Dividend-paying whole life insurance: The best financial strategy available today

Since establishing this personal finance blog last spring, I’ve alluded to a superior approach for allowing anyone to save money in a way that allows for maximum safety, a respectable rate of return that is free of income taxes, and the liquidity to access the funds that build up – plus have those funds continue to earn interest for you even while utilizing the money for purchases simultaneously.

But while I’ve touched on these different factors… given you varied teasers, if you will… I haven’t gone into much detail about the strategy of using properly-structured, dividend-paying whole life insurance as your primary savings vehicle.  And there’s a couple of different reasons for that.  1) I wanted to focus primarily on basic financial principles with this blog, because they aren’t taught with any degree of consistency but should be, with the idea that using the strategy I’m about to uncover is more of an advanced approach,  and 2) Even though I’m a licensed insurance agent in California, I’m still learning about the specifics of this technique and its plethora of “living benefits” to go along with the traditional death benefit.

In previous posts, we’ve covered the evils of government-sponsored investment/savings programs such as workplace 401Ks, Individual Retirement Accounts (IRAs), and 529 Plans for college education expenses.  I explained how your lack of control over these instruments can subject your money to avoidable taxation, often ridiculously high fees, and an inconvenient (and needless) inaccessibility to your own funds.

We’ve also delved into the high-risk nature of investing in Wall Street via the equity markets; buying and selling real estate; commodities; collectibles; and just about anything else that will allegedly rise in value over time.

Despite the realities just mentioned in the preceding two paragraphs, the substantial majority of Americans continue to follow the herd and put virtually all of their hard-earned monies into these conventional accounts while holding their collective breaths wishing for steady appreciation and hoping not to get killed by taxes.

Why??????????????

Simply answered, because no one has ever bothered to show them a better alternative.  We hear, see, or read folks who purport to be personal finance “experts” (Suze Orman, Dave Ramsey, David Bach to name three) claiming the conventional, government-controlled approaches are the only way to go and assume what they’re pitching must make sense… because we simply don’t know any other way.  These personalities tend to black-ball permanent insurance (of which whole life is a type), criticizing what they don’t know enough about and, frankly, likely have never taken the time to truly investigate.

So, myself and many who have preceded me have decided we will be the voices (or written words) of reason, truth, and logic.

And on that note, and without further adieu, allow me to briefly detail the advantages of utilizing the proper type of dividend-paying whole life insurance:

Enjoy an immediate death benefit, while building a nest-egg you can access anytime you want.  When you open the right type of whole life insurance policy, your pre-determined death benefit is good from the first day in the event something happens to you (or whomever is the insured on the policy), and at the same time you begin building cash value that you can access whenever you want – no waiting until age 59 1/2 to avoid penalties like there is with the government -sponsored programs.

To be fair, the Roth IRA will allow you to withdraw your contributions at any time without having to pay taxes or a penalty, but that doesn’t apply to any gains the account may have made.  With the whole life policy, you can access virtually all of your account with the right approach (either via withdrawal or non-qualifying policy loan).  Refer to your individual agent for guidance on how to accomplish this.

Know, within a reasonable level of certainty, how much money you can build over a given period of time at essentially no risk.  Although dividends are not guaranteed, the companies that issue the type of policy I am referring to here have enjoyed profits (and, therefore, dividends paid to policy owners) for well more than 100 CONSECUTIVE years.  According to Pamela Yellen at www.BankonYourself.com, these companies have profited every single year since before 1900 – that includes during The Great Depression, times of war, The Crash of 1987, and the recession we endured about a decade ago.

Utilize the unique advantage of borrowing against your policy’s cash value, while it continues to grow as if you had never touched the funds.  That’s because you don’t.  Set up properly, these policies allow for the loan proceeds to come from the insurance company’s general fund, with your cash value as collateral, meaning that the cash value itself stays in place and continues to work for you, earning a rate of return plus dividends.

Loans are tax-free, and don’t have to be paid back on a schedule, or at all if you choose. The flexibility of this type of account is unheard of.  You want to borrow from your cash value?  Just let the insurance company know how much you need.  And although a sensible, long-term financial plan utilizing these policies as retirement vehicles compels you to repay these loans (pay yourself back at a lower-than-market interest rate), you are NOT required to do so.  Any unpaid loan balances still in effect at the time of the insured’s death simply results in that owed money being deducted from the impending death benefit.

In the coming weeks, we will cover more features – in more detail.  Bottom line, you should be excited about what I’m introducing to you here.  This immaculate alternative to conventional investing will greatly simplify your financial life, and benefit you multiple times over on multiple levels.

Until next time, thanks as always 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.

Focusing too much on Rate of Return can result in long-term costly mistakes

So many people who I talk to about personal finance and investing are obsessed almost exclusively with what the interest return is on their money, referred to as Rate of Return (ROR), without truly considering the risks involved.

And too many people assume that the stock market, real estate, and other forms of investing will always create wealth in the long run.  While it’s true that most accepted financial instruments have gone up over differing time periods in history, the assumption that it will always continue to do so, under all circumstances, is both ignorant and foolhardy.

Just ask the tens of millions of folks who saw their investments shrink by as much as 70 percent during the downturn that occurred in both stocks and real estate less than a decade ago.

Putting your money into the stock market or real estate can be a boon, sure.  But there are major downsides.  It’s gambling for all intents and purposes, and therefore doesn’t strike me as the smartest thing we can do with our life savings, the funding of retirement, attempting to pay for college tuition for our kids, etc.

Consider this.  As I have demonstrated in a previous post (or two), average ROR isn’t the same as the actual return you get.  If you have Investment A which earns exactly a 10% annual return over, say, five years, the average ROR for that time frame is, indeed, 10%.  Likewise, if you have the following results over a five-year span:  up 20%, down 35%, up 40%, down 5%, and up 30%, you have an average annual ROR of 10% as well (the five annual figures add up to a positive 50%, divided by five years equals 10% per year).

