Topic Business & Economics Money Management Skills Course Guidebook Professor Michael Finke Texas Tech University Subtopic Economics PUBLISHED BY: THE GREAT COURSES Corporate Headquarters 4840 Westfields Boulevard, Suite 500 Chantilly, Virginia 20151-2299 Phone: 1-800-832-2412 Fax: 703-378-3819 www.thegreatcourses.com Copyright © The Teaching Company, 2015 Printed in the United States of America This book is in copyright. All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior written permission of The Teaching Company. Michael Finke, Ph.D. Professor of Personal Financial Planning Director of the Retirement Planning and Living Consortium Texas Tech University P rofessor Michael Finke is a Professor of Personal Financial Planning and Director of the Retirement Planning and Living Consortium at Texas Tech University, where he leads the doctoral program—considered the premier academic program in ¿QDQFLDO SODQQLQJ +H FRPSOHWHG D GRFWRUDO GHJUHH LQ &RQVXPHU 6FLHQFH IURP7KH2KLR6WDWH8QLYHUVLW\LQDQGLQ)LQDQFHIURPWKH8QLYHUVLW\ RI 0LVVRXUL LQ +H LV WKH IRUPHU HGLWRU RI WKH Journal of Personal Finance and is currently a contributing editor to Research PDJD]LQH $ ORQJWLPHDGYRFDWHIRUHWKLFDO¿QDQFLDODGYLFH3URIHVVRU)LQNHLVWKHIRUPHU SUHVLGHQWRIWKH$PHULFDQ&RXQFLORQ&RQVXPHU,QWHUHVWVDQGVHUYHVDVDQ H[SHUWRQUHJXODWRU\DQGOHJDOLVVXHVUHODWHGWR¿QDQFLDOSODQQLQJ Professor Finke has authored a number of award-winning research articles LQWKH¿HOGVRIUHWLUHPHQWLQFRPHLQYHVWPHQWDGYLFHDQGLQYHVWRUGHFLVLRQ PDNLQJ,QWRWDOKHKDVSXEOLVKHGPRUHWKDQSHHUUHYLHZHGDUWLFOHVDQG ERRNFKDSWHUVRQSHUVRQDO¿QDQFHWRSLFV Professor Finke also has received numerous awards as an instructor of a ZLGHUDQJHRI¿QDQFLDOSODQQLQJFRXUVHVIURPEDVLFXQGHUJUDGXDWHSHUVRQDO ¿QDQFHWRGRFWRUDOOHYHOUHVHDUFKPHWKRGV+HIUHTXHQWO\VSHDNVDWLQGXVWU\ DQG DFDGHPLF FRQIHUHQFHV RQ DGYDQFHG ¿QDQFLDO SODQQLQJ WRSLFV ,Q he was named to the InvestmentNews Power 20 list for his research on the LPSDFW RI SURSRVHG ¿GXFLDU\ OHJLVODWLRQ RQ WKH EURNHUDJH LQGXVWU\ DQG LQ DQGKHZDVQDPHGWRWKHInvestment Advisor,$OLVWRIPRVW LQÀXHQWLDOSHRSOHLQWKHLQYHVWPHQWDGYLVLQJLQGXVWU\ $V DQ H[SHUW RQ SHUVRQDO ¿QDQFH LVVXHV 3URIHVVRU )LQNH KDV DSSHDUHG LQ the national press, including The Wall Street Journal, The New York Times, i USA TODAY, Kiplinger’s Personal Finance, and SmartMoney +H LV DOVR D IUHTXHQW JXHVW RQ QDWLRQDO UDGLR VKRZV VXFK DV 135¶V On Point with 7RP$VKEURRNŶ ii Disclaimer 7KH ¿QDQFLDO LQIRUPDWLRQ SURYLGHG LQ WKHVH OHFWXUHV LV IRU LQIRUPDWLRQDO SXUSRVHVRQO\DQGQRWIRUWKHSXUSRVHRISURYLGLQJVSHFL¿F¿QDQFLDODGYLFH