When It Rains, It Pours

Ray’s Take

I always have an umbrella in my car. Most of the time it just takes up space and I end up pushing it aimlessly around the car to make room for other things. And there are many months of the year when an umbrella seems utterly pointless. But in Memphis, when it rains, it pours, and when that day comes I’m happy to have it. 

The same holds true with an umbrella policy. Just like the name suggests, it’s important coverage to consider adding to your insurance arsenal. You may not ever need it, but when you do, you’ll be glad it’s there to protect you. 

Also known as “lawsuit insurance,” an umbrella policy is extra liability insurance over and above the liability coverage that’s part of your existing homeowners and automobile insurance. In addition, an umbrella policy can also cover the legal fees to defend you from claims of personal injury or property damage that could arise due to accidents.  It can even pay for the legal fees to defend you against false arrest and claims of libel, slander and defamation of character.

The truth is, accidents do happen. Do you have a pool, teen drivers, motorized vehicles, a boat, diving board or a trampoline? There are so many different scenarios of the unthinkable happening, and in every case, you need to be protected. 

Don’t assume the liability coverage in your home and auto policies are sufficient. Most home insurance covers liability claims only up to $300,000 for personal liability, and most automobile policies provide up to $250,000 per person for bodily injury. It’s usually recommended to get an umbrella policy if you have assets over $1 million, which is the minimum amount covered and costs between $150-$300 per year.  

Consult with your financial representative to see if an umbrella policy is right for you and your family so you aren’t caught out in the rain! 

Dana’s Take

Our friends’ college-age child, close in age to our own, was rear-ended by a drunk driver with two friends in the car. Tragically, one child was killed, even though no one did anything wrong. They were simply driving home. 

It is hard to imagine the emotional toll this event has taken on those three young adults and their families. Now, imagine if a lawsuit for millions of dollars was added on top of their loss. An umbrella policy could help cover some of the costs if this would have occurred. 

Ask your insurance agent or a Certified Financial Planner to review your insurance coverage and the policies of your adult children to make sure a large umbrella policy is there to protect your family. It’s one umbrella I hope you never have to use.

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How Much Are You Worth?

Ray’s Take: What do a class=learn" style="color: #7d0200; text-decoration: underline;" href="http://www.memphisdailynews.com/Search/Search.aspx?redir=1&fn=Mike&ln=Tyson" rel='

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Name SearchWatch Service'>Mike Tyson, Curt Schilling, Marvin Gaye, Francis Ford Coppola and Meat Loaf all have in common?


They were all worth millions at one point in time yet all found themselves bankrupt and broke. According to the New York Times, when Francis Ford Coppola filed bankruptcy his assets came out to be a whopping $52 million and his liabilities totaled $98 million. Wow. Talk about major overspending.


While most of us will never be as wealthy as these celebrities, calculating your net worth is an essential tool in measuring your overall financial progress from year to year.


To figure out your net worth, start by calculating your assets. For most people, this is your home, other real estate properties and vehicles. If you own a business, list the current market value. Next, you’ll need to gather statements for all your liquid assets. This includes checking and savings accounts, CDs, and other investment accounts like retirement and brokerage accounts. Last, list personal items of value such as jewelry, coin collections or any other items worth over $500.


Now calculate your liabilities. Add up your mortgage, car loans, student loans, balances on credit cards and other debt that you owe. Subtract your total assets from your total liabilities. Hopefully, your net worth is in the green but there are times in life when it could be in the negative.


Because of easy access to credit, many people with zero or negative net worth have lots of “things” like cars, TVs and even houses. It’s possible to have zero net worth yet appear prosperous by many standards. There are only a few good financial planning rules of thumb, and one is “spend less than you earn.”


Finding out how much you are worth is a good exercise to do each year to see how you are progressing or regressing on your financial journey. And to make sure you don’t end up in bankruptcy court with people – even celebrities – living above their means.


Dana’s Take: a clas="learn" style="color: #7d0200; text-decoration: underline;" href="http://www.memphisdailynews.com/Search/Search.aspx?redir=1&fn=Elizabeth&ln=Thames" rel='

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Name SearchWatch Service'>Elizabeth Willard Thames wrote a book called “Meet the Frugalwoods.” It was about a young couple who achieved financial independence and early retirement (they called it FIRE) by saving more than 70 percent of their income in order to achieve their dream of living in the Vermont woods.


This was a truly inspiring story about a couple challenging their peer group’s values and putting their finances exactly where they found joy. They saved and nipped spending until they were able to live their dream of raising their two babies in the Vermont woods. The couple also shared case studies of others around the globe who have aligned their finances with their dreams.


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To Refinance or Not to Refinance?

Ray’s Take: According to The American Mortgage in Historical Context, 30-year mortgages are a relatively new thing. In the time before the Great Depression, mortgages had short maturity times and usually required a very high down payment. Pre-Depression mortgages featured variable interest rates and were usually renegotiated on a yearly basis. Boy, have times changed!


I always get the question from clients and friends about when and if they should consider refinancing their home. There are many reasons people decide to refinance their mortgage. It could be to shorten the term of the loan, get cash out of the equity for a large purchase, to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or vice-versa, or to consolidate debt.


