My wife is a scientist, and for the past few weeks, she’s been run ragged. Virtually no sleep. No time to spend with hubby talls. Her boss has had her working late and on weekends.
This is no bueno for yours unruly. See, every morning I have a cup o joe. And, most mornings, my wife brings me coffee in my favorite cup. It’s sort of a ritual. It’s not that I can’t make my own coffee. It’s just that when she does it, it just feels better to me somehow.
Anywho, since she’s been so busy with work, we’ve had to share morning coffee duties. Thankfully, she had Sunday and Monday off…and I think she must not feel so rushed or exhausted because I get up, and BAM, there’s my coffee.
We usually make a big pot, and then reheat whatever’s left the next morning. When I am in charge of coffee duty, I reheat one cup at a time on the stove. It takes exactly 1 minute on the highest burner setting to get it hot without burning it.
So, I do one cup at a time. and make hers first. I pour her a cold cup of coffee, pur that cup into a small sauce pot, and set the timer for 1 minute. I dunno, for some reason it just never occurred to me to make 2 cups at a time.
But it did to her. So she puts 2 cups on the stove and starts the timer. It’s not hot yet.
another minute. It’s hot.
So, it took 1 minute for 1 cup, but 3 minutes (1.5x longer) for 2 cups.
This got me thinking…
…it’s an awful lot like what I see happening in finance. Here’s what I mean.
Most people I talk to have a very “black and white” approach to money. Pay down debt. Build up savings. Investments not doing so well? Add more savings. Problem solved.
Except, problem not solved.
When you save more money, you have that much less to spend. There gets to be a point where you simply cannot save anymore, and that point usually comes far in advance of where your savings target needs to be if you’re doing things the conventional way.
A long time ago, in a galaxy far, far away, I wrote a little ditty about how to save more than 50% of your income. Part of the secret is in how you set up your budget (or rather, how you ditch your budget and use cash flow planning). But part of it is how you buy and set up the financial products you use in your life…from bank accounts to life insurance and even investments.
It’s not so much WHAT you buy though as much as it is how you use those things. Most people work way too hard. You only need to start saving between 10% and 15%. Anymore than that is like going on a crash diet (unless you’re already out of debt, in which case it MIGHT make sense to save more). Things will seem good at first, and then it will unravel and you’ll be in a worse position than before.
There are getting to be more and more promoters of whole life insurance, for example. They tell you to plow EVERYTHING into life insurance, and that all you need to do is buy it and something magical will happen. I could do that. I could sell you on that idea…make it magical. Make it seem special. Use really hype-y sales copy.
Truth is, some of these people are VERY good marketers. But, I know from speaking to them they don’t have the backend systems in place to manage it all for their clients.
Example: I know of a few life insurance agents really pushing the idea that you should blend whole life with term insurance and that this will allow you to “boost up” your whole life cash value. It’s true…it will. I did this with my own policy. But, there’s a HUGE catch. What happens is…and I learned this the hard way…what happens is…
…the term insurance cost starts to rise over time.
And, so, when dividends aren’t enough to pay for the term insurance, you pay more for your insurance out of pocket. Also, with these setups, a lot of the flexibility in the policy is lost because the dividends MUST go toward converting that term insurance into permanent insurance.
You can’t use the dividends to pay premiums…
You can’t take dividends as cash…
You can’t do anything with those dividends but keep paying for term insurance.
Taking policy loans becomes a bit more risky…
Oh yes…that cool whole life + term insurance blending drags down your long-term rate of return.
You basically sacrifice everything for a bit more cash value in the first couple of years.
Now…I can fix my own policy, and I can set up a policy that basically converts that term insurance VERY quickly…but for maximum flexibility, it’s actually better to skip the term and use regular old whole life with paid up additions. I can count on one hand the number of times it would make good sense to add term insurance to a whole life policy…
…but some agents push the issue.
It’s a shame, really. What’s going to happen is these clients are going to buy into a great idea, execute it poorly, and then crash and burn. The concept will still be valid, but they won’t believe it anymore because they were missing one crucial piece of the puzzle: cash flow management.
If you want to side-step the hustle, and you’re ready to dig into the details, sign up to my email list and let’s rock and roll.