7 Phases Of Financial Success – Episode 037

This transcript was auto-generated and may contain errors.

[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler, and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel, along with bestselling financial author and my special co-host, Kim Butler. Welcome, Kim. Thank you, Todd. Happy to be here today, really looking forward to talking about a document that I wrote a long time ago called Phases of Financial Success, and I appreciate you digging it out of the archives. Got it. So, we’re going to be focusing on seven phases of financial success, starting with

[00:48] phase one, which would be typically what age, Kim? 20 to 29, and I just picked that because most people are starting to at least get their head above water around their finances. I don’t mean as in cash flow yet, although sometimes, but just becoming more aware. My kids are 18 and 19 right now, and they’re starting to think about credit cards. And though they still may be in school, somebody up till 22 or 24 or what have you, it is generally around this time that they get going. So I thought that that would be the beginning, although I have to tell you, we’re happy to help people younger than that. Certainly, whatever stage of life you find yourself in, you have to start somewhere. So if stage one happens to be later in life than that, then nothing wrong with that.

[01:38] You just have to start somewhere. And what would be the typical things you would look for in phase one? Well, I’m so glad that you brought up that the phases are not necessarily always the ages. So absolutely, phase one, you could be 50 years old and starting over or 70 years old and needing to begin again. So it’s absolutely irrelevant the age. I appreciate you clarifying that. But without a doubt, phase one needs to have savings. And there are so many people that want to jump straight to investing. And I know investing is a lot more exciting to talk about. But the fact is that we absolutely must save money first. So we want to save the goal around 15 to 20 percent of your income. And a lot of financial advisors out there, financial planners in particular,

[02:27] recommend only 10 to 15 percent. But we absolutely think that people need to get in the habit of saving 15 to 20 percent of their income. And if you are in a position where you’re starting over or starting fresh, we could say again, irrelevant of age, it’s a very important goal to get that established first, the savings habit established first. And then you can spend all the rest. And one of the beliefs that I’ve had for quite some time now is that budgeting is not helpful. It’s so much better if you just save first and then spend the rest. So if you’ll set the goal at saving 20 percent of your income and then spending the rest, then you learn how to live on that difference. Now, this is 20 percent typically of gross income.

[03:18] But, hey, if you can’t start there, start with 20 percent of net income and learn how to live on the difference. So many times I’ve heard you say savings is a habit, not an event. What does that mean? Well, it’s something that you do consistently. It’s something that you do on an ongoing basis, typically monthly. Or if you’re paid quarterly, then you do it quarterly. If you’re paid every two weeks, then you want to be doing it every two weeks. And so it’s something that you’re just doing literally the rest of your life. And when you have habits like that, when you develop good habits, then you get good results. So it’s not a one time thing. That would be an event. It is a ongoing habit. And people need to save money well into their 50s, 60s, possibly even 70s.

[04:03] Because if we’re going to be living well past 100, we still better be saving money in our 70s so that we can beat inflation and have those liquid dollars that we’re going to be looking for in our later life. A lot of the folks that are in this category are going to be fresh out of college and maybe have some student loans or a car loan or some debt and things like that, and they’re going to start hearing the messages that are out there by some of the big financial gurus really saying that you need to focus first on paying off your debt prior to savings. What is your response to that? Oh, I’m so glad you brought that up. I absolutely disagree because if you don’t get in the habit of building savings, it’s hard to get in the habit.

[04:50] And if all you do is focus on paying debt, then you’ll be debt free at some point now, we’re probably not talking about mortgages in this case, just consumer debt, but you won’t have savings, which means you’ll be right back into debt if you ever have an emergency or an opportunity. So I believe very strongly that it’s super important to develop the habit of saving along with the habit of working off debt. So if you’re straight out of college and you have some student loans, maybe a little credit card debt, you get your first job, you want to commit maybe 10 to 15% of your income to paying off debt and 15 to 20% of your income to savings that will put you in a much stronger position than if you just allocate all of those dollars to paying off debt.

[05:40] And one of the things that’s written here too is pay the minimum on student loans and mortgages. Absolutely. So student loans and mortgages are the most efficient debt out there. They typically come with very low interest rates and mortgages of course, also deductible. So that’s valuable. So you don’t want to pay any extra on those. I talk people off of the 15 year mortgage game all the time. You and I’ve had that discussion numerous times on the podcast. And then in addition on the student loans, just minimum payments, the credit cards, if you have those, you can make higher payments on those to get rid of them. But the student loans and the mortgages minimum. And you also mentioned something about a will as well.

