Why is that we go through high school and even college, that teachers and professors don't talk about the Rule of 72? And when they do to teach it, they briefly go over it and say "its not important on the exam." That's great there's one less question on the exam because calculating it is so simple. But in real life, this can have a big impact on your view on savings accounts, CDs, and investments.
What is the Rule of 72? Rule of 72 is a mathematical formula that tells you how long it will take for your money to double given the interest rate. This formula was discovered by Albert Einstein, who is one of the most brilliant physicists genius in the entire history of civilization. Let's say the average yield or interest rate on a savings account is 3%. 72 divided by 3 = 24. If you put in $1000 now in the bank and never touch it again, it will take 24 years for your $1000 to become $2000. Stinky isn't it?
What if you put it into CDs? CD's have an average yield of 6%. 72 divided by 6 = 12. It will take 12 years for your $1000 to become $2000. A little bit better, but still a little slow.
What if you put into mutual funds and it historically earn a 12% rate of return in the past 25 years? 72 divided by 12 = 6. It will take 6 years for your $1000 to become $2000. How great is that?
Now you seen the various ways you can save your money, which one makes more sense to you? What interest rate or average rate return are you earning on your money? How many doubling periods do you have left until you retire?
"Compound interest is the most powerful force in the universe" -Albert Einstein
If you don't believe that, then take a look at this:
Let's say you open a Roth IRA and you invest $200/month into it. Lets say your IRA portfolio earns an average rate of 10%. If you begin investing at age 25 and you retire at age 60, you will have: $765,655. Let's say you retire at age 60 and you withdraw $4000/month from your IRA. By age 65, if your portfolio continues to earn 10%, you will have: $947,410. If you continue to invest $200/month instead of withdrawing $4000/month, you would of have: $1,275,355 at age 65.
Anyway, lets say you starting withdrawing $4000/month at age 60. If your IRA continues to earn an average rate of 10%, at age 75, you will have: $1.7 million! Even though you stop contributing at age 60 and started withdrawing $4000/month, your investments continue to grow.
Thursday, March 15, 2007
Wednesday, March 14, 2007
Objections to Term Insurance
Here are some of the things that many agents, financial planners, financial advisors or whoever is certified or licensed to talk about finance will say about term insurance. I'm not saying all are bad, just most of them are.
1) "The problem with term insurance, is that premiums will go up." That is true, but every insurance, not just in life, has rising costs. For example, doesn't your car insurance premiums rise over time? Doesn't your homeowner insurance premium go up? In cash value life policies, while the premiums remain level for life, the cash value is used to pay the rising cost. With term insurance, your premiums are low and level for certain period, which enables you to save your money elsewhere. When level term expires, most term policies are renewable without the need to provide proof of insurability. By buying term and keeping investments separate, you can change one without one affecting the other. For example, if you lower your coverage, would that slow down the growth in your investments? In cash value policies, when you lower your coverage, you slow down the growth in your cash value because less premiums are going toward it. If you stop investing, would your life insurance be affected? In cash value life insurance, you don't have the option to stop putting money into the cash value becaue your life insurance and savings are bundle together in one premium payment. If you cancel your life policy, do you pay surrender charges on the savings? In cash value life insurance you do, but in term insurance, your investments are not affected. Instead, you have more money to invest.
2) In response to above paragraph, someone said "But the premiums remain level in whole life and it never goes up." But the cost of having it does. As you get older, less and less of your premiums are going to the cash value and more toward the insurance payment. Premiums remain level, but not the cost.
3) "Life insurance companies loves to sell term insurance..." If that was true, then why only less than 2% of American families have it and 38% own some sort of cash value life insurance? The other 60% don't even have life insurance.
4) "... because less than 2% of term insurance are ever paid out." This is a myth and there is no data on this comment. The real truth is that less than 2% of Americans own term insurance. Anyway, do you know when a person going to die? How would this person know that term insurance rarely pays out? Maybe he/she think that term insurance rarely pays out because he/she never sold a term policy or maybe because he/she keep converting all the term policies to whole life insurance. Would you rather die with $100,000 whole life policy or a term policy of $500,000 coverage?
5) "Investing the difference is a scam." If investing was a scam, then what's the point of having a stock market? What's the point of having companies selling stocks? Why do bonds even exist?