Financial investing carries an inherent risk that you will lose part or all of \RXULQYHVWPHQW,QYHVWRUVPXVWLQGHSHQGHQWO\DQGWKRURXJKO\UHVHDUFKDQG DQDO\]H HDFK DQG HYHU\ LQYHVWPHQW SULRU WR LQYHVWLQJ 7KH FRQVHTXHQFHV of such risk may involve but are not limited to federal/state/municipal tax liabilities, loss of all or part of the investment capital, loss of interest, FRQWUDFWOLDELOLW\WRWKLUGSDUWLHVDQGRWKHUULVNVQRWVSHFL¿FDOO\OLVWHGKHUHLQ 8VHRIWKHVHOHFWXUHVGRHVQRWFUHDWHDQ\¿QDQFLDODGYLVRUUHODWLRQVKLSZLWK The Teaching Company or its lecturers, and neither The Teaching Company nor the lecturer is responsible for your use of this educational material or LWV FRQVHTXHQFHV <RX VKRXOG FRQWDFW D ¿QDQFLDO DGYLVRU WR REWDLQ DGYLFH ZLWKUHVSHFWWRDQ\VSHFL¿F¿QDQFLDOLQYHVWLQJTXHVWLRQV7KHRSLQLRQVDQG SRVLWLRQVSURYLGHGLQWKHVHOHFWXUHVUHÀHFWWKHRSLQLRQVDQGSRVLWLRQVRIWKH UHOHYDQWOHFWXUHUDQGGRQRWQHFHVVDULO\UHÀHFWWKHRSLQLRQVRUSRVLWLRQVRI 7KH7HDFKLQJ&RPSDQ\RULWVDI¿OLDWHV3XUVXDQWWR,56&LUFXODUDQ\ tax advice provided in these lectures may not be used to avoid tax penalties RUWRSURPRWHPDUNHWRUUHFRPPHQGDQ\PDWWHUWKHUHLQ 7KH 7HDFKLQJ &RPSDQ\ H[SUHVVO\ ',6&/$,06 /,$%,/,7< IRU DQ\ ',5(&7 ,1',5(&7 ,1&,'(17$/ 63(&,$/ 25 &216(48(17,$/ '$0$*(625/267352),76WKDWUHVXOWGLUHFWO\RULQGLUHFWO\IURPWKH use of these lectures. ,Q VWDWHV WKDW GR QRW DOORZ VRPH RU DOO RI WKH DERYH limitations of liability, liability shall be limited to the greatest extent allowed E\ODZŶ iii Table of Contents INTRODUCTION Professor Biography ............................................................................i Course Scope .....................................................................................1 LECTURE GUIDES LECTURE 1 Understanding Your Financial Brain ...................................................3 LECTURE 2 Managing Money with Life Cycle Theory..........................................10 LECTURE 3 Basic Investing—Keep It Simple ......................................................16 LECTURE 4 The Key Financial Instruments .........................................................23 LECTURE 5 How to Use Credit Optimally ............................................................30 LECTURE 6 Investing in Education ......................................................................37 LECTURE 7 The Economics of Home Ownership ................................................44 LECTURE 8 Managing Risk with Insurance..........................................................51 LECTURE 9 Essential Tax Principles ....................................................................59 LECTURE 10 Saving for Retirement .......................................................................66 iv Table of Contents LECTURE 11 Fundamentals of Estate Planning.....................................................73 LECTURE 12 Putting Your Financial Plan Together................................................80 SUPPLEMENTAL MATERIAL Bibliography ......................................................................................88 v vi Money Management Skills Scope: M DQDJLQJPRQH\LVPRUHWKDQEHLQJIUXJDO,W¶VDERXWUHFRJQL]LQJ KRZZHUHVSRQGHPRWLRQDOO\WR¿QDQFLDOGHFLVLRQVXQGHUVWDQGLQJ WKHEDVLFVRI¿QDQFLDOSURGXFWVDQGPDUNHWVDQGFUHDWLQJDSODQ WKDW KHOSV XV UHDFK RXU OLIH JRDOV 7KLV FRXUVH ZLOO JXLGH \RX WKURXJK WKH surprisingly fascinating world of how we manage money throughout our OLIHWLPH<RXZLOOH[SORUHQHZUHVHDUFKWKDWH[SODLQVKRZRXULQWXLWLRQOHDGV us to make common mistakes, review the most important information about ¿QDQFLDO SURGXFWV DQG WKHRULHV DQG OHDUQ KRZ WR FUHDWH D ¿QDQFLDO SODQ² HYHQLI\RX¶YHKDGDGLI¿FXOWWLPHVWD\LQJRQWUDFNLQWKHSDVW ,QWKH¿UVWOHFWXUHDQGWKURXJKRXWWKHFRXUVH\RXZLOOOHDUQKRZRXUHPRWLRQV RIWHQOHDGXVWRPDNHWKHZURQJGHFLVLRQV7KHHPHUJLQJ¿HOGRIEHKDYLRUDO ¿QDQFHVKRZVXVZK\ZHKDYHDGLI¿FXOWWLPHGHDOLQJZLWKULVNFKRRVHWKH wrong investments, buy the wrong kinds of insurance, and fail to meet our JRDOV 7KH ¿UVW VWHS 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additional costs WKDW FRPH DORQJ ZLWK KRPH RZQHUVKLS ,Q DGGLWLRQ WR SD\LQJ IRU D PRUWJDJH SURSHUW\ WD[HV DQG KRPHRZQHU¶V LQVXUDQFH KRPHV DUH DOVR OHVV HQHUJ\ HI¿FLHQW WKDQ UHQWDO XQLWV DQG UHTXLUH UHJXODU DQG FRVWO\ PDLQWHQDQFH %HFDXVH KRPH H[SHQVHV WHQG WR EH XQSUHGLFWDEOHPDNHVXUHWKDW\RXKDYHHQRXJKOLTXLGFDVKWRFRYHU WKHVHFRVWV(YHU\WKLQJHOVHEHLQJHTXDODKRPHRZQHUZLOOQHHGWR KDYHPRUHPRQH\LQDOLTXLGDFFRXQWWKDQDUHQWHU Home Financing % 7KHPRUWJDJHPDUNHWXVHV¿QDQFLDOUDWLRVWRGHWHUPLQHKRZPXFK RIDORDQ\RXFDQTXDOLI\IRU7KHVHUDWLRVDUHEDVHGRQ\RXULQFRPH DQG GHEW SD\PHQWV +LJKHU LQFRPH DQG ORZHU GHEW PHDQV \RX¶OO TXDOLI\IRUDELJJHUORDQ % The practice of establishing and maintaining a credit history in order to maximize your credit score becomes very important when EX\LQJD¿UVWKRXVH<RXUFUHGLWKLVWRU\FDQGLFWDWHWKHLQWHUHVWUDWH you receive on a mortgage, and a higher interest rate will affect how PXFK\RXFDQERUURZ % /HQGHUV FRQVLGHU WZR ¿QDQFLDO UDWLRV ZKHQ GHFLGLQJ KRZ PXFK \RXFDQDIIRUG)LUVWWKH\ORRNDWWKHIURQWHQGUDWLR7KHSD\PHQW needs to be under a certain percentage of your total income—for