But when it comes to the actual numbers, the first scenario – 10% each and every year for the five years – gives you about $1,552 if you started the stretch with a $1,000, while the second scenario leaves you with just $1,348 – more than $200 less!!  How can this be?  It’s because losses hurt more than gains help.

Let me illustrate that point with a question:  If you have $100, and you lose 50% the first year and gain 50% the second, you should be back to an even $100, right?  If you bit and said yes, it’s because you didn’t take the time to do the math.  Fifty percent of $100 lost the first year leaves you with $50, followed by a 50% gain the second year which results in your account balance being $75 (50% of $50 is $25, added to the $50 = $75).

Your net return was zero, yet you lost 25 bucks!  Mathematical fact of life, my friends.

The actual stats can be confusing, I realize, but don’t miss the inclusive point, which is that steady gains are more valuable than big years followed by significant declines, or losses followed by gains, or the two inter-mixed.

Everybody has been told that you need to have your money invested in the stock market, which can be most easily achieved if your job offers a 401K Plan, and if not you can open up an investment account or an individual retirement account, and get your money in the market that way.  Now tell me, after what I have demonstrated above, are you really sure that’s the way you want to go?

As the expression goes, “there’s got to be a better way.”

Well, folks, there is.  I’ve alluded to it, but not delved deeply, in previous posts.  We’re talking about the proper type of cash value, dividend-paying whole life insurance.  It’s the strategy of many of the country’s wealthiest individuals, but it is a game-plan that those of more modest means can utilize effectively.  It has numerous benefits, some that will really blow your mind (as they did mine when I first learned about this concept) with no significant downside.

Next week, I will write a more detailed (but fundamental) explanation of how the correct type of whole life insurance can replace any and/or all of your other financial and investment instruments.

For now, here’s a teaser benefit:  You can know within about 90% accuracy how much money your policy will build, in advance, based on a fixed ROR combined with annual dividends that, while not guaranteed, have been paid out every single year for the last CENTURY by the top companies who specialize in these types of policies.  And all the while, your money isn’t invested in the ultra-volatile stock market, and so you’re not dependent on its whims.

Seriously, this stuff is really cool.  I look forward to going into more detail next week.  Until then, 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.

Neither consolidation nor settlement is wisest for those seeking debt elimination

You’ve seen the ads plastered all over the internet:  “Pay off your debts for a fraction of what you owe!,” or “Consolidate your credit card debt into one, easy monthly payment.”

When you’re deep in debt, credit card debt in particular, it’s easy to fall into the trap of seeking easy answers to suddenly and miraculously rid yourself of that burden.  Paying off four and even five figures worth of debt can be daunting, and seemingly impossible to achieve.  But as someone who has been there, I can tell you without reservation that you CAN do this on your own, and by avoiding the temptation for radical shortcuts, you WILL be much better off in the long run.

Before we go further, let’s make two separate but related points.  1) There is a moral, ethical obligation to pay all of an owed debt.  You borrowed the money, you should be willing to pay it back 100 percent (plus reasonable interest), 2) We will not be discussing bankruptcy here, because that is literally NEVER your best option, regardless of what some attorneys claim.#

#To reinforce my disclaimer that comes at the bottom of every post I write, this statement is an opinion only, and is NOT intended to be taken as specific legal advice.  I am a financial coach and licensed life insurance agent. I’m not an attorney.

There are, however, two somewhat radical yet more industry-accepted measures that can be taken for those in deep debt:  Debt Consolidation, and Debt Settlement.

Consolidation refers to hiring a company which specializes in the reduction and eventual elimination of unsecured debt.  The company helps you organize your debts and can negotiate on your behalf with the credit card companies for reduced interest rates, 0% periods to help you pay your debt down more quickly, and can arrange to take in your payments and then forward negotiated payments directly to the creditors.  Let’s be clear:  Consolidation companies help you with something you can readily do on your own, and charge you a monthly fee for the service.  But in certain circumstances, they can be of some assistance.

However, there are two primary negatives with working with a consolidation company.  First, as I just indicated, they’re not really providing any service that you couldn’t do on your own with a little effort.  You can call your creditors and ask for rate reductions, or request to have payments lowered and spread over a longer time frame in an effort to stay current.

The second downside is that signing up with such a company usually will be reported on your credit report, and can take as long as seven years – from the date of your final payment made to/through the consolidation company – before it is expunged from your record.  This information can lower your score and, thus, make it more difficult to qualify for more beneficial types of financing such as a home mortgage.

In most instances, consolidation is unnecessary and not helpful enough to justify the price – in terms of the monthly fee (typically $35-$75 monthly) or the detrimental credit hit.

Debt settlement is a much more aggressive strategy in which you’re essentially hiring lawyers to negotiate discounted settlements of the debt.  Say you owe Capital One $8,000, and you have no feasible way of keeping up with the minimum payments, and certainly no chance of paying more than the minimum in order to pay the balance off anytime soon.  The company might approach Capital One on your behalf and offer to pay a flat $4,000 within the next 30 days in order for the entire debt to be forgiven.  This is referred to, should Capital One agree in our example, as a “charge-off.”

Hold on!, you may be saying.  You’re telling me I can pay off an $8,000 debt for just $4,000?  Where do I sign?

Yes, it may sound like a Godsend, until you really peek under the hood of how this engine functions.  First off, where are you going to get the $4K to pay off the account within 30 days?  If you’re hoarding cash, you should have already used it to pay down your debt.  Assuming you don’t have that kind of scratch available, you’d have to turn around and borrow it from someone else.  How, in the name of sound financial planning, does that eliminate debt?

Another problem is that in most cases, and depending on the state where you live, that $4,000 “discount” on what you owe is recorded as income for you for tax purposes.  You would be liable for income tax on $4,000 at the end of the fiscal year… on money you never actually saw.  Be sure to consult with an accountant or tax attorney for specific details on your situation.

