This is the third installment of my Investing for Entrepreneurs series.
As a serial entrepreneur myself [having started over 10 businesses with a few home runs and profitable exits] — I coach and consult entrepreneurs on business and financial success.
And the fundamental financial mistake and that almost all of my entrepreneurs customers [unknowingly] make?
They tie up all of their “wealth” in their business and as a result have no real exit strategy! In other words, the only thing on their balance sheet is their business.
This strategy:
1. puts them at enormous financial risk (all eggs in one basket) and
2. keeps them handcuffed to the grind … forever! Where their “love” eventually becomes a burden that turns into a burn out.
The truth is, the way to build real wealth is not through “building” our business. It’s through “building” a healthy integrated suite of assets that are reflected on our “personal” balance sheet. In other words, our business financials don’t make us rich, our personal financials do!
In the text to follow, I’ll be holding up the magnifying glass to two little know but extremely viable investments that should be part of every entrepreneur’s portfolio – Investments that’ll help you start moving towards ultimate financial success and financial freedom.
Quick note:
As an entrepreneur, once you understand that you must “invest” outside of your business, the next challenge you’ll face is determining WHERE to invest your hard earned money.
That’s where this blog comes in. In fact, I’ve written a series three articles to help you get started.
In case you missed the previous posts:
Episode #1 – The Top 10 Mistakes Entrepreneurs Make focused on the financial areas where most entrepreneurs fall short.
Episode #2 – Investing Strategies for Entrepreneurs, Part 1: How to Beat Wall Street serves an excellent primer on the steps you can take right now to set yourself up for investment success.
Here’s the thing, when it comes to investing, there are great places to invest OUTSIDE of the stock market that are off most people’s radar.
So let’s jump right in…
Alternative investment number one is Whole Life Insurance
You might be thinking — But Krisstina, I’ve never heard of Whole Life Insurance. Or worse, I’ve heard bad things about it. I’d like to address one of the big misunderstandings about whole life insurance, but to do that, first we need to define the difference between term insurance and whole life insurance.
What Is Term Life Insurance?
Term life insurance provides coverage for a specific amount of time. If you pass away at any time during the term of your policy (typically 20–30 years), your beneficiaries will receive a payout from your policy.
Term life insurance plans are more affordable than whole life insurance because the term life policy has no cash value until you pass away.
What Is Whole Life Insurance?
By contrast, whole life insurance provides permanent coverage for your whole life. Whole life also offers a savings component, called “cash value,” and life-long protection (as long as premiums are paid), and whole life provides a death benefit to your beneficiaries after you die.
A portion of each of your premium payments is funneled into a savings component of the policy called the “cash value.” Your “cash value” can serve as a source of emergency funds for you if something goes wrong. This is where I keep my “Rainy Day” funds — inside my Whole Life Insurance investment.
The Argument against Whole Life Insurance
The main claim of opponents of Whole Life insurance is that insurance policies shouldn’t be an investment or money-making scheme — They should simply provide security, protection and peace of mind against the unthinkable.
Here’s what I believe:
EVERYONE should have life insurance, period, end of story. (And, disability — but, that’s a conversation for another day).
But I believe that when it comes to saving and investing and being smart with your money, whole life insurance offers some amazing benefits that make it a superior product.
Whole life insurance is an alternative for cash.
As I’ve mentioned in previous episodes of this series, when it comes to investing, the first place you should start is your emergency opportunity fund. And it’s vital that this fund be LIQUID.
If you’re only dumping cash into your 401K, I’ve got some sour news for you – Unless you want to pay big penalties, that cash is untouchable until you’re 59 1/2 (hardly a liquid asset).
What are you going to do if you get in a car accident and have to pay a deductible? What happens if you lose your job and fall behind on your rent or mortgage?
The reason whole life is such a great place to store money – apart from its liquidity – is that its internal rate of return is two or three points above bank rates.
Today, many banks charge you $30 a month to have a savings account that earns 0% – That’s definitely not a growth opportunity. Wouldn’t you rather have your cash stored somewhere it can earn money AND be accessible when you need it?
Whole life insurance is the answer.
Whole Life – The Nitty Gritty.
Term life insurance is a perfect product for protection over a defined period of time.
Whether 5 years, 10 years, 20 years, 30 years – term insurance does a beautiful job of protecting a family in the event of a death. But, once the “term” is expired so is the plan. All of the money put into the plan is pocketed by the insurance company.
Whole life insurance, by contrast, is guaranteed for your ENTIRE life. And because it’s attached to a guaranteed event (death), whole life insurance has to operate differently than any other insurance out there.
Think about it – disability insurance, car insurance, health insurance… It’s quite possible and even preferable that we never actually use these insurances. But should these insurance plans go unused, do we get any of the money we spent back? The answer, of course, is no.
With Whole Life insurance, the cash you save has a guaranteed rate growth. I’m not talking rate as in “interest rate.” It’s an actual dollar figure – an amount that you can expect your plan to grow to over time. Not to mention, Whole Life has an element called a dividend, which, once paid becomes a part of the guarantee.
Whole Life is a boring asset — and therefore it’s too often overlooked. But, when it comes to money, boring usually means stable. And, when it comes to our money, some stability and safe harbors are key to a lot less financial anxiety.
>>> For the full conversation on whole life insurance…watch the full video above with Kim Butler. <<<
Everything Old Is New Again
Let’s switch our conversation to focusing on other important investments options.
