Myths On Money

I like this video. It kind of illustrates how personal finance can be a lot simpler than we sometimes think it is. I will let the video speak for itself.

Couldn’t have said it better myself.

• What is Whole Life?
• Benefits
• Drawbacks
• My Recommendation

What is Whole Life?

Whole life insurance is the most basic form of permanent life insurance. It is basically a term life insurance policy combined with a fixed-yield savings account. This savings account usually yields an interest rate around 2-5%, but grows tax-deferred, similar to your IRA. When the proceeds are withdrawn, they are taxed, but they are not taxed year to year. The premium of a whole life policy has essentially two parts: one part covers the cost of the insurance, the other goes into your cash value account tied to the life insurance policy. I am not going to go into extensive detail as to how these policies work, as there are better resources for that. Rather, I will focus my attention on specific benefits and drawbacks of whole life policies.

Benefits

1. Flexibility.
   It can be difficult to talk broadly about whole life policies because there are so many riders and options you can take to truly customize a whole life policy to your needs. These riders and options are a plus, though, because they allow you to cusomize your insurance coverage and cash value account as you progress through your life.
2. Permanence.
   Because whole life policies are a form of permanent insurance, they do not expire after a given time frame. This means that you will have coverage over the course of your entire life, so long as you continue to make payments on the policy. The cash value of the policy also helps provide a degree of stability to the policy; as long as your cash value is sufficient to pay the premium, the policy will not lapse. If you fail to make a premium payment, then the payment is simply withdrawn from your cash value.
3. Forced Savings.
   If you struggle to set aside funds for the future, then a whole life policy can help force you to save. Because a portion of each premium payment goes into your cash value account, you are essentially getting a bill each month from the insurance company demanding that you make a certain deposit to your cash account. This can make it easier for some people to set aside the funds that they will need to save. These savings also grow tax-deferred, which is an excellent bonus.

Drawbacks

1. Low Return.
   While the interest earned on the cash account is guaranteed and tax-deferred, the actual rate of return tends to be disappointingly low.

   All of the $93 per month disappears in commissions and expenses for the first 3 years. After that, the return will average 2.6% per year for whole life, 4.2% for universal life, and 7.4% for the new-and-improved variable life policy that includes mutual funds, according to Consumer Federation of America, Kiplinger’s Personal Finance, and Fortune magazines. The same mutual funds outside of the policy average 12%.
   Dave Ramsey

2. Expensive.
   As we just saw in the Dave Ramsey quote above, there are high costs to permanent insurance of any kind, whole life included. The expenses of managing and maintaining these accounts, paying (large) commissions to the sales agents, etc make these policies very inefficient. Whole life policies can be double or even thrice as expensive as an equivalent term insurance policy. You get way more bang for your buck from a term insurance policy.
3. Permanence.
   While permanence can be considered a benefit of whole life policies, it’s also a double edged sword. One of the great lies of the life insurance industry is that after “some point” in the future, you can stop paying premiums on your policy. This, the customer interprets to mean that the policy is free after that point because the cash value grows faster than the premiums come out. That’s true, but highly deceptive in nature. You see, when you sign up for a whole life policy, you agree to pay premiums on that policy for the rest of your life. Just because you reach a point where you need not write a check for the premium does not mean that you are not charged for the policy. So, if you are planning on using your cash value to live off in retirement, you had better plan on continuing to pay your premium out of that fund, because it’s automatically set to auto-pay the insurance company. And you wondered why insurance companies LOVE espousing these policies….

My Recommendation

In my opinion, whole life policies are among the worst life insurance policies that a person could get. If you want permanent life insurance and the benefit of forces savings and tax-deferred growth, then there are better forms of insurance out there for you. Whole life policies can be good for the very wealthy (who are unlikely to be reading this blog) to protect their vast estates when they die, but for most people, they are not a great option.

The other night, I was reading Get Rich Slowly, one of my favorite finance blogs. I would like to lift a few of his comments from this fantastic post that illustrate why I LOVE personal finance, and what is truly important in our financial lives.

