The 1 bad, 1 neutral, and 1 good thing you can do with your money...
 

I have some friends... And it sometimes makes me sad...

Why?

These are people who haven't put aside any money for a rainy day.

When they get money, they spend it on the things they enjoy.

Don't get me wrong - they are really great people...

The problem comes... when the flow of money starts slowing down!

For example, one of my friends lost his job about a year ago. He just recently got another one. But during that year in which he didn't have a job, he was really struggling...

Another friend of mine got some inheritance. However, two years later, 90% of it is all gone. I won't go into details of what he did with it, but 90% was all wasted. He has nothing - literally nothing - to show for that 90%. (Fortunately, he did invest 10% of it, which will pay off for him in the long run, but he could have done much better.)

What could they have done better?

What it comes down to is a kind of financial "knowhow"...

Did you know that, when you get money, there are three things you can do with it?

You can save it, you can spend it, or you can invest it.

What does that mean?

Saving it means hanging on to it, not spending it, but not making any extra money with it either.

Spending it means spending the money in ways where it effectively "disappears."

One common way is buying things that will decrease in value. For example, if you win the lottery tomorrow and immediately go out and buy a new Alfa Romeo sports car... As soon as you drive it off the lot, your Alfa Romeo will start decreasing in value! If you try to sell it a few years later, you won't be able to get anything near what you paid for it. You will have lost that money!

Investing your money, on the other hand, means putting it somewhere where the money will grow.

Now, when people think of investing, they often think of stocks and real estate property. However, you can also invest in your own business.

For example, buying "chattel" and reselling it for a profit is a kind of investment (what Gordon Alexander calls "chatteling"). You can keep doing this, and grow your money...!

Are there other ways?

I'd say you can also "invest" it in education. If that education means you'll end up making more money in the end, I see that as a kind of financial investment, too...!

(I've easily "invested" tens of thousands of dollars over the years in my business education - through books, newsletters, courses, and so on... And in my opinion, it's paid off... :) )

Anyhow, i just wanted to share those thoughts... I hate to see people struggle unnecessarily, when those people don't have to, if they just looked after their existing money a little bit better...

What are you doing with your money?

Best wishes,

Dien

Re: The 1 bad, 1 neutral, and 1 good thing you can do with your money...
 

Dien,

As a person in the financial arena for years upon years, I will say:

1) your article is spot on
2) people don't think about a rainy day
3) every civilized country has a method for people to save that will insure said same people a living amount when they get old
4) many people think they know more about saving than they really know
5) advice in this field is all over the place. One of the worst pieces of advice I ever heard came out of the mouth of a syndicated financial guru. This is a guy with millions of followers. One of the best pieces of advice I ever heard came out of the mouth of a guy with no syndicated radio show. Who do you think the people will follow?
6) we need articles like your post to keep people thinking about their money
7) that rainy day you mentioned could be surviving a heart attack, stroke or cancer and not being able to work. Ouch!

OK, I'm off my soap box. Thanks for a money reminder.

Re: The 1 bad, 1 neutral, and 1 good thing you can do with your money...
 

What a tease. Come on, Tom. Regarding #5 what was the worst and best financial advice you've heard? :)

Re: The 1 bad, 1 neutral, and 1 good thing you can do with your money...
 

Hi Tom,

Thanks for sharing that, Tom!

I'll say, regarding my friend who got the inheritance... I didn't know about his inheritance till all this had happened, and he had already lost a big chunk of it. If I had known, I feel I could have probably helped steer him more in the right direction...! (He only started talking to me about it after most of the money was already gone...)

He hasn't had a lot of income his whole life, so I guess he never bothered to educate himself on what to do when you do have money to invest. Then, when he had it - he didn't know what to do with it!

Sadly, he seems a bit morose nowadays... I haven't really talked to him about it explicitly, but I think he knows he had an opportunity to "set himself up" financially for the rest of his life (if he had invested wisely)... and he blew it... I think he can probably see that in hindsight... I don't want to rub salt into open wounds...

On no. 5... I agree with "TommyBoy"... what's the good advice? What's the bad advice? Curious minds want to know...! :)

We'll all have "rainy days"... We'd all like to think we'll be healthy and energetic the rest of our lives. I've had my "scare" with diabetes, which has affected me... I seem to have it more or less under control now, but it took me a long time to figure out what seems to help me (diet-wise, supplement-wise, and so on)...

Can you survive (financially) if you get sick? That's a very scary question for many people...

The solution is to educate yourself... Be open-minded but also a bit "skeptical" of the "gurus"... Then take action, maybe small actions at first (while you test the waters), then, as you gain in experience and knowledge, dip your toe, then your whole foot in the water... :)

Best wishes,

Dien

Re: The 1 bad, 1 neutral, and 1 good thing you can do with your money...
 

I second this... I'd like to know too! :)

Best wishes,

Dien

Re: The 1 bad, 1 neutral, and 1 good thing you can do with your money...
 

Worst - Buy term and invest the difference

Best - Save for a rainy day

I'll let you guess who touts the worst but my mom told me the best.

Re: The 1 bad, 1 neutral, and 1 good thing you can do with your money...
 

