Step #3 of 6: Pay yourself first, do it always, and make the process automatic

By ROBERT K. CUNNINGHAM, Personal Finance Coach/Consultant

RIGHT OUT OF THE GATE:  This blog/website and all its content is designed and produced for information purposes only.  No representation is made to guarantee the accuracy of any of the content contained on this website, nor should it be interpreted that specific investment recommendations are being made.  The reader assumes any and all risk for strategies which are acted on.

Anyone who has spent even the briefest amount of time reading about personal finance has heard the expression, “pay yourself first,” but what does that truly mean?

Well, I’m glad you asked. 😉

Although it would appear to be among the most basic rules in the world of savvy money management, it is arguably the most difficult for many folks to adhere to.  It is promoted as being the first rule of finance, but I hope you will agree that the previous two steps I’ve laid out in this blog over the past two weeks – summarize your income and expenses, and establish a budget – should come beforehand.

If they didn’t, you wouldn’t have any accurate idea of how much to pay yourself.

That said, the primary concern over the long haul is to actually save, rather than obsessing about how much.  Establishing a habit of saving money regularly – and, preferably, automatically – will pay significant dividends, monetarily and otherwise, down the road.

With the power of compound interest – and, yes, it is every bit as cool as advertised – small deposits can eventually achieve surprisingly large results.

I always get a kick out of the demonstration of someone starting with a penny, and allowing it to compound 100% daily, for a month, and seeing how much they have after that time.  When asked to guess the answers, folks usually forecast a few hundred dollars, but the truth is that if you start with a penny and double what you have every day for 30 days, you end up with more than $5 million.

While that seems amazing to me, I prefer to focus on realistic numbers.  So let’s take a hypothetical 22-year old college graduate who starts with $500, and every month adds $300 to it.  And let’s say she earns a 5% annual return (yep, I want to stay conservative and achievable here), each and every year, and the interest compounds annually.

After the first year, she would have saved $3,990 ($500 plus 11 months of adding $300 per month = $3,800 x 5% rate of return (ROR) = $190.  $3,800 + $190 = $3,990.

How much will she have in 20 years?  If you calculate 19 more years at $3,600 contributed per year, the total amount SHE put in, not including any interest earned, would be $75,800.

Now to the whole point of this exercise:  At 5% compounded annually, her account balance after the two decades would actually be $123,067.  That’s more than $47,000 in earned interest!

THAT is why Albert Einstein purportedly said that compound interest is one of the most powerful forces in the universe.

One other vital point:  Starting early is crucial.  Starting late is better than not starting at all, of course, but the power of compounding isn’t only remarkable, it’s a little quirky.  To wit:

We have two business partners, who we will call Ben and Jerry (I love ice cream, but any resemblance to real people of the same names are purely coincidental).

Ben starts saving $200 per month at age 21, does so every month of every year until he reaches age 30, then stops because he gets married to a spendthrift who eats up their budget. Ben saved regularly for nine years, contributing a total of $21,600 before stopping cold turkey, never to contribute another dime for the rest of his life…

Go with me here.

Jerry does just the opposite.  He doesn’t save anything at all until his 30th birthday, when he decides he’d better get started and begins putting away $200 per month, just like Ben.  But Jerry goes one better – he doesn’t stop after nine years, but instead puts in that same $2,400 annually every year for the rest of his working life – until he retires at age 65.  That means Jerry puts in $86,400 over the entire savings period, more than four times what Ben saved.

Assuming both earned 6% compounded interest annually, each and every year (again, it’s about the comparison – stay with me), who would end up with more money in their account at age 65?

Jerry, right?  I mean, he put four times more money in.  Of course he will have more in his account.

Nope.

Ben’s account balance, despite putting in a fourth of what Jerry did, is just a bit less than $1.2 million.  Jerry has only about $650,000.  It isn’t even close.

As the character Leonard on the TV sitcom Big Bang Theory likes to reply slowly, “whaaaaat?!”