The most common scenario for refinancing is when interest rates drop considerably from the time when you bought your home. A lower interest rate helps you build equity in your home faster and it decreases the size of your monthly payment. I have heard lenders say you should refinance if you can reduce your interest by 2 percent, but now I’m hearing that even a 1 percent savings is an incentive to do it.


Refinancing typically costs 3 to 6 percent of the loan’s principal. So it will take years to get that money back from the savings generated by a lower interest rate or shorter term. It’s important to ask yourself how long you plan on staying in your home before considering refinancing. If you aren’t planning on staying in your home long-term, the cost of refinancing could negate any of the potential savings.


But don’t get too caught up trying to pay off your home early if you do not have retirement savings, need to pay-off high interest debt or start an emergency fund. It’s important to consider the big picture of your overall financial plan. And always consult with your financial adviser before refinancing.


Dana’s Take: Ray’s late father, E. Denby Brandon Jr., shared a lot of wisdom with us. One of his favorite topics was distinguishing an asset from a liability. He said that an asset should pay you money, while a liability costs money. By that definition, a house is a liability rather than an asset.


If any of us kept careful records of how much we spent on the upkeep of our homes, including interest, property taxes and repairs, we would realize that the purchase price is only a small part of the cost of homeownership.


Can you afford to keep investing so much in an asset that’s costing you tons of money? Would renting free up money to save and invest? These are tough and emotional choices. Home is where the heart is and it’s often where your money is, too.


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Improving Your Credit Score

Ray’s Take: We all have memories of preparing to take a really hard test. Up all night studying, lots of caffeine, stressing up until that very moment you sit down with the paper and pencil knowing that everything you worked so hard for depends on the answers you mark on that one piece of paper. And then you have to wait for the results. The waiting may be harder than the test itself. I think this is how many people feel about getting their credit score.


Unfortunately, your credit score doesn’t depend on one test. It is determined over time and takes many years to build a good one. If you’ve had overdue student loans, carried high credit card balances over a long period of time or had a foreclosure, your credit score may not be good, but it can be repaired.


If your score is good, there’s always room for improvement. According to FICO, only 1.4 percent of U.S. consumers have a perfect credit score of 850. And the average national FICO score is a 700.


So how can you improve your credit score if it’s not even close to 700 or 850? Here are some simple ways to start:


Pay off all your bills on time going forward. Late or missed payments are the single most detrimental thing you can do to your credit.


Don’t close credit cards as a short-term strategy; instead pay down the balance and don’t open up any new cards.


Keep your balances low on the credit cards you already have and pay them off completely if you have the financial means to do so instead of making ongoing payments.


I think concern over one’s score isn’t such a good use of time. It only matters if you want to borrow more money, and you only need to borrow money if you want to buy something before you have saved for it. I would rather spend my time and energy figuring out how to earn a bit more or spend less. If you do that, you won’t need to borrow as much money and your score really doesn’t matter!


Dana’s Take: A credit score measures how well one has borrowed money and repaid it. Too bad we don’t have a saving and investing score. Perhaps we do – it’s called net worth.


Is your family creating a culture of financial success? What kind of stories do your kids hear around the dinner table? Do they hear you envy those who are spending or do they hear tales of those building savings and investing?


Look for opportunities to create a family culture where stories of hard work and success are celebrated. Encourage children and teens to ask adults and elders about their paths to success. Change your family’s narrative from big spenders to big savers and investors.


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How Much House?

Ray’s Take: One of my greatest joys is helping someone plan and reach his or her goal of buying a new home. Whether it’s a first home, a vacation home, a fixer-upper, new construction or an empty nesting home, buying a new home is exciting.


Homeownership is a milestone that took careful planning, preparation, saving and dreaming. I love seeing these dreams become reality for my clients.


Recently, there was an article in the Wall Street Journal that said U.S. homeownership climbed for the first time in 13 years. One reason for this increase could be that our millennial generation is now seeing the benefit of long-term investment in homeownership as opposed to renting or leasing.


So the question becomes, “How much ‘home’ can I truly afford?” Forget all the online tools and calculators that make claims based on your income or how much the bank “says” they will lend you.


When purchasing a new home, the conversation needs to start with the “B” word – budget. Add up all the extra fees, taxes, insurance, required maintenance and homeowners’ association fees in addition to just the monthly mortgage payment. Does your plan demand that your financial lives go perfectly as planned? If so, stop. “Perfectly planned” is not realistic.


It’s important to keep in mind that the transaction costs of buying and selling a home can quickly negate any appreciation on the property and all of the expenses associated with “more” home can slow down achieving other financial goals.


Ultimately, the amount of house you can afford will depend on your personal needs, desires and financial capabilities. Start by writing up a household budget for five years. This should give you an honest picture of how much you have available for housing expenses.


But most of all, have fun. Having a place to call home and making new memories is a part of living the American dream.


Dana’s Take: Wedding vows say to accept a mate “for better or worse,” but does that mean agreeing to move into his or her house? This is sometimes an issue when people tie the knot later in life.


When Ray and I married, he already owned a house, so I moved into his bachelor pad. This was probably a mistake, both emotionally and financially. I renovated that house for 10 years and it still never felt “right.” I learned a valuable lesson.


My friend recently married a man who has worked on his house for decades and would rather not move. The new bride is planning all kinds of additions and renovations. My guess is it will never feel quite right.


Consider starting fresh when building a nest together.


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