Monday, February 20, 2017

What 20 years in America has taught me about money

Today is my 20th year anniversary living in America-- the land of milk and honey. The place where pretty much anything that I'm accustomed to seeing is bigger. Bigger houses, bigger cars, bigger TVs., bigger you name it.

I can vividly remember what my reaction was the first time I was handed a bucket of popcorn in a movie theater. "Do you expect me to eat all that?" was written all over my face. Suddenly, it finally made sense why most Americans are bigger than me.

It was 1997 and companies in the United States were hiring like crazy in preparation for the Y2K problem, otherwise known as the Millennium bug. Problems arose because programs were designed to store only the last 2 digits of the year to save computer memory and this made 2000 indistinguishable from 1900. It didn't take a long time for me, a natural geek (I've been writing code since age 12), to get hired as a computer programmer.

I grew up in the Philippines, a country with a colorful history. At one point, it was regarded as the second wealthiest in East Asia, next only to Japan. But the economy stagnated in the mid 60s when the late dictator, President Marcos and his wife Imelda (infamous for her 3,000 pairs of shoes), started using the country's Central Bank as their personal ATM machine.

I came from a well-to-do family, but a great number of people in Manila, the city where I came from, were living in poverty. This was a sharp contrast to the booming economy of the U.S., where the majority is the middle class.

Eventually, I became a proud American citizen. I'm very grateful for the opportunities that were given to me. Now, I can honestly say that I love this country probably more than some of her natural-born citizens.

I'm also thankful for the money lessons that I learned along the way...

TIME IS MONEY

When I ask a fellow Pinoy (informal term for Filipino) to meet somewhere at a specific time, a common follow-up question that I get is for qualification whether I meant Filipino or American time.
Filipino time meant I'm coming 15 to 30 minutes late.

You see, Filipinos are notoriously known for being late. One theory that I read is that this is embedded in the culture as it's generally considered 'unethical' to arrive at a party early as you don't want to be perceived as greedy-- that you want to get all the food for yourself.

On the other hand, "American time" meant arriving at a precise time. This probably started when the United States and Canadian railroads instituted a standard time in time zones.  Before then, time of day was a local matter and may vary from city to city. It became very important to arrive at the station at the exact same time in order to not miss your train ride.

In fact, one of the most fascinating things that I've read over the web about American time is that it's not worth Bill Gates' time, the richest man in the world, to pick up a dropped $100 bill from the ground because he's making much more than that per second that he is alive.

I also learned that not investing early will cost you. Given two people of the same age who both plan to retire at age 65. The person who started investing at a late age of 35 will have to contribute twice as much on a monthly basis until retirement in order to accumulate the same amount of savings as the person who started at age 20 and stopped contributing at 35.

From time to time, I still arrive in meetings a bit late. But I learned not to procrastinate. Whether it's paying the bills, filing my taxes, or rebalancing my portfolio, I make sure that I complete them consistently ahead of time.

It took five years after I moved to America that I started to understand and appreciate the time value of money. I sort of regret not investing in my 20s. But it is certainly a lot better than not starting at all.

DIVERSIFY YOUR INVESTMENTS

You've heard the mantra many times: "Don't put your eggs in one basket!". Of course, I knew about this even before I migrated to America. But because I'm Filipino the phrase has a different twist,

"Don't put all your baluts in one basket."

For those who never heard of it, a balut looks like a regular egg that you buy from the grocery store except that it is an actual developing bird embryo (usually a duck or a chicken). It's a common food in countries in Southeast Asia and is considered as a favorite delicacy of many Filipinos.

Eating the thing has been featured many times in the popular stunt game show-- Fear Factor.
I personally find it funny to see how scared the contestants are eating this Filipino delicacy when I myself can eat 5 of those in one sitting especially when they're still warm.

It's all mind over matter. But I also know that it's easier said than done. Case in point, I heard from my wife that some people in Texas eat cows' balls-- I have to admit, that is something that I cannot stomach.

