Click here to download the transcript of Todd's best tips for epochal change!

Two years ago, I announced to my Expectancy Wealth Planning course community that we were about to enter epochal change.

Between the Fed's permissive monetary policy, near-zero interest rates, Covid stimulus, and supply-chain issues, it was clear the game had changed.

And here we are now, with a 20% stock market decline, historic bond market decline, the highest inflation in 40 years, and a slowing economy. The bad news is there's still more to come.

But more importantly, epochal change means the investment rules changed for the next 10-15 years. What worked for the last epoch (40+ years) cannot be relied upon for the next epoch.

I've been writing about this very topic for two years in my private course community to prepare my students, and I've published resources every month for more than a year in my public facing newsletter to prepare my free subscribers as well.

My goal was to provide the knowledge required so that every person following my work could protect and prepare their portfolios in advance. Forewarned is forearmed.

Related: Learn how to invest like Todd

While my private course community responded to the education, protected themselves, and even prospered, I was surprised that only a small percentage of my public facing, free subscribers took action.

Even though I was providing academic level, third-party research proving every supporting point, people weren't responding. It was like they were asleep at the wheel, and didn't believe the regime change was fundamental in nature and would persist.

I decided to check in with my course community in our weekly office hours call.

The discussion that followed was so valuable  that I wanted to share it publicly. Fortunately, my private community students agreed.

This podcast episode is a nearly unedited recording of one my weekly office hours support calls with my private Expectancy Wealth Planning community as we discuss epochal change.

I hope this inside look behind the paywall helps you take appropriate action to secure your financial future.

And if you got great value from this episode, make sure to check out my Expectancy Wealth Planning course here.

In this episode you'll discover:

• What is epochal change?
• The signs I saw two years ago for epochal change
• Why I've been talking to my Expectancy Wealth Planning course students about epochal change
• How inflation was inevitable after the Fed's stimulus in the face of supply chain disruption
• The important role the Fed has played in creating epochal change
• What you can expect to see the markets do for the next 10-15 years
• How investing in this epoch will be different from the last 40 years
• How my course students were able to save their paper asset portfolios from the current bear market
• The best tool to manage your paper assets during the next epoch and beyond
• Why the investment strategy that worked reliably in the past won't work in the future
• How to avoid the insidious trap of “buy the dip”
• The signs for epochal change
• The best way to guard against volatile markets
• The dangers of recency bias
• Why most people don't understand epochal change
• How to apply risk management to investing
• Why epochal change isn't just in the markets
• Why it's paramount to become your own financial expert
• The destructiveness of inflation
• Watching for “dead bodies” to float to the surface
• What to expect for next steps in epochal change
• The geometric growth of government debt caused by increasing interest rates
• The final stage of epochal change and why most people won't be prepared
• How to prepare your wealth plan for epochal change
• and much more….

Resources and Links Mentioned in this Session Include:

• Expectancy Wealth Planning Course
• Allocate Smartly
• (Please note: some of the links above are affiliate links so if you buy a course or book using these links I will receive a little compensation. Thank you for supporting this site!)

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Let’s face it, nobody really wants to buy life insurance.

After all, adding an extra expense to your budget for something you’ll (hopefully) never use isn't at the top of most people’s wish lists.

However, life insurance coverage is a critical part of most sound financial plans. It also becomes absolutely necessary when you have dependents to care for.

Unfortunately, by the time most of us begrudgingly admit that life insurance is something we truly do need, we’re already well beyond the ideal age to purchase it.

So, when is the best time to get life insurance?

The true answer to this question will depend in large part on your individual circumstances, but, in simple terms, the answer is “The sooner the better.”

It’s a Numbers Game

When looking at life insurance coverage from a pure cost perspective, some may say that the best time to buy life insurance is as soon as possible after birth. That’s because a life insurance policy gets more expensive with every year that passes by.

However, this isn’t practical, or advisable, for most people.

In our younger years, other priorities take precedence. Many of us have to focus on getting out of debt first. We’re also saving up to meet important goals like creating a sufficient emergency fund, buying our first home, and saving for retirement.

Related: How to be a pro at growing your wealth

Millennials and other younger people are also choosing to delay marriage until later in life and tend to have less income and more debt than their parents did. These circumstances all contribute to the “deal with it later” attitude that most young people have when it comes to purchasing life insurance.

However, you might be surprised to learn that, in almost all cases, it’s ideal to purchase your life insurance coverage well in advance of your 35^th birthday. Unfortunately, most people in this age bracket mistakenly believe that they can’t afford life insurance premiums.

A 2015 study released by the nonprofit Life Happens and LIMRA found that 80 percent of the people surveyed significantly overestimated the cost of life insurance. Those who fell in the Millennial age bracket overestimated the cost by as much as 213 percent, while Gen Xers overestimated it by 119 percent.

This misinformation has led over 54 percent of Americans to say that they’re unlikely to purchase a life insurance policy within the next 12 months. This is despite 43 percent of people admitting that they would feel a significant financial impact if their household’s primary wage earner were to pass away.

The sad reality is that less than 40 percent of Americans currently own life insurance, while close to 70 percent know that they need it. Don’t let yourself fall into this trap! Keep reading to learn more about the reasons why you might need life insurance even if you don’t have dependents, the true cost of life insurance coverage, and how easy it is to purchase your own policy.

Reasons to Purchase Life Insurance Early (Even if You Don’t Have Dependents)

It’s easy to understand why you might think that you don’t need life insurance if you don’t have a family to care for. However, there are other valid reasons to carry life insurance from an early age. Here are the top four.

1. Cover Your Debts

One of the most important reasons a young, single person needs life insurance is to cover your debts. Many young people who simply don’t earn enough to pay for their expenses end up taking out an unsecured credit card for day-to-day purchases and other necessary costs. As you rack up debt, ideally, you should have a life insurance policy that’s large enough to cover your outstanding balances.

If credit cards and loans are in your name only and your estate doesn’t have enough money to cover your debts, then creditors might be out of luck. But, if you have a joint credit card or a co-signer on any of your loans, the person who is left behind will be responsible for paying off the entire balance. This could put your loved ones in quite a predicament.

2. Replace Your Income

Although marriage rates are down from 70% in 1967 to less than 50% today, more people than ever are living in dual-income households. Unmarried couples sharing expenses need to consider how the loss of their income would impact the other party. If you were to pass away today without life insurance, would your significant other be able to maintain their current standard of living? If you’re not sure, then now is probably a good time to consider a life insurance policy.

3. Retain Your Coverage

If you’re eligible for group life insurance as part of your employment benefits, this is usually a great deal. These policies are often very expensive, of your employer might even cover the entire cost. However, if you leave your job, you don’t usually get to take your policy with you.

Related: Here’s a scientific system to build your wealth now

When you’re young, it’s likely that you’re not going to stay at the same job for the rest of your life. Depending solely on a group policy could leave you without coverage when you need it most. It's better to purchase your own individual policy and consider any group policies as icing on the cake.

4. Pay for Final Expenses

Even if you don’t have any dependents or outstanding debt, if you were to pass away today, it’s likely that your loved ones would have to spend anywhere from $6,000 to $9,000 for your funeral services. If your loved ones are financially well-off and this expense won’t impact them, then you still may not need life insurance. However, if you believe this would create a financial burden, then you may want to consider purchasing a small policy to help cover these expenses.

The Cost of Waiting

According to the quote comparison website Policy Genius, the cost of a 30-year, $200,000 term life policy for a healthy 40-year-old male starts at $53 per month. That same policy for a 25-year-old male is just $31 per month. Over the lifetime of the policy, that’s a difference of $7,920!

In addition, the longer you wait to purchase your policy, the greater the chances are that you could develop a health condition that makes it significantly more expensive. In some circumstances, like if you develop cancer or conditions like high blood pressure or obesity, insurance companies might even deny you coverage altogether. This will leave you with a huge gap in your financial plan and could expose your loved ones to serious financial insecurity.

Since term life insurance premiums don’t go up even if you develop health conditions, it’s usually a good idea to lock in your rate while you’re young and healthy.

You Can Afford Life Insurance

We’ve already mentioned that most people overestimate the cost of life insurance. The truth is that a young, healthy individual can almost always get a term life insurance policy for less than the cost of your daily coffee habit. Studies also show that most of the people who think they can’t afford life insurance make room in their budgets for conveniences like cable and internet services and cell phone data plans. The harsh reality is that if you have money to go shopping, go out to eat, take a vacation, or spend an evening out at the movies, you can afford a life insurance policy.

Some insurance salespeople might recommend a permanent life policy with cash value. They’ll tell you that it makes sense to purchase this type of policy because you can use the cash for things like a mortgage down payment or the kid’s college tuition. However, this is rarely good advice.

Permanent life insurance is far more complicated than a term policy and the added fees, expenses, and surrender charges make these types of policies an unnecessarily costly option. Often, premiums for a whole life policy can be as much as 10 times more than a term policy with the same death benefit. When you’re trying to fit life insurance premiums into your budget, this is clearly not an appealing option. Especially if you're first starting out, purchasing a simple, inexpensive, term policy is almost always your best bet.

Get Your Life Insurance Coverage in 5 Easy Steps

If you’ve read all of these facts and are now convinced that this is the right time for you to buy a life insurance policy, you’re probably wondering how to get started. Luckily, it’s much easier than you might think. Follow these five simple steps, and you can have a policy in place by the end of the day!

1. Review your budget – start by using our budget planning calculator to evaluate your current expenses. This will help you find some wiggle-room to cover the cost of your new life insurance policy.
2. Determine how much coverage you need – before you commit to buying a policy, you’ll want to learn the basics of how life insurance works and calculate how much life insurance you need. This is a simple process that should take you less than an hour. You can also use our life insurance calculator.
3. Easily shop online – once you know what you’re looking for, it’s easy to shop for life insurance online and compare multiple policy quotes.
4. Purchase your policy – when you’ve decided on the best policy and carrier for you, most companies allow you to complete your application online. Some even offer instant approval, so your coverage could start right away.
5. Keep up with your premium payments – remember that buying a life insurance policy does you no good if you don’t keep up with your premium payments. Otherwise, the policy will lapse. This will leave you without coverage and you will have wasted all the time and money you initially put into purchasing your policy.

Final Thoughts

If, despite reading all of the above information, you truly believe you don’t need life insurance, that’s okay.

However, it’s important to keep your future goals in mind and decide if the cost of waiting is worth it to you. Considering that most people can purchase a term policy for less than the cost of a night out on the town, planning ahead is almost always in your best interest. This can help you create a secure financial future for your loved ones and save yourself a significant amount of money over the course of your lifetime.

"Discover The Comprehensive Wealth Planning Process Proven Through 20+ Years Of Coaching That Will Give You Complete Confidence In Your Financial Future"

• Get a step-by-step action plan to achieve financial independence - completely personalized to you.
• How to live for fulfilment now, while building wealth for the future.
• No more procrastination. No more confusion. Just progress and clarity

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Sometimes, debt takes on a life of its own.

Even if you're responsible with money, surprises can catch you off guard and, before you know it, one loan turns into an insurmountable pile of debt.

It’s easy to get in over your head.

If you're paying what you can, but your loan or credit card balances are barely moving, it can feel like you’ll be in debt forever! This is just one of the reasons people find it so difficult to get out of debt.

Should I Consolidate Debt?

Debt consolidation may be a good option for you if:

• You have the income and credit to qualify for a new loan, and
• You can meaningfully reduce the interest rate on your debt by consolidating.

Consolidating debt can relieve some of the pressure on your budget, or simply reduce the number of creditors you need to pay each month. In many cases, consolidating your outstanding debt into a single loan can lower your monthly payments, save you money on interest, or both.

However, not all consolidation loans are created equally. There are many alternatives, each with their own pros and cons. The option that's right for you will depend on:

• What kind of debt you have
• The total amount of your debt
• Your creditworthiness and income

Read on to get all the information you need to decide which type of debt consolidation is best for you. We'll also cover exactly how to get started and offer some tips for avoiding the most common debt consolidation mistakes.

What is Debt Consolidation?

Debt consolidation is simply the process of taking out a single loan or credit card and using the proceeds to pay off multiple loans or credit card balances.

The two types of debt that are most commonly consolidated are credit card debt and student loan debt. But, you can also use debt consolidation for payday loans, personal loans, or medical bills.

It’s important to note that debt consolidation doesn’t reduce the amount of debt you owe. In fact, if you pay transfer fees or loan origination fees, you may end up owing more than you did when you started. However, in most cases, the benefits of consolidation make the upfront costs worthwhile in the long run.

Benefits of Debt Consolidation

You may wonder why you should bother with the hassle of consolidating your debt, especially when you’ll likely end up paying extra fees? There are actually several very compelling reasons. Let’s look at an example.

Related: Here’s a scientific system to build your wealth now

Imagine that you had five credit cards totaling $20,000 in outstanding debt. For this example, we’ll assume the interest rates averag 18.5% and the minimum monthly payments for all five cards totaled $500. In this case, it would take you five years to pay off your debt.

Now, imagine that you’re able to take out a $20,000 loan with a 5-year repayment schedule and a 10% interest rate. Your new minimum payment would be approximately $425 for the same debt and same repayment period.

The new, lower payment gives you two options to solve your debt problems:

The first is to use the monthly savings of $75 to give yourself a little bit of financial breathing room.

This might be the best option if you didn’t have enough cash flow to keep up with your previous $500 monthly payment.

The second option is to continue paying $500 per month so that you can pay off your loan even sooner.

How would these choices impact you?

In the first scenario, you would have an extra $75 per month to support current lifestyle so that you hopefully don't accumulate additional debt, while still saving $900 per year in interest payments. Over the five-year period, you’ll save $4,503. This is a huge benefit, but what if you went one step further and used the extra money to increase your loan payment? This would put you back at your original $500 per month payment while shaving an additional 0.9 years off your repayment schedule. This would allow you to pay the loan off in just 4.1 years and save $1,067 over the life of the loan.

