Financial Uproar

There are all sorts of things that just don’t combine well together. Sex and food at the same time is just wrong. Stop eating strawberries during sexy time people. Peanut butter and jelly? Gross. Yeah, I said it. And you can’t make me take it back. Take your peanut butter/jelly agenda and shove it somewhere dark. M&Ms and pretzels? STOP TRYING TO PLAY GOD.

And, in what has to be the worst hybrid of all, we have whole life insurance.

For those of you unfamiliar, whole life insurance takes a investment product and has it make sweet, sweet love to an insurance product, to create some sort of insurance-investment hybrid. Whole life insurance takes your monthly premium and invests it in a fund, with some sort of principal protection attached. You pay dearly for that protection, usually in the form of both higher fees and crappier returns.

This compares to straight term life insurance, which is relatively straightforward. You buy a life insurance policy for a certain amount of years (hence the term, uh, term) and you either die or you don’t. If you die, you can enjoy watching your wife’s new boyfriend move into the digs your death paid for, assuming you come back as a ghost. If you don’t die, you’ve exchanged years and years of monthly payments for nothing but peace of mind. It almost makes you want to jump in front of a bus two months before your policy expires. I said almost. Don’t do that.

Back to whole life. As you contribute more and more to the investment, the value of your insurance goes up. There are two values that your policy is worth. There’s a cash value, which is what the product is worth if you decide to cash the thing out, or you can use that as collateral for borrowing against. There’s also the death benefit, which is worth more than the cash value, because you should be rewarded for not being alive anymore. Even though it appears to be an investment on the surface, the return of your whole life policy will always trail the returns the index. Why is that?

It’s simple. The insurance company needs a cut, so they take it in two ways. Firstly, they charge higher fees for these types of products, since there is an insurance element to it. They have to protect their interests somehow. So, not only are you paying for an actively managed mutual fund, you’re also paying for the insurance company to protect your principle. Insurance products exist to do this inside the insurance world, but they obviously cost money. Congratulations, you’ve now paid two fees – one to insure the investment and the other to manage the investment in the first place. Fund managers have a hard enough time keeping pace with the market without an extra insurance fee tacked on.

These insurance products are uglier than Rosie O’Donnell making out with Ellen DeGeneres. The problem is, at least from your perspective, is there’s a whole army of salespeople pushing these things like a cocaine dealer in Lindsay Lohan’s neighborhood. (Almost topical!) This army knows all the buzzwords and sales strategies to get suckers like you to buy in. Besides, whole life policies generally pay a much higher commission than boring old term life insurance policies.

For instance, they’ll tout the guarantee of getting paid when you die. Well, term insurance also pays out when you leave an ugly corpse, and it does so without making you pay enormous fees. If you’re a relatively healthy young person, you can buy a term policy for $20-$30 per month that’ll pay out $500,000 to your wife’s boob job fund. (Hey, she’s gonna be single now) You’d need close to a thousand bucks per month to accomplish the same thing with a whole life policy. As the cliche goes, just buy term and invest the difference.

Of course, it wouldn’t be an insurance post at Financial Uproar (witty penis jokes since 2010) without the obligatory P.S.A. about whether you need insurance in the first place.

If you are single and have no rugrats running around, you do not need insurance. Pro-insurance advocates will try to scare you by threatening you with the fear of future uninsurability. (Is that even a word? Screw it, I’m going with it) Yes, there’s a small chance that a relatively healthy young person may develop a debilitating illness that makes it impossible to get life insurance in the future. There is an incredibly small chance of this happening. People who routinely suck on sticks known to give you cancer find a way to get life insurance. Keep that in mind.

Even if you’re married without a kid, life insurance is still a bad idea. Unless you’re one of those “overprotective” guys who won’t let his wife work, she’s not a liability. Chances are, she’s got more education than you do and makes a decent living of her own. Why would you get insurance to protect her? Chances are, your work benefits plan will pay out enough to bury you, hence negating the only financial liability your death will cause your spouse. Of course, if you actually saved and invested, there’d be enough there to buy even a fancy coffin.

The only time you should buy insurance is if you have something that you cannot afford to replace if you have to. If you can’t afford a new car, then you need to insure the cost of replacing your old one. Have a household that can’t survive without your income? Then you need to insure the cost of replacing your income.

If you extend this logic, then there’s no reason to insure a child’s life, since you’re actually better off financially without that liability. There’s also no reason to insure yourself just because you might not be able get it in the future. Would you buy 18 jars soy sauce because you might not be able to get it in the future? Not unless you’re some sort of weird-ass hoarder.