H[DPSOHSHUFHQW6RLI\RXULQFRPHLVGROODUVSHUPRQWK WKHQ\RXFDQDIIRUGWRSD\SHUFHQWRIWKDWRUGROODUVRQ KRXVLQJ 7KDW¶V WRWDO KRXVLQJ H[SHQVHV LQFOXGLQJ SURSHUW\ WD[HV DQG KRPHRZQHU¶V LQVXUDQFH DV ZHOO DV DQ\ RWKHU H[SHQVHV VXFK DVFRQGRRUFRPPXQLW\IHHV6HFRQGWKH\ORRNDW\RXUWRWDOGHEW SD\PHQWWRVHHZKHWKHU\RXKDYHHQRXJKURRPLQ\RXUEXGJHW $OH[5DWKVL6WRFN7KLQNVWRFN Lecture 7: The Economics of Home Ownership When buying a house, you need enough money for a down payment, which should be at least 20 percent of the price of the house. % 7R EX\ D KRXVH \RX¶OO DOVR QHHG D GRZQ SD\PHQW *HQHUDOO\ OHQGHUVZLOOUHTXLUHDWOHDVWRUSHUFHQWRIWKHSULFHRIWKHKRXVH +RZHYHU LI \RX SXW GRZQ OHVV WKDQ SHUFHQW \RX¶OO KDYH WR SD\ SULYDWH PRUWJDJH LQVXUDQFH ZKLFK FDQ FRVW DERXW GROODUV PRQWKO\IRUHYHU\GROODUV\RXERUURZ$QGLWSURWHFWVWKH OHQGHUDJDLQVWGHIDXOWLWGRHVQ¶WSURWHFW\RX % <RX FRXOG DOVR WU\ WR ERUURZ PRQH\ IURP \RXU 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that you pay up front in order to reduce the loan SD\PHQW7KH\GRQRWUHGXFH\RXUORDQEDODQFHOLNHDELJJHUGRZQ SD\PHQW GRHV SD\LQJ SRLQWV VLPSO\ ORZHUV WKH LQWHUHVW UDWH RQ D ORDQ 8QOLNH DGMXVWDEOHUDWH PRUWJDJHV SRLQWV PDNH PRUH VHQVH LI\RXWKLQN\RX¶OONHHS\RXUPRUWJDJHIRUDORQJSHULRGRIWLPH 7KDW¶VEHFDXVH\RX¶UHSD\LQJPRQH\XSIURQWWRUHGXFHPRUWJDJH SD\PHQWVRYHUWLPH Lecture 7: The Economics of Home Ownership When and Why to Buy a House % :KHQLVWKHULJKWWLPHWREX\\RXU¿UVWKRPH"'RQ¶WEX\DKRXVHLI \RXFDQ¶WVHWDVLGHWKHPRQH\WRSD\IRUUHSDLUV,QDGGLWLRQUHQWLQJ for a while keeps you more mobile and saves you thousands of GROODUVLQWUDQVDFWLRQFRVWV % <RXVKRXOGWKLQNDERXWWKHFRVWVRIUHQWLQJYHUVXVRZQHUVKLSZKHQ \RXEX\DKRXVH2QHRIWKHVHFRVWVLVSURSHUW\WD[3URSHUW\WD[HV DUH D SHUFHQWDJH RI WKH DVVHVVHG YDOXH RI D KRPH 0RVW SURSHUW\ WD[UDWHVLQWKH8QLWHG6WDWHVFOXVWHUDURXQGRQHSHUFHQW3URSHUW\ tax is an expense that is, in a way, very much like a rental payment IRUKRPHRZQHUV²LW¶VMXVWPRQH\WKDW\RXQHYHUVHHDJDLQIRUWKH SULYLOHJHRIOLYLQJLQDKRPH 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There DUH WZR YHU\ JRRG UHDVRQV DQG RQH SUHWW\ JRRG UHDVRQ 7KH ¿UVW JRRG UHDVRQ LV WKDW \RX OLNH KDYLQJ FRQWURO RYHU \RXU RZQ VSDFH Research shows greater life satisfaction among owners as compared WRUHQWHUVDWOHDVWXQWLOWKH\KLWWKHLUV % The second good reason is that the home is a powerful savings tool, because when we make a mortgage payment, a little bit goes WRZDUG SD\LQJ RII RXU ORDQ EDODQFH RU SULQFLSDO7KLV PHDQV WKDW ZHRZQDOLWWOHPRUHRIDKRPHHDFKWLPHZHPDNHDSD\PHQW%XW LWGRHVQ¶WIHHOOLNHVDYLQJZH¶UHMXVWPDNLQJDPRUWJDJHSD\PHQW HYHU\PRQWK%HFDXVHLWGRHVQ¶WVKRZXSLQDEDQNDFFRXQWZH¶UH