Going back to investing, diversification essentially means investing in a mix of asset classes to ensure you are not in serious trouble even if you lost a significant amount of money on one of your investments. This is because any losses, incurred on any of your investments, may be offset by gains earned by other assets.

Whereas there weren't many options in the Philippines when I was living there, the vast number of investment options in the United States made it possible for me to diversify my investments.

THE POWER OF COMPOUNDING

As a 13 year old high-school student in the Philippines, my economics teacher required us to open a savings account at a local bank. Our grades at the end of each period would be partly based on the interest that we earned and how frequently we went to the bank to save some money.

In an effort, to obtain the highest mark possible, I remember going to the bank to deposit a measly sum of 3 to 5 pesos (sometimes in really small denominations, to the ire of bank tellers), every first day of the week for the span of one year.

At that young age, I knew that my money was earning interest, no matter how small. I even knew the difference between simple and compound interest. But it was only when I moved to America, after I started saving and investing in stocks for the long term, did I realize how fast my balance could possibly grow (especially when the dividends are reinvested).

For example, it took my retirement balance 7 years to reach the $100,000 mark, but it took only a little over 2 years for it to double to $200,000.

The fact that you'll end up more than $7,000,000 ahead when you doubled a penny every day for 30 days as compared to when you're given a flat $100,000 each day for the same period is simply amazing.

It's no surprise this mathematical phenomenon is always referred to as the 8th wonder of the world.

THE GREATER THE RISK, THE HIGHER THE REWARD

When it comes to sports, Filipinos are known to be passionate about boxing. Hence, the rise of the current record holder, eight-division boxing world champion, Philippine Senator Manny Pacquiao. At one point, he was the second highest-paid athlete in the world second only to his arch-nemesis Floyd "Money" Mayweather, an undefeated American fighter considered by many as the best defensive fighter that the sport has ever seen.

The 2015 fight was billed as "The Fight of the Century". The fight was televised through pay-per-view (PPV) and was jointly produced by HBO and Showtime. Win or lose, both fighters received the highest purse of their life (the single biggest payday in the history of sports). This is in part because of the great amount of risk either party will supposedly experience when facing each other in the ring...

The greater the risk, the higher the reward.

The fight turned out to be a big disappointment because Mayweather spent most of his time dancing in circles around the Filipino boxer instead of fighting.  In spite of this, Pacquiao earned over $100,000,000 fighting Mayweather, who probably earned twice as much. 

Compare that number to the relatively small $4,000,000 base purse that Pacquiao earned fighting a lesser-known Mexican boxing champion, Jessie Vargas, last fall (I and a couple of friends personally flew to Vegas to watch the fight)...

The lesser the risk, the lower the reward.

When it comes to investing, investors can control or minimize the risk in their portfolio by a proper mix of stocks, bonds or cash. Most experts consider a portfolio more heavily weighted toward stocks riskier than a portfolio that favors bonds. Stocks are more suitable for someone with a higher risk tolerance, whereas bonds will be more appropriate for those that can't afford the risk.

Should you invest majority of your retirement savings in bonds because it's less risky? The answer is a big NO, unless you're retiring next month. On average, S&P 500 has returned about 12% since 1982. You're lucky if you get half of that investing in bonds.

Investing in a diversified portfolio of stocks for the long-term is the best way to combat inflation, which is likely to erode your returns otherwise. Using the boxing analogy above, it's better that you face a riskier Mayweather (yet boring fighter) because of the long-term rewards.

American innovation played a major role in providing the advanced tools needed to manage the risk and maximize the rewards of your portfolio. I myself, as well as other immigrants from around the world who worked for fintech companies, have contributed our share towards the advancement of the technology-- in our own little way.

I'm looking forward to learning more lessons in the years to come.


Monday, February 13, 2017

Your spouse will have the greatest impact to your financial well-being

With Valentine's Day just a couple of days away, I'm beginning to feel the pressure to come up with something really special for my wife. Traditionally, it would be fresh flowers-- a bouquet of red roses to be specific.