Because Jerry started late, his efforts are dwarfed by Ben’s even though Jerry put a lot more money in.  Einstein wasn’t trippin’ with his statement.

OK, fine, you’re saying.  That’s very cool, but what if you don’t have much to save at all?  Not even 200 bucks.  Sure, let’s discuss that.

Let’s say you’ve assessed your income and expenses, created your budget, and the best you can do is save $40 per paycheck.  My first reaction, honestly, would be to instruct you to go back and try harder to cut expenses, acquire a side hustle, sell unneeded material possessions, etc. to improve your savings commitment.

But you tried, and it’s $40 a check or fuhgetaboutit. You’re paid on the first and 15th, so we’re talking $80 savings per month.  Fine, we can work with that… as long as you commit to making your savings automatic by having the $40 direct-deposited into the bank account of your choice, a task that most companies can and will readily accommodate.  If not, you will have to take the extra step of manually transferring money to a savings or investment account… IMMEDIATELY after depositing your check and before ANY bills are paid.

This is the key to the philosophy and, fairly obviously, the whole point of “pay yourself first.”  These are logistical concerns, however, and for now I want to re-focus on the saving.

At $80 a month, earning 5%, you can have more than $5,500 accumulated in just five years.

Hey, I realize $5K isn’t going to buy you a Maserati… won’t even get you to a down payment on a Maserati.  But it’s a pretty good start toward getting into your first home, isn’t it?  Or you could knock out a big chunk, if not all, of your credit card debt with five grand, could you not?

To repeat, the true importance of this is about the habit of saving.  Simply put, the ability to save – even in small amounts until such time you can afford to contribute more – is mandatory to getting ahead and, ultimately, building lasting wealth, whether you are diligent enough to build that wealth early or not.

Pay yourself first, friends.  Don’t think about doing it, and don’t do so just part of the time, after your birthday or Christmas, or after you receive your tax refund.  Do it each and every time you get your paycheck, without fail.  The gains really will compound nicely for you.

Thanks for reading.

For more specific information on DPWLI and related strategies, please go to www.spwealthadvisors.com, and let them know that you were referred to that site via www.buildwealthearly.com. 

DISCLOSURE:  If you opt to purchase a product(s) from www.spwealthadvisors.com, I will qualify for an affiliate commission.

Step #2 of 6: Establish a legitimate budget

By ROBERT K. CUNNINGHAM, Personal Finance Coach/Consultant

RIGHT OUT OF THE GATE:  This blog/website and all its content is designed and produced for information purposes only.  No representation is made to guarantee the accuracy of any of the content contained on this website, nor should it be interpreted that specific investment recommendations are being made.  The reader assumes any and all risk for strategies which are acted on.

In last week’s first installment of our six steps to six figures, with at least six advantages, I wrote in detail about how to go about summarizing your income and expenses.

Yeah, I know that wasn’t exactly a hoot in terms of entertainment value, but it’s a must if you expect to proceed intelligently with personal money management.

Now, we will delve into Step 2 – putting together a budget.  What precisely does budgeting mean, for our purposes?  Well, the best way to explain it might be like this:  Last week, we deduced where your money is going.  This week, we will determine in advance where it’s gonna go.

Over-simplification?  Perhaps.  But when it comes right down to it, only you are in control of where your money goes.  What it’s spent on, or where and how much is saved, is decided by no one else.  So if you care enough to read this blog and get some suggestions on how to go about controlling all of this, why not go the distance and actually implement these techniques?

Looking back at the numbers you arrived at last week, in which of the following categories do you fall:  A little money left at the end of the month, or a little month left at the end of the money?  Let’s consider each scenario, and lay out an example budget:

Some extra money available:  Good for you!  It means at the very least that your income is satisfactory for your current lifestyle and your spending isn’t ridiculous.  But it doesn’t mean you can’t drastically improve your situation (yes, I used a double-negative. I find them handy on occasion.  Please don’t bother the writing police).

