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

By BOB CUNNINGHAM

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

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

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

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

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

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

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

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

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

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

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

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

 

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

By BOB CUNNINGHAM

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

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

What does that all mean?  Translated into one expression,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As always, thank you for reading.

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

Earning more income these days? That’s great, but be willing to spend less anyway!

By BOB CUNNINGHAM

One of the more common mistakes that folks make regarding personal finance, especially you younger adults, is to believe that getting a raise at work should equate to raising your standard of living.

The smart money managers don’t think that way.

The common mindset for those who simply haven’t yet fully embraced the idea of getting ahead financially, rather than merely keeping up, is to dedicate those extra dollars into new and improved personal benefits… a more spacious crib (I’m so street), a nicer ride, new clothes, or whatever… rather than the simple step of increasing the amount you save every month.

Worse, many still aren’t saving yet and are spending all (or more) of their income, whether it increases or not.

Now please, don’t get me wrong.  If you earn a substantial raise at work (or even a modest one), there’s nothing wrong with a little celebration – going out to a nice dinner, or maybe a splurge on a new outfit not available at Ross Dress For Less.  You probably worked hard to earn that pay increase, and you should feel fine about enjoying the fruits of your labor… to a point.

If, however, you’re the type who figures out that your monthly take-home just went up by $75, and you’re trying to determine which additional expense you can afford, that you couldn’t before, you’ll never really get ahead monetarily.

If you’ve been paying attention to this blog for any length of time, you will know that I am not a proponent of the live-below-your-means philosophy, but I only feel that way in that I believe saving should not be considered part of the means formula.

To clarify, I’m saying that savings should come off the very top (remember, always “pay yourself first,”), before your means is determined.  If you do that, then it’s fine to live right up to your means, provided you don’t go over it by running up debt or doing something else ill-advised.

Of course, a common response to this is “that sounds all well and good, Bob, but I don’t have any money to spare. I’m barely getting by.”  It’s the most common refrain by a wide margin – people simply refuse to believe there’s anything in their current routine that they can go without, but when I press them about how often they eat out (including fast food), shop for goodies on-line, have coffee at the local coffeehouse, or go to the movies, their answers inevitably range from “occasionally,” to “well, a person has to live.”

Sure they do.  But when you eat fast food, can you focus on the joint’s budget menu rather than get the $8 No. 1 combo?  Couldn’t you simply spend less time thinking of crap you want to buy at Amazon or Overstock.com? Can you settle on a Tall rather than a Venti?  Might you go see a flick during the daytime and pay matinee prices?

And then they get a raise, and they start eating out more, frequenting Starbucks twice as often, add E-Bay to their binge shopping, and see movies they liked a second time, under the premise that “I can afford it.  I just got a raise.”

How about, instead, increasing your savings… and potentially knocking several years off your working life that can be added to your retired life?  I don’t know about you, but why in the heck would anyone work until they’re 65, when the ability to retire 10-15 years sooner (or even earlier) is available?  They like their work?  Great… they should put themselves in a position to dictate EXACTLY how much they do, how often, for whom, etc. by making income a non-factor.

To summarize, you don’t have to go without basic needs and a few wants in order to be smart with your money.  But if you’re not saving something every month without questioning it – preferably, at least 10 percent of your take-home pay – and committing it before you pay any of your expenses, you’re missing the financial boat.

If your tendency is toward spending instead of saving, you have a decision to make.  Have a little more fun now.  Or, with the amazing power of compound interest, have a lot more fun later… both in quality and increased number of years you can worry about playing instead of working.

Then, your next raise won’t matter.  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.

Now that you know dividend-paying whole life insurance is the answer, here’s why…

By BOB CUNNINGHAM

Last week, I made the pronouncement that THE best thing you can do with your savings and investment dollars is to put them into a certain type of dividend-paying, whole life insurance.  I referred to the features and benefits of such policies, to illustrate why I have come to feel so strongly positive about these products.

But some additional perspective might be helpful, in the form of direct comparisons to the government-sponsored, conventional approaches promoted by so many self-proclaimed personal finance experts today.  (Remember, I am NOT an expert… but I am a licensed life insurance agent in California and, at the risk of coming across as full of myself, somewhat more knowledgeable in this area than most because I’ve studied this subject for most of the last decade, and I’m a graduate of SOHK – the School of Hard Knocks).

Okay, so why whole life insurance?  Here’s a breakdown:

Reason No. 1:  These policies offer clients virtually zero risk.  You’ll notice the word ‘virtually’ in there.  OK, technically, the insurance company that accepts your money and writes your policy could go out of business.  Any entity can.  But insurance companies rarely fail.  According to consumer research firm A.M. Best, less than 0.6 percent of life insurance companies have gone bankrupt outright since 1950.  Only a handful more had issues serious enough to require a take-over.  Some might point to conglomerate AIG and its need for a bailout about a decade ago.  But the equities investment arm of that company is what was on the brink of failure, not insurance.