In the past, I hated buying flowers. I've always thought of it as a big waste of money. So to minimize the cost, I bought them at Walmart. If you're as frugal as I was, just don't tell her where you are buying it from, or it will quickly lose its luster.

In fact, when my wife and I started dating I bought her fake porcelain flowers reasoning that they can last forever. The idea that one would spend $50 on a rose bouquet that won't last more than a few days is beyond me.

For single lads out there, I'm now convinced that the bouquet of flowers that you buy on Valentine's Day may very well be one of the best investments that you're going to make (next to an engagement ring)... IF AND ONLY IF, you are giving it to the right woman.

Unless of course, your only intention is to get laid.

For single ladies out there, be aware that accepting a bouquet of flowers from someone you like may become a prelude to a romantic engagement that more often than not lead to an actual marriage. And that's the scary part.

For both parties, be forewarned...

THE SPOUSE YOU PICK WILL HAVE THE GREATEST IMPACT TO YOUR FINANCIAL WELL-BEING

This is an obvious point for gold diggers. But I'm not talking about marrying for money. I'm talking from the point of view of an investor. If you're looking to marry someday, the most important thing that you can do is to pick your spouse carefully.

Happy Valentine's Day.

This is an actual picture of the rose that I gave my wife last year.









Tuesday, January 31, 2017

The real cost of buying that 65" TV

My wife posing at the Jersey shore.

Earlier this morning, I've sold a mutual fund that I held for 15 long years-- Laudus International MarketMasters Fund™ (ticker symbol SWOIX). As the name suggests, the fund invests in shares of companies outside the United States. It falls under Morningstar's "Foreign Large Growth" category because the fund manager's focus is on the stocks' long-term growth prospects as opposed to their valuation.

I bought the shares in 2002 for $1,699. I no longer have a copy of the trade confirmation because 15 years is obviously a very long time, but I do remember the exact amount. This is because it was one of my first mutual fund purchases outside a company-sponsored 401K retirement plan. I had to roll-over a measly balance of about $5,000 to a traditional IRA account. I then split the amount evenly to buy shares of 3 mutual funds for $1,699 each.

I finally decided to sell the fund (in favor of another) because of the following reasons:
  • 15 year average annual return of 7.75% is boring
  • gross expense ratio of 1.59% is relatively high even for an international fund
  • I decided to switch to a more value-focused ETF fund.

What's interesting is that the shares are now worth a cool $8,580. This is in spite of the fact that I never actively bought additional shares of the fund (I stopped contributing to my traditional IRA in favor of a ROTH IRA).

The number of shares that I own grew over the years from about 150 to 396 shares when I sold it. Thanks to automatic dividend reinvestment!


That said, you're probably wondering what on earth does the selling of my mutual fund have anything to do with buying a 65" TV ??

Nothing really... so go ahead, buy that $1,699.99 TV on Best Buy.

But I hope this post gave you an idea how much the purchase will really cost you in the long run.



Saturday, January 14, 2017

Why you should save for your kids' college education

One of the financial concerns of every couple is saving for their kid's college education. Some end up making excuses why they shouldn't, among them:
  • You cannot borrow for retirement, but you can borrow for college.
  • It promotes responsibility-- they'll work harder academically.
  • I don't have much money left after expenses.
Should parents save for college? You're going to hear a strong opinion from me...

My kids playing with the next door neighbor when they were younger.

Top excuses parents make

"You cannot borrow for retirement, but you can borrow for college."

It's true that you should prioritize your retirement; the kids can always borrow. But do you really want your kids to get into debt??? I don't and I'll do my darn best to help them pay for their education. Don't be selfish.

Assuming that you're debt free (besides the house), you should contribute the bulk of your savings into your retirement account AND still make an effort to save some for college. I'm not saying that you should be responsible for 100% of the costs but at least make some effort.

Times are different, the cost of education is getting higher than ever. Your kids will need as much help from you as possible. You brought them into this world, so you bear some responsibility in making sure that they have a bright future.

"It promotes responsibility-- they'll work harder academically."

