“All our dreams can come true, if we have the courage to pursue them.”- Walt Disney
The typical financial advice focuses on helping people determine what they need for their lives financially.
For instance you might be thinking….
How much do I need to save?
How much money do I need to accumulate for my future?
How much income do I need to live on in retirement?
How much insurance do I really need?
No wonder most people would rather do a hundred other things than talk about their personal finances.
Take an example you may have heard before. You’ve been diligently saving in your 401k plan throughout your life to amass a $1MM nest egg you need to turn into income in retirement. Based on the running Monte Carlo simulations on market performance, it has been determined that a 4% withdrawal rate would be safe to minimize the chance of running out of money (see below chart).
Now, even at 4%, there is still chance of running out. That’s only $40k/year before taxes off of a $1MM asset. Probably not the retirement you were envisioning, and we haven’t even factored in the tax risk for the future. It may satisfy your basic needs, but it’s probably not going to allow you to do the things you want.
So, what if you could enjoy more of your income that you’ve worked so hard to accumulate AND pass on more to future generations?
What if you could withdrawal twice as much or more from this account safely by deploying different strategies? What would you want to do with the additional wealth and income for your families or communities?
It can be done by taking a deeper look at your current strategies and determining what it is in life you truly want. You don’t have to settle on what you need; you can get what you want in life!
Have you ever taken the time to visualize your future and what you want it to look and feel like?
What would you like to be doing every day and who do you want to spend time with?
If you don’t take the time to think about the most important things in your life, you’ll likely defer your dreams and passions and start heading down the road of regret.
There’s a great book called The Top Five Regrets of the Dying: A Life Transformed by the Dearly Departed. According to author Bronnie Ware, the five most common regrets expressed by people in their final days are below:
Are you seeing a pattern?
Fortunately, you have time to address these and other things that may be preventing you from living a more fulfilling life. Wouldn’t it be great to have no regrets when you sit down to write your memoirs, or just take stock of your life in your golden years?
Having a life of purpose—free of regret– pertains to our finances as well. I know what you’re thinking: “more easily said than done.” But, having a clear picture of where you are now with your finances and where you want to go, will enable you to live the life you’ve always dreamed of.
Many people come to see me when they’re at a financial crossroads in life. Usually they start asking me what they should be investing in or how much to put into stocks. Before we go down that path, however, I urge them to get their ready-cash situation squared away.
I recommend having a good chunk of your money in safe, liquid areas that you can tap at a moment’s notice. I know many successful people who have significant net worth, but they’re actually “cash poor.” That’s because all their money is tied up in investments that aren’t very liquid—i.e. they can’t get their money out quickly.
Why you need two kinds of ready cash
You really want two types of ready cash available: One type is for emergencies and one is for opportunities. The emergency fund should have 6 months of living expenses available at all times. It can be used for unexpected medical expenses, car repairs and major household repairs, etc. The opportunity fund can be used to take advantage of opportunities that land in your lap unexpectedly—say a limited partnership, a privately held business or a classic car comes up for sale. But if you don’t have liquid cash at the ready, you can’t take advantage of those opportunities.
The best place I’ve found to store cash is in a participating cash value whole life insurance policy. Imagine earning three to four times what banks typically pay, plus it’s tax-deferred (tax-free if accessed properly), with guaranteed cash value build-up, a tax-free death benefit, and access to the funds with no questions asked? Cash value whole life is the optimal place to store safe money for both emergencies and opportunities until needed. In times like today with a lot of certainty, there are bound to be opportunities for those who are prepared.
In my next post, I will discuss the power of diversification. Hint: You may not be as diversified as you think, even if you have a lot of holdings.
Instead of buying your children all the things you never had, you should teach them all the things you were never taught. Material wears out but knowledge stays. – Bruce Lee
For those looking to impact the next generations of their families, most of the attention is focused on estate planning and passing wealth. For even wealthy families, much of their wealth doesn’t last beyond a few generations before it’s gone. So it’s important to plan and put in place strategies to preserve more of your wealth.
However, potentially even more important than passing wealth is passing on your values, experiences, insights, and knowledge to the next generations so they can reach their full potential and create their own independence.
Check out a Facebook Live I did recently that touches on the power of the Family Bank strategy and how it can provide the resources and knowledge to the next generation so they can own their futures.
If you currently invest in real estate or if you plan on investing in today’s real estate market, it’s essential to understand its risks.
No matter your age or stage of life, it’s essential to conduct a yearly financial review with your financial professional. A financial review will allow you to take a close look at your finances, assess the success of various strategies, and determine whether you need to make any changes.
The only thing worse than being blind is having sight but no vision – Helen Keller
With the chaos of balancing life with work or a business, spending time with family, kid activities, staying healthy, and fitting in personal interests it may seem impossible to focus on long-term dreams and goals. Just getting through each day or week can be a struggle.
