An Investment in Knowledge Pays the Best Interest…

“An investment in knowledge pays the best interest.”

Benjamin Franklin said this, not me. And it’s a great quote. Remember that Franklin needed money for printing presses, so he went back to England and set up his “Payday Loan” company and raked in the interest at 500% a week!  His buddies working at the printing press wanted to drink beer on Friday night and needed money.  So Ben loaned them enough to go out that night, if when paid they paid him back with interest. Read Benjamin Franklin’s Experiment with Compound Interest for more fascinating details about his venture. Within a couple of years he was able to purchase all the presses he needed to set up business in Philadelphia.  By the time he was 53, he retired from active labor.  Benjamin Franklin lived until he was 83 years old and died wealthy.

Of course we all know he signed the Declaration of Independence and was totally involved in crafting the U.S. Constitution.  His picture is printed on all our $100 bills.  But beyond all of that very important stuff, he was also a very disciplined and driven man who learned from a young age how to apply his knowledge to help build a fantastic future from which sprang much more than just a return on investment for him, but a legacy that has affected all of us as well.

Take Benjamin Franklin at his word and go to and see for yourself how investing in your own financial education can bring you a wonderful return on investment.  Here’s what you will learn that you can apply to your life immediately that will bring you short-term and long-term rewards:

  • How to get in control of your spending immediately, which will make it possible for you to find at least $100 you are wasting every month.
  • How to get out of ALL debt, including a mortgage, in 10 years or less. 
  • How to begin saving 1% of your income and work up to 10% of your income for the rest of your life.  And similarly, this knowledge will show you how to add at least $300,000 to your current retirement nest egg.

Learn How to Save First, Invest Later

Most often people are told to maximize their 401(k) first before doing anything else.  But I want to make a point that a person needs to be saving money into a simple interest-bearing savings account BEFORE they try to max-out their 401(k) investment account.


What usually happens when an emergency comes along and there is no savings is that credit cards are used. Sometimes people even cash out their  401(k)’s at a horrible cost with early withdrawal penalties and loss of principal. There is no point in dumping all your money in a 401(k) if you don’t have a liquid emergency savings fund you can tap into when you need it.

Savings means putting money where there is no risk.  If you place this savings into a mutual fund, such as those many people invest in through a 401(k), it is at risk of loss.  And if you place your savings into an IRA or 401(k), it is trapped with no liquidity. You cannot have immediate use of this money and therefore you have no control.  A 401(k) is an “investment” vehicle that includes a certain element of speculation and risk. Before you get into all that, at least learn how to put money away in a savings account for emergency purposes. You will build confidence as you do so. If a person cannot save money on a regular basis, they have no right to dump money into a non-liquid investment vehicle like a 401(k), in my experience.


Negotiating the Retirement “Red Zone”

The retirement “red zone” is the age bracket of 55 to 65.  It’s the last ten years before you plan to quit active work.  This period of time is critical to your retirement success.  If you lose money during this time, you may not have enough time to make up the losses.  If you think you have problems now, just make this fatal error in judgment and see how you feel then.

Let’s say you have an adequate amount of money for retirement, but five years before you retire, the value of your retirement account drops by 25 percent.  Will this loss keep you from reaching your retirement goal?  If so, make sure you place your investment in a safe place — a place not subject to market risk.  I repeat, at the five-year mark, if you have enough money to fund your entire retirement, take this money out of the market and put it somewhere safe!! Keep your money safe from market risk. As you move your money over to a safer place, could this mean you only get a small rate of return?  Probably.  But if your path to retirement income is adequate, why put it at risk?  RememberRiskGamewhat season of life you are in, the retirement planning season.  This is called the “autumn” of your life, not the “springtime.”  Don’t play with money that you may need in the winter season of your life… the time when you will need that money for a long-term care facility, for example.

My message is short and to the point.  Don’t risk your retirement money once you get within 10 years of quitting active work.  Don’t do it!  The risk/reward relationship is not good here.  Don’t gamble with your retirement money.

Now, let’s assume you are the other guy, the guy that doesn’t have near enough money to retire on.  You may be inclined to risk all the money you have to try to make up for lost time. The pressure you may feel at this point can be merciless.  However, I beg you, do not risk whatever you have in a retirement account.  Don’t do it!  Address this problem in other ways, including the following:

  • Rethink your retirement plan, including changing the age at which you will stop working.
  • Adjust how much income you will live on in retirement
  • Create a spending plan, if you do not have one, and figure out how you can get out of more debt, sooner based on tracking your spending according to that plan.
  • Look at available resources that you can use to fund retirement, including property you can rent out, money you could put into a small real estate investment, etc .

