The Amateur Financier

Welcome back!  After a brief respite to celebrate Independence Day last Monday, I’m back trying to answer some common personal finance questions in 100 words or less, while still providing all the information you need to make a good financial decision.  You’ll get answers to pressing questions in a bite-sized format, and I’ll be able to practice my succinct writing skills.

As you might be able to guess from the title of this week’s installment, I’m going to be focusing on some of the worst financial events that befall you in the course of your life.  If you find yourself in a situation where some of these extreme solutions sounds good, you probably have plenty of questions.  I will do my best to answer some of those questions, such as:

Q: How Do I Avoid Going Into Foreclosure?

A: My condolences if you are facing foreclosure.  The good news is that you do have options to save your house.  According to the U.S. Department of Housing and Urban Development (HUD), you should (a) contact your lender, as most will work with you to help you keep your house, (b) cut down your other costs to try to make your house payments, and (c) contact the HUD to get help directly.  If you can work something out with your lender, you should be able to stay in your house, making (possibly modified) payments on your mortgage.

This post covers some heavy, sad subjects, so here's a puppy being cute to make everyone smile!

Q: When Should I File For Bankruptcy?

A: Bankruptcy should be the last resort you consider when trying to find a way to deal with excessive debt or other personal financial problems.  If you haven’t tried EVERYTHING possible to keep from going into bankruptcy, from cutting your spending and selling things you don’t need to getting (another) part time job to boost your income, you should consider those options first.  That said, if you find yourself worried that bankruptcy will ruin your life forever, that is unlikely the case; while it shouldn’t be approached lightly, it might be a worthwhile option.

Q: I’m about to default on my student loans; what will happen?

A: Honestly, nothing good.  Student loans (along with child support and a few other obligations) are generally not eliminated even when you file for bankruptcy, so you WILL generally have to repay the student loan, no matter what.  All of that said, though, student loan companies generally are fairly flexible and willing to work with those who have trouble making their payments.  If you are facing a student loan default, try to contact your lender and work something out; they should be willing to offer you some options that should make it possible to pay something on your loan.

Q: How Much of An Emergency Fund Should I Have?

A: There are many opinions on how much of an emergency fund you should have, ranging from $1000 to one year worth of expenses, with most commentators coming in at about three to six months’ worth of expenses.  My thoughts?  Make sure you have enough to cover any potential negative events for the next year (car repairs/replacement, major home damage, medical issues), and continue to grow your fund by at least a little bit every month.  You can roll it into your retirement spending money, so don’t worry if the fund starts to get a bit big.

Q: How Much Life Insurance Should I Have?

A: If you don’t have anyone who depends on your income (if you are single and childless or already retired, for instance), you don’t need life insurance.  If you DO have people who depend on your earnings, then you should have some life insurance.  How much is recommended typically falls between five and twenty times your annual salary; the former amount gives your family time to recover from losing you, while the latter amount, invested well, enables your family to provide your income level ad infinitum.  Consider shooting for a higher amount, if the payments don’t put your other goals at risk.

Q: What Type of Life Insurance Should I Get?

A: The short answer: term life insurance.  For most people, this meets their life insurance needs, providing money to their dependents if they die while the policy is active.  You’re also probably better off with a level term policy, where your monthly payment is held constant for the length of the term, that covers the time that your dependents will depend on your income (likely your working life).  The other alternative, permanent life insurance, is usually only recommended if you have trouble saving for retirement on your own and/or have unusual financial conditions.  Otherwise, term insurance is best.

There you have it, six fairly common questions about some of the less pleasant aspects of personal finance.  Hopefully, you won’t have to worry about any of these issues, but if you do, here’s hoping these answers help you.

Any other questions you’d care to see me answer?