And the settlement company needs to get paid.  Want to know how?  By charging you a percentage of what they save you, sometimes as much as 25 percent according to Experian.com.  In the above example, that means $1,000 of the $4K discounted off the Capital One balance would be paid to the settlement company.

Also, the knock on your credit report for charge-off’s is significantly worse than just utilizing a consolidation company, and can take a decade to come off your report, says FairIsaac.com.

And didn’t I already mention the audacity it takes to justify paying less than what you actually, legitimately owe?  Sure, the credit card companies are rolling in it, and they often charge ridiculously high rates of interest.  Won’t hurt them much to contribute a little back to the common folk, right?  Perhaps, but it still ain’t right to pay $4,000 for an item you agreed to pay $8,000 for.  Period.

The truth is that you do not have to resort to such drastic measures, nor should you.  A little common-sense planning and spending reduction, following the advice of this blog and others like it that propose you handle your own issues prudently, and you can escape your debt much more quickly than it may seem now.

Forget consolidation, settlement, and other non-traditional methods.  Do the right thing, and pay your debt off as quickly as you can using good, savvy savings strategies.  You’ll feel a lot better about it, AND be fiscally better off as well.

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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.

Just this once, I’d appreciate your OK to take this finance blog off topic

Make no mistake – this is a website dedicated to personal finance… unconventional in many cases, in a world that constantly nudges you against your own best interests… but specifically about your money, nonetheless.

But for the second consecutive week, your visit here will not yield you some new, relevant information in the economic world.  I do apologize for that.  Please stay with me, however.

Last week, I wrote you a quick note asking you to excuse me from a new post due to illness – I had surgery to have my gallbladder removed, received doctor’s orders not to work for two weeks, and was in enough post-operative discomfort that proper concentration on work was challenging.  So I took the week off.  I promise it won’t happen often.

I’m feeling significantly better as I write this, and I certainly could attack a new angle in the world of personal finance with this post.  Instead, however, I’d like to request the opportunity for some inflection in light of recent events.  Your humoring of me by reading the following is most appreciated.

In the world of personal finance, and the accompanying “blogosphere,” we spend a lot of time discussing the best ways to save, spend, and invest our money – tools that are extremely handy, strategies that are surprisingly lame, and everything in between.

What we don’t talk enough about is enjoying the fruit of our labors, taking full advantage of how lucky we really are, sharing with those less fortunate, and so forth.

Now please don’t get me wrong – my recent illness was never life-threatening, and by this time next month I should be fully recovered from the ordeal.  Millions and millions of people are a whole lot worse off than I was even at the pique of my abdominal pain a week ago Sunday.  My perspective isn’t improperly altered.

But this did serve as the third reminder of the last five years that life can change drastically.  One minute, you’re going along fine with all your ducks seemingly lined up in a row.  And then suddenly, you learn that your father has died unexpectedly.  You’re cruising with everything planned, and falling into place as you had anticipated, and then BAM!  Your brother obtains a blood infection and is only 50/50 to survive.

Both these things happened in my life.

My brother’s illness came first during this stretch, and for six solid weeks I was doing virtually nothing except heading the 35 miles or so from my home to the hospital every day to check on his condition and try my best to keep my sister-in-law, niece, and nephew informed and calm.  Somehow, he had contracted pneumonia through a strep-throat like bacteria and his condition grew worse as he lay in the Intensive Care Unit, a ventilator inserted to help him survive.  He had become septic, and at one point the doctor informed us that he was “a coin-flip” to make it through, and if he did so, there was a good chance that he would permanently lose kidney function.  They had to do a juggling act, balancing a dangerously accelerated heart rate with declining blood pressure that made him susceptible to a crash.  Very, very dicey.

Ultimately, we were blessed with his recovery.  And, he regained proper kidney function just two weeks after leaving the ICU.  He was laid up at home for several months after the initial stint in the hospital, but today he’s doing just fine and back to work as a restaurant manager.

My dad had been battling multiple forms of cancer, active and in remission, but was feeling as well as he had for months when my son and I drove up to see him at his home not far from the south entrance to Yosemite National Park.  We had a nice visit, and he informed us that he was to have a review from his doctor the day after my son and I were leave for home, with the distinct possibility that he could be taken off of chemotherapy for as long as six months.  With that potential green light, my dad was hopeful of taking a road trip in his RV with my stepmother.

And he certainly looked and acted better.  My wife and I had gone up for a visit about two months prior and it was scary how sickly he looked at the time.  This once 6-foot-2, 215-pounds of brawn built by decades of working as a heavy duty equipment mechanic was 155 pounds and he had begun hunching over to the point that I was now taller than he.  I’m 5-10.  He had always towered over me, but not on this visit.

That trip forced me to start trying to mentally prepare myself for the inevitable.  He was 78, and I was realistic enough to recognize he might never get better.  That’s why the visit two months later when my son came with me was so very encouraging.

But in the following wee hours of the morning, barely 12 hours after my son and I had gotten home, we received the call that my dad was gone – passing away in the local Emergency Room after a coughing fit that apparently burst some blood vessels in his fragile lungs, a side effect of an immune system severely weakened by the months of chemo.

I was devastated, and embarrassingly unprepared for the emotional strain of his loss.  That was 2015.  Less than two years later, I endure the aforementioned illness requiring my own trip to the ER and, subsequently, surgery.  My maladies were nothing compared to what my brother and father went through, but when you’re laying in a hospital bed, all sorts of thoughts race through your mind.  It’s just human nature to ponder the what-if’s.  That said, there are also positive take-aways from the experience:

  • Be sure you live your life to the fullest while you’re healthy enough to do so.  Don’t be reckless, of course,  But don’t wait so long to smell the pizza that you never actually get to.  We get only one life, friends.
  • Be sure you’ve made the arrangements you need to make to assure your loved ones are taken care of in the event something happens to you.  THE dumbest thing you can possibly do is convince yourself that nothing will ever happen to you.  You simply don’t know that, nor do you have any real control over it.
  • And lastly, don’t forget to take the time – time after time – to tell your loved ones how important they are to you, and how much you appreciate them.  I’ve always loved my family – my wife, two sons, daughter-in-law, grand-daughter, parents, brother, sister-in-law, nieces, nephews, cousins, aunts and uncles.  But these days – before I got sick but, admittedly, not so much until after my dad died – I make sure everyone I care about most knows how I feel – frequently.