Children learn from their parents. They are an extension of their parents by their words, thoughts, and actions. How then can not saving for college promote responsibility??

In fact, it might have the opposite effect-- it can promote your irresponsibility.

Would they work harder academically if they're paying for it themselves? Probably yes. Does this mean that they'll perform better than when you're paying for it? No.

By saving for college, you instill in them the responsibility to do the same for your grandchildren and the generations to come.

"I don't have much money left after expenses."

Unfortunately, the people who make these excuses are the same people who overspend on things like cars, vacations, and mindless home renovations.

In most cases, all you need to do is to tighten your budget. There are countless of ways you can save extra money:

driving a cheaper car, changing your own oil,  shopping for cheaper insurance, avoiding junk food, brown-bagging your lunch, getting rid of the cable, buying food in bulk, taking advantage of coupons, avoiding overdraft fees, not paying ATM fees, not buying extended warranties, buying refurbish electronics, skipping the latest model, mowing your own lawn... whew!

Either that or get a second job.

You should and you should start before they're born!

The problem is that parents start saving 2 or 3 years before their children go to college when time is not on their side.

Just like your retirement savings, the earlier you start, the more time your investment will grow. This is especially true if the funds are invested in stocks.

In my case, I started a 529 account for each of my kids as soon my wife told me that she's pregnant. As a result, we now have over $100,000 saved for my 2 children.

The results speak for themselves.

Savings for Madeline (8 years before college)

Savings for Marco (11 years before college)




Saturday, December 31, 2016

Your household needs a year-end report

Along with rebalancing my portfolio, the other thing that I do with my finances before the year ends is updating my household's end-of-year spreadsheet. It doesn't have to be overly complex. Mine is very simple and can be done by anyone who is Excel savvy.

I've been updating the Excel document since 2013 to help us keep track of our expenses relative to our income on a yearly-basis.



What does mine contain?

Itemized expenses

The first column is reserved for the name of the institution receiving the payment. For example, I'd write "American Express" for my credit card payments (which, BTW, I always pay in full). For expenses that are difficult to track, I end up using the generic description of the expense (e.g. ATM withdrawals).

The second column contains the total payment that I've sent to that institution for the year. In the case of a generic expense, I just use the column to total the expense for that category.

I use the third column for the monthly average, i.e. I divide the corresponding value under the 2nd column by 12 to obtain the average.

Lastly, the bottom row contains both the yearly and monthly average totals (sums of second and third
columns, respectively).

Net income per earner

This is similar to the above except that the 'expenses' are recorded from the perspective of our employers. I write my wife's name and mine under the first column, since we are the only ones working in the household.

The second column contains the total amount of the paychecks received by the individual for the year. Like what has been done above, the third column is used for the monthly average and the totals are calculated on the bottom row.

Total savings

I reserve a section to record the total savings that we made that year. The total is calculated by subtracting the total expenses from the combined total net income that my wife and I earned that year.

In addition, I also record our total 401K contributions (including employer contributions) for the year as separate line items. It doesn't make sense to add them to the total savings because they were made before taxes.

Net-worth statement

This spreadsheet also contains our net-worth statement (i.e. assets minus liabilities). This is sort of like the year-end balance sheet of a Fortune 500 company except that the items are expressed in hundreds instead of millions (not to mention that the C.E.O. of the household is also the Chief Financial Officer).

Institutions

This tab contains a list of institutions that I conduct business with. It includes the account numbers, website info, and other essential information. I try to refrain adding password information in this tab for security reasons.


My year-end-report spreadsheet



Why is this important

Maintaining this spreadsheet has the following benefits, among others:

Decision making tool

You can use it to make informed budget decisions for the year ahead. For example, you can adjust your emergency fund goal for next year based on the average monthly expenses that you have incurred in the year.

Historical projection tool

It helps you perform intelligent 'guesstimates' like when you need to project your future net worth. The numbers can help you set long-term goals such as setting a retirement savings amount goal. You see, retirement is not a matter of reaching a certain age-- who wants to retire broke?

