I recently sat through a sales pitch for whole life insurance. Because I’m always interested in new investment opportunities (and mastering the art of sales), I was more than happy to listen to a friend’s presentation about using whole life insurance as an investment vehicle.
It was interesting. There are some very wealthy and successful people who use whole life insurance in their investment strategy. And, from my analysis, whole life insurance is a valuable way for wealthy people to reduce estate taxes when passing wealth along to their children.
However, for the average person, whole life insurance is not a good investment. My opinion is completely my own, but I’m not going to consider whole life insurance until I’m worth at least $5 million – so hopefully I’ll purchase a plan in 18 months (joke).
Although I am not rich enough to buy whole life insurance, I do spend a substantial amount of my time reading and writing about finances – so I thought I would share my views on what investment strategies are worth avoiding and embracing.
Five Terrible Investment Strategies
If you’re looking to grow your finances and retire in peace, these are investments you definitely want to avoid.
There are many people who will try to sell you on the value of these purchases. However, the majority of these people are what one blogger refers to as financial bozos. It’s nothing against them, it’s just that the only people who recommend these investments are typically either 1) people who have a financial interest in you embracing this strategy, or 2) people without a healthy knowledge of finances.
Sure, you can make great money with some of these investments, but look at these items more as speculative than secure investments.
Let’s get the list started…
If you don’t already know that lottery tickets are a bad investment, then good heavens take a math class!
You are more likely to get killed in a car accident on your way to buy your lottery ticket than you are to actually win the lottery!
That’s right, the math just doesn’t make sense.
I personally blame the government for this tool that has been as beneficial to fighting poverty as alcohol and cigarettes. To claim that the funds are used to support the school system is as valuable as saying the sale of cigarettes supports anti-smoking programs – it might be true, but that doesn’t mean it’s valuable.
In fact, poor people spend 9% of their income on lottery tickets. If these funds were invested wisely rather than blown in the lottery, the poorest in the US could be doubling their income in just 10 years!
How would that effect America?
Another “duh” investment, time shares are a great luxury vacation purchase, but a terrible place to store your retirement funds.
Not only do time shares limit your vacationing opportunities (something that would drive many adventure travelers crazy), but you are stuck paying ongoing maintenance fees. And, realistically, you will never be able to sell your time share for what you purchased it for.
Furthermore, if you consider your heirs in your investment strategies, then remember that whoever inherits the time share will be stuck paying those same fees. What if your child isn’t in a financial position to afford those fees? You’re leaving them with the difficult responsibility of getting rid of something that reminds them of you.
If a time share sounds like a fun vacation idea, then go buy one. Just don’t consider it part of your investment portfolio.
Jewelry (including engagement rings), Collectibles, and Art
As I awkwardly fumbled my way through jewelry stores in search of my wife’s engagement ring, there was one thing I heard from nearly every jewelry store – “don’t look at this ring as an expense, look at it as an investment”.
After hearing this, I started searching the web for more information and learned that there are many poor suckers who bought an engagement ring only to have their girlfriends turn them down. They then attempted to sell the ring and were lucky to get 50-75% of what they actually paid.
I later spoke with a friend who’s husband imports jewelry and she said that he purchases jewelry for 25% of what it’s sold for in retail stores.
The diamond market is artificially over valued and you should never consider a wedding ring as an investment. If you decide to spend $10,000 to show your “love” – recognize that you are spending that $10,000 to show your love, and not to prepare for retirement. Also keep in mind that the $10,000 ring comes with a woman who will cost you a lot more.
This same holds true for art and collectibles of any time. Sure they can grow in value over time, but this isn’t something you should bank on.
Buy art or a classic car because it’s something you would enjoy. If it goes up in value, great! If not, don’t be disappointed.
