Tag Archives: money

Numbers, Numbers, and more Numbers!

Posted on by
12

I’m leaving this post running until Sunday to allow time for more comments … to read the really detailed comments that have been left already (they are like ‘mini-posts), just scroll down to the bottom (once you click on the title/link so that you can see them) … and, please feel free to throw your two-cents in as well!

______________________________

If you have been following this blog for some time – and, if you have also been following the exploits of our 7 Millionaires … In Training! – you will see that I have an obsession with ‘helping’ you to understand your Number.

This is because simply understanding my Life’s Purpose, then quantifying that ‘purpose’ into a Number, had such a big impact on my life …

… I truly believe that I would not be sitting here, writing this very post today, had it not been for that simple act.

It’s a process that should only take a couple of hours – more, if you get the urge to dive deep into what your first cut throws at you.

What’s wrong with having no Number?

Nothing, if you like to fly blind; it’s like embarking on a journey with no destination: any road will get you there … which is OK for some, but not me.

My ‘no destination’ journey took me to a lot of work, two so-so businesses (together, they just managed to break even … and this is after YEARS of operation), and $30k in debt.

Yet, as soon as I realized my destination and found out how much it could ‘cost’ me to get there, it was like suddently letting off the parking brake: things almost magically started to fly.

Don’t get me wrong, there was even more hard work and major risks and decisions to undertake (not many people move country to pursue their dreams AND keep their businesses in the ‘old country’ going).

So, if having no Number is ‘bad’ what’s wrong with picking a number out of thin air?

Again, nothing, but have a look at what our 7MITs came up with after a couple of revisions … and, compare that to their starting Number – their first ‘guess’:

picture-2

Let’s ask them: what changed and why? Why did your Number go up/down or (in only a couple of cases) stay the same? And, why is this exercise better than just picking a Number and going with it?

And, let me ask you … if you have a Number in mind, how did you come up with it? And, why?

Finding your lifestyle break-even point …

Posted on by
5

7 Millionaires … In Training! has been featured in iReport; you can check it out by visiting: http://www.ireport.com/docs/DOC-145792 and, this article has been mentioned in this weeks Carnival of Personal Finance!

_________________________________
rich_doctor

I wrote a post a while ago that explained why most doctors aren’t rich … the point wasn’t to appeal to all the medico’s in our audience; it was to demonstrate that income does not equal wealth.

Jeff, a navy pilot who I would happily trade a month or so of my life with (Maserati for Hornet for a month? Fair trade, if you ask me) commented:

Your analysis failed to consider Scott’s ability to incrementally contribute money from his income over the 10 year period. I just thought it was odd that you left it out, since the mantra of this blog (at least in the beginning–money 101 and early 201 stages) is to save as much of your income and invest it. Why wouldn’t Scott be able to follow this advice? …and more importantly, how would incremental contributions affect Scott’s ability to reach his goals?

Also, I bet the doctor making $700k per year in your example isn’t having a hard time investing $150k/year after tax. Why couldn’t a professional making $350k+/per invest $150k/year after tax (assuming they were following your money 101 steps)?

As I mentioned to Jeff at the time, my point wasn’t really meant to be mathematical … it was based upon my (and, Scott’s – who is the doctor mentioned in the original post) ‘real life’ experiences/observations …

… let me explain using four hypothetical doctors as examples:

‘Good Doctor‘ saves a good proportion of his ridiculously high income (what would you guess: 20%? 30%? More? Less?); lives within his means; etc. but will still most likely ‘only’ get to the $2M – $4M range +/- a few mill. if he is reasonably passively investing. That’s just experience talking …

‘Bad Doctor‘ spends more than he earns … there’s no limit to what some people can spend …  just refer to the Millionaire Next Door example from my previous post, if you don’t believe it’s possible to earn $700k a year and still be ‘broke’!

‘Typical Doctor‘ doesn’t wake up to the difference b/w good/bad doctor until he reads a few books and blogs … typically too late to really become ‘good doctor’ … he can’t save, say, $150k immediately – if ever – because he has ‘commitments’, but he sees the light and builds up to his own saving maximum over time … it’s this ‘lost time’ that is his undoing, so he ends up somewhere less than ‘good doctor’, say, $1M – $3M.