This is, after all, so very much more important than IRAs, online savings accounts, or even “pay yourself first.”   Please always keep the proper perspective.  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.

My apologies: No new post this week

A QUICK NOTE FROM BOB CUNNINGHAM:  Unfortunately, I will be unable to post this week due to illness.  An abdominal issue forced me into surgery Sunday, July 16 and I’m now recovering (nicely, thank you).  I will return to this space for a new post no later than July 25.

Please take this time, if you would be so kind, to review some of my previous posts and submit comments.  Just scroll down, or you can refer to my list of Recent Posts on the right-hand portion of this page.  The battle to do the best and most with your money should never take time off.

Thank you for your time and understanding. See you next week.

Four common personal finance tips you should feel comfortable ignoring

By BOB CUNNINGHAM

Have you heard the phrase, “conventional wisdom?”  It’s typically used when information is thought to be so common-sense correct and accepted, that numerous alleged authorities echo the same sentiment, thought, or advice.

When preparing to cross the street, it’s conventional wisdom to look both ways.  Okay, no argument here.

But in the personal finance niche, I have learned over my 30+ years enrolled in TSOHK (The School of Hard Knocks) that conventional wisdom isn’t always the savviest take, nor can it be assumed to be applicable, or even helpful.

Sometimes, it can be downright detrimental.

In this week’s BWE post, I want to talk about some examples of when conventional wisdom simply isn’t the best way to go about your money life. Now, to be fair, not all of these are blatantly false.  It’s just that in some cases they over-simplify a topic, and while I’m usually in favor of keeping things straightforward, I’ll never support the notion of bypassing applicable specifics.

So, without additional adieu, here are some money misconceptions:

1) All debt is bad.  As noted author Robert Kiyosaki of the pioneering finance and investing book, ‘Rich Poor Dad,’ has often said, there is most definitely such a thing as “good debt” as well as bad debt.  Kiyosaki correctly postulates that good debt is used to buy assets, such as stocks and bonds or investment real estate, and bad debt is associated with credit card debt and other methods of purchasing liabilities – things that depreciate over time.

But I’ll take it a step further in noting that a debt doesn’t have to directly purchase an asset in order to be good debt, even if a liability is being bought.  If the debt, in itself, creates the opportunity to profit, I believe it should be considered good debt.  This scenario is most common when discussing home mortgages – low interest rates, the interest being tax deductible.  Mortgages, when utilized correctly, can be truly valuable.  But there are other ways to reap these types of benefits.

For example, say you need a new car – not brand new, necessarily, but an updated vehicle because your current wheels are costing you too much in repair and maintenance.  Because of your stellar credit, you qualify for 1.9% financing through your bank.  You’re looking at spending about $20,000 on a certified pre-owned car.

Should you pass on financing the purchase because you’re acquiring additional debt?  Maybe… if you can’t afford the monthly payment in your current circumstances, none of the forthcoming pointers will truly be applicable. Still, go with the point I’m making here and let’s assume your budget allows for the payment.

Being that this is for buying a car, are we to assume automatically that this is bad debt?  After all, the car will most certainly depreciate in the coming years, right?

Most people would read the above and suggest, “sure the terms are great, but you’re still better off paying cash if you have it available.”  I disagree, because what is being overlooked – and this happens frequently – is the opportunity cost.

Instead of forking over $20K on the car up front, what if I can put that money to work earning, say, 4-5% with tax-free access to this money if I ever need it, and still acquire the car?  Wouldn’t that be a 2-3% positive Rate of Return over what the auto loan is costing me?  Sure is.  And if you’re thinking perhaps that the small profit I’ve illustrated would be devoured by the car’s depreciation, that really isn’t so because the car will go down in value over time regardless of how I buy it.  In other words, if I pay $20,000 cash now, the car will still be worth only $15,000 (or less) in two years.  How I went about buying the car isn’t really relevant.

In short, it actually makes (arguably) more sense to take advantage of the ultra low-cost financing, put the cash to work earning more than that, and still drive my nearly-new ride.

2) Live below your means.  I really hate this expression, which virtually EVERY financial guru insists you must do, because it is so vague.  If the key is to avoid unnecessary spending, just say that.  But even then, more specificity is needed.  If you go out to the movies once a month as your sole entertainment, you’re certainly spending money unnecessarily – you don’t HAVE to go see the flick.  But obviously, if that is your only fun all month long, you’re most certainly living below your means.

I’m also opposed to the concept that you have to set a living standards guideline.  Determine your fixed expenses, and your necessary discretionary expenses, then decide how much of what’s left from your paychecks you’re comfortable with saving and investing, and otherwise live normally.  Make a reasonable, thought-out plan, pay yourself first before you do the rest, and have a life.  Progress doesn’t have to be excruciatingly painful.

3) Tax-deferred is better.  There are some pretty savvy financial minds out there who harp on the idea that if you can defer paying income tax until later, you’re going to be better off because more of your money is working for you. Sounds logical, but I will prove it’s balderdash.

The most obvious example is a Traditional IRA (or an employer-sponsored 401K), which uses before-tax income to be funded, with taxes not due until you take the money out down the line.  This is opposed by the Roth IRA, which uses after-tax money now, and allows you tax-free withdrawals later.