Creating monthly income via buying/owning assets is a challenge to master. There was a time when you used to be able to buy dividend paying stocks, but in today’s world those are much harder to come by. Similarly, bonds used to work as an asset, but these days that is not the case. Annuities offer too low of an interest rate, so those are off the table as well.
So, what to do?
Kim Butler offers a solution. She recommends a major new asset class that’s off most people’s radars — even though it’s been around since 1911.
It’s called Senior Life Settlements.
Here’s how this investment works:
An individual with a life insurance policy he/she no longer needs sells it in exchange for a cash payment. The policy owner receives a lump sum payment, which is less than the death benefit, but more than the cash surrender value of policy. Concurrently, the buyer (investor) assumes the premium payments in exchange for receiving the death benefit.
I like the idea of Life settlements as a smart area to invest in because it’s a win-win.
The investor/buyer wins because of the stability and profitability of the investment. AND, the seller wins because he/she is able to get rid of a life insurance policy that they either don’t want or don’t need. The seller gets cash, is relieved the premium obligation, and they make more from selling their policy than if they just cancelled it (to relieve themselves of the cost to keep it).
Another benefit to the investor is the condensed time frame of the investment. For the typical investment, to really make them work you need to plan on about a 30 year window of time. Comparatively, the ideal growth range for life settlements averages between 7 to 10 years. That means you’ll realize the fruits of your investment faster, AND your investment will incur steady growth vs the roller coaster ups and downs of Wall Street.
What To Do. What NOT To DO…
In the early days of the stock market, there were decent businesses with viable business plans that created products the typical investor could invest in and realize some good and consistent returns. But in today’s world of heavily computerized dealings and tradings, the average investor stands little chance of beating the market.
To boot, there’s so many marketing and money incentives that get attached to certain financial products that it’s difficult to find a financial advisor that can (and will) objectively help you navigate the market. They are in it for the fees they collect, not in it to protect you and your investment.
So what’s an investor to do?
As mentioned above, there are tried and true investment types that have stood the test of time and continue to be sound places to put your money. Real estate, whole life insurance, life settlements, oil and gas — these types of investments may be less sexy then the current new market fad, but they work, time and time again.
In Closing, A “Greatest Hits” Q&A
Below I’ve listed a few of the most common financial conundrums, along with my advice. For a deeper dive, make sure to watch the video above in its entirety.
Q: I have money in a 401k or an IRA that’s not really doing anything. Are there options to convert this money into something that will yield better growth and/or returns?
A: If you’re still employed at the place where that 401k is provided, there’s not much that can be done. But, if you’re no longer employed at the employer that sponsors your 401k, or if it’s already converted to an IRA then absolutely yes – You can move those dollars elsewhere and make a big difference immediately.
Q: My work provides a 401k match program? Do you recommend that I match?
A: I do, absolutely. Contributing to your 401k up to the MATCH level is a fabulous thing to do. What I wouldn’t do is contribute to it up to the MAX level. The difference between the match and max money should go somewhere that you can control, that you can do more with. As we’re quite clear, money put in a 401k plan is gone until you’re 59 and a half. It’s a very stuck environment that the government controls 100%.
Q: How much of my income should I be saving?
A: You need to invest 20-25% of your income if you wish to build wealth and create freedom. If you can’t do that, start where you are. If it’s at 1%, awesome, do it. Bump it up to five next year. Bump it up again and again and again. Sadly — investing a healthy portion of our income is not popular. What’s popular is go out and spend it all. But that doesn’t work in the long haul. Money will call our bluff. Meaning, we may feel like we are getting away with it .. until … there is a crisis … and then we regret we didn’t do things differently.
Q: What’s more important – Budgeting or Saving?
A: I really encourage people to not be overly focused on budgeting. Honestly, I think budgeting is a outdated term. Instead set financials goals that aim towards creating Financial Freedom. Know how much money is enough. Calculate your “Freedom Number.” Then, invest, save and spend accordingly. Meaning, you spend 100% of your after tax income according to a preset PLAN that will enable you to hit your Financial Goals according to YOUR definition of Financial Success.
Q: I’m in my late 50s, early 60s, and I’m approaching this word called “retirement.” Looking at my “portfolio” I fear that I may not enough. What do I do?
A: First things first – lose the word “retirement.” The belief that you can invest even 20% of your money — from your 30’s thru your 60’s — and then turn around and live off that “nest egg” from ages 60 to 90 when every day’s a Saturday? Well, that’s completely unrealistic.
If you take this false idea of retirement off the table, the (time) pressure is now gone. Replace the idea of “retiring” with the vision of continuing to work long into our 70s and 80s. Even 90. In this case it’s much easier to just relax. With the caveat — if you’re going to keep working and earning in your upper years — then, find the work you love today and wish to continue long into old age.
Now, it should go without saying that you’ll want to aggressively save and invest your savings starting TODAY so that when you physically can’t work anymore and/or wish to slow it down a bit — you have money to live on!
This marks the end of my 3-part series on the ABCs of Alternative Investing for the building Wealth and a secure financial future.
As a close, please note that I do not manage money. I teach YOU how to manage your money. If you’d like a financial consultation to discover where you’re financially stuck, and how you can recalibrate to hit your financial goals, click here to set up a 30 minute consult. We’ll do a little digging and determine if there is anything I can do to help you achieve the financial success you’re after.
As always, thanks for reading!
–kw
