Gary: Finally, a topic I can talk about!

Wow, it’s been a while, Gary.

Gary: You’ve been off-topic for a while with all this tax-related advice, education on saving strategies, and so on. I’ve been trying to talk product for a while!

Thrilling.

When my youngest daughter was born last year, we received the opportunity to purchase $5,000 of whole life insurance for less than a dollar a week!

You: Why are you shouting?

I’m not shouting, I’m just trying to relay the enthusiasm presented in the cover letter.

You: Oh.

Gary: It’s a great idea – buying life insurance for a kid!

You: It is?

No, it’s not.

Gary: Think about it.  It’s as cheap as it will ever be (the kid was just born, his/her life expectancy is forever), there’s usually no medical check-up required, and when you buy the policy, your child has protection for life.

You: How so?

Gary: There won’t be any future medical evaluations to retain the policy. So if your child becomes seriously ill and would otherwise not be insurable, he/she would still have coverage through this policy.  Such peace of mind is worth a lot.

You: Is that so? Is all of this true, Michael?

Yes.

You: So I’ll guess I’ll sign Junior up.

No.

You: No?

Gary: No?

No.

You: Why not?

Because, as usual, Gary is only telling you half of the story.

Gary: Hey, I’m right here.

You: What’s the other half?

Think about the true purpose of life insurance.

You: I’m not sure – to protect your loved ones, right?

Exactly.

You: Cool. Got that one right.

Gary: It’s also an investment.

It can be an investment, Gary. But the primary purpose of any life insurance purchase should be to protect your loved ones.  Other features are gravy. Some additional life insurance benefits could have value in certain situations – but you must start your analysis with an understanding for how the purchase will increase our ability to protect your loved ones.

You: I’m with you.  But I love my child.

Of course you do.  I love my little girls.

You: Do you have life insurance?

I sure do.

You: Then why are you telling me not to buy some for Junior?!

Because my life insurance is on my life, not my children’s.   (We have life insurance on my wife’s life too.) Emotions aside, if something were to happen to me or my wife, we would be financially devastated (absent life insurance) since an income would be lost overnight.

You: Okay, I see the importance of the parents having life insurance.

But if my child were to die – the worst thought imaginable from an emotional standpoint – it is, financially-speaking, utterly irrelevant.

You: Why?

Because neither of my children have an income. In fact, they cost me money (and a lot, especially given their appetites, but I digress.)   As a result, there would be little financial impact from their early passing.

You: But what about if they get sick and would be unable to get insurance on their own?

Gary: Yeah, what about that?

First of all, the odds of that happening are unbelievably slim – realistically, when they have children of their own, they’ll need life insurance and will buy it then. Second, even if they do find that they need life insurance and are not insurable at that time, the amount of insurance they can get via this policy is likely to be highly insufficient.

Gary: What about the cost being so low?  This is just a few bucks a week we’re talking about and some policies even provide for your money back in twenty years!  Can’t beat that.

You: That does seem like a pretty low risk to take.

Both of those facts help to lower the risk of this purchase decision.  But doesn’t the offer to get your money back in twenty years seem too good to be true?

Gary: No.

You: A little.

Think about why the insurance company can do this – why it is that they can pay all that money back to you in twenty years.

You: I don’t why.

Gary: Because we can.

Exactly.

You: Really?

Gary: Really?

Yes.  The life insurance companies can provide this “money-back guarantee” after 20 years because they’ll stilll make money.

You: How?

Gary: I’ve got to get a job at corporate.

The insurance company can keep all the premiums paid over the twenty years, invest it, earn a profit and then just return to you the amount of money you originally paid.

You: With interest?

Of course not.  The true cost of insuring someone who hasn’t yet reached adulthood is microscopic, so the insurance companies can help close this deal (at an emotional time for new parents) by apparently taking the risk away in making this decision.

You: But I still want to help my child.

Gary: See, Michael!

I see, Gary.

Congrats on being motivated to give your child a great financial head start.  To do so, I recommend you strongly consider starting a 529 plan with the same money you otherwise would have spent money on life insurance you don’t need.  That’s a bigger help – and the money can grow between now and when your child goes to school.

#     #     #

Something tells me I’ll be hearing from you – thoughts?

It’s Friday, so it’s time for this week’s reader-submitted Q & A. If you’d like to submit a question, click here for more information or simply email a question.