A quick look at the numbers through an example:  Teresa opens a traditional IRA and commits to putting $200 per month into it, for 20 years.  For this exercise, we’ll assume a 25% income tax bracket and a 7.2% rate of return on the invested money.  Richard goes the Roth route, and so his after-tax monthly contribution (based on the same 25% tax rate) is $150 per month, again with the same 7.2% ROR.  Where will each be in 20 years?

  TERESA:  $200 per month for 20 years = $48,000 invested.  At 7.2% ROR, her account balance after 20 years, according to a financial calculator at www.bankrate.com, is $103,844.78.

  RICHARD:  $150 per month for 20 years = $36,000 invested. At 7.2% ROR, his account balance after 20 years is $77,884.34.

Now of course, Richard has already paid his income taxes, so he keeps the whole $77K+ should he choose to take it out.  Teresa, however, still owes the 25% income tax.  Her balance after paying the tax?  $77,884.34.

Well, how ’bout that!  In the end, with both getting the same ROR and owing the same percentage of income tax, they come out exactly the same.  Except for one thing… Teresa paid $25,960.44 in tax, while Richard paid just $12,000.00 ($50 per month times 12 months times 20 years).  Which do you suspect hurts more – $50 each month on the front end, or more than $25K straight to Uncle Sam in exchange for simple account access?

This example demonstrates why the government loves deferred taxes – because it makes more money that way.  Those who insist that tax-deferred is the better method fail to understand that the extra compounding in the account benefits only the government, NOT the account owner.  Why? Because unlike you, the government doesn’t pay taxes (to itself) on the gains.

One last point:  Is it feasible to conclude, based on the current national financial state of affairs (i.e. the national debt nearing $20 trillion!) that tax rates might very well be higher down the road than they are now? I believe so. Sure, they might go down… but who’s willing to bet on that?  Pay now-pay nothing later is a much safer and prudent way to go.  As many before me have pointed out, would you prefer to pay taxes on the seed, or the harvest?

4) Average Rate of Return is important.  Another fallacy I enjoy debunking.  It sounds innocent enough – “the average rate of return for the ABC Fund over the last three years is a sparkling 15%!”  Really?  Okay, well’s let’s consider the following scenario and see if a 15% average annual ROR is truly beneficial.

ABC FUND:  Year 1 ROR = +30%, Year 2 ROR = -55%, Year 3 ROR = +70%. Average ROR annually over the three years = +15% (30 – 55 + 70 = +45 divided by 3 years = +15 per year).  Total opening balance in the account at the beginning of the three-year period:  $10,000.  Total after the three-year period at 15% annual average ROR = . . .  $9,945.

Whaaaaat??  We actually fell by 55 bucks?  What the fudge?

Yep, it’s true.  And this is just the investment itself.  It doesn’t take fees into account.

How can this be?  Run the math, my friends.  After Year 1, with a 30% gain, you would have $13,000.  After Year 2, down 55%, you would have $5,850. After Year 3, even with the monstrous 70% gain, you end up with $9,945.

The above is an example of Wall Street ‘gotcha’ at its finest.  Losses matter much more than gains.   If you have $1,000, and lose half (50%) the first year but gain half in the second, are you now back to even?  Nope… you’re still down 25%.  When you drop 50%, you need a doubling (100%) gain the next year just to get back where you started.  Crazy, but true.

The big banks and investment companies don’t want you to understand this, which is why keeping full control of your assets, through sometimes unconventional strategies like whole life insurance (see last week’s post) is the only way to really know what you have and, better still, what you can expect to have at any point in the future.  Steady gains every year, even small ones, are much better for you in the long run.

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.

In the end, the most important aspect of personal finance is independence

By BOB CUNNINGHAM

Today is Independence Day… and I’m not referring solely to celebrating America’s independence from England, achieved in the 18th century.

As we enjoy family and friends, perhaps eat a little (or a lot of) barbecue, and sit back to enjoy the local evening fireworks display, we should also keep in mind that in personal finance/money management, independence is everything.

Consider this:  In the ‘revolution’ of money today the smart people are the rebels who seek to break away and do their own thing, paying as little of taxes as possible, while the metaphorical Redcoats are represented, ironically, by the American government.

Come again?

This column is not intended to be unpatriotic – heck, few people are more red-white-and-blue than I am – but when it comes to finance, our society has been led down a road that tends to serve the best interest of, shall we say, the kings more than the common folks.

Virtually every personal finance educator and guru I know says to rely heavily, or even solely in some cases, on government savings and retirement programs and their alleged tax-favored benefits. They cite 401Ks, IRAs, 529 plans, and others – all government sponsored programs with strict rules associated with them – as your best choices to put money away for the future.

Well, Ladies and Gentlemen, I’m here to tell you flat out that there’s a better way for all of it.  It’s a strategy that, despite significant nay-saying from the “in crowd” in the personal finance community, has been utilized literally for centuries by some of the wealthiest individuals to walk the planet.  And yet, it’s a system virtually anyone with just a little bit of money available to save can utilize.

What is this glorious solution to all of our money problems?  It’s… wait for it…

WHOLE LIFE INSURANCE

Ta-da!!…

OK, let me back-up a moment.  Whole life insurance is NOT the answer to all money problems.  I was exaggerating for emphasis… trying to create a dramatic moment.  But it IS, far and away, the best approach to managing your personal wealth.

Oh, and when I refer to whole life insurance, what I should actually be writing is “the right type of whole life insurance, properly structured.”

In the space I have here, I can’t go into full detail on how it works, but I can give you some basics and attempt to explain why you’re much better off with this approach rather than Uncle Sam’s.

“Having money is nice, but having the independence to do with it what you wish, and when you wish, is truly priceless.”

The cliff notes version is that properly-structured whole life insurance can allow you to have a cash value fund which can be used for literally anything you want with very few restrictions; have a specific, measured rate of return (over and above the money that goes toward the actual insurance itself); be able to access those dollars legally, at any age, with no income tax due; have the ability to enjoy that access while at the same time those dollars continue to work for you as if you never touched the funds; have this money possibly not count as income or assets for purposes of outside financing qualification or student loan assistance if desired, etc.; and several other benefits.

