Here are four secrets to achieving financial security – regardless of what's happening in the stock market or the economy. These tips can help you bank on yourself, rather than relying on the government, Wall Street, or your employer:
Financial Security Secret #1: Know the difference between "saving" and "investing"
Wall Street and the financial planning industry have led us to believe that "saving" and "investing" are the same thing. However, they are not. The money you have in savings is money you don't want (or can't afford) to lose. Money you invest is subject to loss.
Problem: Most people today "invest to save," and as a result, have no idea what their nest egg will be worth when they plan to tap into it.
Tip: Don't put money you can't afford to lose into stocks, real estate or other traditional investments. Before investing, ask yourself if your money didn't grow for 20 or more years, or even went backwards, could you live with that?
Financial Security Secret #2: Become your own source of financing
The financial and credit crisis has made us painfully aware of how little control we have when we rely on other people's money. As Mark Twain noted, "A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain."
Many people think that paying cash for things is the answer. But this ignores an important, but little-known principle of finance…
You Finance Everything You Buy!
What do I mean by that? Let's say you've decided you're going to beat the financing and leasing rackets by paying cash for major purchases. So you start putting money aside into a savings or money market account. When you hit your savings target, you pull your money out to pay cash for that item. Now how much interest are you earning on that money?
You're earning ZERO interest, of course. Which is why financing, leasing and paying cash are all losing scenarios.
Fact: You're either going to pay interest to others to finance things, or you're going to lose the interest or investment income you could have earned, had you kept your money invested instead.
My research over the past twenty years has uncovered a way of managing your finances and making major purchases that actually beats paying cash and is "better than debt-free."
Financial Security Secret #3: Don't defer your taxes
Americans love the idea of deferring their taxes. That’s a big part of the appeal of tax-deferred retirement plans, such as 401(k)'s.
But what direction do you think tax rates will be going over the long term? If, like many people, you believe taxes are going up, consider that if you're successful in growing your nest-egg, you'll only end up paying higher taxes on a bigger number.
Fact: Even if tax rates stay the same, it's estimated that by deferring your taxes, you'll ultimately pay 10-20 times more in taxes over a 30-year period!
Tip: Consider paying your taxes up front – at least you know what they are.
Financial Security Secret #4: Look beyond the traditional saving and investing methods
Consider proven and time-tested ways to grow a substantial nest egg – without the risk or volatility of stocks, mutual funds, real estate, and other investments.
Tip: For example, there is an asset class that has increased in value during every stock market decline and every period of economic boom and bust for more than a century.
That asset is dividend-paying whole life insurance.
A dividend-paying whole life policy grows by a guaranteed and pre-set amount every year. In addition, the growth is exponential, meaning it gets better (more efficient) every single year you have the policy, simply because you stick with it.
This gives you some protection against inflation and provides peak growth at the time you need it most (retirement). And no luck, skill, or guesswork is required to make that happen.
Furthermore, there are options that can be added to the policy which turbo-charge the growth of your equity ("cash value") in the policy. When your policy is structured properly, you can use it as a powerful financial management tool from day one.
Once credited to your policy, both your guaranteed annual increase, plus any dividends you may receive, are locked in. They don't vanish due to a market correction.
You can use your money in the policy whenever you want and for whatever you want. This can allow you to become your own source of financing, so you can reduce or eliminate the control banks and other financial institutions have over you.
Some companies even offer an option that allows you to use your equity in the policy, and the policy continues growing as though you never touched a dime of it.
These policies also give you peace of mind for retirement planning, because you'll know the minimum guaranteed income you could take in retirement, and for how long you could take it.
Bonus: It's possible to take an income from the policy with little or no tax consequences, under current tax law.
© 2010 Pamela Yellen
ABOUT THE AUTHOR: Financial security expert, Pamela Yellen, is author of the New York Times best-selling book, Bank On Yourself: The Life-Changing Secret to Growing and Protecting Your Financial Future.