June 2019 Q & A

Post your questions in the comments, on any subject, and I will be glad to answer them in the next Q & A.

This month I focused on the personal finance questions I received.

    • What are the most profitable investments?
    • Is the current political trend in California financially feasible to the individual?
    • Term vs whole life insurance?
    • Is Bitcoin a good investment?
    • What about reverse mortgage for retirement?

If you’re interested in this subject, be sure to check out my best selling book,How to be Rich: The Couple’s Guide to a Rich Life Without Worrying About Money.”

(Watch video or read transcript below)

This month I’m focusing on personal finance, which has always been an interest of mine since the 80s when I saw the movie Quicksilver with Kevin Bacon who played a bicycle messenger that made a bunch of money in the stock market. Ever since I saw that movie, probably in my freshman year of high school, I became obsessed with personal finance and the stock market.

Instead of goofing off in school, I spent a lot of time reading investment magazines and books and later ended up at the College for Financial Planning, which led to the Certified Financial Planner designation, writing my first book on personal finance called How to be Rich: The Couple’s Guide to a Rich Life Without Worrying About Money, and ultimately evolved into my coaching practice of today. That’s why I’m looking forward to focusing on personal finance questions this month.

What are the most profitable investments? 

This is a great question and my answer is probably not the answer you’re looking for, but the most profitable investment I’ve found throughout my life is actually your job or your career.

People usually make a lot more money, a lot faster, in their place of work, as opposed to investments like the stock market, real estate, or something like that.

Now, let me explain what I use investing for today, and this took me a long time and a lot of lost money in various investments to figure out. The easiest way to make money is in your profession where you’re an expert, then invest the money you’ve earned to protect it from inflation. I primarily use the stock market to keep ahead of inflation

People that make a lot of money in the stock market tend to do so in individual companies. If you were to invest in Microsoft at the very beginning stages, you would’ve made a fortune. Same with Amazon and a lot of other companies throughout history, but the problem is, who knows which companies are the next Amazon’s, Netflix’s, or similar without a lot of inside information and luck.

It’s really difficult for someone on the outside to make a lot of money in the stock market or real estate or other investments without a lot of luck, so I encourage people to focus on their business, whether that’s their place of work, or the business own, and try to make the money there. After you’ve made the money in your career, take that money and invest in things that are a little bit more conservative, like stock market investments such as index funds, or different rental real estate properties or similar.

Every year your money is worth about 3% less each year because of inflation. Don’t look to make a lot of money in investments, but instead use the stock market as a place to hold the money you’ve made in your career and allow it grow slow and steady as opposed to losing your money to inflation by not investing. If you don’t invest it somewhere, the money you’ve earned from your career and will decrease in value.

Try to make the bulk of your money in your career, whether that’s your business or job, and then take the the money that you make and invest it out in places like the stock market and real estate gold or other businesses as opposed to trying to make money or serious money in those other outside investments.

I’m sharing this from both from a textbook perspective—my studies of the market, but also from making a lot of investing mistakes.

In my early days I tried to be an online day trader in the stock market and I had some successes and failures, but I realized that in the long run you will make a lot more money in the area where you are most knowledgeable, which is your career. Then use conservative investments outside of your career to let that money grow slowly to and to stay slightly ahead of inflation.

Don’t try to hit home runs in real estate, the stock market, gold or any of the other flavors of the week. Instead, just take the conservative path and it will work much better in the long run.

Is the current political trend in California financially feasible today to an individual?

California is a complicated place. I love California because it’s where I have lived almost my entire life. I love the weather, the diversity of the geography, the diversity of people, and the many things to do. There is a lot of good in California.

California is an amazing place, but it’s also taken a really bad turn with many serious problems. Although California boasts the fifth largest economy in the world, it’s also represents the highest poverty rate in the United States when cost of living is factored in. There is a lot of money being made in California, but it’s very difficult for a lot of people live because of the cost of living is so high.

California is the highest tax state in the country, not just income tax, but also sales tax, gasoline tax, and virtually every tax you can imagine. Even taxes are taxed. I believe that’s across the board with all taxes in the State.

In exchange for extremely high taxes, we get good weather, but we also get the highest poverty rate in the nation compared to cost of living. The schools in California today are rated in the bottom 10% across the nation. California also gets to boast having one-third of the nation’s welfare recipients living in our state. There’s a lot of good, but there’s also a lot of bad, which is why a lot of people are fleeing California.

I just heard that to rent a U‑Haul to go from California to Texas costs $1,500, but to return from Texas to California, only costs $400 bucks. That tells me there’s a lot more people leaving California than coming back.

People are fleeing the absorbent prices, taxes, and liberal policies that make it incredibly difficult to run a business. California is a contradiction. We have all these great things where some people are making a lot money, while simultaneously a lot of people were being taxed to death and fleeing because they cannot afford to live. California is evolving into a situation which is very similar to that of third world countries where a minority of people are making a fortune and the masses are leaning towards poverty.

In California, some people in tech sectors and Hollywood are doing well, but at the expense of the middle-class. The middle-class in California is struggling more and more each day and there is greater disparity between the rich and the poor.

Recently the California governor was annoyed that all the news reporting about San Francisco has to do with feces on the street. It’s a series problem and anyone who’s gone to San Francisco knows just how bad of a problem poverty is in San Francisco. The same thing is true in Los Angeles where tent cities has become normal in parts of town. It’s terrible and it’s growing.