Let’s briefly take each point above individually:

1) Can be used for anything with very few restrictions. Because you have access throughout, you can use the money for whatever you want.  So having one account for retirement income, another for college savings, and still another as a health savings account, etc. is unnecessary unless you prefer to go that route.  The only guidelines are that you can’t always put into the policy as much as you want, or risk it becoming an investment account (referred to as a Modified Endowment Contract) by law rather than an insurance policy, which would essentially convert the policy into government control.  To get around this, simply open another policy.  And if you’re not personally insurable, someone else can be the insured and you still own the policy and the associated control. How cool is that?

Government programs, by the way, have maximum investment allowances of which you cannot circumvent by opening another account. It’s one per customer, and once you’re maxed for your yearly contribution, that’s it ’til next year.

2) A measured rate of return. You will know in advance what the minimum performance of the savings will be because the correct type of policies offer that aspect, with the only variable being the annual dividends paid out. And as we go into this strategy in more detail down the line, you’ll learn how to pick the right sources for your policy(s). Government programs rely directly on Wall Street, and we all know how volatile the stock and bond markets can be at any given time.  Isn’t it better to know you not only will avoid loss of principal or interest forever, but that you are assured your account will grow annually as long as you maintain at least the minimum premium?

3) Access your money income-tax free.  The money in your cash value can be accessed completely free of income tax using two different strategies – withdrawing the dividends paid, or borrowing against the account.  No age or credit requirements. And get this… policy loans never have to be repaid, or can be paid back solely at the policy owner’s discretion.  It should be noted, however, that the savviest long-term strategy for using whole life insurance cash value is to systematically pay back any loans taken.  Government programs all restrict and regulate how you can access your own money, whether it be age 59 1/2 on the front end, or forcing you to take withdrawals from an account – even if you prefer not to – when you turn 70 1/2.

4) Access your money and still have it actively working for you.  You can’t beat this have-your-cake-and-eat-it-too feature.  Because funds borrowed from cash values actually come from the general pool of the insurance company, not your policy cash value specifically, you can borrow funds up to about 90% of your cash value for a major purchase (a car, for example) and at the same time, the funds are still growing within the policy as if you had never taken the loan at all.  This, Friends, is better than paying cash for a car because you avoid losing the opportunity cost.  And it’s obviously preferable to attempting to secure outside financing for a purchase because of the control you retain “borrowing from yourself.”  Try borrowing against your retirement account and see if they will credit you interest earned as if you didn’t take the loan.  Ain’t happenin’.

5) The money doesn’t officially count as assets.  I’m going to tread lightly here because I’m not a tax lawyer or accountant, so be sure you do your own due diligence if you opt to initiate this strategy.  In essence, my point is that you might be able to legally exclude life insurance cash values when requested to list assets for applying for certain types of outside financing, and as part of estate settlements and personal liability.  But again, check on this yourself – I am NOT telling you this is a broad benefit.

I hope I’ve sufficiently introduced the whole life insurance strategy to you, and awakened you to the definite availability of legitimate, preferred savings alternatives to government programs.  Like any other form of saving and investing, the earlier you get started the better off you will be long-term.

Maintain your independence!  God Bless America.  And 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.

Importance of Emergency Fund over-emphasized by most finance gurus

By BOB CUNNINGHAM

This week’s post is being sent to you via Lake Tahoe, NV, and I gotta tell ya — it’s friggin’ beautiful up here.

But of course, you don’t read this column to hear about my vacation travels, so let me get right to business. I will note, however, that I have intentionally shortened this post in the interest of time (as in, more time for me to play!).

Okay, so did my headline catch your attention?

The idea that having a monetary reserve to cover you in the case of an unexpected significant expense is, on its face, a no-brainer.  We don’t want to have to borrow from friends or family, or go on a Top Ramen diet just because the car radiator is leaking and needs to be replaced.

But the notion that the majority of folks should put emergency funds in a savings account, which yields virtually no interest, while maintaining a credit card balance that charges more than 20% APR, strikes me as non-sense.  Many of the most prominent minds in the world of personal finance insist that you have at least $1,000 – preferably a lot more – set aside and accessible before you pay off debt, invest for retirement, etc.

Phooey on that. There are more productive ways to accomplish the same thing.

The main concept behind emergency money is that it has to be liquid… but that doesn’t mean it has to be as liquid as bank ATM access. Withdrawing from investment accounts, life insurance cash value, and even tapping a credit card can be utilized smartly to accomplish the same goal – and allow the individual to have his or her money working at full income-producing capacity in the meantime.

For example, if you are currently investing in a Roth IRA, you can withdraw the monies you’ve put in (but not the growth) without penalty.  This is, of course, not the ideal scenario for gaining quick funds to pay for an emergency because you want your investment account money to stay put and grow using the magic of compound interest.  But the setback is usually temporary if you do need to tap the funds, and the smart money managers account for the scenario of not having an emergency as well as the what-if something bad happens.

The idea that we probably won’t need those funds set aside for an emergency is the basis of my approach.

If you have a permanent life insurance policy – which I will talk about in detail in a future post coming soon – you can withdraw dividends the policy has earned and/or borrow from the policy’s cash value.

In both the above instances, the average time to have your money in hand is about 3-5 business days.  So you’re probably thinking that in an emergency, you might have to have the money RIGHT NOW.  Then what?

That’s where the credit cards come in.  You see, using a credit card to pay for an emergency is only a dubious idea if you’re not prepared to pay off that charge before the end of the grace period.  But if you use the card to pay the emergency cost as it happens, then use one of the two above scenarios to pay off the credit card, you’re golden.

Now, I realize that not everyone has money invested in a Roth or has insurance cash value to tap, or wants to bother family with the ultimate taboo question.  For some, who truly have no other means to cover a significant unexpected occurrence, it’s a choice between putting some unproductive cash aside or rolling the dice with the knowledge of using a credit card if absolutely necessary and perhaps paying a higher cost in the process.

