Inflation: devastating or full of opportunity. Which do you want?

May 25, 2012

Banks lending again? What does that mean for you and your money? More than you may think.

Did you notice there are some banks that have begun to lift their tight lending requirements? For example, Key Bank here in Denver is now offering 100% financing again. So, what’s the big deal? Before we take a look at what this means, let’s ask a few questions:

  • Have there been any bad times before in the history of the world financially? Of course.
  • During those bad times, even the Great Depression, were there any people who made money? Of course.
  • Was it the people who planned and prepared or people who just let stuff happen to them that were most successful? Obviously those who planned.
  • So which one do you want to be and when do you want to get started?
  • If you could truly put yourself in a position to take advantage of the opportunities you have to earn your family’s financial independence even in bad times, then shouldn’t you be thinking the current economic situation is an opportunity and not a “bad thing”?

Inflation is going to do some real damage to our money if we’re not prepared. Stop and think about this, if you had $1,000,000 and you lost $200,000, you’re down to $800k and that money just stays the same. If we have 7% inflation that $800k is only going to buy $400k of retirement, or $400,000 of goods and services a decade from now.

  • What’s your strategy to make sure that you don’t get hurt by this inflation?
  • More importantly, are there any strategies available that would help you actually take advantage of that inflation to your benefit?

There are strategies that have been implemented for over a century.

Now, let’s get back to the banks…like what Key Bank is doing. The banking system received an unbelievable amount of [printed] money (inflation Step #1) that our government created when TARP was passed. We’ve discussed before but do you remember Step #2 that is required for inflation to take hold? Step #2, the printed money has to be circulated. You starting to put this together?

  • Did the banks circulate those monies initially? No they didn’t, at least not very much of it.
  • Even though they didn’t circulate a lot have we experienced some inflation because of those funds? Absolutely, all you have to do is go buy a gallon of milk today to see it first-hand.

Here’s the bigger problem, banks are beginning to circulate more of that money (i.e. Key Bank offering 100% financing again!). This will have a huge impact over the course of the next decade. Huge!

  • What happens to interest rates when inflation begins to roar? They go up. Remember the early 80’s after the inflationary pressures from the late 70’s?
Historical rates of great opportunity
If you don’t remember what interest rates were at that time then take a look at this graph. Opportunity? You better believe it but only if you were in a position to take advantage of it. What if all your money was in your house (equity)? Look at this graph. In 1982 would you have borrowed money at 16.08% in order to earn 15.12% for one year? Of course not.

There are always those who plan and those who do not. Over the next decade and beyond, you have the opportunity to take advantage of these opportunities but it requires one very important characteristic.

  • You MUST have access to capital, more specifically, guaranteed access to capital no matter the situation with the ability to collateralize those funds and earn a spread in a GUARANTEED and PREDICTABLE environment!
If inflation was raging right now and guaranteed rates, like CDs, were flying high, are you in a position to take advantage of it or are you currently positioned to be hurt by it? It’s a choice, not a matter of chance.
Since I’m on a roll, here’s some more questions for you
I love questions so here are a few more; however, these questions are designed for you to ask other advisors who want to invest your money. Those advisors MUST be able to provide an answer for each one these and we challenge you to ask them because, after all, it’s YOUR money and YOUR future.
  • What are you doing to do to make sure I don’t lose any money? What’s your strategy?
  • If I do lose, what’s your strategy to make back any money lost to get me back ahead of the game? What are your recommendations?
  • What impact are taxes going to have on all of this and could taxes prevent me from having a successful outcome?
  • Do you believe taxes will be higher in the future? If so, please answer the third bullet point again.
  • What strategy is there in place to keep taxes off my back going forward?
  • If you are recommending my money be put in a taxable position then please explain to me the specific reason why (especially if you believe taxes will be higher in the future) and the exit strategy to minimize those taxes in the future.
  • How can I take advantage of the pressures caused by inflation with your strategy?
  • What impact will inflation have on your strategy?
  • What is the impact of fees over time to the performance of your strategy? How can I get rid of or minimize those fees?

