I've Got to Change My Shopping Habits

J.D. Roth, a very successful personal finance blogger (www.getrichslowly.org), wrote a very helpful post on "Eating Well on One Dollar a Day." He's actually referencing another fellow's blog who details (pictures of receipts, etc.) precisely what he bought and how he bought it to average spending under $1 per day for a month of food.

The reason I'm referencing J.D.'s post rather than the original is that J.D. indexes it in a helpful way to get at the information. From this, I can see that some of my shopping has been all wrong. Especially with feeding all these boys, I needed a primer in cheap shopping!

Infinite Banking and Bank on Yourself: Scams or Wise Investments?

A friend was considering buying into "Infinite Banking" or "Bank on Yourself", which is a sort of whole life insurance policy that allows you to borrow on your own money once you're fully vested. At first, it seems like a really cool deal: why borrow from a bank when you could borrow from yourself, paying yourself interest rather than the bank?

But the more I read, I determined that some of the supposed benefits were largely illusory. Yet, the fascinating thing was that, after reading for hours on the subject (and I was always good at Math and consider myself pretty good at personal finance and investing - hey, I wrote an entire book on it!), there was still a mental cloud that hung over it. It's sort of like those mathematical puzzles where Sally buys something, sells something, then something complicated happens and you know you're applying all the right equations, but in the end the numbers always come out wrong. When your mind tries to retrace the steps, it gets lost in sort of a fog.

But in this case, the fog eventually cleared for me. Here are my conclusions that I shared with my friend. Feel free to interact if you're considering this. But you may want to go straight to the Kiplinger site, where a ton of interaction is going on. You can read people arguing pro and con, and eventually you, like my experience, might see the fog clearing up.

Here's the Kiplinger discussion, which any person considering "Infinite Banking" should carefully consider:

http://forums.kiplinger.com/showthread.php?t=10496&page=3&pp=15

During the first pages of the discussion, many of the comments are positive toward Infinite Banking, but as people delve into it more, you find more and more negatives. So make sure to keep reading. This is a ton of money you're considering putting into this, so study it carefully. Remember Solomon's warning: "The fool believes everything he hears."

So here are some of my red flags, concerns and questions I'd ask for someone trying to sell me this policy:

Questions, Concerns and Red Flags

1) What is the name of the insurance company you'd be using? I’d like to see how it’s rated. Here's an authoritative source for rating insurance companies:

http://www3.ambest.com/lh/default.asp

But even if it’s rated excellent, that’s lots of money tied up in one company. If that's where most of your savings is going, you're putting a lot of eggs into one basket. Is it insured by the FDIC? If so, up to what level? What happens to the money if the company goes broke? (Just before Enron went belly-up, it was still given the highest ratings. People didn’t know what was going on inside until the very end.)

2) The Websites for these groups immediately start explaining why Dave Ramsey and Suze Orman are against them, saying stuff like “They don’t understand these policies.” Well, from what I’ve read of Suze, although I don't always agree with her, she's pretty thorough on things, particularly insurance. I’d want to know precisely why Suze and Dave are against this. If you don't understand their criticisms, you don't know both sides.

2) Some are saying this isn’t anything new, it’s just being marketed differently. So, if it isn’t new, then why did the others stop doing it? Maybe it’s something that sells well when the economy is looking bad and everyone is scared, but nobody wants to get in when things are going well.

3) Why aren’t the major insurance companies selling this? Are they? I’d like to see what the big insurance associations say about them.

4) The way this is being marketing looks more like hype than solid information. Look at Pamela Yellen's book, Bank on Yourself in Amazon. So it has almost 100 reviews, and a significant percent are five star. But any author can get lots of associates and friends to write five star reviews, particularly if you're selling a product and have other product sales people under you who have a vested interest in making the book look good. But a significant 12% of the reviews are only one star. I often see this in financial books that have some good stuff in them, but also some crap. Lots of five-star fans, but also a significant portion of one-star critics saying, "This is crazy!" Read these one-star reviews carefully.

http://www.amazon.com/Bank-Yourself-Life-Changing-Protecting-Financial/product-reviews/B003156AXW/ref=cm_cr_dp_hist_1?ie=UTF8&showViewpoints=0&filterBy=addOneStar

My Bottom Lines

1) It’s a type of whole life insurance policy. Don’t get it unless your main reason for doing it is to give money to a loved one at the time of your death. Even then, make sure that it’s a good policy compared to other life insurance policies. Example: how much of all that money you’ve saved actually goes to your beneficiaries in the end?

