The even greater Power of 10-1-1-1-1

Yesterday’s post was about Suzy Welch’s “life transforming idea” (her words, not mine) about the Power of 10-10-10, which I believe can be applied to financial decisions as well.

Now, here’s an even better idea:

How do you know WHEN something is a ‘major financial decision’ worthy of asking Suzy’s Three Big Questions?

Simple, use this table:

If you’re on a low-to-average income, or still well-entrenched in Making Money 101, then you may want to replace each ’1′ with a ’3′ …  but, if you’re super well-off, then you just start adding zero’s to the dollar amounts to suit!

But, the ‘default table’, as presented here, is a pretty good place to start …

So, next time you’re walking past a store and see that little $99 ‘number’ on sale that you simply “HAVE to have … and, look … it’s ONLY $99! [squeal]” pull out this little table – that you’ve laminated [ AJC: don't worry, you'll wait at least 10 minutes in line at Kinko's to give yourself plenty of time to decide if the cost of laminating is worth it ) ] – from your pocket and check to see that you really need to come back in 24 hours to complete the transaction …

… chances are you won’t.

Think about even the small expenses that you may be tracking, if you keep a budget; take a glance down the list for even one or two random days and see how many you would have not bought (or bought less of, or fewer of, or the cheaper one of, etc.) had you taken even 10 minutes ‘time out’?

Is this being frugal [AJC: shock/horror ... 7million7years on a frugality drive?] – perhaps, overly so? I don’t think so, because you can still make the purchases that you want to make … it’s just that you may change your mind IF you:

(a) allow a little time out, and

(b) ask yourself Suzy’s 10-10-10 questions.

Instead, you may just end up suffering a little less buyer’s remorse …

Does this work?

Well, when the ML Mercedes first came out, I simply HAD to have one of those [squeal] little SUV’s that drives like a car … after some self-imposed ‘time out’, I decided that I really didn’t need the car right now.

Sure enough, the burning desire to buy the car – right then and there – dissipated to the point that I forgot about it; sure enough, a year later the opportunity fell in my lap to buy a factory executive-driven vehicle (genuine … I bought it directly from Mercedes Benz head office), virtually no miles on it, for $11k off the best dealer price that I could get.

Oh, and last week I was hungry … but, after 10 minutes of waiting decided I was even more hungry, so I bought more

Give it a try and let me know how 10-1-1-1-1 works for you … use the Contact Me form on the About page or just drop me a line at AJC at 7million7years.com, I love hearing from readers (but, not spammers) …

Are you carrying expensive debt?

Sometime ago, I uploaded a video that explains my unique debt repayment strategy – after all, EVERY self-respecting ‘finance guru’ has one these days -  and, I wrote a follow-up post explaining the concept of ‘expensive debt v cheap debt.

Money Funk – and, I thank her for (a) taking the time to run the numbers, and (b) for taking the trouble to write about what she found (in not just one post, but two on her own blog) – says:

Now, read the post and reread the post. It took me a couple times to completely follow. But, I will tell you that I am really glad I did. Why? Well, because it could end up saving me $35,328!

I recommend that you read Money Funk’s post – “and reread the post” – to see how she thought through the numbers …

… but, for those of you – like me – whose eyes glaze over as soon as you see a bunch of numbers with IF’s and THEN’s liberally interspersed, simply think about the whole subject this way:

Take a look at the interest rate on the debt that you are thinking of paying (e.g. 2.5% on a student loan; 5.5% on a mortgage / housing loan; 19% on a credit card debt) and decide whether you would be better off leaving that loan in place and investing the payments that you would have made instead.

- If you could earn 8.5% on that money in the stock market, why wouldn’t you do that?? 8.5% is better than either 2.5% or 5.5%

- Alternatively, if you are thinking of borrowing to buy an investment property, why would you pay off a 2.5% loan just to then take out a 6.5% ‘investment loan’?

Oh, and if you are not thinking of buying an investment property instead of paying down any reasonable, low-cost (eg mortgage or student loan) debt … think again!

- However, if you are carrying a 19% credit card debt, what are you thinking of: pay that sucker off ASAP!

BTW: you may be wondering what the Debt-to-Income-Ratio pie chart on the top of the page has to do with anything?

I ‘lifted’ it off MoneyFunk’s site before she changed the pie chart to this one:

Now, I can’t comment on the first version, but I can on this one: even though Motley Fool suggests that it’s OK to carry 15% of your income in servicing ‘bad debt’, the ‘correct’ ratio of bad debt to income is 0% … you should carry NO bad debt.

On the other hand, if you DO currently have ‘bad debt’ (eg consumer loans, car loans, mortgage – this one is in the ‘grey area’ between good/bad debt – or credit cards) then the correct comparison is how much expensive debt you should carry v cheap debt … the answer again, of course, is none.