I just received a significant raise and now I can afford to save more.  I already max out my 401(k) and a friend of mine said that the best thing to do now is to buy an annuity because that way I can get more tax-deferred growth.  But my wife’s friend told her a whole life insurance policy would be better since there’s an insurance component.  Last, a friend of mine at work says I shouldn’t do either; instead, he says, I should just get index funds.  Who’s right?

–Jonathan P., 26, Cincinnati, OH

Congratulations on your raise, Jonathan.  It appears that your increased income has made you attractive to a few others already.

Gary:  Indeed, I scour the “Movers and Shakers” column every week.  When’s the best time to catch you, JP?

While your dilemma may seem confusing, it’s actually not.  Let’s address a few points:

Tax-Deferred Growth

While tax-deferred growth is important – especially for long-term saving objectives like retirement – it is far from the only consideration. You must also think about risk, required return, ability to access funds in an emergency, fees/penalties, and so forth.  Both annuities and whole life insurance policies do promise the benefit of tax-deferred growth.

Gary: Amen!

However, so does an IRA.  With an IRA, you can invest in index funds, which will have very low expenses. So, if you are looking to save more for retirement and have not yet done an IRA, I’d start there.  (You should also consider a Roth IRA, which allows the benefit of tax-free growth.)

An annuity is seldom an appropriate product for a 20-something because of the lack of flexibility in the product and the existence of other greater financial priorities typically not yet met by a 20-something (including full funding of 401(k), IRA, emergency fund, etc.).  A whole life insurance policy is also not something relevant to a 20-something, especially one without any dependents. Life insurance is arguably the most important financial consideration out there – once you have a child (or, perhaps someone else) depending on your income. But if no one is hurt – financially speaking – by your untimely demise, you don’t need life insurance, and certainly not just to get the tax-deferred benefit.

But before you go ahead and put your money into an index fund, make sure you understand the goals for your money. If it’s for something long-term such as retirement, go ahead. But if you have not yet paid off all your high-interest debt, established an emergency fund, made significant progress towards a housing downpayment (or already own a home), I suggest starting in one of those places before putting more money in the stock market.

And be sure to continue to ask questions first, buying (perhaps) later.  You’ll never regret sleeping on a financial decisions.  If it’s a great idea today, it will still be a great idea tomorrow.

I just stumbled on this not so recent but still accurate summary of how life insurance companies hawk their wares to the Gary’s of the world. None of this should shock you, yet the extent of the commission-first culture may startle you. It’s unfortunate, but Gary only exists thanks to these companies’ marketing messages. If commissions didn’t drive sales, the insurance companies wouldn’t continue to offer them. Then again, without the high commissions, would some advisors be in a different line of work, one more naturally suited to a heavy sales culture?
To be sure, there are great financial advisors who take commissions and there are fee-only advisors who should be doing something else. But I’ll take my chances on someone who has no chance to be Gary.

Then I’d check his (or her) references.

How did you pick a planner? Any regrets? Any good stories?

“personal finance” “financial education”

You: I just bought this whole life insurance policy yesterday. Was that a good idea?

It might have been, but I don’t know.

You: How come?

Well, I’d have a lot of questions to ask you before I could comment on what’s appropriate for your situation.

You: What kind of questions?

As in your income, assets, marital status, previous marital status, children, age of children, mortgage, other debts, degree of participation in your 401(k) plan, if it has a match, and so on and so on.

You: Well the guy who sold me the policy didn’t need to know all that!

No, not to sell a policy to you he doesn’t.

You: So did I get burned then?

I still don’t know because I still don’t know enough about you. But the fact that you’re nervous and asking me about a decision you made yesterday tells me that you may have good reason to be fearful.

You: So what should I do?

First, never make a financial decision you don’t understand. If you don’t feel comfortable with your understanding of something, have the person explain it to you again. If it still doesn’t feel right, sleep on it. It’s okay to be skeptical.

You: Really?

Absolutely. A good financial advisor never rushes you into a decision, especially if he wants you as long-term client.

Gary: C’mon, people, hurry up here. I got 15 others to see after you and I know they’re buyers. Are you in?

If you’re feeling sales pressure to make a decision quickly, it’s a decent indicator you might want to take a step back and talk it over with someone else. Taking care of your money, even in the presence of financial experts, is one way to be sure to live Beyond Paycheck to Paycheck.

“personal finance” “financial education”

You: Can I trust a financial professional?

Yes, but always verify.

You: What?