‘Business Man Doctor‘ sees the light and realizes that income/savings alone won’t get him to where he wants to go. He reads my post, and the rest is history 😉

Now, here is the issue:

In all of our four examples, the doctor is doing well – just like the two doctors in Dr. Stanley and Danko’s book – earning $700k p.a. … the problem is, if they are spending all of it to live on now (one of those two doctors was certainly doing that!) how are they going to keep it up in ‘retirement’?

Let’s check the math: $700k salary x 2 [for 20 years inflation @ 4%] x 20 [for min. size of passive nest egg] to ‘replace’ $700k spending power …

… that’s just shy of $30 Mill. in 20 years by my math!

So, there lies the real problem for any doctor / professional; how do they replace their income in retirement?

The mechanism is obvious – they need to channel part of their income into passive investments, and allow time for those investments to grow large enough to replace 70% – 125% of their final income depending on how much their spending will go up (most likely) or down (golf / travel, anyone?) in retirement.

There are only two ways that I know to achieve this:

1. Find their Replacement Income’s Break-Even Point: That is, as their salary increases over the years, how much do they allow their spending to go up in order to control their final spendable salary so that their nest egg neatly replaces it?

Let’s see:

Perhaps if they live off just half their salary ($350k) they may be able to get to somewhere in the near vicinity of $15M assuming that they allow themselves 20 years to get there (i.e. if $30 Mill. in 20 years was required, in our earlier example, to ‘replace’ the future value of $700k today, then $15M might do the same for $350K?)

How do we get that $15 Mill.? Well let’s see what happens if we save the other half of their salary:

$350k – 35% tax X 8% (say, after tax return of their ‘passive investments’). By my reckoning, if they increase these $350k (less tax) contributions by 4% to keep up with inflation each year, they may just get to $15M in 20 years. Success!

Naturally, this works for anybody on any salary … except the lower your required salary, the more that the ‘tools of the poor’ (401k; employer match; etc.) kick in to replace your final salary at perhaps less than a 50% of total income savings rate.

2. Find their Lifestyle’s Break-Even Point: The problem with the above example, of course, is that our ‘good doctor’ has to suffer with living off only half the income that he earns … now that he’s ‘retired’ he’s having to make do with playing at the local Public Golf Course while his professional friends are at the Country Club … poor sod.

To a greater or lesser extent this is the choice that conventional Personal Finance wisdom asks you to make: live large now and live poor later, or sacrifice lifestyle today to go for a longer period of being able to live the same lesser lifestyle in retirement (while your less-financially-astute friends simply take their chances).

But, this totally misses the point: what if the 50% Lifestyle simply ain’t good enough … are you going to take ‘second best’ (albeit for as long as you live) lying down?

If your answer is YES; then go back and revisit 1. with your own numbers and there you have your financial plan!

If your answer is NO; then you have come to the right place …  but, saving/investing alone is probably not going to do the trick 😉

We're split down the middle …

Posted on by
7

… some agree that paying down your mortgage is the dumbest decision that you can make (not really the dumbest …. but certainly down there with the best – I mean, worst) and some simply don’t agree.

Right now, though, I want to pick up on one of Nick’s comments, since he has summed up the ‘pro-pay down argument’ really well:

I do a decent amount of investing myself, and while I don’t claim to be a master of the trade, I do well. That doesn’t change the fact that I don’t know how my investments will turn out. Everything could go horribly wrong, and I could end up taking quite a hit… or it could go really well and I could make a killing.

I don’t think anyone really knows for sure how well their investments will perform. I think anyone who does is either lying or fooling themselves. It is all about managing risk.

Putting a sizable portion of your cash as a down payment, and making prepayments to pay off your mortgage, is very good way to minimize risk. You end up with lower monthly obligations, less debt, more equity… Of course, this means less free money to invest and less money making potential..