My experience after 45 years of helping people prepare for retirement is DO NOT RISK YOUR RETIREMENT NEST EGG, NO MATTER HOW BIG OR SMALL, ONCE YOU REACH THE RED ZONE.  Don’t do it! Resist all temptations to do so, or you will be sorry.  

To help make my point, I share a story of one of my clients I’ll call Thomas that will make you sick. Thomas had just enough money to retire.  In the back of his mind, he thought he could keep working if he had to, so he place 50 percent of his money into a risky investment and two years later lost it.  Then Thomas’ knees got arthritis in them and he was in excruciating pain every day, until he was forced to quit his job. He told me if his knees had not gone out on him, he would have been shutterstock_224050600okay.  Why did Thomas take that risk?  What extra amount of money might he have gotten out of this risky, last-minute adventure that would have been worth all this trouble?  Let’s say that Thomas’ risky investment had paid off.  In my experience, all it would have taught him was to keep taking more risks.  He would have kept taking risks at an age that he really couldn’t afford.

Here’s another story of risking retirement money:  Samuel, I’ll call him, had a good job and making good money.  He and his wife always wanted a bigger home on a larger piece of land.  At age 60 they sold their home and purchased their dream home twice the size of their old home. Financially speaking, as long as Samuel kept his job up and through age 67 they would have no problems. Unfortunately, Samuel’s employer fired half the staff and reduced his hours by 25 percent.  Right after this, in 2008, the U.S. economy tanked causing housing values to plummet, so much so that there was no equity left in Samuel’s new house.  His wife had to go to work to make enough money for the short-fall in income and they no longer had extra time to travel and do the things they loved.  They put their home up for sale, but could not sell it.  Today the value of their home has increased, but not back to any respectable level.

Place yourself into Samuel’s shoes for a minute.  How would you feel if you lost 43 percent of your retirement account, then your monthly income dropped by 25 percent, and there was no equity in your house but you had planned to retire in five years?  Now take that answer and ask yourself this question, “Was the bigger house worth it?” I have seen this kind of situation play out over and over again.

The red zone is a critical time where no financial mistakes should be made.  Don’t put your money at risk if you are now in the red zone, it just isn’t worth it!

Millennials Are Turning Away from Parents’ Poor Financial Example

Recently the CEO of Mass Mutual Life was interviewed about what he saw happening with young people in the work force.  He said they have become spooked and do not trust the stock market.  He went on to say that these younger people are saving more money than any other generation and not doing 401(k)s and mutual fund investing as much as their parents did.  They are watching their parents and are shocked by what has happened.

So what happened to them? Baby Boomers are turning age 65 at the rate of 10,000 a day!  They are unprepared for retirement, with a total of $60,000 of assets, according to the 2010 U.S. Census.  I repeat, $60,000 is all they have for retirement… despicable! When do you think an age 65 couple will die?  ANSWER:  Age 84 for the male and 87 for the female, on average.  Now go back to the $60,000 of total assets and ask how that will last 19 years, plus?  This fact is forcing us all to change the way we are doing things.

Now take health care and then think of this $60,000 of total assets, obviously it just won’t be enough to cover long-term care, which more than half the population over age 65 will need between age 65 and 85. Oh-h-h-h this hurts.

And here is a further national statistic for all people reaching age 65:  They only have an average of $13,000 of equity in their homes.  Now think back to this same and only $60,000 of assets at age 65 and ask yourself if another measly $13,000 is going to do you much good if you live 20 years beyond retirement age.

Sorry if I have depressed you, but if you’re age 50 or younger, now is the time to do something different than your parents did. Don’t wait until you’re 65 StockBrokerand find that you have no way to take care of yourself in your senior years. Take a hint from the Millennials, who are now starting to get really nervous about the same old status quo financial advice they’re hearing that has been passed around for decades with little results and determine to do something different with your money.  That something different should include the following, something you won’t hear much about from your standard popular, so-called financial “experts:”

  • Get spending under control while at the same time eliminating debt. This is only possible if you have a Spending Plan and a Debt Plan that you live simultaneously.
  • Save using the 60/20/20 Rule, which means that you not only have long-term savings and emergency savings, but you also save for emotional needs as well.
  • Get out of ALL debt, including your mortgage (which is considered bad debt) in under 10 years.
  • Learn how to pay the right amount of taxes at the right time.
  • Learn  how to create a predictable retirement based on more than just a herd mentality 401(k) or mutual fund. Think real estate, rental resources, small business ventures, life insurance, and annuities.