QRWWHPSWHGWRVSHQGLW % $ SUHWW\ JRRG UHDVRQ IRU RZQLQJ D KRPH LV WKDW WKH JRYHUQPHQW wants us to own, so they provide some incentives that renters GRQ¶WJHW:HPD\EHDEOHWRGHGXFWVRPHRIRXUPRUWJDJHLQWHUHVW IURPRXUWD[DEOHLQFRPH7KHVDYLQJVDUHRIWHQRYHUVROGWKRXJK HVSHFLDOO\ IRU DYHUDJHLQFRPH KRPHRZQHUV ZKR GRQ¶W KDYH D ELJ PRUWJDJH7KH PRUWJDJH LQWHUHVW WD[ GHGXFWLRQ WHQGV WR SULPDULO\ EHQH¿WKLJKLQFRPHSHRSOHZLWKH[SHQVLYHKRXVHV % 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borrowing, but they can also drain one of the ODUJHVWVRXUFHVRIHPHUJHQF\ZHDOWKIRUPRVW$PHULFDQIDPLOLHV % 'RQ¶WVWDUWERUURZLQJDJDLQVWKRPHHTXLW\LI\RXKDYHDEDGKLVWRU\ RIFRQWUROOLQJVSHQGLQJRUSD\LQJRIIGHEW<RXPLJKWHQGXSZLWK more debt than you can repay—and this leads a homeowner down WKHSDWKWRORVLQJKLVRUKHUKRPHWRIRUHFORVXUH Suggested Reading %UD\6FKURHGHUDQG6WHZDUWNolo’s Essential Guide to Buying Your First Home 'LHW] DQG +DXULQ ³7KH 6RFLDO DQG 3ULYDWH 0LFUR/HYHO &RQVHTXHQFHV RI+RPHRZQHUVKLS´ Questions to Consider 1. +RPHRZQHUVKLS LV FRQVLVWHQWO\ RQH RI WKH VWURQJHVW SUHGLFWRUV RI Lecture 7: The Economics of Home Ownership KRXVHKROG ZHDOWK HYHQ ZKHQ FRQWUROOLQJ IRU LQFRPH DQG HGXFDWLRQ Why do you think homeowners are wealthier than renters? 2. 0DQ\$PHULFDQVERUURZHGWRRPXFKGXULQJWKHPLGVSDUWLFXODUO\ LQYDULDEOHUDWHPRUWJDJHSURGXFWV:K\GR\RXWKLQNVRPDQ\SHRSOH ZHUHZLOOLQJWRULVNEX\LQJKRPHVDIWHUSULFHVKDGULVHQVRTXLFNO\DQG ZK\GLGVRPDQ\XVH$50VWR¿QDQFHWKHLUKRPHV" Managing Risk with Insurance Lecture 8 R isk is 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Lecture 8: Managing Risk with Insurance PRVW7HUPOLIHLQVXUDQFHLVDJRRGLQYHVWPHQWFRPSDUHGWRRWKHU LQVXUDQFHSURGXFWV % Many employees have the option to buy group term life insurance SROLFLHVWKURXJKWKHLUHPSOR\HU7KHVHFDQEHDJRRGGHDOEXWVKRS DURXQG¿UVW<RXZDQWWRPDNHVXUH\RXKDYHDGHTXDWHFRYHUDJH 6LPSOH UXOHV RI WKXPE VD\ WKDW ZRUNHUV QHHG WLPHV LQFRPH LQ WHUPOLIHLQVXUDQFH%XWWKLVQXPEHUZLOOEHORZHUODWHULQWKHOLIH F\FOHLIWKHQHHGVRIVXUYLYRUVDUHOHVV$QGLWPD\EHODUJHUHDUO\ LQWKHOLIHF\FOH % One strategy is to estimate the amount needed to fully fund HGXFDWLRQDOH[SHQVHVSD\RIIDPRUWJDJHDQGSD\IRU\HDUVRI DIWHUWD[ KRXVHKROG H[SHQVHV )RU \RXQJHU IDPLOLHV XVH D ODUJHU PXOWLSOHDQGIRUROGHUKRXVHKROGVXVHDORZHUPXOWLSOHRIHDUQLQJV % Whole life insurance is meant to provide coverage for your whole OLIH%HFDXVHFRYHUDJHODWHULQOLIHLVPRUHH[SHQVLYHWKDQFRYHUDJH early in life, your premiums for the same amount of coverage will EHVLJQL¿FDQWO\KLJKHU$V\RXJHWROGHUERWKWHUPLQVXUDQFHDQG whole life insurance get more expensive because your risk