Episode #27 – The 5 Steps to Financial Freedom


Well, hi everyone! Welcome to another Wealthy and Wise Wednesday. In this podcast and video, I wanted to cover a few critical issues that come up regularly, as people call in from all over the country. They like the idea of a well-engineered High Cash Value Life Insurance Policy but want to know exactly where it fits in.

00:01:01

So let’s talk about that for a second here. If we break down the steps to what I’ll call the 5 Steps to Financial Freedom, they may look something like this.

00:01:12

First, you need to know where your money is going. Some don’t like to use the dreaded “B” word, “Budget” to track their income and spending. And I get that! And this can be overwhelming for some and maybe even pleasurable for others. Let’s not say pleasurable but some of you like to know where every penny is going and that’s okay. If you don’t get a hand on what’s coming in and what’s going out, it’s just going to be really frustrating until you can control and save.

00:01:44

Well, once you know where you’re at, then you can determine what you can put aside, right? Now, there are thousand different answers to how much you should save. Well, we’re going to go over that another video as we go along but suffice it to say, save as much as you can. At some point, your goal should be at least near that 20% of your income and certainly 10%.

00:02:08

So now that you’ve got money and you know where it’s going and now you can start saving it, the next step, step 2, you need to have what’s called a MOD.

00:02:18

That stands for a Money On Demand account. This includes all the safety nets usually provided by other insurances. There are times where you have to have money on demand for unforeseen events. Now, this would include car insurance and homeowners insurance and health insurance.

00:02:35

If you’re a professional or a business owner, you probably going to have liability insurance of some sort. Some of these insurance policies depending on the state that you live in, they may even be mandatory. I know in our state, you can’t even drive a car without having mandatory car insurance.

00:02:52

Now what I find interesting is that even though the risks mentioned are certainly risks, the risks that we aren’t necessarily guaranteed in our lifetime that are going to happen or occur, you aren’t guaranteed a car accident, luckily, or assured that your house will be violently damaged in a tornado just because you carry the insurance, right?

00:03:17

We carry it just in case. It’s our safety net. But this is what’s interesting, there’s one event that is 100% guaranteed to occur at some point in your lifetime. What do you think that is? Well, at some point, we all get kicked off this planet. Yup! At some point, we’re going to all die. So, even though it’s a 100% sure that we’re going to die, there’s still those who die without life insurance.

00:03:55

Now, isn’t that kind of silly? We don’t anticipate a car accident. We carry car accident insurance. We don’t anticipate a hurricane and a tornado and a flood but we carry homeowner’s insurance. Yet, there are thousands and thousands of people out there who know at some point they’re going to die but they carry no life insurance.

00:04:14

So we have a budget that we want to make sure that we have our MOD account. That’s our Money On Demand account. You might call it an emergency reserved, whatever you want to call it. I love the thought that it’s Money On Demand just in case you have some unforeseen instances. And then, of course, you want to have your insurances in place as part of that Money On Demand, the car and homeowners and all that good stuff.

00:04:48

Now, the third step is what we call E&O. Now, if you’re a financial professional, even a medical or dental professional, you’ll probably know the term E&O. And you might think of it as errors and omissions insurance, which certainly is important in those industries. However, for us, E&O stands for emergency and opportunity.

00:05:15

Now again, this is where a solid well-engineered cash-valued policy can come into play because it can cover some if not all your Money On Demand for life insurance. But it can also be an exon place to store funds for your emergency and opportunity needs. Okay?

00:05:34

Now an E&O Account or an emergency and opportunity account, it needs to be safe. But it also needs to be liquid, so a retirement account like an IRA or a 401(k), that’s a lousy place to store emergency funds. So, what we want to do is put it in a place where we can have access to it because remember, it’s for emergencies and opportunities.

00:06:01

So, let’s quickly look at what an E&O Account might hold so to speak. You should have somewhere between 3 and 6 months of expenses as your emergency fund. 6 months is optimal, of course, but it may take you a little longer to get there. And that’s okay, right, because we are going to save every month and build up our capital accounts.

00:06:30

And all you need to do is simply figure out your expenses in a given month and then multiply that by 3 or 6 and that’s what you need to have in your emergency fund. Alright? If you have a car, maybe it’s on its last days. You’ve been hearing some clinking and clanking and it’s not starting all that great.

