Do you have to take risks to make a return on your money? Emphatically… No!

By BOB CUNNINGHAM

Greetings, all.  I’m tapping out this post from the Rio Hotel & Suites in Las Vegas.  I’m here to attend a convention – so it seems appropriate to discuss what some call the “Wall Street Casino.”

Essentially, what we’re talking about is the subject of risk.  More specifically, we want to ascertain why it has become common “knowledge,” that in order to get good returns, you have to be willing to take some risk.

There is some truth to that notion when you look at it from the risk perspective.  There are investments out there that are highly speculative. No one knows what’s going to happen, and folks don’t even have a decent idea of what’s going to happen even if they pretend they do.

And I’m not talking about investments that have a reputation as being risky, such as options trading, day trading, commodities, or even collectibles.  No, sir, I’m referring to that mainstream investment called the S&P 500 Index.

You may have heard of it.

Obnoxiousness aside, financial experts of all kinds will have you believe that investing in the stock market is the only legitimate way to earn good returns, and that if you do it right by conducting proper due diligence, diversify your portfolio, consult a professional, etc., you will most certainly be fine in the long run.

These know-it-alls love to cite that the S&P, which stands for Standard & Poor, has returned an average of about 10% annually since The Great Depression.  I’ve read multiple articles on-line and in print magazines, of late, suggesting you shouldn’t be wary of the potential for a sharp decline in the market such as what we experienced in 2008 and 2009 – even though we’re nearing a record-duration bull market as I write this – because even if it does drop sharply at some point, the market inevitably comes back and then some…

Pish posh.

Folks who saw their investment account balances drop 40% or more nearly a decade ago are just now catching up.  A few are showing a slight gain from pre-2008 levels, but projected as an annual return most would have been better off keeping their money under their Serta Perfect Sleeper.

And with retired people who are counting on taking an income from their investment assets, a volatile market can literally make them queasy because they’re not sure if they’re going to have enough money to do the things they want to do in their golden years.

By the way, that aforementioned 10 percent annual S&P growth is before taxes and fees, and your actual return isn’t 10% because you can only earn that if the market were to return exactly that percentage every year.  We’ve demonstrated multiple times on this site how average returns are a far cry from actual returns.  Here’s another quick example:

(Start with $1,000 account balance.  Earn 60% the first year, lose 50% the second. Your average annual return would be 5% (60 – 50 = 10, divided by 2 years), but your actual return is a 10% annual LOSS ($600 gain first year = $1,600 in account, 50% loss the second year = $800 loss – net result is $1,000 + $600 – $800 = $800 balance in account after the second year.  $1,000 – $800 = $200 loss is 20%, divided by 2 years = 10% loss per year).

Wouldn’t it be nice if there was a financial instrument in which you could store money safely, and still earn a respectable annual rate of return with virtually zero risk?  How sweet to fund it and forget it, knowing that you have a better chance of being struck by lightning – twice – than of losing with that account!

Dividend-paying whole life insurance.  Yes, we have introduced this product on this site, and I’ve written on it numerous times.  And in the coming weeks and months, this blog will adjust its focus from a general personal finance educational approach to a site dedicated to teach as many folks as will take the time to learn, the numerous benefits of utilizing life insurance “living benefits.”

It has to be the right kind of insurance, set up by properly trained agents representing carriers who have been established for more than a century.  But when you use this tool to hold your nest-egg, you will get the following:  Safety of principal and gains, a guaranteed rate of return that can be even higher depending on annual dividends, a structure that legally allows you to access your funds tax-free whenever you want, and a system available by some companies (but not all) that allows you to borrow funds from your cash value – without qualifying – and yet your full cash value continues to earn returns and grow as if you never took a loan at all.

It’s all about educating people.  Our public school system falls far short of any legitimate teaching about money or investments or retirement savings, so it’s up to citizens like myself who are passionate about people of all ages succeeding financially, for the short- and long-term.

Keep reading this space every week, friends.  We will continue to shed light on what is not only a desirable alternative to the gambling that investing in Wall Street and the money markets is, but also a critical undertaking we need to be aware of… NOW.

Thanks for reading.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

It may seem as if buying with cash is best, but don’t forget about opportunity cost

By BOB CUNNINGHAM

It is a common misconception that you should always pay cash on purchases.  Old-school thought on this is simple and straight-forward:  If you don’t have enough money on hand to pay the price, you can’t afford it and should save until you do.

Well, I’m here to tell ya that cash isn’t always king.  In fact, many times it is detrimental to your personal finances to pay cash for purchases.  And few people are as old-school as I am… or at least, as I like to think I am.

When you pay cash, there is this frequently overlooked factor called “opportunity cost.”  On small purchases, like a combo meal at Wendy’s, the opportunity cost is pretty doggone small.  But there is still an opportunity cost.

How does that work? Well, what if you use a cash-back credit card to buy your burger and fries? If the card pays 1% cash back, doling out a five and two ones instead of using the card just cost you about seven cents.

That’s $.07.  Not much, of course.  But if you buy lunch using the cash-back card five days a week, in a month you would have earned yourself $1.40, assuming you pay the credit card balance in full before the grace period of roughly three weeks expires.  That adds up over a year to nearly $17 – enough for two free lunches, super-sized.

It should be obvious by now that I’m not calling your attention to this for such small fried potatoes.  Instead, I’d like you to consider your next car purchase.  Let’s say the ride you want costs $25,000.  And for the sake of this discussion, let’s suppose you happen to have $25,000 saved and available.  It’s invested in a stock market index fund inside at an online brokerage account and has earned about 7% since you’ve had it.

Very smart of you to put that money to work, by the way.

Meanwhile, the car dealership is offering 2.9% financing on that sweet-looking sedan.  You have enough money to just pay cash for the car.   Your parents have always told you to pay cash.

