How My Financial Beliefs Have Changed
This is the 1st article in a series of 3 that shares the financial journey my wife and I went, and are going, through.
The 2nd article is: How I am Capitalizing My Banking System
The 3rd article is: How I am Getting out of Debt and Financing My Life
The Way I Used to Think
As I have mentioned in other articles, I became a typical financial advisor to help people achieve financial freedom. It began when my wife and I attended the popular Financial Peace University by Dave Ramsey through a local church as newlyweds. We wholeheartedly began implementing the strategy, and when I became a financial advisor, I indirectly coached people through this process. Although the company I was employed with as an advisor was not in partnership with Dave Ramsey and therefore could not directly promote him or his process, I did, however, create my own little process based on his strategy with slight variations to walk clients through.
Here is the Dave Ramsey process directly from his website:
Baby Step 1: Save $1,000 for Your Starter Emergency Fund
In this first step, your goal is to save $1,000 as fast as you can. Your emergency fund will cover those unexpected life events you can’t plan for. And there are plenty of them. You don’t want to dig a deeper hole while you’re trying to work your way out of debt!
Baby Step 2: Pay Off All Debt (Except the House) Using the Debt Snowball
Next, it’s time to pay off the cars, the credit cards and the student loans. Start by listing all of your debts except for your mortgage. Put them in order by balance from smallest to largest — regardless of interest rate. Pay minimum payments on everything but the little one. Attack that one with a vengeance. Once it’s gone, take that payment and put it toward the second-smallest debt, making minimum payments on the rest. That’s what’s called the debt snowball method, and you’ll use it to knock out your debts one by one.
Baby Step 3: Save 3–6 Months of Expenses in a Fully Funded Emergency Fund
You’ve paid off your debt! Don’t slow down now. Take that money you were throwing at your debt and build a fully funded emergency fund that covers 3–6 months of your expenses. This will protect you against life’s bigger surprises, like the loss of a job or your car breaking down, without slipping back into debt.
Baby Step 4: Invest 15% of Your Household Income in Retirement
Now you can shift your focus off debts and what-ifs and start looking up the road. This is where you begin regularly investing 15% of your gross income for retirement. Because if you’re still working at 67, it should be because you want to, not because you have to. An investing pro can help you build a solid strategy.
Baby Step 5: Save for Your Children’s College Fund
By this step, you’ve paid off all debts (except the house) and started saving for retirement. Next, it’s time to save for your children’s college expenses (that is, if they make it through Algebra II and Chemistry unscathed). We recommend 529 college savings plans or ESAs (Education Savings Accounts).
Baby Step 6: Pay Off Your Home Early
Now, bring it all home. Baby Step 6 is the big dog! Your mortgage is the only thing between you and complete freedom from debt. Can you imagine your life with no house payment? Any extra money you can put toward your mortgage could save you tens (or even hundreds) of thousands of dollars in interest.
Baby Step 7: Build Wealth and Give
You know what people with no debt can do? Anything they want! The last step is the most fun. You can live and give like no one else. Keep building wealth and become outrageously generous, all while leaving an inheritance for your kids and their kids. Now that’s what we call leaving a legacy!
Dave Ramsey acknowledges that his process primarily came from the teachings of Larry Burkett, who was the founder of Christian Financial Concepts (1976), which eventually merged with Howard Dayton’s Crown Ministries (1985) to form Crown Financial Ministries in the year 2000. There are still very striking similarities between their processes.
Our Personal Application
We had already started saving together and, by the grace of God, we did not have much debt. I had a small student loan that we were able to knock out within a year or so. We quickly jumped to step 3 and maximized our emergency savings. We then increased our retirement contributions where we both contributed 5% of our income to take advantage of the employer matching, which totaled 9% of our income. Next we opened a Roth IRA for me to get our total contributions to the 15% of income goal. As our income increased, we opened another Roth IRA for my wife, to keep our contributions at the 15% of income goal. During this time, we also had been saving for several major expenses we expected in the near future, such as a down payment for our first home and our next automobile. Within a year or so, we were ready to start house hunting and purchased our first home in 2014. We followed Dave Ramsey’s instructions to have at least 20% down, keep the payments less than 25% of our take-home pay, and set the term no more than 15 years. We were making great progress, but most importantly, my wife and I were on the same page, moving in the same direction together. We continued at this level for several years, then in 2019 we finally started a 529 plan to save for our kids' education.
The Flaws We Discovered
As I began to work with clients as a trusted financial advisor and help them align their finances (indirectly) around the same process my wife and I were living, several challenges to the process were revealed.
I had several clients that carried large cash balances in their bank accounts that I would show them how inflation is eroding their purchasing power.