In my experience, it all comes down to spending decisions made during emotional times in our lives.  Learn to control your emotions and you have hope for a predictable future. Learn to think outside the box so you will have more to look forward to than your parents’ generation. To learn how to do this, call me: (801) 292-1099, ext. 2.

Would You Rather be Taxed on the “Seed” or the “Crop”?

Taxes have such a subtle, yet profound effect on our money.  That’s why it’s important to organize retirement funds based on how those funds will be taxed (Money Mastery Principle 8).  By doing so, it becomes easier to see how taxes will affect retirement money over time.  In addition, using calculating and forecasting tools can help project how much money will be available at retirement age and what percent will be subject to some kind of taxation.

For example, without the tools to play “what if” scenarios with your money, it may be easy to get caught up in popular retirement and savings programs that may actually end up costing you serious tax dollars when it comes time to retire.  Take 401(k) programs for shutterstock_261713222instance.  The argument for these plans is that when a person begins to withdraw funds at age 65, he or she will usually “be in a much lower tax bracket” than they were during their working years, so theoretically, they should pay much less in taxes.  But if you are applying sound financial management principles to your life, you should be making much more! At least that’s what I advise my clients…don’t settle for less as you get older, demand from yourself much more!

Bart Croxford, a CPA writing for the Salt Lake Tribune, spells out what may be closer to the truth about how 401(k)s and the like will actually be taxed upon reaching retirement:

I have never seen anyone who promotes tax-qualified plans [such as IRA or 401(k) plans] run the figures through retirement.  They run the figures to age 65…But in savings, as in sports, it’s the final score that counts, not the score at half-time or even after three quarters.  The real clincher…is the fact that with tax-qualified plans one must pay taxes on the entire amount taken at retirement, including the growth, which accounts for the largest portion by far.  Whereas on tax-free plans, one pays no taxes on the growth at all.  In other words, one can be taxed either on the seed or the crop.  With tax-qualified plans, one pays on the crop and on tax-free plans [such as a Roth IRA], one pays on the seed.  One does not receive the tax deduction now, but he or she receives a far greater benefit by not having to pay taxes on the amount received at retirement.  

Of course this does not mean you should automatically dismiss 401(k) programs, and I encourage you to take advantage of matching contributions your employer may make towards a fund.  However, keep in mind that a 401(k) is only one  of many ways you can save and plan for retirement. There are other methods for saving that have great tax advantages, depend less on the stock market, do not demand management and maintenance fees, and can be used at any time without penalty. To learn more about these passive income opportunities that can help you predict a happy and secure retirement, call me today: (888) 292-1099, ext. 1.

“Good Debt” vs. “Bad Debt”

Is there such a thing as “good” debt?  Absolutely.  What most people don’t understand, even those with a lot of financial knowledge, is that a mortgaged home in which you live is considered bad debt.

Many people do not like this answer.  They usually respond with, “Yes, but my home is an appreciating asset, how can it be considered bad debt?”

Well, let’s first define the difference.

Good debt:  Debt that makes you money.

Bad debt:  Debt that costs you money.

“Yes, well, my home is making me money, because it’s appreciating in value,” is usually the response I get when I define the two to my clients.

Here’s the problem:  Until the “dead equity” is harvested through the sale of your home, or the money is borrowed out and put to work, the equity just sits there (this is why it’s called “dead equity”). Your house is not making you any money.  You cannot take the equity out to invest in other money-making ventures.   Yes, your home is appreciating in value, but it’s not available for you RIGHT NOW to spend.  In the meantime, you must pay taxes on the home, do maintenance, pay interest, do improvements, etc. etc.

If the house can be converted to include a basement apartment, for example, or some other legal revenue-generating resource, then arguably a mortgaged home in which you live could be considered something other than bad debt.  But not until.


Your Home is Your Largest Lifetime Expense

The point here is that for most people, their home is their largest shutterstock_250088392lifetime EXPENSE (sometimes incorrectly referred to as an investment).  Assuming that one day a homeowner wants to live in a house that is paid for, the equity becomes a comfort but is still not an asset that can be used to make more money and to increase cash surplus until it is sold. 

For a home mortgage to be considered good debt, it would have to be a house in which you do not live.  Many financially literate people will get a mortgage for such homes, fix them up in a fairly short amount of time, and resell them at a higher price.  Thus, they pay off the mortgage quickly and make a return on their investment in a short amount of time and this increase can then be used to purchase more properties or invested elsewhere to fund retirement or provide more cash flow for future projects.