So, the real comparison is how much cheap debt you should then carry, but that’s a whole other enchilada that I have some of my best people working on for you …

… stay tuned

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This is like the closing credits: the reward for people who don’t leave the movie until the VERY end … or, in this case, actually for people who read the WHOLE post:

I got top billing on a site called “hahagood” … I sincerely hope it’s a foreign-language version of this site and not a Chinese porno site

Debt Snowball, Debt Shmowball … as long as you're RICH!

Let’s face it, if your whole goal in life is to simply get rid of your debt you are probably reading the wrong blog ….

… but, I am working on the assumption that you feel that paying off debt will help you get rich(er) quick(er).

How?

Well, most people that I talk to say: “I will become debt free then I will have all that money spare to start investing … stress-free because I’ll have no debt to worry about”.

Stress free, until I point out that paying off debt early to start saving up to invest later is the long road to nowhere. You see, they will simply start investing too little, too late to make a dent in their true retirement needs … assuming that living on an ashram, eating rice-cakes three times a day isn’t their ideal future

When I point this out, they say: “Oh no, I’ll be accelerating my investment plans because I’ll be borrowing to buy an investment property … you see, I’ll have paid off all of that BAD DEBT (on my car, my TV, my house) and be ready to put all of those monthly payments into a big, fat GOOD DEBT loan on an investment property”.

Then they point me to all the methods that might be used to quickly and efficiently pay down all of this ‘bad debt’  – conveniently and cleverly collated in this blog post by my good blogging friend, Pinyo, over at Moolanomey – and:

BANG!

I’ve got ‘em right where I want ‘em …

You see, the concept of ‘good debt’ and ‘bad debt’ only applies when you are deciding whether to take on debt or not.

Let’s take the following two examples:

You want to buy a car on finance = BAD DEBT

You want to buy a ‘positive cashflow’ investment property by borrowing 80% of the purchase price from the bank = GOOD DEBT

Still with me? Good.

Now, here’s the twist: once you have acquired the debt, there is no more ‘good debt’ / ‘bad debt’ anymore … there’s only EXPENSIVE DEBT and CHEAP DEBT.

I don’t think that this is something that you’ve ever seen anywhere else (at least, I certainly haven’t!), so let’s take a simple example to explain:

You used to have a $25,000 student loan (at 2.5% fixed interest) and a $5,000 car loan (at 11.5%) … and, you cleverly and diligently worked at paying off the car loan at the rate of $150 a month (your minimum payment was $50 a month, so you paid it off pretty quick … good for you!), while maintaining your minimum payment of $25 a month on the student loan.

Now that the car is paid off, you are naturally planning to apply that whole $175 a month to the student loan and have it paid off in only a few years (yay!) … is this the right thing to do?

Well, let’s apply the cheap debt / expensive debt test to the alternatives available to us:

1. Pay down the student loan (save 2.5% interest), or

2. Spend the extra $150 a month on all the stuff we’ve been going without (an effective 0% earned or 100% ‘interest’ expense on the money spent, depending on how you want to look at it), or

3. Stick the money in a CD (earn 1.9% interest).

Clearly paying down the student loan is the best ‘bang for buck’ that we can get, here, and spending the money is the worst.

But, what if we add a fourth option:

4. Use that $150 a month to save up for a deposit, then apply for an 80% loan to buy an investment property (pay 6.5% interest).

Using my ‘cheap debt / expensive debt’ rule, you would immediately work on reducing your most expensive debt, which is the 6.5% mortgage loan … and, the best way to reduce it is by keeping $25k of it in the cheaper (2.5%) student loan.

However, the ‘Ramseyphiles’ would pay off the student loan (BAD DEBT), then save up the entire $175 ($150 + $25) for the deposit on the investment property (GOOD DEBT), and spend a lot more in interest for the privilege.

Now, do you see the sense in doing this?

Well, I can’t!

Why pay down a $25,000 loan at 2.5% just so that you can replace it with another $25,000 loan (plus ‘another loan’ for the remainder of the amount that you will need to buy the investment property) at, say 6.5% or 8.5% or whatever the interest rates will be a few years down the track.

Not, only do you pay more in interest, but you delay the purchase of the ‘cashflow positive’ property which means that you are putting less cash INTO your pocket and missing out on all of that extra appreciation on the property, not for the benefit of being debt free (because you will have a nice, fat mortgage on the property), but for the very minor advantage of only have one larger loan to pay rather than two smaller ones (student loan, plus $25k smaller mortgage).

If you don’t think the property is going to make you money, why buy one at all … and, if you do think it will make you money, why delay?

