Annual Review Checklist – Episode 032

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. Once again, we have our co-host and bestselling financial author, Kim Butler, with us. Welcome, Kim. Thank you, Todd. I’m very excited to share this information today. We’re going to call it the annual review checklist. And it’s so funny, you know, a lot of times people do a review in December, that’s a or maybe January, you know, that end of the year, that’s kind of a common financial

[00:46] checklist time. But it occurred to me that people need to do a review when it’s right for them. And sometimes summer is a little slow, maybe they’ve got a little extra time on And so they might want to just do a quick run through of all their finances and make sure everything is up to speed. So I thought we would do a review in July. Super. Now, these are actual ideas and strategies that you have come up with and use with your paying clients. So if you don’t have a pen and paper, I would grab one because there’s some good stuff here that you’re going to want to remember. So let’s just kind of jump into them. And some of these are kind of counterintuitive and it might challenge my thinking. I’m sure they’re challenge your thinking as well.

[01:31] Number one is to review your car insurance deductibles and to make them a thousand dollars or as high as you possibly can. Absolutely. So the thinking behind this is to keep your deductibles high, which keeps your premiums low. Now, not everybody can handle a thousand dollar deductible, but most people should be working towards that. And the reason is because if that high of a deductible is there, your premiums will be as low as possible. Now a lot of people will say, oh my gosh, you know, raising my deductibles from say five hundred to a thousand doesn’t save me that much money, but they’re looking at their car insurance over probably a six month period of time, maybe a one year period of time.

[02:19] We’ve got to remember that we hope to be driving a car until we’re 100 years old. I mean, driving a car equals freedom. Of course, pretty soon we won’t be driving our cars, but never mind that. For now, we want to have that freedom that keeps us driving cars. We want to think about driving cars long term. And so paying the least amount to the car insurance companies over our whole lifetime is the goal. And the way to do that is to have those high deductibles. Sometimes with a lease, they don’t let you do that. You have to have the five hundred dollar deductible. But if you have a thousand dollars in a savings account or in cash value of life insurance, then you absolutely can handle a thousand dollar deductible.

[03:05] High deductibles will keep your premiums low. And that is the most efficient way to handle car insurance over your entire lifetime. Well, and since you taught me this principle, the other side of it that I also was thinking about was your claim exposure. I mean, even if you had a two thousand dollar accident and you turned it into your insurance company, that could translate into higher premiums for who knows how long. So chances are if you probably are going to try to pay for anything that’s reasonable to keep from having that negative claim exposure, is that reasonable as well? Absolutely. You want to use your car insurance for the biggies. And the statistics show the average biggie is about five times in a lifetime.

[03:52] And good heavens, I know a lot of people that have never really had a big accident. Thank goodness. So even if you had to pay five thousand in that example or, like you said, double it for some of the little ones, you’re still going to save thousands in your car insurance premiums over your lifetime. And as always, we have to remember one of the prosperity principles, which is to measure opportunity costs. So here’s a situation where just a little bit every single month or every six months to your car insurance company, if you apply the opportunity cost concept, that little bit in savings, knowing that you could invest that money instead, can net a big difference again when measured over your whole lifetime, which is how you should be looking at it.

[04:39] Super. And then, of course, a similar concept with homeowners insurance, I’m assuming. Yeah, it’s really the exact same discussion. You want to have your deductibles at a thousand or sometimes at one percent even is how some deductibles are measured. And again, keeps your premiums lower, lessens the opportunity cost, much more strategic and efficient way to handle home insurance again over your lifetime. High deductibles, low premiums. Got it. And then the next question that you have on here is about keeping pictures of your valuables and storing them off site. Yeah. And this is a piece of cake to do with cell phones these days. Turn the video cam on or run around with the still pictures. Take a photo of all the valuables.