These numbers will obviously vary for each person's individual scenario, but you can see what a huge difference consolidation can make. If you want to see what your consolidation numbers would look like, check out our debt consolidation calculator.

Another advantage is you’ll enjoy the freedom and convenience of dealing with one single loan instead of trying to juggle five credit card payments. It makes life easier, and it reduces the very real risk that you'll miss a payment, incur late fees, and tarnish your credit.

Depending on your credit history, debt consolidation may also give your credit score a much-needed boost. Once you’ve consolidated to a single loan and establish a track record of on-time payments, you should see a positive improvement in your credit score over time.

Now that you understand the benefits of consolidation, the next step is figuring out exactly how you’re going to consolidate that debt.

There are multiple options so it's important to weigh the pros and cons of each to decide which is best for your situation.

5 Methods for Consolidating Debt

The five most popular debt consolidation options are:

1. Home equity
2. Personal loans
3. Credit card balance transfers
4. Student loan refinancing
5. Debt consolidation services

1. Home Equity or Mortgage Refinancing

If you're a homeowner then consolidating your debts with a home equity loan or line of credit (HELOC) is likely to be the least expensive option. Home equity loans typically offer lower interest rates than most other loan types because you’re putting your home up as collateral.

In some cases, you may also be able to refinance your mortgage for more than you owe and withdraw the difference as cash to pay off your debts.

However, both of these are options are risky propositions. You’re converting unsecured debt into secured debt.

Related: Why you need a wealth plan, not a financial plan.

If you stop repaying a credit card, personal loan, medical bill, or any other unsecured debt, your creditor will have to sue you to attempt to collect the unpaid balance. They might be successful, they might not. However, even if they're successful, the worst that can happen is a judge will place a lien on your property or garnish a percentage of your wages.

Home equity loans — just like mortgages — are secured by your home, which means if you're unable to make the minimum monthly payments then the lender can foreclose on your home. Until the loan is paid off, the bank has the legal right to the value of your home, and can take it once certain conditions are met.

Therefore, while home equity can be an inexpensive way to consolidate debt,  you’ll only want to consider this option if you’re absolutely sure you have sufficient cash flow to easily meet the monthly payment requirements. If not, it's not worth risking the roof over your head.

If you want to explore home equity or refinancing as a debt consolidation option, LendingTree is a convenient website to obtain no-obligation rate quotes for all kinds of mortgage products. Get your personalized rates in 5 minutes here.

2. Personal Loans

Personal loans are the fastest-growing type of unsecured debt. Since these loans aren't backed by collateral, the rate you’ll pay (and whether you’ll get approved at all) will depend in large part on your credit score. They’re an excellent option for consolidating multiple loans, particularly if you already have good credit.

You can get personal loans through banks, credit unions, personal finance companies, peer-to-peer lenders, and through online direct personal loan lenders like these.

If you have excellent credit, direct online lenders often offer great rates, fast approval, and prompt delivery times. In some cases, they can approve and transfer funds in as little as a day or two.

If you have poor credit, direct online lenders will also offer the best chance of approval, but they may be willing to loan less money and will inevitably charge higher interest rates than you're already paying, which defeats the largest benefit to consolidation.

If your credit is somewhere in the middle — okay, but not great — then a local credit union may offer a better chance of approval at a fair interest rate.

If you're curious about whether a personal loan could help you consolidate debt, these websites will show you the best personal loan rates, loan amounts, and monthly payments based on your individual situation. They're free to use, do not affect your credit score, and come with no obligation to apply for a loan.

Learn more about how to use personal loans responsibly in our complete guide.

3. Balance Transfer Credit Cards

If you're looking to consolidate credit card debt and only owe a modest amount, a 0% balance transfer credit card could be the right answer for you. However, approach this option carefully.

Credit card balance transfers are usually best when you owe no more than a few thousand dollars.

The zero-percent rate is offered for a set period of time (usually between 12 and 24 months).

If you haven't paid the balance in full by the time the offer expires, the remaining balance will be subject to the credit card's regular interest rate, which can be quite high.

Most cards also charge a balance transfer fee that amounts to between 3 and 5 percent of the balance transferred.

Before considering using a zero-percent interest rate offer, make sure you read all of the fine print and understand every detail. Then, figure out the payment schedule you’ll need to adhere to in order to ensure you can pay your balances in full before the promotional period ends. If you want to be safe, plan to pay the total off at least one month before the deadline.

4. Student Loan Consolidation

Most people graduate from college with multiple student loans. These loans often have different interest rates, terms, and repayment periods. Keeping track of them all is a hassle and consolidating them will almost always put you in a better financial position.

Federal Student Loan Consolidation

If you only have federal student loans, you may consider consolidating them using a Direct Consolidation Loan through the U.S. Department of Education. Doing so can also give you access to additional loan repayment plans and certain loan forgiveness programs. In many cases, you’ll also be able to remove the uncertainty of variable rate loans by consolidating them into a fixed-rate product.

Before moving forward with this, however, you’ll want to take a close look at the terms of your current loans and make sure you won’t lose any valuable benefits or credits by transferring your balances to a new loan. It’s also important to note that this option only works for Federal loans. If you have private loans or a mix of the two, then you’ll need to explore working with a private lender.

Private Student Loan Refinancing

Consolidating student loans through private lenders is often referred to as refinancing. This option could help you get a better interest rate, but you may find that it’s also more difficult to qualify.

Since Federal loans offer favorable repayment plans and forgiveness programs that you won't find with a private lender, you’ll want to think twice about rolling them into a private loan. It may still be a good idea if the rate is significantly lower and you don’t need these types of options. Before making a decision, you’ll want to ensure that you understand everything completely and weigh the pros and cons carefully.

If you only have private loans, then consolidating them through a new private lender will work in much the same way as consolidating credit cards using a personal loan. Many banks and credit unions offer student loan consolidations. However, online direct lenders are often the best choice. There are many websites available that allow you to compare offers from various lenders, which is a smart thing to do before you make your final decision.

5. Debt Consolidation Companies

There are various names that “debt consolidation” companies operate under. They may call their product debt consolidation, debt management, credit counseling, or a number of other things.

These companies should be considered an absolute last resort. If your credit is poor enough that you cannot qualify for other kinds of debt consolidation, using one of these firms may keep you out of bankruptcy, but it will cost you.

You should also know that these companies often don’t consolidate your debts into one loan. Rather, they serve as a middle man between you and your creditors. You send the company one monthly payment, and they distribute it among your various loans and credit cards. Sometimes, they can negotiate lower interest rates or minimum payments with your lenders. But, you must pay them a hefty monthly fee for using their services, which can offset any negotiated savings.

Finally, using these companies will almost always have negative consequences for your credit in the short-term. That's because your creditors will report to the credit bureaus that you are repaying your debt under modified terms, which goes on your credit report as a negative remark.

While some debt consolidation companies are reputable, there are also a ton of debt consolidation scams out there. If you decide to pursue this option, be very careful. Do your research, ask a lot of questions, and always trust your gut.

Is Debt Consolidation Always a Good Idea?

Although we’ve discussed the many benefits of debt consolidation, it’s important to note that there are situations when it’s not a good move. Generally, you’ll only want to consolidate your debt if the new loan will give you a lower payment and/or a lower interest rate.

Remember, also, that your new loan may offer you a lower payment simply by extending the amount of time you have to repay your loan. The longer you hold debt, the more total interest you’ll pay. That’s why it’s better to pay more than your minimum payment each month.

Related: How to take back control of your portfolio

Getting out of debt is always a challenge, in part because it requires planning, discipline, and some major lifestyle changes. While consolidating your debt is an excellent first step towards financial freedom, it won’t do you any good if you aren’t prepared to follow through.

5 Debt Consolidation Mistakes to Avoid

Make sure you get started off on the right foot by avoiding the most common mistakes people make when consolidating their debts.

Mistake #1: Not Learning from the Past

If you’ve accumulated more debt than you can comfortably handle, the first step is to look at how you got there. You have to solve the underlying spending problem. That means committing to fundamental changes in how you handle money or reducing lifestyle because the alternative is to end up in the same situation again.

Now is also a great time to look back at your spending habits and identify triggers. Do you tend to impulse-buy when shopping online? Do you spend more than you can afford on gifts for loved ones, or eat out at expensive restaurants more often than you should? Once you notice patterns, you can make conscious efforts to change them so you don't charge up new debt.

Mistake #2: Forgetting to Set Up An Emergency Fund

After you’ve consolidated your debt, it’s easy to become hyper-focused on paying it down. However, it’s important not to neglect savings. Without an emergency fund, one little incident can easily throw you back into debt.

While you’ll want to commit to paying as much as you can on your outstanding loan balance, make sure you also set aside at least a little bit for your emergency fund each month. The general rule of thumb is to keep the equivalent of three to six months of fixed expenses in a liquid account. If you have at least a few hundred dollars saved up, this can keep you from having to turn to credit cards when something unexpected comes along.

If saving seems impossible, there are a number of personal finance apps that can help you track your expenses and budget, and even some so-called microsavings apps that use technology to automatically help you start saving small amounts.

Mistake #3: Racking up New Debt

If you consolidate credit card debt, it’s also absolutely critical not to run those card balances back up. Consolidating all of your outstanding balances into a single loan will ultimately free up thousands of dollars in credit. Do not use it!

If you fall back into your old charging habits, you’ll end up with twice the amount of debt and far fewer options for digging yourself out again. This is a recipe for disaster.

Choose one credit card with a low rate and no annual fee and hold onto that for emergencies. Then, cut up the rest so you’re not tempted to use them. If you don’t think that’s enough to keep you from accessing the credit, consider closing the cards. While closing credit cards can pull down your credit score, it may be worth it if it helps you control excess spending.

Mistake #4: Failing to Have a Plan

You’ve heard the cliché “Failing to plan is planning to fail.” This is particularly true when it comes to paying down your debt.

It’s important to remember that debt consolidation isn’t the same as debt elimination. When you consolidate your loans, you’re simply rearranging them. To make serious strides in getting yourself out of debt, you need to change the way you think about money. This includes tracking your budget and coming up with a plan to help you spend less, save more, and only pay cash for future purchases.

Sometimes, making real progress will require hard decisions. Start by ruthlessly cutting out unnecessary expenses including dining out, grabbing coffee on your way to work, and maybe even that Netflix subscription. Small spending cuts may not seem like a big deal, but when taken together over time, they can accumulate into significant savings.

If you don’t have enough income to make your plan work, then consider selling some unneeded items, picking up a side job, getting a roommate, or even downsizing your home.

Mistake #5: Not Tracking Your Progress

Do the calculations so that you know exactly how much you need to pay each month and when your debt will be paid off. Your repayment period will likely span over several years, so it’s important to check in once in a while to make sure everything is still working according to the plan.

Related: The science of investment strategy – simplified!

Consider using a free cash flow tracking app like Personal Capital to monitor your expenses. If you use a credit card for online purchases or emergencies, make sure you pay it off in full each month. Tracking your spending and checking your debt and savings balances at least once a month will help you quickly notice when you start to stray from the plan. This will allow you to make proactive changes before they compound into a real problem.

Final Thoughts

When used correctly, debt consolidation is an extremely valuable tool. Whether you’re in over your head with outstanding debt or you just want to make the smartest possible financial moves, it’s worth learning how consolidation can help.

Don’t forget to weigh the pros and cons of your various consolidation options before making a move. Then, create a plan to pay off your debt and make sure you’re mentally prepared to follow through. Taking these steps will put you on a fast track towards achieving financial freedom and building true wealth.

"Discover The Comprehensive Wealth Planning Process Proven Through 20+ Years Of Coaching That Will Give You Complete Confidence In Your Financial Future"

• Get a step-by-step action plan to achieve financial independence - completely personalized to you.
• How to live for fulfilment now, while building wealth for the future.
• No more procrastination. No more confusion. Just progress and clarity

Expectancy Wealth Planning will show you how to create a financial roadmap for the rest of your life and give you all of the tools you need to follow it.

Learn More...

When we think about making a major purchase, the first thought that comes to mind is usually: “How much is it going to cost?”

Life insurance is no exception.

When you purchase a life insurance policy, you’re making a financial commitment that you’ll likely carry for decades.

Not only that, but life insurance is a negative expectancy bet.

You hope to pay your premiums and outlive your policy. The insurance company makes a profit because most people never collect.

Obviously, you want to pay as little as possible for life insurance.

Unfortunately, buying a life insurance policy isn’t like buying a television or a new pair of shoes. The cost varies among carriers and depends on your age and hundreds of different health criteria. If you visit 25 different insurance carriers, it’s extremely likely you will receive 25 wildly different quotes.

This makes comparison shopping difficult at best. When you’re looking for a policy, you’re likely to ask questions like:

• How does the life insurance company come up with my quote?
• How do I know if I’m getting a good deal?
• Is there anything I can do to minimize the cost?

These questions are important, and understanding the answers will help you avoid some of the most common life insurance mistakes.

If you buy a policy that you can’t afford and end up allowing it to lapse, then you’ve done nothing but waste your time and money. On the other hand, if you make your decisions based only on price, there’s a chance you’ll end up with insufficient coverage or buying from a poorly rated company that might not be able to meet its obligations when the time comes.

Related: Why you need a wealth plan, not a financial plan.

The good news, however, is that life insurance is probably far less expensive than you think. Studies show that while 63 percent of people think they can’t afford life insurance, most of the population significantly overestimates its cost. Getting the facts will help you make smart financial decisions and protect your loved ones.

Do you know how much a life insurance policy will cost you? Are you clear on all the factors that go into determining your final price? Learning the answers to these questions will help you find the ideal policy to fit your needs and your budget.