Freedom

To lift a quote from Get Rich Slowly:

“To me, life was all about the Stuff. I had hundreds of CDs and thousands of books. I had a TV, a stereo, a house, and a car. I wanted more. Sparky had none of these, but he had something I did not. Sparky had freedom. His frugal lifestyle allowed him to save and invest….
For some reason, I could not see the connection between Sparky’s thrifty lifestyle and his financial success. I could not see the connection between my own profligate ways and my mounting debt. I was blind.”

What is freedom? I think the idea can mean different things to different people, so I guess a better question would be: What does freedom truly mean to you? To me, freedom means that I can do as I wish. There is nothing (besides natural law) holding me down or constraining my actions. Nothing preventing me from fulfilling my every desire. Financial freedom is relief from servitude and slavery. I structure and manage my finances so carefully because I know that I am a slave, and I wish to someday find my freedom.

But slavery ended over 100 years ago, didn’t it? No, it didn’t. One kind of slavery did end after the Civil War, the kind we associate with cruelty, cotton plantations, and the Underground Railroad. But there is another form of slavery that has, rather than being stamped out, has been promoted, endorsed, and even celebrated in this country. The slavery I speak of is financial slavery, and it is a rapidly growing problem.

Think about it. Do you ever feel like your “stuff” owns you, rather than the other way around? Ever wake up in the morning wishing that you could just hit the snooze button and forget about work? What prevents you from doing so? Isn’t that what you would like to do on those mornings? I know I have those mornings. I don’t hit the snooze button for one very simple reason: I need money. I have rent to pay, groceries to buy, high-speed internet to pay for, burgers to buy, a car to fill up with gas. In short, my “stuff” is dictating my actions. I am going to work, (quite against my natural inclination) because my “stuff” demands it. So who, then, is truly in charge of your life? If you can’t take a day off because the car payment is coming due, then who is in charge of your life? Is it you? The bank? The car? Debt and excess are slavery, plain and simple.

I have structured my finances in such a way as to allow the maximum amount of freedom. I could switch to part-time work if I wanted to. I would certainly enjoy the extra free hours. I would have to sacrifice some other things to do so, though. Maybe the internet would have to go (a terrible thought!!), maybe we would have to eat ramen noodles and macaroni and cheese every day. But we could survive. We could pay our rent, keep the car filled with fuel, pay utilities, etc. The reason I could do such a thing is because I have limited the powers of my financial slave-masters. My rent is low. I have no car payment. I have no credit card debt. By stripping would-be financial obligations of their power, I have empowered myself. To a degree, at least. I would still need to work to get money, regardless of what I want. So I am not totally free, yet.

Since I only need a part-time salary to maintain my lifestyle, why do I work full-time? It’s simple. I CHOOSE to work full time because I want to get rid of all the forces that restrict my freedom. By spending significantly less than I earn, I am building my financial power. One day, that power will be enough to set me completely free. One day, I will have a home that has no payment on it, and investments that work for me to earn the income I need for my daily upkeep. When my money is working for me, rather than me for it, then I will be totally free, and I can use my time as I wish, and not as my creditors demand. That’s my financial dream. I want the right to CHOOSE to work how I want, when I want, as much as I want, for any pay (including $0). If I want to go on a vacation, I will need no one’s permission to go. I will just pack up and go. If I want to sleep in, then I will. If I wish to rise early, then I will. To be the master of my own time, to use it as I wish, oh what a joy that will be.

One of my favorite quotes, to sum up:

“Normal is getting dressed in clothes that you buy for work and driving through traffic in a car that you are still paying for – in order to get to the job you need to pay for the clothes and the car, and the house you leave vacant all day so you can afford to live in it.”
- Ellen Goodman

My friends, BE EXCEPTIONAL.