WAIT! … We had large cash balances in our bank accounts to cover emergencies and some major expenses. That means we are losing purchasing power too! Especially considering the amount of savings we will need over our lifetime ($1M+ just for vehicles). As we spent the funds to pay for the things of life, we had to start all over again to save for the next thing. Does this mean that this significant portion of our savings does not actually contribute to building wealth for our family? That money is gone forever once it is spent. The cash savings did at least provide the freedom to not have to borrow for major expenses (this is really the only benefit), except for our house, but it was not growing nearly enough over time while it sat there.
I had several clients who had also diligently contributed to their retirement plans for many decades and had substantial balances when they retired (that’s what I was going for). However, when they started planning for retirement decades ago, they were projected to be able to withdrawal about 4% (the standard at that time) from their retirement accounts so that they would have a consistent income over their lifetime. Now the projections, based on current market performance, would only allow a 2%-3% (at most) withdrawal rate to maintain consistent income throughout their lifetime. They didn’t have enough saved to produce the level of income they planned for, or they may run out of savings too early.
The planning process is also predicated on many assumptions that are difficult to determine. When were they going to pass away? What will their expenses be in 20 years? Will their taxes increase or decrease? When will there be another market correction and how much will it be? Etc.
I began to question our situation: won’t taxes continue increasing over our lifetime? Aren’t my dollars' worth more today than in the future? Wouldn’t I rather pay taxes, if I have to, on my smaller contributions today than of my greater withdrawal amounts in the future? Maybe the Roth plans are the better way to go.
Oh wait! Very few employers offer them to their employees. Ok, so we’ll use Roth IRA’s.
Oh wait! People can only contribute up to $6,500, or $7,500 if 50+ years old (at the time of this writing), and only if their income is below a certain level. At that time, my income was low enough to utilize Roth IRA’s but knowing the income levels I was working towards, it could not be a permanent savings solution. It certainly wasn’t for many of my clients.
I also had clients on the other end of the spectrum who had done exceptionally well throughout their working years, so much so that they had other, more beneficial sources of income outside of their traditional retirement plans. When they had reached the age (currently 72 years old) where the government made them take Required Minimum Distributions (RMD’s), or pay a 50% penalty, they didn’t need to, or want to. Many of my clients were very generous, so rather than continue giving out of their regular cashflows, we used the RMD’s to donate toward those same charities, avoiding paying the taxes on the distributions.
Some others we setup reinvestment plans into non-retirement, brokerage accounts so they could continue investing the funds. They had to pay the taxes as ordinary income, which in many cases was a higher rate than the capital gains taxes they would have paid if they had started with the brokerage account to begin with.
I always thought that taxes would be less in retirement, but as I realized that even if tax brackets stayed the same and someone's lifestyle stayed the same, by the mere existence of inflation, income must rise and therefore taxes will be greater in the future.
Many clients considered their retirement plan, not only a source of supplemental income later in life, but also a legacy planning strategy. When clients passed away, I helped their beneficiaries complete and file the appropriate paperwork to redeem their inheritance. Many of the beneficiaries were in their peak earning years and had to pay taxes on the inheritance in their own tax brackets. To help manage around this issue, we would setup Inherited IRAs to park the funds where the beneficiaries had 10 years to empty the account or be penalized (like the RMD penalty). Some clients wanted to be generous with the funds, others took distributions to fund other things, including contributions to their own retirement accounts. The retirement funds didn’t seem to be an ideal inheritance strategy. Many times, they were actually a major hinderance to family legacy planning.
Retirement Flaws Summary:
- Though traditional retirement plans reduce taxes a little today, taxes are compounded into the future (including the taxes the employer passes to the employee through matching).
- Most of the variables in income planning around retirement accounts are assumptions that will change unexpectedly.
- There are several limitation and rules that make retirement plans severely inflexible.
- Retirement plans can have much higher tax and penalty liabilities than other strategies.
- Taxes actually increase over one’s lifetime.
- Retirement plans might possibly be the worst asset to pass to beneficiaries.
Why on earth would someone contribute to a plan that was not going to be beneficial for their future needs? Because “experts” like me were telling them that it was the absolute best way to go, when, in their case, it may have been the worst way to go.
I thought, “Maybe my wife and I should consider other savings strategies than typical retirement plans.”
College Savings Plans
529 plans were the go-to solution I used for client's education savings goals. We didn’t do many of them but primarily pointed people to the state 529 plan websites. Most, if not all, states have a 529 plan available that sometimes offers incentives for residents to participate in.
After realizing the flaws in retirement plans, I began having similar concerns in the 529 plan we had started. College expenses will continue increasing tremendously every year (almost guaranteed), and I knew that the savings plan invested in the stock and bond markets were not guaranteed. My concern was that no matter how diligent we were at saving, it very possibly would not be enough, or worse could all be lost.