And consider this:  If an insurance company does go down, the Guaranty Association will “insure the insured,” covering your cash values up to a certain figure and percentage.  Values and coverage vary depending on size, age of the policy, etc. but according to the California Department of Insurance, 80% of the cash value or death benefit (whichever applies) is paid typically.

Also, only a few of the more than 2,000 insurance companies nationally offer the specific types of dividend-paying whole life insurance that works best for this approach.  Stick to a company you’ve heard of and, well, your risk of losing your money is infinitely less than having it stuffed under your mattress at home.

Reason No. 2:  YOU control your own money at all times.  According to Douglas Andrew, the author of several pioneering personal finance books including his most famous, Missed Fortune, the most important characteristics shared by truly astute investments are:  safety, liquidity, and a rate of return.  He also adds tax-favored status as a factor that separates wise investments from the rest.

No. 1 above covered the aspects of safety, and the second point is the idea that you can access your money pretty much whenever you need it.  That is a seemingly basic but actually uncommon and invaluable control.  Conventional methods, such as saving in your company’s 401K Plan or in an Individual Retirement Account (IRA), immediately restrict you from your own funds unless you’re willing to pay penalties.  With both 401Ks and Traditional IRAs, you pay a 10% penalty plus the full income tax hit if you try to get at your money before age 59 1/2 and/or if the account has been open less than five years.  In a Roth IRA, you can pull out your contributions if you wish, but not the gains without the aforementioned extra costs.

And, with the 401K and Traditional IRA, you also have a problem on the back-end. Even if you prefer not to, the government has a minimum required distribution clause – fully taxed, of course – beginning at age 70 1/2.  If you don’t take it, Uncle Sam will make the withdrawal for you and penalize you on top of taking the taxes due.  That, my friends, is complete LACK of control… of YOUR money!

Reason No. 3:  Your money gets a guaranteed and steady rate of return, with no chance for loss.  The normal basic ROR is 4-5%, plus any dividends paid out.  Dividends aren’t guaranteed, but the companies that specialize in these special whole life policies have literally paid out dividends every year going back more than a century.  Refer back to previous posts about the importance of steady annual returns versus the volatile nature of traditional investments such as stocks and bonds.  Losing money hurts more than gains help. With these policies, you simply don’t lose money, regardless of what the markets do, domestically or internationally.

Still, I must ask… could you invest your money elsewhere and possibly earn a better return?  Of course, but consider that the government programs littered with Wall Street mutual funds and other similar products often carry with them high fees as well as no guarantee of any return at all (and thus, no downside protection).  Insurance companies have some associated fees as well, true, but those are already factored into the return and dividends – and made known to you up front – rather than subtracted from the end results. And they are typically lower than the fees charged inside a 401K Plan, notes Tony Robbins in his personal finance best-seller of a few years ago, Money: Master The Game.

Reason No. 4:  Tax-free access, bay-bee.  This advantage is often the most misunderstood, so let me clarify.  Any monies you’ve paid in as premiums into a whole life policy, as well as dividends earned, can be withdrawn from the policy free of income tax.  Any other funds accrued in the cash value can be accessed through policy loans.  Loan proceeds are never taxable.

And although there are those who think the government intends to eliminate that last feature from these products, such talk has purportedly been going on for decades and nothing’s come of it.  Plus, if the law did change it would almost certainly affect only future policies not yet written, not current ones already on the books.

Reason No. 5:  The policy can include a feature that allows your cash value nest egg to grow even if you borrow from it, as if you didn’t borrow at all.  That sounds too sweet to be factual, but it’s completely true and actually pretty straight-forward.  Written properly, these policies allow for this huge benefit because the loan proceeds come from the insurance company’s general fund, NOT the actual cash values of the clients.  The cash values are just the collateral, thereby allowing them to stay in place and grow as if no loan had been taken against them at all.

So imagine having $25,000 built up in the cash value of your policy and you want a new car.  You can borrow the funds from the insurance company (without qualifying – just request it, and the money will be made available to you in a few days), and the $25K will still be accruing the guaranteed ROR plus be part of how your potential dividend is determined.

You are charged interest on the loan, usually about 5%, but with the roughly matching rate of return, the loan is costing you a net of nothing.  And, you can choose the terms for paying it back.  You can even decide NOT to pay it back if you wish.  If the insured individual dies, and there are unpaid loans on the books, the loan balance is simply deducted from the death benefit before it is awarded to the policy’s beneficiary.  It should be noted that for most financial planning strategies involving whole life insurance, it is recommended that policy loans be repaid.

