Castles & Moats

Insurance and Investment Planning...Simply Explained

Save, Save, Save2018-07-05T21:24:54+00:00

Chapter 12

Save, Save, Save

Sadly, there is no sexiness in saving. It’s boring…there’s no endorphin rush in setting $$$ aside for future needs…especially in relation to that same endorphin rush when we buy stuff. Even if we know we don’t need it, it’s still a rush!

Look at this chart below from the US Bureau of Economic Analysis.

This ain’t fake news people…this is a legitimate source. Look where annual savings were in the 70’s. Between 10-15% throughout the decade. I think there’s a reason for that.

If you can think back that far or ask your parents or grandparents about it. What did they NOT HAVE then that we have today?

They DID NOT HAVE:

  • Mutual Funds
  • Individual Retirement Accounts (IRA)
  • Online trading platforms
  • Access to information for individual stocks & bonds.
  • 401(k) plans with their employer.
  • 529 College Savings Plans
  • Health Savings Accounts (H.S.A)
  • Credit cards, and easy access to them.

So, what did they have?

  • Savings accounts
  • Certificates of deposit (CDs)
  • Christmas clubs (ask your parents what these are)
  • Lay-away plans at department stores (ask about these too)
  • Whole life insurance policies with guaranteed cash values
  • Company sponsored Pension Plans with guaranteed retirement income
  • Discipline to not spend what you don’t have & live within your means.

Where are we today? Overspending like crazy. I live in West Nashville in a neighborhood full of homes built in the 60-70s. I’m blessed to be where I am. My next-door neighbor just turned 88 and she built her home! Amazingly, if you go one mile to the east, you’re seeing multi-million dollar homes. However, if you go one mile to the west, there’s a cash advance or a check cashing store on every block. It’s very telling. Ever seen the interest rates on those places? It’s the price one pays for not saving anything and having a “life event”.

Today as a country our savings is too low. Maybe around 5% on the high side…and this includes your IRA/401(k) contributions. Our firm believes in “WORLD CLASS SAVINGS” …meaning 15-20% of your income put away in various accounts annually. I’ll show you how to do that in Chapter 15.

Observation: we don’t save unless we are given incentives to do so…such as tax-deductible contributions to retirement accounts, or employer matching in 401(k) plans…but that’s for another chapter.

All the “financial entertainers” use the phrase “rule of thumb” A LOT. I hear you should have 3-6 months of income set aside for emergencies. Given the extremely low interest rate environment we have been living in for the last decade or so, there’s not a lot of motivation to put $$$ in savings accounts and money markets to get less than 1/2 % annual return…and that’s on the high side these days.

But we’ve got to do it. We must go back to that budget in the earlier chapter and find the margin in our lifestyles to create ways of setting $$$ aside for those “life events” that creep up on us when we least expect it.
Given what has happened with your healthcare plan, do you have enough $$$ available to meet your annual deductible and maximum out of pocket expense? Maybe you should start there as an attainable amount.

When life happens, the first thing is to look for CASH & CASH EQUIVALENTS. A CASH EQUIVALENT is something that is readily liquidable. A home equity line of credit, if opened when not needed can serve well…if you treat it well. If you manage it correctly, $$ will be available when you need it most.

A premature withdrawal from an IRA is the worst decision one can make. It’s costly, and it will come back to bite you eventually. Especially when you calculate the lost earnings that withdrawal would have earned you had you had other funds for that particular need. Trust me on this one…Big stupid tax I paid when I had to do it 30 years ago…huge life tuition gained by never putting myself in the position to have to do it again!

You might think I’m still trying to sell the concept, and maybe I am, but I said throughout that I have certain biases in my professional life. This is one of them. Life insurance CASH VALUES are readily liquidable via loan or withdrawal.

Another story from the Carden Archives

Here’s my personal example of how I share this concept with others. When I bought my home years ago, I wasn’t in a good cash position. I had paid the IRS for the prior year’s taxes, paid two quarters of estimated taxes for the year, funded my retirement accounts for the previous and current years, and I had nothing left in my emergency fund.

Then I got the bug to get out of my condominium and get back into a house. I got it big time…and amazingly, within a 48-hour period, I found a home I loved for sale, got a full price cash offer on my condominium, and there I was…with no $$$ to close on the house.

BUT… (there’s always a but…and this one is a good one) …. I had been funding my life insurance policy for years…just systematically setting it aside because my budget allowed for it. Have you ever noticed when you fill out an application for a loan and they ask for an itemized list of your assets that they always want to know what the life insurance cash values are?

When I met with my mortgage broker, I told her my story about being temporarily cash poor…but then I gave her my life insurance statement showing more than enough cash value available to go to closing. I think she was a little shocked when I told her I had full access to 90% of that value within 48 hours.

Made a phone call, filled out a form, and I had a check in my hand soon thereafter. I basically borrowed the insurance company’s $$$ at a 6% annual rate of return…made the interest payment in advance, and paid off the loan within the next year. Money was returned to the policy…still growing…and I had my new home. Ta-da!

If I had withdrawn $$$ from my IRA, I would have paid taxes and a 10% penalty….and I would have lost all the future value of that IRA account. A life insurance loan is a non-reportable event on my tax return because it’s a loan! I paid it back in full, and the only out of pocket cost was the interest payment on the amount I borrowed.

Ok, I rambled a bit…but if you’re this far into this book, then you know that I tell stories.

It does amaze me though that the media always talks about “consumer spending”, but they never talk about “consumer saving”. Again, as I started this chapter, it ain’t sexy.

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If you’re in need of auto, home, landlord, or life insurance, I look forward to getting to know you and becoming your partner in protection.

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