“Character is the ability to carry out a good resolution long after the excitement of the moment has passed.”
– Cavett Robert
Last year we published Parts 1 and 2 of “Make a Million Dollar Resolution,” and today, we continue with Part 3.
The Power of Decisions
The decisions you make today, combined with actions and habits in alignment with your decisions, can add as much as a million dollars or more to your wealth over time. Whether the decision is a New Year’s resolution or made in June or August is irrelevant, but the beginning of a new year is the most popular time for setting new goals and intentions. As Oprah Winfrey says, “Cheers to a New Year and another chance to get it right.”
Resolutions don’t have to be “financial” resolutions to have a huge impact on our long-term wealth. For instance, getting in shape or quitting smoking can literally add zeros to your bottom line, as we explored in Part One of “Make a Million Dollar Resolution.” And of course, decisions to start a business, follow a budget, or get out of debt can also help you create more prosperity, as we discussed in Part Two.
Today, we’re adding two more resolutions to the list. Both of them are powerful ways of saving that have helped millions of Americans build wealth. Both of them help you build equity in assets that can make a million dollar difference in your finances over time.
As Investopia.com summarizes in their definitions of equity, “you can think of equity as ownership in any asset after all debts associated with that asset are paid off.” Building equity in an asset means owing less, and owning more.
Equity is built in two ways: first, by making payments and reducing what is owed against an asset, and second, by the asset increasing in value. By making payments over time and by investing in things that increase in value over time, you can build equity in million-dollar assets even when you start small. This is certainly true about the two assets and the two simple but profound resolutions in today’s article.
Million-Dollar Resolution #6: Buy a House (or Another One)
“Buy houses, don’t sell them!” is the personal advice of multi-millionaire realtor Joseph, a Seattle real estate broker (though he is careful to never say the “don’t sell them” part to potential clients who would like to list their homes!) And Joseph would know – the homes he started buying in his 20’s made him a home equity multi-millionaire with $60k-per-year cash flow in his 40’s.
Buying a first home, a second home, or a rental home may seem to take you temporarily backwards, financially. You have to save for a down payment, in most instances, and typically a mortgage payment is higher than a rental payment for an equivalent property.
However, as years pass, that home purchase starts to look pretty savvy. Rents rise, but fixed interest rates don’t. Equity is built while the renters next door have nothing to show for their monthly payments. Yes, there are maintenance costs and tax increases, but in the long run, buying a home is usually the wiser choice.
Owning a home is harder than renting, but it is rewarding. Not only can you improve it and decorate it to your liking, but it becomes a substantial asset. Many studies have demonstrated a substantial correlation between home ownership and building wealth. As we cited in “The Power of Leverage,” according to a Consumer Finances Report published by the Federal Reserve in 2012, the average total financial assets of renters totaled only $12,600 vs. $296,200 for homeowners, a differential of more than 2,300%!
Be aware that a home is an expense as well as an asset, and you will be wise to not buy a home that breaks your budget or prevents you from saving elsewhere. And if the property is not the home you live in, we recommend you look for ways to generate cash flow with it, so that it contributes to your present prosperity instead of draining it. Second homes and rentals can be very effective investments for building net worth as well as cash flow, however, we don’t recommend purchasing properties based on speculation of where the market will go.
Of course, there can be potential pitfalls in being a landlord. You’ll want to do your research before you buy and be confident that there are qualified renters looking for a property like yours at an agreeable price. You always want to do credit checks, background checks, and periodic walk-through’s. You may want to hire a property manager, especially if the property is not close by and/or you aren’t handy.
Many people prefer the simplicity of investing in the stock market because it can be “hands off,” but the stock market has some disadvantages compared to real property:
- Major banks and lending institutions won’t lend you money at low interest rates to buy stocks.
- Tenants won’t send you monthly checks to build your investment portfolio.
- If your stock goes up in flames, it’s not insured.
- While market values fluctuate, they rarely take steep and sudden dives as some stocks have been known to do.
- Borrowing against stocks is a very risky business, as you can lose more than what you borrowed in a margin call.
- There are some very favorable taxation laws when it comes to homes, such as the ability to exclude $250,000 of the gain from the sale of a home ($500,000 for couples) from your taxable income, provided that you lived in the home for at least 3 of the last 5 years.
Million-Dollar Resolution #7: Start a Permanent Life Insurance Policy
The fastest way to add a million dollars to your net worth is to buy a million dollar permanent life insurance policy! Now you might think, “Why would I want to get a policy that I only pays when I DIE?” but that is NOT how a properly constructed and utilized life insurance policy works at all. In my best-selling book, Live Your Life Insurance, I explain many ways that you can use whole life insurance for savings, investing, providing your own financing, and much more.
Most people can actually add a million dollars to the worth of their estate very quickly simply by starting a life insurance policy (or an additional policy… I have several on myself.) And unlike term policies which are almost always cancelled when terms expire and new term policies become cost-prohibitive, a whole life policy is structured to remain in place and be used during your LIFE – not simply to pass assets to heirs. While the estate planning benefits are significant, the first beneficiary of your life insurance policy should be YOU!
Permanent insurance policies can actually put money into your own pocket as well as create legacies for children, grandchildren and/or charities. They can also function as a safety net or “permission slip” that can allow you to spend down other retirement assets sooner. For instance, some people may wish to sell a business they no longer wish to run, or take a reverse mortgage and spend their home equity, and still have something to leave to heirs.
Permanent insurance can also provide potential savings over taxable savings instruments, as cash value grows at competitive interest rates (much faster than bank savings!) safely and without taxation within the policy. One key to growing cash value more quickly is maximizing PUAs, or paid-up additions riders, which we recommend with all our client’s policies.
Building cash value is our favorite form of savings, as cash value earns rates of return much higher than bank savings accounts. Saving in a whole life policy creates flexibility in your finances, as you can borrow against or withdraw the policy’s cash value if needed. (Some clients have borrowed against cash value to purchase houses or pay for property repairs such as a new roof, so you can see how these two resolutions can work together!) You can also collect policy dividends for additional cash flow. And in certain circumstances, you can even sell a death benefit while still living, which many people don’t realize.
If a million dollar whole life policy seems woefully (or just somewhat) out of reach for you, purchasing term life insurance – or a combination of whole life and term – is another great way to make a potentially million dollar resolution. That way you can protect your family for a term of 10 or 20 (or so) years while saving towards a permanent policy. (We don’t personally sell term life policies, but for the most competitive prices for term, we send our clients to P4PRewards.com.)
Just as with purchasing a home, whole life policies require discipline and an investment of money. And just like purchasing a home, you’re building wealth for the long-term. Since all permanent insurance and even all whole life policies are NOT created equally – you’ll want to contact us to discuss your options or get a personalized quote. We like to help our clients maximize their cash value without compromising guarantees.
We wish you all good things in 2015, and we look forward to being your Partners in Prosperity!