6) "Insurance companies makes lots of profits by selling term insurance." Hmm, you either pay $1000/year for term insurance or pay $2000/year for whole life. How does that compute that life insurance companies makes lots of profits by selling term insurance? Why is that average face amount of whole life policies is only $100,000 and that term insurance is $275,000? The real truth is that life insurance companies makes lots of profits by selling cash value life insurance. You pay lots of premiums for low amount of coverage. Do you know that if you want to use your cash value, that you have to borrow it and pay 6-8% interest on it? Do you know that if you die someday, that the insurance company keeps your cash value? So which product is the life insurance company really making more money off of?
7) "If you invest the difference, you pay taxes on them. With my life insurance, you don't pay taxes on the savings." Of course you don't pay taxes on them because you are paying at a loss. Do you pay taxes on a loss? What is the loss? Its the difference between total premiums you pay in and the net cash surrender value. If there is a gain, then you will pay taxes on them when you withdraw the money. I guess this guy or girl doesn't know about IRA accounts or variable annuities either. If they did, they would of suggested of investing your money into these tax-deferred accounts instead of putting it in a life policy. I always try to open Roth IRA for every client I sit down with. Currently, not everyone can get a Roth IRA, so I open a Traditional IRA instead.
8) "Buying term is like renting an apartment. With whole life, you build equity just like as you pay your mortgage." Apples and oranges... this person is comparing an insurance product to a house. The truth is that the equity in your home is count as part of your asset. Life insurance does not count as part of your asset. If you die, all the "equity" in your life insurance is kept by the insurance company. The equity in your home will still be there because someone in your family will get ownership of the home, which is mostly likely to be your spouse and then your kids.
9) "Permanent life policies pays out dividends." Of course it does because you are over paying your premiums. For example, lets say you pay $1800/year in premiums, when it really cost only $1600 for that year. So they pay you a dividend of $200. You may take it in cash or re-invest into the cash value. I would take it in cash and put into a Roth IRA. Of course, I wouldn't own cash value life policies in the first place.
10) "Nobody invests the difference." If you are not securities license, of course you are not helping anyone invest the difference. I am and therefore I can help people invest the difference. All my clients invest the difference using dollar cost averaging and they are still doing it today. So don't say "nobody" because its really agents who can't help clients invest the difference because they don't have the proper license to do so and/or their company doesn't offer investments.
11) "What if you outlive the term? Then all your money spent on it was a waste." What if you don't? Do you know when you going to die? Would you rather leave behind a $100,000 cash value life policy or a $500,000 term policy? If you outlive the term, you didn't waste your money. In fact, its money well spent because the premiums were low and you had more flexibility to save your money elsewhere instead in a life insurance policy. Its like you buying car insurance and you never get into an accident. Is that a waste of money? No because you were protecting yourself in case something does happen.
12) "Buy term and invest the difference doesn't fit for everybody needs." Let me ask you this, who in the right mind would want to keep life insurance and savings together and then find out you can only get one back? Who would want to spend more on insurance coverage with a whole life or universal life versus spending less and maxing out the coverage needed with term insurance? Who would want to invest their money in a life insurance policy that has expense ratios above 3% versus getting 1% if they keep the investments outside of a life policy? Term insurance fits for everybody needs because people can buy the right amount of coverage for the lowest possible cost.
13) "Most people are not discipline enough to invest their money." That maybe true, but I teach my clients on why they should invest on a monthly basis. I teach them to pay them self first because the most important asset in their life is themselves. So I setup a systematic investment plan for them. They can invest as little as $25/month into their mutual fund. Most people don't add themselves as another bill and they really should. If you don't pay yourself first before paying others, the chance of you becoming financially independent or even wealthy will be very slim (unless you win the lottery or inherit large amount of money).
As you can see, if someone is trying to sell you that whole life, universal life, or variable life insurance as the "right" plan for you, its really the right plan for them because they earn lots of money by selling these products. They don't care about your finances. Why would they sell you a cash value life policy and you can only afford a small amount of coverage? Why would they recommend investing or saving money in a life policy rather in an IRA account or your 401k plan? Why is it good to bundle life insurance and savings together and that it only pays out one benefit?
I believe greed affects many people judgments and therefore, they make bad decisions. If people step back and think about what they are saying, does any of it make logical sense? They should put themselves in the client's shoes and ask, "What would I do if I were in his/her position?"