[05:28] Open the cupboard doors, open the drawers, take pictures of all the content, throw those online somewhere where they can be stored securely. And that way, in the event of a fire or a water loss or some type of thing that would destroy valuables, you can actually not only remember what you had, but also prove to the insurance company that you had those things. And I know one family that had a fire in their bedroom destroyed the closet. Of course, all the clothes got smoked damage and they were able to get a lot more money from their insurance company because they were able to prove, look, I had these many business suits at a thousand dollars each or whatever the price was. So that kind of thing, pictures of valuables and not just

[06:14] valuables, really pictures of contents are a valuable thing to have, throw them online, store them off site somewhere. And that will hopefully never have to be used, but certainly be helpful in the future. What a great project to compensate a teenager for. Great idea. All right. The next one is about a personal liability umbrella. And some of our listeners may not even know what that is. You know, it is the most unused or underused insurance product out there. And it’s relatively inexpensive, which is, I think, why a lot of car and home insurance agents don’t bring it up. But a liability umbrella protects against liability. In other words, something that would happen that you might get sued for. And as the umbrella term implies, it covers everything.

[07:06] So this is liability above and beyond whatever you would have in your car and homeowners insurance. And so typically you can get, for example, a million dollar liability umbrella for maybe two or three hundred dollars a year. And I absolutely recommend it. And as your net worth grows, you want that liability umbrella to grow two million, three million, five million, etc. And it’s again, relatively inexpensive. It protects against a lawsuit of something that would happen that you could potentially be liable for, hence the name. And one of the inexpensive and shopping oriented places to get it is at P4P Rewards. So that’s P as in partners, the number four. And then P is in prosperity rewards dot com.

[07:53] You can go to your own car and home insurance agent and have them help you with it. But if you want to just grab it quick, P4Prewards dot com, go to the insurance section, push the liability umbrella button and you’ll have one fairly quickly. So definitely something we recommend for everybody. Even somebody starting out can have a small liability umbrella and it actually, in some cases, enables you to reduce your car and home insurance. Not always. They often have to be paired up together. And P4P Rewards can help you do this as well. But back to our earlier discussions, if you can raise your deductible, consequently lower your premium on car and home, that difference could actually pay for the liability umbrella.

[08:39] And then you would have substantially more protection at no out of pocket cost beyond what you are already paying. So liability umbrella, a million dollars or one times you’re not worth usually two or three hundred dollars a year to get that very effective. What about shopping your insurance coverages? Should you stick with one company? Is it a good thing to shop around from time to time? It is a good thing to shop around from time to time, and yet it’s a pain. So for those of you that have relationships with an individual, obviously we respect those and wouldn’t ever recommend that somebody change unless they just really felt like the person wasn’t doing a good job, in which case, obviously, the relationship’s not great.

[09:22] So for those of you that don’t have and those good relationships, I think are becoming farther and fewer between the rewards environment. Again, P4Prewards.com is a great place to shop for you because it will do it automatically every six months. It just runs through your car home and liability insurance and shops it. So that’s the kind of thing that can save you a little bit of money. Again, some people are not interested in that small savings. But I don’t know that I would literally switch every six months. But the rewards platform will tell you, hey, we didn’t save you any money. So just stay the course. Now, obviously, if you have tickets and that kind of thing, sometimes you really can’t switch.

[10:05] So, OK, fine, stay put. But I do find that it is something that should be shopped. If you don’t want to do the automated shopping every six months, at least every two or three years, run through your car home and liability insurance and have them looked at together because they are interrelated. And just see if you’ve got that where it should be protection wise and also see if you can save yourself any money by taking a look at some alternative companies. Sometimes it makes sense to keep them all together because you get some discounts, but sometimes it doesn’t. It’s just something you have to take a look at. Our next area is to review medical insurance. What are we looking for? Boy, that is one area that I just know is changing constantly these days.

[10:50] But it is something that should be reviewed. A lot of people have group coverage. There’s really not much that they can do about it. But one thing that we do recommend is that you have maximum coverage. A lot of people have a limitation of a million dollars for health insurance coverage. And again, we like to see high deductibles and lower premiums consequently, but in today’s environment of group insurance, again, there’s not a lot that can be done there. If you feel like this area really needs some help, we do have a health care consultant. So reach out to us if you feel like you need somebody to really objectively look at your situation, especially if you’re hitting that close to age 65 environment