Too Much Home
That’s right, buying a home can be a bad investment. Regardless of what your banker, realtor, or wife might tell you – a bigger home does not equal a bigger investment in your future. As Robert Kiyosaki shares in Rich Dad Poor Dad, your house is not an asset. Just take a look at this story from one Seattle resident who “lost out” by making $102k on his home purchase.
A bigger home does not equal a bigger investment in your future.
Now, real estate is a great investment. Whether you own a small property in the inner city like me (yes, I am a bit of a slum lord), or whether you own multiple units like the great blogger behind AffordAnything, renting out property means money coming in. Real estate is a fantastic investment – when you aren’t living in the property.
The moment you become then tenant, you are renting to yourself. So, if you own a property that you could rent out for $2,000/month, you are essentially costing yourself $2,000 a month. Then, when you buy a bigger house by “reinvesting” the equity in your previous home, you cost yourself an even greater amount of income.
Sure, a $600,000 home is great. However, if you live in a $300,000 home you could spend the additional $300,000 to buy two rental properties bringing you in an extra $3,000 a month! Once you pay off your own home, you’re now making an extra $36,000 a year – indefinitely. Not a bad addition to your retirement budget.
In all reality, if you want to become wealthy, than you need to learn how to buy a home like a millionaire. or decide to be content with your starter home. Don’t bite off more than you can chew; recognize that money in your home is money not invested elsewhere; and remember that it’s better to be the lender than the borrower.
Whole Life Insurance
Sorry buddy, but I’ve got to call out life insurance as a bad investment. Yes, maybe if you’re making $10 million a year, it can help with tax breaks. But, for the average person, it’s just not worth it.
Although I don’t buy everything Dave Ramsey says, he does mention that you’re better off buying a cheap life insurance plan and investing the difference. Over a 20-30 year period that investment can actually be worth more than the payout of your life insurance plan would be!
So, although I admire anyone with an impressive sales drive, I must simply agree with MomAndDadMoney – whole life insurance isn’t worth it.
Five Great Investments You Want to Maximize
*Of course, I need to specify that my advice is my own. So, use your own common sense to determine if my ideas are reasonable or ridiculous.
There are many ways you can invest your money (stocks, peer-to-peer lending notes, bonds, index funds, etc) but I’m not talking about those today. Rather, I’d like to share with you five exceptional investments that will help prepare you for retirement, save on taxes, and essentially get free money.
Your Company 401(k) Matching Policy
Everyone and their mom talks about the value of maximizing your 401(k) contribution – especially if your company has any kind of matching policy. The thing is, I actually know people who aren’t doing this! If your company is offering to give you an additional 3% – take it! The math makes sense.
For anyone unfamiliar with a 401(k), it’s a retirement account operated by many companies. Generally, if you agree to put in a certain amount (often 3-5%) your company will match it – making your 3% investment actually 6%. This amount could easily add up to an extra $200k-400k for your retirement – and only cost you a few dollars a month.
Why don’t people agree to their company’s 401(k) matching? Usually because they aren’t sure about what it is and how it works.
You should become familiar with your company’s retirement matching.
However, if you aren’t currently receiving your company’s match – then sign up for it right now! It doesn’t matter if you have no idea about what it is or how it works. Go talk to HR and tell them you want to receive the full retirement matching. Odds are, you won’t miss the money you’re investing – and you’ll end up with a much larger nest egg when you retire. Totally worth it!
Your IRA (Traditional or Roth)
Just because your company has a retirement account doesn’t mean that you should stop investing. No sir! You can receive a tax benefit for adding up to $5,500 into either a Traditional or Roth IRA in 2016.
If you make under $116,000, you’re best off investing in a Roth IRA – which is essentially an account where you add after-tax money. Which means that, when you start withdrawing from the account during retirement, you don’t pay any taxes on the gains! That $5,000 you add now could be worth $40,000 when you retire – and you receive that money without ever paying taxes on it.