Money is not Wealth

From Get Rich Slowly:

“Please, my friends, always remember that true wealth has nothing to do with money. True wealth is built from friends and family, from experiences and relationships — it is derived from a life filled with meaning. Without these things, money means nothing. “

To this I would add that “stuff” means nothing. It doesn’t matter how shiny and new your car is. It doesn’t matter how dented and “economical” your car is either. It doesn’t matter how expensive of a gift you give. It doesn’t matter when your home was built, how big the yard is, how nice the granite countertops look. These things are not the source of happiness. Happiness comes from “friends and family, from experiences and relationships – it is derived from a life with meaning” and a life of freedom. Own your own life. Take control. Tell the advertisers that you don’t care that the Jones’ drive a better car, have a bigger house, throw bigger birthday parties. Tell the credit card companies that you will not be their slave and tell the banks that you will no longer work for them. Tell the Jones’ to join you on your way out of slavery and into freedom. As one who is living the frugal and “uncool” lifestyle, I can tell you that it is worth it. The greatest rewards are the furthest away, but the rewards of peace of mind and, yes, even freedom, that you will find the first day and onward make the small sacrifice worth it all by themselves.

The internet is a fantastic resource for anybody looking for the opportunity to shave a few bucks off their monthly budget. Well, actually, it can shave much more than a few bucks. Here is a tip on how to leverage the power of the internet to decrease your expenses and increase your savings!

Cut the Cable

Think about how much your monthly TV bill is. $50? $70? $100? $200!!? While it may not seem like a big deal to you to spend “just” $50 a month on cable, here’s something to think about. If you cut the cable and save even just $50 a month, then, if you invested it in the stock market, you would have $625 in one year, $3,871 in five years, and $113,024 in 30 years. Is your weekly fix of CSI:Miami worth $113,000 to you?

Am I suggesting you cut TV out of your life completely? No. I mean, you can, and that would probably be a good thing overall, but who wants to do that? I don’t. This is where the power of the internet steps in to save the day. There are great resources out there that let you watch your favorite shows online, FOR FREE. The major networks all post the latest episodes of most of their shows on their websites (CBS, ABC,NBC, etc.) Even some of the cable networks have free episodes on their websites (one such is HGTV, my wife’s personal favorite!) While these ‘”official” websites may not have EVERY show and EVERY episode, they are great resources and my family uses them regularly.

If you can’t find what you want to watch on official channel websites, don’t give up. Hulu is a great resource for finding literally millions of television show episodes. It divides the shows up by category, then you can simply browse by category until you find something that you like, or you can search for something specific. Another fantastic resource is Ovguide. This site searched many different video hosting websites for the show or movie you want to watch, then displays the results. A resource that I just recently stumbled upon is called Freetube. While I have not personally used Freetube very much yet, it seems to either feed a channel LIVE to your pc (which is way cool), or, if a live feed is not available, then it stores past footage and presents that to your pc. Just today I watched part of Get Smart on The Movie Channel off of Freetube. (be sure to turn on family friendly browsing when you go to the site; this makes it so that the adult channels do not ever appear as an option). There are many other options out there.

One thing to be wary of is a thing called Zango. Some websites that host video will want you to install Zango before they will allow you to access the content of their website. I would strongly encourage you to LEAVE any website that asks you to do this. Don’t click on anything except the ‘Back’ button on your browser. What Zango purports to do is essentially install a bug on your computer that allows them to track where you go and what you do on the internet. They use this information to present “helpful” and “relevant” advertisements directly to your internet browser window. Now, I am no tech-guru, but I smell a rat. Don’t ever ever do anything like this. There are so many legitimate and safe places to watch video online that there is no need to stay on a website that is even slightly questionable.

Using your TV

I know that computer monitors are generally not was easy to watch a show on as a TV, especially when many people want to watch at the same time. Well, there is a solution for that too. Most laptops have an s-video output that looks like this
You can get an s-video cable that will transfer the image on your computer screen to you TV screen. If your TV does not have an s-video input, then you can get cables that convert an s-video output to an RCA output. Last I saw, Radioshack had such a cable for $40, although I am sure that you can find it much cheaper other places. Cutting the cable not only saves you money, it also lets you watch what you want, when you want, wherever you want, and you can even do it on your existing TV.