There. Now you don’t have to waste your money on whole life insurance. Save it for a hooker or something.

I try to spend at least some of my time hanging out with people who are more successful than I am. And with hot chicks.

Usually on Fridays, when I’m done with the chips, I head over to my Dad’s office. He (along with his business partner) runs a multi-million dollar business out of a run down retail outlet. The business is primarily real estate driven, between the two of them they own all sorts of properties. There’s an apartment block, many rental houses, and even a trailer court owned between the two of them. Unfortunately, the trailer court is devoid of a banjo-pickin’ inbred sitting on a rocking chair named Cletus.

Throughout their working careers, they worked blue collar jobs. One worked for the railroad for years. The other for a farm machinery dealer. One tried his hand at selling real estate (with only marginal success) while the other ran a taxi. Neither man had the benefit of making six figures per year until fairly recently, when they had both already built up impressive balance sheets.

What’s the secret? Did they receive large inheritances from random great uncles? Were they extra sexy and sold their bodies for lots of cash? (That did not bring up a pleasant mental image) Did they start a crappy frugality blog and sell it for 7 figures? No, there were no get rich schemes involved. They simply lived cheaply, invested intelligently, and slowly accumulated assets. The power of compounding took over, and today they’re in an enviable position, at least financially.

As we talked on Friday, the subject of budgets came up. You guys should already know I don’t have one. Those of you who have one spend hours per month coming up with amounts you can spend on certain categories, all to try to end up with some savings at the end of the month. I, meanwhile, simply pay myself first and live on the difference. I accomplish the same thing, all in about 5 minutes a year. It’s smart, it’s simple, and I think you’re all suckers for not doing it. As long as we accomplish the same goals, who cares how we get there?

My problem with budgets used to be like my problem with forearm tattoos. The problem existed, I just didn’t care enough to do anything about it. I still haven’t done anything about the forearm tattoo thing, (except ranting about it during some Saturday Morning Dump like a year ago) but I gotta do something about the budget thing.

Getting back to the conversation on Friday, do you think the two wealthy guys I was talking to have ever had a budget? OF COURSE NOT. Think about the truly wealthy people you know. How many of them have a budget? I’m willing to bet it’s not very many.

Rich people generally become wealthy because they’re committed to the goal of accumulating money. They simultaneously spend time working harder and finding ways to spend less. They know they can supercharge their savings by focusing on both sides of the equation, so they do. Frugality becomes a way of life for the aspiring wealthy. Spending money takes them further away from their goal, so they try not to.

Meanwhile, let’s look at the average budget. There’s categories for things like rent, utilities, food, and the like. These are true necessities, so I’m not going to argue with those categories. But what about allotting money for entertainment? If you give yourself $100 per month for entertainment, are you going to spend it simply because you’ve allocated money for it? How about your budget for eating out?  Is your budget really doing all it can to save you money?

When I look at the bloggers I know who make budgets, there’s only one I know who is legitimately on their way to becoming wealthy. Formerly Fabulously Broke, Serena from The Budgeting Tool has a net worth approaching $200,000 – and she’s only in her late 20s. She’s pretty pro-budget – after all, she named her new blog after the budgeting tool she created. There’s no doubt that creating a budget has helped her create wealth. But do you know what’s 5 times more important? The fact that she’s maximized her income and cut her expenses like some sort of frugal nut. The budget is only secondary.

How many monthly spending updates do you read where bloggers completely crap all over their spending goals? Yes, I realize stuff happens. But shouldn’t emergency funds take care of that stuff?

Instead of having a budget, can I suggest an alternative? This may be a little extreme for some of you, but if you’re not serious about building wealth, I’m surprised you’re even here. Instead of allocating certain amounts of money for expenses every month, focus on cutting the crap out of those expenses.  Entertainment? Screw entertainment. Work more and use the library.Want a fancy iPhone and the $70 plan that goes with it? Not if you’re going to rich.

Of course, you’re probably not going to want to give up those things. That’s fine, then you gotta make sure you really maximize your income, and plug holes in your spending. If you spend extra on your cell phone, then maybe you should drive an older car. If you spend lots of money on people preparing food for you (like I do) then maybe you should cut your clothing spending to less than $50 per year. (It helps that work gives me a credit towards buying clothes, but still.)

The point is, you’ve got to maximize your saving. I’m don’t think a budget is the way to make that happen.