When thinking about finance, it’s much better to shift your focus from the means (paying off debt) to the ends (having enough passive income to fund your ideal life) …

If you’re interested in understanding more about how this works, read Pinyo’s post to get the basic Debt Snowball mechanics set in your head (he has a nice diagram), then read the Cash Cascade where I explain in video and words how to make this work – even better, in my most humble of opinions – for you

But, if your sole goal really is to become debt free, why not consider doing it the easy way as the cartoon above, suggests?

401k … a means or an end?

There’s still this general expectation that if you earn an income then you will have a 401k … it’s seen as an ‘end’ rather than the ‘means to an end’ that it really is.

Let’s look at the advantages:

1. Tax free on deposits into your 401k … ‘boosts’ your investment buying power by up to 25% to 35%

2. Possible employer ‘match’ … further ‘boosts’ your investment buying power by up to 50% to 100%

Now, let’s look at the disadvantages:

a) Generally, limited investment choices (e.g. managed funds)

b) High fees (both explicit and hidden)

c) Restricted access to your money until government-managed ‘retirement age’

d) A fairly low ‘cap’ on amounts that may be invested

But, similar lists of advantages and disadvantages can be draw up for ANY form of investment, tax scheme, etc. etc. …

… it’s just that we mostly don’t bother. We blindly accept the 401k as the ONLY way to go.

Ryan says:

I share your distaste for 401Ks, and their fee’s and penalties, but I have to believe that there is some advantage to having tax shelters (be them 401k or not). Otherwise, won’t the government just take all of your hard earned (and passively earned!) money?

Ryan’s right … the Government WANTS you to pay tax, but only the minimum that you NEED to pay … they don’t expect a penny more. The problem is, the government is only interested in the tax portion of your personal ‘Profit & Loss’ … YOU should be concerned with all of it!

As Scott says:

Robert Kyosaki states that the wealthy aren’t the one’s paying the lion’s share of the taxes. The middle and upper middle class do.

A 401k, ROTH, ROTH IRA, etc., etc. are all simply methods of protecting assets from taxes to a greater or lesser extent …

… the problem is not with these ’shelters’ in themselves, it’s in their design. You see, they were designed for the ‘average American’ to encourage them to save for retirement.

You and my other readers are probably NOT average Americans – if you are like me, you are aiming for a Number in the millions – and will surely hit the ‘roof’ (i.e. the maximum amount that the Government ‘allows’ you to sock away during any one year) of these vehicles very quickly, as your income starts to sky-rocket from Making Money 201 activities …. then, once you achieve your Number, the limits that you can have socked away will mean little to your Making Money 301 wealth preservation strategies … it’s why I don’t even bother!

It doesn’t mean that you shouldn’t tax-protect your money …

… it’s merely that Scott has hit the nail on the head: these aren’t the ONLY tax shelters available, or even the BEST tax shelters available.

For example, and as Robert Kiyosaki suggests, investing in income-producing assets via corporate structures (LLC’s; trusts; C- and S-Corporations; etc.; etc.) and taking advantage of all the tax deductions available to you (e.g. depreciation, 1031 Exchanges; etc.; etc.) will blow away any ‘tax advantages’ of 401k’s and similar (even WITH the ‘free’ money from the employer match factored in).

So, let’s not put the cart before the horse:

- FIRST look at the types of investments that you need to make in order to reach your financial objectives – be they long term (i.e. your Number) and/or short-term (e.g. flipping a house / trading some stocks and options)

- THEN look at the best ‘vehicle’ to house them in.

As an extreme example, if you decide that a business is the way to go – and, put up 100% of your savings as ’seed’ capital’ – then having a 401k is hardly going to help you, is it?

Blindly setting up a 401k first, then seeing what investments you are allowed to make in them is putting the cart well before the horse!

Retirement Accounts: 7 Case Studies

Everybody has a slightly (some – like me – dramatically) differing view on the whole subject of 401K’s, ROTH IRA’s, and other forms of so-called ‘retirement accounts’.

If you are in a job, then it might be an easy decision: pull the trigger on maximum withdrawals from your salary and attract the generous employer match. Or, is it?

But, if you are self-employed – or, you have more flexibility in how you choose to handle your retirement accounts than the typical employee – then it becomes a bit more confusing: do you outsource or self-manage? Do you try and save your tax now (on deposits) or in the future (on your withdrawals)? Do you even bother …. ?

Well, if you are still confused, let these 7 ‘case studies’ from our 7 Millionaires … In Training! ‘grand experiment’ guide you:

Scott – Not everybody chooses to have a 401k – or, any type of retirement account, for that matter – and some even do it because they feel that they have an even better ‘retirement plan’. Scott is one such example … what do you think? Is he doing the right thing?

Lee – Is at (or past) typical retirement age for most of us. He thinks that he has made some (a lot?) of mistakes with his finances, yet he at least has some money put aside. But, it’s not enough to meet his goals … and, is it really enough to live off?

