Life Insurance Rules of Thumb Are Stupid - Like This Sign       Like so many other rules of thumb, the 10 times your income for life insurance rule is a stupid way to make a major decision for your finances. (Sames goes for the 15 times your income, or 20 times your income, or any # times your income…) I keep writing about stupid rules of thumb because they can be so dangerous to your financial future. These simple rules of thumb are nice and easy for a quick guess or check on where you’re at now, but you should never use them as your primary decision making tool!

       The problem with using one of these simple rules for calculating your life insurance needs is that they ignore your personal situation. What if you don’t need all of your income to be replaced? What if you only need the income to last a few more years? These simple rules ignore these factors if they don’t give you some way to adjust.

How to Figure Out How Much Life Insurance You Need

       Your first step should be to decide if you actually even need life insurance at all. There are cases where you probably don’t need life insurance. It would be foolish to buy it if you don’t need it.

       If you decide you do need life insurance, the next thing you want to do is think about what you need it for. Are you in one of the rare cases where permanent life insurance makes sense or should you stick with term (which is the best option for just about everybody)? Do you need it to replace your entire income (so your survivors can still fund other goals like retirement or education)? Do you just need it to cover the bare essentials for your survivors? How much would that cost? Will your survivors be able to provide for some or all of their own needs?

       Then you need to figure out how long that income needs to last. This is pretty simple – how much longer would you probably be working assuming you don’t die prematurely? That’s generally how long you’ll need the income to last. You can choose to cut it short or maybe extend it a little longer than you estimate, but you need to know why you’re making that choice.

       After you’ve got those two numbers worked out then you can start using a number times your income need. This chart below is designed to help you figure out how much you need based on the number of years until you retire (or number of years you need your replacement income to last):
 

Life Insurance Factors

 
       So if you need to replace an income of $40,000/year and you have 40 years until retirement, you’ll multiply $40,000 by 25 to get $1,000,000 of insurance coverage needed.

       Next, add in any immediate costs like funeral costs or debts you want to pay off immediately at death. Then, subtract any savings that could be used to fulfill any of the goals you included when you were figuring out how much income you need. I generally exclude retirement savings because that money is set aside for non-working years and the amount you need to save for retirement going forward should account for your current savings. That will leave you with the total amount of insurance coverage you need to buy. If you’re married, just repeat this process for your spouse (from their perspective).

       All that’s left is to buy life insurance for the amount and term you need. If your situation is relatively straightforward, you can probably do all this yourself. But if it’s complicated, I’d highly recommend at least sitting down with a CERTIFIED FINANCIAL PLANNERTM to discuss your situation. If you can find someone who works on an hourly basis or by the project, it won’t cost you too much to get a second opinion.

Think for Yourself!

       Even though this method involved multiplying your replacement income by a certain number, you didn’t get to that step until you thought through several aspects of your situation. That’s the point of all the articles I’ve been writing about stupid rules of thumb. You need to think for yourself to figure out what really makes the most sense for your unique situation. Once you take the time to do that, you can be sure your decision is going to be a lot more accurate than following a stupid, over-simplified rule of thumb.

(photo credit: Chris Ingrassia on Flickr)

This article was included in the Carnival of Personal Finance.

       Last month, I posted an update about how my wife and I are raising a cow for beef. This is a summary of our activity and costs for month 15. As always, let’s first check Bambi’s growth. Here he is at fourteen months old:

Bambi - 14 Months Old

       And here he is at fifteen months old (technically, fifteen months, one week, and three days old):

Bambi - 15 Months Old

       This picture isn’t the best because I had to take it on my phone (forgot my camera…). And yes, he’s on the cattle trailer (more on that later). True to form, Bambi wouldn’t cooperate for a good pose either. However, I think it’s clear he’s gained a good bit of weight since the last picture. He’s filled out a bit more, especially around his haunches. I’m not sure why his coloring has changed so much. Part of it is lighting, of course, but his color has changed over time anyway so I’m not worried about it. I’m sure it won’t affect the taste.