[11:32] where you’re going to have to be making some Medicare and Medicaid decisions. We have a consultant that we can refer you to that handles that for a small fee. She can just get on the phone real quick, go over your family’s choices and give you some good guidance. Great information. How about disability insurance? Well, here we want to have ideally the maximum allowable, which is typically about 60% of your income. And you want to have, again, a large deductible, which in this case is the waiting period. So 90 days, 180 days, some people can even go 360 days if you have cash value of life insurance or a good savings account to rely on. And then that will enable you to have lower premiums. So your, quote, deductible for disability insurance

[12:21] is really your waiting period. And again, this is another area P4P Rewards can help you with. A lot of people have group coverage. That’s great. It’s usually pretty minimal, but certainly better than nothing. And I use the term ideal, ideal as in, well, what ideal means, like the best possible situation. But I think many, many people have just a little bit of disability insurance. So another way to look at it is make sure you’ve got enough to pay the mortgage and put food on the table and make the car payment more of a minimalistic approach. And there’s nothing wrong with that, too. Just make a decision for yourself rather than just burying your head in the sand and ignoring this environment.

[13:02] Make a conscious decision to either have the disability insurance or don’t have it, to either have it at a maximum level or have it at more of a minimalist level. But make it a conscious decision, not just a default decision. Now, if you work for a company, should you have your own disability insurance as well or just what they provide you? Or is there even an option there? Yeah, that’s a really good question. If you work for a company that does provide it, you can have your own on top. But I find that a lot of clients find that it’s more expensive than they wanted to handle, which is certainly understandable. If you have life insurance that has a waiver of premium, that handles your ability to keep saving in the event of a disability.

[13:48] But it doesn’t put food on the table and pay the mortgages. So some clients will mix both group coverage and individual coverage. One thing to note is that group coverage is likely going to be taxable if it comes to you, whereas individual coverage is typically tax free, depending on how you pay for it. But most commonly it is. So it’s a tough call. And again, if somebody really needs some help in this area, they’re best to get a hold of us. We do have a consultant that helps with it. And we can get you to somebody that can walk you through all of your options. And the next one is probably one of the biggest conversations we hear every day, and that’s long term care insurance. Yeah, and it’s a toughie.

[14:27] And right on our list, we say this depends on your level of concern about it. And you’re right, people are asking a lot about it. Straight long term care, kind of a tough thing to pay for, because you could pay and pay and pay and then die peacefully in your sleep and never use it. But obviously, more and more people these days are ending up in nursing homes. So if you want to take a look at that, then again, we have a consultant that can help you that’s a specialist in that area. One of the things I really like to see is the long term care riders that are now being offered on life insurance policies. However, they’re only on new life insurance policies. We can’t add them to old policies. And they’ve really just been approved within the last year or so.

[15:11] In some states, we’re still working on getting those approvals. So if you are interested in long term care, reach out to us and let us see if we can get you a life insurance policy with a long term care rider, because that way, if you need the long term care, you can get at it. If you don’t, the beneficiaries, your children or grandchildren or whoever you’ve got as beneficiaries of your policy, they just get the money instead. So it’s a more effective way to buy the long term care. Again, as a long term care rider on an on a new life insurance policy, not an existing one. All right. And then we need to talk about wills, trusts and powers of attorney. Yes, the thing that everybody loves to have on their list.

[15:55] So right now, a state tax law hasn’t changed much. If you’ve got a will or a trust that’s five years old or so, you’re probably fine as long as it still meets the needs that you have. But we do recommend that they get looked at. And it is something that is a tough discussion to have, but please have the discussion and then you can check it off your list and not worry about it anymore. So there are a variety of things that we recommend that go along with it. And one of our favorites is called the torch dot com. And at the torch, the idea there is that you’re able to pass along. Think of passing a torch from one person to another. You’re passing along your information from one person to another,

[16:38] because a lot of times where the missing pieces are is not the legal document of the will or the trust, but the actual data of where are the car keys and where is the dog food and who are the doctors and that kind of thing. So if death occurs, we want to be able to get at that information easily and quickly, just as well as we want to have the legal documents. That’s there. We’re pretty big fans of living trusts. They’re not necessary in all states or all counties. But it is something that we would encourage you to take a look at. We do have a relationship with a national network of estate planning attorneys. So if you need help being referred to one, we’re certainly able to do that. At a minimum, you will want to have a will.

