Coffee to Car Payments

Why Wait for Socialized Medicine?

I just switched my own health insurance yesterday!  Let me tell you why.

I make it a point from time to time to re-evaluate my plan since I'm self-employed and responsible for paying all of it myself.  My old plan (by choice) had a $10,000 deductible and $20,000 maximum out-of-pocket cost in a calendar year; however, I did not have to meet my deductible to have small co-pays on prescription drugs and office visits.  So, being relatively healthy, the plan was well suited to me and it only cost me $94/month.

I'm 34 years old and since it hasn't been 12 months since my last cigarette, I'm still classified as a smoker for insurance purposes.  So, I looked at this new plan that had a $3,000 deductible and $5,000 maximum out-of-pocket.  I still got 3 office visits per year for a $30 co-pay without having to meet the deductible as well as $8 co-pays for prescription drugs.  So, I cut my deductible by $7,000 and my maximum out-of-pocket costs by $15,000.

Guess what?  My premium went from $94/month down to $70.75/per month.  So, I'd say it pays to re-evaluate your plan every couple years because the health care business is very competitive and good companies will always innovate to try to earn your business.

Besides my health insurance, I also had a $50,000 term life insurance policy costing me $21/month.  Well, I'm saving $23 on the health insurance and had the option of purchasing a $100,000 term life policy for $33.74 on the same application.  Sounded pretty good so I did that too.  Then I thought, "What the heck?  I'll take the dental plan too for $21.40/month."

So, I added it up and my total premium for everything went from $115/month to $125.85/month. So, what did I get for that extra $10.85?  I got $50,000 more life insurance, $15,000 less in out-of-pocket risk for major medical, $7,000 less for a deducible, and a dental plan to boot.  Plus, I like things simple.  I get this all for one single monthly payment.

I've often told people that the problem with health insurance is agents trying to sell you a "Cadillac" plan when a "Chevy" will give you peace of mind and get you where you want to go for a lot less money.  Affordable health care is very doable right now even through private companies if you first determine your tolerance for risk and then sit down with an agent who will help match it with the right plan.

I call it right-sizing your health insurance.

If you live in Iowa and are responsible for your own health insurance costs, get in touch with me.  It pains me to see people running around who have looked into health insurance, got a quote for way too much insurance, and think it's way too expensive to even consider.  They have some tolerance for risk or they sure wouldn't be uninsured.  But they're probably been quoted a premium 2-3 times what I'd end up quoting.

This post is getting a little long but one final thought:

I don't represent any of those no-name companies that send their fliers to your fax machine in the middle of the night.  I only write business through reputable insurers whose names you'll easily recognize.

What would you do with an extra half-million $$?

   Mark and Michelle are 35 years old.  They got married back in 1997 and bought a starter home.  They bought within their means and have been able to make a few extra payments along the way.  That, combined with the increase in the value of their home has left them with a fair amount of equity.

In 2001, Michelle gave birth to twins, Matthew and Madison.  Now the twins are getting ready to turn 7 and the starter home is getting a little small.  However, the equity they have accumulated will enable them to make a nice down payment on a larger home.   So they start shopping.

After a couple months of shopping they find a nice home that they can afford and make an offer.  Their house sells a couple weeks later.  They've already been pre-approved for a mortgage of $200,000 @ 6% interest for 30 years.  Their principal and interest payment will be $1199 per month.

They move into the new home and get settled.  A few months later, Mark reads a book on this thing called equity harvesting.  The author proposes that Mark and Michelle trade their fully-amortized mortgage for an interest-only mortgage.  Assuming the same 6% on $200,000, their interest-only payment will be $1000 per month.  That leaves $200 per month that they can use to invest and build a nest egg.

So, Mark sits down with a financial planner who shows him that if he invests $200 per month faithfully for 30 years and earns an average of 7%, at age 65, he and Michelle will have a nice nest egg of $243,994.  Mark is a smart guy and says, "Hey, wait a minute! I'll still have a $200,000 mortgage that I need to do something about.  So, after 30 years, I'm really only ahead $43,994." 