Listen to your folks?  Or go into debt?

In my opinion, it’s a no-brainer… with all due respect to Mom and Dad.

If you opt to pay cash, you will have no car payments.  And that is, of course, a good thing.  It merits consideration, to be sure.  But that $25,000 is now tied up, and thus can’t be used for anything else unless you immediately turn around and sell the car (which if you did, you’d be lucky to get $20,000 because new cars depreciate as much as 30% the minute you drive them off the lot according to KBB.com).  So you’ve not only tied up the cash, but done so in a depreciating asset.

On the other hand, if you qualify for and accept the financing, and keep the $25K in the investment account, it would earn about $1,750 if it maintains a 7% rare of return (ROR) annually.  The spread of a 7% return over a 2.9% interest debt is a net positive 4.1%.  Mathematically, when the new car is paid off in five years, you will have netted a positive 20.5% (4.1% multiplied by 5 years).

Plus, you will still have the $25,000-plus if you need it for something else. It won’t be tied up in the formerly new wheels.

But hold on, you say.  What if we need to make the $449 per month car payment from that same $25,000 account?  OK… $449 times 12 = $5,388 in payments each year, with $388 of that being interest (we arrive at that by knowing the $25,000 cost of the car divided by five years equals $5,000 to principal per year, with the remainder being interest).  So in the first year, and the subsequent four years, you pay $388 in interest every 12 months.

But how much did the index fund money earn you?  The answer,  considering the dwindling balance as we make those monthly car payments, ends up at about $1,400.  That’s better than $1,000 more (the first year) to keep the cash and use it to make the payments as we go.  We aren’t considering income taxes in our figures, because you’d have to pay taxes on the gains of the $25K at withdrawal, whether all at once or a little at a time.

The major key to the comparison is the 4.1% separation between the interest rate being paid on the car loan and the ROR on the investment account.  Whether it’s the first year or the fifth, or anywhere in between, that spread is going to average out the same.*

*I’m not saying you can count on your cash to make a 7% return precisely, each and every year.  Of course that isn’t the case.  It might lose one year, but it also might make 30 percent gains the next.  Determining which strategy is the best requires us to use constants (averages) where they don’t typically exist.  If the investments in the account lose money in every one of the five years, then paying cash would have been better because we’ve lost that aforementioned spread.  But five straight losing years is extremely unlikely. Historically, four of the five will be gains with two of those being at least 10 percent. (source – Morningstar.com)

Finishing with our example utilizing a 7% annual return on the investment account, in five years using the auto financing to pay off the car in full, we would still have about $1,900 remaining in the account (according to BankRate.com calculators) to go with a paid-off car that is now worth roughly 10-12 grand.  Paying cash, you would still have a $10,000-$12,000 car… but the investment account would be fully depleted – immediately.

Look, nineteen hundred bucks versus zilch is a huge difference.   So remember – opportunity cost is a big factor to look at when considering whether or not to pay cash for a purchase.  For fast-food lunches, go ahead and use cash or your debit card.  But on the larger purchases, be sure to take advantage of credit IF the rate of return on your saved money exceeds what the creditor charges to loan you the funds.

As always, thanks for reading.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

Small savings here and there can add up to surprisingly significant amounts

By BOB CUNNINGHAM

My family and friends often give me a hard time about being frugal.  When I first revealed to them that I had a personal finance blog, they asked if I had written a post yet on cheap eats or the wonderful world of coupon clipping.

It’s not that I don’t enjoy spending money, or that I’m not willing to splurge on occasion.  I am, and my wife and I do.  What I don’t like is feeling as if I have wasted money.  Spending $500 or more on the latest cellphone, for instance, just seems like a bad investment when I can go out and obtain a perfectly functional phone – for talking, texting, and taking basic photos – for less than $100.

My adult kids, ages 27 and 24, want the fancy phones.  Like the old fart in those Consumer Cellular ads, I’m happy with my basic phone.

Either way, there are numerous ways to save small amounts of money on a consistent basis… and when you do these consistently, I believe you will be genuinely surprised by how the little discounts, rebates, and cash back add up.

I do clip coupons, but I’m not obsessed.  Mainly, I look for discounts on grocery brands I buy, and restaurants we frequent.  I also constantly am asking for discounts.  When I recently had the oil changed in my car, I requested “the best deal you can give me. Been a customer here a long time,” and got a discount for a coupon I didn’t have and was afforded an additional  10% senior discount despite being ‘only’ age 53.  If I hadn’t asked, I’d have never received either courtesy,

Also, I’m a big believer in taking advantage of cash-back credit cards.  The process is really quite simple – apply for and (hopefully) get approved for a credit card that offers either a flat cash-back rate for all purchases, or quarterly “specials” with as high as 5% back on certain categories, or both.  The categories, usually featured for three months at a time, include restaurants, grocery stores, gas stations, or department stores among others.

The idea is to use the card each and every time you shop – for virtually all of your weekly purchases.  Concentrate solely on what you would spend anyway.  Don’t spend more just to utilize the card.  Defeats the purpose.

Then at the end of the month, you use your checking account funds to pay off the card.  You never want to carry a balance on the credit card, because you will then be wickedly guilty of stepping over dollars for dimes.  After all, how much sense does it make to get 5% back on groceries, but pay 20% or more interest monthly to carry a balance for those very same trips to the store.

None, of course.

Do this right, by using credit cards as the point-of-sale tool and your bank account to pay the credit card balance in full each and every month, and those 5% purchases here, and 1.5% there (and elsewhere) start to add up nicely.