Example 20-Year Term Life Insurance Cost by Age

As you will learn below, there are many factors that affect the cost of life insurance including your age, the type of policy, the policy term, and whether or not you have a medical exam when you apply.

Because life insurance rates vary so widely, it's impossible to show you exactly how much life insurance will cost you. However, the table below provides some sample rates per $100,000 of coverage for a 20-year term life insurance policy (one of the most common life insurance products purchased). Your mileage will almost certainly vary, which is why it's so important to get several quotes from reputable life insurance providers and brokers.

Sample Monthly Premiums Per $100,000 (20-Year Term Life Insurance)

As you can see, life insurance rates begin to climb dramatically after the age of 40. In addition, healthy applicants who take the extra step of having a medical exam can save a decent amount, especially if they're older.

5 Factors that Affect the Cost of Life Insurance

There are five primary factors that affect the cost of a life insurance policy: The policy details (type, term, death benefit, and riders); your age; your health; your gender; and your lifestyle factors.

Let’s take a deeper look into each of these factors.

Policy Details

One of the most important factors that affect how much your life insurance policy will cost is the type of policy you choose and how it’s designed.

Policy amount

The first thing to consider is the amount of life insurance coverage you really need.

In general, the higher the death benefit, the more expensive the policy. This means that a $100,000 policy will be far less expensive than a $2 million policy.

However, you won’t want to skimp out on coverage just to save some money. It’s important to think about why you need life insurance, then take the time to accurately calculate the amount of coverage you'll need to meet your goals. If possible, give yourself a little bit of wiggle-room in case your circumstances change in the future.

Policy term

The next major factor is the length of time your policy will remain in force. While making this decision, you’ll have to choose whether you will purchase a term insurance policy or a more expensive permanent policy.

Term life stays in place for a set period of time, often 10, 20, or 30 years. If you pass away while the policy is active, your beneficiaries will receive a death benefit. However, if you live one day past the term, your coverages ceases and your beneficiaries receive nothing. This is the most common type of insurance and also the least expensive. Most people purchase it to cover expenses during their working years, while their children are minors, or during some other set time period.  By the time the policy lapses they have no need for the coverage and can happily eliminate this expense from their budget.

Policy type

Permanent insurance, like whole life, universal life, and variable life, doesn’t ever lapse unless you stop paying your premiums. This means your beneficiaries will receive a death benefit whether you die tomorrow or live to be 110. These policies have a separate cash value component, and some allow you to invest a portion of the policy value for greater growth. However, they’re far more expensive than term policies and carry many extra fees. In fact, you’re likely to pay 6 to 10 times more for a whole life insurance policy than for a term life policy with the same death benefit.

Optional riders

Finally, many carriers offer life insurance riders, which are basically mini policies that you can add to your main policy. Riders can add extra perks like lapse protection, early pay-out options, and providing coverage for long-term care needs. However, these also come with an extra cost.

Age

As you get older, it becomes more expensive to purchase a life insurance policy.

The primary reasons for this is that the older you are, the fewer years you're expected to live. If you purchase a policy and then die shortly after, the insurance company won't have time to collect enough premiums to offset the death benefit.

Related: Here’s a scientific system to build your wealth now

After age 40, you can expect your premiums to increase by 10 to 15 percent for every year that you wait to buy a policy. Once you reach a certain age, some carriers will no longer offer policies.

The good news is, once you purchase a term life insurance policy, your monthly or annual premiums remain level throughout the entire time the policy is in force. You won't have to inform the company about any changes in your health or lifestyle and the fact that you’re getting older won't impact your premium. This makes buying a longer term policy advantageous as long as it fits into your budget and you continue to have a need for coverage.

Health

Your health is another major factor that determines how much you’ll pay for a life insurance policy. The better your health, the less likely you are to die at a young age.

This makes you a good risk for the life insurance company, so your policy will cost less than someone with significant health issues.

Most insurance carriers require applicants to undergo a process, called underwriting, that helps them determine how risky it is to cover your life. This includes (among other things) a detailed review of your current health status and family history, a review of your medical records and prescription history, and a brief physical exam. Some companies also require bloodwork, a urinalysis, and/or an EKG.

Some of the health factors that are likely to result in a higher premium include:

• Nicotine use
• Use of recreational drugs (including marijuana)
• High blood pressure
• Hypoglycemia
• High cholesterol
• Heart disease
• History of strokes
• Uncontrolled diabetes
• HIV/AIDS
• Other chronic diseases or illnesses
• Pre-existing conditions

Life insurance companies usually rate applicants in 12 to 16 different categories. The most common are Standard, Standard Plus, Preferred, and Preferred Best. Tobacco users usually have their own class (ex. Standard Tobacco, Preferred Tobacco). Applicants who don’t qualify for at least a standard rating will pay significantly higher premiums or could have their request for coverage denied.

There are many different life insurance companies and each uses its own methods to evaluate risk. If you run into a problem during your application process, it’s important not to give up. If one company gives you a less-than-ideal rating or denies coverage, request quotes from a few different companies. It’s likely that you’ll find at least one that’s priced closer to what you were hoping to pay.

Gender

Your gender also affects your quoted premiums.

Statistically, women live longer than men. For this reason, when all other factors are equal, a woman will pay, on average, 15 to 40 percent less than a man for life insurance.

Lifestyle

When evaluating how much of a risk you pose, carriers will also look at your lifestyle, hobbies, and occupation.

If you work in a dangerous industry or enjoy hobbies like skydiving, auto racing, or general aviation in your spare time, you’ll pay more for your life insurance coverage.

The insurance company will also factor in things like your driving record, whether you plan to travel to dangerous locations, and even your credit history.

Understanding Life Insurance Fees

In addition to the factors listed above, the additional fees included in a life insurance policy will also impact the cost. Depending on the type of policy you purchase, you may pay some or all of the following fees.

• Mortality and Expense (M&E) Charges – this is the cost to provide the death benefit to the beneficiary.
• Administrative and Sales Fees – this covers the commission the insurance agent earns, the cost to set up and maintain the insurance policy, and the insurance company’s ongoing expenses.
• Investment Management Fees – this applies to policies that allow the owner to choose the underlying investments. The cost will vary depending on the types of investments you choose.
• Withdrawal Fees – this applies to policies that allow you to withdraw a portion of the cash value. It’s charged each time you take a withdrawal and is usually a nominal amount, like $25.
• Policy Loan Interest – if you borrow against your cash value, the insurance company will charge you interest on the loan.
• Surrender Charges – many policies with cash values will charge you a surrender penalty if you take a withdrawal or lapse the policy early in the coverage period (typically within the first 10 to 15 years after the policy is issued).

Rather than simply looking at the quoted price, it’s important to carefully read the policy details and ensure that you understand all of the policy’s fees and expenses. This will help ensure that you aren’t blindsided by unexpected costs further down the line.

Tips for Reducing Life Insurance Costs

Even though life insurance is generally very affordable, we still want to make sure we're getting the best possible deal on the policies we choose. Luckily, there are some simple things you can do to lower your life insurance premiums.

1. Kick Some Bad Habits

Using tobacco will increase your life insurance rates by as much as 25 percent. Some companies will also raise your rates for vaping e-cigarettes while others also consider marijuana use “smoking” and may place users in a tobacco class.

Kicking some of these bad habits can help you move into a better rating class, which will save you some money. Even if you already have a policy or you’re shopping for one right now, it’s still a good idea to make these changes today.

After you’ve been smoke-free for a year, many companies will allow you to ask for a re-evaluation. If you're moved into a non-smoking class, your rates will go down.

2. Improve Your Health

If you live a sedentary lifestyle and/or eat an unhealthy diet, you’re likely to suffer from physical conditions like high cholesterol, high blood pressure, and obesity. Making even small changes to your daily routines can significantly improve your overall health.

Once you’ve implemented these lifestyle changes for at least a year, you can ask for a medical reevaluation, which will likely lower your rates.

3. Consent to an Exam

Some life insurance companies offer policies that are issued without the need for a medical exam. While this is convenient, it can also translate into higher premiums. Those who have health issues that might come up in a medical exam may find that policies without medical underwriting are beneficial. However, if you’re in excellent health, you’ll receive a much better price by going through the full medical underwriting process. In almost all cases, the difference in premium is well worth the extra effort.

4. Avoid Unnecessary Riders

A bare-bones term insurance policy without any extra bells and whistles is going to be your least expensive option. While the benefits offered through riders may seem appealing, they’re usually not necessary and are rarely worth the extra cost.

5. Pay Your Premiums Annually

While paying your life insurance premiums monthly might seem easier on your wallet, the insurance companies don’t offer this convenience for free. You can often get a discount of 2 to 8 percent of your premium by paying annually. Once you have enough cash flow to cover an annual payment, it makes good financial sense to do so.

6. Don’t’ Buy More Coverage Than You Need

While it’s good to have a little bit of padding when it comes to life insurance, buying too much will put an unnecessary dent in your budget. Take the time to thoroughly calculate the amount of life insurance you need and the number of years for which you need coverage.

Related: How to be a pro at growing your wealth

Once you’ve figured out what you need, try rounding up to an even number and see how much the premiums change. Some companies have “sweet spots” for certain death benefits, like $100k, $200k, and $250k. If you determine that you need $90k in coverage, for example, purchasing a $100k policy is likely your best bet.

7. Layer Your Policies

Most people’s life insurance needs don’t follow a single timeline. For example, you may need a certain amount to provide for your children until they turn 18 and an additional amount to cover your 30-year mortgage. Instead of buying a large 30-year policy, it’s usually less expensive to buy a 20-year policy and a separate 30-year policy.

By layering your policies, you won’t end up paying for coverage you don’t need for an additional ten years.

Final Thoughts

While the cost of life insurance is certainly important, it shouldn’t be the only deciding factor when shopping for a life insurance policy.

You’ll also want to make sure the death benefit and coverage term you choose are appropriate to meet your goals and that you only do business with a highly rated carrier.

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Surprisingly, early retirement is not that hard.

Hitting the lottery or inheriting a windfall from ol' Aunt Myrtle isn't required.

Similarly, you don't have to become a brilliant investor or possess any unusual skill to retire early.

The strategies that work are repeatable and predictable science—not random luck.

In fact, the science supporting early retirement is so simple, literally anyone can do it.

However, almost nobody is willing to do it…and therein lies the rub.

Let's start by proving the theory with mathematics, talk a bit about why so few people succeed, and then explore the steps you must take to ensure the strategy can work for you.

How the Math of Early Retirement Works

Let's play with some simple equations to illustrate the point.

We'll assume $48,000 per year earned income to keep the taxes low and the math easy. Alternatively, you could just assume $48K after taxes and eliminate the tax complication from the equation. That works out to $4K per month spendable.

(By the way — the actual income level is irrelevant to the calculation, as you will see below, so use whatever income works for you. The key is the percentage of income that is dedicated to savings.)

Using one of my handy retirement calculators, we'll determine how long it takes to save your way to financial independence applying industry standard numbers like 8% for investment return, and 3% spendable retirement income to support living expenses. Another invaluable tool is the retirement planner available with a free Personal Capital account; when you link your existing investment accounts and enter assumptions about how much you'll spend and save, Personal Capital can show you exactly how soon you'll be able to retire based upon projections of your specific investments. Learn more about Personal Capital in our review.

If you saved 70% of your income, or $2,800 per month, at 8% return, you would have $515,000 at the end of 10 years.

Related: Why you need a wealth plan, not a financial plan.

Yes, I know that leaves you with only $14,400 per year to live on (I'll address this issue later), but the fact is, you'll be financially independent in 10 years because 3% of $515K is $15,450 in spendable income. This would be $1,000 per year greater than what you had been living on.

(If that math went by a little too fast and you want more detail, read this book: How Much Money Do I Need To Retire. It explains everything in step-by-step detail… plus a whole lot more.)

If you're really in a hurry to tell your boss what he can do with your job, and don't mind extreme frugality, then try saving 80%. You could be financially independent in less than 7 years, because $3,200 per month at 8% results in a $361,000 savings balance, providing $10,830 of annual spendable income at 3%. This is greater than the $9,600 ($800 per month) you would be living on for this scenario.

Quieting the Early Retirement Naysayers

The first and most obvious comment nearly every reader will have to these two examples is something like, “Cute idea, Todd, but I can't even get by on 100% of my income. The idea of living on 20-30% is a pathetic joke! Your article is complete rubbish!”

(Come on… own up to it. The little voice in your head was saying something like that. Right?)

Here's the rub. That's only true for the people making those lifestyle choices. It's not “the truth”.

There are many people who have committed to extreme frugality as a lifestyle choice because they don't want to spend any more of their life than absolutely necessary working for money. They would sooner live without the luxuries that others have claimed are necessities than pay the price of working to have all that stuff.

It's an expression of personal values.

There are people who choose to live in motorhomes, use public transportation or their bicycle, shop only at thrift stores, grow their own food, and so on to keep expenses to a bare minimum.

It can be done. It's possible if that's your choice.

Alternatively, living on 20-30% of your income doesn't have to equate to extreme frugality. Try running the same numbers with $250K or $300K in income.

It leaves plenty of spending money for lifestyle today. Sure, it's far less than you could afford at that income level, but again, it's a choice.

In fact, I initially built my wealth following this exact formula. It totally works.

I just raised my income to a very high level, paid my house off, and never got frivolous, but never suffered. I chose my spending consciously based on my values (personal growth, reading, research, outdoor sports, adventure, and recreation), and never needed to spend much of the fat income.

The bulk went to savings with little effort or discipline. Presto! Instant financial freedom.

So anyway, it does work, and it's do-able. People do it every day.

Others might attack the 3% spending rule or the 8% return on investment. My answer is save your breath.

3% spending is easy to support in perpetuity because a portfolio of quality dividend stocks would pay that (and likely more) while growing to adjust for inflation, and without ever touching principal. It's easily do-able.