However, if we don’t take the time to consider what we truly want in our lives, what will bring us the most happiness and joy, what we want to accomplish while on this earth, the liklihood of them happening is low. Some of those dreams could take a lifetime which requires us to have a long-term focus while taking the actions today to take us one step closer.
Regarding our financial success, it takes a similar approach to think long-term and implement strategies that positions us with the highest chance of success regardless of what happens. One concept that most people have likely heard of is the power of compound interest and the need to leverage it to build great wealth. However, there are many factors that can create headwinds to reaching your maximum financial potential and obtaining the true benefits of the compound interest curve.
It comes in two major forms…losses and use. In terms of losses, they can come in the form of taxes, fees, and market volatility which can greatly erode your wealth and slow the compounding. Exploring strategies to minimize these types of losses can leave more of your money working instead of being transferred to others.
The use of your money can reduce or reset the compound interest curve such that you’ll need more time to get the biggest benefits. It’s typically thought that it’s best to use your own money to finance a purchase or an investment, however the strategic use of other people’s money (OPM) can have a multiplier effect on your money. Look no farther than your local bank as they utilize this approach to earn substantial returns leveraging depositor funds instead of their own.
Now, understanding the phases of the compound interest curve can help you fully appreciate its power. In the below example, if you invested $10k per year for 30 years earning 7% you would reach over $1MM.
Phase 1 (Interest): In this phase your money starts to earn some interest and reaches a modest $148k with a total $100k contribution through the first 10 years. Not bad, but we’re just getting started.
Phase 2 (Growth): During the next 10 years, you’ll experience some growth in your wealth as your account reaches $439k. In this phase, the ratio of what you contribute and how much your account balance increases grows to nearly 1:3.
Phase 3 (Compound): In the next 5 years, we start to see the impact of the compounding of interest from the prior 20 years. At this phase, the account balance grows significantly to $677k (over a $238k gain with a $50k contribution). The consistent approach to saving and investing is really starting to take hold.
Phase 4 (Rocket): In this last 5 years is where nearly 30-40% of the value of the account will be realized and takes off. As noted before, getting here is the hard part as it not only takes time, but it also requires the avoidance of the losses and use of the money which will slow it down dramatically.
Now, when you take look at the compound interest curve, for each year this is delayed, what part of the curve do you not get to realize?
You guessed it, the end, and that’s where most of the value is created. You only have one compound interest curve in your lifetime; use it wisely and start as early as you can.
It’s often stated as part of conventional wisdom that you should let your money compound over long periods of time to create tremendous wealth. There are clear advantages to earning compound interest in certain circumstances.
For instance, you may have heard that a penny that doubles each day for thirty days results in over $10 million dollars. This mathmathical truth demonstrates two key points related to compounding:
The biggest gains occur at the end. In the penny example, 75% of the value comes in the last two days. This goes to show how important it is get the compound curve moving as early as possible.
Eliminating the disruptions or losses to the compound interest curve can massively improve your resultsHowever, the way most are taught to take advantage of compounding has many disadvantages and are stealing your wealth.
However, compounding can also work against you. The most devasting use of compounding is in taxable accounts (e.g. mutual funds, money market) or tax-deferred accounts (e.g 401k, IRAs).
For taxable accounts, the typical advice is to reinvest dividends and interest into the account to further the growth of the investment. Imagine you have an account with $10,000 that earns 6% per year. The $600 earned at a tax rate of 30% would result in a $180 tax bill. That doesn’t seem like much but if you were to continue this path, the tax bill would be over five times ($975 tax bill) the original amount in year 30. The cumulative total of the taxes paid over the 30 years would be $14,230.
To make matters worse, the taxes paid would be coming from another account. This creates an additional opportunity cost since you could not invest the dollars used to pay the taxes each year. In total, the taxes and lost opportunity costs would total $31,015 on an account that rose to $57,435. That’s a substantial cost to generate the gain.
For tax-deferred accounts such as an IRA, you may be thinking that you won’t be paying taxes during the compounding and could be in a lower tax bracket in retirement when making withdrawals. The truth is you’ll pay a larger amount of taxes when you defer them as the taxes are also compounding in the account. This is building up a big IOU to the IRS, and there is no guarantee the tax rates will be lower later in life. Who do you think controls the tax rates?
So what to do?
Compounding your money can help you grow your wealth as long as you consider strategies to reduce or minimize the wealth eroding factors such as taxes and lost opportunity costs. One example would be to divert any dividends or interest you recieve in a given year to another account that is tax-advantaged to flatten the tax you pay. Doing so will not only avoid building a tax liability, but will also significantly minimize the future opportunity costs.
Leveraging alternative strategies to have your money compounding safely, free from loss or taxes, and is liquid for other uses can help you reach your maximium financial potential.
Are you ready to explore strategies to reap the true benefits of compounding interest?
In these times of uncertainty, I would highly encourage to you read my prior email on diversification if you missed it.
Also, check out this interesting interview of what may be on the horizon with the economy and investments and what you can do now to protect yourself.