February 29, 2024

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Totally Worth It, Week 7: Protect your financial future

We’ve worked on improving your current financial state and saving up for some stuff that will happen soon, though maybe not imminently. Today, let’s talk about your financial future.

I know the future can seem like it’s a long way off. And what with climate change and the general state of politics and the world at large, it can feel futile to bother thinking about it at all, never mind setting aside money for it. But “Don’t save anything, the planet will probably be a burning tire fire by the time you reach retirement age” isn’t prudent financial advice.

Before we get to retirement savings, though, let’s talk about protecting your future finances now.

Freeze your credit, please

In 2018, someone stole the wallet out of my purse at a bar. Not a huge deal. One trip to the DMV, a few phone calls to replace cards, whatever.

What I would learn very, very shortly thereafter is that just about everyone’s personal information is for sale on the dark web, thanks to the many data leaks (including Equifax, a credit bureau!) over the last few years. The thieves got all my information online and went on a shopping spree. They opened credit cards, checking accounts, they used my driver’s license to rent a car which they then stole and subsequently abandoned.

Please freeze your credit, especially if your wallet or driver’s license is stolen, but really, it should be your default credit setting. It is not foolproof — the thieves were able to unfreeze my credit at one bureau by impersonating me on the phone. (They were part of a ring of what was described to me as professional serial identity thieves. It’s been an ongoing saga.)

You can set up your accounts with the three biggest credit bureaus — Equifax, Experian and TransUnion — and have your credit frozen in about 15 minutes. Seriously, it’s way faster and easier than I thought it would be. NerdWallet has a good guide to it. When your credit is frozen, no one can use your information to open a new line of credit. If you need to get a loan or open a new credit card, you just go back to the bureaus’ websites and unfreeze it. I had no problem doing this when I was applying for mortgages in 2020. If you want to add an extra layer of protection, you can freeze your information with ChexSystems, which does the same thing for your checking account information.

If you are not currently applying for a loan or line of credit or trying to open a new bank account, you should have your credit frozen. I was ultimately not held financially accountable for any of the things the thieves did, but for the first half of 2019, calling banks and collection agencies about this stuff was basically my unpaid part-time job. It was horrible. I can feel my blood pressure rising just remembering how miserable it all was.

Do you want to cry from frustration on the phone with an unsympathetic customer service agent who’s demanding that you prove you aren’t the one running an elaborate credit card fraud scheme? Which you can’t, because it’s difficult to prove a negative, a concept with which said agent is unfamiliar? No? Freeze your credit.

Up your insurance coverage

Renters’ insurance: Do you rent? You should have renters’ insurance. It doesn’t insure the rental unit itself. It insures all of your stuff that’s inside the unit. The coverage can extend outside of your apartment too — so in other words, this can be “laptop got stolen from your car” insurance. And it covers costs if someone gets hurt at your place (including your legal fees if they sue), and some living expenses if your apartment becomes uninhabitable and you have to move. It’s usually under $20 a month. It’s worth it. Get it.

Pet insurance: I am less sold on pet insurance, frankly. There are a lot more variables here, including the age of your pet. A study cited in U.S. News & World Report said the average monthly cost for pet insurance is $29 for cats and $49 for dogs. I had it when my dog was a puppy, but I don’t have it now. Depending on the provider and policy, there can be high deductibles, ineligible procedures, payout amounts that are less than what your vet charges, and maximum annual coverage amounts.

I prefer to put aside a set amount in a “someday fund” in my budget for pet expenses. My dog is almost 15 years old and has been relatively healthy since I got her at 10 weeks old. (Obligatory dog tax.) If I did the math, I would have spent more on premiums paying $49 a month for pet insurance than I did in paying outright for vet stuff. But some people prefer to have the coverage and peace of mind, especially if they have a breed that’s prone to injury or illness.

To me, renters’ insurance is an absolute no-brainer, while pet insurance is a “do your research, think about your personal situation and decide what’s right for you” expense.

Car insurance: You have to have car insurance in California if you have a car. But you probably don’t have enough. If you have the legal minimum liability coverage, your premium will pay up to $15,000 for injury/death to one person, $30,000 for injury/death to more than one person, $5,000 for property damage.

That’s … not a lot. If you, say, swerve to avoid a coyote in the street and drive over someone’s beautiful xeriscaped frontyard, and they say, “Cool, that will be $20,000 to fix and replace,” your insurance will be like, “Well, here’s the $5,000 you’re covered for with us” and the rest of the bill will be your problem. Or if you hit someone crossing the street — you know what healthcare costs are like in America. They can take an ambulance to the emergency room and get a couple of X-rays and an MRI and be at $15,000.