Although it certainly isn’t recommended for younger adults who are trying to establish themselves as financially healthy long-term, my wife and I like to eat out.  We rarely do fancy dining, but we like Applebee’s, El Torito, Panera Bread, and the like several times a month.  Currently, our Chase credit card pays 3% cash back on all our restaurant purchases (including fast food, although we don’t do much of that).  Generally, in two months we have accrued enough cash that we get a dinner on Chase courtesy of a gift card to most any chain eatery we choose.

Over time, you can acquire a few cards, each of which might be dedicated to a different part of your overall budget – one for dining, one for groceries, one for gas, and one for miscellaneous.  The common denominator among all of them remains paying the balances in full each month, thereby NEVER paying interest on these purchases.

It’s like earning a rate of return on your expenditures, rather than just your investments.  Best of both worlds.

Thanks for reading.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

Diversification: An often misunderstood term, and misused investment strategy

By BOB CUNNINGHAM

There are numerous commonly referenced words and expressions in the personal finance world, and truth be told, only a handful of them are utilized correctly.

One of the many you will hear frequently is ‘diversification.’  Most often, diversification refers to the cliche of “not putting all your eggs in one basket.” By diversifying in the investment world, you’re hedging some of your money against the possibility of poor returns in other parts of your portfolio.  You don’t invest all of your money in stocks, for example, but instead should diversify by putting part of your cash in bonds (because bonds tend to run opposite of stocks, although try telling that to those hurt the worst during the recession of nearly a decade ago, when the bottom fell out of both for a time).

Or, don’t just invest in equities.  Take part of it and go into real estate, or gold, or collectibles.  Or all of the above.  Each have their benefits and detriments, and together the idea is avoid too much exposure to one asset class in the event that the primary investment in question happens to tank.

Sounds reasonable enough, except for one thing.  Why do we really need to diversify?  Can’t we just invest conservatively in something that can’t go down, and sit back and enjoy steady, predictable growth?

We sure can, by using dividend-paying whole life insurance to hold and grow our nest-egg.  But this post isn’t specifically dedicated to insurance.  What I want to accomplish here is to illustrate why traditional, conventional saving and investing for retirement and other uses is actually counter-productive, and I’m going to use one of Wall Street’s favorite buzzwords to make my point.

Let’s say you’re convinced that the Standard & Poor’s 500 Index is about to hit the skids.  We have been blessed (?) with the long-running bull market of the modern era, but even the most optimistic of investment experts acknowledge that the run can’t last forever.  So how do you think they would react if you informed them that you believe the market is about to take a downturn, and that you’re going to exit your entire index fund and stay on the sidelines for a while, to see how it all shakes out?

“Well, uh, Mr. and Mrs. Investor, you can do that if you want to, of course, but the smart strategy would be to keep part of your money in the fund, so that you can remain diversified,” might be the reply.  “It’s impossible to know with any certainty what the market is going to do, and you don’t want to miss out on any additional growth.”

So you and your significant other counter by informing the broker that if you’re in cash temporarily, you can’t lose money except for the spending power decline due to inflation, and you don’t expect to stay away long enough for that hit to be anything that should truly matter.

“Well, if you’re uncomfortable staying with your current fund, perhaps you’d like to invest instead in our XYZ corporate bond fund?  But again, I advise you leave some of your investment dollars in the S&P,” retorts the broker.

“So you’re telling me to ignore my instinct and leave at least some money in there, so that my loss that I feel strongly is coming isn’t as significant and that I just might gain more?”

“Precisely.”

“In essence, then, it’s a coin toss… at best.”

“Well, as I said earlier, it’s impossible to know for sure what will happen.”

“Then it sounds to me like I’d be better off invested in something where I do know what will happen, even if the returns might be lower.”

“Well, uh.. um…”

PRECISELY. 🙂

You see, the basic concept of diversification is fine.  An index fund, by definition, IS diversifying because instead of investing in one or just a small group of stocks, you own a piece of every stock in the index, usually at least 50 or more.  In this fictional example, it’s the entire S&P and its 500 companies.

But investing strictly in the S&P doesn’t make much sense, because it’s still 100% in stocks and nothing else.

So what can you do to avoid this conundrum?  The aforementioned life insurance approach is the ticket.  Because you can’t lose money with this product (this assumes you purchase your coverage from one of the long-established, professional mutual carriers and not take a “discount policy” from “Larry’s Life and Health”), the need for diversification is essentially absolved.

Going this route, you invest in an instrument that will pay you a steady 4-6% net (after tax, because done correctly there is no tax) annually plus you will have a host of other advantages – living benefits – that include potentially tax-free access to at least 90% of your cash value at any time, non-qualifying loans that don’t have to be repaid AND allow your money to grow at the same rate as if you hadn’t borrowed, an asset that isn’t reported as one for income tax or estate purposes, and a strategy that is generally immune from lawsuits (seek licensed and appropriate legal counsel to assure this is correct where you live).

All of this, and a death benefit for your designated beneficiaries as well.  Now that’s what I call diversified advantages.

Thanks for reading.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

It’s time to review several things we’ve covered in past BWE posts – Part II

By BOB CUNNINGHAM

Continuing with the post from last week, in which we are examining some basic financial principles from a “fantasy and reality” perspective:

“Invest in your company’s 401K Plan.”  The most common workplace retirement savings vehicle is a 401K Plan, which is a qualified (i.e. government-sponsored) account in which the company holds your money and pays a brokerage to invest it for you into various securities.

FANTASY:   Max out your 401K Plan (the government places limits on how much you are allowed to contribute annually) as soon as you can.  The government is truly generous in allowing us an account that can grow tax-deferred.