Mark remains interested in the concept but decides to shelve the idea for now.  Then he comes across this loan called the Home Ownership Accelerator and learns that it is supposed to be a very efficient tool for equity harvesting.  He knows that he and Michelle are locked into paying $1200 per month no matter what for 30 years so he uses that figure when he talks to the offset mortgage professional.

Here's what Mark learned: If he were to take out an offset mortgage and divert the same $200 per month to outside investments earning an average of 7% (same numbers as the interest-only scenario), he would pay off his $200,000 mortgage in only 18 years, 10 months and have an accumulated nest egg of $92,616.  However, he still has 11 years, 2 months before his current 30 year fully-amortized loan would be paid off.  So now, with no payment, he would be able to invest the full $1,200 per month until he turns 65.  After all, the twins would be done with college at this point, and he and Michelle would have a lot more discretionary income.  So, leaving the $92,616 alone and increasing to $1,200 per month until age 65, he learns that he and Michelle would have a nest egg of $448,485 just from the money that would have gone for mortgage payments.

Now, the only question is, "Does he tell all his friends or just keep it to himself?" 

No-Sweat Equity

Would you store 53% of your life savings under a mattress?  How about in a coffee can?  Would you go to the bank a put in a safe deposit box?  Of course not!  You probably want as much of your money working for you as possible at any given time.

We've heard time and time again that your home is your biggest investment.  We've also been told that the best mortgage is no mortgage but let me ask you a question.  Does your home appreciate faster or slower based on how much equity you've accumulated?  That's right.  It makes no difference how much or how little you owe on your mortgage.  The value of your home is what it is. 

Many equity harvesting gurus will recommend that you continue to refinance every five years or so to continuously tap the equity in your home for other investments.  Your parents and grandparents keep saying to pay off your home as quickly as possible.  I said "They're both right!"  That is you can do both.

In the first quarter of 2007, we Americans owned $20.8 trillion dollars worth of residential real estate on which we owed only $9.8 trillion dollars.  That's an average of 53% equity in our homes.  Let me just add right here that the sub-prime mortgages that are causing such a commotion and turmoil in the market represent less than 20% of all outstanding mortgages.  You've heard the saying that the squeaky wheel gets the most grease.  Well, This quarter 1 2007 balance sheet shows that while consumer debt is growing, overall we still have a positive net worth.  $65.6 trillion in assets-$12.5 trillion in liabilities equals a positive $53.1 trillion in collective net worth!

I agree with Marian Snow when she suggests that we stop sitting on our assets, but beware that an interest only loan or a series of them will leave you with a big mortgage during retirement that will eventually need to be repaid.   The Home Ownership Accelerator offers an extremely efficient platform for equity repositioning along with the ability to retire mortgage free.   

By combining this powerful tool and safe money savings vehicles, you could call it "no-sweat equity"

There's gold in them there walls!!

Let's pretend you just bought a house in an older neighborhood and you were told the following urban legend at your housewarming party:

The house and several others in your neighborhood had been built during the Great Depression.  It is rumored that some relatively affluent individuals had escaped without suffering total losses in the market but they were still panicked.  So, they cashed in their investments and converted the money into gold and then built a modest, comfortable home to ride out the storm.  They decided that since banks weren't safe, they would stash the gold between the studs of their new home and then cover the opening with plaster.  When things got back to normal, they would simply bust out the plaster, retrieve their gold, and start investing again.  After all, the cost of repairing the hole would pale in comparison to accessing their gold again.  Meanwhile, a handful of these folks passed away before things got better and obviously they hadn't told anyone for fear that some desperate soul would try to steal it.  They never even told their family.

Now, you have it from a fairly reliable source that your house is one such house.  Only trouble is you're going to have to gut it or at least start tearing into it until you find it.  The price of the gold will far exceed any cost you will incur putting your house back together.  You have a friend who is whispering in your ear that he found gold when he was remodeling his home so you really ought to try it.  All of your other friends are saying that your home is lovely and even though there may be gold hidden in the walls, you should just leave it the way it is because at least right now you know what you've got.