Josh – On the other end of the age/work scale is Josh, who still has the ‘luxury’ of living at home with his folks: free rent = more to save (or spend?). Should Josh even be saving in a system that doesn’t allow him free’n'clear access to his money until he is 3 times his current age? And, should Josh be using his ‘retirement account’ in the Grand Casino that is the Options Market?

Ryan – Is a highly paid rep. for medical equipment with some ideas of his own. He is exploring the options as to whether he should be investing INSIDE his 401k etc. or OUTSIDE, both for him and/or his wife. What advice could you give him?

Diane – Is currently assessing her options; while she does so, she is drawing down on her retirement account. Should she take the penalties and pay down debt and/or continue to draw down her living expenses?

Mark – The title of his post is 201k in reference to the beating that the stock market has given it recently, but Mark has a long-term view; it seems to me that he hopes to reach a large Number through investments, etc. and leave his retirement accounts simmering along nicely … if the meat’n'potatoes of his Wealth Strategy don’t pan out, then perhaps he’ll have a nice hot financial stew waiting for him when he reaches 60?

Jeff – Here is an example of a reasonably well-salaried government employee who has one foot in each camp: his Grandpappy once told him to invest in his 401k so that he does, as well as have a couple of residential properties. How much money – in today’s dollars – does a high-saving guy expect to accumulate by the time he reaches 60? Is it worth the wait?

You be the judge … be sure to read the comments and add some of your own

The Frugal Billionaire

I just love people who pursue frugality for frugality’s sake … like it’s an end, rather than a means to an end.

For example, take this really interesting post on Grad Money Matters where he points to a bunch of rich old men who live like misers:

Some of the world’s wealthiest people … also happen to be some of the most frugal.

• Despite having a net worth of $62 billion and being the world’s richest man, famously frugal investor Warren Buffett still lives in the same home he bought for nearly $31,500 some 50 years ago.
• John Caudwell used to ride his bike 14 miles to work everyday and cut his own hair because he didn’t want to be bothered going to the barber despite having amassed a fortune of over $2.2 billion. Caudwell also purchased all of his clothing off the rack at British retailer Marks & Spencer.
• Jim Walton, member of America’s richest family and Wal-Mart scion, reportedly drives a 14-year-old Dodge Dakota despite having a net worth of $16.4 billion.
• Retail Tycoon Frederik Meijer, worth $2 billion is known to drive cars with very high MPG and prefers to only stay in budget motels.
• Gene Burd, a 76-year-old journalism professor at the University of Texas has donated over a million dollars to financial foundations but walks 6 miles to work everyday, lives in a very tiny apartment, picks up pennies on the ground, and wears shoes that he found in the trash.
• Ingvar Kamprad built a $33 billion fortune after founding Ikea but the Swedish tycoon drives a 15-year-old Volvo, tries to avoid wearing suits, and flies coach. It’s also said (surprise, surprise) that Kamprad furnishes his home entirely with affordable Ikea furniture.
• Indian billionaire Azim Premji worth upwards of $17.1 billion drives a Toyota Corolla and stays in the company guesthouse rather than 5-star hotels when he’s traveling on business. At a lunch honoring his son’s wedding he even served the food on paper plates.
• We would be amiss to not mention some of the highest earning dead celebrities who are perhaps the most frugal of this list due to their inability to spend For example, top earning dead musician, Kurt Cobain made about $50 million last year. Elvis Presley made $42 million despite having died in 1977 and, in third place, Peanuts creator Charles M. Schulz earnings were about $35 million.

*About the author: This list was compiled by Lewis Bennett, writer for an Individual Voluntary Arrangement (IVA) site.

I have a word to describe this kind of behavior: sick.

You need to ask yourself two questions:

1. Did these people become rich solely because they were frugal?

2. Is their current level of frugality sensible, given their net worth?

There’s no doubt in my mind that you will NOT become rich unless you learn how to delay gratification, but that is not the same as NO gratification. If you can afford to spend on a reasonable lifestyle and you choose not to, you MAY be just as ‘sick’ as the person who lives beyond their means and spends uncontrollably.

On the other hand, if you simply have no interest in the ‘trappings’ of life, that’s entirely a different matter … but, one then wonders why you bother with the whole “let’s get rich” thing, anyway?

But, here’s what I suspect really happens:

1. Some rich people are so driven by the process of making money that they never know when to stop … some take one step, one chance, one risk too many and lose their money, while others just keep going on and on and on, driving themselves – and, their families – to an early grave. There are exceptions of course: those like Warren Buffett who so enjoy what they are doing that they would be doing it even if they were not paid.

The ‘antidote’ is to work out your Life’s Purpose and if it’s to make money … then go until you drop! If not, pursue the financial path until you have acquired enough money to live your Life’s TRUE Purpose, then stop … and, live!