Record keeping tool

I've uploaded this spreadsheet on the 'cloud' (One Drive, to be specific) so I can easily share the document with my wife (who happens to be my household's chairman of the board). In this way, it is easily accessible from any device and not forever lost in the unlikely event that I get ran over by a truck.


That, my friend, is why you need to create a household year-end report...

I wish you all a happy, healthy and prosperous New Year!!!



via GIPHY

Tuesday, December 27, 2016

Rebalancing your portfolio is like going to the dentist

There's probably nothing more uncomfortable than your visits to the dentist. I don't know about yours, but my dentist certainly doesn't have the gentlest hands that I can brag about. Once you're seated on that dreaded chair, you'll be as helpless as a toddler as she works on scraping the tartar buildup from every corner of your teeth with her very rough hands. It's never a pleasant experience.


The same can be said when rebalancing your portfolio. Except that now, you're in charge. You are the dentist and your patient's set of teeth is your investment portfolio.


Your portfolio needs regular checkup

Every six months you need to get your teeth checked or else you might get cavities no matter how skillful your brushing skills are. Same is true with your portfolio- it needs regular checkup no matter how good your mutual fund or stock picks are.



Just like your visit to the dentist, it's never a pleasant experience. But you know it needs to be done regularly to maintain your financial health. Unlike your experience at the dental chair, the pain is purely psychological.

Rebalancing your portfolio involves selling your winners-- the ones that went up substantially in value, and buying some 'losers' with the aim of adjusting the allocation to match your original goals.

The problem is that this process goes counter to natural human emotions. Because of greed, we tend to buy more of those that went up. Out of fear, we sell those that went down without regard to the long-term outlook. As a result, we end up buying high and selling low.

Perform an X-ray of your investments

The dental X-ray machine provides pictures of the teeth, bones, and soft tissues around them. Not only do these images help find issues with the teeth, but they can also provide some insights on possible problems with the mouth and jaw. A similar tool should be used for your portfolio, and it's probably already being offered by your online brokerage.

I've been a Charles Schwab customer since 2002. I have benefited immensely by the investor tools available on the website. One of them is the "Schwab Portfolio Checkup" tool, which I've been using to 'x-ray' my portfolio on a regular basis.

The following aspects of your portfolio should be thoroughly examined.

Asset allocation

You need to stick to your long-term plan. The majority of your assets should be invested in equities when you're in for the long haul (10 years or longer). Historically, stock investments offer the best upward potential compared to other investments. In my opinion, someone with a high tolerance for risk and longer investing time horizon should allocate 90% of  his portfolio to stock funds.

Equities are often categorized based on market capitalization: large, mid, and small caps. Large-caps are companies that have market capitalizations of $10 billion or more.  As a consequence, they provide stability and liquidity to a portfolio. Small and mid-capitalization companies have more up-side potential for growth given their smaller size.

As you approach retirement, it's wise to gradually increase your allocation to fixed-income instruments such as bonds, which are less riskier. This is especially true when you find yourself unable to sleep at night, constantly worrying about an incoming market crash.

Not only will fixed-income instruments 'soften' the effect of a market crash having no direct correlation with stock market price movements, but they also generate regular income flow that you can potentially reinvest.

My asset allocation as of August of 2016



Sector diversification

The equities portion of your portfolio may be diversified in other aspects, say, market capitalization. But if those companies all belong to single sector then you may be in trouble.

For example, everyone knows what happened to the airline sector in 2011 as profits were trimmed substantially when the travel industry was hit hard by rising fuel prices.

The chart below displays the percentage of my equity holdings by sector compared to the overall market (S&P Global BMI). Any deviation of at least 20% will be a red flag.











Equity concentration

Billionaire investor Warren Buffet famously stated that "diversification is protection against ignorance" and many investors took this to heart and lost a lot of money.

The problem is not because they got cocky or too confident about their picks that they end up investing in just a couple of individual stocks. Rather, it's because their portfolio is highly concentrated in a few stocks (not to mention that they're not Warren Buffet).