What would you do?  You've got a very distinct possibility that there's gold in the walls but, you also are very comfortable with your home just the way it is.  So, you live in your home for a few years and then sell it.  A few months later, you're watching the news and there's a story about a family who purchased a home, started remodeling, and discovered a tidy stash of gold hidden under the plaster.  You remember the rumor and upon closer observation you realize it's the house you used to own.  I'm not going to ask what you'd be thinking at that point. 

That is precisely what equity harvesting is all about.  Many folks including financial planners shy away from it simply because they don't understand it.  The view debt and assets as two completely separate parts of your financial plan.  Debt is bad.  Investments are good.  You get a 15 or 30 year fixed rate mortgage because at least you know what you've got.

The truth is that, with the right tools, you can efficiently siphon equity out of your home for outside, relatively safe savings vehicles and still live out your retirement years with no mortgage payments.  You don't have to choose between paying off your mortgage as fast as possible or staying mortgaged to the hilt and maxing out your retirement savings. 

You can do both!

"You are way too young for an annuity"

OK.  What's up with the S&P 500?  Not much, actually.  It closed today at $1325.19 down 7% from a year ago when it closed at $1426.37.  7% isn't a lot unless you think of it in dollars.  If you had $100,000 a year ago you now have $93,000.  You've lost $7,000.  What could you do with $7,000.  In the big picture, it's not financial ruin; however, it is a little disappointing. 

"But Derek, you have to take the good with the bad. You know, win some, lose some"

Really.  What have you heard about fixed index annuities?  The concept is this: If you have money in one of these annuities and it has an annual reset, if the market goes down, your account balance stays the same.  Then when the market goes back up, your interest earnings are based on an index such as the S&P 500.  Your actual interest will vary somewhat from the actual market returns because your money is not directly invested in the market.  The reason is that in order to offer you this protection, the insurance companies will apply a participation rate, a cap, or a spread that may decrease your actual return.  It's a small price to pay for peace of mind.  It is important to make sure that the amount you invest and the type of annuity you purchase is suitable for your particular situation.  Most carriers have suitability standards that serve as a guidline to help you and your agent determine what is suitable; however, it is your money and it's up to you how much or how little of your nest egg you can't afford to lose.  Ask your financial planner if it's something you may want to consider in these uncertain conditions.  The key here is that by the time your direct investment in the market gets back to where you started, your fixed index annuity would have actually earned interest since you never went backward but you got to participate in the recovery of the market.  Zero (loss) is our hero!

There is no one-size-fits-all approach to financial planning!

What if it wasn't about the money?

I'm really looking forward to watching the movie "Bucket List".  I hope it's as good as the previews.  Have you ever started to make a list of the things you want to do before you kick the bucket?  No. I don't mean random ideas that make you think "Wow!  Wouldn't that be cool?".  I mean sit down and start brainstorming about all the things you'd like to do and put it on paper.  When you consider:

• Your career goals
• Places you'd like to visit
• Hobbies that you've not yet found the time to enjoy
• People you'd like to meet
• Some adrenalin-pumping adventure
• A worthwhile cause you'd like to volunteer or contribute to

Chances are if you sit down for half an hour and just write things down as fast as you can to go back and edit later to add meaning and clarity, you'd probably end up with 75 or 100 things.  Go ahead try it. 

Next, you'd rank them in order of priority and be experiencing an overall sense of pleasure just thinking about it.

Now, back up a step.  What if you had to rank them in order of cost and decide which ones you'd have to forgo?

That is why I do what I do...so you can do what you want to do instead of thinking about the money.

Do you sell car insurance?

Sorry it's been over a week since I last posted!  I've been busy studying to take the Iowa exam to offer home and auto insurance and it's got me feeling a little like the picture on the right.  So, I decide to take another test to see if I'm a left brainer or a right brainer.  The result was that I'm 53% left and 47% right.  I guess that makes me undecided.

Anyway, for the last 4 years, whenever I meet someone and tell them I'm an insurance agent, they say "Really!  What type of insurance?"  I say, "Annuities, life, long-term care, accident and health." to which they reply "Oh, do you do homeowners insurance?".  So then I start over, "No, annuities, life, long-ter..."  So, I'm taking this exam so that after next Wednesday, I can just say "Yes".

I'm actually excited to add this new service to my business but the exam is taking all of my brain cells and giving me a mild case of Blogger Block.  I'll be back soon.