Similarly, 8% growth during the 10 years in this example is supportable using investment strategies designed to safely support growth that I teach my coaching clients and students in my courses, including Expectancy Wealth Planning.

Related: 5 Financial Planning Mistakes That Cost You Big-Time (and what to do instead!) Explained in 5 Free Video Lessons

However, even if you disagree with me on this point, the argument is moot because the compound return represents very little of the asset accumulation over this short time period. The math is dependent on the percentage savings rate – not the growth rate. It helps, but it isn't critical.

The time is just too short to make a big difference. Don't waste your energy arguing details – it all boils down to the savings rate.

Also, notice that I didn't include Social Security, pensions, or anything else. This is simple, stripped down math to make a minimalist point that is unarguably clear.

Anyone can retire early and live with financial independence (but not freedom) in 10 years or less. It's absolutely, 100% do-able.

I've done it, lots of other people have done it, and there are many entire web communities of people trying to walk the talk like the one run by Jacob at EarlyRetirementExtreme.com.

If you're a naysayer, then just be honest with yourself and realize your negativity is all about a lifestyle choice – not the viability of the strategy.

With that said, the reality is very few people will ever succeed with this approach. Let's look at why.

Why So Few People Will Actually Retire Early

You probably already guessed why so few people are able to follow this plan…

It takes the self-discipline of a celibate monk living in a brothel to survive on 20-30% of what most people earn in our current culture. I did it easily because my income was substantial while living the simple life as a single male.

It would have been much harder if I was married with kids on an average income.

Does that mean you can discount this article and throw the idea away? No!

The math is the math. I'm teaching you how saving your way to financial independence works.

Related: How to be a pro at growing your wealth

This is one of three paths to financial independence. (The other two are real estate and owning your own business). The rules are inviolable. They are scripture in stone.

You can't argue with them. It's just math.

You can reduce the savings rate and lengthen the time, but you can't change the math.

• Staying with the example above, a 25% savings rate ($1,000 per month) compounds to roughly $1,149,000 in 27 years where it will finally replace the 75% of your earned income you're spending. This example isn't as rock-solid because the time period is much longer, meaning you have to start including inflation and other complicating factors to make it realistic; however, the principle demonstrated is consistent.
• A 10% savings rate in our simplified example requires a traditional career duration of 40-45 years to make sense of the numbers. It's the classic retirement savings formula most people are taught to follow – save 10-15% throughout a normal career duration to replace 80-90% of earned income – but few actually ever do it.

There are a couple of key principles you want to understand with this strategy…

1. The critical factor to success is the percentage saved from earnings. Every 10% increase in spending adds a little more than 3+ years to the process, because it not only decreases how much you save, but it increases the threshold of spending your assets must overcome as well. It's a double-edged sword.
2. Investment return and inflation have very little effect when the time period is short (high savings rate). However, investment return and inflation have a huge compounded effect when the time period is long (low or traditional savings rate). You must plan accordingly.
3. Almost nobody is motivated enough by financial independence to persist with a frugality discipline for 10 years and then survive on the same level of income for a lifetime. That's why so few people ever achieve financial independence following this path.

Frankly, I question if early retirement is even a worthwhile goal as stated in this post here.

Questioning the Goal of Early Retirement

All of this begs the question, “Is your goal financial freedom or financial independence?”

Surprisingly, they aren't the same thing.

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You can be financially independent on $15,000 per year in 10 years or less with the above example, but you'll have to give up some freedom to achieve it.

Living low on the economic scale limits what you can buy and do with your life. These limitations are antithetical to freedom and cause what I call a “poverty mentality.”

Every corner must be cut, every dime squeezed for maximum blood. It creates an obsession with spending and money that doesn't equate to happiness for most people.

Unless your values are inherently extremely frugal, you'll constantly make concessions to save money as decisions are based on the right side of the menu of life (prices). Rather than work for money, you'll spend a comparable amount of life energy working to save money through all the frugality strategies required to make ends meet.

This is not a right/wrong question – it's just reality. It takes effort to figure out how to spend less and survive on less.

Money buys convenience, but that convenience comes at a price because you have to give your life energy in the form of work to earn it in the first place. Everything is a trade-off. There's no perfect answer.

For example, extreme frugality would limit my ability to take my family to France for a month (like I did last year), which honors my values for adventure and life experience. I wouldn't be able to honor my values on education by paying for quality, private schools for my kids.

I wouldn't be able to honor my health values by paying for professional services like sports training, physical therapy, or expensive organic food. All these things would be luxuries in a world dominated by frugality thinking.

These would all be limitations to my freedom and would dishonor my values. In my personal experience, that's antithetical to true wealth and personal freedom. Others would disagree, but that doesn't make them wrong.

It's all a question of values.

Integrate Your Plan to Retire Early with Your Values

Extreme frugality is not everyone's cup of tea. It works fabulously for some people, and it's a recipe for misery for others.

The key is to integrate your plan for financial freedom with your values. The two must be congruent because the goal isn't just financial independence – the goal is true wealth and personal freedom.

For example, the spending level that honors my values as a 50 year-old, middle class, head-household, family of four, is much higher than when I was a single male straight out of college. It's probably higher than it will be 10 years from now when my kids are grown.

You must design a financial plan to reflect whatever reality is true for you. That's always the starting point when I begin working with coaching clients.

We co-design a wealth plan for financial freedom that integrates every aspect of their life: values, spending, life habits, skills, resources, interests and abilities.

Related: Here’s a scientific system to build your wealth now

We define their leverage points and competitive advantage into a plan specific to their needs.

Some clients save their way to wealth using the formulas discussed here. Others choose real estate and/or building a business to better leverage their passions and interests (this employs entirely different equations beyond the scope of this article).

Most use some combination of these three paths to wealth (I usually encourage two of the three paths).

One size does not fit all. Your wealth plan must fit you like a favorite pair of jeans in order for you to succeed with it. It must comfortably wrap every curve and unique attribute of your being, or it won't feel right and you won't stick with it long enough to succeed.

Getting your plan right is the first step to financial freedom on which all subsequent decisions and actions are built.

One of Only Four Paths to Wealth

In summary, the purpose of this article was to illustrate how the rules of frugality and saving your way to wealth can be applied within your wealth plan to help you retire early. It's one of four potential paths to wealth.

1. Some people wing it and get lucky (for example, they win lotteries, inherit millions, or are in the right place at the right time when their employer goes public.)
2. Others use the traditional saving strategies described above and try things until they get it right.
3. A large number of people hire financial advisors to do the work for them. This can work, but it's extremely expensive and often much slower than option 4 (or even option 2).
4. Smart people realize there is no one-size-fits all solution, and they must use proven strategies to design their own individual wealth plan.

To do this, traditional savings strategies are usually the primary choice (coupled with real estate) for W2 employees who lack entrepreneurial dreams. Entrepreneurs will typically build wealth through their business, and park that wealth in paper assets or real estate.

Let me reiterate: There is no such thing as one-size-fits-all when it comes to wealth planning. It's a very personal choice.

How fast you want to achieve your wealth goals through savings (7 years? 40 years?) is purely a lifestyle choice and a statement of your personal values and priorities. The paths you choose to realize your financial dreams should reflect your life situation.

The thing to note about paper asset savings plans is they're governed by specific mathematical rules and limitations. If you want to break out of those mathematical rules and get more creative, then you must include the other two asset categories—real estate and business.

…which is why they will be subjects of future articles, so stay tuned.

Finally, if you have any questions about what it takes to retire early, everything is explained in great detail and made fully actionable in this step-by-step course showing you how to design your life to create financial independence.

Let me know how I can help.

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5 Free Sample Lessons

Building wealth is simple.

It doesn’t require luck, genius, or special connections.

You don’t have to attend overpriced weekend financial seminars or learn the latest tricks and gimmicks sold by slick marketers.

As John Bogle wisely stated, “The secret is there are no secrets.”

The truth behind how to build wealth is public domain knowledge, simple to understand, and nobody is going to get rich selling it to you.

In fact, it's so simple it can be explained in just two sentences:

1. Make more than you spend and invest the difference wisely.
2. Develop simple daily habits that result in wealth accumulation.

I know… you’re probably a little disappointed.

You wanted something new, different, and clever – the missing ingredient that has held you back and will produce breakthrough results. The fabled “secret” every marketer tries to sell.

Instead, I give you something dangerously close to what Grandma would have said.

But listen to the voice of experience. I’ve coached hundreds of people from debtors to the wealthy, and the pattern is unmistakable.

Related: Why you need a wealth plan, not a financial plan.

And it’s not just me singing this song. These same truths were taught by Benjamin Franklin hundreds of years earlier and reiterated by numerous authorities ever since, including J. Paul Getty.

It's timeless wisdom that has been proven over the centuries, and will also probably work for you (if you just put it into practice).

In short, if you want wealth in this lifetime with the highest probability of success, then these two sentences contain the essential wisdom you need to know.

Wealth Building Step 1: Spend Less Than You Make & Invest the Difference

The first sentence summarizes how to manage your personal finances so that you grow assets.

It explains the importance of creating positive cash flow that you invest to produce additional positive cash flow.

Notice how it's composed of three separate yet connected ideas to form a single concept:

1. Spend less
2. Earn more
3. Invest wisely

There are endless variations on how to achieve this objective, but they all follow two simple themes:

• You can reduce spending immediately through various forms of frugality.
• You can increase your income through various strategies including changing jobs, getting a raise, or starting a business.

In short, you must create a gap between how much you earn and how much you spend that results in savings to invest for growth and additional income.

The twin themes of spending less and making more are not mutually exclusive, but they do require very different mindsets.

Frugality is about living on less and requires self-discipline. For most people, there is a feeling of sacrifice when following this path, thus making it difficult to succeed.

If that's you, then frugality is a slow and difficult path to wealth because you will be in constant battle between lifestyle desires and financial freedom goals.

For others, frugality is a pleasurable journey in simplification where fulfillment results from redirecting earned income toward financial freedom goals rather than squandering it on spending.

It's not uncommon for extreme frugalists to save 70% of income and achieve financial independence in less than 10 years, but it’s not everyone’s cup of tea.

Another alternative is to raise the income side of the equation. The advantage to this approach is there is no theoretical limitation to how fast your wealth can grow because your earning capacity is unlimited.

Many wealth gurus teach the income side of the equation as the “fast path” to wealth; however, if you don’t master the spending side of the equation, you still run a high risk of failure due to the all-too-common mistake of allowing spending to rise as fast as income.

The greatest wealth builders focus on both sides of the equation together. They maximize savings by controlling spending while growing income at the same time.

Related: How to be a pro at growing your wealth

It's the quickest, most certain path to increased savings for investment.

The third component to the equation – invest wisely – is also simple because everything you need to learn is available for free in the public domain.

You don’t have to take investment seminars or build extraordinary expertise. There are two well proven paths:

1. Paper Assets: Conventional buy and hold using low cost index funds and proven asset allocation models. Vanguard Funds offers you everything you need.
2. Real Estate: Direct ownership of positive cash flow real estate in your local area.

In summary, achieving financial freedom is really quite simple.

1. Spend less than you make and invest the difference wisely.
2. Rinse and repeat until the income from your investments exceeds your expenses. At that point you’re infinitely wealthy and financially independent.

With that said, the sad truth is few will achieve financial freedom despite the desirability of the goal and the simple path you must follow to achieve it.

The reason is explained in the second sentence.

Wealth Building Step 2: Wealth is Determined by Your Habits

The reason so few people build wealth is because they don’t adopt habits that lead to wealth.

As you already know, the formula for how to build wealth is simple and fully proven. The only thing remaining is to take action with enough consistency to achieve the goal… and that's where the problems occur.

Here's the formula for how this works:

[(Small, Smart Choices) * (Consistency) * (Time)] = Wealth

Procrastination is the single biggest wealth killer. You plan on getting around to it someday. You know what you should do but there is always some other priority. The kids need braces, the car needs repair, the kitchen needs remodeling.

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Action is where the rubber meets the road. It's one thing to know what to do, and it's something else entirely to get it done. That's why habits are so critical.

Habits are the reason postal workers become millionaires while lottery winners go broke.

It doesn’t matter if you look at the writings of Benjamin Franklin from 250 years ago or Stanley and Danko’s bestseller The Millionaire Next Door.

They all say essentially the same thing – the distinguishing characteristic of people who achieve wealth is they manage their money well. They have good money habits.

They don’t earn the most. They aren’t the smartest. They don’t have any special training. They just have good money habits – brain dead simple.

The reason good money habits are essential is actually scientific and results from the mathematics behind how money compounds to grow into wealth.

Small changes done over long periods of time can create massive results. It's an easy path to financial independence, and it's the not-so-secret “secret” to how to build wealth.

That’s why daily habits are so important.

• A daily habit of frugality saves small amounts every day that compound and grow over long periods of time to become substantial wealth. Try this Latte Factor calculator to prove it to yourself.
• A daily habit of increasing your earning capacity through training and education will add small amounts every day to your income potential.

Both of these daily habits will create an increasing spread between what you spend and what you earn, which will increase your wealth at an accelerating rate.

This isn't rocket science. It's just daily habits dedicated toward a specific goal – building wealth.

The habit causes the action which produces the result. It's simple cause and effect.

Habits are the easiest and simplest way for you to cross the bridge between how to build wealth using the simple formula above, and actually doing what it takes to achieve the goal.

You don’t have to intellectualize the process or overcome massive obstacles. You don’t have to get ready to get ready.

Related: Here’s a scientific system to build your wealth now

Instead, you just start today by adopting one habit that serves your wealth goals. Here are some potential starting points:

1. Sign up for an automatic savings program.
2. Opt-in to your company 401(k) (if they offer it).
3. Prepay a small amount on your mortgage.
4. Find an unnecessary expense and eliminate it.
5. Clean up clutter by selling unused assets (RV, boat, jewelry, etc.).
6. Repair something instead of replacing it.
7. Develop a niche expertise in your profession that commands a higher wage.
8. Start learning about asset allocation or investment real estate.

