Your Money_ The Missing Manual - J. D. Roth [110]
If you decide on this strategy, check with your lender to see how they handle bi-weekly payments. Some aren't set up to process them, so you might have to enroll in some sort of program. Search for a free program rather than a paid one—but take the paid program if that's all that's available.
Put money into some other investment, like an indexed mutual fund (which you'll learn about in Chapter 12) until you have enough to pay off your mortgage. This will, in theory, provide the highest rate of return for your money. But as with any stock-market investment, there's an element of risk. If your goal is to pay off your mortgage, a bear market (like the one in 2008) will make you sweat.
You can accelerate your mortgage payment in other ways. My wife and I chose to make a flat $2,000 monthly payment, which was $582.10 more than the minimum payment. This gave us flexibility—if we had an emergency we could drop down to a regular payment. You can read more about our plan here: http://tinyurl.com/GRS-prepay.
If you decide to accelerate your mortgage payments, try to do it on your own. Banks often charge a fee to add this as a service, but you can usually do it yourself for free.
Chapter 11. Death and Taxes
"In this world nothing can be said to be certain, except death and taxes."
—Benjamin Franklin
Taxes and insurance are topics so dull that even the keenest reader feels her eyes glaze over. But they're important—very important. With a basic understanding of taxes and insurance, you can make better decisions about other parts of your financial life and avoid costly mistakes.
This chapter won't give you all the answers—for that you should consult a professional financial adviser. But it will give you the basic info you need to deal with taxes and insurance effectively. It also provides a very brief overview of estate planning. Ignore this info at your peril!
An Introduction to Insurance
Insurance is a way to manage risk. As you go about your life, there's always a chance that you'll be in a car accident, twist your knee, or that your house will burn down. The risk of these accidents is small, but if one of them were to happen, the effects could be catastrophic. Without insurance, you'd have to come up with the money on your own to repair your car, have knee surgery, or rebuild your home.
Although these things happen to some people, they don't happen to everyone. With enough data, it's possible to know roughly how many people are likely to experience these events—and how much recovering from them will cost. Using this info, an insurance company can spread the risk among all its customers.
Here's an example: Imagine a school with 100 students. Every year for the past 25 years, one student has broken an arm in the schoolyard, resulting in about $5,000 in medical expenses. Without insurance, every family would have to save $5,000 to cope with the odds that their child would be the one with the broken arm. At the end of the year, 99 families would have paid nothing (and have $5,000 in savings), but one family would have paid $5,000 (and have nothing left).
With insurance, the families could join together to spread out the risk. If they created an insurance fund, all 100 families would pay $50 at the start of the school year. This $5,000 would then go to the family of the child with the broken arm.
By spreading the risk, each family only has to save $50 instead of $5,000. Yes, that $50 is gone if it's not your child who breaks an arm, but for most people, that's an acceptable trade. Instead of having to scrape together the full $5,000, they'd rather risk losing $50 for a chance to avoid $5,000 in medical bills.
But is it really fair to have every family pay $50 into the insurance fund? Some kids go to the library at lunch and