[17:23] You’re looking at maybe five hundred dollars give or take for that. And the living trust arena may be more like fifteen hundred, two thousand kind of depends. But those are things that are very, very beneficial, easily done within the course of a couple of months of work. And then you can check it off. And as long as we don’t have a state tax law changes, be done with it for at least five or ten years. I know some attorneys recommend you update them every couple of years. But I would say that that if you can get on a program of that is fabulous. If not, at a minimum, every five or ten or any time your family situation changes was just reading an article before we went online about a woman who passed away. They did not think she had any life insurance.

[18:07] And it wasn’t until six years later that they discovered that she had a life insurance policy. So how would you address making sure that somebody knows what you have and where it is? Well, that’s what the torch dot com is for, without a doubt. And if you don’t want to do it online and do it in a list. My grandmother had a green notebook and everybody knew the green notebook was where the list of all the things were. The torch dot com really forces you to think through all those things. And it’s nice because it doesn’t make you collect the information about the policy per se, but just to say the life insurance policy that’s in the third drawer of the desk or the tax returns that are up in the attic or what have you to make it easier

[18:50] for people to find things and not have to be hunting them down or worse, not knowing that they existed and not even knowing to look for them. So the torch dot com, something that we recommend. There’s a free version and then there’s an upgraded paid for version as well. And we’re also talking about types of ownership is our next conversation. Yeah. So a lot of people these days have a desire to have maybe a little business out of their home or something like that. And you can get a lot of value out of creating an LLC or a corporation. LLC standing for limited liability company. We’re big fans of those. We certainly have corporations ourselves because of the businesses. But we also recommend that if you can create a little company

[19:33] or a network marketing group or something like that, create yourself an LLC. You can get a lot more tax deductions than if you don’t have that. So the ownership idea is very, very valuable. You’re going to need a CPA to help you with it. And we definitely can refer you those as well. And if you already have one, you want to make sure you’re taking full advantage of it. Again, a good CPA can help you do that. Many times I’ll find people have an LLC, but then they don’t really know what to do with it after that. So that takes pretty consistent CPA slash bookkeeper work. Just making sure that the appropriate things are in the LLC so that you can get the deductions and having it documented so that you can back those up.

[20:16] And we have had CPAs on our show before. And I believe the figure that they gave was an average of about $10,000 per year by tracking your expenses and using the LLC to the best of your advantage. Now, 10,000 per year invested over a 30, 40 year period of time. That’s some considerable money. Absolutely. Well worth a little bit of time keeping decent records. All right. Now talk about the specialty of the house here, life insurance. Certainly. So we recommend the first thing to take a look at is the total death benefit. And we use a rule of thumb called human life value. And the definition of human life value is 15 times your income or one time your net worth. So most families are going to fill this number

[21:10] with a combination of term insurance and whole life insurance. So whole life insurance, as people that listen to this podcast know, is the place to store cash. It’s your savings account alternative. And you’ll want to have as much whole life as your cash flow can handle. In other words, what are you saving every month or every year that’s going into liquid savings? That should be allocated towards an insurance company building you cash value of life insurance. And then whatever death benefit that is, that’s great. On top of that, then you’ll want to have some term insurance because most families don’t have enough cash flow to have whole life insurance up to their human life value. I don’t. And so I have term insurance as well on top of my whole life insurance.

[21:54] So the term insurance is most easily done, again, back at P4P rewards because there’s a shopping service there that can just find you some cheap term insurance. We also often recommend something called convertible term insurance. Convertible term insurance will enable you to have term insurance that you can convert or switch over to whole life. Now, it tends to be a little bit more expensive because you get a conversion credit for it. So you spend a little bit of money for a year or two paying for slightly more expensive term insurance so that when you’re ready to upgrade that to whole life, you just write a check rather than having to go through the whole approval process. But then there’s other term insurance that you may never convert.