Just pick one habit and start today. Practice the habit until it becomes permanent, then pick another habit and do it again. Then another and another until you can see your wealth grow.

The greatest obstacle to building wealth is procrastination. Habits are the simplest way to overcome procrastination and get into immediate action.

Habits reduce the entire wealth building process into bite-sized pieces that are easy for anyone to digest. The compounded effect of all these tiny actions over a lifetime becomes wealth.

Summary of How to Build Wealth

The formula for how to build wealth is simple: spend less than you make and invest the difference wisely.

The mechanism to take action on the formula and produce results is equally simple: adopt wealth building habits.

Here's how it looks in a different format: [(Small, Smart Choices) * (Consistency) * (Time)] = Wealth

The only question remaining is whether or not you will do what it takes.

Will you follow these proven, simple formulas to achieve amazing financial results? Or will you return to your same old patterns that produce the same old results?

The only thing standing between you and wealth is the willingness to act on this timeless wisdom.

Are you ready to jump in and design your life so your daily actions create your financial independence? This course will help you form an exact step-by-step plan to become financially free.

Please share your thoughts in the comments below. How have these principles worked for or against you in life? What takeaways did you get from this article?

So, you have questions about life insurance.

Perhaps, someone recently told you that you should buy a life insurance policy.

Maybe you already have a policy (or several) but suddenly want to really understand the ins and outs of how life insurance works.

Or, you may be feeling as if paying life insurance premiums is throwing money away because you believe you'll never need it.

Although the general concept of life insurance is pretty simple, when you dive into the details, things start to get complicated. Life insurance is a legal contract, and, as such, there are many small details that can make a big difference.

Often, when we think we “should” understand something, we avoid asking questions that we think someone might perceive as “dumb.” Instead, we nod our heads in agreement and assume everything will work out fine. Unfortunately, when it comes to finances, a lack of knowledge can lead to big problems.

Whether you think you’re already a life insurance pro or you aren’t sure you understand it at all, you’re in the right place. Stick with us as we examine the basics of life insurance and give you answers to questions you might not have even thought to ask.

Table of Contents

1. Why Life Insurance Exists
2. How Life Insurance Works
3. Types of Life Insurance
4. Frequently Asked Questions 
5. Rules, Restrictions, and Conditions
6. Where To Buy Life Insurance

Why Life Insurance Exists

Before we get into the nitty-gritty of how life insurance works, we want to make sure to clarify how life insurance should be used, and how it should not be used.

You should use life insurance as a tool to manage the financial risk of dying prematurely.

As we'll explain below, life insurance pays out benefits when an insured individual dies while the life insurance policy is in force (i.e., active).

Most frequently, life insurance is used to provide financial stability to dependents in the event a family breadwinner dies.

It's important to recognize that life insurance is a negative expectancy bet.

Hopefully, you'll live to a rip old age and will end up paying all your life insurance premiums for nothing. However, losing those premiums is a better result than living with the risk that you could die and leave your family in a financial predicament.

Related: How to be a pro at growing your wealth

It's important to understand that life insurance is a negative expectancy bet because some life insurance and commissioned financial advisors may try to tell you otherwise. If that's the case, be sure to read our comprehensive explanation of whole life insurance. Either way, remember that if a financial company is aggressively selling you something, they're the one that's making out, not you.

How Life Insurance Works: The Basics

In the simplest terms: Life insurance is a contract, written by an insurance company, in which the company agrees to pay a sum of money to designated beneficiaries upon the death of a covered individual as long as the required premiums are paid up until that time.

Parties in a Life Insurance Contract

When trying to understand a contract, it’s always a good idea to start with each of the parties involved. The primary parties in a life insurance contract are the insurance company, the contract owner, the insured, and the beneficiary.

1. The Insurance Company

The insurance company is the financial institution that issues the contract. This is the company that agrees to pay a death benefit to a beneficiary upon the death of the insured in exchange for receiving premium payments from the contract owner.

2. The Contract Owner

The contact owner, also called the “policyholder” is the person who owns the policy. Life insurance is ultimately a contract between the policyholder and the insurance company. The policy owner is sometimes the insured, but not always.

For example, a father may purchase a policy on his own life and designate his children as beneficiaries. In this case, he is both the policyholder and the insured. The father could also purchase a policy on his spouse’s life and designate himself as the beneficiary so he would have money available to take care of his children upon his wife’s passing. In this case, the father would be the policyholder and the beneficiary while his wife would be the insured.

The policy owner is the person who controls the policy and makes all of the decisions. This includes designating and/or changing beneficiaries and accessing the cash value of the policy. The policy owner is also the person who is responsible for paying the premiums.

3. The Insured

The insured is the person whose life is covered by the policy. The death benefit will only pay out when this person passes away. This is also the person who has to go through the underwriting process and the physical examinations. The insured has no rights under a life insurance contract.

4. The Beneficiary

The “designated beneficiary” is the person (or people) who will receive the payout when the insured person dies. This payout is called a “death benefit,” and it’s almost always a tax-free payment that the beneficiary is free to spend as he or she sees fit. Only the designated beneficiary can collect the death benefit.

Related: Why you need a wealth plan, not a financial plan.

Many people designate their spouse or children as beneficiaries, but you can name whomever you wish. Note, however, that designating minors can create some serious problems (more on that later). There are many options when naming a beneficiary, including naming multiple beneficiaries and naming both primary and contingent beneficiaries. Depending on the purpose of a life insurance policy, the beneficiary may also be a charitable organization, business, or other institution.

Beware of the “Goodman Triangle”

When choosing the parties in a life insurance contract, it’s important to watch out for a tax trap called the “Goodman Triangle,” or the “Unholy Trinity.” This is a phenomenon that occurs when three different people are named as the policyholder, insured, and beneficiary. When this happens, the IRS could consider the death benefit payout to be a taxable gift to the beneficiary.

To avoid this, it’s important that the same person or entity takes on at least two of the three roles. Although this might seem confusing, taking a look at an example will help clarify things.

Consider the case of a policy purchased by Joe (the policy owner) on his wife, Mary (the insured). This policy named his son John as the beneficiary. When Mary dies, the insurance company will pay the death benefit to John. However, since Joe owned the policy, the IRS may deem the death benefit a taxable gift to John from Joe. In this case, the person who gave the gift (Joe, the policyholder) would be liable for the gift taxes, not John (the beneficiary).

This could have been avoided by having Mary purchase the policy, so she was both the policyholder and the insured. Upon Mary’s passing, John would receive the death benefit tax-free and no one would owe any gift taxes.

The current lifetime gift tax exclusion is $11.4 million for individuals and $22.8 million for couples. You may assume this means you don’t really have to worry about gift taxes. However, this huge tax break is set to lapse in the year 2025. If you’re planning for the long term, it’s best to assume that gift taxes are a concern and choose the parties for your insurance contracts carefully.

Considerations for Older Policy Holders

Sometimes, parties to an insurance contract may find themselves feeling frustrated when they learn about their limited rights.

Consider, for example, a contract that’s owned by Jane, an elderly woman with limited mental faculties. If her daughter, Julie, who is the beneficiary on a life insurance contract, wants to make a change to the underlying investments of a variable policy or needs to access the cash value to help pay for her mother’s care, she doesn't have the right to do this unless there is a durable power of attorney in place.

This legal document gives Julie the right to make financial decisions on her mother’s behalf. If Julie was named as the durable power of attorney, she could submit the document to the insurance company and take care of the necessary decisions. Having these legal documents drawn up before they’re needed can save everyone a lot of headaches.

Types of Life Insurance Contracts

Now that we’re clear on the parties involved in a life insurance contract, it’s time to examine the types of contracts that are available for purchase.

There are two primary types of life insurance contracts: term and permanent. There are also several different kinds of permanent contracts. The most common are whole life, universal life, variable life, and variable universal life. Although many are similar, there are some important differences. Following are the basics of how each one works.

Term Life Insurance

Term life is the simplest form of life insurance. It’s almost always the least expensive and it's almost always the only type of life insurance most people should buy.

Term life insurance coverage only lasts for a specified period, usually 10 to 30 years. As long as the premiums are paid, if the covered person dies during the contract period, the policy will pay a death benefit to the beneficiary.

Related: Here’s a scientific system to build your wealth now

Once the term period is over, no more payments are due, and the policy ceases to exist. Much like auto insurance, this is a type of policy that we hope we never need to use. However, it also gives us the peace of mind in knowing we’re protected if the unthinkable happens.

Term life is a “bare-bones” type of policy, although additional benefits are sometimes added by purchasing “riders” on the contract.

At the end of the term, some policies give you the option to renew or convert to a permanent policy. In many cases, however, these options are cost-prohibitive. Most people plan ahead to ensure that the term they choose will cover them for what they need. Once the term is over, they are able to comfortably lapse the policy.

Whole Life Insurance

Whole life is a “permanent” insurance. Instead of being in place for a specified term, it’s held for your entire life. This means that as long as the premiums are paid, the beneficiary will receive a death benefit whether the insured person dies at age 25 or 105.

Because coverage continues for the insured’s entire life, premium payments are also required for that entire time. The premium for a traditional whole life insurance policy stays level for the entire time the policy is in force. Those who don’t want to worry about paying premiums for the rest of their lives may wish to consider “paid-up whole life.” This type of policy allows you to make larger payments for a certain number of years and still keep the policy in force for your entire lifetime. “Single-Premium Whole Life” is another type of whole life policy that allows owners to pay the entire premium upfront with no additional payment.

Unlike term policies, whole life insurance has a savings component known as a “cash value” in addition to the death benefit. Each time the policy owner makes a premium payment, a portion goes towards the life insurance death benefit, and the rest goes towards the cash value.

Policy owners can access this cash value during their lifetime by taking a withdrawal or taking a loan against it. If the cash value is not withdrawn, it may be used to increase the death benefit or to pay part of the premium. Some policies also pay out a dividend based on the cash value, but this is less common now than it was in the past.

Withdrawals taken from the cash value and loans against it which have not been repaid will reduce the death benefit that the beneficiaries will receive. Before withdrawing or borrowing from a life insurance contract, it’s important to understand exactly how it will impact your payouts.

It’s also important to understand that whole life insurance policies are more expensive than term policies. There are several reasons for this. First, you’re contributing part of your premiums to savings, so it makes sense that you will have to pay more than if you were just paying for life insurance protection.

Related: Why you need a wealth plan, not an investment plan.

Second, when you buy term life insurance, if you don’t die during that time period, the insurance company keeps the premiums with no obligation to pay out anything. When you buy a whole life policy, as long as the premiums are paid, the company will definitely have to pay out a death benefit. When they determine how much to charge you, they’re essentially calculating how much they need to take in so they can cover that obligation without suffering a loss.

Universal Life Insurance

Universal life is another type of permanent life insurance coverage. It’s similar to whole life but works a little bit differently. This type of policy provides owners with more flexibility as they have the ability to adjust both the premium payment and the death benefit at any point throughout the life of the policy.

As with whole life, each premium made goes partly to cover the cost of insurance (COI) and the rest goes towards the cash value. The cash value portion is invested by the insurance company and pays out either a minimum rate or the market performance, whichever is greater. As the cash value grows, the policyholder can access a portion of this cash without affecting the guaranteed death benefit.

A universal life policy will usually have a required minimum and maximum premium amount. The policyholder can choose to pay any amount between these brackets. You can choose to pay a higher premium, which will allow your cash value to build up over time. Once you have enough cash value built up, you can skip premium payments or pay lower amounts without worrying about lapsing your policy.

It’s important, however, to keep an eye on the cash value of the policy and be aware of rising insurance costs. Otherwise, you might end up without enough cash value to keep your policy in force. If this happens, you could be faced with much higher than expected premium payments. If you don’t have enough cash flow to cover this, you could risk inadvertently lapsing the policy.

Variable Life Insurance

Variable life is similar to Universal Life. However, the policy owner can choose the underlying investments. These policies have multiple “sub-accounts” which are similar to mutual funds. There are often multiple investment choices which include stocks, equity funds, bonds, bond funds, and money market funds.

This investment aspect gives the cash value more potential to grow. However, the life insurance company offers no guarantees regarding the performance of the investments. If the investments underperform, the cash value will fall.

Variable life policies also give the owners more flexibility. Although the required minimum premium is usually fixed, the policy owner can choose how he or she wants to pay it. For example, if the owner wants to pay a lower premium, the insurance company will pull the remaining required amount out of the cash value. The owner could also pay more than the minimum required premium, thereby increasing the cash value and the policy’s investment holdings.

Although it might sound like this type of policy has a lot of benefits, there are some significant drawbacks. First, since there are no guarantees, it’s entirely possible that your cash value could fall so low that you have to pay significantly higher premiums to keep your policy in force. If you don’t have enough cash flow to do this, you could lose the entire policy. To make matters worse, if there are outstanding loans on the policy when it lapses, this could also cause you some significant tax headaches.

Secondly, these types of insurance policies are quite expensive. There are many fees and administrative costs baked into the premium. In most cases, it makes more sense to purchase a term insurance policy and then put your extra money into a less expensive type of investment.

Variable Universal Life Insurance

Variable Universal Life (VUL) combines the features of a variable life policy and a universal life policy. They work just like a universal life policy but give owners the advantages of flexible premiums and the option to invest in multiple sub-accounts. VUL policies usually have a maximum cap and a minimum floor on the investment portion of the policy.

When the policy owner pays the premium, the entire amount goes into the savings portion of the policy. Each year, the insurance company will deduct what’s needed to cover the cost of insurance (mortality and administrative costs), leaving anything that’s left in the investment portion to continue growing.