REALITY:   Doing so means you’re trusting others to manage your money, in markets that are risky and volatile, and forfeiting access to your money until you’re age 59 1/2 (unless you want to pay a 10% penalty on top of standard taxation) and the account has been in existence at least five years.  It’s true that many companies offer a match up to a certain percentage of your income.  As a secondary retirement savings instrument, I’m fine with maximizing the company match (example – company matches 25% of the first 5% you have deducted from your paycheck to be put into your 401K).  Otherwise, there are better places to put your savings where you have safety and complete control. And once and for all:  Tax-deferred doesn’t mean tax-free, and it doesn’t result in more compiled money once you’ve paid income tax at the back-end.

“The most important aspect of investing is Rate of Return.” How much compound interest your money makes as it is invested in stocks, bonds, precious metals, real estate, or any other from among a host of investment choices IS something you’re going to want to track.  But there are other factors.

FANTASY:  You should be investing your money where you can earn the highest returns.  The stock market has risk, but it has gone up steadily over the long-term so if you leave your money in the markets, you’ll most certainly come out ahead.

REALITY:  I can’t quite recall where I first read the following, but the adage is oh-so accurate:  The most important part of savings and investing isn’t the return on your money.  It’s the return of your money.  I’ve never fully understood why otherwise sensible people have allowed themselves to become convinced that they should put their hard-earned life savings at significant risk.  In 2008-09, I personally knew folks who saw their nest-eggs drop by 40 percent.  They are just now fully recouping those losses, and that’s amidst the longest-lasting bull market in any of our lifetimes.  Remember, in a previous post we demonstrated how a 5% return every year can out-perform and average of 10 percent over the same period, in the same way that a 50% gain followed by a 50% loss results in a 25% net loss (Don’t believe me? Try it starting with $100 to make the math simple).  Slow and steady wins the race.  Just ask either the tortoise or the hare.  Better yet, ask them both.  Wouldn’t steady gains with no market risk – that’s zero risk, ladies and gentlemen – seem to be more intelligent when it comes to something as important as retirement savings? As opposed to hoping your funds return double-digits and avoid big declines along the way?  The answer is yes, because it is,

“Buy term and invest the difference.” This expression, of course, is referring to life insurance.  There two primary types – term and permanent.  Term insurance is solely a death benefit in exchange for a monthly (or annual) premium.  Permanent insurance includes products like whole life insurance, and can be set up to function in several capacities in addition to providing a death benefit.

FANTASY:  Because term is cheaper, it is advisable to buy term and then take the amount of money you’re saving on premiums versus permanent insurance and invest it in the stock market or other vehicle for long-term returns.

REALITY:  It sounds logical enough on its face, but two big problems here.  First, the vast majority of folks who intend to follow this strategy won’t “invest” the difference.  They will spend it… on stuff that depreciates.  And I simply don’t believe in unrealistic advice, even if the logic is sound (which it really isn’t here).  Secondly, there’s an obvious reason that permanent insurance tends to be more expensive than term.  IT DOES A LOT MORE FOR YOU!  Dividend-paying whole life, the product choice for permanent insurance suggested by this blog, offers a host of “living benefits” in addition to the fundamental death benefit.  The premiums are higher because the product is superior, on numerous levels. To recommend term strictly because it’s cheaper demonstrates a lack of reasonable research and comparison.

I hope you enjoyed this review and reaped some additional wisdom, or at least some reinforcement, from it.  Once again, thank you for taking time from your busy schedule to join us weekly on this site.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

 

It’s time to review several things we’ve covered in past BWE posts – Part I

By BOB CUNNINGHAM

(Note to my readers:  My apologies for being a day late with this post.  This marks a permanent change to Tuesday morning release of my new post each week.  The change is due primarily to professional convenience.  Thanks for your understanding.)

This website is, first and foremost, dedicated to coaching people how to best go about the various tasks related to savvy personal finance.  Achieving success can be accomplished through a mixture of some sound fundamental principles, combined with the reality that many strategies which are considered advisable by the masses are, instead, more beneficial to others.

What does that all mean?  Translated into one expression,

    “Unconventional wisdom, in many cases, is better than conventional.”

As you read, listen, watch, and research the world of personal finance, you will encounter some common themes preached by everyone from the most famous gurus to the tiniest out-of-the-mainstream blogs (I’d like to believe I’m somewhere in between, but closer to the latter than the former.)

This blog has been dedicated to assisting you in deciphering what to believe and trust, and what not to.  We’ve taken individual topics and broken them down into pieces small enough to digest in a way that allows us to effectively learn just how such habits can affect us, short- and long-term.

What I haven’t really done, until the paragraphs to follow today and next week, is put together a summary of the major points made through this blog’s seven months of existence.  So let’s get to it.  I’m calling this, “Personal Finance:  Fantasy and Reality.”  Part I is below, with Part II to run Oct 17.

“Pay Yourself First.”   This is arguably the most common adage in the world of money.  It simply means that you should set aside money for savings and/or investing before you earmark funds to pay your bills and for everyday expenses.  The theory, of course, is that if you get in the habit of doing this, you’re guaranteed to save more and anything is better than nothing.

FANTASY:  Saving even the smallest amount on a regular basis will eventually lead to significant holdings, from which you can build on additionally.

REALITY:  While it’s true that something is always better than nothing, there has to be a definitive goal for increasing savings regularly, and it should only be undertaken after expensive personal debt, such as credit cards that can have APRs well more than 20 percent, is eradicated.  One of the most common mistakes is to save slowly in an account earning less than 1% while simultaneously carrying a balance on a credit card charging 23.9% interest compounded.  Spend every extra dime paying off the card, stop charging stuff unless you pay it off entirely by the due date, and THEN ratchet up the savings to blow away what you would have accumulated – and wasted – otherwise.

“You need to save at least 3 to 6 months of living expenses in an emergency account.”  The idea is that if you have this kind of a reserve, loss of your job for an extended period won’t put you in the poorhouse – or worse, your parents’ basement.