The vast majority of financial counselors that I read say to buy term insurance (which is much less expensive) and invest what you save, until you've saved up enough to be self-insured. If you're 55 years old and you've got lots of money saved up for retirement, you just need to insure the difference between what you've saved and what your loved one would need if you died. So you need less and less life insurance as you go through life. After you've got enough to retire, you probably don't need life insurance at all.

2) The concept of “being your own bank” and “infinite banking” seems largely illusory. I got fascinated with it and was up till 1:00 AM trying to understand people’s arguments back and forth in this regard. When I woke up the next morning, I suppose my mind had been working on it during my sleep, and it seemed clearer to me. I think the quote at the end of this post will show clearly that, if you need to borrow money, in most cases, you’d be better off just finding the lowest cost loan than borrowing from your own money in your insurance policy.

As an aside, I'm in the habit of saving up and buying things, so that I've never made payments on depreciating assets like a car or furniture. Don't borrow on a depreciating asset. And don't borrow on an appreciating asset unless it's absolutely necessary. Borrowing is sometimes a necessity (a medical emergency or to buy a house), but never safe. Even if you're borrowing from your own insurance policy, "the borrower is the lender's slave." There are consequences if you don't pay it back, and you need to know precisely what those consequences are.

3) In what cases are smart people justifying buying one of these policies. Only in limited situations. Some who argue for the wisdom of such a policy are saying that “it’s not a substitute for your retirement, but if you’ve already got a great retirement set up, and if you’re currently making a high salary, so that you’re not likely to default on your payments, then it may be a way to further diversify the assets that you want to go to loved ones at your death.”

4) Some say that they weren’t saving anything for the future, and this is forced savings, like when you have to make your mortgage payment each month. They say it works for them, but it seems pretty expensive to me. You're paying tons of money for the policy that could be growing in a low-cost mutual fund. And if you’re an undisciplined spender today, then might you also over borrow from your insurance fund and get in trouble trying to pay it back?

5) I’d want to know exactly what happens if you can’t keep up your payments, or if you borrow from it and can’t pay it back on time. And can those rules change over time?

6) I’d want to know exactly how the 5% (or whatever) growth per year works. What is the rate based on - how well the company’s doing? If so, what if this type of policy goes out of favor and new people stop putting money in? Will the percentage increase drop?

7) I'd want to see an exact comparison, all costs considered (taxes, service fees, etc.), of how the money you'd put into a policy like this would stack up against a fairly conservative investment in stocks, bonds and cash equivalents at a respected firm like Vanguard.

8) Some people are talking about paying up these policies with the equity in their houses or using this as their retirement plan. This would be a huge step and makes no sense to me at all. What if this company goes belly up? Again, you've got a lot of eggs in one basket. Sure, stocks and bonds and banks and real estate can be scary. But that's why we diversify. If my stock mutual funds are diversified between thousands of companies, then the worth of all those companies could never drop to nothing, except in an Armageddon scenario. And in an Armageddon scenario, say goodbye to your insurance and the FDIC as well. If you're looking for Armageddon, get your life right with God (for your long-term outlook) and invest in guns and knives (for your short-term outlook).

A Comparison of Banking for Yourself (from your insurance policy) and Borrowing from Your Real Bank

I'm just slightly revising one of the posts from the Kipplinger discussion group. The important thing here is to keep your eye on how much the transaction is costing you out of pocket over time. I think you'll see that in all three cases, you're spending the same amount to borrow the money. Banking for yourself is in reality giving you no real benefit that I can see over taking out a traditional loan.

Example 1: Using CASH for purchase. $10,000 account earning 5% interest.

I take out the $10,000 and make purchase. It is no longer earning 5%. So, after 1 year, I have lost $500 in interest, correct? Well, lets say at the end of the year I put back the $10,000 + $500 ($10500). So, it was as if I never took money out in the first place because I added $500 out of my pocket to make up for the lost interest. The opportunity cost of using the money was 5%, but I made it up by "charging myself" 5%.

This transaction cost me $500 out-of-pocket and I now have $10,500 in my account.