In this type of policy, the policy owner takes all responsibility for the performance in the sub-accounts. When returns are negative, it will impact the cash value. If losses are continual or drastic, then the policy owner may need to pay much higher premiums to cover the cost of insurance and build the cash value back up. VUL policies are also usually much more expensive than a traditional whole life policy.

Life Insurance FAQs

Now that we know the basics, it’s time to dive into some of the most commonly asked questions about life insurance.

1.  How Do You Buy a Life Insurance Policy?

Life insurance contracts are typically sold through licensed life insurance agents who receive a commission for each policy they sell. While there are many reputable life insurance agents out there, when taking advice from an agent, it’s smart to keep in mind that the more money you spend on premiums, the more they get paid. This is why it’s a good idea to do your own preliminary research first and don’t hesitate to get more than one opinion before purchasing a policy.

You can also easily compare policies online. There are many great options like Policy Genius, Bestow, or Haven Life that allow you to purchase life insurance directly from the comfort of your home.

Many employers also offer group life insurance policies as part of their employee benefits package. To purchase these policies, you would need to talk to your employer and/or human resources department. The employer often covers all or part of the premium, and your employer will deduct your portion of the premiums (if any) directly from your paycheck.

2. How Do Life Insurance Companies Make Money?

There are two basic ways that life insurance companies make their money. The first is that they invest the premiums they’re paid, hoping to earn more over the lifetime of each contract than they have to pay out upon the insured’s death. The second is that when a contract owner lets a contract lapse, the insurance company gets to keep all premiums paid without having to pay out anything.

Insurance companies employ teams of people and use advanced calculation methods to determine exactly how much they need to charge for each person’s policy to offset the risks they take on.

3. How is Life Insurance Priced?

Almost every person who buys a life insurance policy will pay a slightly different premium. This is because a large number of factors go into determining how much a particular policy will cost. This includes (but isn’t limited to):

• Your age
• Your gender
• The type of policy you’re purchasing (term, whole life, universal, etc.)
• The death benefit amount
• Your medical history
• Whether you use nicotine
• Your family’s medical history (ex. cancer or heart disease in your immediate family)
• Your driving record
• Other risk factors (ex. whether you fly a private plane, scuba drive, have a history of drug abuse, or are planning to travel to dangerous locations)

To verify all of these factors, the insurance company does a great deal of research. They will review your medical records, credit history, driving record, and check the prescription drug database to determine what medications you are taking or have taken in the past. They'll also often check the MIB Group for past life and health insurance applications, run a criminal background check, and, if applicable, check your business credit reports.

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Finally, in almost all cases, applicants will need to go through a thorough medical exam. This will usually include blood work, a urinalysis, and, possibly, and electrocardiogram (EKG). This entire process is called “underwriting,” and it typically takes several weeks.

Only once the underwriting process is complete will the insurance company issue the policy. The good news is after the policy is issued, you don’t have to inform the insurance company if there is a change in your health. So, if you develop cancer or start skydiving after you have a policy in place, your coverage and premiums won’t change.

There are some insurance companies that offer policies without the need for a medical exam. People who need term insurance quickly and don’t want to deal with the hassle of going through an exam may prefer an instant-approval life insurance policy like Haven Life’s InstantTerm or the policies offered by Bestow.

4. What Happens if I Die While Going Through Underwriting?

Many life insurance companies offer temporary insurance that will cover you while you’re going through the underwriting process. Since this can sometimes take several weeks or even months, this temporary coverage can give you some peace of mind while you wait.

Your temporary coverage amount is usually close or equal to the amount of coverage you’ve applied for, but you’ll want to check with the insurer to confirm this. To get temporary insurance, you’ll usually need to pay your first month’s premium at the time you submit your application. The company will issue a temporary insurance receipt, which indicates that you’re covered. This coverage will stay in force from the moment the receipt is issued until underwriting is complete and your actual policy is issued, or your application is declined.

If you die while you’re covered under temporary insurance, your beneficiary will receive the face amount.

Common Life Insurance Rules, Restrictions, and Clauses

It might seem like we’ve covered everything you need to know about life insurance, but there are still some important rules, restrictions, and clauses that you need to be aware of. Here are some of the most important.

1. You Need Insurable Interest and Consent

Many people don’t realize that you can’t buy a life insurance policy on just anyone. Before you can insure someone’s life, you must have:

1. an insurable interest, and
2. the person's consent.

To have an insurable interest in someone, that person’s death must cause you emotional, financial, or another type of loss. If the beneficiary of the policy is someone other than the owner, then the beneficiary must also have an insurable interest in the insured person. This is usually obvious in the case of immediate family members but can get more complicated when insuring others. For example, you would have to prove insurable interest to insure aunts and uncles, cousins, nieces and nephews, stepchildren, and stepparents.

Sometimes, an insurable interest exists in business relationships and in creditor-debtor relationships. Again, the insurance company may request proof before moving forward with the underwriting process.

The insured must also give their consent for you to take a policy out on them. In most cases, he or she will need to undergo a medical exam as part of underwriting. Even if the policy doesn’t require a medical exam, the insured will still need to sign the application. It’s not legal to purchase a life insurance policy on someone without their knowledge.

2. Your Premium Payment Frequency Matters

For the contract to remain in force, all required premiums must be paid on time. Policy owners can usually choose the frequency of their payments and many companies offer monthly, quarterly, semi-annual, and annual payment options.

If you choose to pay any more frequently than annually, the insurance company will usually add a small extra fee to each payment. It’s common for annual premiums to be 3 to 5 percent lower than payments made more frequently. Although in some cases this is only a couple of extra dollars each month, it can add up over the course of your lifetime.

You’ll want to take a look at your cash flow and decide which payment frequency is best for you. Many companies allow you to switch your payment mode, so, in many cases, you can make adjustments in the future. Many younger purchasers begin with more frequent payments, then switch to annual when they’ve built up enough extra cash flow.

3. You May Be Able to Change Your Mind

Most life insurance policies offer a “free look” period that ranges from 10 to 30 days from the date of issue. In fact, in all 50 states, there are laws requiring free look periods. This allows you to change your mind and surrender the policy without any penalties or surrender charges during the designated time period. If you’re not satisfied with the policy for any reason, you can simply contact the insurer and let them know you’ve changed your mind and you would like a full refund.

When you receive the final copy of your insurance policy, read the entire contract from cover to cover. Make sure you don’t see any red flags and that you’re comfortable with both the coverage and the final premium amount. Once the free look period has passed, things will get more complicated and changing your mind will likely cost you some money.

4. Beneficiary Designations Supersede Your Will

Many people don’t realize that your beneficiary designations supersede your will. This means that whoever is listed as the beneficiary on your policy will receive the death benefit regardless of any other legal documents you might have in place. That’s why it’s critical to review and update your beneficiaries regularly, particularly if you have gone through any major life changes.

Imagine you went through a bitter divorce, then several years later you got remarried, had children, and lived happily ever after. Even if you updated all of your legal documents and most of your insurance policies, if you forgot to change one of your policies and your ex-spouse is still listed as the beneficiary, then he or she will receive the death benefit.

Changing or updating your beneficiaries is very easy. All you need to do is call the insurance company and tell them you want to make a change. They will send you a simple form to complete and return to them.

What happens if you fail to designate a beneficiary or your beneficiaries predecease you and you didn’t update your designation? In this case, the company will pay the death benefit to your estate and it will be distributed as outlined in your will.

5. Naming Minors as Beneficiaries Can Create Problems

Designating minors as life insurance beneficiaries can create many complications because insurance companies won’t pay a benefit directly to a child. Unless you have set up a trust or made other legal arrangements, the courts will need to appoint a guardian. This is a complex and expensive process. It’s almost always a better idea to name a responsible adult, set up a trust, or make other legal arrangements. A reputable estate attorney can help with this.

6. Your Beneficiaries Must File a Claim

When the insured person dies, the beneficiary of the life insurance policy must file a claim with the insurance company so they can receive the death benefit. The beneficiary doesn’t need to have possession of the actual policy, but they will need to contact the insurance company and let them know that they’re a beneficiary.

The insurance company will then send them paperwork to complete and return along with proof of identification and a copy of the death certificate. Once everything is received in good order, the beneficiary will typically receive the death benefit within a few weeks. Once the beneficiary receives the death benefit payout, that money is 100 percent theirs and they can do whatever they want with it.

It's important to let designated beneficiaries and/or the person who will handle your estate know that you have life insurance and where to find the policies. If no one files a claim, the insurance may never pay out and all of your premium payments will be wasted.

5. There Are Times When Life Insurance Won’t Pay Out

In general, as long as life insurance premiums are paid up until the covered person dies, the life insurance company will pay the death benefit to the beneficiary. This is true whether the death is caused by an illness, accident, or old age. However, there are some situations when the company won’t pay. In most of these cases, beneficiaries will receive a return of the premiums you paid, but nothing more.

When purchasing a policy, it’s important to read the contract thoroughly and understand what is and isn’t covered. Below are a few exclusion clauses that are sometimes found in life insurance policies.

• Suicide Clause – the death benefit often isn’t paid if the insured commits suicide during the designated period (usually the first two years).
• Fraud – if the contract is obtained using fraudulent methods, the insurance company isn’t obligated to pay the death benefit.
• Murder – no death benefit is paid if it’s proven that the beneficiary murdered the insured.
• Alcohol and Drug Use – some policies will also refuse to pay out if the insured is under the influence of alcohol or illegal drugs at the time of death, even if this didn’t contribute to the cause of death. This can vary from policy to policy and is something purchasers will want to look out for.
• Illegal Activity – if the insured dies while participating in an illegal activity or committing a crime, the policy usually won’t pay out. This could be anything from participating in a bank robbery to driving while intoxicated or even having a heart attack while trespassing on someone’s property.
• Dangerous Activity – if this clause is included, it will usually list out the dangerous activities that are excluded. Examples may include skydiving, scuba diving, flying in a private plane, and car racing. It’s usually possible to purchase additional insurance so you are covered while doing certain activities. For example, if you’re an avid scuba or skydiver, you can pay an extra premium so your beneficiaries will receive a death benefit if you die while participating in that activity.
• Act of War – this clause is intended to exclude coverage for civilians who are killed during acts of war and isn’t intended to exclude benefits for active military. It’s also not as common in policies today as it was previously. However, people like journalists or those who intend to travel to unstable countries should check to ensure their policies don’t have this exclusion.

Most life insurance policies also have a contestability period which is typically within the first two years after a policy is issued. During this time, if the insurance company finds out you lied about your health when you completed your application, it’s within their rights to lower the death benefit payout amount or completely cancel the insurance policy. However, once the contestability period has passed, the policy becomes incontestable and the company must pay out unless they can prove fraud.

Now You’re Ready to Start Shopping for Coverage!

There you have it! You now know everything you need to know about how life insurance works.

If you’re considering purchasing coverage, the next step is to learn more about how to buy life insurance the smart way, how to calculate how much life insurance you need.

Finally, check out 3 of the best websites for buying term life insurance online here.

Armed with this knowledge, you’ll have everything you need to protect your loved ones and ensure their financial future.

Close your eyes for a minute and think about what would happen if you had an unthinkable accident and died today.

Would your loved ones have money to pay for your funeral?

Do they have enough cash on hand to get through the next few months?

How about the next five years? Ten years?

Would they face the possibility of losing their home?

Would your kids, if you have them, still be able to go to college?

When you have a family to support, questions like these make it obvious that, yes, life insurance is important.

However, most people still wonder if it's worth the expense. After all, who wants to shell out their hard-earned money to pay for something you hope you never use?

Is Life Insurance Worth It?

Life insurance is worth it because it serves as a tool to manage the risk of dying prematurely—whether you currently have a family or not!

According to the actuarial tables put out by the U.S. Social Security Administration, 15% of American men and 9% of American women will die before the age of 60.

If you have a spouse or children, do you want to take the chance that you could die and leave them without your income—as well as the unexpected expense of your funeral and other final bills?

Even if you don't have a family to support, things get even more complicated. Sure, cousin Bob, the newly-licensed insurance agent, has told you that you really need life insurance (purchased from him, of course). But is that actually true?

The answer is… maybe.

Even if you don't have any dependents or you already have life insurance coverage through work, it might still make financial sense to purchase a separate life insurance policy.

There are actually many uses for life insurance. Those who fail to understand how life insurance fits into their financial plan can end up inadvertently creating a financial crisis when they pass away.

While you may find that you truly don’t need life insurance, understanding the many different reasons why it’s important can help you make an informed decision.

Keep reading to learn about the top ten reasons why people need life insurance coverage. If you see something that sets off alarm bells, then it’s time to start thinking about how much life insurance you need and researching the best term insurance policies.

Why is Life Insurance Important?

Life insurance is important for individuals with dependents to provide income replacement and to cover funeral expenses. But it can also be important even for individuals without dependents in certain situations.

Let's take a look at the top ten reasons why buying a life insurance policy today might be the smartest thing for you to do.

 1. Burial Costs Add Up

The average cost of final expenses is currently between $8,000 and $15,000, depending on whether you’re cremated or buried and whether you have a memorial service or a full funeral. Even a cremation with no service at all costs around $2,000.

If you don’t have a life insurance policy in place, your loved ones will need to tap into savings to cover these costs. When emotions are running high, people don't always think clearly. In some cases, grieving families end up putting themselves in serious debt by planning a service they can’t afford.10

A life insurance payout will help them plan an appropriate service without having to worry about finances during this difficult time.

2. Co-Signers Need Protection

If someone has co-signed on a loan for you and you die without proper insurance coverage, they will be held responsible for the entire loan balance.

Consider, for example, the case of Mary, a single mom with a young child and no life insurance. Mary's parents co-signed on an $80,000 student loan before she was tragically killed in a car accident. After her passing, they were shocked to learn that they were required to continue making Mary's loan payments. In addition, they were now caring for Mary's orphaned child. It's easy to see how this could quickly leave them in a financial crisis.