FANTASY:  This is one of my favorite finance fables.  Some pretty well-known gurus claim it’s better to have a year’s worth saved.  Sure, and it would be better if my retirement savings had one or two additional zeroes, too.  In truth, for 95% of the population on this planet it is a complete fantasy to have a liquid cash reserve of $10,000 or more and be willing to leave it alone for a rainy day.  There’s a better HD television available.  It’s an emergency!!

REALITY:  A much savvier plan is a basic reserve fund of $1,000-$2,000 for things such as auto repairs.  But actually, I propose to use your credit cards as your emergency fund.  As long as you’re disciplined – and let’s face it, discipline is required when utilizing any type of advisable strategy – you can use a credit card to charge a true emergency and then formulate a plan to pay off the card with minimal damage.  Saving more than the aforementioned $1K-$2K means you’re not utilizing legitimate funds properly.  You should be investing those funds in debt elimination, or a dividend-paying whole life insurance policy, or if you must, low-cost index funds, or even in your work’s 401K plan (more on that next week).  All are preferable to letting inflation eat away at the buying power of a tidy sum dedicated to nothing… and earning next to nothing in a regular savings account.

“Avoid credit cards.”  Because they are debt instruments, many gurus advise to ignore them entirely, except perhaps for one card that can be used only in a “true emergency.”

FANTASY:  Just pay cash for everything, and you won’t need cards.  Credit cards only benefit the companies who issue them.  They victimize their customers unfairly.

REALITY:  Credit cards are great, but ONLY when used wisely and properly.  Running up a balance on an account charging such high interest rates is fiscal mutilation.  But if you are able to obtain 3-4 cards, each with cash-back allowances (preferably in rotating categories offering as high as 5%), and you use them for everyday regular expenses while ALWAYS paying off the entire balance prior to the next minimum payment being due, you not only avoid unnecessary costs, but also accrue small refunds, and at the same time build a favorable credit history.  Plus, your purchase of tangible goods are often insured by the card company, a service not provided by cash or a debit card.

“When strategically paying off credit card debt, pay off the smallest balance first.” As opposed to eliminating the account with the highest APR, many financial advisers propose the “snowball” strategy versus the “avalanche” approach.

As the AFLAC duck often exclaims, “Huh??”

FANTASY:  Paying off your smallest balances first, before working on the larger ones, yields quicker results and gives you a sense of accomplishment. This increases your chances of sticking with the program.

REALITY:  I won’t argue with psychology because I’m not educated in that area beyond my Psych I college course explaining the difference between Sigmund Freud’s id, ego, and superego.  But our goal is to save money on interest, so why would I pay off an account charging 16% before one jacking me for 24%?  The latter is going to require a larger minimum payment, so I want that one outta-here ASAP.  Look, if you have two accounts of very similar rates (like, within 1% of each other) and you choose the smaller one in order to get rid of it quicker, knock yourself out.  But don’t leap over dollars for psychological nickels.  Just dedicate yourself to the task with the knowledge that it is what is best for your long-term financial health, and save every dollar you can.

That’s it for Part I.  See ya next week for the conclusion of our review.

As always, thank you for reading.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

Tax reform important, including to those who don’t think they have much to tax

By BOB CUNNINGHAM

Frequently, when the subject of taxes comes up I hear people refer to their own lack of income and assets, and indicate that “any changes won’t affect me much..”

Even if the statement were true, which it almost always isn’t, that represents the wrong attitude when considering your personal finance.

Sure, many people – primarily younger adults still trying to get themselves established – lack the income and/or asset accumulation to be significantly affected by marginal tax rates and such.  But it’s still a good idea to understand how the system works, and how new changes in the law compare, because eventually, such things will directly impact your bottom line.

I’m not going to attempt to go into any sort of detail in this space on the proposals recently offered by President Trump.  It would take a great deal more space than is practical to dedicate here in order to do it justice.

Nor do I intend to go all political on you.  Again, that’s not what this blog is for.

But I will comment on some specifics, and suggest you pay attention to them regardless of your current economic standing.  NOTE:  Nothing from this post, or anything else found on this website, should be interpreted as professional advice.  For all things tax-related, seek the advice of a certified tax professional.

The major tone to the president’s changes elicits simplicity – purportedly, 80 percent of Americans will be able to file their taxes annually on one sheet of paper.  Wow… I presume we will need both sides of the page?

The simplification in terms of tax rates is two-fold.  First, the proposal suggests a low-end tax rate of 12 percent, up 2 percent, among only three levels.  What… he’s raising taxes on the lowest income Americans?

Hardly.  Instead, as I understand it, those who don’t make enough currently to be required to pay federal tax will still be under that line.  And the aforementioned 2 percent difference will more than be made up for by a doubling of the standard deductions, for both individuals and married couples.

And some long-held itemized deductions, like for mortgage interest and charitable contributions, will remain intact.  Other deductions, however, such as home office write-offs and gambling losses (currently, the law allows you to claim losses up to a maximum equal to any claimed winnings) would go by the wayside.

After the 12 percent, the other two rates are 25 percent and 35 percent, plus possibly an additional upper bracket still to be determined.  Currently, the top bracket is about 39%.

Also unclear is the treatment of capital gains.  Under current law, they are taxed at a cap of 15 percent – this affects you and me if you understand that, in order to get the capital gains rate on the growth of your investments, you are required to have held these investments at least for one year.  If you sell stock less than 12 months after you bought it, folks, any gains are taxed as regular income. That can make a substantial difference.