00:06:52

Well, maybe it’s a good idea to have some money for some potential upcoming car repairs. Because car repairs shouldn’t be part of your emergency fund. That should just be part of the fact that “Hey! Cars don’t go forever.” And that’s the same way with maybe some home repairs. Any kind of repair that you might need that wasn’t anticipated, not bad to have a few bucks set aside.

00:07:17

But it’s not your emergency fund because emergency funds are more or less based on losing a job, not being able to work, a short-term disability, that kind of stuff. So, think about adding some money to your E&O Account for repairs and other maintenance as well but not consider it part of the emergency side. It’s just capital that you can use for a maintenance item that may come sooner or later.

00:07:47

Now, opportunities are a bit different. This is money that you want to have available that would take advantage of opportunities. Now, here’s a thing, there are capital expenses too. Let me give an example. You might want a new car or remodel your kitchen, this is typically major purchases or expenses that you can also include in your future buying needs or your future capital needs. But the opportunity account should also hold funds that you may want to use for an investment or a business opportunity.

00:08:21

Now, one word of caution here, when we use opportunity funds from a High Cash Value Policy, we want to take loans and invest in opportunities that make sense, that are predictable. That have a very strong potential for a good outcome. We also may want to use some of this money for the major purchases again, the cars and remodels and those things.

00:08:55

But when we do that, we want to make sure whether it’s an opportunity or a purchase. That we get those loans paid back. That we replenish our opportunity fund. Because it makes no sense to build this up, to take those funds and get it invested and lose it or to put it into a car or a home and never replenish those funds. So it’s extremely important.

00:09:26

Let me give you an example. Let’s say for instance that you’re going to buy a fixer-upper home. Alright? Your plans are to make improvements and then sell it. And you could access the capital needed for your High Cash Value Life Policy. Okay? So you do that. You get the capital, you do all the repairs and now you’re going to sell that property.

00:09:45

What you want to do is pay back your policy of course plus the interest plus any interest that you want to charge yourself on top of that and replenish that capital. So it’s ready to be used again. This is a good use of money. Now, another word of caution, because you want to get that money back in, again you want to feel very confident that the opportunity or in this case the house is a viable opportunity. And that there’s a high probability that you’re going to get those funds paid back into your E&O Account at some point.

00:10:23

Don’t cheat yourself! You don’t want to lose that money. The best part about an E&O Account is that it can be also one of the safest, tax-advantaged, income-producing accounts for you during retirement as well. So you kind of get double whammy here and you take advantage of a lot of different things that are going on inside of that policy. And I’m going to talk more about that in other videos especially when it comes to retirement income. So you’re going to want to check that out. Make sure you subscribe. That’s the best way to know that these videos and podcasts are coming out.

00:11:17

Okay! So, after your emergency and opportunity account is established and being funded continually, now it’s time to maybe get out of debt. Get rid of that debt. Once again, there are a thousand ways to go about doing this. And as a side note, you may want to attack the debt after your emergency account has been created. And, maybe before you start building your opportunity funds, you may squeeze in ahead debt or at least have a plan that you’re knocking out that debt as you go along.

00:11:56

There are some, I won’t say good debt, but there is some debt that’s reasonable and then there’s some horrible debt. If you’re talking about credit cards and things of that nature, horrible debt. A home mortgage, maybe not so bad. And we will again attack that in some other podcasts and videos. But suffice it to say, we definitely want you out of debt. And all the mortgage, all that stuff, so much depends on your income level. And how much you can put towards your debt and still save at the same time.

00:12:34

So one of the best methods I’ve seen for getting out of debt is commonly referred to as the Snowball Method. Now for some, it’s best to knock out the highest interest rate loans first. For others, they want to see that success quickly. So it’s best to knock out that lowest balance first. That gives you that boost of confidence as you see that debt go away. That you can keep going and moving on.

00:13:06

And what we can do is help you stay on that track and help you determine which way is the best way to go. But that Snowball software is available. It’s usually out there on the web. It’s just a spreadsheet. And it’s really kind of neat. But the idea is that the Debt Snowball, what you do is you pay out your first debt and that payment that you were using for the first debt now gets added to the next debt.