1) "The problem with term insurance, is that premiums will go up." That is true, but every insurance, not just in life, has rising costs. For example, doesn't your car insurance premiums rise over time? Doesn't your homeowner insurance premium go up? In cash value life policies, while the premiums remain level for life, the cash value is used to pay the rising cost. With term insurance, your premiums are low and level for certain period, which enables you to save your money elsewhere. When level term expires, most term policies are renewable without the need to provide proof of insurability. By buying term and keeping investments separate, you can change one without one affecting the other. For example, if you lower your coverage, would that slow down the growth in your investments? In cash value policies, when you lower your coverage, you slow down the growth in your cash value because less premiums are going toward it. If you stop investing, would your life insurance be affected? In cash value life insurance, you don't have the option to stop putting money into the cash value becaue your life insurance and savings are bundle together in one premium payment. If you cancel your life policy, do you pay surrender charges on the savings? In cash value life insurance you do, but in term insurance, your investments are not affected. Instead, you have more money to invest.
2) In response to above paragraph, someone said "But the premiums remain level in whole life and it never goes up." But the cost of having it does. As you get older, less and less of your premiums are going to the cash value and more toward the insurance payment. Premiums remain level, but not the cost.
3) "Life insurance companies loves to sell term insurance..." If that was true, then why only less than 2% of American families have it and 38% own some sort of cash value life insurance? The other 60% don't even have life insurance.
4) "... because less than 2% of term insurance are ever paid out." This is a myth and there is no data on this comment. The real truth is that less than 2% of Americans own term insurance. Anyway, do you know when a person going to die? How would this person know that term insurance rarely pays out? Maybe he/she think that term insurance rarely pays out because he/she never sold a term policy or maybe because he/she keep converting all the term policies to whole life insurance. Would you rather die with $100,000 whole life policy or a term policy of $500,000 coverage?
5) "Investing the difference is a scam." If investing was a scam, then what's the point of having a stock market? What's the point of having companies selling stocks? Why do bonds even exist?
6) "Insurance companies makes lots of profits by selling term insurance." Hmm, you either pay $1000/year for term insurance or pay $2000/year for whole life. How does that compute that life insurance companies makes lots of profits by selling term insurance? Why is that average face amount of whole life policies is only $100,000 and that term insurance is $275,000? The real truth is that life insurance companies makes lots of profits by selling cash value life insurance. You pay lots of premiums for low amount of coverage. Do you know that if you want to use your cash value, that you have to borrow it and pay 6-8% interest on it? Do you know that if you die someday, that the insurance company keeps your cash value? So which product is the life insurance company really making more money off of?
7) "If you invest the difference, you pay taxes on them. With my life insurance, you don't pay taxes on the savings." Of course you don't pay taxes on them because you are paying at a loss. Do you pay taxes on a loss? What is the loss? Its the difference between total premiums you pay in and the net cash surrender value. If there is a gain, then you will pay taxes on them when you withdraw the money. I guess this guy or girl doesn't know about IRA accounts or variable annuities either. If they did, they would of suggested of investing your money into these tax-deferred accounts instead of putting it in a life policy. I always try to open Roth IRA for every client I sit down with. Currently, not everyone can get a Roth IRA, so I open a Traditional IRA instead.
8) "Buying term is like renting an apartment. With whole life, you build equity just like as you pay your mortgage." Apples and oranges... this person is comparing an insurance product to a house. The truth is that the equity in your home is count as part of your asset. Life insurance does not count as part of your asset. If you die, all the "equity" in your life insurance is kept by the insurance company. The equity in your home will still be there because someone in your family will get ownership of the home, which is mostly likely to be your spouse and then your kids.
9) "Permanent life policies pays out dividends." Of course it does because you are over paying your premiums. For example, lets say you pay $1800/year in premiums, when it really cost only $1600 for that year. So they pay you a dividend of $200. You may take it in cash or re-invest into the cash value. I would take it in cash and put into a Roth IRA. Of course, I wouldn't own cash value life policies in the first place.
10) "Nobody invests the difference." If you are not securities license, of course you are not helping anyone invest the difference. I am and therefore I can help people invest the difference. All my clients invest the difference using dollar cost averaging and they are still doing it today. So don't say "nobody" because its really agents who can't help clients invest the difference because they don't have the proper license to do so and/or their company doesn't offer investments.