Once again though, risk management philosophy comes into play. Is your primary residence something you want to take the risk with? In today’s market, putting less down, and making lower payments would turn out to be a very costly mistake if your investments don’t net the return you wanted (you’ll be stuck paying up to hundreds of thousand of dollars more in interest over time).. and this is only assuming you merely break even on the money you invested (and are not in the red).

I think everyone’s long term plan involves moving to a nicer house in a nicer area. This is something perfectly attainable by playing this situation safe. IMO, it is dangerous to put such basic life plans on the chopping block. I think this is how people could potentially get into serious trouble.

Now, don’t get me wrong. I’m not saying that you should immediately put any money you have towards prepayments, or you should put all your money down on that new house. I’m saying that you need to carefully balance this based on your confidence about making good investments and the amount of risk you are willing to take. In other words, I think its foolish for just about anyone to put very little down and not make prepayments when they can (i.e. tax return time, or portions of a raise). I think its equally foolish to put ALL of your money towards prepayment and down payment.

Make no mistake, that large down payment is a very good protection plan when you lose your job, your wife has a kid, or you encounter some medical emergency. Those lower monthly payments make things more manageable and prevent you from being overrun with debt.

A prepayment of only $300 a month on a $350,000 principal can save you well over a hundred thousand dollars in interest over 30 years. That money goes straight into your bank account or investments when your mortgage is paid off early.

These items are your safety net… and that’s part of good risk management isn’t it? To maximize gains and minimize risks. You can’t just focus on maximizing gains – you need to protect against potential pit falls as well.

By all means have your money work for you, and try to get investments that produce greater returns than your mortgage rate… but start off by minimizing your monthly payment (sizable down payment) and put a good effort in to pay your house off early (prepayments)… You know, just in case those investments don’t work out.

I have some questions of my own; let’s use Nick’s $300 per month example:

1. Is the $300 a month a sizable proportion of the amount that you intend to invest overall? If so, do you know what you are getting for it?

Nick says that paying down his mortgage by an extra $300 per month will save him $100,000 in interest over 30 years … let’s accept that number for now and assume that this $100k can be somehow freed up at the end of the 30 year period:

$100,000 in 30 years will have almost the same buying power then as $31,000 does today (assuming that inflation averages just 4%).

That should provide Nick a yearly stipend of just over $1,500 in today’s dollars (commencing in 2038, assuming that 5% can then be ‘safely’ withdrawn each year).

Now, there’s a problem right there; how can 5% be a ‘safe’ withdrawal rate in 2038?

If inflation is still just 4% Nick needs to find a ‘safe’ investment that will return him 9% after tax (4% to keep up with future inflation and 5% to spend) … he can’t get that return in retirement by paying down his mortgage any more, it’s already paid off!

So, now – in retirement – he has to look for a more ‘risky’ investment than the one he used to get there!

Therefore, I am assuming that Nick will either keep his paid off house and actually entirely forgo this income entirely or move into a smaller paid off house or unit to free up $100k of equity …

… in any event $1,500 or zero a month sounds pretty similar to me 🙂

2. Do you know what returns you can get elsewhere?

Even if Nick isn’t relying on this $100k (then why bother with it in the first place?!) – because he is also  investing elsewhere – what could he achieve if he also invested his $300 a month elsewhere?

Well, Nick is ‘saving’ 6% interest in the current market [AJC: if you aren’t prepared to fix an incredibly low interest rate like this, how can I help you?!], which could be equivalent to a 7.5% – 8% after tax investment return.

[AJC: Unlike investing in income-producing investments, there is possibly no income tax to be paid on your mortgage interest payments/savings … of course, there could be a tax disincentive if you have been itemizing your home interest on your tax return and can no longer claim that deduction]

But, what if he can find an investment that returns more than 8% after tax?

Even an extra 1% (after tax) additional return will improve Nick’s 30 year outlook by 20% (at least, for the $300 monthly extra that he is putting into his mortgage).

3. Do you care?

For me, this is the key question: can Nick achieve his financial goals even without investing this $300 a month elsewhere? If he can’t, is he willing to let these goals go for the apparent ‘safety’ of a home partly or fully paid off?

So, my real question to Nick is: can you achieve your financial goals at the same time as paying your mortgage off? It’s possible (hell, I did it!) but, for most people, not likely … they are already skating too close to the wind even before pulling extra money out of their investment portfolio.

