stein.  The guy is just plain smart.  I’ll always think of him as the teacher in Ferris Bueller’s Day Off, but over the years, I’ve also come to think of him as an intelligent investor.  In Ben’s latest post he talks about two different friends of his.  One spends his days working and buying cars and facing the impact of poor financial decisions and the other has done a good job of having their money work for them.  The post is strikingly similiar to countless personal finance blog posts, including a couple from ELYM.  Nevertheless, it’s worth reading to reinforce what many of us already know.

So, check out the article. It really is good reading, although there are a few typos in it.

As I sat reading the Sunday paper yesterday, I found an article that talks about Motorola cutting out their pension.  Approximately two years ago, Motorola stopped offering pensions to new employees.  Now, they are changing the way the benefits are calculated for current employees which will result in smaller pensions for 24,000 of their workers.  Just one more example of why we each have to look out for ourselves.

The article also points out other companies that have started reducing or have cut out their pension benefits altogether.  They mention Lockheed Martin, Hewlett Packard, IBM, Coca-Cola, and Circuit City as well.

Unfortunately, this is just the new reality.  As newer companies come online and take a dominant position in the market, they force the older, more tradtional companies to change or die.  If companies like Dell don’t offer pensions, how can Hewlett Packard compete on price, if they have much higher overhead?  It’s not just US based companies that are part of the equation either.  Our US companies are now competing with other companies all over the globe.  In many of these countries, companies aren’t saddled with pension obligations or employee health insurance.  While I think it sucks, I understand the harsh situation.  The days of monthly payments from your company after you retire are winding down. 

I used to joke that I longed for the day that my only responsibility was to walk down the driveway to open up the mailbox and take out my check each month.  I think I’m going to have to modify that dream a bit.  Instead, I think I’ll long for the day that I can log on to my 401K account, or Roth IRA, or brokerage account and transfer some money in to my credit union’s checking account.  I guess the one upside to this is that I don’t have to walk all the way down the driveway.

MyMoneyBlog has done some great posting about the average spending habits of people.  I always find it fascinating to see how people split up their budgets.  I guess it’s a bit of financial voyeurism, but it is very informative.  Jonathon also had a post a few days ago that discussed this further so scroll down on his site once you get through this article.

NCN has been doing some retirement calculating, which we all should be doing.  Check out his reality.  I have also been doing some retirement calculating and don’t count social security either.  I figure if there is anything left for me by the time I retire, that will just be icing on the cake.  Frankly, I’m not holding my breath.

Suns Financial Diary discusses various savings scenarios, based on age and income.  As you’ll see in his post, the older you are, the more you have to save.  Compound interest isn’t kind to those who have waited too long.

You know how I love cars.  David @ MyTwoDollars tells us which cars are cheapest to own after five years.  I was also very suprised that the Honda Civic wasn’t on the list.  I would have expected that would have been near the top since it has great fuel economy and Hondas are known for holding their value and minimizing depreciation.  I was glad to see the Honda Accord on the list, since we own one.

Tricia @ BloggingAwayDebt discusses alternate sources of income.  My family does a few things to pick up extra money.  This blog gives us a bit and my wife also teaches piano lessons as well.  It’s not making us rich, but helps pay for those extra things that pop up during the month so that we can maintain our investment goals and finish building our vacation house.

I was reading an article recently that mentioned investors are looking for Best Buy to buy back some of their outstanding stock rather than buy other companies.  I would say that their track record of buying companies isn’t exaclty great considering they dumped a ton of money in to their Musicland purchase a few years ago and then later gave the company away as long as the buyer assumed the liabilities.

I didn’t realize that Best Buy had purchased Speakeasy.  It will be interesting to see how that plays out for them.  Speakeasy has been a niche ISP and it seems like they are somewhat of a contrast to the culture at Best Buy.

