In contrast, I assume that at some point all of this stuff will happen to me, and possibly all at the same time.  This may be seen as a very pessimistic way of looking at the world, but realistically my main goal is to ensure that I do not experience a financial “hit” that puts me into poor financial shape.  Beyond putting the brakes on my goal of early retirement or financial independence, such an event would be very stressful for my wife and I (or anyone) to take on, which for the most part with adequate planning can be totally avoided.

Here are some techniques my wife and I employ for avoiding financial disaster:

1) We keep our monthly expenses low:  In doing so, such things as prolonged unemployment or disability (to a certain extent) can be mitigated as our expenses are set up so that the low-earner can cover our total monthly expenses.

2) We have a decent-sized amount of savings:  Since we cleaned out entire savings account buying a car in March, this has been our number one goal.  Having no savings means that something as small as a car repair would cause us to utilize debt, which we would like to avoid at all costs.  Our end goal for savings is to have an entire year’s worth of “fixed” expenses (around $10,000).

The reason for this is two-fold – the first being insurance against unknown expenses, the second is if we don’t really feel like working at our current job / career, there is a buffer we have built into our finances to allow for a job-search or lower wages if the new job doesn’t pay as much.

3) We have a bunch of insurance:  Car insurance, life insurance, CAA for automobile breakdowns, as well as health insurance through my workplace which provide a cushion for expenses that if we incurred them at 100% would put significant strain on our finances.  I don’t really like to pay for the insurance, but the peace of mind it provides is worth it when I examine what would happen if I didn’t have it in place.

I don’t really think there are many financial disasters that can’t be planned for, I just don’t think many people think about the downside or have the same pessimistic viewpoint as myself or others with a robust financial plan.

How do you plan against financial disaster?  Do you think you have a negative viewpoint in thinking up a financial plan?

I spend 40 hours a week sitting at a desk.  I have a decent knowledge of accounting via the hundreds of hours of studying and application of the skills, along with a degree in Economics.  After perhaps reading too many post-apocalyptic books, I have come to realize that if push came to shove I really don’t have a whole lot to offer outside of these skills.

In the latest “collapse” book I read (Patriots by James Wesley Rawls) an economic collapse was triggered in the US which caused society to basically break down into anarchy, with people forced back to homesteading as food and other supplies ran out rapidly.

I’m not  a part of some fringe sect of survivalists, (really, I promise I’m not) but as part of my personal finance plan, I generally look at the worst-case scenario of any possible situation and attempt to insure I have at least some sort of a plan to combat the down-side scenario.  In a situation where I may have to live off of what I can produce by myself, I’m thinking that my desk-sitting ability may not come in too handy and my knowledge of accounting would not be overly useful to anyone.

It seems to be over the past 30 or 40 years or so that a sort of “hyper” specialization has taken place, with people gaining knowledge in only a few areas, while not bothering to figure out the basics of life, some people don’t even know (or care) where their food comes from.  My grandparents, when they were growing up still butchered their own meat, built their own houses and really didn’t look for outside help unless the task they were carrying out was new or extremely intricate.  Compare that to me, who can barely do basic home repairs without breaking something, and there seems to be a disparity of skills.

So, I have no “real” skills – I am not really all that handy, have never really built anything substantial by myself and really don’t have the opportunity to do so at this time.  The main thing I’m missing and I think my grandparents (and more so my great-grandparents) had was time – none of them worked in “town” they all lived and worked on farms and essentially grew the food they ate.  In doing so, they learned real skills which, other than a small percentage of people in North America have largely disappeared.

I have previously written about Homesteading as a quaint lifestyle – I don’t believe it would be easy, but I do think even a partial setup which would allow some self-sustenance would not be out of place.  I really don’t think that there is a significant risk of financial collapse occurring, but gaining some real skills, such as the ability to build something (anything really), hunt/fish/farm would be useful.  What it all boils down to for me, is that what I know how to do, if there is a major problem with the economy doesn’t really translate into survival all that well.

Do you have any “real” skills?  Does the possibility of a significant Economic collapse concern you?

My work has decided that I need to learn about Insurance, specifically the Chartered Insurance Professionals courses in order to get an insurance designation.  This is great (I like to learn new things), other than I was already taking accounting courses for a Certified General Accountant’s designation.  So, for the next month or so I will be a little busier in the evenings and weekends then I was really planning on being.

