With regular gambling, you are putting money toward something in the hopes that some random event (a flip of a coin, the toss of dice, the turn of cards) will bring good fortune to you. With insurance gambling, you are putting money toward something in the hopes that some random event (a natural disaster, fire, car accident) will not spell utter misfortune. Basically, it comes down to fear and greed , or rather greed and fear, once again.

So why is it that gambing is considered so financially imprudent, but insurance seems to be a requirement? Probably because fear is considered an appropriate emotion and greed is not -in most cases. (There are some cultures such as the Amish and Muslims who do not believe in insurance because it is considered gambling.) People are much more frightened to lose money than they are willing to risk it for a much larger prize. Even if the bet is irrational, people still fear losing more than they are hopeful of winning.

Most insurance companies know this bit of behavioral economics and want to take advantage of this by overcharging and underinsuring- because they can. And they are big business! They are the casinos that slide through as “good neighbors” that plaster our TVs with ads and who routinely turn people down for true claims. They want to scare you into insuring anything and everything, even if it may already be insured elsewhere under another policy. Double insurance is a huge drain on people’s finances because most people do not even know what their policies cover!  We have selective attention when it comes to insurance.

Insurance takes advantage of so many people, but we are not looking at this gorilla in the room…we are looking elsewhere. We’ve been told to pay attention to what could go wrong -to be fearful- instead of seeing the guaranteed loss when you pay too much for insurance.

I’m not necessarily saying that you should go out and cancel all of your insurance policies, but I am saying that more than likely you have fluff in there that you really don’t need, but that they charge you a lot more for.

For instance, I found in our home’s insurance policy that they had a calculated figure of over $100,000 for just our “stuff” our things inside the house like furniture, jewelry, etc. Well, we try to live pretty minimally and avoid collecting too many things so we have nowhere near this amount. But by using their standard formula, we are losing out.

They also have not adjusted any of our properties for the downturn in the economy, and most people should not have comprehensive coverage on their car. To remember this, tell yourself over and over again: cars are liabilities, cars are liabilities, cars are liabilities -all these old reliables (not new shinies) need is liability insurance.

And nobody should get universal/whole life insurance -that is a waste of money. It is only for people who do not have the discipline to save their own money (which admittedly is a lot of people, but still!). And term life or disability should only be used if you would not be able to take care of your family if either of these random events (death or disability) should occur. It should not be used for people who are already retired with plenty of money -what do you have to fear? Not much will change in their lives. Why are you gambling away all that money on the premiums instead of just saving that for when you depart?  

And health insurance? How much more corrupt can we get?

When I think of the insurance gamble, it is so very pessimistic. In a small way we hope something goes wrong so that we can at least get something for all the money we put in over time. At least with Las Vegas Reno, Atlantic City and Monaco there is a certain hope for the best -optimism. With insurance, really the only time you get paid out is if something bad happens. Insurance is a reverse gamble in an industry that is often corrupt and overlooked. Next time you watch TV, pay attention to the number of insurance ads. I think you will be surprised! And go do a full review of your insurance -cut out the junk. You will likely save hundreds if not thousands in premiums as long as you don’t let them scare you into spending more.

So today I was thinking about what it would have been like if we had gotten a 7 year mortgage loan on our primary house instead of a 30 year. Why are 30 year home loans the standard? How many people actually pay off their homes (or even stay) in 30 years? Wouldn’t it make more sense for a home loan to be a much shorter period of say, 7-10 years? To better illustrate this, look at the difference in interest that you will pay over 30 years @ 5% interest compared to a 10 or even 7 year loan @ 5% interest on a $100,000 property:

$100,000- 30 year mortgage- 5% interest =Principal and Interest: $536/month
Total interest paid: $93,255.78!  Or in other words, a $100,000 house for about $193,000.

$100,000- 10 year mortgage- 5% interest =Principal and Interest: $1060/month
Total interest paid: $27,278.62 -total about $127,000

$100,000- 7 year mortgage- 5% interest =Principal and Interest: $1413/month
Total interest paid: $18,724.84 -total about $119,000.

(Figures calculated at Bankrate)

So, let’s look at that objectively. The monthly payment is much higher for the 7 year loan than the other two. In fact, it is nearly 3 times as high (2.6) as the 30 year. However, the amount of interest paid over the period of 30 years is 5 times as much as the 7 year loan! Compared to the 10 year loan it is 3.4 times as much interest and less than twice the mortgage cost per month. In other words, you could pay off your house in a 1/3 of the time (on the ten year example), but pay barely twice the cost of the mortgage payment and save about $66,000 in interest in the process.  

This also doesn’t take into account that the interest rate on a shorter term loan is usually lower than a longer term loan making it even more attractive. What’s more, is that since most people don’t last the full 30 years, they take out second mortgages, refi (usually to another 30 year loan!) or otherwise prevent themselves from owning it outright.

People need to remember on any loan that is amortized, the first payments pay virtually nothing toward the principal and the last few payments pay almost everything towards the principal. For a longer term loan, it is much harder to pay down the principal. Which speaks to another reason for our housing bubble crisis. When we had such low interest rates (as we still do), the policies should have encouraged people to get the shortest term loan possible and the goal in the end should be to have as many people as possible in houses free and clear!