[22:39] So we always want to take a look at those two structures, the convertible term, as well as the what I would call cheap term. And that’s going to be on top of the whole life insurance that is used as your place to store cash. All right. And how about reviewing your cash and your checking accounts and your savings, money markets, and all that fun stuff? Sure. So I find a lot of people have little stashes of money here and there and we’re big believers that money is better stored in the life insurance companies than in the banks. So keep a couple months in your checking account. And as far as I’m concerned, everything else should be put in a bank. I heard just in the last 30 days, two different client stories

[23:21] where money was taken from them at a bank because of past challenges. And the banks seemed to be conspiring together against these clients. I’m sure that wasn’t the case, but it sure was not a pretty picture. So we really strongly recommend that you don’t leave much more in a couple of months expenses in banks and everything else should be stored in cash value of life insurance, way more effective, usually two to three points above bank rates. If we see interest rates rise, which we will someday, dividend rates will rise at the insurance company as well. And so those dollars are more effectively stored inside an insurance company, completely liquid than they are inside a bank. Just to clarify, at one point you said a couple months

[24:07] and then everything else should go in the bank. You meant in a life insurance policy at that point, correct? I did. Thanks for catching that. So just to be clear, a couple months of your expenses should be in a bank and everything else should be in the life insurance industry. All right. How about mutual funds? I even hate to say the word, stocks and bonds. Well, they’re not our favorite, but if you do have them, one of the strategies that we highly recommend, and these would be for after-tax investments. So I’m not talking about your IRAs and 401ks, but if you have regular mutual funds, one of the things you can do is use the cash flow from them, the dividends and the capital gains that are typically paid every quarter or every six months

[24:52] and take that money off the top, if you will, skim the cream off the crop and use it to go do something else with. Maybe you pay a life insurance premium with it. Maybe you pay car and home insurance payments with it. Maybe you use that to invest in something else. But if you can do that rather than reinvest, then it will keep money from being so subject to loss, which mutual fund money is, and it will keep your tax efficiency a little bit higher because every time you’re reinvesting in the mutual funds, if you use your dividends and capital gains to do that, while your mutual fund account is rising, your tax bill is going to be rising as well. And we prefer to have those dollars be a little more tax efficient.

[25:37] So if you’re really stuck in the mutual fund arena and you want to stay there and you have after-tax money in it, take the dividends and the capital gains in cash every single year and reinvest those dollars somewhere else, ideally where they’ll never be taxed again. All right. And how about your 401k? Well, we believe that these should only be contributed up to the match level. That’s M-A-T-C-H, not M-A-X, like most people think. So the media wants to have you max out your 401k. We strongly disagree. If you want to contribute up to the match level, M-A-T-C-H, that’s certainly fine. Don’t blame me for not wanting to have that match money, but more and more we’re hearing from clients these days

[26:24] that their corporations aren’t matching any of the money. And then I would question contributing to the 401k at all because that money is going to be locked up. It’s going to be completely taxed as income. It’s not going to be available except to roll into an IRA until you’re 59 and a half and then be fully taxable at whatever tax rates are at the time. There’s just a lot of negatives. And I think somewhere on the partnersforprosperity.com blog, we even have an article from the originator of the 401k saying it was basically a failed experiment. How about IRAs? You mentioned them. What are they? Well, IRAs are typically formed when somebody rolls a 401k plan or a pension plan or a profit sharing over into another retirement account not to be taxed.

[27:13] So I don’t find very many people contributing to new IRAs, though I suppose there’s still some out there doing that. Most of our clients’ IRAs are existing from an old retirement plan at a company. Nothing wrong with that. The money’s there. You’re certainly not going to be real inclined to want to pay taxes on it, though there are some times when maybe a Roth conversion or just a regular take the tax hit and move on does work. For the most part, if people are rolling over retirement plans, they’re going into an IRA. And so IRAs, in our minds, should be invested with our two main goals that we talk about all the time when we’re seeking investments, and that is low double digit return with no loss

[27:56] of principle. So we’ve got a couple different environments for accredited investors for IRA money. And then we have an environment for the non-accredited investors in the lending club or Prosper.com arena. Those are fabulous places for self-directed IRAs. And I know we’ll be doing another podcast shortly on the self-directed IRA environment. So if you’re unclear on that, stay tuned and we’ll talk a little bit more about that. But we believe strongly that IRAs should stay invested. If you want to convert to a Roth, that’s one option that can go. And we can certainly have some discussion around that. But again, our goals for investing double digits, no loss of principle. How about your mortgage?