It’s also important to understand that the 12%, 25%, 35% and whatever other rates are included in the new proposal are, like the current system, tiered.  In other words, if your adjusted gross income is $100,000 per year, you would fall under the 25% rate.  But that doesn’t mean all $100K is taxed at 25%.  Instead only, the portion that falls within the 25% rate range is taxed at that rate.

So in a fictional example, you may get taxed nothing on the first $25,000, 12% for dollars $25,001 through $74,999, and 25% for dollars $75,000 through $100,000. Again, these numbers are fictional for ease of explanation, but if the above were true, your effective tax rate on $100,000 would be $5,999.88 (12% of 74,999 – $25,000) + $6,250 (25% of $100,000 – $75,000) = $12,249.88, or about 12.25%.

In the meantime, as Washington D.C. labors over tax reform and other issues, your job as an individual (or couple, if you’re married), is to pay as little in taxes as you can legally avoid.

Doing so starts with understanding the basics of how your taxes are determined… and may be perpetuated by utilizing tax-friendly strategies including (but not limited to), Roth Individual Retirement Accounts, maximum leverage on personal as well as investment real estate, and owning dividend-paying whole life insurance policies as a central part of your financial plan.

We’ve discussed the life insurance aspect in previous posts, and we will continue to explore these types of strategies in the future.  So stay with me, and as always…

Thanks for reading.

***

DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

What you should know about car loans, when obtaining one is your only option

By BOB CUNNINGHAM

Most personal finance gurus agree that the one type of debt that is acceptable to have is a home mortgage.  As soon as you can reasonably afford such a hefty monthly output, and provided you have some money for a down payment and closing costs, it’s generally better to buy a residence than to rent.

I agree completely with the second part of the above statement, but not the first sentence.  Well… not exactly as it is written.

I have learned that a home loan is, indeed, okay as long as you’ve avoided going in over your head.  I also believe that under the right circumstances, obtaining auto financing is just fine in the big savvy-money-management scheme of things.

To be clear, not everyone who desires new wheels should be out applying for a car loan. If you’re already in a lot of debt (i.e. credit card debt), and/or don’t have steady employment or another reliable source of income, locking up $300 or so per month for the next five or six years is foolish.  You likely wouldn’t qualify anyway.

However, the old-school thinking that you should pay cash for everything except your house, under all circumstances, is unrealistic and sometimes downright ill-advised.  Under certain reasonable but necessary parameters, you should feel fine about going into some debt for your car.  Why?  Because the risks of buying only what you can afford by paying cash often outweighs the temporary negative associated with using credit, even on a depreciating asset.

In a perfect world, you WOULD avoid traditional financing.  A dividend-paying whole life insurance policy, such as what this website has been detailing periodically since its inception, with sufficient funds in its cash value is a far superior method for buying a car because it is “self-financing,” and allows the policy owner to continue growing his/her money even while tying up funds in the new ride.  Set up properly, you wouldn’t lose the growth that money would earn had you not went car shopping.

It’s a really cool and wise way to go about it, but this particular post isn’t dedicated to that, because I realize many of my readers are younger and either don’t yet have the insurance policy or don’t have enough saved in cash value to collateralize a loan sufficient to buy the desired automobile.

So that means your choices are, 1) walk/ride the bus/ride a bike, 2) buy something so cheap for cash that it could break down at any moment, as mentioned above, or 3) qualify for a loan in order to buy a car that will likely last for several years.

It’s fairly obvious, I would think, that a huge majority in such circumstances will opt for Choice #3.  So here are some tips for making a smart purchase, and getting yourself financially to a point that this doesn’t hurt your ultimate bottom line much, if at all:

1. Buy pre-owned, not brand new.  The beauty of buying a car that is two or three years old is that you can save a higher percentage off the new model’s sticker price than has been spent in terms of the pre-owned car’s expected lifespan. Yes of course, I will explain.

For example, say you’re after a Toyota Corolla.  Not sexy, true, but usually super reliable. A brand new one typically goes for about $23,000, as per my research, but an average of the half-dozen or so appropriate pre-owned Corollas I found was about $14,000. The latter refers to a 2015 model or newer, less than 40,000 miles, and an average of no more than 15,000 miles per 12 months of the car’s life since it was originally bought new (I recommend 12,000 miles).  Most auto-buying websites list not only the year of the car, but info such as when the car was originally bought, month and year.  If you don’t have that information, a CarFax report – free for the asking from dealers – will show it.

OK, so $14,000 is about 61% of the car’s new price today (another way of stating this is the pre-owned car is discounted 39% from new), but 40K miles is only about 20% of the very reasonable expected lifespan (if maintained properly) of 200,000 miles.  That difference (19% in this example) is value for you.  Let the person who originally bought the car absorb that excessive depreciation.  KBB.com indicates a new car loses an estimated 20%-25% of its value as soon the buyers leaves the lot with it.

2. Get pre-qualified for a loan BEFORE you go see and drive cars. You have a lot more leverage knowing what you can pay ahead of time. But don’t qualify for the maximum your credit and other circumstances allow.  Be content to buy a little under your means, so that you have a comfort level with the payment and also have the option to pad the minimum required payments if you wish in order to reduce the principal balance faster and pay off the loan sooner.

Speaking of paying it off, do not apply or sign for a loan of more than five years (60 months).  It’s silly to pay for six or seven years on a car that, in great likelihood, you won’t have or want to retain before the end of the term. Plus, of course, you will pay more interest over the longer the term if you make just the minimum payments.  (Take note, however, that if the interest rate is identical on a six-year term vs. five years, which it frequently is, and you KNOW you have the discipline and willingness to pay at least 10% extra every month, it makes sense to go ahead and get the 72 months.  But ONLY if the above is accurate for you and your circumstances)

With the above said, it is generally best to go with the shortest loan term you can afford considering the aforementioned “padding” and comfort level for the required minimum payment.