Dien,

I answered the question on number 5 in the above post. Let me expand on that rainy day saving idea. Currently there is a product on the market that will let you save for a rainy day. Even if you employ no other method and if followed faithfully will accumulate quite a bit of cash for you when you reach 65, the age at which most of us have been trained to retire. This product is available, from what I understand, in almost all civilized countries.

Even when I show them the power of this product some people say no and walk away. They've bought the buy term and invest the difference parable in their mind.

Of course that's their right but these are the same folks who will scream their social security check isn't enough to live on and that the income inequality gap isn't fair. Yada, yada, yada.

We live in fantastic times. It is time to wake up and employ the solutions that already exist.

I have term insurance
 

No doubt there is a "financial literacy" problem and sometimes the right choice for a person isn't the best option but rather the best option for their discipline, resources and skill level.

I am able to live within my means, save for a rainy day, use tax favored investment vehicles (401k, 529, IRA, etc.) and non tax favored investments.

For me, insurance and investments are 2 different things and the insurance that makes sense for me is term life for a certain portion of my life (kids at home, wife and outstanding mortgage, etc).

I don't agree that "buy term and invest the difference" is the worst advice as a blanket statement but it is only good advice for a limited audience.

Rob Yaggie

Re: I have term insurance
 

Rob,

Thank you for the reply. I believe it is the worst advice because of the alternative that exists. I also can prove it is the worst advice that exists. However this isn't the place for me to prove it so I won't.

I noticed the programs you list. They are forever taxed programs once you begin withdrawing your money. The program I talk about is a never taxed program once you begin withdrawing your money. This program is also IRS approved so that isn't even an argument or consideration.

By the way, if you should suffer a heart attack, cancer or stroke and live and can't work or see your income diminish how will your investments and term policy help you? Better yet, how long will they be able to support you? My product will support you for life. You can't beat that. Hence buy term and invest the difference is the worst advice I know of.

I believe you should always arrange your finances in the manner that is best for you and your family. I am not arguing with you or trying to convince you how smart I am or get you to change your mind.

It is my opinion a look at alternatives that exist and are proven to be superior to what we've been told in the past should be examined. That's it.

The only constant thing in life is change. And, that is exactly what has happened in the financial world. The people who control what we invest in figured this out and are now on to this product. It has already made a big difference to quite a few people.

I also believe all advice is good advice for only a limited audience. I can also prove that.

Again, thank you for the reply.

Defining "Invest the difference"
 

Tom,

Thanks for your reply and I'm not arguing here either. There are many financial products out there and several (not all.... lol) have a valid use and audience. Maybe my issue with you classifying this as the worst advice could be differing definitions of "invest the difference". In my definition, anything not spent on the term insurance become available to the use in the rest of the plan (which could include an annuity or anything else you might be recommending). I just mentioned a few of my other choices (like company matched 401k) but not my entire financial plan (which I'm sure has some gaps as well).

So, how does term help me if I survive a heart attack? It doesn't because it is not designed to help in the least for that scenario and wasn't purchased to fill that gap. However, in an equally undesirable event (my death during a critical 20 year period of my income contribution to my dependents) it is an excellent affordable tool. This is just one of the many tools I use and doesn't mean I ignore the others.

Thanks,
Rob Yaggie

Re: Defining "Invest the difference"
 

I absolutely understand you do not ignore the others. That is completely in the realm of a sound investment strategy. My remarks are general in nature so I probably should have made that clear.

The invest the difference is almost always meant to put that money in mutual funds. I won't go into the disadvantages this mode carries as baggage. When I was a stock broker I was a hustling fool. I interviewed, eyeball to eyeball, about 2000 people. Of those 2K only 20 had an actual personal financial management program.

We were expected, if the client wanted life insurance, to sell them term and take the difference between a whole life (this was in the 80's) premium and their term premium and put it into company owned mutual funds. Today that mantra is used to put investors into the mutual funds that pay the advisor the highest commission.

I can also prove that by the way. This means the poor sap who followed this erroneous advice was screwed. Here's the problem with the supposed investing of that difference. People don't do it or they do it for a very short period of time.

That defeats the purpose. Soooo, since there exists a product that relieves them of rationalizing away their difference investing, I say it is best they use that.

Here's a real life example. $400 per month for a person age 34 would produce a tax free annual amount of a little over 40K for the rest of their life. They would be insured, enjoy tax deferred growth and tax free income.

Plus if they had that heart attack they would have approximately 400K tax free cash they could use to pay their bills, chase women or men and pay for their health care. All the while their money pot continues to grow.

Let's say they took my advice and started the program. Anything over that $400 is available for stock, bond, mutual fund, ETF, REIT, etc. investing. They've eliminated almost all market risk plus insured themselves against any catastrophic health occurrence.

I will say it again so I am not taken as a my way or the highway bloviator. Do what you believe is right for you and your family. Period. The only one responsible for you is you. Anything I have to say should be considered in the context of what you think is best.

And, because I'm that kind of guy, I will say buy term invest the difference is the worst advice I've ever heard :) .

Have a great day.

Tom