11) "What if you outlive the term? Then all your money spent on it was a waste." What if you don't? Do you know when you going to die? Would you rather leave behind a $100,000 cash value life policy or a $500,000 term policy? If you outlive the term, you didn't waste your money. In fact, its money well spent because the premiums were low and you had more flexibility to save your money elsewhere instead in a life insurance policy. Its like you buying car insurance and you never get into an accident. Is that a waste of money? No because you were protecting yourself in case something does happen.
12) "Buy term and invest the difference doesn't fit for everybody needs." Let me ask you this, who in the right mind would want to keep life insurance and savings together and then find out you can only get one back? Who would want to spend more on insurance coverage with a whole life or universal life versus spending less and maxing out the coverage needed with term insurance? Who would want to invest their money in a life insurance policy that has expense ratios above 3% versus getting 1% if they keep the investments outside of a life policy? Term insurance fits for everybody needs because people can buy the right amount of coverage for the lowest possible cost.
13) "Most people are not discipline enough to invest their money." That maybe true, but I teach my clients on why they should invest on a monthly basis. I teach them to pay them self first because the most important asset in their life is themselves. So I setup a systematic investment plan for them. They can invest as little as $25/month into their mutual fund. Most people don't add themselves as another bill and they really should. If you don't pay yourself first before paying others, the chance of you becoming financially independent or even wealthy will be very slim (unless you win the lottery or inherit large amount of money).
As you can see, if someone is trying to sell you that whole life, universal life, or variable life insurance as the "right" plan for you, its really the right plan for them because they earn lots of money by selling these products. They don't care about your finances. Why would they sell you a cash value life policy and you can only afford a small amount of coverage? Why would they recommend investing or saving money in a life policy rather in an IRA account or your 401k plan? Why is it good to bundle life insurance and savings together and that it only pays out one benefit?
I believe greed affects many people judgments and therefore, they make bad decisions. If people step back and think about what they are saying, does any of it make logical sense? They should put themselves in the client's shoes and ask, "What would I do if I were in his/her position?"
Tuesday, March 13, 2007
What your financial plan should have.
I believe everyone should have a financial game plan, but many don't have a clue on where to start. Hopefully this blog will help understand what your financial plan should include. I'm not sure how to draw a house in Google Blogger, so you have to follow these instructions to draw it.
1) Grab a blank piece of paper
2) Draw a large simple house (a vertical rectangle box with a triangle on top of it)
3) Now draw 3 horizontal lines, evenly spaced, in the rectangle box. Each of these boxes represent a floor of your financial house.
4) On floor one (which is the bottom floor), write, "DEBT"
5) On floor two, write, "Emergency Fund"
6) On floor three, write, "Retirement"
7) On floor four, write, "Education"
8) In the roof, write, "Will"
Now I'm going to explain why you should have each part included in your financial plan. The first step is to eliminate debt, which is floor one. Having debt will make you worry every day on when you going to pay it off. If you don't find a way to eliminate debt, you will be in debt for a very long time. I have found that Primerica Financial Services is one of the better companies that is good at tackling personal debt without any extra cost to the client.
Second step is having an emergency fund. An emergency fund is an easily liquidable asset that in case of an emergency, you can take money out. You should put in between 3-6 months of your income into an emergency fund. For example, if you were fired at work, where would you go to pay off your bills and be able to survive without income? Or if you become hospitalize and you can't work for awhile, where would you go to draw income from?
Third step is retirement. This should be the primary step that everybody should focus on. I believe there is no such thing as "saving too much money." But if you don't have anything or not much saved for retirement, you are going to be in deep trouble. Social security don't pay out much, pension plans are going extinct, and the government is going to make it very difficult for you to get help (because the government is in debt too). Where are you going to go to get money? From you kids or grandkids? They are more likely to have problems of their own. Do you want to put this huge burden on their shoulders as well? There's various retirement plans out there for all kinds of people from IRAs to Variable Annuities.
Forth step is setting up an education fund for your kids (if you have any). Before funding your kid's education, you should make sure that your own retirement plan is in order. Your kids will grow up and find ways to save money. Hopefully you will teach them the importance of saving. Anyway, there are several ways to fund for your kid's education. They are 529 plans, Coverdell, UGMA, US Government Bonds, and Certificates of Deposits.