In taking this first insurance course, there are a couple of things that I thought would be appropriate to share with readers of this blog:

1) It doesn’t pay to lie: Insurance companies work on the premise of “utmost good faith”.  Basically, the onus is on me to inform the insurance company if there are any changes in what I’m doing that would change my current policy.  For example, a few weeks ago I was assigned temporally to a job that would require me to use my personal vehicle for work.  In total, this may mean only 1,000 kilometers I would have to drive for work.

I called the insurance company and told them what I was going to be doing for the next few months.  They reclassified my car to account for the added activities I would be undertaking and changed the premium I would be paying.  I don’t really appreciate paying the higher rate, but at the same time if I hadn’t told them what I was doing and gotten into an accident they may not have covered the claim.

Personally, I never want to be in a situation where I have been paying for insurance, get in an accident and find out that it isn’t covered – it doesn’t really pay to not disclose material facts about your activities.  You may pay a lower premium, but being turned down on a claim would not be good financially.

2) Make sure you’re properly insured: Meaning make sure you haven’t bought too much insurance or not enough.  From an early retirement perspective, being properly insured is probably the best way you can spend your money.

How do you know if you’re properly insured?  Basically think of the worst things that could happen to you financially and protect yourself against that – there is insurance available for the majority of types of occurrences that would limit your ability to make money and retire.  Examples of personal insurance are liability, disability, and automotive.  If you’re not sure what you need, an insurance broker or agent would be more than happy to explain (and sell) any of these products to you.

I don’t particularly enjoy paying for insurance, but at the end of the day there is a certain feeling of peace-of-mind knowing that I have handled most of the catastrophic events that would hinder my future financial plans.  I try to ensure that the insurance companies know what I am up to so that I am being covered for everything and not just thinking that I am.

How do you figure out where to draw the line with insurance?  Do you keep your insurance company up to date on any changes that happen in your life that would change your policy?

One of my main jobs at home is to manage our household finances.  Currently this is a somewhat boring exercise as it amounts to paying off our house as quickly as possible.   Once a month I set up the mortgage prepayments and watch the balance decrease slowly but steadily.  On a whole, I make the majority of the financial decisions that take place in our house, generally in consultation with my wife.  My spouse is not really aware of the exact mechanics of such things as our insurance policies, my company pension, my investment accounts or my various bank accounts.

As of yet, we have not created Wills – this is something we will be doing in December, when I have completed my current accounting course and have time to do something other than study.  At this point in our marriage, we really don’t have much in the way of assets to disperse.  In a previous discussion with our lawyer it was explained to us that a Will is more useful in dispersion of assets outside of the marriage (family and friends) to meet our wishes.

Besides a Will, I am creating a list of names and numbers for my wife to use in the circumstance that I am unable to provide them.  With this list, my spouse will be able to get in touch with all individuals who have assets that she can get at.  Over time, as we invest more money, I hope to be able to teach her why these investments are made and the strategy behind this, but for now just getting her access to the funds should be enough.

In an age where money can be placed in a myriad of locations, it is important to leave a trail so that people in your life are able to access your assets.  Even outside of your spouse, others noted in your Will should be able to find your assets easily.  This can be done via a search of your SIN number, but a regularly updated document would be much easier to update and would provide one place that people involved can easily resolve estate questions.

This isn’t really something that I’m super excited about (which is probably why I don’t have a Will) but it is important.  In a situation where I am not necessarily dead, but am unable to provide details to my spouse, I would hate for her to have to hunt for money that is rightfully hers.  For the ten minutes it would take, I would know she would be able to find all of our assets quickly and easily.

Perhaps my houses finances are unique because we keep everything completely separate, but I’m wondering if anybody else has created a reference document like this?  If so, where do you keep it (we’re thinking fire-proof safe)?

I don’t particularly enjoy paying for insurance every month (I’m not sure who does).  Yet insurance is an expense that makes up a good portion of my overall monthly expenses.  I use insurance as a means to reduce, and in some cases eliminate catastrophic financial risk in my life.  Most people will have the same or more types of insurance but I thought for this post I would highlight the types of insurance that I have and the reasons that I have them.

Life Insurance:

I have $300,000 in life insurance on myself and my spouse.  We chose this amount after we wrote down our major debts and what we’d need to live for a few years as well as allowing for time if we wished to move to another town. We may only need this insurance for 10 to  15 years, but getting a  similar type of insurance at an older age would be significantly more expensive.    This insurance costs us $45 per month for the two of us.

