Whole Life Vs The Stock Market
Dave Ramsey Fan’s this is for you!
If you know what I do, you know Dave Ramsey and others like Suze Orman are not fans of the concept I teach. They despise “whole life insurance.”
Let’s address this “whole life insurance” area first. The reason I put quotes around whole life is that Dave does not use the correct terminology when speaking about life insurance. There are two categories of life insurance, term and permanent. Under the permanent category, there are several types: Whole, Universal, Variable, Indexed, and a mixture. It gets very confusing but is necessary to understand the differences. Dave hates the fees and charges, as do I because they hurt the growth of the policy and in turn, it hurts the policy owner. The types of policies Dave is referring to is Universal, Variable, and Indexed. These policies are based on market returns to some extent and sold that way! I despise these policies and warn people about them in my book, Farming Without the Bank, and on numerous videos and blogs. What Dave is not sharing is that Whole life does not have these risks, it’s a guaranteed product. He is using the wrong terminology and calling permanent life whole life – lumping them all together! He should know better and if he does and refuses to change that is sad for his followers.
I occasionally get calls from Dave Ramsey followers who truly love how Dave has shown them to save and handle money (as do I). They call my office because they are questioning the market ideals of his program! These particular followers are a blessing to me for a couple reasons.
- They are independent thinkers. They don’t blindly follow the advice of one person. They objectively look at everything and are willing to learn. They purchased my book and after seeing real numbers start questioning why Dave doesn’t share this information with them. These same people have made multiple sacrifices to follow Dave’s program and save money. They understand cash flow and how to budget their money. They know where their money goes each month and they don’t want bank loans.
- Even though Dave preaches that cash is king, these people to see the lost opportunity on using cash and are interested in the potential of uninterrupted compound interest. (Read Why I Don’t Believe Cash Is King.)
- They want liquidity of their money to use today for farming/ranching rather than wait until they are 59 1/2.
I can’t ask for a better client than one who takes the steps necessary to learn, question and avoid the Arrival Syndrome.
I encourage my clients to be independent thinkers and provide education to understand budgets and cash flow. So when Dave Ramsey followers call in, I thank him for taking care of that part for me! Dave’s followers are one step closer to being prepared to use their whole life insurance policy as a tool to help grow their wealth in a very secure way.
My hat goes off to Dave’s fans for taking steps to be financially savvy. If you’ve read this far, you’re looking for the next step. You can find it laid out in simple terms in 100 short pages.
If you have not grabbed the book “Farming Without The Bank” yet please do so, others like you have and found it very helpful in understanding opportunity cost, the power of compound interest and living life without the bank.
None of us have “arrived” (know it all) so keep an open mind. Learn what you may be missing by not having all the information on the subject of smart personal finance.
As always call when you are done reading the book so we can visit and I can get all your questions answered. Yes, I am an agent, and yes I can help you through the process of living life without the bank.
Mary Jo
The Type of Interest is What Matters Most
Today’s blog has the answer to one of the reasons you may not be getting ahead and stuck spinning your wheels. This one little word – uninterrupted compounding- can change it all.
You have been told to focus on interest rates and I am here to tell you it’s not about the interest rate itself, it’s also about the type of interest. This is another one of those things you are not taught to look at. Instead, you are sold based on monthly payment. Bigger issues are what is being lost in that monthly payment.
This is such a misunderstood topic that it takes some time for people to grasp and the initial reaction is ALL interest paid is bad. That is not the case when you are looking at the type of interest.
There is a difference between uninterrupted compounding and amortizing interest and the difference is huge!
Uninterrupted Compounding: This is when interest is added to the principal balance, again and again, each month, quarter, or year. This is an ever-increasing event that is never interrupted to allow for maximum growth of your money.
Amortizing: This is when your interest amount is set based on the principal at the time a loan is taken. The interest is set for the loan and as you make payments you pay down the interest, with the last payment being very little interest and mostly principal. These are your car loans and home loans.
To illustrate the difference between the two takes a look at the below graph. This graph represents the effects of compounding vs amortizing interest.
First, you see the power of uninterrupted compounding of $30,000. The total over 30 yrs is $97,302, a gain of $67,302.
Now you see if you had purchased a $30,000 piece of equipment at 5% your payment over 7 years would be $4,937.71 per year. Seven years of payments are 34,563.97, which is lost interest of $4,937.71.
If you made four of these purchases over the next 30 years you would have lost $19,750.84 to interest for the use of this money, but your money over those 30 years was NOT interrupted so you earned $67,302.
That is the power of UNinterrupted compound interest.
You do not want to have a loan with compounding interest because it will continually increase and you’ll never get ahead with. Credit cards, home equity lines of credit and student loans have compounding interest. Some student loans compound daily! You all know credit cards compound monthly. Most have no idea that home equity lines of credit have compounding interest monthly as well.
How to Get Ahead
What you want is to put your money in a place where you can earn uninterrupted compounding interest. This one little thing alone will make a huge difference in the amount of money you are holding later in life. Just think if you had ten dollars and turned that into $20, then $20 into $40, and $40 into $80, and $80 into $160, and $160 into $320. See how fast that grows, this the effect of compounding.
Summary
In summary, do not just look at that interest rate alone. Make sure you are asking what type of interest you are paying or earning. Make sure you are finding a place to put your money where you can earn uninterrupted compound interest. There is only one place that I am aware of and it’s dividend-paying whole life insurance if there was another tool I would have money there too. The stock market is compounding but it’s not uninterrupted, there is a difference there too.
It’s about allowing your money to work while you use someone else’s.
Mary Jo