But Officer....I was turning left!

When we see a sign that says "no right turn on red", it assumes that we know a couple things already.  First, red means "stop" and second, there is a general exception to that rule if you are turning right. 

This argument will most likely not get you out of a ticket, but this is a good example of what authors, Chip and Dan Heath refer to as the "Curse of Knowledge" in their book Made to Stick: Why Some Ideas Survive and Others Die.  The Curse of Knowledge is simply this:

Knowledge we possess makes it impossible for us to imagine what it's like to lack that knowledge.

This is probably the reason why financial professionals' two biggest challenges when dealing with a client are complexity and apathy.  These two feed off of one another.  The financial professional has a vast amount of information that they can use to help their clients.  The Curse of Knowledge causes them to try to explain every intricate detail to the client.  The client becomes confused and thinks the financial planning process is too complex and decides to put it off.  Now we have apathy.  Isn't the whole idea of seeking advice from a professional to make things simpler?

Here's an example:

I'm almost done with a 500 page book on equity harvesting.  The Curse of Knowledge makes me want to tell you everything I know about equity harvesting when really I could just ask you, "Does the value of your home increase faster or slower just because it's paid for?"  The answer of course is "It will increase or decrease in value exactly the same no matter how much or how little you owe."

So, while it would be nice to not have to plan for a house payment in retirement, in the meantime, maybe your money could be working a little harder for you.

Equity harvesting is simply creating a systematic way to increase your net worth using the equity in you home to build your nest egg.  That's it.  That's all.  I read the book so you wouldn't have to.

The Home Ownership Accelerator is the ultimate tool to make this process systematic, automatic, and with no change to your spending habits.

P.S. Here's a whole list of "But Officer..." excuses just for fun.

The "I List"

In my last post of 2007, I highlighted the people that I have had the opportunity to meet and get to know in person.  For my first post of 2008, I wanted to share the "I list" that Drew McLellan has started to show the growing community of Iowa Bloggers.  Most of the people on this list meet offline on the First Friday of every month at Panera Bread at 6740 University Avenue in Clive (Panera U) starting around 8am.

If you are an Iowa blogger, please post this list on your site along with any Iowa blogs that we might have missed.

The I List

Adam Carroll
Andy Drish
Around Des Moines
Art Dinkin, CFP, CLU, ChFC
Association of Business & Industry
Association for Women in Communications DSM Alliance
Babich, Goldman, Cashatt & Renzo
Barry Pace
BeatCanvas
Bill Grell
Blue Frog Arts
Brett Trout
Bridges Financial
Broom Wizards
C Wenger Group
Carpe Factum
Claire Celsi
Cloud Nine Diamonds
Compass Financial Services
Conference Calls Unlimited
ConverStations
Dave Dreeszen
Des Moines Families
Dickinson, Mackaman, Tyler & Hagen
DMWebLife
Do You Q?
Dr U Fantasy Football
DSM Buzz
Dwebware
Employer Ease
Enroute365
Eric Peterson
Essential Estrogen
Focal Point Multimedia
George Davison
Gift Idea Help
Home Know-it-All
Insight Advertising & Marketing
Iowa Bed & Breakfast Association
Iowa Biz
J. Erik Potter
Jann Freed
Jennifer Jaskolka-Brown
Josh More
Kyle's Cove
Maiers Educational Services
McKee, Vorhees & Sease
McLellan Marketing Group
NCMIC Insurance
Purple Wren
Radio Iowa
REL Productions
Rental Metrics
Rita Perea Consulting
Roth & Company
RSM McGladrey
Ruby's Pub
Runners' Lounge
Rush Nigut
Ryan Rossinick
Simplifive
SmartPestSolutions
Snap! Creative Works
Studio 24 Design
Sullivan & Ward's Iowa Law Blog
Swing Station
The Members Group
The Mitchell Group
The Simple Dollar
The Yin Blog
This Ain't No Spin Class
Transition Capital Management
US Rodeo Supply
Victoria Herring
Wade Den Hartog
Wealth With Mortgage
When Words Matter
White Rabbit Group

I look forward to getting to know many more of you by the end of this year.