Are you saving any money on a regular basis? If not – and we will discuss why this is so vital in future posts – you’re going to remedy that here and now with a commitment to save at least an amount equal to your current monthly surplus.  For example, if your monthly net income is $2,500 and your expenses added up to $2,300, you’re going to put at least $200 into savings (or investing) monthly.  You will do this first, preferably automatically via a payroll withdrawal conducted by your employer, with the money transferred directly to your savings or investment account of choice.

Making this automatic is more efficient, and it reduces the chance that you will blow off this step in favor of the $229 dress at Forever 21 that you believe makes you look hot and is on sale for $179.  Don’t get me wrong… people need clothes and I like to see folks dressed up, but there should be a category in your budget that this fits into – pun intended. And honestly, $179 will buy you a whole friggin’ wardrobe at Ross.

So we have our $200 set aside for savings, and the next step is to total up our fixed expenses – rent, car payment, cellphone bill, gym membership, etc. – because these are (usually) constant and unable to be significantly altered. When we have that figure (let’s say it’s $1,500), we add it to the $200 and what’s left is for our monthly discretionary spending.

$2,500 income – $200 to savings – $1,500 for fixed expenses = $800 discretionary money available per month.

Discretionary, or variable expenses, are things we pay for that cost us different amouns each time.  Food (groceries and eating out), gasoline/car maintenance, utility bills, entertainment costs, and we will also include a miscellaneous category.

The last step is just a matter of attempting to spend less than the $800, so we can add to our $200 monthly savings total.  If we spent, for instance, $300 on groceries and $300 on eating out, might we able to drop that $300 restaurant cost to $240 or $250?  Seventy-five dollars a week for groceries (this includes toiletries, pet supplies, and anything else bought at the grocery store, not just food) seems reasonable.  But $10 a day eating out might be excessive.  Perhaps you could commit to giving the fast-food dollar menus a longer look and reduce that overall cost to $8 a day.  Do that and you just gained $60 more for savings.

What about your cellphone? Do you need unlimited data, or might you be able to go on a cheaper plan and be just as connected?  That gym membership… are you going regularly?  Can you change your routine to allow for exercising at home and eliminate it?  Go to Starbucks a lot?  Could you taper that back a little, being that it’s at least $4 a pop (just three “coffee breaks” a week is $50 per month. Small changes can really make a difference).   Find that extra $40 of savings somewhere, and combined with your cutback on eating out, you can boost your monthly savings up more than 30%, or another C-note.

Spending more than you make:  The difference between this scenario and the first is that instead of choosing whether you want to decrease costs in order to save more, you HAVE to cut costs just to save anything at all.  This is where discipline comes in – you have to want to improve your financial life, long-term.  Bypassing instant gratification – at least some of the time – is crucial to accomplishing more important goals, short- and long-term.

Let me take a quick detour, briefly, to talk about discipline.  I’m telling you right now:  If you’re looking for a way to get ahead and be smart without sacrifice or discipline, your wasting your time on this site.  I can and will coach you, if you’ll have me. I enjoy passing along my decades of experience to folks who can benefit via a much quicker learning curve than I had.  But EVERYTHING worth having comes at a cost.  Are you willing to pay it?

Last spending category I didn’t yet get specific with is “miscellaneous.”  The definition of this category, quite simply, is any expense that doesn’t fall into one of the other categories.  Clothing, for example, falls into this slot.  I suggest you put entertainment there, too, but the main point is to be reasonably frugal across the board.   It’s not a crime to go the movies, of course, but consider going to a matinee and saving as much as $6 per ticket.  It’s that type of thinking you should be willing to attempt in order for this process to truly be effective for you.

To practice sound budgeting fundamentals, never let your miscellaneous costs exceed your savings commitment.  That simple practice will make it less likely that you spend on non-essentials.