Trust, but verify. No matter the quality of a financial professional, no one ever will care about your financial well-being as much as you will.

You: Even the good advisors?

Yes, even the good ones. A quick aside: Previously, I worked for a Fortune 500 company. One day, my boss’s boss–someone who was a bit of a mentor–told me that no one would ever care as much as I would about my career. She clarified that no one would ever be as concerned as I should be about whether I was taking the right assignments and doing the necessary things to ensure my career growth.

You: Really? Sounds like you weren’t too popular there.

Actually, she liked me and my work. Her point was that it was simply human nature, regardless of who might lead me to believe otherwise, that everyone else would have their own priorities.

You: I get it, like their personal career advancement?

Yes. So, in effect, she was just being explicitly honest with me.
You: You mean speaking with Total Candor.

Precisely. The same rule of thumb applies when it comes to the management of your personal finances.

You: Does that mean I shouldn’t use a financial advisor?

No, it does not mean you shouldn’t use professionals. Professional advice is seldom a bad idea, especially if you’re choosing between advice and procrastination. However, never delegate responsibility to another individual, only expertise. Always evaluate carefully (i.e., verify) who you trust.

Although many excellent financial professionals are available, there are also those who take advantage of others’ ignorance for their own self-profit.

Gary: That’s an oversimplification!

Big word, Gary. These are the planners you do not want to work with. Furthermore, there are other professionals who may do their best but are just not great advisors. Their advice might lack awareness of other, more appropriate opportunities available to you because such options are beyond the scope of their expertise.

You: So what can I do to increase the chance that I pick a good financial professional?

If and when you decide to seek the help of a financial professional, treat it like the establishment of any new professional relationship, like a doctor. Talk to friends to get their recommendations. Meet with some – do any advisors seem particularly effective in their attempt to understand you? Is their office staff competent? Will they provide you with at least a basic financial planning education?

Ultimately, interview several candidates and ask each the following question:

How are you paid?

The ideal response you want to hear is “Fee-only.” You don’t want the planner to say “Commissions” or “You don’t have to pay me anything; I get paid by other companies based on the products you buy.” (The last two responses mean the same thing).

In general, commissions are unattractive from your standpoint because you want your best interest to be the only thing influencing the planner’s advice, not the amount of commission the planner earns by recommending one course of action over another.

Still, there are lousy fee-based financial planners out there and some excellent financial professionals who take commissions, so the payment question isn’t the only thing that matters. But advisor compensation is an important consideration and should be known at the outset of the relationship.

It’s best to choose a financial planner with good references from people whose financial situations are similar to your own. Such references are among the best ways to find any good professional and to avoid the Gary’s of the world.

Gary: I’m right here!

But none of my friends recommend you.

You: Neither did mine.

Good. Anybody here meet Gary? Tell us about your experience. Misery loves company and we can all learn from one another. Just make sure you refer to your misguided advisor by the name “Gary.”

“personal finance” “financial education”

You: What should I invest in?

No financial advisor worth the time you invest in a free meeting could possibly answer that question without first getting to know you and your financial situation intimately.

You: Intimately?

The financial advisor/client relationship is a close one.

You: Okay, then say “close.” The idea of having an intimate relationship with anyone who likes investing that much kind of creeps me out.

I can see that angle, but the point remains that a successful advisor/client relationship is a close relationship. As such, you should always be very skeptical of anyone who can quickly tell you what you should be investing in. As you know, I have a name for such people.

You: Yes you do.

I call such advisors “Gary.” Remember, Gary isn’t concerned with the appropriateness of a recommendation from your perspective. Gary’s the kind of guy looking out for his best interests.

You: So where does that leave me?

Assuming you’ll be investing on your own (we’ll talk about identifying an appropriate financial advisor in a later post), the key–after you’ve determined your risk tolerance–is to keep your head on straight and your expenses low.

You: In other words?

Don’t swing for the fences. Establish an appropriate asset allocation based on your ability and willingness to tolerate risk and then purchase low-cost index funds.

Gary: Boring!

You know, I won’t argue that one, Gary. But responsibly growing people’s life savings is a good place to be boring.

You: Really?

Most people simply need their investments to grow steadily over many years. Trust me, those ending balances won’t be boring. And some weeks (like last week) the ride won’t be boring either. If you want crazy fluctuations of up 20% down 25%, go to your nearest casino. Play (because gambling is playing, not investing) with money you can afford to lose.