[06:25] Yep. Just a simple will. It can be literally at this stage of the game for most people, something that you get online for 20, 30 bucks, maybe at an office supply store, if you prefer to do it that way, I think as you get married and move forward, a lot of attorneys are going to recommend you upgrade that. But when you’re beginning and life is very simple and you don’t have real estate in any other state, other than where you live, a simple will would do the job and I would rather have you get a simple will and get it done than debate for years about paying an attorney to have a more complicated one and never get it done. And life insurance, let’s discuss that. Yeah. So life insurance is going to come up at some point, often when

[07:09] you have a first child, but it can come up earlier if you understand the value of having cash value of life insurance as opposed to a savings account at a bank in order to store your emergency money. So there’s two things here to take a look at. First of all, you want to be conscious of something called human life value. And that’s just simply a rule of thumb on the amount of insurance that somebody could have the maximum amount of insurance that somebody could have in their life. So let’s say you’re going to have a first job with 50,000 a year of income. Well, if you multiply that times about 20, you’re going to get a sense of your human life value. That is the maximum amount of insurance that you could own.

[07:54] And many times the best way to get it is with simple term insurance, cheap term insurance that you can just pop on the web and get. Now, as you progress, if you want to have also cash value of whole life insurance, in order to store your emergency slash opportunity fund, then a portion of that human life value will be done as term insurance. So let’s say, for example, you’ve got a million dollar human life value. Maybe you get a hundred thousand of whole life. So I said that wrong earlier, a portion of it will be as whole life insurance is what I meant when I was talking about savings and cash value. And then a portion will be term. So maybe of your million dollar coverage, you have 900,000 of term and

[08:36] $100,000 of whole life that you use for your emergency slash opportunity fund. And we often talk about how important it is to have your own life insurance versus the life insurance offered by your employer. Maybe you could address that for a minute. Sure. So anytime you have something by an employer, you have the chance of losing that if you lose your job. And it’s tough to lose your job and then lose all your benefits along with it. It can be a little bit of an abrupt switch over. So we’re big fans of having benefits that are outside of your job environment, owning that insurance personally, rather than relying on your employer to do it for you. And so many employers these days aren’t offering any types of decent

[09:20] coverage anyway, that it’s necessary to have it outside as well. And I’d say this day and age, there’s at least a 90% probability that you will not stay with your first employer for forever. Correct. Absolutely. And that’s a good thing. All right. Let’s move to phase two. So here we have typically you’re in your thirties. Again, you could be in your fifties or sixties, depending on what’s going on in your life. But at this point, it’s important to start to build something that we call a prosperity flow through account. Now that’s just a fancy name for your savings account. It could be literal savings in a bank, or if you’re using our recommended method, it’s cash value of life insurance. And this prosperity flow through account can be the place where you

[10:08] can now upgrade into other investments. Typically $50,000 is the minimum where you can get any decent investment. Now I know you can go get mutual funds for 3000 or a hundred bucks a month or what have you, but I’m talking about an alternative investment of the type that we’d be interested in. Most of those minimums are 50,000, sometimes a little bit less. So you want to build up that amount of money that should be the goal when you are starting out. Prior to that, you can invest in things like peer to peer lending or other places where smaller dollars are available, but the goal should be the real investment world with $50,000 minimum. And you also mentioned something about converting more of your life

[10:52] insurance to whole life during this phase. So if you had started at your million dollar coverage that we talked about in the first phase with 900,000 of term and 100,000 of whole life, you could now convert some of the term insurance to whole life convert just means sign a piece of paper and you don’t have to get another physical exam, which is handy. So your next step would be say 200,000. So you would take your $900,000 of term, lower that to 700,000 and convert the 200,000 to whole life. So you’d now have two whole life policies, the original 100,000 plus the additional 200,000, and you’d still have your 700,000 of term. Now this is assuming you have not had an increase in income, which would be pretty rare.

[11:42] And as your income rises, your human life value rises. And so in actuality, what happens a lot of times is that 900,000 of term stays put and you add say 300,000 of whole life to it, thereby having a total of a million three, but that’s really going to depend on that income. And if you’re just focused on converting term, then that’s what you do. You sign a piece of paper and your term insurance becomes whole life in portions or sections of it. And again, the main reason for doing that is locking in the amount of that coverage for life and also being able to store more of your cash value inside that life insurance policy. And why is that a better place to store cash than say a bank? Well, the cash value of life insurance is always going to earn above bank rates,

