We often hear those who are running for public office state their opinion that the government should be run like a business. In theory, this sounds great as businesses often achieve their goals much more effectively than government does. However, one goal we should all strive to achieve even if governments cannot do so is effective financial management, if not for ourselves, for those who we love and will be the beneficiaries of our hard work or the one's left to clean up the mess of our failure.
Governments and not-for-profit entities are governed mainly by their budgets, not by the marketplace. These organizations control or strongly influence both their revenues and expenditures through the budgetary process. Their budgets drive all decisions based on the concept of intergenerational equity or inter-period equity as it has become known in recent years. This concept emphasizes that constituents should pay for the services they receive in the current year and not shift the burden to their children. Budgets provide insight into whether governmental and not-for-profit entities are paying for current services (expenditures) with current revenues and thus avoiding borrowing to pay for those services and passing the obligation to future generations. Most citizens are aware that our national debt is in excess of 18 trillion, which would suggest the federal government is not very concerned about passing the cost of our current services to our children. During each election cycle, we all complain about what this is doing to our country and vote for those who promise to balance the federal budget and reduce the national debt. Beyond voting there is not much we can do to correct this problem as it is left in our elected officials hands to manage and argue in congress. Since most of us are not elected officials, the vexing problem we face each day is the management of our own household budgets and the debt we accumulate to make ends meet. Should we not also be concerned with intergenerational equity? Even if government cannot or are unwilling to achieve intergeneration equity, shouldn't we? Most people are and should be concerned about the potential financial mess that our children will have to deal with when it is our time to go. In addition, we would all like to leave our children and grandchildren in a better place financially than we were when we began our life journey. To accomplish this goal, planning and consideration must be done on several fronts. We must effectively manage our finances and properly insure ourselves against financial loss. Purchasing the appropriate insurance is one of the most important components of the planning process.
Consider insurance as a partnership between you, other people and an insurance company that agrees to accept the risk of loss for a fee referred to as an insurance premium. Financial pools are created with all premiums collected and are allocated between the administrative cost of the company and the payment of claims, the remainder is the profit of the insurance company. Personal losses are only paid if the event is covered in the insurance policy. Often, people who purchase insurance fail to read their policy carefully and find out too late that the loss is not included in their plan. In those instances, it is always easier to blame the insurance company rather than accept responsibility for their failure to fully understand the policy they purchased. We should always read our policy to be aware of what is covered and what is not. Every policy sold will have basic limitations and most will have a deductible. Deductibles on insurance policies are a way we accept responsibility for some of the risk. Deductibles are out of pocket expenses that we agree to pay before the insurance company will pay for any covered loss. The higher the deductible, the lower the risk to the insurance company and the lower your premium will be. The size of the deductible you choose is determined by how much you are able to afford to pay out of your pocket for losses sustained and the benefit in terms of lowering your premium.
Other issues to consider include exclusions, multi-coverage discounts, other discounts offered and your credit score. Exclusions mean that some items are not covered, at least initially, by the policy you purchase. You should always inquire as to how exclusions affect your premium and the time frame for the exclusion. Multi-coverage discounts are often offered to those purchasing multiple types of coverage with the same company. For instance, purchasing both your homeowners and auto policy with the same company typically reduces the amount your premium would be if you purchased the coverage from different companies. Many companies offer a variety of discounts for safe driving, good students, non-smokers and other personal characteristics that the insurance company feels reduces their exposure to risk. You should always inquire about the various discounts available to maximize your coverage and minimize your premium. Finally, although it is prohibited in some states, it has become common practice in the insurance industry to utilize credit history as a factor in determining insurance premiums. Typically, the higher your credit score, the lower your premium will be. This is just another reason to reduce or eliminate your debt and effectively manage your finances.
While purchasing insurance takes time and effort, it also takes time and effort to effectively maintain control over your insurance coverage. However, effective control can result in significant savings over time. Always file your policies in a safe place where you can find them. It is also important to make someone else in your family aware of the insurance cover- (cont'd at right) (Don Ray Cont'd) -age you have and where you keep the policies. Make it a practice to review your coverage periodically to make sure it is up-to-date and that you have adequate coverage and that you are not over insured. Find out your rights in the event that you have a claim denied before accidents happen so you will be prepared. It is also important to never pay cash for a policy. Payments should always be made by a check or money order made payable to the company, never to the agent. You should also keep receipts to document you are current in your premium payments. In most cases, it is best to use insurance as a means to provide protection against large financial losses rather than a means to save money for some future goal. Direct your insurance dollars to cover potentially large financial losses only and begin saving to cover minor losses.
Regardless of whether it is your home, vehicle or life, protecting what you currently have is an effective use of your current income. Properly caring for and maintaining our assets allow us to avoid costly repairs and the potential borrowing necessary to replace them. It is also a mechanism to achieve our ultimate goal of building wealth we can pass to future generations so they can enjoy it without the worry of paying for it. Although the government has not in recent years adequately achieved intergenerational equity for the children of our nation as a whole, on an individual basis we can through planning, consideration and purchasing adequate insurance achieve it for our children and grandchildren.
The University of Missouri Extension office is open Monday -- Friday, located in Kennett, Missouri at 233 North Main Street. Contact 573-888-4722 with questions or comments. MU is an equal opportunity/ADA institution.