Money for Nothing

If you are like me, a fellow-Altadena-resident-whose-home-burned-down, you may have more money in your checking account than you have ever had in your life, thanks to payment(s) from your property insurer. These are my thoughts on what you should think about and do next. Incidentally, if you are still waiting for your money, make sure the insurer transfers the money to your bank account; checks can create unnecessary problems for you.

The first thing I did was move the money from my checking account to my savings account while I decided what to do. I needn’t have bothered. My “savings” account paid “one basis point,” a 0.01% annual interest rate. A basis point is one percent of one percent; there are one hundred basis points in one percent. While it is better to be earning some money in a riskless investment than earning no money, on one thousand dollars, one basis point earns you one thin dime – ten cents – in a YEAR. That’s less than one penny a month. I explained basis points in the foregoing because that’s how my bank described its “ordinary savings” rate to me. “One basis point per annum,” on accounts with no minimum balance and no restrictions on withdrawals, is the definition of a “basic savings” account in my bank. Note: your account may vary. If your savings account has an interest rate of one percent or more, and if the cost of transferring money among accounts at your bank is free, you should go ahead and move the funds to the savings account while you decide what to do. Bad on me for never checking what my “savings account” paid.

“I am risk-averse; preservation of the insurance proceeds was our highest priority.”

The next thing I did was consult with my financial advisor, something I suggest you emulate. I hope you are not relying on your high school buddy, Sal, or Aunt Henrietta, but rather a certified professional (there are several forms of certification) who takes their fiduciary responsibility for you seriously. Our advisor reminded me that deposit insurance is limited to $250,000 per depositor per institution and that I needed to break up the money to ensure that it was all insured by the government. I am risk-averse; preservation of the insurance proceeds was our highest priority. If you are a risk-taker, you might consider other investment opportunities. Please, just remember the adage, “If it sounds too good to be true, it probably is (too good to be true).”

We then needed to discuss what to do with the money, which depended on when we needed it and how much we needed. The answer for you will depend on whether you intend to rebuild, purchase a replacement property, or move on to a non-ownership option, such as renting or choosing an independent living facility. Don’t worry, you don’t need to have made a decision yet. My wife and I have decided to postpone our decision about what to do next until at least six months to a year after the fire.

Create a Timeline

I found it useful to make a timeline. You can use your imagination, a calendar, or a piece of paper, but the goal is to identify the earliest you might need how much of the money. Since the earliest we are going to decide is July, the earliest I realistically might need the money – to buy a replacement property, for example – is November. The four months between decision and need for cash is my best guess at how long it would take me to (a) find a realtor, tour available homes, make a winning offer, and enter escrow, or (b) choose an architect, agree on a design, find a contractor, and get the plans approved, or (c) if we neither rebuild or replace, the timing of deciding when to make long term investments is not that important. Accordingly, I needed to choose an investment, a place to put the insurance policy cash, which would be available to me in its entirety in November.

“You do not pay a contractor in advance for their work”

Had we decided to rebuild, our future cash needs would have been more complicated. I would need a little money upfront to pay for an architect, to get my lot fenced, to hire a surveyor, perhaps, and to get the plans approved. Then, my future cash needs would depend on the rate of construction of the rebuilt property. You do not pay a contractor in advance for their work. In fact, it is a big red flag if you are asked to pre-pay. The current Mayor of Paradise, California, who addressed a Zoom meeting of Altadenans arranged in May by ACONA (Altadena Coalition of Neighborhood Associations, a longstanding  Altadena group), said that if he could give merely one piece of advice to the Altadena Town Council, it would be to put up a billboard advising Altadenans not to pre-pay for any construction work. Too many people in Paradise were convinced by seemingly legitimate contractors that pre-paying would allow them to build the property faster. The usual outcome was that the contractor in question would disappear with the cash. Don’t let this happen to you. Do not pre-pay for construction work. Paying in pieces is the norm when certain milestones are achieved, such as when the foundation is poured, or the framing is completed. Your contract with the builder should clearly outline these matters.

We decided that certificates of deposit (“CDs”) best met our needs of safety and specific maturity. Naturally, I first checked the rates at our local institution. My financial advisor told me the CD rates available at the money center banks. I was surprised that our local rates were 100 basis points lower than the big banks’ rates. On reflection, however, I realized that many local people are receiving insurance proceeds and depositing them in local banks. The local banks are paying less because they can and still attract whatever deposits they need. One hundred basis points are equal to one percent. If you look at a one-million-dollar deposit for one year, that one percent is equal to $10 thousand. That difference is material to me, at least, so I (metaphorically) shipped my money to New York.

There is much more to consider than I have written here. Getting good advice is key for most of us. Aligning our risk appetite with our investment possibilities is part of good planning. Proceeding carefully is usually wise. Everything will likely take longer than you anticipate. Paradise is quite different from Altadena, but it is sobering to realize that 6.5 years after their fire, only 35% of their lots have a structure on them.