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Insurance: Stop wasting money on it

Moshe Milevsky
York University business professor Moshe Milevsky

Among the provocative assertions in his most recent book, Your Money Milestones: You are probably making the wrong choices when it comes to spending and borrowing; you should consider your children to be financial assets; and majoring in English is a bad economic bet. Economic insubordination is nothing new for Milevsky, who made the case in an earlier MoneyWatch story that, before investing, you have to decide whether your career makes you a stock or a bond.

You write that we should buy less insurance and self-insure more. Why?

I think people are spending their insurance dollars on the wrong things. You have to separate risks into two categories: There are catastrophic risks where you cannot bear the losses; those you must insure. All the other risks are nuisances; self-insure those. The trip cancellation insurance and the extended warranty, those are wasted insurance premiums. I have a self-insurance fund. Whenever things break or need to be replaced, I tap into that fund.

Does this mean you need to have more money in your rainy day fund than the standard three to six months of living expenses?

No, this is a completely separate pot of money. Every time I'm offered an extended warranty, instead of giving it to the cashier, that money goes to my insurance reserve. It's a no-brainer.

But how will that $50 savings help if you have to buy a new $2,000 TV?

That reserve account also has the $120 I saved by not buying the trip cancellation insurance and the $40 for the warranty I didn't buy on the fridge. Statistics tell us that the TV won't break the same time you need to cancel a trip.

Why do you think it's a good idea to borrow from your 401(k)

In many cases, borrowing from a 401(k) may be a better deal than incurring 25 percent interest charges on your credit card. This isn't a license for people to go out and raid their 401(k) so they can go on the vacation they always wanted. I'm talking about people who have debt elsewhere at a relatively high rate. If you're carrying a credit card balance from month to month, there's no way your 401(k) can consistently earn the rate you'd get by paying off your credit card, on an after-tax basis.

But don't you need discipline to pay back that 401(k) money, so you won't endanger your retirement?

Absolutely it's going to be very easy to avoid paying it back. You need to have a plan -- whether it's an automatic withdrawal program to put the money into the 401(k) or having your spouse remind you.

You say many homeowners should have rented longer and not bought homes until their 50s or 60s. Why?

Buying a house in one city is basically the equivalent of buying one stock. You may hit it, you may not. You can't sell it quickly. Then there are the transaction costs. There is no Scottrade where you can sell your house for $9.99 in an instant. The only financial benefit from owning a house is you avoid paying rent.

You say people should think of their kids as investments. I've got two kids in college and I feel that they're depleting my money. Or am I just not waiting long enough for the payoff?

I have four lovely daughters and I don't view them as assets or liabilities. But if you want to think about kids from a financial point of view, early on in life, they're a liability and later they become an asset.

In your later years, you will need less long-term-care insurance and less pension income because in most cases, the kids will help out. The larger the number of children, the greater the probability that that's going to be the case. Your kids may be your pension.

What do you mean when you talk about the opportunity cost of being an English major?

If you're an English major, the earning potential is going to be much, much smaller than someone studying engineering or computer science or accounting. For a mechanical engineer who's going to be earning $60,000 or $70,000 after graduation, a $30,000 student loan shouldn't be that bad. But if you're a Shakespeare major, maybe you shouldn't be taking on any debt because I'm not sure how you're going to pay it off. 

But maybe that English major will start the next Google? Who knows?

Absolutely. But all else being equal, if you have two students in the same dorm room, one majoring in electrical engineering and the other studying dance, who's going to be making more money 10 years from now? On average, it's a no-brainer.

Don't they know that intuitively?

You'd think so. But why does my local Starbucks barista complain about her master's degree in Milton? She's stunned that her thesis isn't helping her get a job.

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