To me, it’s the same thing as asking if you can fish for trout in a babbling brook without getting wet:

It’s possible, but you won’t probably won’t make a great catch unless you are prepared to (slowly, carefully, and not deeper than you can handle) wade in …

Your Perpetual Money Machine won't start?

Posted on by
8

AJC has written his first article on US News magazine’s ‘alpha consumer’ web-site. It’s all about what US News calls Recession 2.0 … check out the article here then PLEASE leave a comment on the US News site!!!

______________________________________

Your Perpetual Money Machine won’t start?

… then it probably just needs a little oil and a good kick!

I am, of course, talking about the Perpetual Money Machine that I covered in a series of posts last month. But, Caprica, who lives in Australia asks:

But not all perpetual motion machines are that seamless. If you want to invest in cash flow positive properties here in Australia, either you are buying into regional areas that are subject to seasonal trends or you become a slum lord. Furthermore, the boom on “cash flow positive” properties and the high interest rates here in Australia has meant that the cash flow positive opportunities have all but dried up.

Similarly, a Berkshire Hathaway portfolio can easily loose large chunks of value during declining markets (sub prime for example).

Is there a such a thing as perpetual motion machine (short of having more than 7 million in the bank earning interest) that means that I don’t need to deal with difficult tenants or worry about every jitter in the market?

Caprica is right, of course … not all Perpetual Money Machines are ‘seamless’, run entirely smoothly, or even start without a ‘kick’ in the right place!

But, start – and run – they will, if you do it just right …

You see, there is one ingredient that you need, Caprica, regardless of where you live: time.

Any reasonable property can become cashflow positive if you allow time for the rents to build up such that you ‘overtake’ the costs … in our analogy, it takes time for the ‘capacitors’ to build up enough ‘charge’ to kick-start our Perpetual Money Machine.

It helps if you can buy when the market is off its highs; it helps even more if you can lock in interest rates when they are still relatively low; it helps if you can put in your research and buy a property that will rent reasonably well and appreciate over time (but, we aren’t looking for ‘home runs’ in either category, here).

Similarly, stocks may go up/down, you just need to keep pumping money in (i.e. buying more stocks) until you have a buffer (excess of stocks) that will allow you to ride the waves and sell down a little at a time to live off (after you ‘retire’).

Equally, it helps if you have the fortitude to ignore the waves entirely -better yet, be contrarian – knowing that the inevitable ‘upwards correction’ will come ‘eventually’.

The Perpetual Money Machine will work anywhere, anytime … you just need to give it time to warm up properly 🙂

Can you diversify a business?

Posted on by
4

I’ve just loaded 3 new videos into the Vault (click on this link, or check the VodPod Widget on the right hand side of this page for the latest) …

Now for today’s post …

Now listen up!

You want to keep working that job forever? Stop reading today’s post! If you’re determined to stay poor forever, you deserve the extra 2.5 minute break 🙂

You want to work your job AND invest in real-estate? Well, keep reading, because SOME of what I’m about to say, applies to RE, too.

But, if you want to blaze the business path … hang about, because Dustbusterz has a GREAT question for you:

Tell me here ,if I am wrong in my assessment. I believe diversifying(i.e. buying or starting many businesses) is better than having all your money tied into just 1 business.
Currently, we own about 5 small businesses, which bring in small amounts of cash. Our intent here is that we will build these businesses up gradually over a set time frame , and at the same time, continue to buy or build more businesses to add to our income stream.
By having these several businesses, we somewhat mitigate future problems if say,1 of these operations should suddenly be stricken with cancer and we are unable to restructure and save it.
So having 10 smaller businesses (1 goes bankrupt or gets sold) it is less of a drain on your income stream as having all your cash in only 1 or 2 bigger businesses.

As I said to Dustbusterz, there are some great reasons TO enter into multiple businesses and some equally great reasons NOT to …

… but, I have to admit, diversification was never on my list … until now )

First, let’s look at why you might want to buy/start just one business:

– You can concentrate on it ( THE reason not to ‘diversify’)

– One business can become many through territory expansion, franchising, joint ventures, etc.