In my case, the two largest individual stocks in my portfolio are Microsoft (MSFT) and Bank of America (BAC), both of which I've owned for a very long time. But they represent less than 5% of my portfolio.














The thing is even if you run the company yourself or are involved in its day-to-day operations, there will always be some risks that need to be managed. The saying that you should never put your eggs in one basket still holds true.

Fixed-income

Like equities, your typical fixed-income mutual fund may be comprised of different types. For example, US treasuries provide stability while municipal bonds provide tax-exempt income. Treasury Inflation-Protected Securities (TIPS) provide protection when inflation is high.

You should examine the allocation of your fixed income holdings to make sure they still reflect your original goals.









Bonds can be also classified based on the credit ratings of the companies or institutions that issued them. For example, US issued treasuries are rated AA+ by Moody's. On the other end of the spectrum are junk bonds, which generally offer higher yields and therefore riskier.

Lastly, it is important to understand how your fixed-income investments react to higher rates. For the past decade, the Federal Reserve kept interest rates very low to promote economic recovery. This is where the time-to-maturity matters. The longer the bond matures, the more sensitive its price reaction will be against interest rate hikes.

Quality

There are many techniques that you can do to check the quality of an investment. In my opinion, it doesn't make much sense to perform fundamental analysis on a baskets of stocks like mutual funds or ETFs (or you'd be more inclined to pick individual stocks instead), so we normally rely on some reliable benchmark to compare to.

One red flag is the consistent underperformance relative to its benchmark. Given a choice, I'd personally invest only in mutual funds that have a long positive track-record. Sadly, they seem to be hard, if not impossible to find, in employer-sponsored retirement plans.

I'd pick a fund with higher Morningstar ratings (3 stars or more). The company provides data on thousands of investment offerings, including mutual funds. It has emerged as the trusted source of investment research.







Expense ratios

You need to pay attention to your fund's expense ratio as it can easily eat up your return. Actively managed funds have substantially higher expense ratios than index funds for obvious reasons-- they need to pay a fund manager and other expenses related to actively managing the fund. Sadly, most actively managed funds don't beat their respective benchmark indices.















I'd personally avoid any actively managed fund that charge more than 1.2% unless the fund has an exceptional track record. Note that international funds generally do have higher expense ratios so it doesn't make sense to compare their expense ratios to domestic funds.


What's next


Your portfolio's 'X-ray' report is an important tool. Using the numbers and information that you gathered, you can adjust your portfolio to better reflect your risk tolerance and time horizons for various goals.

As for me, here's how I've rebalanced my portfolio for 2017. With rising interest rates and record-high equity prices, I decided to increase my cash position while making sure that it is still completely aligned with my current goals.














Just as X-rays can be harmful to you when done too frequently, rebalancing your portfolio too frequently can do more harm than good.

You don't need to follow the day-to-day changes in your portfolio either--- for most of us, that would be stressful and could potentially just lead to reactive, bad investment decisions driven solely by emotions.

In my case, I rebalance my portfolio once in every six months. About the same frequency, as my visits to the dentist.


[ Disclaimer ]

The above references an opinion and is for information purposes only.  It is not intended to be investment advice.  Seek a duly licensed professional for investment advice.



Sunday, November 27, 2016

Drive carefully. Don't skimp on insurance.

Inspecting a rented Lamborghini in Nevada

One of the aspects of wealth building is being able to protect what you have accumulated. Even if you are extremely frugal with no debt, wealth that you have worked so hard for your entire life can be lost in various ways, among them:
  1. a natural disaster
  2. a medical emergency
  3. an ugly divorce
  4. a court judgement arising from a lawsuit.
I've recently almost had to deal with the last one when the greedy 20-year-old waitress, whom I got involved in a 3-car-accident with, tried to sue me, and the person driving behind me, by half a million dollars for non-existent injuries that she sustained. Fortunately, I was adequately insured. The case was eventually settled, I paid nothing out of pocket, except half of my $1,000 deductible.

Here's how the story went...

