My boss had to rebuild his house out of pocket and the lesson I learned is that you don’t have to live next to the Mississippi River to need flood insurance.  If you think you have any chance of a significant amount of water causing a problem with your house, get flood insurance.  The insurance will protect you from heavy or prolonged rains, coastal storm surge, snow melt, blocked storm drainage systems, levee dam failure, or other causes.  The government will give you an idea of how likely it is that your house will be flooded at floodsmart.gov as well as connect you to an insurance agent that sells flood insurance.  However, the government won’t tell you if your house is in danger from floods other than from rivers and other bodies of water.

It certainly would feel good to not have any debt, but he would end up converting his liquid cash into an fixed asset.  Any number of events that could happen which would make it difficult to sell his house or get a home equity loan, turning his inheritance into a rock.  To give a few examples:

1. He could lose his job — no bank will give a home equity loan to someone who is unemployed.

2. The house could be taken over by fungus or other natural disaster not covered by insurance.  A few years ago this would have sounded like a bad science fiction movie, but I’ve seen houses for sale whose interior wall cavities were covered with green gunk.

3. A credit meltdown, such as the one currently causing our economy to gridlock.  Nobody would have guessed this a year ago in the era of “liquidity”, but now even people with perfect credit can’t get loans and houses are sitting on the market until they go stale.

Instead, I suggested that he put the money in a high interest bearing account or brokerage account and pay off the mortgage at a faster rate.  That way he would have cash on hand (or close at hand) and still be able to erase his debt when he pleased.

Here are the reasons this fiasco is hitting even well run banks, thrifts, and savings unions:

1. The economic downturn has made it harder for people to pay off their loans.

2. The banks have had to increase the interest they have to pay out to depositors so that they can compete with subprime lenders desperate for deposits needed to cover their subprime loan losses.

3. The banks became highly leveraged (a higher number of loans to deposits) as they were lulled like everyone else into thinking that the economic expansion would last forever.

The National Institutes of Health Federal Credit Union is an example of a perfectly fine credit union having a tough time of it, despite avoiding subprime lending.  From 2003 to 2007, their delinquent loan ratio has nearly doubled from 0.43% to 0.82% while the loan to deposit ratio has gone from 58.60% to 94.47%.  At the same time, they’ve had to pay 4% or more on their money market funds.  The net result was a net income of only $4,291 last year, in part because they increase their reserves to cover loan losses.  This year doesn’t look any better.

Today, the House of Representatives voted 278 to 146 to provide federal employees with four weeks of paid parental leave. Senator Jim Webb has introduced corresponding legislation in the Senate.  However, it’s possible that the White House may veto the legislation due the assumed cost, which is in excess of $100 million per year.  In times of tight budgets, that amount of money is not a small amount to ask taxpayers to pay.  On the other hand, providing parental leave similar to that offered by some companies in the private sector can be a good recruiting and retention benefit that can result in improved productivity (which is one reason the corporations offer the benefit).

1. A good business plan.  Seems simple enough, but there is an endless series of failed businesses that have been based on the idea of selling something for $9 that costs $10 to make.  Examine the business as if you were the owner trying to make the business work.  Then examine the business as if you were the customer.   If the plan is too complicated to understand, that’s an indication of a poor business plan.

2. A low price to earnings ratio.  This is the amount of annual profit per stock share compared to the price of the stock.  If it’s more than 20, which works out to a return of less than 1/20 or 5%, why not put your money in a bank account instead?

3. Stable earnings.

4. Protection from competition.  Imagine what it would take to launch a new cola — billions of dollars to match the amount of money Coca Cola and Pepsi have spent over the years to popularize their sodas.  Each soda has a particular taste that people grow addicted to.  Drug companies are protected from competion by patents.  An important point is that the amount of money you need to spend isn’t a form of protection by itself.  Billions have been spent on the airline industry without a cent of profit.  To create a successful airline you’d somehow have to make people particular to your brand.  Nobody has ever really done this in the airline industry, because an airline flight is an airline flight.

5. No barriers to growth.  Restaurants are a classic example of difficult to grow business — one chef can only serve so many restaurants.  Software is an example of a nearly infinitely scalable business since you can make more copies of your product for only a small additional amount of money and effort.

1. The Dependent Care FSA. With this FSA you can set up biweekly payroll deductions totalling up to $5000  per year.  You can use this money to pay for summer camp, daycare, after school care, etc. for children under age 13 or for other people completely dependent on you.  This account pays out as the money comes in from your payroll check — you can’t get the money in advance.  However, you can submit claims that total over the current amount in your account and the plan will deposit the money into your bank account as soon as it comes in.

2. The Health Care FSA.  This FSA can also be set up as a biweekly payroll deduction totalling up to $5000 per year.  Unlike the Dependent Care FSA, the account can pay out the full amount before it is deducted from your paycheck, so if you have a $5000 medical expense on Jan. 1, the full $5000 will be paid out if that is the yearly amount you opted for.   You can use this account to pay for medical and dental costs and for prescription and over the counter medicines.

The one drawback for both of these accounts is that you have to estimate how much you want to deduct from the account in the beginning of the year.  Any funds you don’t spend in the year are forfeited and you  can’t roll the money over into the coming year.  An easy way to estimate how much to put in these accounts is to total up your dependent and health expenses for the previous year.  It’s easy to underestimate this amount as costs are always going up, so don’t worry to much about guessing too high.

Note that if you use the Dependent Care FSA you can’t take the Dependent Care credit on your federal tax form — however, it usually works out the the FSA is the better deal.  Also, the $5000 yearly limit for both FSA account types is per family, not per person working.

1. Buy a cross cut paper shredder and shred any personal information before putting it in the trash.

2. Check your credit reports once a year for free at annualcreditreport.com to see if anyone is using your identity.

3. If you do anything involving money on your computer, like doing your tax return or banking, you should have a virus and spyware checker, like ZoneAlarm, that looks for programs maliciously downloaded onto your computer.  Also, your computer should have a firewall to keep thieves from contacting your computer.

4. Keep your financial information locked up.  Some identity thieves are contractors, friends, and family members.

5. Do not give out any personal information by email, telephone, or on the internet unless you know for sure you know who is contacting you.  Don’t trust anything just because it looks or sounds like it is from someone you do business with — anything can be forged, so challenge everything.

6. Passwords should be memorized or kept in a safe place.  Don’t put them near your computer or make them easy to guess.