– A bigger business can be more atractive to the people who will pay you more (say, 6 years’ profits) than the typical ‘small business purchaser’ (who might only pay 3 to 5 years’ profits); these uber-purchasers include: e.g. the private equity firms, large corporations, IPO, etc.

Now, let look at how you may end up with multiple small businesses:

– The businesses are related in some way (this is how I ended up with a portfolio of businesses)

– The first business that you buy or start doesn’t have enough potential so you open up another on the side and … it just keeps rolling from there

– You are in the business of ‘flipping businesses’ … really!

Before I continue, let’s take a break to satisfy the real-estate guys:

With real-estate you can own one property or multiple … across a single location or many. It matters not, so long as you put good management in place.

And, if you decide that you are going to be in the business of flipping RE – well, then you have no choice but to be hands on with multiple properties … you just have to hope that it all holds together!

Not so with businesses; the management requirements in small business – indeed, any business – are relatively HUGE (certainly, when compared with the management stresses in real-estate). This usually points to having one business that you grow and grow, slowly and carefully adding management layers underneath you.

I believe that by diversifying, you are exponentially INCREASING management risk (hence, failure) … which may or may not offset the potential diversification ‘benefits’.

But, it can be done … as I said before, I managed it.

And so has Brad Sugarswho is a bit of a legend where I come from … I recall going to a free ‘business seminar’ and being surprised by the speaker: a lanky kid in his 20’s in a slick business suit. And, he’s gone from there to found a well-regarded multi-national business coaching company.

Brad spoke about how he would buy small businesses, often with ‘no money down’ and fix their basic money and management problems, and then sell them off. Brad often didn’t even work in the businesses himself, so I guess that you would say that he’s to ‘random’ small businesses as Ray Kroc was to McDonalds.

I particularly loved this technique that Brad shared:

1. Buy a business for as close to zero dollars as possible (this IS possible … just offering to take on the lease payments – as a take it or leave it ‘final offer’ – is often enough),

2. Install a manager

3. Help the manager build the business up

4. Sell the business to the manager (after all, they have seen how quickly it has grown!)

5. Repeat!

Personally – like RE flipping – this is a ‘business’ (that buys/sells businesses), not an investment. It’s not the kind of business that I like, because there’s no HUGE upside; although, if you can scale upwards of 50 such transactions … 😉

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

Posted on by
Reply

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!!

_______________________________

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

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

    How do you manage real estate risks?

    Posted on by
    Reply

    My most recent post – of a long series – on 401k’s v real-estate (which is a dumb comparison: like comparing the container with the drink that you might put into it … when, what we are really trying to compare is Mutual Funds v Real-Estate) sparked a long series of detailed comments about the risks and rewards of real-estate …

    … I encourage you to read that post and the associated comments here. The discussion culminated in a great series of comments/questions by Jeff who also asked:

    I agree, the “technical risks” need be manageable. But, how much does the management of these risks (infusion of cash when necessary) reduce your return?
    For instance, do you keep a safety net for possible negative cash flows (high-yield savings account, CD)? Do you then bundle the two investments (investment property return plus safety net return) to determine the actual return of the investment property?
    Do you pull cash out-of-pocket to cover short falls? Since you don’t receive any additional growth from this new cash and the new cash is added to your capital investment amount, it drastically reduces your present and future return from the investment.
    Do you borrow more money to cover the cash flows? Since this borrowed money provides no additional return it puts you in severe negative leverage situation. Further, that loan has to be paid back with future cash flows from the investment property that you were expecting to give you the return your initially expected–for lack of a better term–compounding the damage of the negative cash flow.
    Do you use a cash flows from another property to cover the short falls? This seems to be the best solution for the property receiving the infusion of cash, but to what extent doe sit reduce the return of the other investment property–by reinvesting its cash flows in an investment that provides no additional return? Put differently, it is a loss of opportunity to invest those cash flows in something that will bring additional return–rather than saving your RE investment from foreclosure.