I hope it’s obvious by now but we have an answer, and a specific strategy, for each and every one of those questions.

You better be able to address each and every one of those. If not, then you’ll simply be one of many who didn’t plan…again, it’s not a matter of chance but instead a matter of choice.

We’d be happy to show you.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook

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Owning A Home: The Most Misunderstood American Dream #4

November 5, 2010

“A large down-payment will save you more money on your mortgage over time than a small down-payment.”


This one is long…most likely will be the longest in this series but it’s worth it. This topic cannot be “glossed” over if a paradigm shift in your thinking is to occur.  I heard recently,

“Have you probed your paradigm lately?”

Thought that was funny and yet so great of a question. Let’s face it, even the Bible tells us to ensure those who teach the Word are in fact teaching accurately…basically, don’t take anyone’s word for it.  We have to stay diligent in our learning or we can simply become dead in our thinking. Or worse yet, a blind follower of that which is not true. Case in point here with Dave’s mortgage advice.

YOU OR THE BANK


In the previous post, we discussed a basic financial truth: you finance EVERYTHING you buy.  This happens because you either keep your cash and borrow thus paying interest (finance) or you use your cash to purchase (Dave Ramsey’s method) and thereby lose interest you could have earned on that money going forward (lost opportunity costs – aka a finance expense).

So it begs the following two questions:

  1. Which of these two situations will cause the least amount of wealth transfer for you personally?
  2. Which option makes the most money for the bank?

I’ve yet to meet an individual who intentionally desires to transfer large amounts of money away.  Also, I do not know one single person who wishes to make financial decisions that benefit the bank the most.  Unfortunately, very smart and well-minded individuals do this everyday…and the mortgage is just the tip of the iceberg.

So, will a large down-payment save you more money on your mortgage over time than a small down-payment?

Yes or No?

ROCKY ROAD ICE CREAM and INSULIN


If you said “Yes”…you’re wrong. Remember, it’s NOT my opinion but rather it’s the MATH that proves it wrong.  Unfortunately, Dave Ramsey’s advice, compared to that which is mathematically true, is similar to the comparison of Rocky Road Ice Cream and Insulin.

Dave is saying that Rocky Road Ice Cream is the best (Subjective Opinion – you see, I think Mint Chocolate Chip is the best) yet he’s presenting it as an Objective Truth.  His teaching on this (make a large down payment to save you money) is only backed up by his personal attitude and feelings.  It’s like Dave saying that Rocky Road Ice Cream is medicine to help the diabetic.  That’s just false. Insulin is the medicine that helps the diabetic (Objective Truth – doesn’t matter if you like it or not).

When we present our opinion as an objective truth we set ourselves up to be proven wrong…that’s what Dave has done.

Dave can claim all day that the above statement from our quiz is True but it’s not.  He’s giving you ice cream to heal your diabetes (your financial plan).  We give you Insulin.

So, if something you thought to be true turned out not to be, when would you want to know about it?

Right away!

If you believe that a large down-payment saves you money then logic would follow that you feel the best down-payment is paying cash in order to pay no interest on a mortgage.  So, if “cash” is the best down-payment, then let’s take a look.

EQUITY HAS NO RATE-OF-RETURN


First, you have to understand that equity has no rate-of-return.  A down-payment, or paying cash for a home, is like putting money in a tin can and burying it in the back yard.  The day you sell the home you get to dig the can up and blow off the dust.  Since a home appreciates or depreciates the same if it is financed 100% or is free-and-clear, makes the cost of having our money tied up in the house something we should consider.

As a matter of fact, every dollar you pay to equity actually decreases in value each year due to inflation.  If you put $10,000 towards your equity this year that same $10,000 is available to you in the future (assuming of course the bank allowed you access or you sold the home), but, at that future date it has less buying power because of the inflation factor.  Yes your home may have appreciated but it would have appreciated anyway whether you put the extra $10,000 towards equity or not.  Now, most “wise” mortgage Ramsey followers will say “No, what I pay in principle DOES have a return because I’m paying less in interest.”  Not so fast.  Keep reading.