Fifth step is having a Will. If you die tomorrow, who should get your assets? Who should take ownership of your home? If you don't have name a beneficiary, everything that doesn't have a name beneficiary will be held by the state and the state will decide on who should get what. This usually leads to family wars and your family will pay taxes on your estate. So you want to take care of this as soon as possible.
But if you look at your financial house, do you notice anything that is missing? What are all buildings built on top of? A foundation! Step 9: Draw a horizontal rectangle below floor one. Write: "Income Protection" in the foundation.
Without a foundation, your house will begin to sink or fall apart. In life, without having income protection (also known as life insurance), you are putting a high risk on your family that you are going to live for a very long time and that nothing is going to happen to you. But what if you do die unexpectedly, how would your family survive? Without life insurance, your spouse will first use the emergency fund. Soon that will disappear. Then your spouse will go either into the kid's college fund or the retirement plan. Eventually those will disappear until your spouse finds a new partner or your kids go to work to keep the family in the house. If not, the family will have to move in a cheaper home or rent an apartment. If you and/or your spouse don't have life insurance right now, then the entire financial house is resting on you and/or your spouse shoulders because both of you are providing income to the family (unless your spouse doesn't work, or you are not married, then the whole burden lies on you).
With life insurance, you are managing your risks. There are many types of life insurance out there and the ones that are commonly sold are whole life or universal life. I can give you many reasons why they are sold more, but I pretty much revealed the whole truth about cash value life insurance in this blog. With cash value life insurance, you can only buy what you can afford. That's why many families are under-insured. With term insurance, you can buy the right amount of coverage because premiums are low.
In every financial house (your financial plan), you should have life insurance to protect it. You should have a game plan to eliminate debt, open an emergency fund, save for retirement, save for kid's education, and complete a Will. This is what I do for every family I sit down with.
1) Grab a blank piece of paper
2) Draw a large simple house (a vertical rectangle box with a triangle on top of it)
3) Now draw 3 horizontal lines, evenly spaced, in the rectangle box. Each of these boxes represent a floor of your financial house.
4) On floor one (which is the bottom floor), write, "DEBT"
5) On floor two, write, "Emergency Fund"
6) On floor three, write, "Retirement"
7) On floor four, write, "Education"
8) In the roof, write, "Will"
Now I'm going to explain why you should have each part included in your financial plan. The first step is to eliminate debt, which is floor one. Having debt will make you worry every day on when you going to pay it off. If you don't find a way to eliminate debt, you will be in debt for a very long time. I have found that Primerica Financial Services is one of the better companies that is good at tackling personal debt without any extra cost to the client.
Second step is having an emergency fund. An emergency fund is an easily liquidable asset that in case of an emergency, you can take money out. You should put in between 3-6 months of your income into an emergency fund. For example, if you were fired at work, where would you go to pay off your bills and be able to survive without income? Or if you become hospitalize and you can't work for awhile, where would you go to draw income from?
Third step is retirement. This should be the primary step that everybody should focus on. I believe there is no such thing as "saving too much money." But if you don't have anything or not much saved for retirement, you are going to be in deep trouble. Social security don't pay out much, pension plans are going extinct, and the government is going to make it very difficult for you to get help (because the government is in debt too). Where are you going to go to get money? From you kids or grandkids? They are more likely to have problems of their own. Do you want to put this huge burden on their shoulders as well? There's various retirement plans out there for all kinds of people from IRAs to Variable Annuities.
Forth step is setting up an education fund for your kids (if you have any). Before funding your kid's education, you should make sure that your own retirement plan is in order. Your kids will grow up and find ways to save money. Hopefully you will teach them the importance of saving. Anyway, there are several ways to fund for your kid's education. They are 529 plans, Coverdell, UGMA, US Government Bonds, and Certificates of Deposits.
Fifth step is having a Will. If you die tomorrow, who should get your assets? Who should take ownership of your home? If you don't have name a beneficiary, everything that doesn't have a name beneficiary will be held by the state and the state will decide on who should get what. This usually leads to family wars and your family will pay taxes on your estate. So you want to take care of this as soon as possible.
But if you look at your financial house, do you notice anything that is missing? What are all buildings built on top of? A foundation! Step 9: Draw a horizontal rectangle below floor one. Write: "Income Protection" in the foundation.