So, in addition to your company’s retirement plan, make sure you setup an IRA that you can add to on your own. If you want to get creative with this investment, consider setting up an IRA with peer-to-peer lending platform LendingClub.com or a robo-investor like Betterment. While you can’t control much of your 401(k), you have a lot of flexibility with where you place your IRA investment.
Your Health Savings Account (HSA)
I just discovered what an HSA is and I am stoked! And, if you pay any kind of deductible on your insurance, you should also be excited.
In the past, companies would have a health savings account that you could add money to every year to pay medical expenses taxes free. However, at the end of the year, any money left in that account would be lost.
Now, you can setup an HSA through an established financial provider (like Wells Fargo), and it becomes another investment account. You can’t add much to it – only $3,500 a year. However, those funds come with several benefits.
With the $3,500 you add to your HSA you:
- Pay no taxes: The funds are added pre-tax, saving you several hundred dollars.
- Cover all medical expenses not covered by insurance: Including deductibles and prescriptions (not insurance premiums).
- Receive funds that rollover to the next year: What you don’t spend this year can be invested and/or spent next year.
- Gain full access to the funds when you retire: In other words, anything you’ve added that isn’t spent on medical expenses can be invested and, at the age of 65, withdrawn for your regular living needs.
In short, the HSA is one of the greatest new investment tools that anyone with a deductible should be taking advantage of.
As I briefly mentioned in the section about owning too much home. Rental properties are a great place to invest.
Not only does property generally increase in value, but the residual income you receive from renters can be more than enough to cover your retirement expenses. In all reality, if you own several rental properties you can be financially secure without any other retirement account – because the income from the property is perpetual and consistent (although you are better off diversifying).
And it doesn’t take much to get started as a landlord. In fact, my brother and I purchased a foreclosed run-down home for $10k! After putting a bit of work and some extra cash into it, we now have a rental bringing in $650/month. While you may not live in an area where you can find a property for that cheap, it is possible to find great rental opportunities in any community.
If you want to get started with real estate, the best first step is to jump on Zillow and familiarize yourself with the prices of properties in your area. As you spend time evaluating the going rates for real estate, you will begin to recognize great deals. For example, we found houses for $3,500 in the community where we were living – but these properties wouldn’t have been worth it. Meanwhile, our $10k foreclosure ended up being a great steal.
Your Own Business
According to The Millionaire Next Door, the vast majority of millionaires own their own business. This is actually for several reasons:
- Business owners have more control over how much they make: They can simply hire more employees and find more clients to grow their business.
- Business owners are constantly engaged with their finances: When you spend your days tracking your business finances, you become aware of how much you are spending for everything – including personal finances. Therefore, business owners are often more savvy as to the true cost of their purchases.
- Business owners build up equity in something they can sell: If you spend 30 years working for the organization, you receive nothing when you leave (other than your retirement). Meanwhile, if you own a company, you can sell that when you are ready to retire and walk away with a handsome chunk of change. Or, you can simply hire someone to manage the business and make money indefinitely.
Finally, investing into your own business can provide you a tremendous amount of freedom – even if you are happily employed. Running a business on the side keeps you sharp, aware of what’s happening in the market, and provides you with a way to make additional money to support yourself. Who knows, you may reach a point where you want to leave your day job to manage your business!
What are you doing to grow your investments?
I believe that the best decision you can make with your money is to become educated about how to use it. It really doesn’t matter if you invest in stocks, real estate, or maybe even whole life insurance (but I don’t recommend it). They key is, choose one, two, or several investment strategies and research them thoroughly.
And remember, there are no get-rich-quick strategies that actually work. Don’t pay for “secret” stock lists. Don’t buy into whatever business your buddy becomes involved in. Do your own thorough research.
Even if you aren’t financially savvy, you can Google “why X investment is a bad idea” and come up with a plethora of results. Read through the results and make your own intelligent decision.
For the comments: How do you invest? Are there things I should add to this list (on either side)? If you disagree with some of my items, feel free to share that as well – the more you share the more we can all learn!