[12:36] two to three points above bank rates, typically. So you’re going to be more efficient with your dollars. Plus very critical issue, the growth on the cash value of life insurance is not taxed. And so obviously a bank’s interest rates are taxed and it’s more efficient. Of course, if you’re not having to pay tax on the growth of that emergency slash opportunity fund inside the cash value of whole life insurance. Anything else on phase two you want to add? Well, a lot of people will get a mortgage at this point. And so we’re going to recommend minimum down and again, no extra principal payments, 30 year mortgage and not ever prepay or ever doing the bi-monthly mortgage or the variety of other programs out there that

[13:20] get that mortgage paid off. What we also like to see if it’s possible is something called a home equity loan, which is like a second mortgage, a home equity line of credit. They’re sometimes called and that can just be sitting there. You don’t have actually have to use it and you could, but that’s a perfect emergency slash opportunity fund to really beef up your available liquid dollars, if need be, it needs to be secondary. You need to have your cash value or your savings account first. But it, it, the home equity line of credit can act as a nice secondary emergency slash opportunity fund for you. All right. And then if we move into phase three, what’s the ages on that? So here we’re typically in our forties, 40 to 49 give or take

[14:07] again, could be a lot later, depends on your situation. And if you are later, when you’re starting these, then maybe phase one, two and three are all combined. It’s going to depend on your situation, but here we are again, upgrading. So we’re going to recommend further term insurance conversions. So now we’re taking our term and converting it to whole life, even more, meaning more and more policies. And that is why people end up with three, four, five, 10, 15 whole life policies over time. So that’s an important step. And then also sometimes people get involved in rental properties here. We have a great rental real estate calculator inside the truth concept software that can help people determine the rate of return that a

[14:54] particular rental property would get rental properties, not for everybody. But if you have an interest in owning real estate that way, then that can be a really good strategy. And we also like to see depending on net worths. So at this point, people can sometimes accumulate some pretty decent net worth, and if you hit the accredited investor environment where your investment available dollars or million dollars or more, then you can use life settlements and bridge loans for your alternative investments to be very, very effective. And those can be done with either cash monies or with IRA monies. If you, at this point, which people probably will have 401ks that have been rolled over to an IRA.

[15:38] What’s interesting is when you look at this, save 15 to 20% of your income, that can really start on a relatively low number straight out of school, but by the time you’re up into your forties, you’re still following the same percentages, but the dollars now are really starting to compound from the previous investment and your income should have gone up so that the amount that you’re contributing is really starting to build. So now we really start to look at rates of return, don’t we? Absolutely. And it’s funny. You know, I talk to people sometimes at this stage and they want to seek out additional places to save, but my response is no, don’t spread your dollars thin, continue to focus on the three main areas that we like to

[16:25] help our clients with and just add more and more and more dollars to them. And that is of course, cash and cash value of life insurance, bridge loans, so you can create some cash flow, getting income on a monthly basis, not that you’re going to spend it at this point, you’re going to reinvest it, but it’s still good habit to get into. And then the life settlements where you get a real net worth play, where your dollars can make big jumps in value. And when you find three absolutely perfect places to store and build wealth, there’s no need to go out and continue to find other things. The investment real estate we mentioned, the peer to peer lending we mentioned, those can be done in addition, but this idea of diversifying

[17:10] so that people end up with 20 different accounts all over the place and all kinds of different mutual funds or stocks or bonds, they’re not really that diversified. What we’ve talked about here is actually very heavily diversified and works very effectively. Diversified in the sense of the word non correlated is a huge buzzword in the market right now. Maybe you could tell us what that means. Sure. It just means that you have assets that are not connected to each other. And so many things are connected to the stock market. No matter how you look at it, it could be bonds, could be even a REIT is connected to the stock market and obviously stocks and mutual funds are. So non-correlated means completely disconnected from that environment.

[17:54] It literally does not matter to our clients. What is going on in the stock market? Who’s in the presidency? What’s happening out in the other areas of our world? Because their investments are not affected by any of that. And we’re recording this in July of 2015. And the life insurance, the whole life insurance to store cash is paying what type of interest rates now? It’s around 4%, four and a half, depending on your age. So that’s your liquid cash account. And then of course our investments are in the low double digits. And that’s an important distinction as well, because I think so many people try to gain liquidity by keeping their investments somewhat liquid. And they end up hurting both sides of the table.

[18:46] In other words, one side of the table is the cash. You need to be content with cash, liquid cash earning. So let’s just call it 4%, which of course is a huge improvement over the banks, and then you need to be content with your investments, earning double digits. If you’ll split those up very firmly, you’ll do so much better than if you just try to ride the fence and have all of your money earn seven or 8% because basically what happens is it doesn’t do either job. Well, it doesn’t be liquid very well, and it doesn’t invest very well. And that’s what the stock market does is it keeps you on that fence. It’s kind of liquid, but it’s kind of invested and consequently it doesn’t do a good job of either one.

