Building Wealth - Cutting Costs

OK I have to give credit for this idea to my Brother-In-Law (we will call him Mark).  I took a different approach to saving for college for my son.  In our case simply set up a 529 plan for our son, made contributions as part of our financial plan and he is now in college and can do four years (including housing) as a state college with no debt and almost on out of pocket expense.  While this seems wonderful a bit of it is already biting us in the rear.  Our boy just doesn’t seem to realize how lucky that makes him.  I am glad we did it but what I am about to lay out for you is a much better solution at least to a degree.

What Mark has been doing since both children were born is both simple, cost free and may I say genius.

Every kid has birthdays, Christmases, Easters and many other times that relatives, friends etc send them cards and gifts and very often money.  Mark has required that 50% of his two children’s financial gifts (no matter how small or large) go into savings accounts to be used for college.   He choose very safe investments and did not elect to use a 529 due to its restrictions.

What does this mean to his kids?  Upon Graduation both will have over 20,000 dollars in funding toward schooling or life in general if they choose not to go to conventional college.   I should point out that this is not a family the gets huge amounts of money for each event, we are talking 20 bucks here, 5 bucks there, may be 50-100 for a Christmas that goes into these funds.  Mark requires his kids to save this money no matter the source.  If they come over to my house and I give them a ten a piece for spending money, Dad puts 5 bucks a piece away, just like clockwork.  The fact that 18-20 years is a very long time for money to grow, takes care of the rest.

Some of the family thinks this is “taking away the fun of just being a kid”, most of our family is BROKE by the way!  Taking advice from the broke is a good way to not only be broke but build generations of kids and grandkids that are broke too.  Mark wisely has ignored this and I think when his kiddos go to college or start a business or do what ever with their money as adults they will put more value on the funds.

Now we did teach our son to save, we helped him invest in stocks, set up accounts and always made him put some money away.  Yet if I had it to do over I would have also had some allocation go to his college fund directly from his hands.  Not just to increase the funds available but to give him a true sense of ownership, responsibility and gratitude for the fact that this money is available.

What I know is this my niece and nehpiew will have real options when they finish high school.  Options my brother-in-law would be hard pressed to provide on their household income.  All this from the simple wisdom of “pay yourself first”.  Consider it the next time your little ones get a card from Grandpa Joe or Aunt Betty.  A few less do-dads today for a real kick start to life tomorrow.

This is going to be a brief and short post, I am going to put this simply DO NOT EVER purchase whole life, universal life or any other name they ever come up with to try to sell it to you. This has been written on a lot so if you want to know more then I give you here, do a bit of research online and you will find a lot more information to back my suggestion.

Let me be blunt, Life Insurance is for when you die, nothing more and combining it with anything is a mistake. Your life insurance should be about 10 times your annual income if you are supporting a family. The reason for that is simple, 10% returns are quite doable with solid investments so your survivors can invest the proceeds, draw 10% a year and not deplete the money for a very long time. This effectively replaces your income for longer then your working life.

Now to carry that much whole life insurance would be extremely expensive, beyond the budget of most working Americans. An insurance agent will try to show you how whole life builds “cash value” but this is nothing but an illusion.

Remember life insurance pays out when you die! When you live a long time (most of us do) it is good for the Insurance company, you pay and they do not. So when you buy term insurance you pay the amount that very smart economists and math PhD’s have determined will be profitable for the insurance company based on average life expectancy. In other words a fair market price that covers you if you die during the term.

Now look at whole life, you pay a LOT MORE for the same amount of insurance (the risk incurred by the insurer) but the insurance company has the same level of risk. Now if you are a good stooge and pay way to much for way to long, they will then give you some of your money back some day. In the interim they invest your money at market rates of 10-15% returns. So they make that interest, they hold your money and they tell you how great it is that they will give some back.

If you like that how about this. Go get 100,000 dollars, send it to me and I will hold it for you, I will even pay out 2% interest on it. Twenty years from now you can have your 100K back, plus 2% interest per year or you can just let me keep holding it until you die. When you die, I will give the money to who ever you tell me do. Sound like a good deal to you? Of course not! Oh and yea if you ever need the money I will loan your own money to you and you can just pay it back with a bit of interest. Sound like a scam? It’s not you just pay in your 100K in installments and they call it whole life!

So here is what you do, buy the insurance you need on 20 year level term and invest the rest of the money in good solid investments. You make the 7, 10, 12 or 15% depending on your risk tolerance and ability, you retain the ownership and control of your money. If you die in the interim your loved ones are covered, if you live till the end of the term and have invested well then you should not need as much insurance. Perhaps you might buy a bit less for say 10 years and by then if you still need insurance you have done something very wrong.

Don’t let the insurance guy tell you how hard it is for a 70 year old to get insurance! At 70 you don’t need life insurance if you have done a good job of saving and investing. You are not leaving behind a young wife and 3 kids, you just need to be buried. If you can’t save enough money to get yourself put in an box and under six feet of dirt in 70 odd years something is drastically wrong.

I won’t be writing on this subject very often as it is pretty well known and accepted by most good financial professionals today. I just wanted to get it out right away because it is a huge mistake often made by young people who end up in front of a well trained but undereducated insurance agent.