SANDWICHED BY TWO CARS

It was a clear and sunny morning, in the spring of 2013, I was driving along the highway towards work at probably around 55 to 65 miles per hour when the car in front of me suddenly stopped. It was so abrupt that even though I was comfortably 6 to 8 car lengths away when I first hit the brakes, I still couldn't avoid the accident (and I did try to hit the brakes hard!). Seconds later, I was rear-ended by the car behind me.


NOBODY GOT HURT

Fortunately, none of us got hurt. Everyone got out of their respective cars unscathed. The other 2 drivers, both in their early 20s, even shook their hands. It turns out that they happen to know each other as they worked in the same restaurant a few years back.

It's so obvious that none of us got hurt that nobody even bothered to call an ambulance.
Should one of us got hurt it would have been me. My car was sandwiched between bigger and heavier cars, and I'm the oldest driver, the one having the brittlest bones among the three.

Don't get me wrong. I know that whiplash injuries are real and that they can sometimes manifest days or even weeks after the accident. But I do know that I didn't hit the car in front of me that hard. It had no visible damage whatsoever, as far as my bare eyes can tell.

THE POLICE REPORT

The traffic policeman came, quickly investigated, and wrote the police report. The driver behind me and I were given traffic citations for driving faster than conditions warrant, presumably because we were the ones who hit the cars in front of us.

I probably hit the car in front of me at 10 miles per hour. The car, a relatively new sport utility vehicle (SUV), did not sustain any visible damage, it seemed to me. The police report states that it has minor paint scratches. This is not surprising because I was driving a small subcompact car, a Prius C hybrid (I blogged about my Prius), which I bought just the year before this accident.

When the traffic citation came over the mail, I decided to just pay the $130 fine and not contest the ticket. I figured it's not worth the trouble and it would have been difficult to prove otherwise. Anywhere you go, you are presumed guilty if you happen to rear-end the car in front of you. Besides, the report states that everyone is fine and there were no injuries.

THE DAMAGE REPORT

My car wasn't as lucky. It absorbed all the energy from the impact (modern cars are designed this way). It had sustained $13,000 worth of damages, at least according to the collision shop responsible for the repairs, brought forth by the front and rear impacts. Part of the reason why it sustained that amount of damage is because of the bumper incompatibility between my car and the SUV- mine is much lower height in comparison. Amazingly, I managed to drive the Prius back home, after the accident, without being towed after the rear left wheel had been replaced with a donut.

Since my car was less than a year old, it was never declared as totaled; it's much cheaper for my insurance company to shoulder the repairs than to pay for the replacement cost. With the Prius C having been in the market for barely a year, the bright side is that car parts will be replaced with original equipment manufacturer (OEM) parts.

Since I've chosen to have a high deductible in my policy, I had to pay my insurance $1,000 before they can do the repairs. I was reimbursed $500 because the other driver who rear-ended my car was also at fault. Of course, this is peanuts compared to paying for the repairs yourself.

THE COMPLAINT

A full two years later, the driver of the SUV filed for a civil case against me and the other driver seeking compensation. The complaint alleges the following, among others:

"As a factual cause of the two collisions, Ms. XXX sustained the following injuries, some of all which may be permanent in nature and may have aggravated pre-existing conditions: trauma throughout her body; headache; contusion and strain and sprain of her left ankle; strain and sprain of the pelvis;  bilateral shoulder strain and sprain; cervical, thoracic and lumbar strain and sprain; rib contusions; cervicobrachial syndrome; cephalgia; kyphosis; lumbago; and myofascitis."

I wasn't surprised of the lawsuit because I was warned by my insurance carrier months before. But the above made me laugh. Her ambulance-chasing lawyer probably tried very hard to put as much medical lingo in there to make her 'injuries' appear very serious.

I wasn't at all worried. Why should I?  My policy provides coverage in the amount of $250,000 per person and $500,000 per occurrence for bodily injury. The chances of me paying out of pocket is very low:
  • The case would have to go to trial
  • The jury would have to decide in her favor
  • The judgement would have to exceed my coverage limit of $250K
Having a peace of mind is exactly the reason why we buy insurance.


