How Much You Should Be Saving – Episode 255

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[00:03] 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. Welcome to the Prosperity Podcast. Today we’re going to be talking about savings. We’re going to be talking about how much you should be saving, why you should be saving, and some surprising strategies and benefits. Kim Butler, are you there with me? Yes, Spencer. Hello, hello. Hello. Well, savings, maybe it’s not the most exciting conversation, but I’ll tell you what, if you have money in your savings account and you see a really good opportunity, I’ll tell you, that is pretty exciting, isn’t it? It is.

[00:52] That’s really well said. I was talking with our social media gal, and I don’t know whether I said it or she said it, but it was such a great thing, and I know she’s amplified it on social media, and that is that savings saves families. And it does. It is just so dead-on accurate, and yet you said it well at the introduction. It’s the most boring thing, and it is so overlooked in most financial circles. You start reading about what should a person first do when they get out of school, and the recommendations are to max out your 401K and do all kinds of things other than save money. And it’s horrific to me that we would be recommending that a 22-year-old kid would put money into something that they cannot get access to until they’re 59 and a half.

[01:50] And instead, wouldn’t it be so much better if they put it into a savings account that they could get access at it tomorrow? And we’re not talking a checking account. We all understand that us human beings need a little bit of distance from our money, but a separate savings account at a credit union or a bank is the most valuable thing in the world, and it truly does save families, even if, in this case, the family is a single person at this stage. Yeah. Now, you mentioned something that’s a little bit hidden, a little cryptic in that. Now, you said not having that savings in a checking account are easily available, and I think that is something, as a human nature, when we see it in the checking

[02:34] account, maybe the opportunity will look a little bit more appealing or maybe it’ll be a little bit easier to spend. However, if we know the money is somewhere and it’s a little harder to get to, it’ll build up a lot faster. Would you agree? Absolutely. And it’s why, for years, our family has used permanent life insurance. This whole life is a product that’s been around for a couple hundred years. We use it as our forced savings account and forced in a good way because, yes, us human beings, not only do we need a little distance from our money, but sometimes we need a bill to show up every month or an auto debit to show up against our checking account in order to get that money saved. So, without a doubt, I recommend that people shoot for saving 20% of their income.

[03:27] Some people are able to do that easily and they save 30% to 40% of their income. Others, not so much and maybe they have to start with 3% or 5% or whatever it is. But to start with a percentage and to have the goal to build it up towards that 20%, I think that’s a very first critical thing. But then I also want to put a word on this quote savings account that I have used of late that I feel really helps drive home its effectiveness more better. And that is the Emergency Opportunity Fund. Because so often, financial people will talk about, well, you have to have your emergency fund, you know, three to six months expenses, got to have your emergency fund. Yeah, I agree with that. And yet, as you said in introducing this idea, it’s the opportunities that are exciting.

[04:21] And we’re going to be a lot more motivated to save as a verb like the act of saving. If we have opportunities on our mind, then we would if all we had was, quote, emergencies on our mind. Plus, who wants to be constantly thinking about emergencies? That’s not a prosperous mindset. And we know that thinking from a prosperous mindset is one of the first principles of prosperity that we talk about all the time. And so if you can get in the habit of saving, that’s an important step to make it habitual or even automated, like I was saying, automatically deducted from your checking account. And then you can switch the focus of that saving from the emergency side of things to the opportunity side of things.

[05:14] I think you’ll find that you’re a lot more interested in it, a lot more committed to it, a lot more effective because of it. And then additionally, if you’ll use whole life insurance as a place to store that savings, what we know about that product is that, one, it is a little disconnected from our checking account. So that’s a good thing. Takes about 7 to 10 days to get the money, which is another good thing. And then third, that money, that’s cash value of life insurance, your, quote, savings account stored inside the insurance company is going to earn two or three times bank rates. Now, we’re recording this in 2018, so we could give the banks the benefit of the doubt and say they’re at, say, 1%.

[06:03] That’s being generous. So the insurance companies are going to be at three or four, and yet it’s even better than that because cash value of life insurance is not taxed, whereas, of course, interest on a savings account is taxed. So there’s quite a bit of difference in the growth that the cash value of whole life insurance is going to have. And this is your emergency opportunity fund. And because it’s both emergency and opportunity, you’ll always want to continue to fund it. And that’s something that if you are just focused on your emergency fund, you’re going to get to that number, whatever is magic for you. The financial people say three to six months, but I really think that that’s a very personal number,

[06:56] and your own family needs to come up with their own number for a dollar figure that they’re seeking for their own peace of mind. And then you’ll want to keep working past that because you want to build that opportunity fund bigger and bigger and bigger. And then, of course, there’s times that you actually use that opportunity fund to go do work, to go take advantage of an opportunity. The beautiful thing about using the cash value of life insurance for the storage of this emergency opportunity fund is that you can borrow against it when you want to use it. And what that does is enable the dollars to keep growing inside your emergency opportunity fund while at the same time they are outdoing or taking advantage of the opportunity.

[07:52] Now, this does have some costs. There’s interest costs that you pay to the life insurance company for the use of that money. And yet it’s identified as an interest rate. So let’s say it’s 6%. And let’s say your opportunity is at 9%. So then you’re borrowing against something at six and you’re earning nine. And we all know that that works very well. And by the way, that’s not a 3% differential. It’s going to be a lot higher than that. I’ll get a calculator out here in a minute and calculate it. But in addition to that, you’ve got the life insurance cash value that’s continuing to grow and it’s growing, let’s say, at 3.5%. So there’s just a whole lot of effectiveness going on with your money in that series of transactions.