Car Insurance:

I am the sole driver, and pay $90 per month for car insurance.  Right now, I have minimal coverage having removed comprehensive insurance when I felt I could replace my car with cash.  When we buy a new car in the spring, I would probably re-instate a high-deductible comprehensive policy, as our savings will be significantly depleted for at least a year or two.  There’s not much I can do about this insurance cost, other than try to limit it and keep it low by driving legally and safely.  One reason why I wanted my wife to go to driver’s training was the training aspect – hopefully making her a better driver and perhaps limit the chance of collision and higher insurance rates for us.

Content Insurance for our Condominium:

The nature of a condominium means that we don’t actually own the townhouse structure that we live in.  Our real estate agent described our ownership as “from the drywall in”, which is a simplistic explanation.  This ownership method means that we don’t really need to insure the structure, we just need to insure our “stuff” inside the structure.  For $17/month I get the following:

Personal property – $42,000 (Deductible $1,000)

Loss of use of my unit – $21,000 (No deductible)

Unit improvements and betterments – $42,000 (No deductible)

Personal Liability – $1,000,000

CAA:

I classify this as “car-breakdown” insurance.  For $114 per year, I am insuring myself from what possibly could be a very expensive tow-ride or somewhat dangerous situation.  About twice a month, I drive 500 km (round trip) either to my wife’s family or to one of our friend’s places.  A lot of this drive is on major highways and much of it is somewhat desolate.  The piece of mind that buying this insurance means a lot to me, and for what works out to $9.50 per month is worth it to me.

A couple of months ago, I was at a red light and attempted to put my car in gear, only to find my clutch slamming to the floor – knowing I could call for a tow to a garage meant that the situation wasn’t as tense as it normally would be, it essentially fixes my annual towing cost if I breakdown, leaving only car repairs to worry about.

Other than minor insurance costs associated with health insurance premiums for work, I self-insure everything else I own.  I don’t buy extended warranties on electronics, nor pay for things like phone-replacement insurance from my provider.  By having some savings and looking for used models, it would be fairly cheap to replace pretty much everything in my house, eliminating the need to insure.

So, that’s where my insurance dollar goes.  It seems like a lot of money every month, but if I were to ever need it, I will be very happy to have paid the approximately $160 per month in insurance costs (around 10 to 15% of our monthly expenses).

How do you decide on what types of insurance to get, and how much?  Do you feel over insured?

Heck, even the creek by my house looks close to overflowing, but the good news is my basement is still dry, but my teleposts need to be adjusted since all this extra water is expanding all the clay in the area and causing my basement floor to heave up a bit more than usual.

Yet what got me thinking about all of this mess was the fact how utterly unprepared most people are for an disaster.  What happens when the power goes out and doesn’t come back on?  How would you cook something or what would you eat?  Do you have any drinking water? Could you keep warm?

In my case I’m not completely screwed.  I do have a fireplace to provide some heat in a disaster and I do keep some water set aside along with a camping stove and some fuel. We also have some canned food.  Not huge amounts of anything, but enough to get buy for a couple of days if required.

Of course the personal finance side you would also ask: do you know what your insurance will cover?  Or won’t cover?  In my case I’ve ready to go, mostly, our coverage is up for renewal right away and my premiums are increasing a fair bit to cover the higher value of rebuilding the house if required.  I might complain a bit, but in the end I’ll shut up and pay because it’s cheaper than rebuilding my house by myself.  Also I do get a claims free discount and I’ve increased my deductible to help keep my yearly cost down.

So how would you do if a disaster strikes?  Could you survive the short term?  Do you have insurance?

I consider myself a fairly good driver given my age.  By virtue of several of my jobs over the years I’ve logged more time behind the wheel of a vehicle than I care to admit.  Yet at the same time I’m aware I’m not perfect I can screw up.  So if I can screw up then the average driver is much more likely to screw up, hence I better have some insurance to protect myself from other people’s stupidity.  The same goes for life insurance and house insurance.  I’m not so worried about my wife or me setting fire to the house, but I am concerned enough about my two curious boys to not leave out matches near them.

I think insurance is highly underestimated how critical it is to your overall financial well being until you are making a claim.  At that point you are likely damn happy to have it and glad you have been paying premiums for years.  Now some people would question isn’t that a waste of money to pay premiums?  No, in my mind I’m not wasting the money.  I’m paying someone else to take on the risk in my place.  I’m getting a service for my money and I’m happy to send them a cheque for it.  If they can make a profit on it, so be it.

On the other hand I firmly believe insurance should be used reasonably.  Insurance in my mind is for those high cost items that could wipe me out financially speaking, not for every little thing I buy at the electronics store.  It is very possible to have too much insurance and then be wasting money. One way to reduce your insurance costs is to keep your deductibles on the large side and self-insure for those minor items in life.

