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Get a pulse on your financial position

January ACap ReCap – Your Financial Questions Answered

1. Should I increase my car insurance deductible?
Like any insurance, the higher your deductible, the lower your premiums. But the question is how much of a deductible is reasonable? There are two types of coverages that call for a deductible: comprehensive and collision. Comprehensive coverage protects you from things like theft, natural disasters, and other non-crash related accidents while collision coverage protects you from car accidents. Here is a short list of things to consider when deciding whether to increase your insurance deductible to lower your premiums.

Emergency Cash: do you have enough emergency cash saved up to cover unexpected expenses. The more cash you have saved up, the higher the deductible you should have. Not sure how much emergency cash to hold? Read this article.

Replacement Value: How much is your car worth? If you have an old car, it probably doesn’t make sense to increase your comprehensive deductible. What is the likelihood your car will be vandalized and what will be your expected loss? Will it be worth filing a claim with your insurance company and paying a deductible? Keep in mind that insurance companies are well aware of high crime areas and they price insurance premiums accordingly.

Recklessness: Are you a careful driver? When was the last time you were in a car accident? Of course accidents are unexpected (hence their name), but insurance companies do review your driving record when pricing your policy. If you are a careful driver and have not had a ticket in a very long time, then it would also make sense to increase your deductible.

The longer you go accident and ticket-free, the more time you have to save the difference in lower premiums to apply towards that higher deductible. One last thought, even if you kept your deductible very low to reduce your out of pocket costs for filing claims for everything, it would only be a matter of time before your insurance company either increases your premiums or drops you completely for filing too many claims.

2. What do you think of Obama’s new MyRA accounts?

It’s no secret, all the statistics and trends show that Americans are not saving enough for retirement and the administration has responded by creating (through an executive order) a “new” way to save known as “myRA”. MyRA will allow people to save a maximum of $5,500 a year with contributions as low as $25, there are no costs to setup the account, and contributions can be withdrawn tax-free at anytime. The account is only available to households earning up to $191,000 a year. This account is a great idea, but it already exists. The Roth IRA offers all of these benefits and more, yet few people maximize their Roth IRAs each year. Additionally, the administration’s intension is good, but the message is confusing. We are attempting to address a growing savings problem in the US, but are penalizing those who do save. In the same executive order, the president proposed to limit the tax benefit for those individuals who diligently save in their retirement accounts and also caps how much someone can have in their retirement accounts. Lastly, saving is only one side of the coin; there is also a growing spending problem. For example, GDP numbers were recently announced and the news was good – the US economy grew by 3.2 percent. What was the largest contributor to GDP growth? Consumer spending. Consumer income, however, declined during the same period. So how did consumers spend more if their income declined? Debt.

3. Why are bonds called fixed income?
Stocks are also referred to as equities because owning a stock is equal to owning equity in a company. Bonds are also known as fixed income because the interest rate on a bond is fixed. Suppose you buy a 10 year 5 percent bond for $1,000 from Ford Motor Company. Ford will pay you $50 a year for 10 years. No matter what happens to the economy or interest rates, you will receive $50 a year. On the 10th year, Ford will pay you $1,050 (your initial $1,000 and $50 in interest). So if the interest rate on the bond is fixed, what happens if market interest rates rise or fall? If market interest rates increase above 5 percent, now you have a bond that only pays 5 percent a year and if you tried to sell it, a buyer would not pay you the $1,000 you paid. The opposite is true if interest rates decline below 5 percent, now you have a bond that is paying more than the market and investors will pay you more than $1,000 to buy that bond from you. This is just an illustration of a simple fixed term bond, but there are many other types of bonds: floating, callable, putable, convertible, the list goes on and on.

Have a financial question? Contact ACap Asset Management at info@acapam.com or 818-272-8511.

Ara Oghoorian, CFA, CFP® is the president and founder of ACap Asset Management, Inc., a “Fee-Only” investment management firm located in Los Angeles, CA specializing in helping doctors and physicians make sound financial decisions. Visit us at www.acapam.com