Tuesday, January 26, 2010

When is 4% Twice as Much as 8%?

I know, most people would say that this sounds like a stupid question.

Well I have a story for you that will illustrate and answer this “stupid” question.

Bill, age 25, opens a Roth IRA down at the Bank with a guaranteed 8% return. (Now I know that no Bank in their right mind would guarantee an 8% rate of return these days, but, let’s see what would happen if they did.) Bill decides to fully fund his Roth IRA by investing $5000.00 a year for 40 years. At an 8% return on investment, at the end of 40 years he would have accumulated $1,518,386.00. If you minus out Bill’s deposits of $200,000.00 over 40 years he would have netted a $1,318,386.00 profit that would be totally tax free!



That’s a pretty good deal huh? ............ Or is it?

Now let’s check out what the Bank does with Bill’s money. Now keep in mind, the bank is not going to just bury the money that bill has invested in some hole in the ground. No, they are going to lend that money to someone else. Let’s assume that the Bank gets only 4% more return on the money then they pay Bill. (I’m sure that is not a hard stretch to the imagination if you consider annual percentage rates on credit cards.) $5,000.00 a year for 40 years at 12% return would equal $5,226,429.00. Of course all of that money is not the Bank’s money. The Bank will first have to pay Bill his $1,518,386.00. That would leave the Bank with a nice cool profit of $3,708,043.00! And who put up all of the money? That’s right, Bill did!



So, when is 4% twice as much as 8%? When it is the Bank’s 4%!

I’m not here to bash banks; I just wanted to state some facts.

The Money Message:

  • Banks serve a very important purpose, however, for long term investing, bypass the “Middleman”.
  • Be an “Owner” – Not a “Loaner”.
  • When you put money into a Bank CD, you are loaning the money for a defined period of time, and for a “guaranteed” return.
  • When you put money into an equity mutual fund, you effectively own shares of stock in typically 200 different companies; however, there is no guaranteed rate of return.
I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any questions or comments, please feel free to contact me.

Friday, January 22, 2010

Take 100% Responsibility for Your Life - STARTING TODAY!
Written by Jack Canfield


This isn’t a trick question.

Certainly you know the answer—the person who has been responsible for the life you live right now: YOU.

Everything about you is a result of your doing or not doing... Your income. Debt. Relationships. Health. Fitness level. Attitudes and behaviors.

I've often said that you are either creating or allowing everything that is happening in your life.

I think everyone knows this in their hearts, but often times people convince themselves into thinking that external factors are the source of their failure, disappointment, and unhappiness.

External factors do not determine how you live. YOU are in complete control of the quality of your life, by either creating or allowing the circumstances you experience.

When I hear people complain about the state of their life (be it their problems with personal finances, weight, their jobs, or general dissatisfaction), I like to help them see things differently.

If they feel “stuck” and unable to move forward for whatever reason, I ask them to scrutinize both what is working well and what isn’t working well in their life and see how they’ve arrived at where they currently are.

For example, if a woman tells me she’s unhappy with her weight—she travels frequently, and has no to time to exercise or seek healthy foods—I point out that her weight is not a result of her travels and schedule. It’s an outcome of what she chooses to eat and how she chooses to move, regardless of her daily agenda. Why not make a conscious effort to pre-plan healthy meals and snacks, even if it’s on the go, and sneak in 10 minutes here and 10 minutes there to be physically active (hey, I know some frequent flyers that make it a habit of running through airports!).

If you’re frustrated with any area in your life, then it’s time to take a little inventory.

Certainly there are wonderful things happening, whether it’s your job, your romantic relationship, your children, your friends, or your income level. Your accomplishments are just as important as your missteps.

First, congratulate yourself on your successes; and then take a look at what isn’t working out so well. What are you doing or not doing to create those experiences?

Watch out! If you find yourself beginning to complain about everything but the choices you’ve made, then you need to take a step back. See if you can stop blaming outside factors for your unhappiness.

When you realize that you—and only you—create your experiences, you’ll realize that you can un-create them and forge new experiences whenever you want.

How empowering is that!