[08:48] Very well said. And I think another hidden benefit of using the whole life insurance is that it shows up as an asset. And so as you do that, what happens is it’s one, creating the discipline. Two, when you do decide to take advantage of an opportunity or if you’re moving or whatever circumstances may be, you have another asset in that column. So if you want to take out a loan and use some of that emergency opportunity as a part of the transaction, well, you have an additional asset. You look better to the lender. Would you say that’s something that is a surprising benefit? Absolutely. And that asset can either be on your personal balance sheet or on your business balance sheet if you prefer,

[09:36] depending on what’s going on with the cash and the cash value, cash that you’re using to pay premiums and the cash value that it’s building, which is the asset. And then, of course, there’s the death benefit as well. And we forget about that. I just learned of a friend’s partner passing on and there was a buy-sell agreement, but it did not have insurance with it. So here this guy is legally obligated to buy the deceased partner’s family out and he has no money to do that. And that death benefit could have played a really large role for that business and that family had it been in place. You know, I’m going to get to a personal example. So our listeners can see real life. So I’m going to rewind the clock back to when I was about 20,

[10:23] I think I was about 23 years old, and I had a company that I had recently sold. And so I had some money in my emergency opportunity fund. Now, granted, that was a long time ago and I didn’t use the term emergency opportunity fund, but now I currently do. So I had this money and I saw an opportunity and it was a small investment to start a new business. So because I had some money set aside, I was able to do that. And that small investment turned into a net profit of about $3,000 a month for a very small investment. So I got a humongous return on my capital. Now, had I not had some money set aside, I wouldn’t have been able to take advantage of that opportunity. No, I wasn’t a millionaire and I wasn’t retired at 23 years old,

[11:19] but it was something that made a significant difference in my life. And I think the same happens for people. It’s almost overwhelming when you have no savings. But if you just start small and you get that moving along and you create the discipline, and as we talked about earlier, make it so that it’s not easy to access. So you’re not dipping into it. You’re going to see that thing grow. And again, the life insurance is such a beautiful vehicle for that. Yeah, it’s funny. You mentioned age 23. I was 24 when I bought my first whole life policy. And I’ll readily admit I didn’t really know what I was doing at the time. I bought it because I felt like I should learn. And sometimes you learn better when you own things than when you don’t.

[12:10] And so I’ve been forever grateful that that forced savings was there, that emergency opportunity was there. I actually also just talked to a long-time client, one of the first people that I helped over 25 years ago, who said to me, you know, I didn’t really like this life insurance at the time. I basically did it because my spouse wanted me to. And I got to tell you, it has saved our family so many times. And that’s super cool. That’s a really, really nice thing to hear from a client that has actually been able to use the life insurance. Yeah, that’s incredible. I wanted to circle back. I grabbed the calculator to do the quick return on the 6 to 9. And it’s 50%. So, so many times, because we do not apply dollar figures,

[13:12] when we’re talking about interest rates, we don’t understand the difference between what’s going on with a 6% cost. Like I was saying, let’s say you had to borrow at your life insurance company at 6, and you got to invest at 9. That’s a 50% improvement. It’s a 3% spread, but it’s a 50% profit. And so I’ll send you a link that explains this very, very thoroughly, shows the actual calculators that get used to make this determination. You have to have a financial calculator to do it, like HP12C or like Truth Concepts in this case. And you can include those in the show notes for our listeners. The example I’m going to send you is borrowing at 4% and investing at 5. And that is a 25% improvement.

[14:07] So 6 to 9 is 50, but the idea is the same. And so I’ll give that to our listeners so they can actually see those calculations done if they’re interested. I think they’ll definitely be interested. And for our listeners, as we started out, this is not an exciting topic. But it is a really valuable topic and something that is frightening to me. And I’ll end before we wrap up, Kim. I remember I was in the bank last week, and I don’t go into the bank all the time. And the lady in front of me was with the teller. And she was, my guess, late 60s, early 70s. And she was looking to take out some money out of her account, and they were both talking fairly loud. And she only had access to a couple hundred dollars.

[15:02] That’s it. That’s all it was. And she seemed even distraught and kind of confused about and overwhelmed to just access a couple hundred dollars. And I thought, oh, one mishap in life can make her destitute. And that’s really scary. Yep. Yep. And that’s why young people and really people of any age, if they don’t have savings, will absolutely want to get started. And so start with what you can. Start saving what you can and make it a game, make it fun, find, you know, gamify it, put points on it, whatever you need to do, get your whole family involved, and really start to build up that savings account and do it first in a savings account at a bank if you don’t have anything. And then, or a credit union,

[15:52] but in a separate account from your day-to-day expenses. And then once you get two or three months of expenses built up, then you can shift and upgrade to the life insurance and use the whole life policy to build cash value. And if you’re in a position where you already have a lot of cash, and this happens all the time, clients will call and they’ll have two or three hundred thousand or even more just cash sitting around that they’ve kept liquid because they didn’t really know what else to do with it. And they felt like they wanted it to stay liquid. Then we can talk about how to shift that slowly over to using the cash value of life insurance as a place to store emergency opportunity money.

[16:33] And we can actually help you see how much more efficient that will be long term for your family. Kim, that was a wonderful summary. And for our listeners, if you are thinking about creating that whole life, creating that type of policy that’s going to help your family, you can always email Kim at hello at partnersforprosperity.com. And I’ve always seen it that Kim is an open book. She’ll answer your questions. And you can also check out the other episodes that we have to get educated and to learn more about savings and learn more about long term prosperity. So thanks for tuning in with us today. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you,

[17:26] visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.