3. Know the Kelley Blue Book (or comparable) values of your target car before you head to the lot.  It is important that you make your buying decision based on the total price of the car, and NOT based on the monthly payment.  Auto sales reps make a good living showing prospective customers how they can actually afford the car of their dreams (translation:  a car they really have no business buying) with the loan stretched out far enough.

With that in mind, know what your target car is worth and should sell for, allowing for a modest profit for the dealership – a good rule of thumb is no more than 10% above private party value.  Don’t be concerned with dealer retail or average price of similar cars sold in the area.  You can do better if you’re willing to work at it a little (see No. 4).

Lastly, it’s obvious that you must test drive your car of choice.  But when you do, really put it through its paces.  Ask the salesperson to direct you to a quiet side street and try an abrupt stop to test brakes, complete a sharp u-turn to test radius, and do a three-point turn to assure the transmission’s smooth functionality going from drive to reverse and vice-versa.  Ask for a certificate from the dealership guaranteeing all buttons, switches, lights, etc. are in good working order.  If that isn’t available, personally inspect and test everything.

4.  No-haggle pricing is NOT to your benefit.  Have your info, and stick to your guns while being reasonable.  Many car dealers are advertising no-haggle pricing in an attempt to cater to those who find the car-buying process stressful or even distasteful.  This is nonsense.  Haggling is to your benefit.  Arrive at what you’re willing to pay for the car based on the above parameters… and don’t buckle when the salesperson tells you their price is, “the best we’re going to be able to do I’m afraid.”  I can practically guarantee you that if you’re reasonable in what you’re willing to pay, and you’re willing to leave the lot if you don’t get close to what you’re requesting, the deal will get done to your satisfaction. The dealership wants and needs your business a lot more than the few hundred extra dollars they appear to be unwilling to discount for you.

5.  Make your car payments automatic through your bank’s online bill-pay. Set it to make the payment each month 3-5 days before it is due, and forget it.  And preferably, add at least $25 or 10% – whichever is greater – to the minimum payment when you set up the automatic payments.  You’re unlikely to feel the extra out-go in your monthly budget, and yet you could knock six months, a year, or more off the loan term.

There’s a lot to consider when buying a car, especially if you’re willing (and qualified) to make a long-term commitment by borrowing funds. Use the above as a basic guide, and you will undoubtedly come away pleased, while having not fallen into the trap of over-paying.

Once again, thanks for reading.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

‘Budgeting’ has negative connotations for some, but it doesn’t have to be that way

By BOB CUNNINGHAM

In personal finance parlance, it is known as “the B word.” And not in any sort of positive way.

Budgeting, defined as the excruciating act of creating a personal or family summary of income and expenses for the purposes of determining what can be spent and (hopefully) saved, carries such a negative vibe that some alleged PF gurus claim you can effectively manage your money without it.

Not likely…

Look, it’s really a matter of what you want to accomplish, in life and specifically when it comes to your money.  Are you truly satisfied to wing it from week to week, month to month and hope you have enough to get by?  Or are you willing to put in a little effort, in the boring form of crunching numbers, to improve your circumstances?

If you are among the vast majority of folks who want to make financial progress ongoing, there’s no way around some version of monetary accountability.

Still, that doesn’t mean it has to be painful… or a pain in the posterior. Budgeting is actually relatively simple, if you decide to keep it that way. Here’s how:

Know as accurately as possible your monthly take-home pay

True, determining what you make isn’t always that simple.  Sales professionals who work on commission, for instance, can have a wide variation in what they make from month to month. But there are ways around this.  First, determine an average income.  Go back three months, six months, or whatever time-frame you believe can most accurately reflect your net pay, and come up with a “common” figure.

Obviously, if you are on salary, you simply need to take a peek at your paycheck, or observe the associated direct deposit in your bank account.

Now reduce that number by 20% for budgeting purposes.  For instance, if you’ve determined that your average monthly net income is about $3,000, reduce it by 20% ($600) and work with $2,400 as you figure your budget. The 20-percent fudge factor allows for errors and anomalies while also demonstrating to you (eventually) that you can get by with less than you think. What if you only make $1,500 in a particular month… are you going to have to move back in with your parents?  You may be nodding your head after reading this, but we both know you’ll do whatever it takes to avoid that scenario.

Make savings an integral part of any “spending” plan

Next take at least 5% of the $2,400 (10% is reommended), and mark it down as your monthly savings goal.  Yep, do it now… this resulting $120 for socking away in our example is important – commit to it, even before you figure out what your bills are.  That comes next.

Once you have your typical monthly income established, and your associated monthly commitment for savings, the next step is to mark down your fixed expenses.  These are the monthly bills that are the same every month – rent or mortgage payment, car payment, TV/internet bills, cellphone bill (in most cases), loan payment to Mom and Dad, etc.  It doesn’t matter what they’re for, if you pay them and they are constant, they should be included here.

Determine your expenses in two broad categories first

Now add up the total of your fixed expenses, tack on the aforementioned $120 savings figure, and come up with a total.  Then, take that total and subtract it from the $2,400.  The result is what you have available to spend monthly on what is referred to as discretionary spending – the costs that change every month, such as groceries, gasoline, and entertainment.

Guess what? You’re more than half finished.  Not exactly bamboo under the fingernails, correct?

OK, sure, I’m not claiming this is as fun as Space Mountain on Halloween. But it’s a lot less costly.

Be willing to go back through previous spending history

Now comes a little bit of effort, because you need to go back through your on-line banking or credit card receipts, and determine how much you’ve been spending on those discretionary costs.  My suggestion is that you separate them into the following categories:  groceries, eating out, gasoline, entertainment, and miscellaneous.