There are some people thriving in California in certain sectors, but people who are in the middle class are going to increasingly struggle. On July 1, 2019, they added another gasoline tax on top of the past gas tax. Looking at gasoline by itself, that hits lower to middle class people more than anyone else because gas is not a luxury. People need gas to get to work and live. Those taxes disproportionately hit the poor and middle class more than the wealthy. The excessive taxes in the state, combined with the bureaucracy, make it very difficult to run a business in California.

The excess environmental and regulatory burden from the Liberals in California is overwhelming and people are leaving in masses. I think if you are to purely look at this from a financial point of view, unless you’re in certain sectors like tech, Hollywood, or a few of other sectors, I wouldn’t stay in California.

It’s difficult for a many people, particularly the poor and middle class, to survive in California. But most people do not stay in California for economical reasons. They’re here because they were born and raised and they like the weather, beaches and other stuff, so it’s tough.

I think most everyone in California would agree that our current path is not sustainable.

California voters are confused. Only a small segment of the population that votes, and when they vote, they vote based on how whoever they follow tells them to vote, without any idea of what the heck they’re actually voted for.

Who on earth would ever vote for higher gasoline taxes in California? I can’t picture a single human ever voting for higher gasoline taxes, particularly when that money’s being spent is just wasted.

Term Life insurance versus whole life insurance?

A lot of people have no idea what this question means, but you really should pay attention if you have life insurance and here’s why. Most people are sold life insurance. They’re too busy with life so most people do not seek life insurance until somebody, like one of their friends or relatives becomes an insurance broker and tries to sell it to them.

Typically, that person is selling some variety of a whole life insurance policy. Whole life insurance is profitable to the insurance company, but it’s not the ideal product for most families.

Let me try to distinguish the two. Term life insurance is typically ideal for the average American family who is married with a couple of kids. Term life insurance allows you to buy life insurance that spans a specific term, let’s say 20 years as an example.

The purpose of buying life insurance is to replace income in case you die. In my case, for example, I have a 12-year-old son. I’m anticipating that little guy should be self-sufficient I hope by 18, but if we look at the trend today, it’s probably 25. Theoretically I should only need to support him until he’s 18 to 25 ish. Theoretically, I wouldn’t need life insurance for him past 25 years old. I only need life insurance that will last for a term from now until my son turns 25 years old.

You don’t need a policy that lasts for the entirety of your life, because in my opinion, people should not financially benefit from your death. They should be better off when you’re alive, so you only want to get life insurance that replaces your income for your dependents during the years they depend on your income. You should get life insurance that lasts long enough to raise the people that are dependent upon you and then that life insurance should stop afterwards.

In contrast, the purpose of a whole life policy is for about 1% of the population that would have a need for life insurance that extends their entire life. For example, let’s say you have a developmentally disabled child who will forever be at the mental level of a 12-year-old. In that case, your child would be dependent on you your entire life because he will never mentally mature. In that case, it would make sense that you have some sort of policy that would enable you to cover him for your entire life and provide income support after you pass away. Those are rare incidents where you would need life insurance that extends your entire life but that’s when you might want to start looking at a whole life policy.

What is the difference between a term and a whole life policy? Very simply, a term policy promises to pay your dependents X amount of dollars during a fixed length of years of your life. For example, you might get a half a million-dollar policy that covers you for the next 20 years.

If you die, your dependents would receive that half a million-dollar payout, and at the end of that term, 20 years in the example I just gave, there would be no more need for insurance. The policy goes away and there is no cash value. It’s a lot like car insurance. If you don’t have a car accident, you don’t receive anything.

Whole life on the other hand retains some sort of cash value or benefit at the end. It accumulates in value as you go along. The reason term life tends to be better than a whole life if you don’t need whole life, is because term is much cheaper than whole life.

Whole life is often sold as some type of investment because it has a value at the end. But whole life tends to be very overpriced insurance and a very poor investment. A lot of investment advisors suggest that rather than buying a whole life policy, you instead buy a term policy and invest any extra money that would have gone to the whole life policy, into the stock market, real estate, or something similar. Personally, I use a term life policy for my family.

Is bitcoin a good investment? 

Personally, I don’t know a lot about it, and I have no interest in learning about it for two reasons. The first reason is I don’t invest in anything I don’t completely understand, bitcoin being an example. Number two, I believe the government is not going to tolerate this kind of stuff for much longer and I think they’re going to intercede because that’s competition for the government and control of their currency. I honestly don’t know much about it and it’s not something that I want to get involved with because it’s too risky for my comfort level.

What about a reverse mortgage for retirement? 

It’s worth paying attention because this is not an uncommon problem for elderly people to be house rich and cash poor. It’s sometimes better to carry a mortgage and save money instead of paying your house off early.

A lot of people have a goal of trying to pay off their mortgage early. That’s not a bad goal, but when you pay off that mortgage early, and you’re not also saving money, that poses a risk of running out of cash in retirement. If it were my choice, I would save money instead of paying off my mortgage early so that you don’t get in a situation when you’re in retirement and not earning income, but you have a paid off house and no cash coming in.

With this is a particular question, I’m a little bit ignorant because I don’t have any personal experience with reverse mortgages, nor have any of my clients. The only answer I have about reverse mortgages is from what I’ve read. With a reverse mortgage, you assign ownership of your paid off house to a mortgage company and in exchange the reverse mortgage company gives you monthly income for the remainder of your life.

From what I understand there are a lot of unscrupulous companies that charge a lot of excessive fees, so you have to be very careful with that.

** Now, a quick disclaimer about all these questions. None of this is intended to be investment advice. It is for educational purposes only.

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