Without a foundation, your house will begin to sink or fall apart. In life, without having income protection (also known as life insurance), you are putting a high risk on your family that you are going to live for a very long time and that nothing is going to happen to you. But what if you do die unexpectedly, how would your family survive? Without life insurance, your spouse will first use the emergency fund. Soon that will disappear. Then your spouse will go either into the kid's college fund or the retirement plan. Eventually those will disappear until your spouse finds a new partner or your kids go to work to keep the family in the house. If not, the family will have to move in a cheaper home or rent an apartment. If you and/or your spouse don't have life insurance right now, then the entire financial house is resting on you and/or your spouse shoulders because both of you are providing income to the family (unless your spouse doesn't work, or you are not married, then the whole burden lies on you).
With life insurance, you are managing your risks. There are many types of life insurance out there and the ones that are commonly sold are whole life or universal life. I can give you many reasons why they are sold more, but I pretty much revealed the whole truth about cash value life insurance in this blog. With cash value life insurance, you can only buy what you can afford. That's why many families are under-insured. With term insurance, you can buy the right amount of coverage because premiums are low.
In every financial house (your financial plan), you should have life insurance to protect it. You should have a game plan to eliminate debt, open an emergency fund, save for retirement, save for kid's education, and complete a Will. This is what I do for every family I sit down with.
Monday, March 12, 2007
Why Buy Term and Invest the Difference?
Why buying term and investing the difference makes more sense than cash value life insurance?
1) You can afford more protection for lower premiums in the beginning.
2) Most term policies contains provision to continue coverage until age 100.
3) Paying less premiums in the beginning allows you to free up money to save money elsewhere.
4) This enables you to find the right savings vehicle to meet your objective.
5) By keeping insurance and investments separate, you have more flexibility on how to spend your money. You can change your life insurance or your investments without either one of them affecting the other. For example lets say you pay $50/month for $500,000 policy and invest $50/month into a Roth IRA. You can lower your coverage to pay less premiums and invest more money or you can stop investing and get more coverage.
6) You control how and where your money is invested.
7) You maintain full access to your savings and investments.
8) If you die during the level term, your family gets the death benefit and all your savings and investments.
9) If you outlive the level term, you probably won't need as much coverage at this point because you are near retirement. The most logical choice would to pay less premiums and invest more money.
For most families, buying term and investing the difference is the best way to protect the family. Take a look at some of the real life examples below why term insurance is better.
1) Husband dies in a car accident. Prior to meeting him, he had no life insurance. My company gave him a $250,000 policy. His wife and his 2 kids now has $250,000.
2) Husband dies from a brain tumor. Prior to meeting him, he had $150,000 coverage. My company gave him $500,000 coverage. His wife and 4 kids can maintain the same life style, even though the husband is not there anymore.
3) Wife dies from cancer. Prior to meeting her, she had $50,000 coverage. My company gave her $150,000 coverage. Her husband and one child now has $150,000.
I can go on and on of the number of term policies my company paid out. I am thankful to be working at this company and I love that I can help and change people lives for the better. I'm not going to say which company I work at, but many of you can guess which company I represent.
1) You can afford more protection for lower premiums in the beginning.
2) Most term policies contains provision to continue coverage until age 100.
3) Paying less premiums in the beginning allows you to free up money to save money elsewhere.
4) This enables you to find the right savings vehicle to meet your objective.
5) By keeping insurance and investments separate, you have more flexibility on how to spend your money. You can change your life insurance or your investments without either one of them affecting the other. For example lets say you pay $50/month for $500,000 policy and invest $50/month into a Roth IRA. You can lower your coverage to pay less premiums and invest more money or you can stop investing and get more coverage.
6) You control how and where your money is invested.
7) You maintain full access to your savings and investments.
8) If you die during the level term, your family gets the death benefit and all your savings and investments.
9) If you outlive the level term, you probably won't need as much coverage at this point because you are near retirement. The most logical choice would to pay less premiums and invest more money.
For most families, buying term and investing the difference is the best way to protect the family. Take a look at some of the real life examples below why term insurance is better.
1) Husband dies in a car accident. Prior to meeting him, he had no life insurance. My company gave him a $250,000 policy. His wife and his 2 kids now has $250,000.
2) Husband dies from a brain tumor. Prior to meeting him, he had $150,000 coverage. My company gave him $500,000 coverage. His wife and 4 kids can maintain the same life style, even though the husband is not there anymore.