Related: Here’s a scientific system to build your wealth now

Some loans also have a provision that makes them immediately callable upon the loan holder's death. If this were the case, Mary's parents would need to come up with the entire balance of the loan right away. In this scenario, they could face having to tap into their retirement or even sell their home to cover her debt.

A term life insurance policy naming Mary's parents as the beneficiary would have avoided this problem. Adding an additional amount to cover the expenses of taking care of her child would ensure that everyone remains in a comfortable financial position while they grieve her passing. If Mary's financial situation didn't allow for the expense of insurance premiums, her parents would have benefitted from purchasing their own policy on Mary's life.

3. Life Insurance Protects Your Business

Many businesses are dependent on one or more key employees whose knowledge and experience simply aren’t replaceable. If one of these employees were to pass away, it could cause a significant financial loss and could even cripple the company. Sales could take a dive, and if the company is publicly traded, stock prices could plummet.

A key-person insurance policy will pay the business enough money to shore the business back up and buy it time to regain the trust of its customers and investors.

Business partners can also purchase life insurance policies on each other.

If one partner dies, the other partner can use the proceeds of the policy to purchase the other half of the business from the deceased partner’s family. This helps ensure that the family will receive a fair value for the business while also ensuring that the business can continue operating without taking the major financial hit of having to buy out half of the company. These policies are usually accompanied by a legal document known as a buy-sell agreement.

4. Employer-Sponsored Insurance Isn’t Enough

Many employee benefit packages include life insurance coverage that’s a multiple of your salary.

Even if the coverage you have is more than enough to cover your family’s needs, it’s never a good idea to rely completely on this coverage. If something happens and you decide to quit, get fired, or get laid off, your insurance coverage will likely cease. This will leave you and your family with a huge gap in your financial plan.

Related: Why you need a wealth plan, not a financial plan.

If this happens ten years down the road, your life insurance premium will be much higher than it would be if you just bought your own policy now. Even worse, if you develop a serious medical condition, then you may not be able to get coverage at all. This could leave your family in a serious financial predicament. It’s much better to purchase a private policy for the amount you need, then consider the coverage you get through work as an added bonus.

5. Single Parents Need to Look Out for Their Kids

When you’re a single parent, money is often tight. You probably have been meaning to get life insurance coverage, but something always seems to get in the way. It's normal to want to just hope for the best, but things happen. Consider the case of James, a single father of two boys who is living paycheck to paycheck. He currently has about $3,000 in savings and doesn't have life insurance.

If James were to die today, after paying for his burial expenses, his children would be penniless. They would have to depend on their new guardians to provide for all of their financial needs, or, even worse, could end up in the foster care system.

Since you never know what could happen, the time to purchase an inexpensive term insurance policy is right now. If you're not sure how you can afford it, try reviewing your budget to see where you can cut costs.

6. Stay-at-Home Parents Need Coverage, Too

Do stay-at-home moms and dads need life insurance? You bet.

Although most people buy coverage to replace their salaries, it’s important to take into account the value of the services that stay-at-home parents provide. From childcare and cleaning to tasks like grocery shopping, managing the family’s financing, and making repairs around the house, it’s important not to underestimate these contributions.

In fact, according to 2018 study by Salary.com, if a stay-at-home parent were to get paid for all the services they provide, they would earn an annual salary of approximately $162,581!

Buying a life insurance policy for a stay-at-home parent will allow the family to hire the additional help they need or give the surviving spouse the opportunity to stay home with the children for a few years until he or she can figure out what to do next.

7. Life Insurance Gives Families Peace of Mind

Planning ahead and purchasing the right amount of life insurance coverage can give you the power to secure your family’s financial future. A death benefit can help you meet goals like:

• Paying off the family’s mortgage and other debts
• Ensuring there's enough money for your children to go to college
• Helping your children to have their dream wedding and/or purchase their first home
• Providing for the surviving spouse until retirement or throughout their lifetime

Purchasing a bit more coverage than you think you need will also give your family some wiggle-room. This will allow them to adjust to living without you and make any necessary lifestyle changes without having to worry about how they'll pay the bills.

8. Childless Couples Can Benefit from Coverage

Married couples without children—and even couples who aren't married but live together—should consider buying life insurance, too.

Working couples without children can also benefit from purchasing a life insurance policy. While it might not be absolutely necessary, the death benefit can help the surviving party maintain their standard of living. This is particularly important if you own a home together.

When a partner is grieving, he or she might not be able to return to work right away. The last thing you want is for financial concerns to loom overhead while your partner tries to decide how to move forward without you. As long as paying an insurance premium won’t create a financial burden, purchasing policies and naming each other as beneficiaries can give you both some extra peace of mind.

9. Buying Life Insurance Early Can Save You Money

If you’ve read all of the points above and you’re still not sure you need a policy, consider this: Your life insurance coverage will never be less expensive than it is right now.

With every year that goes by, the cost of insurance coverage will increase simply due to the fact that you're a year older. Other issues can also impact your premiums including:

• Medical problems
• Treatment for drug or alcohol abuse or depression
• DUI or other driving citations
• Significant weight gain

Are you 100 percent sure none of these things could happen to you? Depending on the condition, the insurance company might even deny you coverage. If you have a family or business partner that needs protection in the future, the inability to get a life insurance policy could leave a gaping hole in your financial plan.

Related: How to be a pro at growing your wealth

If you can afford a small life insurance premium then you might consider purchasing a policy while you’re young and healthy. If you don’t have anyone to leave the death benefit to, consider naming a charitable organization or another institution. You can always change your beneficiary designation when your circumstances change.

10. You Can Use Life Insurance to Leave a Legacy

Life insurance is a great way to leave a significant donation to a charitable organization or other institution upon your death. Purchasing a policy allows you to multiply your donation well beyond what you could afford with your current assets.

A life insurance policy is also an effective strategy for leaving an inheritance to loved ones. While you might not have a large number of assets, by paying an annual premium, you can leave a significant amount of tax-free money upon your death. This is an excellent way to set your children up for financial success and/or provide a financial cushion for future expenses that may arise.

Do I Need Life Insurance?

If you have children, are married, share a home with a domestic partner, have a business partner, or have any loans with cosigners, then yes, you should have life insurance! 

If you don't yet meet any of the above criteria but expect to in the future, you should still consider buying life insurance soon, because it will only get more expensive as you get older.

Finally, remember that life insurance works best when purchased as part of a carefully thought-out financial plan rather than sold as a way to generate a commission for an insurance agent.

Make sure you buy life insurance on your own terms, not someone else's!

Buying life insurance can make you feel a little bit like Goldilocks.

Buy too much, and you’re throwing away money on higher premiums for no reason.

Buy too little, and you could leave your loved ones in the lurch if you pass away.

Choosing the right amount of life insurance is critical for keeping your family financially secure, but how much life insurance do you need, really?

Ask an agent who makes a higher commission when you buy more coverage, and you might get an answer that’s not necessarily accurate.

You could also try to figure it out yourself with an online life insurance calculator, but plugging in numbers without really understanding the factors that go into the formula can also lead you to inaccurate results.

When faced with this conundrum, many people want to throw their hands up in frustration and just pick a random number. Of course, that’s no way to plan for your family’s future.

If you’re ready to get the real answer, keep reading!

We’ll provide you with everything you need to know so you can choose the perfect amount of coverage for your family's individual needs.

Do I Really Need Life Insurance?

If you have a spouse, children, or other dependents who rely on any part of your income, then yes, you should have life insurance. Some people in other situations should also consider buying a life insurance policy.

Before you start calculating how much life insurance you need, it’s important to consider this question:

“Do you actually need life insurance at all?”

If you have a spouse or children, the answer is almost always yes. However, some people who may not need a life insurance policy include:

• Young singles
• Low income earners
• People covered under group insurance
• People who are self-insured

If you fall into one of these categories, don't stop reading yet! Although at first glance it might seem like you don't need coverage, consider the following points:

I'm a Single 20-something; Do I Need Life Insurance?

A young, single person with no dependents might assume that life insurance is a waste of money.

However, a term life insurance policy is far less expensive when you’re young. In addition, if you have any health issues when you get older, it could be more difficult or even impossible for you to get coverage.

Consider, for example that some new life insurance products like Bestow or Haven Life can issue term life policies to some healthy young adults within a half an hour online. (Traditionally, applicants are required to undergo a comprehensive medical exam and weeks of underwriting before getting life insurance.)

If you can afford it, you might consider purchasing a small policy now. You can always elect a charitable organization or a relative as your beneficiary until you’re married or have dependents.

I Don't Earn a Lot; Should I Still Buy Life Insurance?

Life insurance is only good if you can afford to keep it in place.

For low income earners, this can present a real challenge. However, it’s important to remember that life insurance policies will only get more expensive as you get older.

If you don’t think you can afford coverage, take a second look at your budget to see if you can free up enough for a small term insurance policy. For surviving family members, even a small life insurance policy is better than nothing if it gives them a year or two of living expenses after you pass.

Related: Here’s a scientific system to build your wealth now

If, however, purchasing a life insurance policy will really stretch your budget, then it’s probably best to put the extra money into savings.

I Have Group Life Insurance Through Work; Do I Still Need to Buy More?

If you have a great group life insurance policy through your employer, you might assume that there’s no need to purchase a separate policy.

However, you’ll still want to run through the exercise to determine how much coverage you actually need. This will help you decide if your current policy is sufficient. If it’s not enough, then you can purchase a separate policy to make up the difference.

You’ll also want to confirm that you can keep your group policy if you leave your current employer, and how much it will cost you to do so. If you’re not happy with the answers, this is another reason to consider a separate, private policy.

I'm Financially Independent; Do I Still Need Life Insurance?

If you have plenty of money stashed away to cover your family’s financial needs in your absence, then you might fall into the group of people who actually have no need for life insurance. This would apply to those who are independently wealthy or who have already retired and are financially free.

In addition to the points above, you might also consider whether you want to leave a legacy by making a charitable contribution upon your passing or leaving an inheritance to an important person in your life. In this case, you’ll want to buy a policy with a death benefit equal to the amount you need to meet your goals.

The Flawed “Rule of Thumb” for How Much Life Insurance to Buy

If you start asking family and friends or listening to popular advice columnists, there’s a good chance that you’ll hear about the “rules of thumb” for determining how much life insurance you need. Here's one of the most common rules—and why you want to avoid it!

One of the most popular rules of thumb for how much life insurance to buy is to choose a multiple of your current salary. The common advice used to be that choosing a death benefit that’s 10 times your salary is sufficient. Then, a popular financial advisor began to tout the benefits of increasing this to 20 times your salary. The thought behind this is that your surviving spouse can invest the death benefit and earn a 5 percent annual rate, which will produce an annual income equal to your salary. This would allow your family to maintain their standard of living without ever having to touch the principal.

For example, assume you earn $50,000 per year and purchase a $1,000,000 life insurance policy. If you were to die tomorrow and your spouse invested that money, a 5 percent return would give him or her $50,000 per year for life without the need to ever touch the principal.

Unfortunately, this advice is overly simplified and inherently flawed. First, it doesn’t factor in the impact of inflation. If the current inflation rate is 3 percent per year, $50,000 in today’s value would only have the purchasing power of approximately $36,000 in just 10 years. To keep up with the demand of $50,000 per year in expenses, your family would have to withdraw an additional $14,000 from the principal each year. As the principal amount goes down, there’s also less available to generate the next year’s income. It’s easy to see that using this calculation method will eventually lead to the depletion of the entire account well before your family’s needs have ended.

Related: How to be a pro at growing your wealth

Secondly, this rule of thumb assumes that your family will be able to invest in a portfolio that gives them 5 percent in earnings every single year. Knowing what we do about current interest rates and market fluctuations, it’s clear that this is another major flaw. Sequence risk also tells us that having one or two years of poor returns soon after your spouse starts taking withdrawals can have a catastrophic effect on the account’s ability to ever bounce back.

Finally, the “multiple of salary” rule of thumb doesn’t take into account any “hidden expenses” or other sources of income that your family may be eligible to receive (more on both of these topics later).  This over-simplification makes it very likely that you'll greatly either overestimate or underestimate your life insurance coverage needs.

The 3-Step Process for Determining How Much Life Insurance You Need

Luckily, there's a better way to determine how much life insurance you actually need. It takes a little bit more effort, but when it comes to protecting your loved ones, you’ll want to get it right. It’s impossible to predict your exact life insurance needs to the penny, but the following steps will help you estimate your ideal amount with greater accuracy.

Step 1: Determine How Much Financial Support You Contribute to Your Family

If you have a spouse and/or dependents, at a minimum, you’ll want to ensure that your death benefit plus other sources of income will cover the amount that you’re currently contributing to your family’s finances. In addition to your salary and bonuses, don’t forget to include the cost of services you provide for your family. Examples may include childcare, filing the family’s taxes, or maintaining the lawn and pool.

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You’ll also need to add in any “hidden income.” This is money you’re contributing to the family that doesn’t come in the form of a paycheck. Examples may include the employer-paid portion of your medical benefits, your 401(k) match, and other perks of your job that benefit your family.

It should be noted that a stay-at-home spouse also needs life insurance even though he or she doesn’t have an “income” to replace. If the stay-at-home spouse were to pass away, at a bare minimum, the surviving spouse would need to cover the cost of childcare. When calculating the amount of coverage needed, consider the cost of replacing all of the jobs this spouse does at home. You may also want to add in some extra cushion to cover the potential loss of income from the wage earner while he or she mourns the loss of the spouse and helps the children adjust to their new reality.

Once you have this number, multiply it by the number of years your family will need coverage if you were to die today. You may want to plan for coverage until your youngest child turns 18, until your spouse reaches retirement age, or throughout the surviving spouse’s entire life expectancy. This is a matter of personal preference and your financial resources.