With all these valuable advantages – and truthfully, I’ve only touched on the most basic benefits – it’s hard to imagine anyone choosing instead to let the government control his or her funds.  But that choice remains out there and selected by a whole host of folks, most of which simply have no idea that the proper kind of life insurance has living benefits rather than just a death benefit and is far superior to traditional approaches to saving and investing.

Continue to consider all your choices, and be savvy… because you CAN Build Wealth Early!  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.

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

By BOB CUNNINGHAM

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

By BOB CUNNINGHAM

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.

***

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.

***

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.

Whoa… let’s back up for a moment

By BOB CUNNINGHAM

In case you didn’t already recognize the signs, this site is new… and is published by a blogging newbie.  I don’t mind admitting that.  I’ve been writing professionally nearly 30 years, for established publications and as a freelancer, but BuildWealthEarly.com represents my first foray into the blogosphere.

And as I was contemplating my next post, and briefly reviewing what I’ve released so far, it occurred to me that I have failed to share this blog’s true message – my actual philosophy on personal finance, and the often contrarian angle from which this subject matter will be provided in the coming weeks, months, and (hopefully) years.

Yes, I established in my introductory post that I am not a financial professional in the sense that I sport a bunch of impressive designations in front of my name – my only official title is as a licensed life insurance agent in California – but instead I am relying on a combination of my “PhD in the School of Hard Knocks” and some diligent research over the last decade-plus.

Still, I hadn’t truly shared my perspective – so here it is:

“Most of what you have learned about money, either from your parents, teachers/professors, or from so-called gurus, is NOT truly in your best interest.”

Say whaaat?

There are many, many valid basic points that I would never try to contradict – spend less, save more, know what you’re investing in, etc.  This is mostly common sense that doesn’t require you to read it in a blog post in order to recognize it as fiscal wisdom.

But the American system of, shall we call it, “public economics,” is mostly baloney. Our system is still the best in the world, in my opinion, but it falls shy of being truly valuable across the board for most citizens.  Far from it, actually.

I will give you one example now – trust me, you will get plenty more in future posts.  The 401K Plan.  We have been told that your company’s 401K plan is far and away the best way for an individual to save for retirement.  Put every dollar in that you can muster, many experts recommend.

As Col. Sherman Potter said on the 20th century TV show, “M*A*S*H*, at least once, “Monkey muffins!”

OK, so how would you react if I offered you the following savings plan? My strategy that I recommend to you is not liquid, meaning that once you put money into this instrument, you cannot retrieve it (for an emergency or any other reason) until the government says you can – beginning at age 59 1/2 and with the account open at least five years – unless you wish to pay a 10% penalty for the privilege.  This strategy frequently charges you among the highest fees in the industry, as much as 2.5% of your holdings annually, and gives you  little if any say in what specific investments your money will go into.  This strategy says to save a small amount on income taxes now, by having your contributions taken from your paycheck pre-tax, but pay a much larger gross amount of taxes in the future, when you are finally allowed to access the dough.  Oh, and if you happen not to need your money when you get past retirement age, well, that is irrelevant because when you turn 70 1/2 the government forces you to withdraw a minimum amount, the failure to do so costing you not only the taxes you would owe but IN ADDITION, a 50% penalty tax for good measure.

What do ya think?  Sound like a good way to go?

I just described the primary characteristics of the typical company-sponsored 401K plan.  Does Uncle Sam rock or what?

Now, to be fair, the 401K does have one desirable trait – the possibility of a company match.  Many companies offer some sort of matching funds to your contribution – a percentage of what you put in based on a percentage of your income.  But here’s the kicker – not every company offers a match.  In fact, according to multiple sources, the percentage of companies which offer matches, among those that sport 401K plans at all, is declining.

Under most typical circumstances, it makes sense for folks to contribute enough to their 401K plan in order to maximize the benefit of any company match.  But not always, and never a penny more than what counts toward the match.  There are simply other strategies available, which virtually anyone can utilize, that are significantly more beneficial than what Washington D.C. has laid out for you.

And very soon, we will be going into those.  Thanks for reading.

**

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 or all 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.  Profitability is NEVER guaranteed.  Invest at your own risk.

Pay off debt or save? A quandary that is deceptively complicated

By BOB CUNNINGHAM

Another personal finance blog’s post on this subject caught my attention recently, and it got me to thinking that the question of whether to pay off debt as soon as possible, or maximize saving and investing, must be among the most-asked by Americans interested in smart money management.