[28:38] Mortgages, fully amortized, 25, 30 years and no extra principal payments. We’ve spoken about minimum down payment for a new mortgage as well. If you’re buying a home, minimum down payment, 30 year mortgage fixed right now for sure. And again, no extra principal payments. That is not a place to be putting money. It goes against our clue acronym, C for control, L for liquidity, U for use and E for equity. You do not want to be saving money in your house. It is not available to you in the way that you think it is. So mortgages should be maxed out. This is a time for MAX. Big mortgage, little down payment, no extra principal. Got it. And again, the idea is that extra money that you would be using for those

[29:30] extra payments, there’s the opportunity cost of that money because we can find a better place to put it, not just time to spend it and have fun, right? Absolutely. Having fun is okay, but not with investment and savings dollars. Not yet anyway. How about investment properties? Well, we love investment real estate, but I do find a lot of clients don’t really know how well theirs is doing. We actually have a real estate calculator that we can run investment property through. And if that’s your area of love, have at it. We’re happy to help, super supportive of people owning individual real estate. That being said, it’s clearly not for everybody. But if you are curious how well your own real estate is doing, you can head over to truthconcepts.com and grab the real estate

[30:13] calculator and run your numbers through that or bug us and we’ll do it for you. It is important to know that your real estate is cash flowing. That’s really what we’re recommending that you look for. If you’re going to do investment real estate, make sure that investment real estate is providing you positive cash flow every single month. Don’t be as focused on the appreciation or the depreciation that’s going to give you the tax benefits. Just be looking for that cash flow. Principle number four, seven principles of prosperity is flow. You want to keep that cash flowing. And if the property seller or realtor has to increase your down payment to something astronomical in order to get the cash flow to happen, still not a good deal, right?

[30:59] Oh, so true. Thank you for saying that. It is so critical that we realize that down payment is our money and our own cash has a cost. So we don’t want to be adding extra money to make it cash flow. That’s a very elusive solution and it’s not an accurate one at all. Right. Next area is hard money loans. Yes, hard money or bridge loans. We love these as investments and you can find them on your own. You can get our help to find them. They’re great for IRA money, great for after tax money. Again, they fit our goal of low double digit, no loss of principal environments because they are protected by real estate. And this is a great place to do real estate if you can’t do it yourself. In other words, if you can’t own it,

[31:45] you don’t have the time to find properties. It’s not your love to be fixing things up, etc. Then owning the bridge loan or hard money loan as an investment is a way to get some of the benefits, primarily the cash flow off of the real estate without having to do it yourself. And along that same line, life settlements, which we’ve talked about a lot. Yep. Our other favorite alternative investment that fits our guideline of double digit, no loss of principal, great place for IRA rollovers, 401k rollovers, or also after tax money, seven to 10 year timeframe. So sort of medium term. And these don’t provide a lot of cash flow, but they can at least fulfill our goal of investments, which again, double digits, no loss of principal.

[32:30] And did you bring a gift for our listeners today? We do have one partners number four prosperity.com slash ebook. It’s called financial planning has failed. There’s an audio version there as well. And a good couple hours or 60 pages of a lot of information about why typical financial planning only been around since the 70s and hasn’t really worked. And then what to do about it. Great action calls, great case studies in there, something that I think will be very valuable. And I hope that this review checklist was helpful as well. It may spur some questions, which we’re happy to field via the email system or right there on the podcast and on our website and really welcome any interaction around this.

[33:17] I’d encourage we went through so much information that if you’d like to have some more information, or if you’d like to have an appointment to maybe talk about your personal situation, the telephone number is 877-889-3981. Probably the best bet would be to start at extension 120, which is a wonderful lady by the name of Jill, who’ll be glad to get you on the calendar so that your personal questions could be answered. Kim, anything else you have to say before we wrap up? I’m just happy to share the info and hope it starts a conversation amongst your family members because that’s something that we find is missing in our world is conversation about finances. So take your notes and have a little dinner table discussion.

[34:04] Super. Well, this is No BS Winnie Guy, Todd Strobel once again, for the Prosperity Podcast. 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 partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review. Bye.