OK, one last reminder – no, two reminders – as you put together your budget.  First, figure every cost into this.  Do you like stopping at AM-PM to buy those new Reese’s white chocolate peanut butter cups?  Me, too.  Best damn things since deep-fried raviolis.  But figure the $3 a week you spend on them into your costs.  Be detailed and thorough, if you really want this to work you.

Secondly, stick with your commitments.  Adjustments can be made, but not on the fly.  Say you under-estimated your gasoline cost by $30.  No problem, but find that $30 somewhere else in your budget.  Do NOT automatically reduce your savings allotment to accommodate your lack of foresight.

The savings commitment you have made should only go up, never down… even if you have to skip those peanut butter cups for a while.

Thanks for reading.

For more specific information on DPWLI and related strategies, please go to www.spwealthadvisors.com, and let them know that you were referred to that site via www.buildwealthearly.com. 

DISCLOSURE:  If you decide to purchase a product(s) from spwealthadvisors.com, I will qualify for an affiliate commission.

Step #1 of 6: Summarize all your monthly income and expenses in detail

By ROBERT K. CUNNINGHAM, Personal Finance Coach/Consultant

RIGHT OUT OF THE GATE:  This blog/website and all its content is designed and produced for information purposes only.  No representation is made to guarantee the accuracy of any of the content contained on this website, nor should it be interpreted that specific investment recommendations are being made.  The reader assumes any and all risk for strategies which are acted on.

In the previous installment of the new-and-improved BuildWealthEarly.com, I laid out the six primary steps to accelerating the process toward reaching six figures of net worth in the shortest time that’s reasonable.

So now it’s time to begin dissecting the specifics of each step, starting with No. 1 – SUMMARIZE YOUR INCOME AND EXPENSES.

Although this appears to be a pretty straight-forward task, there’s more to it than just adding up your pay and out-go.  We want to be detailed when we do this, because we will refer back to it over the course of other steps, primarily in the area of attempting to cut wasteful spending.

First, let’s determine our income.  For most millennials, income is limited to a job.  How much are you paid? For our purposes, we want monthly numbers rather than weekly or semi-monthly.  Why?  Because the vast majority of expenses are paid out monthly, and when we put these figures side by side, it’s easiest and most effective if we’re comparing grapefruit to grapefruit.

I will assume that at least some of you may be asking, “but what if I’m paid weekly?”  It’s not important to get your income total right on the nose, as long as it’s close.  If you are paid weekly, for example, you will receive a paycheck four times in eight different months, and five in the other four months per year.  So for the sake of consistency, you can take your weekly numbers and multiply by 4.3.  This will give you an average monthly number over the entire course of a year, and that’s sufficiently accurate for our purposes.

An alternative to dealing with the weekly-pay dilemma is to simply assume just four paychecks per month for budgetary purposes, and in those four months during which you receive a fifth check, you can choose to ratchet up your savings or debt elimination. Treat those like mini-windfalls.

The same principles hold true to being paid every other week – you will occasionally receive a third check, but for the purposes of accurate info, simply multiplying by two will give you the monthly income total needed.

In compiling these numbers, you will need gross pay and net pay, as well as ANY other steady income sources.  If you rent a room in your home to a friend, for example, and he/she pays $300 per month, that is absolutely income that you count towards your monthly total even if you tend to immediately turn around and hand it to your landlord or mortgage company.

We note the gross pay because we want to have a starting point in reviewing the deductions from our pay each check.  You should verify these and understand not only what the deductions are for (taxes, medical, social security, etc.), but be prepared to assure they are correct.  If necessary, get a sit-down with a representative of Human Resources.  It’s also good to know what’s being taken out in taxes, and how your most current W-4 form is filled out so that you can adjust if necessary depending on if you’re receiving too much of a tax refund annually, or worse, you’re paying additional taxes come every April 15.  The latter scenario is uncommon, but certainly possible and avoidable.

Net pay, also commonly referred to  as take-home pay, is the magic number that determines how much spendable income you have available monthly.