The easy answer is to do both – after all, especially in the world of finance, how can diversification be a bad thing, right?  And the truth is, for most folks, paying off some debt and saving some money, too, probably IS prudent.

But there are factors that many gurus don’t properly consider, especially those who happen to come down particularly hard on either side of the aisle.

In the get-rid-of-that-nasty-debt-at-all-costs camp, the reasoning for paying off a 23% APR credit card ASAP is difficult to assail.  It’s sort of like an instant 23% return on your money… yeah, sort of.  Certainly, being able to ratchet that balance down rapidly is beneficial – a $120 minimum payment on $5,000 of credit card debt at 23% nets only about $24 going to principal, the other $96 pure interest profit for the company which issued the plastic.  That’s why you can end up paying nearly $20,000 to erase that debt if “you go the distance,” and just pay the minimum required each month.

But whenever you add money to the minimum, you have to figure the lost opportunity cost of not having that cash invested in a compounding account instead.  In other words, the interest goes both ways.  True, that performing asset is likely to fall way short of a 23% Rate Of Return, but in getting the money into the account earlier, you reap the rewards of more interest accrued long-term because of the magic of compounding.

The invest-as-much-as-you-can-and-don’t-worry-so-much-about-the-debt crowd, meanwhile, conveniently tends to overlook the lack of liquidity in most of the alleged best investments.  Want to build up your 401K and then use some of those funds to pay off that credit card?  Forget it.  Unless you’re turning 59 1/2 and are prepared to quit your job, it’s unlikely that will be an option for you.  And borrowing against your 401K generally defeats the purpose.

Also, don’t forget you will be paying taxes on your accrued savings when you finally do access it.  With the beefed up credit card payments, it’s after-tax dollars already so you get the full bang of your bucks toward eliminating principal.

I know… I haven’t really answered the question of which is wiser.  Well, here are some basic numbers using the following scenario:  An individual we will call Titus (why not?) is faced with a choice.  He makes $3,000 per month gross salary, has no savings yet, and owes $5,000 on a credit card at 20% interest with a minimum required monthly payment of $100.  His 401K at work offers a 50% match on up to 5% of his gross income, and is returning an average of 7.5% annually (figure 10% minus the typically exorbitant 2.5% of fees).  Lastly, Titus has determined he has $300 per month extra to dedicate either to savings or debt elimination.

If Titus opts to go after his credit card debt, at $400 per month ($300 extra plus the $100 minimum required payment), he will have his $5K debt paid off in about 15 months, after which he plans to put $300 monthly toward his 401K and improve his current standard of living with the $100 extra per month for discretionary spending.  After five years from the start of accelerating the pay-down of his debt, Titus has about $21,000 in his 401K with no debt. He achieved this with his $300 plus $75 from the company ($3,000 salary times 5% = $150 times 50% is $75), for 45 months. He went from minus $5,000 to plus $21,000.  Pretty sweet.

If there had been no company match, incidentally, he would have a little less than $17K.

On the other hand, if Titus chose to pay the $100 minimum on his debt and instead put the $300 toward his $401K, along with the $75 match, it would amount to about $27,000 in five years minus the $3,800 he would still owe on the card for a net gain of roughly $23,000.  Sans a company match, the net gain would be about $18K.

But before you key on $23K being more than $21K, one other factor needs to be considered:  Remember that Titus would not have the option of using the 401K money to pay off the $3,800 credit card balance, so that debt would continue charging 20% interest annually.  Chances are that this ongoing liability eats into (or completely decimates) what is otherwise a relatively small advantage for going the 401K route.

In the end, it is the company match of the 401K and the interest we credited in this example that pushed the pendulum towards not accelerating the pay-off of the credit card initially.  But what if we endured a down market during this five years and the return was only 3%?  Wouldn’t that make paying off the debt come out significantly better?  Yep.

Ah, and remember that Titus took $100 a month after the debt elimination and began using it as extra spending money.  He improved his budget flexibility, and that’s a tangible gain too.  I incorporated this into the example because it’s my opinion a large percentage of folks, faced with having $400 to “play with” after eliminating a debt, would choose to have fun with a portion of it.

Ultimately, in my opinion, a credit card debt at 20% interest should be your first and only priority because it is definitive, non-taxed progress.  Opting to contribute to the 401K up until the company match is maxed and then turning your attention to the credit card debt certainly is logical – you’ll never get a truly dissenting vote from me even if the math leans otherwise.

But ignoring the available acceleration of paying off big debt in order to pad your retirement account contributions is essentially leaping over dollars for quarters.

**

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 or all 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.  Profitability is NEVER guaranteed.  Invest at your own risk.