Example 2: Commercial loan. $10,000 at 5% interest

I take a 5% loan from a bank and leave my $10,000 in the bank, still earning 5% interest. At the end of the year, I pay off the loan in full for $10,000 + an additional out pocket $500. My bank account earned $500, but the loan interest cost me $500. The opportunity cost of using this method was 0, but the interest cost of using this money was 5%.

This transaction cost $500 out-of-pocket and I now have $10,500 in my account.

Example 3 (Infinite Banking): Policy loan for $10000, current loan rate 5%

I take a 5% loan from my policy and make my $10,000 of cash value collateral, still earning 5% interest + dividends. At the end of the year, I pay off the loan in full for $10000 plus an additional out of pocket $500 to free up my collateral. My cash value earned $500, but the loan interest cost me $500. The opportunity cost of using this money was 0, but the interest cost that I needed to pay to free up my collateral was 5%.

This transaction cost $500 out-of-pocket and I have $10,500 in my account.

Also, I should mention, I can borrow money on my home equity loan presently for much less than 5%. And some car loans are at 0%. If I "borrow" from my cash account that's getting pitiful interest, like my Money Market fund, then my out-of-pocket opportunity loss would be only about 1% over a year. My point? Even if you had an "infinite banking" account to borrow from, in many cases you'd be better off borrowing elsewhere.

The bottom line? What benefit was it to me to borrow from my insurance policy?

Moheban Argues: Don't Expect Hyperinflation or the Collapse of the Dollar

Need to understand basic macroeconomics? I just read this book: Debunking the Hyperinflation of Peter Schiff and the Gold Bugs: A Guide for Investors, by Moheban. Recommended read. here's my review.

Peter Schiff predicts "surging long-term interest rates," "runaway inflation" and the ultimate "collapse of the dollar." Will it happen?

Many people proclaim to know the future of the economy. In the 1990's many financial advisers "just knew" that we had entered a "new economy" where technology stocks would continue to rise in value. They had great arguments to back up their claims. Alas, they were wrong; and those who followed their advice lost fortunes. A few years ago, many top economists argued that the housing market wasn't in a bubble and that defaults on the new, creative loans wouldn't cause severe economic problems. They were wrong.

So today many experts argue, with great confidence, that the Fed will have to print tons of paper money to pay off its debts, resulting in hyper-inflation and the collapse of the American dollar. Those who subscribe to this theory and act upon it should, they say, buy precious metals (even at inflated prices) and weight their stock holdings toward foreign securities. While this is a possible scenario, Richard Moheban argues that it's highly unlikely, thus providing a useful counterpoint to Peter Schiff's claims.

I began reading Moheban's book fully expecting to give it a quick read and find a bit of value, but in the end resell it on Amazon. Instead, I underlined, interacted with my pen and kept it for future reference.

Rather than use insider, technical economic speak, Moheban explains the basics of macroeconomics in language that is not only easy to understand, but actually entertaining. During my before-bedtime read, I felt compelled to interrupt my wife's reading to repeat Moheban's illustration of how inflation would occur in a fishing village, as opposed to something as bewilderingly complex as the US economy.

His lucid arguments and helpful analogies resulted in several "Aha!" moments for me, which I wasn't expecting, since I'm a financial writer.

Here's why I recommend Moheban's book:

1.He introduces macroeconomics to the uninitiated. To evaluate arguments concerning our economic future, you need a quick, lucid introduction. This book works.

2.He provides a helpful counter-argument to Schiff and company. To maintain objectivity in any academic endeavor, open-mindedly read intelligent opposing positions. Read Schiff. Read Moheban. Whether you agree or disagree with Moheban, you'll realize that there's another side to these important issues.

3.He helps us to understand just how tenuous economic predictions are when dealing with large, complex economies. Consistent with this, Moheban doesn't declare with certainty where the economy is headed. On the one hand, America may learn its lessons, pay down its excessive debts, and continue to lead the world's economy with its leadership in such areas as higher education and innovation. On the other hand, people may lose confidence in the dollar, cash in their stocks and bonds, pull their money out of the banks and buy guns, knives and gold.

Either scenario is possible; but our economy is so large and complex that we can't make predictions with certainty. And for those who correctly predicted the present economic mess, how can we know with any degree of certainty that they can correctly predict the next stage?

It's important to note that Moheban doesn't believe that all is well with the American economy. He's particularly concerned that if investors in short-term government bonds decide not to continually reinvest, how will the government continue to finance the deficits? Again, we can't know for certain what will happen, so get used to making decisions in the light of economic uncertainty. As Kurt Vonnegut observed in his novel, Slapstick, "History is merely a list of surprises. It can only prepare us to be surprised again."