00:13:36

So, let’s say for instance that you had a debt that was $50 a month and you pay that off. Now you have that extra $50 to add it to the next payment or the next debt. So let’s say that that second debt was a $100 a month. So again, you’ve paid off the $50, you’re already paying a $100 so now you have a $150 towards debt number 2. And you just see that Snowball over and over and it gets pretty exciting. In fact, most people can knock out all their debts, including their mortgage in as short as 9 years, maybe around 11 for some. But you can get that thing knocked out pretty well or pretty quickly. So that gets paid off.

00:14:20

Now you have a $150 to add to debt 3 and then so on and so on. So, I’m going to put a spreadsheet for that, in the notes or in the bottom of this video as well so you can take advantage of that Snowball debt. And again, it’s just a spreadsheet. You’re throwing your debts, tells you exactly what to do, how to do it. But that’s a critical part of financial freedom and it’s certainly a critical part of being able to now take more capital and have it for opportunities.

00:14:57

So, just a quick review. We first determined where the money is going. We’ve set up some sort of a budget, we’re committed to putting money away every paycheck. That means if you get paid twice a month, you’re putting away money twice a month. Alright?

00:15:18

Second, you’re assured that you have Money On Demand in case of an accident, health issues, a death, family needs, your property. Everything is protected. So we’ve got Money On Demand and most of those again are covered by all the different insurances that we typically have or must have, depending on where you live.

00:15:37

Third, we’ve created our E&O Account or Emergency and Opportunity Account. Again, a well-engineered High Cash Value Life Insurance Policy works great for this. This is where you’re going to keep your 3 to 6 months living expenses for an emergency. And it’s also going to be where you pack in the capital for opportunities to take advantage of as you go along.

00:16:06

Now, one other side note here, there’s no cap to how much you put in the E&O Account. Right? There’s no cap on how much money you put into your Opportunity Account. Once you see that this can produce income down the road and a tax-free income, it may be an account that you heavily fund over the years. Because not only can you use it through the years, for all the different things that you may need capital for, but it’s one of the best and highest-producing tax-free income streams during retirement. And then lastly, it leaves a legacy and a nice benefit for your family.

00:16:49

Okay, so the fourth thing we’ve done is we’ve knocked out our debt. We’ve eliminated our debt using the systematic program such as the Snowball. And this just feels good to literally owe nothing to no one. And so we definitely want to get you to that point. That’s step 4.

00:17:07

So, now the 5th step. The 5th and final step to financial freedom is really getting down to having money work for you. We call this Wealth Squared. Meaning that you now can use the same dollar twice. So, it’s a squared effect when you’re using your policy properly. So, as we’ve mentioned we’ve already designed our E&O Account and we’ve got a source for all the tax-free income as well. And it’s working and it’s compounding and it’s doing all the heavy lifting now. It’s just as important to worry about your money as to what your money is doing! Is it wise to put money at risk if you can’t afford to lose it? Right?

00:18:03

Well, here’s a quick risk test and this is a very simple one. If you can’t walk away from an investment that you put money in and it does nothing to your finances if you lose it, well, that’s a good simple test. Right? If you can afford to lose your money and will have no financial impact on your future, then that’s a good definition of risk capital.

00:18:28

But here’s the problem, after asking that risk question, there are so many people over the years, the majority of people will say “Well, I really can’t walk away from this money.” But guess what, where do you think the majority of their money is? It’s at risk! And one of those places that are at risk is inside of a 401(k). There are several risks there.

00:18:54

One is you can’t access it ‘til you’re 59 and a half without some substantial penalties. The other for the most part it’s invested at risk. And, you’re just constantly throwing more money into the bucket of risk. And, maybe you’re trying to dial it back a little bit, who knows. But typically what I see is most people have the money that they say they cannot walk away from at risk.

00:19:24

Well, most people who established an E&O Account, that’s what we’re trying to do. We’re trying to put it in a place where you don’t have to worry about risk, it’s got some guarantees, some safety nets and that’s where we should start. We kind of do a backward here. We tend to put our risky investments first. And then we might save a few pennies on the side in a more safe location. Just because you may be able to afford to lose your money, doesn’t mean that you have to.

00:19:58

You don’t have to always play in traffic. Emotion plays a huge part in investing and it may just turn your stomach just the thought of losing money. And quite frankly, with some of the things you can do, you don’t have to lose money. In fact, Warren Buffett says the first rule to investing is “Don’t lose money” and the second rule is “Refer to Rule 1.”