With expenses, there are two broad categories — fixed, and discretionary. Fixed expenses are those which are the same, or virtually the same, every month.  Rent or mortgage payments, car payments, cellphone bills, and gym membership fees are examples.  Discretionary expenses are those that change significantly every month, such as food (it’s wise to separate groceries from eating out when compiling these costs), gasoline, utilities, clothing, and entertainment.

You need to separate any and all expenditures into one of these two categories, and by all expenditures I’m referring to everything from rent and car payments to gourmet coffee to your breath mints.  You don’t need a separate line in your summary for LifeSavers, but the mints are part of your grocery bill and should be included in the monthly total you dedicate to Ralphs, Vons, and Stater Bros., etc.

We separate fixed from discretionary because the former are expenses that you cannot easily change or eliminate.  Discretionary spending, on the other hand, is simpler to manipulate for your fiduciary benefit.  It’s pretty difficult to reduce your rent (good luck with that!), but quite doable to choose to walk or bicycle more and, thus, reduce your monthly fuel expense.

To ensure reasonable accuracy for listing your expenses, I suggest using the last three months’ of records – whether an on-line banking summary, credit card transactions summaries, hard-copy bank statements, or a combination of all.  If Christmas season falls during the prior three months (as it does at this particular writing), skip December (or November if you’re a proactive Christmas shopper), and utilize the surrounding three months.  Mark down all your expenses in both categories over this time frame, by month, and then average the three totals for each category to arrive at a fairly reliable monthly average.

Once your totals for income and expenses are laid out, simply compare.  If you are earning more money than you’re spending, it means you have some left-over funds that you should be dedicating toward saving, or debt elimination, or perhaps both.  And, as previously alluded to, you can attempt to decrease discretionary spending to give you even more money to work with each month.

If you’re spending more than you make, knock it off already!  In order to make this entire process beneficial, you have to be willing to cease bad habits… and spending more than you make tops the list. Get rid of all the credit cards in your wallet, at least temporarily, and use only your debit card for purchases, which will prevent you from spending money you don’t have (literally, but not in terms of budgeting – that onus is on you).

Now that you know where you stand in the most basic sense, we can figure out how to begin “paying ourselves first,” and otherwise create wealth-building money habits.  We’ll go into that line of thinking in next week’s post.

Once again, I thank you for reading.

For more specific information on DPWLI and related strategies, please go to www.spwealthadvisors.com, and let them know by any communication you choose that you were referred to that site via www.BuildWealthEarly.com. 

DISCLOSURE:  If you decide to purchase a product(s) from spwealthadvisors.com, I will qualify for an affiliate commission.

Over the next several weeks, let’s talk about 6 steps to 6 figures, with 6 advantages

By ROBERT K. CUNNINGHAM, Personal Finance Coach/Consultant

RIGHT OUT OF THE GATE:  This blog/website and all its content is designed and produced for information purposes only.  No representation is made to guarantee the accuracy of any of the content contained on this website, nor should it be interpreted that specific investment recommendations are being made.  The reader assumes any and all risk for strategies which are acted on.

Last week, I introduced to you the revised focus of this website… which consists of a personal financial gameplan centered on Dividend-Paying Whole Life Insurance (DPWLI).

Now it’s time to lay out how I will detail this information, which will be formatted as six posts, explaining in specifics how to go about each of the six steps to achieve six figures of net worth.  I’d love to be able to announce that you can accomplish this six times faster than with traditional strategies, but there are two reasons that would be a false claim.

For one, the notion of six times faster than about 42 years — the timeframe from age 23 to 65 that many adults spend as income-earning professionals — would mean that I can get you to $100,000 in seven years.  Some might achieve that milestone in such short order, of course, but there’s no way I would propose to assist the masses in doing so.  Sorry, but this is about keeping it real.

Secondly, it would imply that “normal” or accepted methods of saving and investing typically buoy people to six figures.  I’m not sure that’s so, thus any claim related to that, including a comparison, would be moot.