J. Steve Miller
Author of Enjoy Your Money! How to Make It, Save It, Invest It and Give It

Money: Teens Don't Get It

I've long been a proponent of teens living at a time in their lives when they can save vast amounts of money. Though their income may be small, they have very few expenses, seeing that their room and board and virtually all their living expenses are paid for.

Warren Buffett seems to be one of the few teens who understood "the power of early" - the vast potential of saving in the the early years so that it could multiply in the latter years. That's how he saved (in today's money, accounting for inflation) $47,000 by high school graduation.

Now you'd think that perhaps the current recession has made teens rethink their spending and begin to save toward an uncertain future. Yet, a recent survey of over 61,000 teens in over 31 countries found 15 percent or less spending less on movies and music. Less than 20% are spending less on console and computer games. I assume that means that about 80% of teens haven't changed many of their spending habits at all because of "The Great Recession."

Does this strike anyone but me as odd? I've heard that adults are spending less and saving more. Why hasn't this trickled down to our young people?

50% of Generation Y Has No Savings

The recent survey also found 18 to 34-year-olds giving themselves Cs, Ds or Fs in personal finance skills such as budgeting and effective savings. Further, they were mostly likely, among working age adults, to be putting no money toward retirement. "The survey was released by the National Foundation for Credit Counseling, which polled 1,000 adults nationwide in March."

This is such a shame! I suppose the baby boomers are partially to blame for mentoring a life of spending rather than saving. But it's a shame, because

• those early years can be times for incredible savings. As I share in my book for that age, Enjoy Your Money! How to Make It, Save It, Invest It and Give It, Warren Buffett started the habit of making and saving money before age 10, and continued these useful habits through high school so that he was able to graduate with today's equivalent (adjusted for inflation) of about $47,000.
  
• they're leaving themselves wide open for an emergency to put them into long-term debt. If you have no savings when you car dies; have no savings when you have an extended illness; then you end up borrowing and paying it off over the long-haul. These emergencies happen on average every 10 years or so, meaning we should plan for them.
  

What do you think?

Schwab Study Finds People more Vigilant with Personal Finances

A June survey by Charles Schwab found

• 51 percent of investors thinking of their finances daily.
  
• Before the big market drop in 2008, only 27 percent thought daily about their finances.
  
• Forty-five percent are committed to adopting stricter personal budgets.
  
• Thirty-eight percent want to keep a closer watch on the economy.
  
• Forty-six percent want to pay closer attention to what they save and invest.
  
• One in four are considering changing financial advisers and brokers.

It would seem that it takes a significant market downturn to make people re-evaluate their finances. For the years prior to the crash, personal savings had been at all time lows, with Americans averaging somewhere close to no savings at all. That indicates to me that most people assumed that good times would go on forever - they'd never lose a job, the economy would continue moving forward, they'd never have an emergency that might require some of today's cash.

One lesson of the crash is that we should all consider worst-case scenarios. Example: is your car paid for? If not, and you lost your job, would you also lose your car due to an inability to pay? Debt introduces risk, making worst-case scenarios more devastating.

How has this economy changed your money habits?

Teens Worry About Money

Young adults aren't just obsessed with their friends, dates and video games. They also worry about their money, according to a survey released this week by Seventeen Magazine and Bank of America. They interviewed 2,000 young people, ages 16-21. Their interesting findings include:

Teens worry about money and the economy:

• 85% of the teen girls worry about the economy, vs. 75% of the guys.
• 88% of the girls worry about money, vs. 82% of the boys.
• 65% of the teens have changed their spending habits due to the economy.
  

Yet, they're optimistic:

• 82% of the girls think they'll one day be better off than their parents.
  

And altruistic:

• 64% would rather have a job that makes a difference over one that makes a lot of money.
  

Ruminations:

1. Young people should be very motivated to study personal financial management and business classes. Their worry could translate into motivation to learn these skills.

2. Americans tend to err to the side of optimism, which on the good side makes for lots of adventurous entrepreneurs, but on the negative side can lead to disappointed expectations. Is there really any reason to expect that this generation will do better financially than the last? Do they think they're smarter, harder workers? Do they think the economy will simply be better? I'd like to know why they think they'll do better.

Comments? Ideas?