    When you experience short falls in RE investing, which one of these options is best? What did you do when you experienced cash short falls, and why? …and what effect did/does it have on your annualized return?

    As I said, great questions, but the first comment that I would make (actually, did make) is:

    I would caution you to remember the phrase: “paralysis by analysis” … in a practical sense, once I satisfy myself that (a) a certain type of investment is within my skill/interest level, AND (b) is LIKELY to meet my investment targets, AND (c) I can cover the risks – usually through a ‘reserve’ which may or may not be sitting in a shoebox with the word ‘RESERVE’ etched in the side, then … shoot … I’ll close my eyes and just go for it!

    In other words, if you are going to be a success in real-estate investing – indeed, any endeavor where you expect to achieve more than the average person expects/can achieve – then you need to have a bias for action.

    Often, we have to proceed in a world of imperfect information …

    … magically, once we jump in a lot of these types of questions just seem to fall away!

    But, to try and answer Jeff’s question:

    Technically, YES the ‘reserve’ is part of the investment and lowers the returns e.g. if you are earning 20% on the investment and only 4% on the CD’s sitting in ‘reserve’ then obviously the actual return lies somewhere between the two.

    BUT pulling ‘free cashflow’ out of one property to help service another, doesn’t actually reduce the return of the first … but, the amount of cash that you put IN to the second property affects ITS return.

    But, at the end of the day, it’s the COMBINATION of all of these returns that counts: will you, or will you not make your Number, or whatever target you set?

    The only real benefit of analyzing the return on each individual investment once you have made it is if you then intend to do something about it e.g. trade it for something better …

    … a forced flight away from stocks!

    Posted on by
    20

    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!!

    _______________________________

    I wrote a post a while ago about the Myth of Diversification – just another piece of financial ‘wisdom’ almost designed to keep you form retiring early / retiring rich …

    Yet, despite the current melt-down that should prove that there is no real safety in diversification, the principles remain as mainstream as this comment from Francis illustrates:

    That’s the idea behind diversification and re-balancing. If you invest in multiple things and periodically adjust the balance between them you are forced to buy low and sell high.

    It really doesn’t take a genius to make a few million if you can just buy low and sell high …

    … but, it takes genius to know when to buy low and when to sell high!

    Who knows where ‘high’ and ‘low’ really sit: they are relative, which serves (partially) to explain why market timing doesn’t work!

    As the Dalbar Study shows:  mere mortals should not be in the business of trading stocks / timing the market; people who attempt this reduce their returns from 11.9% to only 3.9% … !!

    No, we are simply investing for the long term, that’s why I asked Francis:

    I agree with the “buy low” part … but, why “sell high”? Warren Buffett got rich by not selling his winners … he holds on to them.

    Quite rightly Francis responded by pointing out that we aren’t Warren Buffett, saying:

    Another reason to sell is that there are bubbles where the valuation of particular resources is out of whack. Wouldn’t it be a good idea to sell off at some amount before the peak of the bubble then repurchase after the crash? If you could reliably time the market you would sell it all at the peak and buy at the trough. I don’t have a crystal ball and I’m terrible at market timing. I’ve accepted rebalancing as a reasonable compromise.

    As for Warren I know his favorite holding period is forever, but he is buying individual companies and is really good at valuing companies. He avoided the internet bubble like the plague, but I suspect that if he had stocks that became wildly valued he would sell them off.

    But, if we really aren’t Warren Buffett, how do we KNOW when “the valuation of particular resources is out of whack”? Well, according to Francis, that’s when ‘rebalancing’ comes into play …

    But, how does re-balancing provide a ‘reasonable compromise’ to the fact that we are all (WB aside) “terrible at market timing”:

    Let’s say that you have $100,000 invested: 50% of your money invested in stocks and 50% invested in bonds.

    Let’s then say that stocks ‘devalue’ by 50% overnight (a huge market crash) … in the case of an Index Fund, this could simply be a cyclic response to the market that has occurred many times in history.

    Suddenly, your portfolio has shrunk by $25,000, so now you have $25,000 worth of stocks at post-crash prices and $50,000 worth of bonds (their price/value hasn’t shifted in this hypothetical crash). That is, you have 33% in stocks and 67% in bonds … so what do you do?