2. Some learn the lesson early that you need to delay gratification and live frugally if you want to avoid spending all the fruits of your labor (rather than reinvesting in your future) but become so driven by the process of saving money that they never know when to stop …

… in my opinion, there’s NO lesson to be learned from a multi-millionaire or billionaire who lives like a miser … other than they are great counterpoint to those billionaires who live overly and ridiculously flamboyantly.

To me the ‘right’ path is simple: live comfortably within your means … whether that is a $50k a year lifestyle or a $50 million a year sustainable one.

How fast is frugality?

I love it when I read interesting posts on the personal finance blogs and other forums … take Mighty Bargain Hunter‘s view that frugality is the fastest way to a better bottom line:

It shouldn’t be the only way you’re improving your bottom line, but it does give results, fast.

For someone who already has their finances under good control, some money-saving activities are simply too little payback for too much time … [but] what about the people who aren’t as well off?  Maybe they’re making $40k or $50k, but have a lot less saved up than they probably should for their age.  This is the situation for which packing your lunch, buying generic, buying used, skipping Starbucks, and clipping coupons will help.

And it helps immediately.  The week you take lunch to work at $2 a day instead of hitting Subway at $5 a day, you’ve improved your bottom line by $15.  Boom.  Or brew your coffee in the morning instead of hitting Starbucks.  $10 per week.  Boom.  Instant gratification.

Building up income streams takes longer, especially the kind of income streams you want (passive ones) … higher income may be better in the long run, but that’s the long run.

Frugality is here and now.

Businesses have taken this view for a long time now … they call it cost-cutting

Usually a business that is spending its time cutting costs is a business that you should selling out of, not buying into …

… it’s current finances may begin to look great, but its future may be bloody awful (that’s why it’s busy cutting costs!).

On the other hand, a GREAT business invests in their future (sales and marketing, product development, R&D, production, etc.) while managing their costs.

So, let’s put it to the test: how fast is frugality?

Well, to find out, I put four scenarios into the Magic Excel Blender and here’s what it spat out:

Save: If you earned $100,000 a year and cut corners so that you could save 20% to stick in your mattress, at the end of 20 years, you’d have $400k stashed away.

Invest: If you only managed to save 10% a year and spent your time investing the proceeds wisely (@ 8% p.a.) you’d end up with $460k in (say) stocks.

Save + Invest: But, if you did the sensible thing and invested your savings instead of stashing it under your mattress (in other words, save 20% then invest it @ 8% … hardly rocket science), you’d end up with more than $920,000 after 20 years, and still have dividends each year to live off … a much better result for only a little extra work together with some belt-tightening.

MM101: However, if you did the really sensible thing, and built up your income (so that you can afford to reinvest the dividends), saved well (at least 20%, but only of your original level of income), and invested both the dividends and the savings wisely (@ 8% p.a.) after 20 years you’d have over $2.5 million.

Frugality may be quick (in that we can afford to pay a bill; pay down a pressing loan), but will never make us rich …

… that’s why we take a multi-faceted view to personal finance:

Making Money 101 – to ensure that our costs are under control and free up some cash to help us invest in MM201

Making Money 201 – to grow our income by investing what little cash we may have (to begin) wisely and maintaining sound MM101 ‘habits’ to ensure that we have ever-growing streams of investment income, keeping our growing personal ‘needs’ (read: expenses) in check, so that we can eventually reach our Number

Making Money 301 – to manage our Number (i.e. our nest-egg) so that it lasts as long as we do, while living the life that we have designed for ourselves, not the life that others have resigned us to.

The perfect way to allocate your spending?

I saw this on Get Rich Slowly and wonder what you think of it?

Since I didn’t allocate my own spending this way ‘on the way up’, I can’t comment either way … but, maybe some of you can?

Here’s how it works:

You take your After Tax income and divide it into three categories:

1. Needs – These are you ‘must haves’ i.e. things that you can’t go without: rent/mortgage; car; electricity; basic food (the book provides a ‘rule of thumb’ for this); and, so on.

You allocate 50% of your after tax income to these needs; given that we already have the 25% Income Rule (spend no more than 25% of your after tax income on rent/mortgage) that leaves 25% on all the other ‘needs’.

2. Wants – According to the book, you should have fun – and, budget 30% of your after-tax income for it. I happen to be of the same mindset … what is money, if not for spending (except that you must do it in a way that allows you to live your Life’s Purpose by your desired Date). 

According to the book, ‘wants’ include additional food (i.e. lamb chops instead of dog food?), your cable TV and internet (these are definite needs for me, especially on my 100″ home theater screen … but, I can afford it!); trips and vacations; and, so on.