Are ya with me so far?

I mentioned six advantages in the headline of this post.  In fact, there are more than six, but in the interest of being consistent the half-dozen are:  safety, liquidity, rate of return, tax-advantaged, living benefits, and a death benefit.

OK, without further adieu (and that’s as French as I get), here are the six steps with a brief explanation of each:

1) Summarize all your income and expenses.  Yeah, I know… this sounds painful, and boring as hell.  But it’s a must if you’re going to do this correctly.  Whether you do it on a computer, or you sit down with a pen and a legal-sized yellow pad, you need to be willing to account for all your net income (take-home pay, income from rent or other sources) and your monthly payments to others.

The idea behind doing this is two-fold:  A) Determining how much income, if any, that you have monthly to dedicate to saving/investing, and B) Form strategies on effectively cutting your current spending in order to increase A.

2) Establish a budget. The dreaded ‘B’ word.  Let me make something clear from the get-go.  There are certain financial authors (should I cite any specific examples, David Bach?), who will claim you can engage in savvy personal finance without a budget.  I’m not entirely sure what is meant by that — and I’ve read The Automatic Millionaire twice (it’s mostly a very good read) — but any strategy that doesn’t decipher income vs. expenses is either ill-advised or is wasteful of available resources, or both.

The need to be overly specific can be debated, but you have to not only know where your money is going and coming from, but also be willing to adjust based on those numbers for your own long-term benefit.

3) Begin ‘Paying Yourself First.’ This simply means that you dedicate x amount of money per month to saving/investing BEFORE you start paying bills and everyday expenses.  It’s the one piece of personal finance advice that, I believe, is universal.

In other words, EVERY so-called guru, expert, author, blogger, and wanna-be seems to agree on this principle. So should you.

4) Eliminate all unsecured debt. You can never truly start the journey toward six figures of net worth until you eradicate your debt.  Home mortgage debt and, in some instances, a car loan and school debt are acceptable, depending on the terms and circumstances.

Credit card debt, however, is only OK if you pay your balances in full each month, and so that is managed under expenses.  If you carry a balance, even just a few hundred dollars, a top priority for you is to pay it off as fast as possible. Because if you don’t, you’re wasting money on the astronomically high interest rates.  And even if you’re taking advantage of a low (0%?) promotional APR, it’s temporary and still interferes with saving and investing. It limits your ability to EARN interest rather than pay it.

5) Open a DPWLI policy.  A plethora of benefits, living as well as the other kind, and advantages over conventional strategies await you.

6) Borrow against your accrued cash value to buy a home.  Personal finance, like a typical college’s curriculum, has several stages… from introductory to intermediate to advanced.  Buying your first home often represents the culmination of a successful completion of fundamental financial principles.

And soon, you might be able to tap your resources for a car purchase… eventually, it will make sense for you to do so as you learn to take full advantage of the features of your DPWLI policy.  But we’ll get into that soon enough.

Meanwhile, in next week’s post we will break down Step 1 — exactly how to go about determining your income and expenses, and begin the process for using that information.

Until then, as always, thank you for reading.

For more specific information on DPWLI and related strategies, please go to www.spwealthadvisors.com, and let them know by any communication you choose to commence that you were referred to that site via www.buildwealthearly.com. 

DISCLOSURE:  If you decide to purchase a product(s) from spwealthadvisors.com, I will qualify for an affiliate commission.

In money management, there’s a difference between automation and auto-pilot

By BOB CUNNINGHAM

My son is the worst about it of anyone I know.  You’d think that, being his old man writes about smart money management on a regular basis, he would be averse to such bad habits.  Nope.  Instead, he swipes or inserts his debit card to pay for things… and whatever balance his bank shows in his account at any given time – if and when he bothers to check – must be correct.

This folks, is referred to as money management on auto-pilot.  It’s not recommended.