But people should be aware of all their options, and quite frankly, I’m sick of reading about concepts that are allegedly Finance 101 when, in fact, the logic is potentially faulty.

Understand all the choices and consequences, and then proceed with the best strategy for your particular situation.  Don’t get pigeon-holed into following the masses.

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.

Top 5 LEGIT Personal Finance Books

By BOB CUNNINGHAM

Ever since I became enamored with personal finance and, more specifically, unearthing guru-promoted myths, I have developed my favorites from the list of all the PF books I’ve read over the last decade-plus.

Now before I go any further, I want to point out that just because a book may not have earned a mention in this space doesn’t mean that the book in question doesn’t offer some value (how ’bout that artfully crafted triple-negative?!).  There are money authors out there who I personally believe are way off the mark in several areas of finance philosophy (mostly those who insist government programs are the best way to save and invest), but I nevertheless agree with them on other topics.

With that caveat out of the way, the following is a summary of the books that are the most worthy of you spending your money to obtain, simply because they offer information that, in my opinion, is generally spot-on with what is best for the vast majority of people.  These selections are easy to understand, follow, and implement, yet don’t dumb things down to a juvenile level.

Many of these books support somewhat unorthodox solutions, and are even outright contrarian to some of the most popular conventional advice.  In many instances, the courage demonstrated by the writers is a primary reason I like the work.

All are available through normal sources, so I won’t be delving into individual websites, book costs, etc.  Just titles and authors, and why I believe they’re worthwhile:

1. The Bank on Yourself Revolution, by Pamela Yellen

A topic of this blog in the near future, and indeed it will be arguably the most important post I’ve ever written, will be about how the correct type of whole life insurance is far and away the best tool available for short-term and long-term savings, retirement planning, funding college educations, and more.  Yellen, who should not be confused with Janet Yellen, the current Chairperson of the Federal Reserve, summarizes the in’s and out’s of this strategy in the most contemporary sense considering the philosophy itself is more than a century old.

Earlier works, such as Become Your Own Banker, by Nelson Nash, are better known in the financial publishing sector, but Pamela Yellen’s most recent release is the best guide to understanding and implementing the approach now.

2. Last Chance Millionaire, by Douglas R. Andrew

The author of two preceding and related works, Missed Fortune and Missed Fortune 101, Andrew lays out an extensive strategy regarding the value of mortgages, tax management, and arbitrage… this was the first book that led me to conclude that so much conventional personal finance wisdom is hokum.

In my opinion, combining the strategies laid out in this book, and the Bank on Yourself approach in No. 1 above, can put folks of numerous financial categories onto a path that results in superior overall results.

3. Money: Master the Game, by Tony Robbins

Better known for his dominance of the personal development niche, and a guy who gets a lot of unwarranted flak in my view, Robbins put together a marvelous all-star team of financial experts and lays out an outstanding overall plan to take care of virtually all areas of finance.

Robbins didn’t try to pretend he is the expert, although he comes off a bit arrogant in acknowledging that his celebrity gave him the ability to contact, and sit down with, literally dozens of influential, acknowledged money master minds. His newest spin-off release, Unshaken, was mostly a disappointing re-hash of many of the points he was able to make in MMTG (i.e., a not-so-subtle attempt to milk the cow twice during the same dawn), but that misfire doesn’t detract from his successful initial foray into personal finance education.

4. Multiple Streams of Income, by Robert G. Allen

Another author who strayed from his primary expertise — in this case, Allen is a noted real estate investing pioneer who has penned numerous best-sellers on that subject — to delve into areas related to personal finance.

Talking about a myriad of ways to increase income (and thereby, cash flow) is admittedly a bit of a stretch, especially compared to the direct impact of the first three publications on this list, but Allen covers so many straight-forward, self-generating income concepts that you can’t help but significantly improve your bottom line just by implementing one or two of them in addition to how you currently make your living.  I had to include it here, because it has been so influential on me.

5. Think and Grow Rich, by Napoleon Hill

Okay, so I had to go a little conventional on you, but for good reason.  Simply put, no credible listing of top financial books can omit this one.  It’s the one that started it all, so to speak.

To be blunt, I only took a few things from this book that have had direct impact on my personal finances or life approach, but to be fair, that is because I got my start in this type of information-seeking relatively late in life.  For anyone who wants a solid foundation from which to begin seeking legitimate wealth, this is the one and only book to start with.

As a special show of respect, I will give one other title a mention in the same “breath” as TAGR, separating it from my list below of others worth reading:  Rich Dad, Poor Dad, by Robert Kiyosaki.  Interestingly, I have found myself drifting away from Kiyosaki’s line of thinking for the last few years because he’s gone somewhat in the direction of doomsayer, but I admire the unique perspective he brings as well as his obvious enthusiasm for what he believes to be the smartest philosophy there is on money.  I’ve learned a great deal from his series of books in addition to the one that started it all for him.

HONORABLE MENTIONS

Automatic Wealth, by Michael Masterson;   Start Late Finish Rich, by David Bach (author of another good work, The Automatic Millionaire);  The Smartest Investment Book You’ll Ever Read, by Daniel Solin;  The Index Card, by Helaine Olen and Harold Pollack.

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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.

Buying a home is a valuable step, but don’t do so until your financial house is in order

By BOB CUNNINGHAM

As my wife and I enjoy a brief vacation here in beautiful Big Bear, Calif., about 90 minutes northeast of L.A., the vast view speckled with wonderful homes got me to thinking about my next blog post.

One of the most prominent among the numerous dilemmas that face young adults as they attempt to successfully establish positive financial momentum is when to pull the trigger on the purchase of a house… and thereby cease building someone else’s net worth.   Put another way, there are giant advantages to buying a home versus renting for the people who are reasonably in a position to make that leap.

