The Right Way to Save – Episode 061

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[00:00] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, best-selling 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 resident financial author and my co-host, Kim Butler, with us. Hello, Todd. Happy to be here today. Always a joy to share some wisdom with those that enjoy listening. Super. Well, today we’re going to be addressing, I guess, what is kind of a common topic, and that’s the bucket system or setting aside buckets of money for specific purposes.

[00:49] A lot of the big gurus out there are big proponents of this. And I know you have your own theory on this, which is quite different. And I think your theory is much more effective, so I’m just going to let you take it from there. Wonderful. Well, I’m glad you think it’s more effective. It sure has worked for our family and it seems to work for most of our clients. And the idea is that rather than saving in a retirement account for retirement and saving in a 529 plan for educating kids and saving in somewhere else for emergency opportunity money, whether that’s a bank or a CD account or cash value of life insurance and then saving somewhere else, you know, people prepay their mortgages. So they’re effectively trying to save in their mortgage and then saving somewhere

[01:36] else for a Christmas account or vacation fund or what have you. That is a common strategy that a lot of financial people recommend. And I think their motive is to try to help people compartmentalize and in some way not maybe access their savings when things go wrong. For example, oh, gosh, I’m not going to get into this Christmas fund because I really want to buy Christmas presents. But the challenge is that if we need to replace the air conditioning, put a new roof on, you know, fix the car, the myriad of things that come up in family’s lives, we need the money. And so if we have it all separated out in these various places, it’s inefficient. For the one thing, the 529 plans, the retirement accounts, a lot of any

[02:30] governmental offered environment has way too many rules, way too many structures that we don’t control. And as we know, control being one of the principles of prosperity, it’s a real challenge when it’s a environment that the government controls, but we want to control it. So as a general rule, we’re just not a fan of those. And then you get into the other analogies where you’ve got a account for Christmas and account for vacation and account for emergencies. Again, if something happens, you’re going to need to turn to that money. So a much more effective way is to get off the fence. The fence is, oh, I want a little bit here, a little bit there and whatnot. Get off that fence and just go for savings on the left side of the fence,

[03:22] if you will, or the right side. You can pick. It doesn’t really matter. And then investments on the other side of the fence. So the savings environment needs to be controlled. So we’re going to use our little clue acronym controlled. It needs to be completely liquid. This is your savings environment squarely on one side of the fence. It needs to be able to be used for whatever you want, which is typically going to be short-term things like emergencies and opportunities that require money in the next, say, two, three, four, five years. So that could be educating children because maybe you’ve got a teenager and so college is two or three years away, or it could just be the myriads of emergencies and opportunities that come about.

[04:06] So that’s where savings should be controlled, used for whatever we want. Sorry, I got my own acronym mixed up. Controlled liquid used for whatever we want. And then ability to act like equity. And we’ve chatted about this before, but the ability to act like equity, if your savings account can act like equity, it means that you can borrow against it and pay it back and rebuild that savings without having to start at zero every time. So this works beautifully for cash value of life insurance. If you just have a regular savings account, you can actually do the same thing as long as you pay that account back with interest. And just a couple of podcasts ago, we talked about this idea fairly thoroughly.

[04:53] And then that’s it on the control liquid use equity side of the fence. That’s where we want our dollars squarely available and saved. And then on the other side of the fence, it’s where our investments are and investments we still want to control, but they’re not going to be liquid. They’re going to be for things five, 10, 15, 20, 30, 40, 50 years down the road. We want them fully invested efficiently at all times. And as most of our listeners know, our goals for investment are double digit, no loss of principle. Our goals for investment are double digit, no loss of principle. And not that you can always find that, you know, even if you can get an eight or 9% return with no loss of principle, you’re in a pretty good spot.

[05:48] But if you can find those double digit, no loss of principle environments, that’s the investment arena, but they’re not going to be liquid. And so we need to be okay with that. And the reason that we can be okay with it is because we have our other savings that are liquid. So it’s a much better strategy. You have your savings, you have your investments, basically just a couple places, maybe three, because investments can be broken down into two categories, one that creates cashflow and one that is more of what we call a net worth play where it’s just growing. But those are really the bottom line of everybody’s personal finances. It doesn’t need to get more complicated than that, but I’m sure you’ve got

[06:30] at least a couple of questions for me. Quick question on the investment side. Are you talking about using a vehicle like a 401k or an IRA or something different? Well, here’s the thing. They are not our favorite because the government controls the rules. But if somebody already has money in a 401k or an IRA, then so be it. We do have investments available that can handle that kind of money and meet our stated goal of double digit no loss or return inside the 401k IRA environment. So if you have money in there, that’s a different discussion, in which case you basically keep it in there, then if you don’t have money and you’re debating, putting money in there. Now I will agree that if you’ve got a 401k and it has a heavy match,

[07:20] M-A-T-C-H, then all right, that’s pretty tempting and people tend to want to receive that match. And oftentimes they have to contribute in order to get that match. So fine. But beyond that, we’re not big fans of putting money in those environments because they’ll go against the seven principles of prosperity. If you just walk through those seven principles, they go against almost every single one of them. Super. And I know particularly on the college saving side, many times our savers who use the 529 plans are actually penalized for those savings, aren’t they? Absolutely. And that environment is called savings, but it’s really not a very good word for it. And especially if you’ve got older children and you’re looking at

[08:08] college and a pretty short period of time, it really shouldn’t be invested and 529 plans are supposed to be invested, but then they don’t earn money very well and they lose money. So I have a hard time seeing any value in them at all. I think what impresses me the most is that in the short term, either something will happen where you need the money or something will happen where you have an opportunity to invest the money and if it’s straddled out in too many different places, sometimes you miss those opportunities or you can’t access it when you have to have it. Absolutely. And the bucket theory that a lot of financial advisors recommend does cause you have this account and that account and some other account and

[08:53] some other little account over here, and you might not even be aware of the total amount of your savings capability. Again, some of our better investments that you mentioned often have a minimum requirement that could be missed, couldn’t they? Absolutely. And 50,000 is a real common minimum. And for some people, that’s easily accessed and others think that’s a huge goal, but awesome. So it’s a goal. Go for it. Super. Any other resources you’d like to recommend to our listeners? Well, we do have our audio books still available at partnersforprosperity.com slash ebook. And I did record and we’re looking forward to be offering in the near future, our Busting Interest Rate Lies book and that’ll be available.

[09:40] We’ll let you know when it is. And just a little heads up for 2016, we’re going to have a Busting the Life Insurance Lies book that’ll be available around mid-year 2016. So we’re looking forward to all of those and they’ll all be available on audio as we progress. And I believe that is the corporate mascot in the background. Yes. Are we hearing the Great Dane dog? Yes. That’s through a closed door, I might tell you. Anything else you’d like to add before we wrap up? Nope. It’s Thanksgiving time. Go be grateful. Awesome. Well, this is No BS Money Guy Todd Strobel for the Prosperity Podcast. Once again, thanks, Kim Butler and take care of everybody. Thank you for listening to the Prosperity Podcast.

[10:27] 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.