of dying LQFUHDVHVHDFK\HDU % <RXGRQ¶WUHDOO\QHHGOLIHLQVXUDQFHZKHQ\RX¶UHROGDQGGRQ¶WKDYH DQ\GHSHQGHQWV6RLWGRHVQ¶WPDNHDQ\VHQVHWRSD\IRULWZKHQ \RX¶UH\RXQJ&RPPLVVLRQVRQZKROHOLIHSURGXFWVDUHKLJKHUVRLI \RXVHHDQLQVXUDQFHDJHQW\RXPD\¿QG\RXUVHOIEHLQJVROGVRPH type of whole life product—there are many different names for WKHP)RUPRVWKRXVHKROGVIRUJHWWKHPDOODQGEX\WHUP Disability Insurance % The second type of insurance for protecting human capital is GLVDELOLW\ LQVXUDQFH $ ELJ SUREOHP ZLWK GLVDELOLW\ LQVXUDQFH LV that many people who think they might become disabled buy the SURGXFWDQGWKHQ¿OHDFODLP7KLVLVNQRZQDVDGYHUVHVHOHFWLRQ,I the insurance buyer knows more about their true risk of loss than the insurance company, then buyers with the highest risk will buy more LQVXUDQFH7KLVUDLVHVFRVWVDQGPDNHVGLVDELOLW\YHU\H[SHQVLYHLQ WKHSULYDWHPDUNHW % The best way to buy disability is in a group policy through your HPSOR\HU<RX¶OOQHHGWRFKHFNZLWK\RXUHPSOR\HHEHQH¿WVRI¿FH to sign up for group disability, but if you 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<RXUKRPHLV\RXUVHFRQGPRVWYDOXDEOHDVVHW7KHJRRGQHZVLV WKDWDIWHUWHUPOLIHLQVXUDQFHKRPHRZQHU¶VLQVXUDQFHLVSUREDEO\ WKH VHFRQG PRVW HI¿FLHQW LQVXUDQFH SURGXFW DYDLODEOH ,Q IDFW D KRPHRZQHU¶V LQVXUDQFH SROLF\ KDV HYROYHG LQWR DQ H[WUHPHO\ important insurance product that covers not only the value of your home but also the property inside and outside your home and SURWHFWLRQDJDLQVWODZVXLWV % For most homeowners, it makes sense to stick with the basic KRPHRZQHU¶V SROLF\ DOVR NQRZQ DV WKH +2 SROLF\ 7KHUH DUH WKUHHEDVLFSDUWVRIDKRPHRZQHU¶VSROLF\FRYHUDJHRIWKHGZHOOLQJ FRYHUDJHRIWKHFRQWHQWVDQGOLDELOLW\SURWHFWLRQ % $ KRPHRZQHU¶V SROLF\ LV NQRZQ DV DQ RSHQSHULO SROLF\ ZKLFK means that it covers losses from any cause other than those VSHFL¿FDOO\H[FOXGHG7KHPRVWLPSRUWDQWH[FOXGHGSHULOVDUHÀRRGV DQGHDUWKTXDNHV,I\RXOLYHLQDQDUHDZKHUHWKHVHSHULOVDUHDULVN WKHQ\RX¶OOQHHGWRJHWDVHSDUDWHSROLF\FDOOHGDQHQGRUVHPHQWWR SURYLGHFRYHUDJH % <RXU GZHOOLQJ LV FRYHUHG DV DUH XQDWWDFKHG EXLOGLQJV VXFK DV D JDUDJHXSWRSHUFHQWRIWKHYDOXHRIWKHKRPH,I\RXFDQ¶WOLYH in the house after an incident, living expenses are covered up to 20 SHUFHQWRIWKHKRPHYDOXH % <RXUVWXIIRUSHUVRQDOSURSHUW\LVFRYHUHGXSWRSHUFHQWRIWKH KRPH YDOXH 7KDW¶V D ORW EXW PRVW SROLFLHV FRYHU RQO\ WKH DFWXDO FDVKYDOXHRIWKHSURSHUW\6R\RX¶OOEHFRYHUHGIRUWKHGHSUHFLDWHG value of your old electronics and furniture, not what they cost when WKH\ ZHUH QHZ <RX FDQ DOVR JHW UHSODFHPHQW YDOXH LQVXUDQFH ZKLFKZLOOFRYHUWKHFRVWRIEX\LQJDQHZLWHP0DNHVXUHWKDW\RX take a video of