3. Savings – that leaves (or should leave) 20% of your after-tax income for your 401k investments and other savings/investment … since this is 5% to 10% more than most authors suggest, I commend it. Just remember, that even with 20% you’re not going to be able to save your way to wealth.

All in all, it seems like a pretty good savings plan to me … what improvements would you make?

The FDIC might insure up to $50 Million of your deposits!

If you’ve ever thought about starting your own online business but didn’t know where to start, check out my latest post on I’m About To Find Out If You Can Make Money Online!!

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Everybody (by now, I hope) knows that the FDIC will insure up to $250,000 of your deposits (recently increased from $100,000 in order to instill confidence in the American banking system), provided they are with an approved bank (most reputable banks are) in the event of a bank failure.

There are some questions as to how quickly you will get your money back … but, at least you know your principal is (relatively) safe, thanks to the FDIC.

But, the $250,000 limit is a real bitch – or, one day will be (!) – for our readers, but JT steps in to save the day:

I found this while looking for information on interest rates for bank accounts with multi-million dollars, and protection for those types of accounts. Like many I knew about the 100k FDIC coverage for normal bank accounts, but I was curious if I had more how could I protect it if I had it in an account. This is what I found,

There is something called CDARS which allows multi-million dollar FDIC protection. CDARS = Certificate of Deposit Account Registry Service. From what I gather it uses it’s network power kind of like a clearinghouse to place large deposits with other FDIC insured banks to give multi-million dollar accounts supposed risk free FDIC protection up to 50 million. It’s a CD, so I believe there is a 2 year min, I could be wrong. Again, I read this rather quickly, and I say I believe, and what I gathered during my explanation. So bottom line is, read it for yourself. LOL I did a search on CDARS, and multi-million dollar FDIC and it popped up with a lot of links.

I saw this question started reading, and though the info I found belonged here. I’m not a banker, or a finance person I was just curious. So for anyone who just happens to have an extra 50 mil stuffed in a mattress some place it looks like there maybe a way to protect that money! LOL

JT is right, there is at least one ‘clearing house’ that (for an appropriate fee, of course) takes care of opening accounts in you name across as many banks as necessary to break your deposits up into lots of no more than $250k each … effectively FDIC-insuring up to $50 million  … legally!

But, you probably do not need to go through all of this … did you know that you can actually FDIC-Insure (and, this happens automatically, provided that you comply with the regulations) as much as $1.75 million in a single bank, without resorting to any third parties or paying any extra fees?

You simply open up different types of accounts: a deposit account for $250k in your name; another one for $250k in your name; a third one – this time a joint account (i.e. in both names) also for $250k; a fourth for your ROTH, and so on – and, it’s all legal!

But, there is a limit (about $700,000 will max out most people) …. then you just go and repeat at a second bank

Now, not only does the FDIC allow this – they actually promote it in their own brochure (this brochure hasn’t yet been updated to allow for the increase from $100k to $250k per account name/type):

Basic Insurance Amount Is $100,000

The basic insurance amount is $100,000 per depositor per insured bank. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank.

If you and your family have $100,000 or less in all of your deposit accounts at the same insured bank, you do not need to worry about your insurance coverage — your deposits are fully insured.

Coverage Over $100,000

The FDIC provides separate insurance coverage for deposit accounts held in different categories of ownership.

You may qualify for more than $100,000 in coverage at one insured bank if you own deposit accounts in different ownership categories.

Common Ownership Categories

The most common ownership categories are:

• Single Accounts
• Certain Retirement Accounts
• Joint Accounts
• Revocable Trust Accounts

Single Accounts

These are deposit accounts owned by one person and titled in that person’s name only. All of your single accounts at the same insured bank are added together and the total is insured up to $100,000. For example, if you have a checking account and a CD at the same insured bank, and both accounts are in your name only, the two accounts are added together and the total is insured up to $100,000.

Note: Retirement accounts and qualifying trust accounts are not included in this ownership category.

Certain Retirement Accounts

These are deposit accounts owned by one person and titled in the name of that person’s retirement plan. Only the following types of retirement plans are insured in this ownership category:

• Individual Retirement Accounts (IRAs) including traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plans for Employees (SIMPLE) IRAs
• Section 457 deferred compensation plan accounts (whether self-directed or not)
• Self-directed defined contribution plan accounts
• Self-directed Keogh plan (or H.R. 10 plan) accounts

All deposits that an individual has in any of the types of retirement plans listed above at the same insured bank are added together and the total is insured up to $250,000. For example, if an individual has an IRA and a self-directed Keogh account at the same bank, the deposits in both accounts would be added together and insured up to $250,000.

Naming beneficiaries on a retirement account does not increase deposit insurance coverage.

Note: For information about FDIC insurance coverage for a type of retirement plan not listed above, refer to the FDIC resources on the back of this brochure.