Many executives who have been less than thrilled with how their deferred tax retirement plans, such as 401(k)s and IRAs, have performed in the market over the last several years are beginning to see the merits of building up retirement through real estate investing.  With the housing market such as it is these days, in many parts of the country, several good properties can be had at a much lower price than they once sold for, making it possible to purchase properties, get them ready to sell, or fix them up to rent out for a guaranteed monthly income.

The financially savvy are those who live in homes that are entirely paid for and only have short-term mortgages for homes they rent out to others.  They are sure to pay off the mortgage quickly using the monthly rent money they collect from their tenants.


Mortgage = “Death Grip”

shutterstock_43047007Remember, “mortgage” means “death grip” in Latin.  That’s why we advise our clients to quickly pay off their 30-year mortgages (bad debt) in 9 years or less using Power Down principles (learn more here).

If you do not have a mortgage on the home in which you live, congratulations!  Now, have you considered what you might do with all the interest expense you are saving by having paid off your house? If you haven’t considered using some of that saved money to get into some “good” debt for a while to help you make even more money, now is the time to explore that possibility.  Call me directly at (801) 292-1099 ext. 1 to discuss.

The 401(k) Test is a Failure…

The 401(k) was started in the early 70’s as a test, against the long-standing insurance industry’s pension funds management system. With pension plans getting harder and harder to pay out, employees were being advised that they would need to start funding their own retirement accounts — of course Wall Street wanted a piece of the action and thus the 401(k) was born.  Allow me to make some observations based on my 45 years of retirement planning experience about how well that 401(k) test has done.

Observation #1: Human resources counted on to help employees with retirement planning using new programs but this never happened. In the 1970s as pensions became harder and harder to fund, employers were forced to cut costs and hoped HR people would council with employees about their retirement options. Unfortunately this guidance has never really hapFundingpened.

Observation #2: Employees are only taking advantage of the employer’s match 24 percent of the time.  Statistics show that $24 billion in matching funds for 401(k)s is going unclaimed every year.  This is a huge amount of money that could help the average worker have a better retirement but the opportunities of the 401(k) program have obviously not caught on in the workplace as much as had been hoped with the program was put in place.

Observation #3: Only 10 percent of all employees have stayed on top of any portion of investment choices in the last eight years.  During this time the run-up in the market should have given people a reason to re-balance their funds. When 2008 hit hard, uneducated employees chased the market all the way down selling at the bottom.  Many got so discouraged as to never again be a part of a 401(k) plan again.

Observation #4: Mutual fund companies enjoyed large fees with no accountability.  Plan administrators rebated costs back to fund managers in terms of “soft dollars” (or in other words, paying for travel and entertainment expenses supposedly related to placing investments). These were never reported to anyone for any reason.  If a mutual fund employer can get travel expenses paid for travel needs of his staff members, they are delighted.

Observation #5: The value of the 401(k) approach is in question.  Results speak volumes! Years later, few employees have adequate retirement accounts, and they are living longer that ever before.  Our recent 2010 census report shows the average person reaching retirement age has less that $60,000 of total assets and this is after a lifetime of work and making an average of $52,000 a year.  So $2 million goes through our hands and we have kept only $60,000 to use for the next 20+ years of retirement?  To me this says the 401(k) experiment has failed.

Contrast all this to what workers experienced prior to 1970.  No market risk ever,  because insurance companies guaranteed all the funds.  Of course this meant employees received a boring rate of return, but they also received a retirement income they could not outlive based on a formula, like the number of years worked and a percent of salary.  The employee never had to study investment options and funds were guaranteed so the pension administrator didn’t need to be an investment professional.


Balancing Statistics

Here are some balancing statistics to compare.

  • The average worker pre-1970 did not have a college education.  They worked for one company their entire working life, receiving a gold watch after 40 years of service. Those were the good old days.
  • The average worker today will have six careers during their working life…six careers, not six employers. The number of people who employ them may be double that! As a result, the 401(k)  experiment came along and each and every employee now had to become their own investment adviser (even though they didn’t know that’s what they would have to do).
  • Workers have never have realized, even up to and including today, that they must be totally in charge of their retirement income.  But as I have mentioned in previous posts, even though they are expected to handle all this playing of the stock market, they don’t actually get to do this. It is done by a fund manager, who will often mismanage funds and tack on hidden fees.
  • The knowledge that they were supposed to be playing the market and managing their money all these years has come as a big shock to many Baby Boomers as they have begun to reach retirement age and as they realize they haven’t made much in the 401(k)/IRA game. The Census report for 2015 proves this point as an average 65-year-old has less than $60,000 of total assets to show after a lifetime of work.

In future posts I will discuss HOW to change this dreadful situation by learning alternative methods for building retirement.