$31,693,128…now that’s a MISTAKE Dave!


Recently, some news came out about Dave Ramsey’s new house. I contacted Peter who heads up the blog I read about Ramsey (and just linked to) and I sent him a quick video on the math for Dave’s very own purchase.  This video is personalized for Peter but go ahead and take a look of Dave’s HUGE mistake.  If you recall earlier, in my first mortgage post…this is where you either start to get a bigger box or you choose to keep following an opinion because it “feels” good.

Banks aren’t in the business to make me “feel good”.  They’re in the business to make money from my money…period!

Let’s recap the video:

Dave has $4.9 million to buy his home. He decides to pay cash.  What Dave must understand is that it costs him the same amount of money to live in the home whether he finances it or not.  How’s that possible? Well, with math…that’s the whole point.  Remember, this is Insulin not Rocky Road Ice Cream.

If he could have invested that $4.9 million at 5% he would have a balance of $21,891,947 after 30 years.  If he financed $4.9 million at 5% he’d have a monthly payment of $26,304.  If that $26,304 is going to the bank and not being invested at 5% then the principle and interest PLUS the lost opportunity costs (not able to invest those payments if they’re going to the mortgage) equal $21,891,947.  They are identical.

Now, you Ramsey followers are told, and very foolishly by the way, that if you put your money in a “good growth mutual fund” you can average 8-12%.

Unfortunately, his position here is even wrong because the average rate-of-return means nothing…only the actual rate-of-return is what you should concern yourself with regarding your money.  Watch this video of us explaining this very thing.

So, if Dave took his own advice, because he certainly claims that over the “long haul” you can in fact average 8-12% so it would only make sense that he could also, then his $4.9 million could have been invested at these rates.  Let’s take the 8% and be nice (keep in mind, you have to take the Expense Ratio and 12b1 fees into this as well so you can typically add another 1 -1.25% on top of this “average”).  If he invested the $4.9 at 8% in 30 years his account would be $53,585,075.

Wait, you mean, if he took a mortgage at 5% it would cost him $21,891,947 (far more that what he even claims because he only takes the principle and interest into consideration we add the lost opportunity costs because let’s face it, he’s making a mortgage payment and that payment can’t be saved anymore) and if he took his own investing advice that $4.9 million could become $53,585,075? Yep.  Ummm…that’s a $31,693,128 difference!   No small change here folks.

If he can’t sell that home in 30 years for $53,585,000 then Dave Ramsey made a minor financial error. But there’s more.

BEGS THE QUESTION DAVE!


A lady on the blog I mentioned above made this comment to me,

“But Kelly you are not taking the risk factor into this.  He could lose everything.” (not an exact quote)

She’s right; however, does Dave ever say that statement concerning his recommendations?  Does he ever say that if you invest in a “good growth mutual fund” that has a track record of at least five years that you could lose everything?  Nope.  As a matter of fact, all of his calculations assume that the 10-12% WILL in fact happen (by the way, feel free to send me any mutual fund that you think would make Dave happy and I’ll break down the ACTUAL rate-of-return for you).

Take me up on that last offer!

Even though he believes that it WILL happen, let’s say that he could in fact lose everything (which he can) and chose to NOT take on the risk to ensure he wasn’t under risk of foreclosure if the “Fit-Hit-The-Shan”.  Let’s break it down.

As a matter of fact, that’s exactly what he recommends (and wisely too):

“You’ve compared a zero risk investment [free and clear home] with a risk investment [investing in mutual funds] , and you don’t do that.”

He’s right but that does beg the question: Dave, can we take a zero risk investment with a zero risk investment? Maybe we’d want to do that if we could.

What would it look like, assuming he decides to go with his own recommendation here and take no risk, if he chose something that has guarantees at a measly 5%?   Remember, this account CANNOT lose so it’s an absolute certainty that the 5% will happen.  Well, we’ve already proved earlier that investing the lump sum at 5% and paying a mortgage at 5% would come out the same.  So what are we missing?