In a neo-technical society, automation can be a great thing.  Banking apps are all the rage – just snap a photo of the check you want to deposit, complete a couple of clicks, and just like that you have made a deposit.  No need to venture out and walk up to an ATM, deal with a drive-thru, or (perish the very thought of it!) stand in line inside a branch.

But often, people confuse utilizing modern-day tools to assist noble efforts with a hands-off approach that, quite honestly, is just begging for problems.

You need to be on top of your money, gang.

So here is a quick breakdown of how you can utilize automation to your benefit, and what you should be willing to take the extra time required to do just to make sure you really are engaging in intelligent money management.

Use on-line banking…

Why wouldn’t you?  Like the trash-talking big guy proclaimed in the film, White Men Can’t Jump, to explain his sudden departure from the basketball court in the middle of a 2-on-2 tournament game he and his partner were dominating, “This is too easy!”

On-line banking allows you to quickly check your balance, see transactions, and the Bill-Paying feature lets you set up recurring payments on bills which are the same amount every month, such as your mortgage and car payments. You can also sign up directly with the vendor to get regular alerts for how much your bill is and when it’s due (ideal for utilities, for instance), go to your bill-pay page, and authorize payment in less than 30 seconds.

… But monitor it regularly

I go to my bank’s on-line site at least 3-4 times per week.  No, it isn’t because I’m obsessed with seeing a large balance.  Trust me, that isn’t applicable… not because my wife and I are poor – we’re doing fine – but because my regular bank account is used for paying bills and everyday expenses.  The bulk of our assets are located elsewhere, where they can earn a respectable rate of return.

I go there because I want to safeguard against two things – errors and oversights.  Errors are when someone charges you erroneously, or there is an error on the bank’s end (very rare, I have found).  Oversights are when it’s my fault – a charge I didn’t remember to account for, or perhaps a subscription auto-renew that I forgot about or didn’t want.

Simply put, I want to make sure the amount of money shown in our account is what should be shown.  Typically, the quicker mistakes are discovered, the easier they are to remedy.

Have your paychecks direct-deposited…

Many banks offer small incentives for agreeing to have your paychecks directly deposited regularly.  The perks can be fee-free basic accounts, discounts on loan rates, small cash-back considerations, even tangible gifts.  Nothing cozier than watching TV draped in a blanket with “Bank of Cucamonga” emblazoned.

Yeah, I’m kidding about the blanket.  Still, it is more convenient not to have to worry about physically possessing your check, getting to the bank to deposit it or cash it, etc.

…But know what’s being withheld from your net pay and why.

Don’t trust your employer with getting it right.  Be sure you concur with what is being withheld, how many hours you were credited with working, even the pay rate itself.  My other son recently took a new job, only to find out that he was being paid 75 cents an hour less than he thought he was promised.  And of course, he didn’t notice this until about a month in, making a correction (and retroactive reimbursement) more difficult to request and obtain.

Pay Yourself First:  Have money from your check sent directly to an investment account…

One of the oldest adages in personal finance, discussed numerous times on this site. “Pay yourself first” means that you set aside funds for savings before you pay any bills or cover any other expenses.  It assures you save, regardless of circumstances, which is especially critical when you are first starting out and have the maximum time to take advantage of the amazing principle of compound interest.

…And monitor your  balance to assure full credit and growth

Again, don’t trust that the powers that be will get everything right.  I once had a life insurance policy, for which I sent in a contribution toward what is referred to as a “payed-up additions rider,” which allows for growing your cash value more quickly provided you stay within certain parameters.  The insurance company mistakenly credited the payment toward a small policy loan balance I had, that I had just taken and wasn’t yet willing to pay on.

The error wasn’t a big deal, and was easily corrected by the company, but had I not caught it, it would have ultimately cost me money in the form of lost compounding on the funds which never would have reached my desired destination.

By all means, utilize the great modern technology available to us whenever you can, and it makes sense to you.  But whether you go old-school or new-tool, be “accountable” every step of the way.  Pun intended.