As I read this article, I did notice that the investors didn’t ask Best Buy to dump all of their higher paid employees and then hire a bunch of low paid, low knowledge workers in their place.  Maybe Circuit City should watch their competition’s investors and reconsider their strategy of hiring low paid workers in place of someone that might have had a chance at helping you.  I know I haven’t been in there since I read the news a few weeks ago about Circuit City’s strategy.  Heck, I don’t even read their advertisement in the Sunday paper anymore.

I just read an interesting article here that discusses the current economy and the struggles of being young in it.  My overall observation is that I seem to be reading more and more articles like this.  The author talks about the aging baby boomer population and hints at some of the issues that are sure to come as more and more of this “bubble” in our population hits the beaches.  The younger generations will certainly see a significant strain on the economy as more and more of these baby boomers attempt to live without working.  He also talks a bit about the cost of college and the overwhelming debt that some graduates end up with after they graduate, (or don’t graduate, but still have the debt).  Certainly some people will attack this guy and say he’s just a doomsday author who has a negative outlook on the economy and the world in general.  I tend to take a less controversial view.  I think this is just one more person that is recognizing that the economic fundamentals in our economy aren’t all that great.

-Huge deficits

-Huge national debt

-Average consumer debt over $9k

-Housing prices down for the first time in 2 decades

-Morgage defaults drastically inreasing due to creative mortgage loans

-Largest US employers being service sector, lower paying jobs (Walmart)

-Aggressive global competition

-Declining pension opportunities

I’m sure others could list even more factors.  I have to wonder whether authors like this are simply “warning signs” that the overall party may be over.  Prior to the dot com crash, there were these same types of authors saying that the financials of these companies just didn’t make sense and there was no reasonable explanation for their inflated prices.  Others poo poo’d on them saying that they just didn’t understand the new economy.  In the end, the authors were right.  In more recent times, there were those that said the housing price increases couldn’t be sustainable and the mortgage loans that people were signing up for were outrageous.  Others would simply tell them that “they aren’t making any more land”, or “You just don’t understand real estate”.  Well, I think most would agree that, while those authors were in the minority, they were right.  We are now in the midst of a small real estate melt down.  It’s hard to say how ugly it might get.  I would venture to guess that if the economy starts heading south and we go in to a recession, the housing market will get even uglier.  Overall, I have a very concerned view of the economy right now.  Sure, I’m just an amateur, but I think as I live through a few more of these cycles of boom and bust, I’ll probably be accused of being one of those negative authors that just doesn’t get it.  Pardon me while I go move a bit of my investments back over to cash.  I think I’d like to play a little defensive investing for awhile and be ready for the next buying opportunity.

I was driving by the gas station today and looked at the cheapest gas on the sign.  It was $3.29 a gallon.  What I find interesting is the last time gas was $3.29 a gallon, the whole nation was screaming bloody murder.  Now, rather than scream, everyone seems to be just sucking it up and paying the price.  It’s interesting how we slowly aclimate to the higher price.  I’m sure there is a term for this type of behavioral response but I have no idea what it is.

I’ll be interested to see what kind of profits the oil companies roll around in this quarter.  It seems somewhat amazing to me that we can take a limited resource like oil and have no regulation at all on it.  I’m not going to say whether I think that is right or wrong, but I wonder what would happen if energy was regulated?  Would we see the massive spikes in price?  Would we pay more for energy because of the lack of competition?  Frankly, competition doesn’t seem to be helping all that much at this point, although I’m just an amateur shmuck sitting in line at the gas station, so what do I know.  Would regulation really do anything, considering we are now a global economy?  What good would regulation do in one country?  Probably not a lot.  Maybe the better approach would be to enact legislation to force better energy efficiency.  What do you think?