Imagine what a different society we would have if half the population (or more!) owned their own homes outright! Wouldn’t that change things? Especially when housing costs are almost always the highest costs for people. If we could get people out of the cycle of debt and more debt on top of old debt and instead move people (with our policies) toward a debt-free lifestyle I think we could eliminate many of society’s ills.

The argument would be that this might push people who otherwise could barely afford a house with a 30 year loan out of the running for the “American Dream” of home-ownership. Well, if they can barely afford it with a 30 year loan, it might not be the right time to buy a home. This is similar to the argument of why people shouldn’t have to put down the 5 or 10% down payment. If they can’t come up with at least that much, they have no business in getting into bigger debt on a house! This is kind of like a test to prove that you are serious and stable. If not, you should wait until you can. Simply put, not everyone is prepared to get into this type of debt obligation. 

 A house is an expensive, ongoing cost that pretty much mandates the ability to save. Maybe they need to learn the ABC’s of financial literacy  first before jumping in to home ownership. A requirement to put money down is a good practice because it makes people remember that they have a piece of skin in the game; that they really want this and aren’t just going along with it because everyone else is. They would be much less likely to default on the loan if they had a lot of their personal hard-earned money on the line. People would also be more likely to buy a house that is truly within their price range instead of stretching to get the biggest, fanciest thing possible to “keep up with the Joneses”.

In fact, I would say decreasing the standard mortgage term from say 30 to 10 or 15 would actually help people out a lot. The current 30 year loan standard is much more unfair. It takes so long to get out of debt that it feels you never will. After 7 years on a 30 year $100,000 loan, guess how much you still owe?! $87,774.63! You have barely made a dent. And after 10 years? $83,276.42 

If you could see your loan coming up to its end in a decade or less (year 7 on a 10 year loan $100k loan you only owe $34,476.30 compared with year 7 on a 30 year with $87,774 remaining) with huge amounts of your payments going to the principal, wouldn’t that give you motivation to finish it off and pay it? I mean, really, would we want people with 50 year loans because we could barely scrape them into qualifying? Isn’t that taking advantage of the system and the most vulnerable people? If we start to look at 30 year loans that way then we can see that they are really taking advantage of people like a wolf with sheep’s clothing.

The reason it looks like a sheep (ie a good thing) is because it seems like you are doing the responsible thing…you are keeping your payments low in order to be sure that you can pay them. But really, for all the reasons I listed above, you are probably doing yourself -and in turn, society- a disservice. Because of your fear, you have created a monstrous beast called endless (or at least 30-year) debt.

Remember that the word mortgage and amortization have in their etymology the latin word “mortus” which means “death”. So, break free of them (and let them die!) as soon as possible and go live fruitfully!

Most people by now would agree that a college education is a good thing. It is almost a necessity to a modern job in the system. And the college system wants to keep it that way. Long gone are the days of apprenticeships where you learn from a master. Long gone (or mostly so) are the days of academics that challenged the status quo and questioned how we think (remember a PH.D stands for Doctor of Philosophy). Welcome to the future where colleges are meant to churn out worker bees for the top industries (currently health care, education and computer technology).

The institutions scare you, seduce you or otherwise convince you to attend when you have absolutely no idea how to pay for it. Many of them are for-profit corporations like The University of Phoenix, Devry Univeristy, etc that are preying on people’s dreams for a better future. Then if you cannot afford them (and the for-profit institutes are even more expensive than many private and all public universities), they will offer you government-backed loans. These public loans basically pay for these corporate institutions. Can you imagine McDonald’s encouraging its customers to get a rebate from the government to pay for their meal that they will then have to pay back with interest?! Seems pretty crazy to me (although it could be argued that we do this with our current food subsidies…).

But crazy is the current reality. Nowadays, it is almost unheard of for people to graduate from any type of higher education without some form of huge student debt.  There is a lot of money to be made off these loans, and they are the most collectable form of debt. They cannot be wiped out with bankruptcy, they can garnish wages and follow you for life. These loans, unlike housing, car, or even credit card debt, are  for something that you cannot get rid of. You cannot sell, or trade or otherwise ask for a refund for your education.

So what happens when we have an economic situation like our current one that has high unemployment and high attendance at colleges with large numbers of people graduting or otherwise exiting with these large debts? Well, if they can’t find a job (which studies show is increasingly happening), they will probably default on these loans. With high defaults on the horizon, the colleges and banks -and government- that offer this money are likely be squeezed again in the same way they were with the housing bubble.

Of course, eventually, they might actually get paid something because of its high collectability. But this collectability could also be a problem with people purposely seeking under-the-table jobs, job hopping, or dropping out of the job market all together  in order to avoid collections on their student loans. This only keeps the interest on these loans compounding and the hole harder and harder to dig out of.

As this article also points out, we have all the markings for the next bubble to burst. The only question is how hard it will pop.