[19:28] And when we use numbers like over 10% or 10% or 12% or something like that, there’s a feeling in the marketplace that you have to move into an aggressive risk category. How do you feel about that? Well, this old saying of it takes more risk to get more reward is a fallacy. It’s something that the stock market has sold us on that we seem to think is accurate as we as a society, but it is not accurate. You do not have to take on more risk to get more reward. And so to me, we want the rewards without the risk. That is our point. And we look for investments that do that job. So to us, this 10, 12% that we can find for our investments, they’re not risky at all. And there’s many, many different types of risk.

[20:20] And I’m not saying that they don’t have risk, but when you use the typical definition, which is ability to lose principle, the investments that we work with have a very, very small percentage of that ever happening. Super. Anything you want to say to wrap up phase three? I think we’re good. So we’ll move on. Yep. Phase four. So this is typically age 50 to 59 again, can vary widely. And right now we want to continue to convert our term insurance and get more and more whole life. We also want to possibly be borrowing against the cash value of our whole life. If we have done a good job up to this point, let’s say we literally started in our twenties or thirties. Now we’re 20 years into our cash value accounts.

[21:08] We can actually use the cash value as an emergency opportunity fund. We have to do it very carefully. It’s not right for everybody, but I always use the term emergency slash opportunity to imply the cash value of life insurance can become an opportunity fund as well. So that’s something that we can take a look at on an individual basis, borrowing against the cash value to see about investing with it. Again, not right for everybody and must be done carefully, but can be very, very effective. It’s also important at this point that you’re using, if you’re borrowing against the cash value, that you’re using your income, whether it’s earned or investment income to be paying off the loans. So you read and hear a lot about borrowing against your cash value.

[21:55] And that’s a fabulous strategy, but you want to be paying it back, borrow, pay back, borrow, pay back, borrow, pay back. And so if you’ve invested in bridge loans, that is a great source of income with which to pay off your life insurance loans. And then of course, you can just keep doing it. So when you get into phase four, again, in your fifties, you want to be pretty focused on getting those life insurance loans paid off. All right. And then phase five, what age are we talking about here? So here we’re 60 to 69. And of course the typical financial environment is going to talk about retirement at this phase. We do not believe in that. We don’t believe in the idea of retirement. We don’t think it’s financially feasible for most families, but more

[22:38] importantly than that, we don’t believe it’s good for your health. It’s not good for mental and physical health, psychological health, et cetera. We believe that you still want to keep working at least part time. Take long weekends, take sabbaticals, take a break if you need to, but keep working. Now, at this point, if you’re working, obviously you should keep saving and you should also keep investing. So saving again is our monthly or annual habit that we’re developing. And it’s so important to keep saving at this stage of the game because somebody in this age, 60 to 69 has got 30 years, if not 40 years ahead of them. And we find that the older clients get the more cash they want to have. So it always interests me.

[23:25] People will come to this phase in their life and want to stop paying their life insurance premiums. But paying life insurance premiums literally until the day you stop working is a fabulous way to keep saving. So if you own life insurance, keep paying it, keep paying it, keep paying it. It will really beneficial, will be really beneficial to your family because you will be continuing to raise that cash value number. And again, the older people get the more cash they typically want to have. So also we can continue to build the life settlement portfolio, the bridge loan portfolio. We can continue to be paying off any life insurance loans. And again, keep that mortgage high. It’s tempting at this point, I think, for some people to literally

[24:10] reduce an investment in order to pay off a mortgage. And that makes no sense if you have investments that are earning double digits and then you have a mortgage that’s probably at 5% right now deductible, it makes absolutely no sense to liquidate your investments, to pay off that mortgage. You’re much better continuing on with the recommendation that we’ve always had, which is minimum payments on the mortgage. What amazes me most is, is that this whole process is not complicated. I mean, we’re doing a few things and doing them consistently. Well, this is not portfolio theory or bond theory or anything like that, that we have to get into anything really complicated. It’s just executing a few simple strategies long-term.

[24:59] That is so true. And they are things that we can do consistently, regardless of what is going on in the stock market, regardless of what’s going on in our economy, and it is, it almost gets to the point where it’s boring. You don’t have to have quarterly meetings. You just let these three main products do their job. And there’s a lot of peace of mind in that. And if we move to phase six. So now we’re in our seventies. And at this point, if somebody has stopped working, they can do a couple things, they can start taking dividends from their whole life insurance and they can stop paying the premium. So that’s almost a double transaction there. You’re not having any more out go. And as a matter of fact, you’re getting inflow.

