Eric Tyson - Home Buying Kit For Dummies

Startup business expenses: Another reason to save money is if you hope to start or purchase a business someday. When you have sufficient equity in your home, you can borrow against that equity to fund the business. But you may desire to accumulate a separate investment pool to fund your business.

No matter what your personal and financial goals are, you’re likely going to need to save a decent amount of money to achieve them. Consider what your goals are and how much you need to save to accomplish those goals, especially for retirement. Get your finances in order before you decide how much you can really afford to spend on a home. Otherwise, you may end up being a financial prisoner to your home.

Not carrying proper insurance is potentially disastrous — both to yourself and your dependents. We’re not talking about homeowners insurance here. (Heck, we haven’t even explained how to find a home or get a loan yet! We get to homeowners insurance in Chapter 13.)

You need proper insurance protection for yourself personally, as well as for your assets. Sure, you can take your chances and hope that you never contract a dreaded disease, get into a horrible auto accident, or suffer some other misfortune or bad luck. But misfortune and bad luck usually come knocking without a warning.

Trust us when we say that we’re optimistic, positive thinkers. However — and this is a big however — we know more than a few folks who got themselves (or their families or both) into major financial trouble after purchasing a home because they neglected to obtain proper insurance.

Here are a few cautionary tales:

Steve bought a home and then found out from his doctor that he had multiple sclerosis. Steve ultimately had to cut back on work, and because he lacked proper long-term-disability insurance and now earned much lower work income, he was forced to sell his home at a large loss due to a soft real estate market in his area.

Mary owned a home in California and, despite the known risk of earthquakes, didn’t purchase earthquake coverage. “It’s so expensive, and besides, the insurance companies won’t be able to meet the claims in a major quake. Government assistance will help,” she said. Mary’s home was a total loss in an earthquake, and although the government made a loan, it didn’t pay for the loss — ultimately, the money came out of Mary’s pocket.

Maggie and Donald were living a charmed life in the New England countryside with their two children, a white farmhouse, and a dog and a cat — until Maggie came down with cancer. She left her job, which placed some strain on the family finances. After much treatment, Maggie died. Donald and the kids were forced to move because Maggie lacked proper life insurance.

Michelle had a walkway in disrepair. Unfortunately, one day an older man tripped and severely injured himself. To make a long story short, after lengthy legal proceedings, the settlement in favor of the man was significant enough to force Michelle to sell her home. A good chunk of the settlement money came out of Michelle’s pocket because she lacked sufficient liability insurance.

Now, we’re not about to try to tell you that insurance would have made these situations come out totally fine or that these are common occurrences. Insurance generally can’t prevent most major medical problems, keep a person from dying, or stop someone from suing you. However, proper insurance can protect you and your family from the adverse and severe financial consequences of major problems. The right kind of insurance can make the difference between keeping versus losing your home, and it can help you and your family maintain your standard of living.

Wanting to skip insurance is tempting. After all, insurance costs you your hard-earned, after-tax dollars, and unlike a meal out, a vacation, or a new stereo, insurance has no up-front, tangible benefit.

You hope you won’t need to use insurance, but if you do need it, you’re glad it’s there to protect you and, in some cases, to protect your dependents. Buy too little insurance and it won’t protect you and yours against a real catastrophe. So you need the right amount of coverage that balances good protection against cost.

Before you buy a home, get your insurance protection (for yourself and for your valuable assets) in order. Not doing so is the financial equivalent of driving down the highway in an old subcompact car at 90 miles per hour without a seat belt. You should purchase sufficient protection to prevent a financial catastrophe.

Your ability to produce income should be insured. During your working years, your future income-earning ability is likely your most valuable asset — far more valuable than a car or even your home.

Long-term-disability insurance replaces most of your lost income in the event that a disability prevents you from working. Major disabilities are usually the result of accidents or medical problems — occurrences that, of course, can’t be predicted. Even if you don’t have financial dependents, you probably need disability coverage. Unless you’re quite wealthy and no longer need to work for income, aren’t you financially dependent upon your paycheck? Although many larger companies offer long-term-disability insurance, many small-company employees and self-employed people have no coverage — a risky proposition.

When you have dependents, you may also need life insurance protection. The question to ask yourself and your family is how they’d fare financially if you died and they no longer had your income. If your family is dependent on your income and you want them to be able to maintain their current standard of living in your absence, you need life insurance.

Term life insurance, like most other forms of insurance, is pure insurance protection and is the best type of insurance for the vast majority of people. The amount of coverage you buy should be based upon how many years’ worth of your income you desire to provide your family in the event of your passing.

Insurance brokers love to sell cash-value life insurance (also known as whole or universal life insurance) because of the hefty commissions they can earn by selling this type of insurance. (These commissions, of course, come out of your pocket.) Some mortgage lenders lobby you to buy the mortgage life insurance that they sell. Skip both these options. Mortgage life insurance is simply overpriced term insurance, and cash-value life insurance generally combines overpriced life insurance with a relatively low-return investment account.

In addition to disability and life insurance, everyone should have a comprehensive health insurance policy. Even if you’re in good health, you never know when an accident or illness may happen. Medical bills can mushroom into tens or hundreds of thousands of dollars in no time. Don’t be without comprehensive health insurance.