Any guesses?  His tax deduction. You see, this new home of his is a primary residence.  Let’s be nice and say he’s at a 35% tax bracket.  This changes his GROSS rate of 5% to a NET rate of 3.25% after the tax break.  Now, once we consider the mortgage payments at 3.25% that we can’t invest since they’re going to the bank (again, opportunity costs), it’s costing him $12,973,610…no longer the $21 million figure.

His puny, wimpy, guaranteed account earned him $21,891,947 and his mortgage cost him $12,973,610.  A difference of $8,918,337! With how much risk?  COME ON, with how much risk!?

NONE!  It was all guaranteed.

Who had control of the money?  HE DID!

What happens if values plummet?  THE BANK FREAKS OUT NOT DAVE!

What happens if his income stream completely dries up?  HE’S LIQUID!

Dave’s all about emergency funds so what happens in case of emergency?  HE HAS THE MONEY NOT THE BANK!

What happens if he comes across an investment opportunity?  HE HAS LIQUIDITY AS OPPOSED TO EQUITY!

Here’s two bonus questions:

What if the account where he has this money has no penalties to access?

What if this account can be used later tax-free?

Answer me this: do you think that banks have a faulty model of making money?

I mean that seriously.  Do you?  Can you literally “look me in the eye” and say that the way banks make money is ineffective?

Of course you can’t. Yet you then discredit the same model when it’s presented on a personal level.  Maybe not you…but Dave sure does!  You see, in this example Dave did exactly what a bank does:

  1. He borrowed money with a low cost (3.25%). (He’s all about getting a deal)
  2. He used his money in a guaranteed and predictable environment (at 5%) to earn a spread. (Remember, he said no risk)
  3. His mortgage is fixed so it will NEVER go up or cost him more and
  4. His earnings are FIXED because it’s in a guaranteed environment.

No matter what happens he wins. He created a banking environment for himself because both of these two financial tools were guaranteed to happen.

REMEMBER…YOU’RE A FINANCIAL IDIOT!


You see, I just about exploded when Dave’s right-hand man (I won’t use his name or title because he is an old friend of mine from church), told me (after seeing this math for himself) that “80% of our clients Kelly are financial idiots”. Honestly, that pissed me off…in a big way.  I asked him, “Then why are you following his advice?”  He had no answer.

You’re not idiots. You’re just being served Rocky Road Ice Cream for your diabetes.  It’s time for some Insulin.

Next up, the math behind his bogus advice about 15-year mortgages versus 30-year mortgages.  The banks would love for you to choose a 15-year mortgage…that’s the problem!

You don’t want to miss this one.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


Taxes (Defining Moment #2) Part I

September 27, 2010

I’ve spent some time over the last few posts about, what we call, Defining Moment #1.  This post dicusses Defining Moment #2 but lets first start with a quote from the former Comptroller General of the United States, David Walker:

“We are heading for a future where we will have to double federal taxes or cut federal spending by 60%”.

The rapidly changing demographics of our country are going to impact everyone’s lives in our nation. Simply believing we are a great nation will not continue to make us one.  To compete and survive we will have to change and that change may not come easy.

Alan Greenspan said “As a nation we have already made promises to coming generations of retirees that we will be unable to fulfill.” Keep in mind, he said this in 2004…well before the last two years of continued spending.

That’s why Defining Moment #2 is critical to understand, it states that “this may be the lowest tax bracket you will ever be in.”

As you are reading this post, the U.S. Federal Government continues to spend more than it takes in from tax revenues. The debt in our nation is growing over one million dollars an hour. And it keeps going up. What does that mean to every person in the United States? Well, in order to pay for this government burden every citizen in the country would have to pay about $174,000 or for every household $664,000 (as of September 2010).