You must take responsibility for your happiness and your unhappiness, your successes and your failures, your good times and your bad times.

All too often we choose to claim the successes and blame the failures on others or other circumstances. When you stop blaming, however, you can take that energy and redirect it to focus on shaping a better situation for yourself. Blaming only ties up your energy. Imagine roping all the energy into a positive effort.

Some ideas to make this happen:

1. Believe, Believe, Believe! Have unwavering faith in yourself, for good and bad. Make the decision to accept the fact that you create all your experiences. You will experience successes thanks to you, and you will experience pain, struggle, and strife thanks to you. Sounds a little strange, but accepting this level of responsibility is uniquely empowering. It means you can do, change, and be anything. Stumbling blocks become just that—little hills to hop over.

2. Take no less than 100% responsibility. Successful people take full responsibility for the thoughts they think, the images they visualize, and the actions they take. They don't waste their time and energy blaming and complaining. They evaluate their experiences and decide if they need to change them or not. They face the uncomfortable and take risks in order to create the life they want to live.

3. Stop complaining. Look at what you are complaining about. I’m fat. I’m tired. I can’t get out of debt. I won’t ever get a better job. I can’t stand the relationship I have with my sister. I’ll never find a soul mate in life. Really examine your complaints. More than likely you can do something about them. They are not about other people, other things, or other events. They are about YOU.

4. Make an immediate change. Are you unhappy about something that is happening right now? Make requests that will make it more desirable to you, or take the steps to change it yourself. Making a change might be uncomfortable for you. It might mean you have to put in more time, money, and effort. It might mean that someone gets upset about it, or makes you feel bad about your decision. It might be difficult to change or leave a situation, but staying put is your choice so why continue to complain?

You can either do something about it or not. It is your choice and you have responsibility for your choices.

5. Pay attention. Looking to others for help and guidance is helpful, but don’t forget to stay tuned in to yourself—your behavior, attitude, and life experiences. Identify what’s working and what isn’t. If you need to, write it all down. Then…

6. Face the truth and take action for the long term. You have to be willing to change your behavior if you want a different outcome. You have to be willing to take the risks necessary to get what you want. If you’ve already taken an initial step in the right direction, now’s the time to plan additional steps to keep moving you forward, faster.

Isn’t it a great relief to know that you can make your life what you want it to be? Isn’t it wonderful that your successes do not depend on someone else?

If you need just one thing to do different today, than you did yesterday, make it this:

Commit to taking 100% responsibility for every aspect of your life. Decide to make changes, one step at a time. Once you start the process you’ll discover it's much easier to get what you want by taking control of your thoughts, your visualizations, and your actions!

Jack Canfield, America's #1 Success Coach, is founder of the billion-dollar book brand Chicken Soup for the Soul©Inspirational Books)© and a leading authority on Peak Performance and Life Success. If you're ready to jump-start your life, make more money, and have more fun and joy in all that you do, get FREE success tips from Jack Canfield now at: www.FreeSuccessStrategies.com/.

Tuesday, January 12, 2010

What's Wrong With Your Life Insurance

Most people don’t plan to fail, they just fail to plan. We’ve all heard this cliché before, but it’s true. Most families spend more time planning their two-week vacation than their entire financial future. I wouldn’t ponder that any longer than it takes to read the sentence.

Most families don’t plan because they don’t understand how money works. We pay our bills each month and do our best to prepare for the future. But the truth is, there’s only so much money to go around and creating a financial game plan on our own can be overwhelming. Not to mention most financial services companies charge $500.00 and up just to put a plan in place. That eliminates most middle-income families leaving them alone to figure it out for themselves.

Knowledge is power -- another cliché, however, also very true. This article will arm you with some valuable information to help you plan your financial future more effectively.

Life Insurance is one of the most important financial instruments many of us will ever own; although, it’s one of the most hated -- ranked up there with death and taxes. What thoughts do you conjure when I say “Life Insurance”. Usually, they are thoughts of a sleazy salesman wearing a cheap leisure suit with one long strand of hair wrapped around his head.