Joint Accounts

These are deposit accounts owned by two or more people. If both owners have equal rights to withdraw money from a joint account, each person’s shares of all joint accounts at the same insured bank are added together and the total is insured up to $100,000.

If a couple has a joint checking account and a joint savings account at the same insured bank, each co-owner’s shares of the two accounts are added together and insured up to $100,000, providing up to $200,000 in coverage for the couple’s joint accounts.

Example: John and Mary have a $220,000 CD at an insured bank. Under FDIC rules, each person’s share of each joint account is considered equal unless otherwise stated in the bank’s records. John and Mary each own $110,000 in the joint account category, putting a total of $20,000 ($10,000 for each) over the insurance limit.

Account Holders	Ownership Share	Amount Insured	Amount Uninsured
John	$ 110,000	$ 100,000	$ 10,000
Mary	$ 110,000	$ 100,000	$ 10,000
Total	$ 220,000	$ 200,000	$ 20,000

Note: Jointly owned qualifying trust accounts are not included in this ownership category.

Revocable Trust Accounts

These are deposits held in either payable-on-death (POD) accounts or living trust accounts.

Payable-on-death (POD) accounts – also known as testamentary or Totten Trust accounts – are the most common form of revocable trust deposits. These informal revocable trusts are created when the account owner signs an agreement – usually part of the bank’s signature card – stating that the deposits will be payable to one or more named beneficiaries upon the owner’s death.

Living trusts – or family trusts – are formal revocable trusts created for estate planning purposes. The owner of a living trust controls the deposits in the trust during his or her lifetime.

Note: Determining coverage for living trust accounts can be complicated and requires more detailed information about the FDIC’s insurance rules than can be provided in this publication. If you have a living trust account, contact the FDIC at 1-877-275-3342 for more information.

Deposit insurance coverage for revocable trust accounts is based on each owner’s trust relationship with each qualifying beneficiary. While the trust owner is the insured party, coverage is provided for the interests of each beneficiary in the account. The FDIC insures the interests of each beneficiary up to $100,000 for each owner if all of the following requirements are met:

• The beneficiary is the owner’s spouse, child, grandchild, parent, or sibling. Adopted and stepchildren, grandchildren, parents, and siblings also qualify. In-laws, grandparents, great-grandchildren, cousins, nieces and nephews, friends, organizations (including charities), and trusts do not qualify.
• The account title must indicate the existence of the trust relationship by including a term such as payable on death, in trust for, trust, living trust, family trust, or an acronym such as POD or ITF.
• For POD accounts, each beneficiary must be identified by name in the bank’s account records.

If any of these requirements are not met, the entire amount in the account, or any portion of the account that does not qualify, would be added to the owner’s other single accounts, if any, at the same bank and insured up to $100,000. If the revocable trust account has more than one owner, the FDIC would insure each owner’s share as his or her single account.

Note: The following example applies to POD accounts only. Coverage may be different for some living trusts.

Example: Bill has a $100,000 POD account with his wife Sue as beneficiary. Sue has a $100,000 POD account with Bill as beneficiary. In addition, Bill and Sue jointly have a $600,000 POD account with their three children as equal beneficiaries.

Account Title	Account Balance	Amount Insured	Amount Uninsured
Bill POD to Sue	$ 100,000	$ 100,000	$ 0
Sue POD to Bill	$ 100,000	$ 100,000	$ 0
Bill & Sue POD to 3 children	$ 600,000	$ 600,000	$ 0
Total	$ 800,000	$ 800,000	$ 0

These three accounts totaling $800,000 are fully insured because each owner is entitled to $100,000 of coverage for the interests of each qualifying beneficiary in the accounts. Bill has $400,000 of insurance coverage ($100,000 for the interests of each qualifying beneficiary – his wife in the first account and his three children in the third account). Sue also has $400,000 of insurance coverage ($100,000 for the interests of each qualifying beneficiary – her husband in the second account and her three children in the third account).

When calculating coverage for revocable trust accounts, be careful to avoid these common mistakes:

• Do not assume that coverage is calculated as $100,000 times the number of people –owner(s) and beneficiary(ies) – named on a trust account. Coverage is provided for the interest of each qualifying beneficiary named by each owner. Additional coverage is not provided to the owners for naming themselves as owners. For example, a father’s POD account naming two sons as equal beneficiaries is insured to $200,000 only — $100,000 for the interest of each qualifying beneficiary.

Do not assume that the FDIC insures POD and living trust accounts separately. In applying the $100,000 per-beneficiary insurance limit, the FDIC combines an owner’s POD accounts with the living trust accounts that name the same beneficiaries at the same bank.

All you need to do, is be prepared to handle a few different accounts … doesn’t seem that difficult to get the peace of mind that you need when banks start failing …. apparently, there’s more to fail, yet.