There were some clients that wanted more flexibility in a savings plan, in case the beneficiaries decided not to attend secondary education. In this case we might look at a Uniform Transfers to Minors Act (UTMA) account, which is available in many states authorizing a custodian, typically a parent or grandparent, to hold assets on behalf of a minor child until the child reaches the age of majority — typically either 18 or 21. While it gives more flexibility in use of the funds, the custodian loses all rights as custodian once the minor reaches age of majority. There were many clients that didn’t feel comfortable handing over a substantial account to an 18-year-old, though I couldn’t understand why (sarcasm). UTMAs didn’t seem to be the ideal solution for us personally either.
I was, and still am, a fan of getting out of debt to third party lenders. Perhaps for different reason now than back then. It was exciting to work with clients when they paid off their mortgages. Their expenses decreased and they were able to save more, or withdrawal less from their retirement plans to help it last longer. Their financial stress was reduced greatly, creating a sense of freedom and enjoyment they hadn’t experienced most of their adult life. They could breathe a little easier.
There weren’t very many clients actually doing it though. Many clients had a large percentage of their net-worth tied up in their homes. The only means of accessing that value is through selling or borrowing against it. Interest rates had been falling, until recently, since the early 1980’s making loans much easier to utilize as a way to finance some life goals. As interest rates had been going down, there seemed to be a pattern with the average American household to increase debt and save less. Without the savings, they became more dependent on lenders and government programs.
On the other extreme were the clients, like me, who desired to get out of debt as fast as possible, and to stay out of debt as much as possible. They would commit to saving a consistent portion of their earnings, then maximize their debt payments until debt free. Then, they would maximize their savings. The issue I found goes back to the retirement plan discussion above. In the end, many of them didn’t have enough savings. Why? Because they spent so much time and money getting out of debt, never to see those funds again (opportunity cost), and locking up significant wealth in a frozen asset, their home. Eventually, they would sometimes have to make significant cuts to their lifestyle or become the other client, selling their home or borrowing against it to get access to the value.
“Build Wealth” & Give
This is the Financial Peace step I was eager to get to, and help clients get to, the most. It is exciting to think about the freedom we all can have when we have built wealth. It’s exciting to think about the impact we can have in others' lives with our generosity.
What does “building wealth” actually mean though?
Is it just getting out of debt, more savings in my bank accounts, larger retirement funds, and more college savings plans?
Based on the flaws I had experienced with each of these goals, this step did not make sense to me. At this point I really began to dig deeper, veraciously seeking to understand what it really means to “build wealth”.
My original philosophy for becoming a financial advisor to begin with was that God’s Way is the absolute best way to be successful in any area of life. Therefore, I wanted to teach people God’s Way of stewardship and coach them through the process. I thought I knew God’s Way, but perhaps I was only listening to others claiming to know God’s Way. At this point I realized I needed to directly seek the truth in God’s Word. My goal was to discover if God had created the perfect financial system for His people to operate in, and if He did, how could it be implemented today.
As I have shared in other articles, God revealed that He in fact did create the best financial system for His people to operate in.
Deut. 15:6 ”For the LORD your God will bless you as he has promised, and you will lend to many nations but will borrow from none. You will rule over many nations but none will rule over you.”
All throughout scripture, God instructs His people to be Lenders & Leaders in the World.
As I sought specific strategies to practically apply God’s Word, I quickly discovered R. Nelson Nash’s Infinite Banking Concept.
“Banking is the most important and most profitable business in the world. It should be controlled by you and me.” — R. Nelson Nash
Our Financial Vision TODAY:
I cannot promise that we will achieve everything listed in this vision plan over our lifetime, but I am confident in our abilities to do most of it. Regardless though, it gives us direction for our whole lives that allows for adjustments along the way.
- Get out and stay out of the Stock & Bond markets.
- Get out and never use debt from any finance company again.
- Maximize the benefits of every dollar that flows through our household before it is gone forever.
- Minimize our insurance costs by self-insuring as much as we can when it makes sense.
- Minimize taxes simply and legally.
- Never depend on any government welfare programs, including Social Security.
- Invest more in the personal development of our family members.
- Have more family life experiences.
- Be more active in supporting ministries and impactful causes.
- Invest in opportunities we are passionate about to generate passive income beyond what our IBC style life insurance policies will generate in the future.
- Teach others and future generations how to live this abundant and peaceful lifestyle, that will impact as many people and generations as possible.
In subsequent articles, I will share more details about these goals and how we are working towards accomplishing them.
I am glad we at least had Financial Peace to help us with a plan to save and manage debt. It was certainly better than if we didn’t. I only wish we had known about the Infinite Banking Concept sooner and had started earlier so that we would have been much further along and in a much better circumstance. I suppose we are all trying to play catch-up.