The purpose of telling you this is not to scare you but rather to make you aware that all the conditions are in place for everyone’s taxes to increase.  We know this isn’t new information for you but you can’t just take this for granted. You must understand the importance of planning for not only the demographic changes but the serious problem our government has created for itself and exactly what it means to you.

Traditional thinking professionals may be willing to avoid this problem that is out there right now until it becomes a crisis for you.  For example, are you still being told to defer your taxes now by contributing to a qualified plan that will be most assuredly taxed at a higher rate later?  Times are changing and if you’re being told to just wait it out and see what happens, it is simply going to be too late to react to the problem.

Future taxes that you pay will be the largest transfers of your money that you will ever make. The size and amount of future taxes has not yet been determined but we do know that government debt will be a large determining factor.

You must not only understand this Defining Moment that this may be the lowest tax bracket you will ever be in but you also need to act upon that knowledge.

What if you in fact could be insulated against future tax increases and use your money tax free when you need it?  Would it make sense for you to do a little homework for yourself?  Truly, how much is that worth to you?

If you don’t have a plan to counter this defining moment then please understand, the government does.

We’ll continue to do our part in providing you as much free information and analysis as you need.  But, you need to step up to the plate and ask some questions.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


Velocity of Money Part 3

September 18, 2010

We hear every day, “I thought that I should pay extra principle to lower my interest expense?”

First, the banks are in a win-win situation no matter what you do. You see, if you don’t make additional payments because you understand that you are giving the bank control of more money, then they will just collect more interest over time.

If you do make additional payments the bank doesn’t just sit on it. Remember, they’ve mastered Defining Moment #1 and the velocity of money.  That additional money from you is used and lent back out to start the process all over again.

What would you rather do, follow traditional planning and make all attempts to have your $10 earn $1 more?  Keep in mind, you have to deal with all the other flexible factors that we discuss in our Why Traditional Planning Fails To Reach Its Goals (future posts).  Or, function more like a bank and have your $10 do the work of $50?

Yeah, I think the bank model works quite well. So what do we do? Well, here’s an important question: do you believe banks have your best interests at heart?  Most people say no. If you said “no”, then have you ever asked yourself why banks offer a lower rate on a 15 year mortgage than a 30 year?  If they don’t have your best interest at heart and they are giving you an incentive to go with a particular product, then maybe we should do a little math.

They understand perfectly AND IMPLEMENT the Defining Moment that money will never be worth more than it is today? They want as much of your money as soon as possible (ie a 15 year mortgage) in order to keep it moving, working, and earning for them.

They’ll even entice us by offering gifts for our deposits and they promote like crazy just how convenient it is to deposit our money.  You’ve seen the recent TVcommercials about the new technology for ATM deposits.  Isn’t it ironic that they also make us rely on credit scores which are a directly determined by just how quickly we pay them back?

If we apply this defining moment to our everyday lives the lesson becomes more and more apparent.   By taking a look at the country’s savings rate, there’s no doubt that our ability to hang on to today’s money, the money that has the most buying power, is dwindling.

In reality more of our dollars are going to someone else in the form of debt payments, taxes, and other financial transfers more than it’s working for us. The ability for Americans to save “today’s” dollars has all but diminished.

The traditional approach must change, and the sooner the better. What is really needed is more financial literacy.  It is so important to understand that “your money will never be worth more than it is today.” And equally important, how it may impact your thought process in your everyday life.

If you do, then maybe you’ll question the various strategies recommended to give your money as soon as possible to other entities.  Even if it means incurring some more interest expense.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


The Velocity of Money #2

September 13, 2010

Do you remember the scene in the movie “Miracle” about the 1980 Olympic Hockey Team when coach Herb Brooks told the young men that today was NOT going to be the day that the Russian team would win?  It was a defining moment for that team.  Well, we talk about financial Defining Moments.

I don’t care how successful you are, if you do not understand how these financial Defining Moments effect you as you accumulate, preserve, and certainly as you distribute your wealth…well, then today they’ll probably beat you.