With renting, you are squandering money monthly.  Okay, I don’t mean that in the literal sense – your rent gives you a place to live for 30 days or so.  But once the month elapses, you have absolutely nothing to show for the rent you paid.  Also with renting, you can’t make any improvements without permission from the owner, must trust the owner to make needed repairs in a timely manner, and are restricted by the owner on whom you can have living at the home, whether you can sub-lease… a host of potential restrictions.

Sounds almost like the government, eh?

When you own the home, it is YOURS even though you don’t get sole ownership until after the mortgage is paid off.  And who cares about that technicality as long as you don’t have the bank manager claiming dibs on the master bedroom?

Seriously, as long as you continue to pay the bank as promised when you signed the loan documents, you can do pretty much whatever you want with the home, and have anyone live with you as you please,   More importantly, every payment you make builds equity (wealth) for you in at least one of two ways – by paying down what you owe, and by possessing a commodity that appreciates in value more often than not.

And believe it or not, it is often better to owe money to the bank on your home than having it paid off free and clear.  I will explain in detail why that is in a future post.

Back to the benefits of owning.  Did I mention a very huge tax benefit?  Interest paid on a mortgage loan is (virtually) always deductible as a write-off.  On a new loan, of which much of the payment is interest, that can add up to $10,000 or more in a year.   And you can write off the property taxes, too.

Conversely, rent is not tax deductible.  And don’t even think about the paltry renter’s credit.  There’s no comparison.

But wait!  In your adult life up to now, the money talk has likely been about saving more, spending less, and eliminating debt. Doesn’t buying a home go against the grain in that it represents spending and most certainly is NOT eliminating debt but is instead creating it?

Well, as usual, that depends on your specific circumstances.

Of course, I should clarify that I am referring to a young couple or family’s first home, not a vacation castle in the mountains such as those we’re surrounded by up here.  With that in mind, let’s skip past the how’s of buying a home – entire books have been written on that subject – and focus here on the more crucial “when?”

Many folks fall into two broad categories when it comes to making this decision, and neither are ideal.  The first group is intimidated by the idea of such a massive commitment as buying a home – the process of finding the right place, determining what they can afford, qualifying for financing, having enough for a down payment… it can be overwhelming the first time around.  They’re scared to death to make the wrong move.

The second group jumps into the fray before it can really afford to.  A pay raise of 50 cents an hour with a promotion to assistant to the assistant manager, and a proclamation is made that it’s time to ditch the studio apartment in the low-income district and go get a two-story with a pool in the suburbs.

Hold on there, Trump!  Somewhere in the middle, with a lean toward the overly conservative first group, is where you ideally need to be.

There are essentially four factors that should be in your favor before even considering the decision to buy a home:

1) Gainful, secure employment.  If you’re not solidly employed, you won’t qualify for financing anyway… but nevertheless new home-buyers need to have a steady income stream that can be reasonably counted on (note, however, that there’s no such thing as absolute job security or a slam dunk success in business). In short, you should be working at a stable job that you like enough to make a mental commitment to it indefinitely.

2) Little or no other debt.  A car payment is OK, or absent that, a SMALL amount of other debt.  But if you’re into credit cards and other unsecured commitments more than a few hundred dollars, it is wise to get that taken care of first. And if you have undesirable debt yet have saved what you believe to be enough for a down payment on a house, you should likely use all or most of those funds to pay off the debt instead.

3) Appropriately frugal spending habits.   You’re living below your means, putting money away monthly and are comfortable sticking with “staples” like a cellphone which isn’t the absolute latest, greatest model and technology.  And you’re cool with eating Tuna Helper or Swanson dinners more often than not even during LobsterFest.

4) You’ve got at least a few months of savings built up already.  Stuff happens, so you certainly don’t want to be in a position to get behind on your mortgage if your transmission goes out.

Did you notice that I didn’t specifically make having the money for a down payment a requirement?   Let me explain:  Many, many folks get caught up in the idea that they can’t or shouldn’t attempt to buy a home unless they’ve saved enough cash for a legitimate down payment – 10%, 20% or even more.  It simply isn’t true.  First-time buyer programs today are… well, first-rate.  Some even require as little as a 1% down payment, and FHA’s basic first-time buyer program requires only 3% down.  Closing costs must be accounted for, too, but some programs roll those costs into the loan.

There is a negative to a lower down payment – Private Mortgage Insurance.  PMI is charged by the lender whenever a loan is made on more than 80% of the appraised value of the home (in other words, you put down less than 20%).  It is expensive – as much as 1% of the outstanding balance on the loan annually) – and undesirable, but not so costly that it should prevent wanna-be homeowners from going forward assuming they otherwise have the means.  The numerous benefits of owning your abode outweigh the temporary nuisance of PMI in most cases, and as soon as you have established equity of more than 20%, you can contact the lender (they will not do so automatically) and request the PMI be cancelled.

THE KEY FACTOR HERE ISN’T HAVING A BIG DOWN PAYMENT, IT IS AVOIDING TRYING TO BUY TOO MUCH HOUSE.  Banks have their own rules about “how much home” you can afford.  My recommendation is to see what they will approve, and reduce that amount by 20-25%.  Why?  Because it will virtually assure that you won’t buy more home than you can swing.

Simply put, be willing to dictate the terms, or be willing to walk away and try again in a few months.  Believe me… the latter is grossly preferable to getting in over your head, assuming the lender guidelines would even permit such a circumstance.

Good common sense (hmmm… is there such a thing as bad common sense?) will usually be accurate in determining when you can and should move forward with the big step of buying a residence.  Don’t get eager and foolishly proceed before you’re ready…

But you should also avoid standing pat just for the sake of it.

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DISCLAIMER:  This post represents the author’s opinion only, sometimes based on and supported by cited numbers and sometimes not. 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 strategy or investment.  Results are NEVER guaranteed.  Utilize the information as you see fit, invest at your own risk.