Costs & Time

       As of yesterday, Bambi is no more. He went to the butcher on Wednesday night (when I took the picture) and they slaughtered him on Thursday. However, I still don’t have a final tally on the costs because I’ll need to settle things up with my friends who’ve been boarding him and pay the butchering fees. Here are my totals so far (same as last month):

  • Cost of Bambi – Free!
  • Castration & Dehorning – $16.00
  • Milk Replacer – $45.54
  • Miscellaneous – $46.87
  • Feed – $362.77
  • Hay – $88.00
  • Straw – $20.00
  • Medicine – $5.00
  • Boarding – $100.00
  • Total Spent – $684.18
  • Time – 102 hours

       Bambi will probably hang to age for about a week, so it’ll probably be late next week or early the following week before we get our beef back. Figuring out which cuts to order took a while because there were some that I was not familiar with. It’s also difficult to think about all the beef you’re going to want in the next year and in what proportions. For better or worse, this is what we ordered (though we’ll have a chance to review it with the butcher the day before they start cutting):
 

 
       All the meat will be vacuum sealed. Our roasts will come in 2-3 pound packages. Our steaks will come two per package and will be cut 1 1/2″ thick. The liver, heart, and tongue are all for other people. (I hear the tongue is really good, but I’m going to pass for now…)

       After searching for a good used freezer with no luck, we bought our chest freezer on Black Friday from a local business. I figured they’d have a sale and we got $50 off – a decent discount. But I was surprised when we got a free turkey as well. :) I had no idea they were doing that so it was a nice bonus. Our freezer should get here on the 6th – just in time!

       All that’s left now is to add up the last few costs (final boarding costs and the butchering fees) and compare it to retail and/or bulk prices. Any good ideas on the best way to make a useful comparison? Let me know in the comments. Also, be sure to stay tuned for a special tribute to Bambi in the final post of this series!

       If you haven’t already, make sure you sign up for free updates to Provident Planning so you don’t miss out on my last post where I’ll figure up all the costs, compare it to buying the beef elsewhere, and see how this whole thing works out.

This post was included in the Carnival of Personal Finance.

       The final danger of laziness that we’ll look at is the unnecessary difficulty it creates in our lives. Where the distractions of laziness allow small problems to grow into big ones, careful and constant diligence prevents many problems from ever occurring.

A Little Bit of Laziness Can Go a Long Way…

       The verse we’re going to look at in Ecclesiastes reminds me of an oft-quoted saying of Benjamin Franklin: “…for want of a nail the shoe was lost; for want of a shoe the horse was lost, and for want of a horse the rider was lost, being overtaken and slain by the enemy, all for want of care about a horse-shoe nail.” A little bit of neglect or laziness can cause great problems and difficulty, especially when concerning important matters.

       In our finances or our work, misplaced focus or intentional laziness can cause problems that would have been easily avoided with a little hard work and diligence. A little bit of time spent on maintenance and gradual improvement can have a profound effect when continued over a long period of time. In the same way, a little bit of laziness can have disastrous results when sustained over time.

       By slothfulness the roof sinks in; and through idleness of the hands the house leaks.

Ecclesiastes 10:18 (WEB)

       Maintaining a house takes a lot of work, but it’s often many small tasks that need to be done rather than many large ones. With diligent care, the house can be kept in good condition. Without it, small problems become major ones. Projects that could have been completed inexpensively can become a major drain on your savings.

       This analogy easily carries over into many other areas of our life. Small projects and tasks at work can often be dealt with quickly and prevent future (and larger) problems. But the inconvenience of these tasks often causes us to slack off and procrastinate – creating much more work for ourselves in the future than if we had just dealt with it early on. God wants us to embrace hard work and diligence to save us from this extra work. He knows that there’s no need for us to deal with many of the problems we encounter if we’ll follow His call to work hard.

       The wisdom of hard work and diligence and the difficulty it can save us from is also reflected in this verse from Proverbs:

       The way of the sluggard is like a thorn patch, but the path of the upright is a highway.

Proverbs 15:19 (WEB)

       I really enjoy hiking in the woods. I find my hikes especially easy and enjoyable when I have a clear trail to walk along. I can see where I’m going and find the obstacles easily. And I get to my destination quickly. But when the trail is overgrown and difficult to navigate, I find it takes much longer to get where I’m going and I can’t see the dangers ahead very easily at all. While it can be exciting to overcome such a challenge at times, I don’t have the same peaceful and relaxing experience as I do when the trail is clean and clear.

       Clearing a trail that’s very overgrown is difficult and takes a lot of time. But clearing a trail that’s been carefully maintained through diligent work is easy and quick. Laziness is what allows the trails in our lives to become overgrown and difficult to walk. God wants us to use hard work to keep the trails clear so we can focus on Him and doing His will instead of dealing with hassles and problems all the time.

