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 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…
It’s a shame, really. Because blended whole life insurance can be a great way to own whole life insurance. But… the way some agents do it, 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.
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