The energy industry in the U.S. has surged in the past decade thanks to advances in technology that have allowed companies to extract vast quantities of oil and natural gas from sources once deemed too difficult or expensive to exploit. Yet as unconventional drilling methods like hydraulic fracturing have become more common, scientists have noticed a disturbing pattern that seems to follow their use: a sharp rise in the number of earthquakes in areas where fracking is used.
With many shale oil and gas deposits far from the parts of the country where residents usually expect earthquakes, homeowners are becoming increasingly concerned about the threat of fracking-induced temblors damaging their homes — and also wondering whether they’re insured against the danger.
Oklahoma: Not OK for Earthquakes
Until the recent energy boom, few people thought of Oklahoma as being a potential hotbed for earthquakes. No major fault lines run through it, so residents and the government saw little risk. Although the state isn’t that far from the New Madrid Fault, which runs along the Mississippi River from St. Louis to Memphis, Oklahoma didn’t face nearly the same danger as areas of southeastern Missouri, eastern Arkansas and western Tennessee. In maps produced prior to the fracking boom, the U.S. Geological Survey assessed Oklahoma as having relatively modest seismic hazard risk.
Now, though, all that has changed. In May, the USGS issued an earthquake warning for Oklahoma, the first time it had ever done so for a state east of the Rocky Mountains. Researchers from the USGS and the Oklahoma Geological Survey specifically mentioned the possibility of hydraulic fracturing contributing to quakes. Extracting oil and natural gas through the fracking process creates some pressure, but scientists believe that reinjecting fluids back into the ground creates even greater amounts of seismic instability. As a result, Oklahoma has gone from having no more than a dozen magnitude 3 earthquakes each year from 1990 to 2008 to suffering hundreds since 2009.
Similar concerns have arisen in other areas of new energy production, including Ohio and Colorado. And while the impact on the energy industry hasn’t been substantial yet, residents of states where fracking activity has caused damaging tremors are now learning what residents of California have long known: Typical homeowners insurance doesn’t cover foundation and structural damage from earthquakes. Homeowners need to get additional earthquake coverage to protect themselves from potential loss.
As you’d expect, interest in earthquake insurance has spiked. A recent Time article found that, at least according to one insurance producer, earthquake coverage in Oklahoma has soared in popularity from about 1 percent prior to the fracking boom to about 40 percent currently. Broader-based figures show a more modest climb, but the Insurance Information Institute has figures showing that total premiums collected for earthquake insurance in the state rose more than 70 percent between 2010 and 2012. That comes even as premiums for earthquake insurance there have soared, with the institute reporting a doubling in average costs to more than $12,000 in 2013.
Will Energy Companies Foot the Bill — or Will You?
For consumers, the cost of earthquake insurance has long made it seem optional for homeowners outside areas most at risk. Yet even as premiums climb, greater awareness of earthquake risk will force many homeowners to consider the potential impact of seismic activity on what for many is their most valuable asset.
In the end, the cost of earthquake insurance will turn on the ability of insurance companies to link loss events to specific activities from oil and gas production companies. Insurance industry experts have already looked at research establishing definitive links between wastewater injection practices and resulting seismic activity, but any potential lawsuit by insurance companies on behalf of homeowners against oil and gas producers would need much more specific evidence that a particular operation caused the quake that led to the damage. If insurers can’t collect from energy companies, then they’ll have to pass through loss costs to policyholders via higher premiums.
Nevertheless, if you live in an area where hydraulic fracturing is taking place, you need to keep a close eye on earthquake activity and consider the benefits of having earthquake coverage.
This is the granddaddy of them all. Start to type "emergency" into Google (GOOG), and the first suggestion is "emergency fund." The rule is to make sure you have six month’s of living expenses tucked away in cash in case you losefyour job or suffer a financial setback. Of course it’s important to have a financial safety net, but when you earn virtually nothing on your cash, this rule can cost you. For example, if six months of living expenses for you is $25,000, you’d be sacrificing close to $1,000 of income a year by keeping this money in a checking or money market account.
For years, I’ve broken the mold on this financial rule by telling clients they shouldn’t have their emergency fund in cash. Instead, choose a short-term bond fund that pays 3 percent or higher for your safety net. If you need the money quickly, you can easily sell the fund and get access to the cash. If you don’t need the cash –- and these emergency fund accounts are rarely used –- you can still make money on the assets.
1. You need six months of living expense in cash
Not so fast. There are many good reasons to contribute to a 401(k), such as tax savings, tax-deferred growth and a possible employer match, but there are also good reasons not to contribute as well. Don’t blindly dump money into your 401(k) if you don’t have an emergency reserve of some sort and there is a chance you will be laid off. It is taking longer for most to find a job, so if you think you may be out of work, make sure you have the resources to pay rent and buy food until you land a new job.
Also, if your employer doesn’t provide a match and you are in a low-income tax bracket, it may make more sense to pay the tax now (since you are in a low tax bracket) and invest in a Roth individual retirement account instead. Use this 401(k) vs. Roth IRA calculator to crunch the numbers.