       It’s clear that God is looking out for our interests when He calls us to work hard. If we apply this idea of diligence to everything we do in life, we’ll find we can overcome huge hurdles easily and we’ll encounter fewer unexpected problems along the way. However, we must also remember that God does want us to rest when needed. In all our hard work, we must not forget to rest and refresh ourselves so we are ready for the work that lies ahead and are able to do it with all our might. We’ll look at our need for rest in the next two parts.

       This was a series I ran last year before Christmas. I’m running it again because I think the lessons are a valuable reminder each year. Let me know what you think!

       On Black Friday, I highlighted this video from Advent Conspiracy:

       Over the next four Tuesdays (including today), I’m going to discuss the concepts behind the idea that Christmas can still change the world if we choose to give presence. The four concepts are:

  1. Worship Fully
  2.        

  3. Spend Less
  4.        

  5. Give More
  6.        

  7. Love All

Worship Fully

       It starts with Jesus. It ends with Jesus.

       A meaningful Christmas is not about gifts, trees, Santa Claus, lights, or fruitcakes (thankfully).

       No, a meaningful Christmas is about celebrating the birth of our Savior, Jesus Christ. It’s about rejoicing in the fact that God loves us so much and so deeply desires to have a relationship with us that He sent His only Son to die for our sins so we can be reconciled to Him and have eternal life.

       If we want a meaningful Christmas – if we want to see Christmas still changing the world – we must begin by worshiping fully. We must start by focusing on Who, what, and why we’re celebrating. We have to choose to make the Christmas season all about Christ and not consumerism.

       When we begin to worship Jesus fully we’ll realize how wonderful and meaningful Christmas can really be. We’ll lay down our burdens and reject the worldly idea of buy, buy, buy – and instead we will rejoice in God and His Son. We’ll celebrate His Love and focus on sharing His Love with others.

       Worshiping Fully is essential if we’re going to understand and use the remaining three concepts of Spending Less, Giving More, and Loving All. Until you stop letting the world and Satan dictate what you should be doing during the Christmas season, you will never have a meaningful Christmas.

       We must choose to find contentment in worshiping Christ instead of things. You must make this choice if you want to honor God during the Christmas season!

       So take some time to remember what Christmas is all about. Stop and worship the Lord. Give thanks to Him for His most precious Gift – the unspeakable riches we have in Christ. Worship Him Fully and make this the most memorable and meaningful Christmas you’ve ever had!

Do You Have Enough or Too Much in Your Piggy Bank Emergency Fund?       I can hear the claims of “Heresy!” ringing out through the personal finance world right now. How can I say the 3 to 6 month emergency fund rule is stupid?! Before you give yourself a heart attack, you need to realize that I’m not saying an emergency fund is stupid. Not by any means! In fact, I’ve written several times already about why you need an emergency fund, where to keep your emergency fund, when you should use your emergency fund, and how to build up your emergency fund. Clearly, I have nothing against emergency funds.

       No, my problem is with the silly rules of thumb that get thrown around with the idea of the emergency fund. Some say you need 3 months of your expenses, some say 6, and some say 9. I’ve even heard 2 years! The problem is that all these simple rules of thumb make the same mistake that other rules of thumb make – they ignore your circumstances.

Base Your Emergency Fund on Your Circumstances

       An emergency fund based on 3 months of your living expenses may work fine if you’re married and both of you have stable jobs with comparable incomes and you have your finances under control. But change just one of those variables (marital status, job stability, income disparity, or financial situation) and you can forget about a 3 month emergency fund doing the job.

       The size of your emergency fund needs to be tailored to your circumstances because the riskiness of your situation is determined by what’s happening in your life – not what some rule of thumb tells you. Now, I’ll grant that a 6 to 12 month emergency fund is going to be in the right zone for most people, but I wouldn’t leave this to a guess. You need to take a few minutes to think about your situation and adjust accordingly.

       For example, if you’re single then you probably only have one source of income. That puts you at a higher risk in case of a job loss than someone who is in a two-income household. The same goes for your job stability. If there’s little risk you’ll lose your job (maybe a government position?), then you’re probably a bit safer than someone in a cyclical industry (car sales, perhaps).