For those of you who have managed to send your child to college without a student loan, or who were like me and sent yourself and paid your way, congratulations! You should have a party and cake for this achievement in addition to the completion of the schooling! I believe the only way we are going to get out of these cycles of bubbles and busts is to pay as you go for most everything in life. And if you can’t pay all of it, pay for some of it. Put a down payment on it. If it looks too expensive to be able to pay for in a period of, say, 5-10 years, or if you can’t afford to put down at least 5% of the full cost, it may be a sign to look for cheaper alternatives.

If people had been content to buy a house they could buy outright in 10 years instead of whatever they could be loaned (50 year loans! 0% interest!, adjustable rates!), then prices would have been more moderated by the cash and long-term holding. When people have cold hard cash on the line and the horizon is long-looking instead of buying things on margin and only thinking of now, there is a closer connection to its true value.

Investing in your education can certainly be considered an investment. You are putting money into something where you can directly control the motivation, skill-set and potential. However, it is an investment just like any other. You need to make sure to weigh the potential return-on-investment will outweigh the costs instead of being mesmerized by fantasy-too-good-to-be true stories of easy riches. In general, the more investments you can own outright and sustainably, the better you will be fortified to withstand the bumps and baubles of the rest of the system.

Money choices are so much more fun than money traps, as you can imagine. You have control over what you decide to purchase and generally these are reflections of your interests, hobbies, preferences, or even addictions. They feel good, at least initially, to buy and decide. Sometimes there is buyer’s remorse, but overall these are items that you WANT, or else why would you choose to buy them?

Money traps on the other hand are usually things you were not expecting to purchase, but for one reason or another it is something that you will probably have to pay. This could be a car that needs fixed, a parking ticket, something that you thought was going to cost “only” X amount that ends but being double -or triple- that cost. These are the “random” expenses that are thrown your way because that is just how life seems to play. It is kind of like Monopoly. Sometimes you draw a good card, and sometimes you get sent to jail or have to pay a luxury tax. We generally neglect to truly appreciate the small windfalls that happen quite frequently if you pay attention, but we always notice these money traps that we seem to fall into from time to time. The traps or windfalls we generally refer to as “luck” both good and bad.

What do money choices and money traps have to do with each other? Well, on the surface they look like completely separate items. One represents the things you consciously bring into your life (or spend your life energy on) and the other represents things that just seem to happen, randomly. But is this really the case?

Generally the money traps are connected one way or the other with other money choices you made previously. Take my recent parking ticket. I decided I wanted a car and all the associated liabilities that come with it because I wanted the ability to easily transport myself. I decided to drive (instead of bike) and then park in an area without free parking (though I thought it was free). This seemingly random misfortune (minor annoyance really) was completely connected to my earlier money choices. Everything is connected in that way. Humans tend to separate events in our mind. I have a car. I got a ticket (or an accident, or a huge maintenance bill). Completely different, but yet without one choice, the randomness of a windfall or misfortune could not have occurred.

So the first lesson in money choices (or choices in general) is to understand that they do not stand alone. The consequences from these choices can be some that you may anticipate, or they can seem to be totally random. But we not only have the ability to make a choice in the beginning but also how we react to the “random” consequences (either traps or joys -like windfalls). The ticket I received was for $30. I could have shoved it into my glove box and forgotten about it. But instead I called the very next day and talked them down to $10 -about the price of parking there. It still wasn’t fun and it took time to take care of it, but this decision helped to lessen the impact and stopped a chain reaction that might not have stopped for a long while into the future (DMV, bills, court?, who knows).

If you feel like you got the short end of the stick in some situation, first think about what brought you to that unfortunate place in the beginning, then think about ways you can recover from it in the best way. You will become more conscious about what you bring into your life. Pick the battles you want to fight and ask if it’s worth it. Remember the saying: “Be careful what you wish for, it could come true!” You never know the chain reaction in front of a decision or after. And sometimes what may initially look like a misfortune can be positive in disguise.

The other lesson with money choices and money traps is that you may not be able to prevent all of the misfortunes (but many you can), but you can control your choices and this may make the difference of whether or not you can weather the traps that come your way. If you are conscious of all the little choices you make on a daily basis, then not only are you decreasing the odds that something could go wrong with these objects, but you are saving money (your life energy) to offset the costs of any random traps that may come your way. Be conscious of the drama that you bring into your life. Everyone brings in some, but just be sure that it is drama that you are indeed ok with dealing with.

If you buy, find, or otherwise bring into your life a __________ that you care about greatly, there is a chance that it will break, or get sick or get stolen or any number of things. You have brought that into your life because you cared about it and that is fine. But just be sure that you are willing to deal with all the downsides (known and UNKNOWN) to any of those choices as well as the benefits. Then when these random (set into motion by you) events do occur -which they no doubt will, work to make them the most positive situation possible. This is the connection where chance and choice meet: where free will and destiny interact. Make your choices well and your chance occurrences will be much more positive as well.

And remember to say “thanks” every now and then for the things you brought into your life that you wanted or that “randomly” landed there and brought you happiness. It works both ways. You reap what you sow; karma is real. Be careful with your choices and the traps might just set you free.