For whatever reason life insurance tends to be a common one people go over kill on.  In my family’s case both my wife and I carry $500,000 policies at the moment.  That number was chosen for both of use to have enough money to finish raising the kids and pay off the mortgage.   It’s also income replacement for me and childcare replacement for my wife.  Now that I’m on a campaign to kill off the mortgage that value will likely come down by $100,000 in the next two years.  Then as my saving increase and we are less dependent on my future income we will continue to drop the insurance value down.  There really isn’t a reason to have life insurance once you are financially independent since your income comes from your savings and not you.

So when planning for other people’s stupidity make sure you don’t start going stupid yourself.   Use insurance wisely to cover those huge “Oh my GOD!” events and suck up the “Oh, shit” minor events.  And of course, be prepared to use your horn to stop stupid people from hitting your car.

There are a few requirements you should be aware of if you are thinking about this:

• The program states that you must pay in for a full year prior to making your first claim at the regular employee rate (1.73% of earning in 2010 up to $747.36 a year).
• If you ever make a claim you must continue to pay into the program as long as you are self employed.  If you don’t make a claim you can stop paying in (no refunds).
• You can only qualify for special benefits such as maternity, parental, sickness and compassion care leave.  Since you can’t lose your job (in the traditional sense), you can’t claim regular benefits.
• You must make at least $6000/year of self employed income to be part of the program.

So in reality you would only really pay into EI if you planned on using maternity (max 15 weeks) or parental leave benefits (max 35 weeks), otherwise it would be somewhat wasteful to pay that much money in only to occasionally claim sickness (max 15 weeks) or compassion care (max 6 weeks).  I’ve never claimed sickness or compassion care leave myself yet.  Keep in mind too that the maximum you can get from EI is about $1600/month.  So its not a lot of money.

So what’s the break even point of this program?  Well if you claimed the full 50 weeks of maternity or parental leave at the maximum rate you would get about $20,000 for the year.  So divide that by the max contribution rate of $747.36, you need to pay in for 26 years to be even.  So if you have more than one child this program is likely a good deal or  you could be ok with a child if you are older (30+) and plan to retire early you could do well at least for right now.

You have to recall that the EI program is currently under a rate freeze but you can expect a sharp increase right after 2011 so that will change these numbers a fair bit.

So is getting EI a good idea for a self employed person?  If you plan on two kids or more and will be taking the majority of the maternity and parental leave, then likely yes it is a good idea.  If you only have one kid, you might want to think about.  If you aren’t planning on kids, skip it.

Life insurance is not a fun topic to discuss with anyone, but the question becomes do you want to die without it?  If you are single and have no debt, then the reality is you likely don’t need much if any life insurance.  If, on the other hand, you have a few kids and/or a spouse who partly depends on your income you will want to consider having some life insurance to protect them in case your life is suddenly cut short.

Generally speaking term life insurance is the best bang for your buck for the majority of people.  Shop around for prices as they can vary by a lot.  Also consider dumping your mortgage insurance from your bank if you have it.  My experience has been that it is expensive coverage compared to what you can find elsewhere.

How much you need is highly dependent on your lifestyle (spending), what you want your kids to do (ie: post secondary education), and what your spouse and you have for income and what other coverage you already have.

For example, with my wife and I we decided to take the difference between my wife’s daycare income and our spending and times it over 18 years and then times it out to get a rough estimate.  Since our spending also contains an amount for RESP contributions we decided that was enough for the boys education.  Then we deducted what I already have for coverage and bought insurance for the remaining amount.  Then for my wife we just made that amount equal to my coverage to give me the option of working part time while the kids were young if she died.

In retirement planning you do need an estimate of your death, unless you are planning to leave a large pool of money to your kids.  If that is the case you might not actually need an end date to do a plan since you can just plan to live off the interest and dividends and not touch the capital.

For everyone else you do need to pick a death year to plan how long your money should last.  That year is often based on either a wild guess on the conservative side, typically age 95 or even 100.  Or you can do a bit more research into when you expect to die and try to come up with a better estimate.  After all there is an entire science to planning when people are going to die, how else do you think insurance companies issue annuities?

The trade off of picking a conservative date versus a bit more detail is the standard one.  If you lean to the conservative side you have to save more and work longer than actually required.  If you lean too far to the other side you can run out of money or have to face a reduced standard of living if you live past your planned death year.

So what did you pick for your death year in your retirement plan?  I picked 95, but I’m in good health, don’t smoke and my grandparents all lived well into their 80′s.