       If you’re socking away 20% of your income, a small emergency might not bother you too much. You can easily divert your money away from saving for a bit and go back after the emergency has been covered. But if you’re struggling to make it from one paycheck to the next, even a small $100 car repair can throw your whole world into a giant mess.

       It’s these kinds of factors that should determine how much you need in an emergency fund. I’ve talked about how much you need in an emergency fund, so I’m not going to go over it again. But keep in mind that even my article is just a general guideline. You’ll still need to think critically about your specific needs and situation.

Beware Rules of Thumb

       I’ve written several of these types of articles over the last few months. I talked about the stupidity of the save 10% for retirement rule, the 2.5 or 3 times your income for a mortgage rule, and the 80% or 90% of your income for retirement rule.

       All of these rules are guilty of oversimplification, a complete ignorance of your unique circumstances, or both. Yet some people rely on these rules of thumb for their most important financial decisions. I’m not saying you need a financial planner. But please do yourself a huge favor and take some time to think about your situation and what makes sense for you. Don’t rely on stupid rules of thumb to determine your financial future!

Any Other Rules of Thumb?

       What financial rules of thumb have you heard of that you’d like to learn more about? Are there any you question but aren’t sure why they might be wrong? Let me know in the comments below and I’ll be happy to write an article specifically tailored to answer your questions!

(photo credit: Alan Cleaver on Flickr)

This article was picked as the Editor’s Top Choice in the Best of Money Carnival!

This article was also included in the Carnival of Financial Planning.

Make Christmas Meaningful

Corey —  November 26, 2010 — 2 Comments

       What if Christmas meant more than shopping in packed malls?

       What if you spent more time with your family than you spent trying to pick out gifts?

       What if you could wake up on December 26th with no debts from the day before?

       What if you could throw out all the stress, traffic, and shopping and just focus on worshiping Jesus, giving to the needy, and loving all people?

       What if we gave up Consumermas and went back to Christmas?

       The folks at Advent Conspiracy have a great little video (2 minutes and 39 seconds) about a meaningful Christmas.

       And here’s the promo video from 2009:



       So why not make Christmas meaningful again? Why not do it this year? If you want to change how you celebrate Christmas, here are some good resources:

       How will you make Christmas meaningful this year? Let me know in the comments!

       Another danger of laziness is dishonor or a bad reputation. If we are the body of Christ, our actions and reputation impact other people’s ideas about Christ. If people know us to be lazy, we weaken our witness as Christians and bring dishonor to God’s name.

The Destruction of Laziness

       Proverbs contains a powerful warning against the destructiveness of laziness. Laziness can affect us and our reputation so strongly that it makes us a brother to the “master of destruction”, or Satan.

       One who is slack in his work is brother to him who is a master of destruction.

Proverbs 18:9 (WEB)

       If laziness makes us a brother to Satan, we can easily see why God has called us to work hard. There is no glory for God in laziness. (Let’s make sure we agree on the definition of laziness. Laziness is refusing to do work when work needs to be done or should be done. It is not the same as recreation, which comes after the necessary work has been finished.)

       We don’t admire lazy people. We don’t look at a lazy person and say, “Now he’s a respectable fellow.” We might envy or covet their rest, but that is only an indication that our heart is not right or that Satan is tempting us. But we do not look up to lazy people as an example to be followed. This is why laziness is warned against so strongly in the Bible, and especially by Paul in the New Testament. Laziness can destroy our reputation and completely undermine any witness we have in Christ. And that’s the most terrible effect of all.

       Not only can laziness ruin our reputation, but it can also ruin our life. Laziness in our work can lose us our job. Laziness in managing our finances can bankrupt us. Laziness in our relationships can hurt others. Only a short-sighted fool would choose laziness over doing the work needed to keep things going smoothly.

       The fool folds his hands together and ruins himself.

Ecclesiastes 4:5 (WEB)

       It’s clear that laziness is extremely destructive in our lives. Whether we’re looking at the spiritual aspects of our lives or the temporal, the devastating effects of laziness are not worth the fleeting pleasure of rest. Even just a little bit of laziness can make things much more difficult than they need to be, and we’ll talk about that a bit more in the next part of this series.

       But it’s also important to remember that we do need rest. Proper rest taken at the right time is essential to our health and well-being. After we look at the difficulty laziness brings, we’ll look at our need for rest.