all the stuff in your house so that you have evidence RI\RXUKRPH¶VFRQWHQWVLQWKHHYHQWRIDGLVDVWHU % <RXU KRPHRZQHU¶V LQVXUDQFH SURYLGHV FRYHUDJH IRU SHUVRQDO OLDELOLW\XSWRGROODUV%XWWKDW¶VSUREDEO\QRWHQRXJK<RX QHHG ZKDW¶V NQRZQ DV XPEUHOOD LQVXUDQFH WR SURYLGH DGGLWLRQDO FRYHUDJH DJDLQVW OLDELOLW\ 8PEUHOOD LQVXUDQFH LV ELJ²D PLOOLRQ GROODUVRUPRUH²DQGLW¶VFKHDS*HWWLQJVXHGLVDELJULVNVR\RX DEVROXWHO\QHHGXPEUHOODLQVXUDQFH$JRRGVWUDWHJ\LVWRLQFUHDVH GHGXFWLEOHVDQGXVHWKHSURFHHGVWREX\XPEUHOODLQVXUDQFH Car Insurance % &DULQVXUDQFHFDQEHMXVWDVLPSRUWDQWDVKRPHRZQHU¶VLQVXUDQFH EXW QRW EHFDXVH LW SURWHFWV WKH YDOXH RI \RXU YHKLFOH 'ULYLQJ SUHVHQWV WKH PRVW FRPPRQ H[SRVXUH WR OLDELOLW\ ULVN 0RVW VWDWHV UHTXLUH D PLQLPXP DPRXQW RI OLDELOLW\ SURWHFWLRQ EXW WKHVH PLQLPXP UHTXLUHPHQWV DUHQ¶W QHDUO\ HQRXJK IRU DQ\RQH WKDW KDV DVVHWVWKH\ZDQWWRSURWHFW % When you buy umbrella insurance, your insurer will make you get much higher liability limits on your auto policy—usually a half PLOOLRQGROODUV7KDWPD\LQFUHDVH\RXUFDULQVXUDQFHUDWHVEXWLW LVHVVHQWLDO % &RYHUDJH RQ \RXU RZQ FDU LV DFWXDOO\ OHVV HVVHQWLDO &ROOLVLRQ LQVXUDQFH FRYHUV DQ\ ORVV IURP D FROOLVLRQ UHJDUGOHVV RI IDXOW Comprehensive insurance covers losses that occur from damage to \RXUFDURXWVLGHRIDFROOLVLRQVXFKDVKDLOGDPDJHRUDÀRRG % $VZLWKRWKHUW\SHVRISURSHUW\LQVXUDQFHXVH\RXUULVNUHWHQWLRQ limit when deciding whether to buy coverage and maximize your GHGXFWLEOH 0RVW SHRSOH QHHG PRUH OLDELOLW\ 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Trusts % $Q DOWHUQDWLYH WR XVLQJ D ZLOO LV WR FUHDWH D OLYLQJ WUXVW ZKLFK LV similar to a corporation in that it is an independent entity to which \RXWUDQVIHUDVVHWV,WDYRLGVSUREDWHDQG\RXFDQSXWYHU\GHWDLOHG LQVWUXFWLRQVRQZKDWWRGRZLWKWKHSURSHUW\7KHWUXVWOHJDOO\RZQV WKHDVVHWVVR\RXQHHGWRUHWLWOH\RXUDVVHWVLQWKHWUXVW¶VQDPH % ,Q HVVHQFH \RX¶UH WDNLQJ DVVHWV RXW RI \RXU RZQ DFFRXQWV DQG WUDQVIHUULQJ RZQHUVKLS WR WKH WUXVW %XW \RX FDQ UHWDLQ FRQWURO over your assets by appointing yourself the trustee—that is, the DGPLQLVWUDWRURIWKHWUXVW²RUFKRRVHDORYHGRQHWRSOD\WKDWUROH ,Q D UHYRFDEOH WUXVW \RX FDQ HYHQ GHFLGH WR FKDQJH WKH WHUPV RI WKHWUXVWLQFOXGLQJWKHULJKWWRUHWLWOHWKHDVVHWVLQ\RXURZQQDPH Revocable trusts are good alternatives to a will and avoid probate but may not avoid estate or inheritance taxation if you have a VL]DEOHHVWDWHZKHQ\RXGLH Lecture 11: Fundamentals of Estate Planning 76 % Many have criticized the use of living trusts because they can be costly to create and, in some cases, are more 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