You can calculate your insurance coverage using the FDIC’s online Electronic Deposit Insurance Estimator at:  http://www2.fdic.gov/edie

It's not what you earn that counts …

I wrote a post a short while ago assessing whether the rich should invest in Index Funds.

I received a few interesting comments, including this one from a reader named Mike, that I thought I should share with you all:

Would you do a post that considers the lifetime earnings of different people? Reason being I read an article that high school graduates earn an average lifetime earnings (from 25 to 64) of $1.2 Million. For people with a college degree this goes up to $2 million, with a Masters it’s up to $2.5 million and a PhD brings in $2.9 million. For people with professional degrees (doctors & lawyers I presume) the number goes up further to $4.4 million. Still not bad, an average of $100K per year for the latter category. For the purpose of this article I’m assuming that all earnings are reconciled to net present values.

So you’ve managed to earn $7 million in 7 years… that’s really impressive and nearly twice that of a doctor’s lifetime earnings. What have you earned throughout your life?

For me I’ve earned $2 Million in my life to date. More than half of this has come in the last 3 years. I’m 35 now and have been working since I was 23. I figure between now and age 65 I should be able to earn a total of about $8 million more with an medium / optimistic case. I will pursue investments but realize high risk brings high reward but potentially devastating losses. For example I’ve taken a large position ($110,000) in a Chinese stock with what I believe to be very strong fundamentals and have researched this company for the last 4 months in detail. In the last 3 weeks the stock is down 30% from where I bought in…! So I don’t put everything into high risk investments for that reason.

I think starting a business has elements of this… if your business crashed you would have lost it all I guess?

Firstly, here is the official government report that I believe Mike is referring to:

http://usgovinfo.about.com/gi/dynamic/offsite.htm?site=http://www.census.gov/prod/2002pubs/p23%2D210.pdf

However, I am totally unconcerned with income or lifetime earning potential … I believe that there is very little correlation between what a person earns today – or over their lifetime – and, how wealthy that they are …

… you see, it’s not what passes through your hands, but what sticks that counts!

I remember reading the book that passes for a ‘bible’ amongst the personal finance community: The Millionaire Next Door (because, to a casual reader, it appears to equate ‘frugality’ with ‘wealth’, which of course is only a small part of the story) and was struck by the story of two doctors:

Both were on super-high incomes, yet one doctor was ‘rich’ and the other ‘poor’ …

… one had saved/invested a good proportion of his ridiculously high earnings, but the other had lived the ‘high life’ and was in debt.

Same income … vastly different outcome.

So, when Mike asks:

So you’ve managed to earn $7 million in 7 years… that’s really impressive and nearly twice that of a doctor’s lifetime earnings. What have you earned throughout your life?

… I say: I didn’t ‘earn’ $7 million in 7 years in the traditional sense; plenty of corporate CEO’s, super-high-flying attorneys, and some medical specialists earn more that that in 7 years (some in 1 year).

In fact, at the time my ‘take home’ and total combined business incomes were less than many professionals earn, and certainly nowhere near the stratospheric heights that I just mentioned …

… no, I ‘earned’ the $7 million by investing my far more modest earnings and my Net Worth grew faster than my earnings ever could.

Keeping the ‘two doctors’ story in mind, do you now see why I don’t care what my lifetime income was? If not, consider Mike’s closing question:

I think starting a business has elements of this… if your business crashed you would have lost it all I guess?

The answer to this question is the key to Making Money 301 (keeping your wealth) and explains why income is so unimportant from a wealth perspective:

For the ‘poor doctor’, when his income stops so does his (financial life); if he loses his ability to earn his ‘paycheck’ through some disaster (he certainly doesn’t have the luxury of retiring, yet) he is just on broke!

But, it’s possible that our ‘rich doctor’ may be O.K. albeit at a lower standard of living … at the very least, he is debt free. At best, he has some passive investments to help sustain him and his family … probably not enough to sustain his current lifestyle, though.

In my case, I ploughed as much income into investments as possible and waived all ‘pay increases’ (I could have ‘paid’ myself a higher proportion of my business profits, but chose not to) …

… in fact, my wife kept working, as she earned more than I took home.

In doing so, we put ourselves in a position where it would not matter if the businesses crashed … we would not have lost it all. In fact, the bulk of the $7 million in 7 years was in passive real-estate … selling the businesses just two years later was the ‘cream on top’.

The Making Money 301 ideal is this:

Earn money, plough 100% of it into investments, live off the income of these investments as though you were already retired … increase your spending only as the portfolio income increases.

Simple and self-sustainable … of course, for most people, the ideal is not achievable, which is why you start with ploughing 10% of you income into investments, and build from there …

BTW: Visit this week’s Carnival of Personal Finance; we have an article published there ,,,