2. Max out your 401(k)
You cannot cut your way to wealth. Too many people and financial advisers focus on trimming expenses when they should be focused on the other half of the equation — income. I’m a proponent for living within one’s means, but too often that creates an artificial barrier or ceiling. "This is what I make, so I have to cut back to save more," is often the thought process. Rather than living within your mean, work on increasing your means.
There are many ways you can make more money, including asking for a raise, boosting your skills –- your human capital –- and getting a promotion, starting a side project in the after-hours or going back to school and starting a new career. What you make today is not necessarily what you can make tomorrow. Cut unnecessary expenses and then use your energy to increase your income.
3. They key to financial success is cutting expenses
You should only save for your children’s education if you can afford it. That means when you’re on track to having enough assets for your retirement. Assuming you have the retirement assets and now want to save for college, most advisers will recommend a 529 college savings account.
Not so fast. These 529 accounts have some real advantages, such as tax-free growth of contributions if they are used for approved higher education expenses. This tax-free growth is a big benefit. However, if you withdraw money from this account and do not use it for approved higher education expenses, the gains will be subject to ordinary income tax and a 10 percent penalty.
The big risk is if you fully fund your child’s college education but he or she decides to not go to college, drops out, finishes early or goes to a less expensive school. You have the ability change the beneficiary to another qualifying family member without penalty, but if you have just one child, there may not be anyone you can transfer the funds to. You would then have to liquidate the account and pay the tax and penalty. If you are undeterred and still want to pay for your child’s college education, start with a small contribution into the 529 and fund up to a maximum of 60 percent of the cost in case one of the above scenarios occur.
4. Fully fund a 529 account to save for college expenses
The average age of cars on U.S. roads is 11.4 years. So if you’re average, then it may make sense for you to buy a car -– especially a car a year or two old –- instead of leasing. However, if you do not intend on driving the same car for over a decade, a lease may be a much better option. A new study by swapalease.com found it was better to lease than buy based on its criteria. And under certain circumstances, you may be afforded a larger business deduction with a lease compared to a purchase.
cars
5. It's always better to buy a car than lease
The certified financial planner designation is the gold standard when it comes to financial planning. I wouldn’t think of hiring a financial planner if they weren’t a CFP practitioner. However, just because you are working with a CFP doesn’t mean you shouldn’t research your adviser, his or her areas of expertise and how he or she charges. The CFP tells you he or she has advanced training in areas related to tax, investing and retirement planning; has passed a comprehensive and difficult exam; and has agreed to adhere to a high code of ethics.
The onus is on you to know what you need and to make sure your CFP financial planner can deliver. Don’t get lulled into thinking that just because he or she have three letters after his or her name that he or she has been screened. Ask tough questions before you trust your money to anyone -– even a CFP.
6. A CFP designation is all you need
Most financial pundits will advise taxpayers to have just enough taken out of their paycheck so when April 15 comes around, they will neither owe money nor receive a refund. The rationale is if you get a refund from the Internal Revenue Service, it means you paid too much in over the year — and the government has had use of your money without paying you any interest. Keep the money and invest it yourself is the theory.
‘Again, that’s the theory, but reality is much different. It all comes down to psychology. I look at paying a bit more to the IRS as a forced and automatic savings account. Sure you won’t earn interest, but human nature tells us you probably won’t save the money anyway. There is a greater chance you will squander $100 a paycheck then if you receive a $2,400 check from the IRS. One approach takes a plan and discipline each month to save and invest while the other doesn’t. A check from the IRS isn’t an interest-free loan; it is an automatic savings plan.
7. Don't give the government an interest-free loan
Nobody wants to endure an IRS audit, but too often I see honest and ethical taxpayers avoid claiming certain deductions or taking certain positions that are completely legitimate because they fear it will increase their chances of an audit. First, your chances of being audited are small –- about 1 in 104 chance. If your return doesn’t include income from a business, rental real estate or farm, or employee business expense deductions, your chances are even smaller -– 1 in 250. Second, if you and your tax preparer are not crossing the line, you have little to worry about. In fact, thousands of taxpayers get a check from the IRS at the end of the audit. Don’t let a small chance of an audit keep you from taking advantage of every tax strategy for which you qualify.
8. Avoid IRS audit red flags
Do what you love, and you’ll never have to work a day in your life, or so the saying goes. It sounds good and feels good, but it’s not necessarily true. Sometimes –- often, actually –- doing what you love can be a great hobby but not a good career. There are a lot of things I enjoy that I’ll never make a dime doing. A better approach is to find something you enjoy, are good at and that you can get paid to That is the financial trinity you should aspire to find because it ties your interests with your skills with the marketplace
9. Follow your passion, and the money will follow
Follow this rule, and I’ll send you straight to detention. We know college costs are soaring, and we don’t want to bury our kids in college debt, so most parents prioritize college saving over retirement saving. Big mistake. If worse comes to worst, Junior can get a loan, work while in school or go to a less expensive school. Basically, Junior has decent options, and you have tough choices.
If you haven’t saved enough for retirement, you are stuck. There’s very little you can do other than slash your expenses, work longer or both. Save for your own retirement first. That’s the financial rule you should follow. If you have amassed so much wealth when your children head off to college that you can afford to help them, go for it. If you haven’t, you’d be doing your kids a disservice by jeopardizing your own retirement by paying for their tuition.
10. Start saving early for your kid's college education
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