Most insurers will let you log onto the site and play around with changing your coverage to see what your monthly bill would be with different coverage limits. I was able to increase mine to $100,000 of injury liability, $50,000 of property damage liability, and added $15,000 of uninsured motorist coverage (which is not legally mandated but pretty great to have if you get hit by an uninsured driver!) for just a few dollars more per month.

Figure out your 401(k)

What is a 401(k) match and why should I do it? Your workplace might offer something called a 401(k) match. That means that if you agree to put a percentage of your paycheck into a special kind of investment account, your employer will put some money in it too.

There are a few different ways that match can be structured, and they are all somewhat confusing and involve fractions. “If you contribute 6% of your pre-tax income, your employer will match 100% on the first 4% and 50% on the next 2%” sounds like a mean homework problem.

Here’s what that is telling you, in plain terms:

  • Let’s say you make $100. Before you have to pay taxes on any of that, you choose to contribute 6% of it — so $6 — to your 401(k).
  • Your employer matches those first $4 at 100%, so it puts an additional $4 into your 401(k) account for you.
  • Then your employer matches half of the next $2, so an additional $1.
  • That means you put $6 toward your retirement savings account, and your employer deposits an additional $5 for you.

If you don’t take advantage of your 401(k) match, you are telling your employer, “No, thanks, I don’t want an extra percentage of my salary every year from you.” OK, you don’t get to use that extra percentage right now, but you’ll get to use it someday. You don’t have to pay taxes on any of this money until you are retired and withdrawing it. So it also means you pay less in income taxes this year.

So take advantage of whatever 401(k) match is available to you. Dave Ramsay tells people to forgo the match as they pay off debt. I don’t want to call anyone out in this newsletter, but I personally think that advice is fiduciary malfeasance. The money in your 401(k) is not just sitting around waiting for you to get old. It is invested, and the money it earns is then re-invested, over and over, for years. We know how powerful compound interest is when it’s used against us by credit card companies. In this case, it works in our favor. The dollars you sock away in your 20s and 30s are worth tons more than the money you set aside closer to retirement age.

How much should I set aside? At minimum, you should put aside the amount your employer will match. But that’s not the maximum. If you’re under 50 years old, in 2022, you can contribute up to $19,500 for the year. Most people do not contribute that maximum! I think 10% is a great number to shoot for after you’ve got a handle on your debt, and work your way up to 15%. But if you’re just contributing the minimum amount to get your full match right now, you’re doing great.

OK, fine. How do I sign up? Email your HR person (or boss, if your company is too small to have HR) and say, “Hi, I’m going over my finances right now, and I wanted to know about our company’s 401(k) match and how to contribute to the plan.”

What if I don’t have a 401(k) available? Not every workplace offers a 401(k). You can choose to set up and contribute to an IRA, which is like a 401(k) but not sponsored by your workplace. The contribution limits are a lot lower ($6,000 max in 2022) and, obviously, your money is not getting matched by anyone. There are a lot of different types with different caveats. It’s less ideal than getting free future money from your job but better than not saving for retirement at all.

Do I really need retirement savings on top of everything else?

If you’ve followed each week of this newsletter to the letter — as I’m sure you have — you’re currently saving up for car repairs, medical expenses, a big trip or wedding or down payment, an emergency fund, and now also your retirement. And you’re paying more per month for your insurance coverage. It’s asking a lot from your paycheck, I know.

And as much as I hate to say it, none of this stuff is 100% foolproof. In 2020, there were people with all of those savings and more who discovered six months of expenses means nothing against a global pandemic. You can dutifully pay your premiums and still get hit with something your insurance won’t cover. You can save up for retirement with every paycheck starting the day you turn 22 and still not have enough to fund the life you want when you’re done with work.

But it’s a whole lot better to be prepared and fall short than to not prepare at all. 401(k) savings can be accessed before retirement if you really, really need them — I am talking a life-altering medical event or emergency. You’ll get slammed with a hefty fee on top of getting taxed on what you withdraw, but it’s not completely untouchable money.

You also may be able to take a loan against your 401(k) to use for a down payment on your first home. That’s what I did. I borrowed half the value of my 401(k) at a very low interest rate to get to that magical PMI-free 20%. I don’t lose any of the money in my 401(k) and automatically pay back a tiny bit on the loan from each paycheck. It’s a really good deal. So think of 401(k) savings as a backup down payment fund as well.

Almost there

We are just about at the end, folks. I hope you’re feeling more confident and in control of your money.

Next week, we’ll review what we’ve learned. See you then!

— Jessica

P.S.

This newsletter is free. But making it is not. Totally Worth It won’t have any sales pitches for specific financial products — i.e., I’ll never tell you that you need to buy this specific software or open an account with this specific bank. My only sales pitch is this one: If you aren’t already, please consider subscribing to the Los Angeles Times. For a budget-friendly $1, you can try it out for a limited time.

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