3) Wife dies from cancer. Prior to meeting her, she had $50,000 coverage. My company gave her $150,000 coverage. Her husband and one child now has $150,000.
I can go on and on of the number of term policies my company paid out. I am thankful to be working at this company and I love that I can help and change people lives for the better. I'm not going to say which company I work at, but many of you can guess which company I represent.
Wednesday, March 07, 2007
Investing tip: Dollar Cost Averaging
This is the best investment tip that you should definitely use and share with others when it comes to investing. Dollar Cost Averaging (DCA) is where you invest the same amount of money on a regular schedule, regardless of the price per share. My economic classes talk briefly about this concept but I was never able to see what good this concept is going to do for me. All they tested me on was to calculate some numbers or fill in the missing numbers.
But if you are an investor, you should pay careful attention on what I'm going to show you. Most clients I sit down with have $100 or more to save each month. They don't realize it, but they actually do when I do a budget worksheet for them. So, let’s say you invest $100/month.
MONTH 1, Price per share is $25, so you bought 4 shares.
MONTH 2, Price per share is $20, so you bought 5 shares.
MONTH 3, Price per share is $15, so you bought 6.67 shares.
MONTH 4, Price per share is $10, so you bought 10 shares.
MONTH 5, Price per share is $15, so you bought 6.67 shares.
MONTH 6, Price per share is $25, so you bought 4 shares.
Total shares you own by end of Month 6 will be: 36.34 shares.
The average price per share was ($25 + $20 + $15 + $10 + $15 + $20) divided by 6 is: $17.50
The average cost per share was ($600 divided by 36.34) is: $16.51. You just reduce your cost per share by almost $1 in a 6 month period!
If you were to invest the full $600 in the first month, you will have 24 shares with price per share is $25. With DCA you would of bought almost 12 more shares and reduce your cost per share by $7.50.
Dollar Cost Averaging doesn’t ensure you profits or protect you from short-term or long-term risks, but it does make you a disciplined investor. Most investors in the market don’t know how to invest. They pull out when the market crashes and then come back in when the market does well. There are three things an investor is concern with:
1) Risks, which is the potential that you can lose money,
2) Return, which is the potential you can earn money, and
3) Volatility, which is the day to day fluctuations.
Let’s say you pull out of the market in month 3 with a total of 15.67 shares at $15/share. You will get $235.05 check. Then you come back in Month 6 where price per share is $25 and you put the $235.05 back in the market, so you will now own 9.402 shares. You now own less shares and paying a higher cost per share too. So in reality, you are worse off. This is how many people invest their money and it’s a stupid investment strategy.
If you invested $1000 and you did nothing, you are not accepting any risks or return until you sell them. It’s really a mind-game and even the most discipline investors will be tempted to pull out the market when the stock market crashes. All I have to say if you are investing in the long run, keep where your money is and stay on course.
But if you are an investor, you should pay careful attention on what I'm going to show you. Most clients I sit down with have $100 or more to save each month. They don't realize it, but they actually do when I do a budget worksheet for them. So, let’s say you invest $100/month.
MONTH 1, Price per share is $25, so you bought 4 shares.
MONTH 2, Price per share is $20, so you bought 5 shares.
MONTH 3, Price per share is $15, so you bought 6.67 shares.
MONTH 4, Price per share is $10, so you bought 10 shares.
MONTH 5, Price per share is $15, so you bought 6.67 shares.
MONTH 6, Price per share is $25, so you bought 4 shares.
Total shares you own by end of Month 6 will be: 36.34 shares.
The average price per share was ($25 + $20 + $15 + $10 + $15 + $20) divided by 6 is: $17.50
The average cost per share was ($600 divided by 36.34) is: $16.51. You just reduce your cost per share by almost $1 in a 6 month period!
If you were to invest the full $600 in the first month, you will have 24 shares with price per share is $25. With DCA you would of bought almost 12 more shares and reduce your cost per share by $7.50.
Dollar Cost Averaging doesn’t ensure you profits or protect you from short-term or long-term risks, but it does make you a disciplined investor. Most investors in the market don’t know how to invest. They pull out when the market crashes and then come back in when the market does well. There are three things an investor is concern with:
1) Risks, which is the potential that you can lose money,
2) Return, which is the potential you can earn money, and
3) Volatility, which is the day to day fluctuations.