THE DEPOSITION

Months later, I received a letter from the lawyer assigned by my insurance carrier to defend me. In addition to setting the time and date for the deposition, he gave me pointers on how to conduct myself during the course of the event.

In its simplest form, a deposition is the oral testimony taken under oath prior to trial when most objections available at trial do not apply. You're suppose to tell the truth, speak slowly and clearly, answer the questions directly, and stick to the facts and testify only to what which you personally know to be true. Most importantly, you should never lose your temper.

I was advised to be in the venue 30 minutes ahead of time, so he can prepare me for my deposition. I felt I didn't need preparation because all I need is to sit there and tell everyone exactly what happened. So the only other preparation I really had prior to this meet was watching Justin Beiber's deposition in YouTube.

I went to the event in a suit and tie and shook hands with the stenographer and the other drivers' lawyers. Once seated, her lawyer immediately asked questions, one after another, hoping that I make a mistake. Among the questions asked:

Q. Did you apologize to her for hitting her?
A. I don't -- No.
Q. Have you ever apologized to her for hitting her?
A. No.

Saying 'Yes' would have been tantamount to an admission of guilt. I would never apologize to her. Normally I would, but this is an exception. She's maliciously suing me for financial gain. Besides, she's the one who stopped abruptly. Under no circumstances was I tailgating her before the accident happened.

My deposition probably took an hour. To be honest, I enjoyed the experience mostly because all I had to do is to tell the truth. When it was her turn to give her testimony, I left following the advice of my lawyer.

Hers probably took the rest of the day. Her transcript was four times as long as mine as she was bombarded with questions about the extent of her injuries. It was full of lies she made Richard Nixon an amateur in comparison. I guess that's needed if you're wishing for a huge settlement from the jury.


THE SETTLEMENT

One afternoon, a year later. I received a phone call from my lawyer informing me that the case won't go to trial. They have decided to settle the case with the complainant by paying her the sum of $75,000 ($20,000 to be paid on behalf of the other driver involved). He thanked me for my cooperation then hanged up the phone.

There was a sense of relief that it's finally over. However, part of me wanted to proceed with the trial because this is a clear case of soft insurance fraud and I was more than eager to testify against her. It is insurance fraud that makes our premiums go higher. It is the paying public that eventually suffers.

A great majority of this type of cases don't go to trial. Insurance companies are smart enough to know that trials are typically more expensive because juries are extremely unpredictable. You just can't predict how outrageous the awards complainants get should they win. $75K is a chump change for these big insurance companies. Her lawyer knows this.

I hope she puts the money to good use (a significant portion will probably go to her lawyer's bank account). Paying all her debts is a good starting point. It seems she spends more on things that she cannot afford. A 20-something working 2 jobs probably won't be able to afford a brand new SUV.

LESSONS LEARNED

There are many lessons that can be learned from the accident.

Drive carefully. Never get into an accident.

Drive defensively and never tailgate. Maintain a safe following distance. Avoid distracted driving. If you've been driving distracted, lawyers can easily collect data from your cellphone provider and use that against you in court. Being sued is a long and time consuming process, much more if you go to trial.

I'm the safest driver in the world but still got into an accident. So the next lesson is ...


Make sure you have sufficient insurance coverage

Don't skimp on your insurance coverage. Most states in the U.S. will require you to carry the minimum amount of typically 25/50/15, signifying the maximum amounts of $25,000 for bodily injury per person, $50,000 for bodily injury per accident, and $15,000 for property damage per accident.

Mine was 250/500/250 because I had substantial net worth to protect. If I opted for the minimum, I would have been held liable to pay $50,000 out of pocket to cover the difference. Lowering your liability limits is one of the worst decisions that you can ever make with auto insurance.

Consider having an umbrella policy if you have a relatively high net worth like me. An umbrella policy is relatively cheap because it steps in to protect you only if your liability is over and above the limits of your auto policy.