Thanks, as always, 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.

Ultimately, it’s all about retirement

By BOB CUNNINGHAM

On this website, and hundreds of others like it that I read and monitor, we talk about practically anything that has to do with money/personal finance.  And we should… there’s a helluva lot to cover about the subject.

But what it all boils down to, whether you’re in your 50s or half of that, is preparing for the “Big R.”  What proactive steps are you taking, now and in the near future, to properly prepare for retirement?

So let me ask you, is that what we should really focus on ad nauseum?

While planning for the long-term future is certainly important, I contend that excelling in the short-term, including the ‘now,’ is at least equally vital.  In fact, one often facilitates the other.

Maximizing your efficiency in saving and investing now, logically, will result in you having more money to work with later.

Let’s take a quick look at why planning for retirement has become such big business, cliff notes version.  You ready?  It’s because virtually all private companies have deserted the traditional pension system in favor of a 401K/IRA-led way of saving for one’s own career conclusion.  And, many public and government agencies appear headed in the same direction.

Sure… just save some money with your company in its 401K, or do it on your own with an Individual Retirement Account, combine those with the scraps that are our social security payouts – assuming those rates stay where they are now – and you’ll be set.  Who needs a big, fat monthly pension check when the S&P 500 historically averages a 10% annual return?

I’m tellin’ ya, it’s bananas.  And yet our society has fully accepted this monumental shift in monetary focus.  But what people fail to properly gauge is that, while $500,000 in a retirement account may sound like a butt-load of money, it is in fact barely enough to keep a retired couple above the poverty line.

Undoubtedly, you’ve heard that experts traditionally recommend drawing down your nest-egg at about 4% per year, so that you can live while retaining the full balance of your primary account.  In other words, if you start with $500,000, and want to leave a legacy, you should take annual withdrawals from that account of no more than 4%.

Really?  Hmmm… let’s see how that might play out.

Let’s say you’re an average wage-earner in the U.S., about to retire.  Your household income, says Betterment.com, is about $68,000 a year gross.  That’s roughly $50,000 net spendable money after taxes.

If you expect to maintain the same standard of living you’ve become accustomed to, you would have to have about $1.25 million saved.  And that’s not even considering the erosion caused by inflation.  At a 3 percent inflation rate, $50,000 of net spending power becomes just $25,000 in about 24 years, which is roughly the average length of retirement nowadays.

Of course, you can always sacrifice your kids’ inheritance and spend down your money – in fact, I think you should because it’s your money.  But try making $500,000 last 24 years when you’re taking $68,000 withdrawals on a taxable account.  According to calculators on the BankRate.com website, do that and you will be out of money in less than 15 years.

Your retirement account is a Roth IRA?  Cool.  No taxation on the withdrawals.  But with $50,000 annual withdrawals and inflation, your investments had better return more than 14% each and every year if you expect to continue paying the bills 24 years later.

Also, we didn’t enter increased medical expenses or anything else into the equation.  Scared yet?  Ya should be at least nervous.

So what do we do?  If we’re smart, we utilize specific strategies that take the guesswork out of money, and we start doing them now… to benefit us now, a little later, AND into retirement.  We do things that allow us to live a better, smarter life RIGHT NOW and over the ensuing years, and not just obsess about what we’re going to do when we actually get old.

And I have a strategy that makes all of this relatively simple and definitively painless.  Beginning in 2018, this website will be dedicated to detailing this approach and its various advantages on a regular basis.  Yep… I’m going to make you wait for it.

But, if you’ve been reading this blog for any length of time, you already know what I’m talking about.  DPWLI… to know what this acronym stands for, refer to earlier posts, and let me know your reaction to the suspense.

Yes, admittedly, I’m messing with my audience a little here.  But teasers are good, and it won’t be long now before the info will be at your fingertips.

In the meantime…  thanks, as always, 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.

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.

***

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.

***

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.

***

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.

***

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.