Let’s say you pull out of the market in month 3 with a total of 15.67 shares at $15/share. You will get $235.05 check. Then you come back in Month 6 where price per share is $25 and you put the $235.05 back in the market, so you will now own 9.402 shares. You now own less shares and paying a higher cost per share too. So in reality, you are worse off. This is how many people invest their money and it’s a stupid investment strategy.
If you invested $1000 and you did nothing, you are not accepting any risks or return until you sell them. It’s really a mind-game and even the most discipline investors will be tempted to pull out the market when the stock market crashes. All I have to say if you are investing in the long run, keep where your money is and stay on course.
Sunday, March 04, 2007
Load fund vs No-load fund
What is the main difference between loaded funds vs no load funds? One word: Commissions! There are two types of load funds you should know about:
1) Class A shares (front end load) usually has a sales charge of around 5% and expense ratio around 1%.
2) Class B shares (back end load) has no sales charge when you buy shares, but when you sell them during the first 5 years. If you redeem your shares in the first year, you will pay a 5% sales charge. In year 2 it drops to 4% and in year 3 it drops to 3% and so on. So after the 5th year, you pay no sales charge on redemption. However, Class B shares have higher expense ratio around 2%. Class B shares automatically become Class A shares in 8 years.
No-load funds has no sales charge, but usually have higher expenses. There is no service, no agent, no manager, so no one is getting paid. Since there is no manager, a no load fund will attempt to copy whatever the S&P 500 does. There are many load funds that can outperform the S&P and there are many that can't.
Are no-load funds always better than loaded funds? The answer is no. Neither one of them have any advantage over the other. Over time, the returns on a load fund and a no-load fund are about the same. However, if a load fund has a historical rate of return of 15% and the no-load fund of the same category has only 9%, then load fund is clearly the one you should pick. But if both load and the no load fund earn 10%, then a no-load fund is the better choice.
In summary, a load fund has a portfolio manager that does the research and find out what companies to invest in. A no-load fund will invest in steady companies (companies that been around forever) and will attempt to copy whatever the S&P 500 does. You really have to compare them in the same category to find out which one is better. For example, if you want high growth in your investments, you will pick mutual funds that is focus on generating high growth. Then you will compare whether a load fund or a no-load fund is better. You can only do this when you obtain a prospectus.
What should you look for in the prospectus?
1) What is it's investment objective?
2) Who manages the fund and how much experience does he/she have? Be careful of companies that advertise how the fund perform in its entire history.
3) Check the past performance over 3-year, 5-year, and 10-year period.
4) What is the expense ratio and management fees?
5) What is the turnover ratio?
1) Class A shares (front end load) usually has a sales charge of around 5% and expense ratio around 1%.
2) Class B shares (back end load) has no sales charge when you buy shares, but when you sell them during the first 5 years. If you redeem your shares in the first year, you will pay a 5% sales charge. In year 2 it drops to 4% and in year 3 it drops to 3% and so on. So after the 5th year, you pay no sales charge on redemption. However, Class B shares have higher expense ratio around 2%. Class B shares automatically become Class A shares in 8 years.
No-load funds has no sales charge, but usually have higher expenses. There is no service, no agent, no manager, so no one is getting paid. Since there is no manager, a no load fund will attempt to copy whatever the S&P 500 does. There are many load funds that can outperform the S&P and there are many that can't.
Are no-load funds always better than loaded funds? The answer is no. Neither one of them have any advantage over the other. Over time, the returns on a load fund and a no-load fund are about the same. However, if a load fund has a historical rate of return of 15% and the no-load fund of the same category has only 9%, then load fund is clearly the one you should pick. But if both load and the no load fund earn 10%, then a no-load fund is the better choice.
In summary, a load fund has a portfolio manager that does the research and find out what companies to invest in. A no-load fund will invest in steady companies (companies that been around forever) and will attempt to copy whatever the S&P 500 does. You really have to compare them in the same category to find out which one is better. For example, if you want high growth in your investments, you will pick mutual funds that is focus on generating high growth. Then you will compare whether a load fund or a no-load fund is better. You can only do this when you obtain a prospectus.
What should you look for in the prospectus?
1) What is it's investment objective?
2) Who manages the fund and how much experience does he/she have? Be careful of companies that advertise how the fund perform in its entire history.
3) Check the past performance over 3-year, 5-year, and 10-year period.
4) What is the expense ratio and management fees?
5) What is the turnover ratio?
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