Defining Moment #1 is, “your money will never be worth more than it is today.” That sounds really simple and if you think about it, you’ll agree that EVERY financial institution masters this one lesson. Because of this, they also understand the phrase “the velocity of money.”

Money that doesn’t move or have velocity is like money that is stuffed in a mattress; it doesn’t create wealth or profits. To give you an example, the average bank in the United States spends a dollar about five and a half times. Have you ever thought how they do that?

Wouldn’t you love to spend YOUR dollar 5 ½ times?  Well, it’s simple.  First they TOTALLY embrace this Defining Moment.  You see, they take money, and it is not even their money, that is deposited in their bank and lend it to other people.

These people who borrowed the money make payments back to the bank and pay interest. The bank then takes those monthly payments and lends that money out again, over and over. This process continues repetitively about five times on each dollar they touch.

The collection of interest alone is very profitable for the bank. But they understand one rule that creates more profit for them than just collecting interest. They understand that MONEY WILL NEVER BE WORTH MORE THAN IT IS TODAY.

Due to inflation the buying power of a dollar decreases over time. The buying power of $1,000 today with a 3% inflation factor built in will have the buying power of only $412 in 30 years. The banks and lending institutions understand this clearly and they may even encourage you to make additional monthly payments on the money they lent you.

Wait a minute Kelly, I thought that I should pay extra to lower my interest expense?

Well, if you understand and, more importantly, apply Defining Moment #1, then maybe you should ask some questions.

More Financial Caffeine coming your way.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


The Modified Endowment Contract

April 29, 2010

A modified what? It’s called a Modified Endowment Contract (MEC) and was a creation of the terrible twins TAMRA (Technical And Miscellaneous Revenue Act of 1988) and DEFRA (Deficit Reduction Act of 1984).

It’s important you understand why the MEC was created, who created it, and how it can effect your money.  IRS Code, Title 26, Subtitle F, Chapter 79, Section 7720 is the description.  If you’re bored feel free to read it. Here’s the point.  The very fact they, the government, made the effort to craft and pass this type of restriction and limitation on what you could do with your money, keep in mind, it wasn’t like this prior to 1988, tells us one thing: it must be good in regards to taxation.

You see, prior to 1988 you could put virtually an unlimited amount of money into cash value life insurance and get all the benefits.  What benefits?  Here’s a list:

  • money grows tax deferred,
  • can be used tax free,
  • has a competitve rate-of-return (remember no fees and no tax),
  • has guarantees,
  • returns a tax-free dividend based upon company performance,
  • the money is credit proof,
  • you could contribute an unlimited amount of money,
  • you were unlimited in your investment options because you had
  • liquidity, use and control of the money,
  • it could be used as collateral,
  • it was estate tax-free, and
  • had disability protection – meaning if you became disabled the insurance company would continue to contribute your annual outlay (what 401k will do that one?).

Take a look at this pdf and line up the benefits you have with your money compared to how these policies are designed…click here.

The government didn’t like this; therefore, they decided to “further limit the perceived abuses by preventing policyholders from paying large single premiums to purchase life insurance and borrowing the cash value, tax-free.”  Heaven forbid we have some financial tools that they don’t have their hands ALL over.  The founding fathers of this country would be up-in-arms.  Folks, this type of policy, and the benefits associated with it, had been a LONG standing tool used by virtually all the wealthy families in the country…here’s a great book that describes this very thing, The Pirates of Manhattan.  I have no association with this book it’s just a good read.  Check this out, this is an article from November of 1999 in the Denver Business Journal.  They did a special publication called The Century Book. This publication dedicated one page for every year from 1900 to 1999 and covered something from Denver’s history for each year.  For the 1929 page they talked about the Crash and introduced you to Claude Boettcher – “Denver’s most famous investor”.  Anyone who has lived in Colorado for any length of time has heard of the Boettcher family.  This article mentions how he lost everything but waited for banks and stocks to drop so low that he borrowed $2,000,000 from his cash value life insurance to buy them all up (notice he lost his investments but he didn’t lose his insurance values).  I love the line right after the mention of this – “the reason he is still known to history. Most investors had no other resources to call on.”  Read it here.  The “Infinite Banking Concept” is NOT NEW!  It has been around for over a century.