[25:43] Now, a lot of people are going to want to start borrowing against their whole life cash value. That used to work 20 years ago, but in today’s dividend environment, it does not, you don’t want to be borrowing against cash value for income until you’re much, much older, literally eighties and nineties. So if you’re in phase six and you’re in your seventies, you just want to take dividends, you can now start to spend any bridge loan cashflow. So earlier we were using bridge loan cashflow, the first mortgage environment to pay off life insurance loans and also maybe to make life insurance premiums. But now we’re going to start to actually spend that money. And you can also start to scan the profits off your life settlements.

[26:22] So obviously at 70 and a half, if you have IRA money, you have required minimum distributions. And so that’s a perfect time to go ahead and spend that money. A lot of advisors will recommend that you leave IRA money alone. We do not as soon as you hit even 59 and a half, but for sure at 70 and a half, you absolutely want to start spending your IRA money because that’s the last asset that you want to die with. All right. And one of the topics that comes up during this age group is the reverse mortgage. How do you feel about those? Sure. So reverse mortgage, late seventies, even eighties is better. That can be a very effective way to actually get income from your home and you don’t have to have a paid off house to do a reverse

[27:09] mortgage at this point, your mortgage is probably paid down and you can go get tax free income by reverse mortgaging. Again, it’s not right for everybody. A lot of people don’t like them, but we do find it to be a very effective strategy and I know we’ve got another podcast coming up on combining reverse mortgages with life insurance to see if that can be a beneficial thing for your family. But right now the reverse mortgages are tax free income. And so they’re a helpful way, a beneficial way to take income. And frankly, we find that most families don’t want your home anyway. They would rather have other assets. So you might as well give the home to the bank after the reverse mortgage has created a bunch of income for you.

[27:53] And not to mention you’ve accumulated the life insurance along the way that there would be cash there to pay off the house if your heirs decided to as well. Absolutely. One of the points of flexibility that life insurance offers. Well, finally we move to the final phase, which is phase seven. Right. So this is age 80, age 90, could even be up into your hundreds. And now you’re going to be switching your life insurance strategy from a focus on the cash value to a focus on the death benefit. Again, grab another podcast that we’ll be offering around this idea of spending or using your death benefit while you’re living. You should also develop an exit strategy on rentals at this point, even if you have a management company.

[28:38] You’re probably not going to want to be dealing with residential or commercial real estate. And so you want to look at a charitable remainder trust or possibly just selling the property directly. Maybe you have a family member involved and so it works and that’s fine. You’re also going to continue to take the dividends out of the whole life. You’ll borrow against it, possibly. But again, the focus really should be more on the death benefit, not the cash value. And of course, you’ll continue to take income from the bridge loans is typically that’s an interest only environment. And that can happen literally for the rest of your life. Super anything else you want to add to these seven stages? I think we’ve done a really thorough job.

[29:18] We’re always going to have little bits and pieces that are specific to individuals, and that’s the value of the advice that we give when we’re actually hired by somebody to help them in their individual situation. But this is a great broad brush. And I really appreciate you, again, digging this out of the archives so that it was available for everybody. Super. And Kim, you always are nice enough to give a gift to our listeners. What did you bring with you today? Well, we have our ebook that we’ve continued to mention, but we really want to make it available to everybody that’s interested. So if you haven’t had a chance to download that, grab the ebook. It’s called Financial Planning Has Failed.

[29:56] It covers all three of these products that we’ve been talking about and the various strategies that go along with them. Products are things that you buy and strategies are things that you use. And so that’s available at partners number four, prosperity dot com slash ebook. There’s an audio version there as well as a printed version. So, again, partners number four, prosperity dot com slash ebook. Super. And these are products that sell for about twenty seven dollars. So I would encourage all of you to get that information, read it, regardless of which phase that you’re in. I would guarantee that there’s something there for everybody to learn. Once again, this is No BS Money Guy Todd Strobel for the Prosperity Podcast.

[30:40] Special thanks to Kim Butler and take care, everybody. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you. Visit us at partners for prosperity dot com. If you liked this episode, make sure you subscribe and leave a review. Artisanal products and pieces selected by artists. I chose Shopify because after trying out other platforms, this was undoubtedly one of the most intuitive. For me, it was important to think about where we would be in the future. All the tools to analyze sales, such as inventory management, are right there on our dashboard. Start your free evaluation at Shopify dot com.