    Well, you buy $25,000 more stocks … or, do you sell $25,000 of bonds?

    The reality is that most people don’t have the $25,000 in ‘loose change’ to rebalance by topping up their portfolio, so they shift money FROM bonds INTO stocks.

    Yippee … except, what happens when stocks recover and/or bonds dip?

    In that case, you’d be taking yourself OUT of the stock market (a 9.2% – 11.9% annualized return, depending on who/how is doing the measuring) into the Bond market (a 4% annualized return?) …

    … a forced flight away from stocks!

    Would Warren Buffet do this?

    Heck no! Warren Buffett doesn’t worry about market dips; he knows the market always recovers, as long as the underlying businesses keep making money. In fact, he looks at market dips as a buying opportunity (didn’t he load up on Kraft, while we were all bailing out of the market).

    He identifies quality when he buys (bet he didn’t own any Enron), but, he recommends that you buy a little piece of all of America’s finest companies (a.k.a. an Index Fund, so even if you do happen to buy Enron, it’s only a tiny sliver of what you own), if you don’t know how to do what he does.

    Warren doesn’t ‘rebalance’ his portfolio into cash (no dividends even, because cash/bonds doesn’t produce as high a return as his investments can) … and, he certainly buys more when the market dips and NEVER sells.

    Here’s what to do:

    If stocks are the asset class that you like and if you think that the stock market (as represented by an Index Fund or one or a few individual stocks, if you prefer) represents acceptable value:

    1. Buy stocks … as many as you can afford; and,

    2. Keep buying whenever you can afford more; and,

    3. When the market dips, it’s ‘on sale’ … buy even more; and,

    4. Never sell.

    That’s it … now you are Warren Buffett.

    A random walk in the financial park …

    Posted on by
    8

    I’ve looked high and low and I’ve finally found it!

    ‘It’ is the source document for all of the commentators who have (rightly) suggested that Index Funds outperform actively managed Mutual Funds.

    And, it is produced by Standard & Poors who publish the major Indices themselves:

    The Standard & Poor’s Index Versus Active (SPIVA) methodology is designed to provide an accurate and objective apples-to-apples comparison of funds’ performance versus their appropriate style indices, correcting for factors that have skewed results in previous index-versus-active analyses in the industry.

    And, here are their most recent findings (they are in the process of rebuilding their databases for 2008):

    Indices continue to exceed a majority of active funds. Over the past three years (and five years), the S&P 500 has beaten 65.7%   (72.2%) of large-cap funds, the S&P MidCap 400 has outperformed 68.6% (77.4%) of mid-cap funds, and the S&P SmallCap 600 has outpaced 80.2% (77.7%) of small-cap funds.

    The solution is simple: don’t buy any of the funds in the bottom 65.7% 🙂

    Great! But how?

    Well, Mutual Funds are rated by Morningstar as 5-Star (best performance) to 1-Star (worst performance) so, we should simply buy 5-Star funds, right?

    Wrong … because Morningstar – even though it is the best / most highly regarded of all the Mutual Fund ratings services – is only based upon past performance, which is NO guide to how any rated fund will perform in the future as this independent research review found:

    They find, for example, that five-star US equity funds significantly outperform one-star funds only 37.5% of the time; at the same time, these same funds significantly outperform three star-funds 18.75% of the time. It is clear then that—compared to a random walk–Morningstar’s ratings system offers no added value in terms of predicting mutual fund returns.

    If the best can’t do it, do you think you can?

    And, do you want to leave your financial future to a ‘random walk’ in the financial park?!

    So, why do funds tend to fall short of the ‘market’?

    Well, partly because of a tendency to trade stocks too much (the fund managers like to ‘look busy’) and partly because of fees … Mutual Funds tend to fall short of the market by the amount of the fees that they charge!

    The ‘small moral’ of the story: invest in the Indices …

    … find a low cost Index Fund that will do the job; by as much of it as you want and hold it for the long term.

    Of course, the ‘large moral’ of the story is: who the hell is content with 11.9% maximum long-term stock market index returns, anyway 😉