Nobody likes to talk about it because it helps us to remember that we are only mortal. However, just imagine what would happen to you and your family if the breadwinner of your family were to pass on. How long could you survive without their income? Would you have to get one or more jobs? If you have young children, who would watch them while you worked? Would you move back in with mom and dad? And god forbid, welfare? If you do own life insurance, do you have the right amount? How would you even know?

Most families, who are smart enough to realize they need life insurance to protect the breadwinner’s income in case of an untimely death, don’t have enough coverage. Almost 70% of middle-income Americans are not only underinsured, but they are over-premiumed as well. Why? Because they don’t understand what it is they’re being sold. They blindly trust the salesman and then store away the policy to collect dust for the rest of its life. This article will demystify the different types of Life Insurance and why you should have one over the other.

It’s actually quite simple. There are basically two types of Life Insurance -- Cash Value and Term. Cash Value goes under the guise of many names such as: Whole Life, Flexible Premium Life, Variable Life, Universal Life, and on and on and on. Basically, Cash Value mixes a savings element along with your life insurance. Term, however, is pure protection. There is no savings element. It is for a specific period of your life (hence “Term”) and then it ends.

Probably by now you’ve figured out which one you have and are asking the next question, “Do I have the right kind of life insurance?” For about 99.9% of Americans, Term Insurance is the right product. Term is usually 30-70% cheaper. According to The Wall Street Journal Guide to Understanding Personal Finance, “fully half the cash value policies written are dropped within the first seven years. This means the coverage has been very expensive because high commissions and other fees have limited the amount of cash that could accumulate during that time.” SmartMoney perhaps said it best: “If you’re thinking about permanent life insurance as an investment, forget it. The management fees will eat your returns alive.”

Not only that, but the interest earned on a Cash Value policy is typically only 3-5%. With inflation around 4%, you’re losing money, not making any. Buy Term and invest the rest! With Term Insurance being 30-70% cheaper, it gives you the power to invest the savings into a Mutual Fund like a Roth or Traditional IRA and possibly earn 8-12% over the long term.

In a Cash Value policy, when the primary insured dies, the spouse or beneficiary will usually only receive the death benefit (amount of coverage you paid for), not the cash value – the cash value usually helps to pay the death benefit. And, if you have a loan out on your policy, the company would deduct that from your benefit. By buying Term Insurance, it gives you the power to invest in mutual funds, which, over the long-term, will far outpace a Cash Value policy. And, when the primary insured dies, the spouse receives both the investment and the death benefit.

If Cash Value is so bad, then why do more families have it then Term? That is because Cash Value Life Insurance is sold to you rather than bought by you. Cash Value policies are much more expensive because the commissions paid to the salesman and company are much higher. If you made a living just selling Life Insurance, would you want to sell the least expensive kind or the most expensive kind? Of course, the most expensive kind because then you’re commission will be higher.

Hopefully by now I’ve got you dusting off your old policy to see which kind it is. Sometimes it’s hard to tell. Make sure you sit down with someone who doesn’t just sell Life Insurance; someone who won’t charge to help put together a financial game plan for you and your family; and someone who will take the time to educate you, because remember knowledge is power.

I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any questions or comments, please feel free to contact me.

Monday, January 4, 2010

15 Year Mortgage vs 30 Year Mortgage - Which One Would You Choose?

For more mortgage comparisons, also read:

This is a story about two neighbors with two identical homes, two mortgages and one big financial mistake.


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Mr. A and Mr. B are identical in that they are the same age and they bought identical homes for the same amount of money on the same street in the same neighborhood on the same day. Also, they both have the same amount of financial resources – meaning they both are able to afford to pay the same amount of money.


The only difference between the two men in this example is the type of mortgage that each chose. Mr. A decided to get a traditional 30 year mortgage with a fixed 6% rate of interest with a payment of principle and interest of around $1800.00 per month.


Mr. B decided to pay his mortgage off early and got a 15 year mortgage with a fixed 5 and a quarter percent rate of interest (a little lower than Mr. A’s at three quarters of a percent lower) with a payment of principle and interest of about $2,400.00 per month (a bit higher than Mr. A’s - $612.98 higher to be exact!)