In 1988, the government created a limit.  So think about this: who determines the minimum one can pay for a death benefit of, let’s say $500,000?  Come on, who determines the minimum you, the consumer, can pay for a death benefit of half a million?  The insurance company.  They decide what they can charge you and still make a profit.  This is called term insurance.  You pay the least amount and get one benefit – death benefit.  On the other side of the spectrum, who determines the MOST you can pay for that same $500,000 death benefit?  Most people say, “I do. I determine the most I’m willing to pay.”  Wrong.  The government.  The very fact that the government limits what you are able to do with your money tells you that it must be good in regards to taxes.  You know what, they’re right.  Of course they’re right. Taxes are their biggest concern.  If they aren’t getting them then you bet your $SS they’ll go out and find them.

It then begs the question as to why whole life insurance policies are still around then, right?  Well, you can still get all the above benefits, EVERY one of them, you just have to now capitalize the policy a little slower.  Before 1988, you could put, for example, $200,000 as a lump sum into a policy and get all the benefits.  Today, you have to spread that out over, typically, a five to seven year period.  The argument of “cash value life insurance is too expensive” is plain elementary.  Those supposed experts who make that claim are right if someone is using CVLI purely for protection…i.e., focused on one benefit.  Buy term and do something with the rest.  However, if you want to act and function just like a bank then you’d pay the most amount of money for the smallest death benefit to dance just below the MEC line and get ALL the benefits above on your money.  Read that sentence again. Around year five you’d have available every single dollar you put in.  This then becomes a pool of money that you can use to replace any financing or lost opportunity for paying cash.  It’s exactly what banks do.  Take a look at this graph (it’s nothing fancy as I created it, but the data is straight from the FDIC website). I broke down the top five banks and their holdings in cash value life insurance, in the BILLIONS, and more importantly, how they have increased their holdings over the past few years.

JPMorgan Chase is the only one who’s values went down between 2008 and 2009; however, their loan balances went up by almost the exact same amount.  They very well likely utilized this powerful tool to borrow from.  We’ll know at the end of this year when we see their numbers.  Folks, these are the top five banks in the country making double digit percentage increases in their cash value holdings!  Why?  Because they are masters of liquidity, use and control, and leverage.  I ask you, are you?

You can be.  It’s my job to teach you.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


How do you tell someone that their baby is ugly?

December 15, 2009

We run into this problem everyday. The majority of hard working people believe certain financial myths that require a conversation that is similar to telling someone their baby is ugly. The “conditioning” that has been experienced is frustrating, to say the least, but understandable…especially when you understand who has been doing the conditioning.

For example, and this goes out to all you Dave Ramsey and Suze Orman followers: why do banks offer you a lower rate on a 15 year mortgage than a 30 year mortgage?

Do you believe it is because they have your best interests at heart? If not, then why the discount? If the bank does not have your interest, the consumer, at heart then have you ever considered that maybe you should understand these reasons before you just accept what Ramsey or Orman say?

I sure wish they’d (Ramsey & Orman) take the time to understand because then maybe they wouldn’t lead so many people down a path of waste and wealth transfer. Speaking of wealth transfer, do you believe that Americans transfer more wealth than they accumulate? Come on now. Think of financing. Think of taxes. Think of, and wait for this one since NO ONE talks about it, think of….opportunity costs.

What are opportunity costs? Well, if you paid (or transferred) a dollar that you didn’t have to, not only do you lose that dollar but you lose what that dollar could have earned for you.

The answer to the first question will be the next post. I feel very certain that you haven’t considered the reasons for the discounted rate. As a matter of fact, there has yet to be an individual that I’ve met with, and I regularly meet with everyday-Joe’s to highly successful CFPs and CPAs, who has answered this question correctly.

So bring it on people. Give it your best shot. And if you say it’s because it carries less risk for the bank…you’re wrong.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

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