You: A little more info on mutual funds, please?

Sure. Mutual funds can own stocks, bonds, and even cash, all of which create value for the shareholder. Since mutual funds own many different investments, mutual fund shareholders benefit from diversification, which lowers the overall risk. In addition, mutual funds are run by people who dedicate their careers to managing investments–they’re experts. You can benefit from professional investment management.

You: I can?

Sure, but as with any other occupation, some mutual fund managers are lousy. But–and here’s where mutual funds have a leg up on the people who forecast the weather–it’s pretty easy to see how the manager has performed. If you do some basic research, you can pick a mutual fund manager who has done a good job for a while. Of course, you still have to monitor her annual performance, because anyone can be lucky for a while or become complacent.

You: It feels good to receive an unbiased financial planning education.

Thanks – tell a friend. Let me tell you – it feels even better to give an education.

“personal finance” “financial education”

In her Friends With Much More column posted yesterday to WSJ-online, Diana Ransom discusses a difficult adjustment many recent (and not-so-recent) college graduates face upon transitioning into the “real world.” These twenty and thirty-somethings quickly realize that there are plenty of people, many of them otherwise their peers, with more money than they have. Or as Diana says in her title, much more money.

You: I can totally relate. Some days it doesn’t seem to fair either.

Nope, it’s not. But that’s the deal–life isn’t fair. Furthermore, not everyone who appears to have much more money than you do actually does. They may be spending far above their true capacity by borrowing, sometimes excessively.

You: Even the guy with the big house?

Especially the guy with the McMansion.

Gary: I like my house. And you should see my car.

Gary, how much did you put down on your house?

Gary: 3%

Lease or buy that sporty car?

Gary: Leased it of course; I get much more car that way. Why do you ask such easy questions?

Not sure, especially when I already know the answers.

You: But I am certain that some of my friends really do make a fair bit more than I do. And, as I said before, it can be hard to deal with some days.

Absolutely true. On both points. And there are some good suggestions made in the aforementioned article. In addition, consider the following:

Your friends make the evening enjoyable—not the menu design or the lighting where you meet. When a few friends suggest meeting for dinner, it’s perfectly fine to suggest a place you loved when you had less money. That place is probably less expensive than the trendy yuppie restaurant that just opened. Many of your friends (but not all) will be thrilled to spend $15 on the evening’s food rather than $35. They just lack the courage to propose an alternative to the comparatively free-spending organizers. Don’t be surprised if one or two of your friends thank you for your suggestion—in private.

You: So true.

Thanks, and it’s living Beyond Paycheck to Paycheck.

Comment if you have a suggestion or two to comfortably deal with friends that make more than you do.

“personal finance” “financial education”

Well, it looks like Beyond Paycheck to Paycheck has struck a cord. Since just last Friday, the book has been profiled on radio (WHEB), TV (WMUR) and print (El Paso Times)! You can always check out the latest media coverage by visiting the Total Candor media room.

You: Why do all these people suddenly care?

Folks have always cared about their personal financial situation. It’s just that it’s never before been easy to find a source of truly unbiased financial planning education.

You: Exactly. I find that so frustrating. I’ve gone to the occasional free seminar but by the end, someone up at the front of the room begins to hawk something or other. As a result, I’m usually skeptical of everything the guy said.

Let me guess. Was he pushing a variable annuity or a whole-life insurance policy on you?

You: I think so.

I have a name for such a person.

You: You do?

Indeed. I call ‘em Gary.

You: Gary?

Yes. Gary represents all that can go wrong in financial services. He’s the type of person who puts his interests ahead of those of his clients.

You: Argh.

I don’t like him either.

Gary: I’m right #$%^#$% here.

I know, you always seem to be nearby. How did you find us this time?

Gary: Same way I always do. There was some confusion – you mentioned something about people wanting to take control of their financial futures but not knowing how to trust, right?

I did.

Gary: Well that’s my opening, my friend!

You won’t be calling me your friend for long.

You: I don’t like Gary either.

Good. Stay with me and you’ll learn how to spot him. Remember, far better to meet him in Beyond Paycheck to Paycheck than at a networking event or at a golf course. He’s far easier to recognize here. Who knows? In your town, Gary may even be a woman.

Gary: Hey!

Have you already met Gary? If so, let me know! There’s quite a few of them out there. Just look at this story from today’s New York Times.
“personal finance” “financial education”