Which mortgage would you choose at this point?


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Another difference to be noted is that because Mr. A will be paying for a longer term than Mr. B, he will also be paying more interest than Mr. B. Mr. A will have to pay almost $350,000.00 above and beyond the original cost of the house for the interest during the term of his mortgage, while Mr. B will only have to pay around $134,000.00 in interest during the term of his mortgage.


So, to recap: Mr. A will save $612.98 a month on principle and interest, as compared to Mr. B. Whereas, Mr. B will have a three quarters percent lower interest rate; will have his home paid off 15 years earlier and will save over $213,000.00 on interest payments, as compared to Mr. A.


Now which mortgage would you choose?


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Now, at the 15 year mark, Mr. B has his mortgage paid off. But if you look at Mr. A, you can see that at 15 years, he still owes a little over $213,000.00!


Also, Mr. B has been so used to paying around $2,400.00 per month for his mortgage; he decides that, since he is able to, he will continue paying that amount per month for the next 15 years … but as an investment into a mutual fund. With the mutual fund’s return on investment working at 10%, which is pretty conservative over a fifteen year period, that would pump out a little over $1,000,000.00!!


So, here are the facts so far: Mr. B will have three quarters of a percent lower interest rate; will have his home paid off 15 years earlier and will save over $213,000.00 on interest payments, as compared to Mr. A. Also, Mr. B will have accumulated a little over $1,000,000.00 by the end of the 30 year period.


The 15 year mortgage is looking pretty good, isn’t it? Can it get any better than this?


The truth is it can get better than this. What Mr. B did was very good, but it was not the best.


Sometimes "The good is the enemy of the best."


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Now, for the rest of the story: In the beginning of this example, it was mentioned that both Mr. A and Mr. B had the same financial resources, so Mr. A could have decided to make the higher monthly payment and pay his house off in 15 years.


However, Mr. A decided to invest the extra $612.98 per month (the difference between Mr. A’s monthly payment and Mr. B’s monthly payment) into two Roth IRAs (one for himself and one for his wife). If his investment was working at 10% for 30 years Mr. A would accumulate almost $1.4 million that would be totally tax free!


An interesting fact is that most of Mr. B’s $1,000,000.00 would be taxed upon withdrawal because most of it would not be able to be placed into a Roth IRA.


So, in this example, both neighbors invested the same amount each month for 30 years; however, because Mr. A understood the Time-Value-of-Money – he ended up at the end of 30 years, with an additional almost $390,000.00 of Tax-Free money.


Another nugget:


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You might still be saying to yourself that at year 15, Mr. B now can sleep easily knowing that he has his house fully paid off and has no debt, while Mr. A still owes around $213,000.00 on his mortgage.


That is true, however, here's an interesting note: by investing the difference in the two mortgage payments each month, Mr. A would have accumulated enough in his mutual fund, after 15 years, to completely pay off his remaining mortgage, and still have an additional $43,000.00 left assuming a 10% Return on Investment. If Mr. A had been investing the difference (the $612.98) per month for 15 years; at 10% Return on Investment he would have accumulated a little over $256,000.00 which would more than pay off the mortgage, and he would still have some left over in his investment. Even at 8% Return on investment, he would have accumulated a little over $213,000.00, which would still be enough to pay the rest of the mortgage.


As was mentioned earlier, with Mr. A's investment working at 10% he ended up after the 30 years with an additional almost $390,000.00 of Tax-Free money as compared to Mr. B. However, let's suppose the investment was working a little bit harder, say at 12%. The 30 year difference at 12% return on investment would equal almost $950,000.00 of tax free money!


Furthermore, if money ever got tight during the first 15 years, Mr. A could always decide to pay up to $612.98 less per month, whereas Mr. B would be locked in at the full $2411.63.


So, now you can see that taking the 15 year mortgage over the 30 year mortgage can become a very costly financial illusion.


The moral of this story is that when dealing with mortgages, always try to choose the term that is the longest, the interest rate that is the lowest and, most importantly, to invest the rest!


I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any questions or comments, please feel free to contact me.