What I do know is that all of this expensive energy, (natural gas for my house, fuel for my car, electricity for my house) is causing me to really think about my consumption.  I find myself much more conscious of my energy usage and plan to be much more responsible with the cars that I buy in the future.  I think that Honda and Toyota have seen the writing on the wall for a long time.  They have aggressively pursued high fuel efficiency and they are reaping the rewards of that now.  With all the energy consumption in nations like China and India, it only stands to reason that we would start seeing much more demand.  I wish that we as a nation had done a better job of predicting the increased global consumption sooner, but I certainly can’t blame anyone because I sure didn’t.  (Not that a lowly Information Technology worker should be trying to predict global energy consumption anyway).

Anyway, just a rambling post about energy in general.  I really wonder what the right answer is when it comes to our nation’s use of energy.  We certainly can’t enforce global rules for energy consumption and frankly we wouldn’t have much credibility if we tried considering how we all consume more than pretty much every other country out there.

Here I am, sitting pretty with a 5.75% fixed rate 30 year mortgage.  Sure, I could have gotten a little better rate when the mortgage rates were at their bottom, but I didn’t.  Overall, I’m not complaining about the rate I’ve got.  At least it’s a reasonable rate and it’s fixed.  I don’t have to worry about rate adjustments every 6 months, or payments that balloon out of control.  Needless to say, the whole thing just gives me a certain peace of mind.

I wish that I could send out a letter to all the sleazy mortgage loan companies out there to let them know that I’m very happy with my current loan and would not even consider taking a new loan with them.  At this point, they aren’t going to beat the rate that I have and even if they could, I really don’t want to stretch my loan out another 30 years.  The only time I’d even consider refinancing is if rates got low enough to get me a 15 year fixed loan for approximately the same payment that I have now.  That’s not going to happen.

At first I used to chuckle at the ridiculous mortgage loan letters that I would receive: “0% interest for 3 months, and then your interest rate will go up to 9.9% and adjust from there every 6 months”.  Yeah, I made that up, but I’m sure someone got a letter with those terms in it.  Now, when I receive these offers, it kind of makes me a little mad.  Millions of families are in crisis because of the ridiculous loans they either ignorantly signed up for, or were led to believe had better terms than they really did.  Tons of people are losing their homes in this mortgage meltdown but the letters haven’t let up yet.

I just received a letter in the mail.  The good news is that this sleazy mortgage company has done some analysis on my loan and they have discovered I qualify for a 1% loan.  It is great news indeed.  I can free up money for new cars, vacations, remodel my house or even use the extra money to pay off a bankruptcy.  It seriously says that if I take their loan, I would have more money to pay off a bankruptcy.  Oh, and by taking out a new loan I wouldn’t even have a payment for 30-60 days.  That’s more money, that I could use however I please.

Now the fine print: “The initial rate and APR are variable rates which may increase after closing, and are available on a 40 year first trust deed/mortgage loan to purchase or refinance of owner occupied, single family residence, condominiums, townhouses, and PUD’s only.  Rates and APR are set for five years only.  After the first five years, rate and fully amortized payment are based on a 12 month MTA index plus a margin 2.75.  Lifetime interest rate cap is 9.95%.  The initial payment is based on a fixed payment option for the first 60 months.  Payment referenced is a minimum payment option which may result in deferred interest.  80% loan to appraised value may be required.  Prepayment penalty will be required.”

HOLY CRAP.  No wonder people are getting in trouble in this country.  They get teased in with a 1% offer and don’t read or at least understand the fine print.  The person that signs up for this loan is taking out a 40 YEAR loan, may find their rate increases after closing, will most likely face up to a 9.95% interest rate over the life of the loan, and even the 1% isn’t true because the fine print says that they may just be deferring the interest, not avoiding it.  Notice that they want an 80% LTV ratio, which means that you can’t borrow more than 80% of the value of the house.  Yeah, smart thinking Mr. Dirty Mortgage Man.  You better cover your butt because even I’d probably end up defaulting on this loan and I make a good living and have good credit.  And did you see the part about prepayment penalties?  Sleazy, really sleazy.