After you have those figures determined for the last month (ideally, figure out three months’ worth of each category and average for a more accurate monthly reference), take the monthly figures and add them up.  Compare to what your new budget “allows” you to spend.  Analyze what you’ve been overspending on, and what you’ve been more reasonable about. Adjust accordingly. Let logic and common sense be your guide.

For instance, let’s say your discretionary spending amount that you determined from your income/fixed expenses/savings portion of the budget is $600 per month. And you’ve determined you’ve been spending closer to $900 per month.  That means we need to find $300 to cut, but remember that we took your initial average take-home pay and cut it by 20 percent.  That was $600 lopped off the $3,000 average monthly pay, yes?

Decide on spending cuts if needed, but you don’t have to go overboard

So whatever we determine needs to be cut, it probably doesn’t truly need to be as drastic because we padded the initial income figure by using only 80 percent of it.  Are you with me?

In other words, you have some leeway… as long as you’re prepared to make some needed cuts when it’s obvious.  Are you going out to the movies a lot, or do you mostly stay in and watch Netflix? How ’bout fast-food?  That is the young adults’ most significant bug-a-boo, bar none.  Are you on a first-name basis with the folks at Carl’s Jr.?  If so, that has to change.  Cooking at home typically costs a fifth of fast-food, and a tenth or less compared to eating at sit-down restaurants.  How about at the grocery store?  Do you buy a lot of processed and/or name-brand foods, or do you focus on produce, dairy, and generic stuff?

After you have determined all your adjustments, be sure that the first thing you do at the beginning of each month is put the savings away. “Pay Yourself First” is a universally accepted personal finance adage for assuring you save regularly regardless of your budget.

Ultimately, as long as you’re willing to do a little self-analysis with what you spend, and make some common-sense alterations, it can be pretty simple and only a little painful.

If nothing else, make a commitment to avoid high-interest debt

Last item:  I could easily write 10,000 words about sensible budget decisions, cutting spending, etc.  But that isn’t the point of this post.  Instead, focus on the idea that getting basic organization in your financial life doesn’t have to be difficult and it truly doesn’t have to suck.

A huge take-away is this:  Whatever path you go, do your utmost to stay out of debt… specifically, credit cards that – speaking of sucking – will suck the life out of any possibility of you getting ahead with your money and ultimately being able to reasonably afford many of the things and experiences you desire.

As always, thank you for reading.

***

DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

Worried about a market correction? I’m not, because it won’t determine my fate

By BOB CUNNINGHAM

As I write this weekly entry, the Dow Jones is coming off a gain of more than 200 points.  Despite predictions of impending doom by some, and the realistic acknowledgement from even the most optimistic of investors that the markets won’t go up forever, they continue their improbable ascent.

It’s a lot like late 2006 and most of 2007, when we hit record highs according to all the major benchmarks… right before falling to Earth like a rocket in 2008, reducing many account balances by almost half in a matter of months, even weeks.

So why am I not concerned about the inevitable decline?  What puts me in a position of being so confident?  Simple… I’m flat broke and, thus, have nothing to lose.

LOL… JUST KIDDING.  How I crack myself up.  Truth is, while my wife and I are far from being considered wealthy, we have some decent retirement savings… we’re doing OK.

And the really cool thing is that our funds aren’t invested in the markets.

“But Bob, you’re missing out on some of the greatest profits ever!”

That’s true.  And we’re perfectly fine with that.  Our nest-egg is invested in dividend-paying whole life insurance, which gives us a steady and predictable gain… with NO chance of loss.

None. Nada. Zilch.

Look, friends, unless you’re brand new as a reader on this site, you’ve read here before about how losses annihilate an account more significantly than the same rate of gain helps.  I’ve demonstrated how average annual rate of return is a fallacy.  Go up 25% one year, go down 25% the next… and instead of being even, you’re actually down 12.5%.  Reverse the order – down the first year, then up the second – and you’re STILL down 12.5% after the second year.

Doesn’t seem fair, does it?

And while it is absolutely true that we are missing out on some pretty sweet gains right now, it is without question that we will be better off over the long run than those who insist on riding the roller coaster.  History says so… and I’m not willing to buck a trend lasting more than 140 years.

“Okay, but hasn’t the S&P 500 averaged about a 10% return all-time?  That’s what I always read.”

Again, that’s a bogus average – taking all the returns and adding them up (since after The Great Depression, I believe), subtracting the losses, and dividing by the total number of years.  The effective return, according to Morningstar.com, was slightly better than 3%.  The effective return is how much your money would have actually grown.  Dividend-paying whole life insurance returns between 4% and 5.5% (depending on dividends) EVERY YEAR, and is tax-free when the money is correctly acquired via withdrawals of principal and dividends and/or non-qualifying policy loans.

It’s truly great having a fairly specific idea of how much money you will have at any given time in the future.

“If this is true, why doesn’t everyone use dividend-paying whole life insurance, and get the heck out of the stock market altogether?”

Many would if they knew about it.  And more and more people are going that route, thanks to the strategy getting more publicity from sources such as this blog.  Still, the same conventional drivel of favoring 401Ks, IRAs, etc. continues to be perpetuated by Wall Street, many personal finance gurus, and our federal government.  It’s a constant battle.

The purpose of this blog is to educate folks… primarily, younger adults and families… that there is a much better way than conventional retirement savings vehicles.  The key is starting NOW.  This superior approach offers more safety, liquidity, a steady rate of return, tax benefits, and a living benefit that allows for self-financing of major purchases and other handy uses that you simply can’t get from traditional savings and investments.

And I’ll continue to plug these in this space and others.  Slowly, the tide will turn in favor of Americans who, like myself, want to retain complete control of their finances at all times.

As always, thank you for reading.

***

DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.