00:20:19

And I’m finding that many wealthy people are choosing to keep more their money safe and in a tax-advantaged environment rather than putting it at risk and crossing their fingers especially with the bubble that we seemed to be in right now. They seemed to be even less trusting of risky investments and sadly the unkept promises of many Wall Street advisors.

00:20:45

So, for all of us ordinary or real people across the country who are not insiders getting inside deals, we have to love the fact that we can get a very favorable income stream from a well-designed cash value policy without the risks of the markets destroying our future. And, in the meantime, have access to the cash so that we can take advantage of opportunities that we’re comfortable with, whether it would be owning a business, investing or whatever. It’s all available to us.

00:21:22

So those who do not have the benefit of a properly-engineered High Cash Value Policy, tend to rely on one of two options. Okay? And this is just where we’re at.

00:21:34

The first option is just to put it in a very low-interest-rate environment such as a CD or even a fixed annuity and, it’s just frankly, it’s just not cutting it. Can you imagine right now a million dollars in a CD will send off about 8 to 10 thousand dollars a year in income? And you know what’s worst?

00:21:59

It’s taxable. Yeah! So you got a million dollars that you’ve saved and put away. You want to keep it protected so you put it in the bank CD and that’s going to send you off about 8 to 10 thousand dollars a year. And, that’s assuming the bank is paying the highest interest rates that you see out there right now.

00:22:20

Well, the second option is to keep your money at risk. And, as we’ve talked about, that’s maybe not a good option especially as you’re near retirement. I did a video a while back that I called the 1.4 Million Dollar Disaster. So, if you want to see what that’s all about and how these people just had way too much money at risk, go ahead and check out that video.

00:22:46

The fact is you can’t keep money at risk when you’re relying on it for retirement. We saw this in ’08. We saw this in 2000. Accounts cut in half. It’s almost a sure fire way of making sure that you’re going to either run out of money before you run out of life or be extremely depressed when you lose 10, 20, 40, 50% of your assets.

00:23:10

And I can tell you, there’s a better way. It’s safer, it’s more predictable. And, oftentimes, does better than those taking the risk anyway. So, you might at least take a look at it and see how that might fit in your situation. And it’s a long-term investment opportunity or it’s a long-term investment program. So you want to get involved as quickly as you can.

00:23:35

So, there you have it. Those are the 5 Steps to Financial Freedom that I’m hoping you’re taking advantage of right now. It’s the beginning of the year. It’s time to set those New Year’s Resolution and start building up your wealth in such a way that it’s going to make much more sense and be much more effective.

00:23:58

Remember, this is not a run-of-the-mill or what I call a traditional style insurance policy. It has to be designed properly. And don’t assume that any agent, or every agent, or advisors know how to do this. The majority of them, I’m sad to say, really don’t have a clue. Never heard of this. Never tried to use it. And it might be more of a disaster to be talking to somebody like that.

00:24:20

There are many who would rather just put your money at risk. I should say many advisors would rather just put your money at risk, charge you an annual fee for their quality and active management and then let you ride the roller-coaster and the ups and downs, watching your money year after year and be frustrated, have your stomach turning, not knowing “am I going to get where I really want to be financially.”

00:24:41

So, bottom line, there is a better way. You don’t have to settle for the Wall Street way, that’s been pushed on your throat for years and years and years. And it just doesn’t work long-term anyway.

00:24:59

Wow! That was a lot. But it was the beginning of the year. I want to get a lot in front of you so you would just build a grasp even if you just take one or two of those concepts. Get it going in your life so that 2018 just becomes an awesome year for you. I hope it was informative.

00:25:18

Please, let me know if you have any questions. I’ll be happy to answer them just as quick as I can. Where do you send them? You send the questions to questions@wisemoneytools.com. Again, I’ll answer them just as quick as I can. Also, if you want to in that email, request a personalized plan of attack for 2018, and we can figure out a way to get you on track and get you exactly where you want to be financially, request that in your email as well.

00:25:51

I hope this video is extremely helpful for you and like I say, it’s a great time of year to get a good financial start on what you wanted to do maybe for years. But this is the year to get going and I’m really, really excited for you. So, hope you have a great week. Look forward to talking to you and make sure you subscribe so you never miss a video, never miss a podcast. Until next time, have a great week! Take care!

LINKS:

DEBT REDUCTION SPREADSHEET –  debt-reduction-calculator_10

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