“He who has the gold makes the rules.” – Unknown.
As we discussed in our prior post on cash flow, a common pitfall of investors is to “lock up” their money in a 401k, IRA, or other one-way street where money gets trapped for many years. In order to build true prosperity, you’ll want to follow the 5th Principle of Prosperity and keep your assets under your Control.
How do we “lose control” of our assets? Simple. We put the government or other institutions in charge of our money. People do it all the time. Well-meaning investors lose control of money by putting it where it cannot be accessed, where it cannot be used as they please, or where it is in an unpredictable environment with no guarantee that it won’t shrink or vanish. Some popular ways to lose control:
A qualified retirement plan such as a 401k, 403b, 529 or an IRA puts the government (and whoever manages your employers’ plans) in charge of your money. Sure, you get a tax-break on the front end, but is it worth it? That may depend on factors such as your employer’s contribution, if applicable.
In spite of the reputation of the 401k as a mainstay of a personal finances, it boasts many disadvantages, as Garrett Gunderson details in his book, Killing Sacred Cows. The downsides are too often ignored, such as penalties for early withdrawal, restrictions on how the money is used and invested, and limitations on how much can be withdrawn and when. To compound the problem further, 401k’s are often used to purchase investment vehicles that cause further loss of control.
Additionally, investors should be aware that these sacred cows might not be so sacred. A proposal has been presented to Congress to further tax and control 401k’s. Though the bill did not pass, it may have opened a dangerous door. Recently, the media rumored that the US Treasury Department and Department of Labor were considering mandating qualified plan savers to invest a portion of their funds in government-approved investments backed by government bonds.
Stocks and Mutual Funds are another common way investors lose control. Perhaps nothing better demonstrated this recently than the market crash in the fall of 2008, when many 401k’s became “201k’s”. During the painful, drama-filled slide downwards, investors either stood by and watched helplessly as their account values plummeted, or worse, sold near the bottom, fearing further catastrophic losses.
Few analysts predicted that crash, and most investors and stock brokers alike experienced a profound lack of control. When your advisors and experts can’t see a disaster coming, how is the average investor supposed to do any better? The fact is, they can’t.
Stocks and mutual funds carry a risk factor that we at P4P find dangerous. The market and the economy are affected by too many factors that are simply out of our control. We don’t recommend gambling as an investment strategy, therefore, we don’t promote stocks and mutual funds as appropriate investments.
Pre-paying mortgages is another way that well-meaning investors lose control of their assets. Author of Missed Fortune and Missed Fortune 101, Douglas Andrew details how pre-paying a mortgage can actually leave you more vulnerable to loss and foreclosure while slowing the growth of your wealth overall.
When you accelerate mortgage payments, you give your lender extra cash that will earn no rate of return and that you cannot get back in times of emergency, unemployment, or grand opportunity. As many homeowners have recently experienced, if you suddenly become unable to make your payments, you’ll wish you had that extra money back in your hands. It is much safer to grow a “side account” which is a liquid investment that will remain under your control.
Additionally, paying off your home equity line of credit early does not guarantee that it will be available for use at a later date. We have seen lenders close accounts even with responsible borrowers as property values have fallen and banks have scrambled to better protect themselves.
The solution? To get a “CLUE” with your money!
Control – Keep the control yourself rather than delegating your money to institutions, the government, and an uncontrollable economy. One way to keep control is to put your money in predictable investment vehicles (such as bridge loans) with stable rates of return.
Liquidity – You want at least some of your assets liquid and accessible to you. The first place to start with liquidity is an emergency fund, but you don’t want to stop there! You’ll want to continue to put cash into vehicles that allow you to access your money when you need it, not 20 years from now.
Use – Do you get the use of your money, or does the bank? Granted, there is often a “funding” stage before the cash flow will start coming back your way again, but you do not want to lock up your money for decades out of your own reach.
Equity –. You want your investments to build equity that you can leverage, such as real state and whole life insurance. In this way, you can keep the asset (as opposed to selling it) while controlling its value.
If you follow the “CLUE” guidelines, you will avoid the major common pitfalls and you’ll stay on the Path to Prosperity.
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