Next, consider other expenses your family may incur as they adjust to living without you. Is there a chance they’ll want to relocate, or your spouse will decide to pursue higher education or a new career? It’s important to ensure that they have enough of a financial cushion so they’re free to make good decisions without worrying about how they’ll pay for it.

Finally, add in enough to cover your final expenses. This includes the cost of your funeral services, burial, taxes owed, and the cost of administering and closing your estate. In many cases, $15,000 is a sufficient amount to cover these costs. However, the amount you'll need will depend on your individual circumstances and your personal preferences.

Step 2: Consider Current Assets and Other Sources of Income

Now that you have an idea of the “financial value” you bring to your family, it’s time to back out your current assets and other sources of income that will help offset these costs. One of the most common is Social Security Survivor’s Benefits. If you have children under the age of 18 and your spouse earns less than the maximum amount, these payments can be significant.

Other possible sources of income that are often overlooked include:

• Employer-sponsored life insurance policies
• Policies purchased through an organization or association
• Vested pension death benefits

While you’ll want to consider these sources of income when choosing your life insurance coverage amount, it’s important not to rely completely on job-related death benefits. If something happens with your employment and then you pass away, you could inadvertently leave your family unprotected.

Any assets your family currently has, like college savings plans, investments, and your emergency fund can also be used to offset the total need calculated in step one.

Step 3: Consider the Family’s Other Financial Goals

While the calculation above will cover the absolute minimum your family will need to get by upon your passing, many people like to plan for other important goals as well. Below are some of the factors you may wish to consider.

1. Surviving Spouse’s Expenses After Children Turn 18

Just because your children have met the age of majority, this doesn't mean that your family will no longer need financial assistance. Many parents continue giving their children some kind of financial support after they're technically “adults,” and your surviving spouse will still have expenses to cover as well.

Assume that at the time you die your spouse is 36 and your child is two years old. While you may have factored in Social Security Survivor’s Benefits when determining your coverage need, these will end when your child turns 18. At that time, your spouse will only be 52.

He or she will need income to cover expenses between age 52 and the time that Social Security Retirement Benefits kick in. The earliest you can file for a reduced early benefit is age 62. This means that your spouse will have 10 years of expenses without the benefit of additional income. While you could assume that your spouse will simply get a job to cover their expenses, there’s a chance that he or she could become disabled or otherwise unable to work. If you want the peace of mind in knowing your spouse will remain financially secure, you'll want to factor in enough coverage to get him or her through that time period.

2. Home Mortgage and Debt Pay-Off

When calculating the necessary life insurance amount, some planners suggest adding enough to pay off the home’s mortgage balance. This will reduce the chances that your spouse could be faced with the prospect of losing the family home. If this is a goal, you’ll want to add the unpaid balance of your mortgage to your total death benefit amount.

If the family has other debts, like vehicles and personal loans, you may wish to factor in these pay-off amounts as well. If not, another option is to ensure that the amount your family will inherit can generate enough monthly income to keep making the outstanding loan payments.

3. Caring for Dependents

If you have minor children and/or aging parents, you’ll probably also want to factor in the cost of their care. Upon your passing, not only will there be less income coming in, but it’s more likely that your spouse will need to outsource some or all of the responsibilities of caring for dependents as he or she returns to work. This can come with a hefty price tag and failing to factor it in can ruin your family's financial plan.

4. College Expenses

If you’re planning for your children to go to college, you may also want to add enough money to your death benefit to cover these costs. Assuming an expense of $15,000 per year for four years (the approximate cost of an in-state public college), you might assume an additional death benefit of $60,000 will be enough. However, the cost of college is rising at a rate much higher than the overall inflation rate. It’s currently near 8 percent. Assuming your child is 14 years away from college, the amount of death benefit you would need to add is closer to $183,000.

5. Cosigned Loans

If someone other than your primary beneficiary has cosigned on a student loan, vehicle loan, or other obligation that you hold, make sure you don’t forget about this obligation. If the entire balance of your life insurance goes to your spouse or another beneficiary, he or she is under no obligation to make the person who cosigned your loan whole. This means that they’ll be left with the entire bill and no way to seek compensation.

When purchasing your policy, ask if you can designate specific amounts to certain beneficiaries. If not, you can either buy another small policy to cover this person until your loan is paid off or you can leave them money through your will. Remember, however, that beneficiary designations supersede your will. This means that if you leave a life insurance policy to your spouse, he or she will get 100 percent of that money. Your co-signer will only get the money designated by your will if there is enough money left in your estate to cover it.

6. Surviving Spouse’s Retirement

The basic formula discussed above doesn’t factor in any savings for the surviving spouse’s retirement. While he or she will receive Social Security Retirement Benefits, that’s rarely enough to maintain a comfortable standard of living. You could assume that your spouse will get a job and contribute to the company 401(k). However, as previously mentioned, there’s also a chance that this won’t be possible due to disability or other factors. If you want to make sure your spouse is taken care of no matter what, you’ll want to include a buffer to cover the amount needed for retirement savings.

7. Financial Cushion

Finally, you'll have more peace of mind if you factor in a comfortable financial cushion. This can allow your family to maintain a sufficient emergency fund, give them more flexibility to make life decisions, and/or allow them to enjoy some discretionary spending. Whatever the reason, not having to count every penny can help relieve some of the stress your family will inevitably face upon your passing.

Deciding whether to increase your death benefit to cover the above goals will depend in large part on your family circumstances and the cost of the policy. You may wish to price out several different death benefit amounts so you can determine how much of a cushion you can reasonably afford.

Other Considerations Before You Buy Life Insurance

Now that you have a good idea of how to determine your family’s life insurance needs, you might want to run right out and buy your policy. Before you do, consider these final tips.

1. Understand Your Financial Plan

Buying life insurance shouldn’t be done in isolation. Your family’s insurance coverage is only one part of a well-designed financial plan. Whether you’re doing your own planning or working with an advisor, make sure the amount and type of life insurance coverage you’re considering is appropriate for the “big picture.”

Related: Why you need a wealth plan, not a financial plan.

2. Don’t Underestimate Your Needs

Although your life insurance estimates are based on your current income, remember that both your income and your expenses are likely to increase over the years. It’s often a good idea to bump up your number a little bit rather than keep the margin for error too tight. As long as the premium fits within your budget, a little bit of extra coverage usually isn’t a bad idea.

3. Talk with Your Spouse

Before you buy your policy, go through the numbers with your spouse. Make sure your estimates and their expectations line up. You may find that your spouse has some thoughts about what he or she would do if you passed away and how much that would cost.

If you find out, for example, that your spouse would prefer to sell the family home and live in a bungalow, move across the country to be closer to family, or would undergo some other major lifestyle change. If this is the case, you’ll want to factor these changes into your estimates. Since the purpose of your life insurance policy is ultimately to secure your family’s financial future, it’s important that you have a clear understanding of what that future might look like.

4. Consider Breaking Up Your Policies

Instead of purchasing one large life insurance policy, it’s often a good idea to break your coverage up into several smaller policies. This will give you some flexibility to lapse policies in the future if you find that you no longer need as much coverage. You can also buy policies with different terms, so your coverage automatically adjusts according to your family’s anticipated needs. For example, you may want to purchase a 30-year policy to cover your spouse’s expenses until retirement, then purchase a separate 10- or 20-year policy to cover your children’s college expenses.

Taking this approach can lower your overall cost, give you more flexibility, and allow you to name different beneficiaries depending on the ultimate purpose of each policy.

5. Consider a Longer Term

When in doubt, it’s often better to choose a longer term. For example, if you’re looking at a 20-year vs. 30-year term policy and both are affordable, then choosing the longer term will give you some additional certainty. If you choose a 20-year term and then find out that you need more coverage, buying a new policy at that time will be far more expensive. Even worse, if your health has changed significantly, you might not be able to get coverage at all.

6. Don’t “Set it and Forget it”

You might think that once you’ve purchased a life insurance policy, the only thing you have to do is keep paying the premiums. However, this is not the case. Life isn’t static, and as things change, so can your coverage needs. It’s a good idea to go through the calculation exercise every few years to ensure that your coverage amount is still sufficient and that you’re not carrying too much coverage. This is particularly important any time you go through a major life change like a marriage, divorce, addition of a child, or a death in the family.

It’s also critical to check your beneficiary designations periodically to ensure they still reflect your wishes. The last thing you want to do is accidentally leave a death benefit to an ex-spouse or inadvertently exclude a child who was born later in life.

Final Thoughts

Like almost everything involved in your financial plan, there’s no exact answer to the question of how much life insurance you need. There are many variables, and no one has a crystal ball to see the future. However, following the tips provided and discussing your life insurance plan with your spouse and/or your financial advisor will help you make an accurate estimate. Once you have a clear estimate of how much insurance you need, learn how to choose the best online term insurance broker.

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Do you want to retire with a million dollars in your 401(k)?

It’s entirely possible. People do it every day, and you could be one of them.

But you need to know how to avoid the most common mistakes that can take hundreds of thousands of dollars from your pocket.

Without the proper guidance, you could allocate your savings incorrectly, pay excessive expenses, and miss opportunities for investment growth.

Learn how an investment in knowledge today can you pay you dividends in greater 401(k) growth tomorrow with this ultimate guide to getting a free 401(k) analysis.

The 401(k) Trap

Signing up for your company 401(k) is most people’s first foray into the investment world.

It’s a powerful first step towards achieving a healthy retirement. In many cases, your 401(k) will also end up being your single largest investment.

Despite the importance of this decision, it's surprising how little guidance is given to many 401(k) plan participants:

• How do you decide on the optimal asset allocation based on your age and risk tolerance?
• How do you analyze the expected return of your investment portfolio?
• What are the “all in” expenses associated with your investment choices, and why does that matter?

The problem is, many businesses lack the investment expertise needed to provide you with guidance, and they don't want the liability associated with giving you investment advice. The result? You're on your own — and that can be a very expensive mistake.

The surprising reality is many employees are just handed a worksheet, or given access to a website, because this type of generic education information places no responsibility on the company if something goes wrong. You're given a list of “approved” investment choices like target date funds, stock funds, and bond funds of various colors and descriptions. From this menu, you're expected to choose your financial future. If you make the wrong choice then it's your responsibility.

Worse yet, few employees are taught the critically important role that investment expenses play in your future expected return. It's one of the simplest and most significant lessons you can learn because multiple research studies, including this one from Morningstar, have shown how investment expenses are the single greatest factor affecting long term relative investment performance. Unfortunately, 401(k)s often have some of the highest fees of any investment alternative! You can avoid getting sucked into this trap, but only if you know what to watch out for and how to manage the problem.

Related: How Your Financial Advisor is Taking 75% of Your Retirement Income (or More!) Video, PDF download, or Audio.

If you’re not an investment professional, it can feel overwhelming to make these important investment decisions without background or knowledge.

The sad result is most people end up just taking a guess and hoping for the best.

That’s no way to plan your financial future!

If you’re not completely confident that you know exactly what you own in your 401(k), how much you’re paying in fees, and whether the allocation is appropriate for your specific circumstances, then you’re not putting yourself in a position to maximize the growth of your hard-earned savings.

Making the wrong 401(k) choices now will significantly impact your ability to retire with the nest egg you desire. A 401(k) analysis can give you the knowledge and guidance you need to set yourself up for financial success. Best of all, it’s free and only takes a few minutes of your time! Today, we'll explain:

• What you can expect from a 401(k) analysis
• How to use two different free 401(k) analysis tools we recommend
• How to take action on your results

What Will You Learn From a 401(k) Analysis?

To properly optimize your 401(k), you’ll need to have a full understanding of two things: the investment choices available in your plan and the annual fees you're paying to invest in your plan.

When you know this information then you can choose an allocation that’s appropriate for your expected retirement date and tolerance for risk. The good news is, a free 401(k) analysis will provide you with all of this information… and more.

The Low-Down on 401(k) Fees

While close to 95% of 401(k) plan participants pay fees and charges, most people really don’t understand them.

In fact, TD Ameritrade conducted a survey in which they found that 37% of 401(k) plan participants didn’t believe they were paying any fees, 22% didn’t know whether they were paying fees or not, and 14% weren’t sure how to figure out how much they were paying. That’s a whopping 73% of people who are losing a portion of their retirement savings and don’t know how to minimize the damage!

Related: How to take back control of your portfolio

To further complicate things, there are different types of fees you'll find within your plan. Some are easy to spot if you know where to look, and others are cleverly hidden.

The Ugly Truth About How 401(k) Fees Impact Your Retirement

When you first start looking at the expenses in your 401(k) plan, you might wonder what all the fuss is about. After all, in percentage terms, it seems like a pretty small amount. While plan expenses vary depending on a number of factors, participants in very large plans may pay as little as 0.50% per year while those in smaller plans often come in at 2% or higher. However, when you look at these numbers in real dollar terms then you'll see just how quickly they add up. Consider this example:

A 30-year-old investor has a 401(k) plan with a $10,000 balance that charges 2% per year in fees. If that investor contributes just $5,000 per year for the next 30 years, he will end up paying $153,208 in fees over the course of his career! By learning how to make small changes that resulted in bringing the fee down to 1%, he could save an additional $77,302.

Consider, also, that the cost of 401(k) fees compound in the same way dividends and interest do. When additional money is added to your account, it's then available to grow exponentially for the entire time it's in there. Conversely, when money is deducted for fees, you lose the compounded value of that earning power for the rest of your investment term. To show just how big of an impact this can have, let's look at another example:

A $100,000 investment that earned 5% per year for 30 years with no additional fees or costs would have an ending balance of $432,194. If you added a 2% fee, reducing the performance to 3% per year, that same account would have an ending balance of $242,726. That's a difference of $189,468 — meaning that little 2% fee actually cost you 43% of your total investment return.

It's clear that minimizing investment fees can have a huge impact on your retirement. At the same time, the 401(k) can be one of the most expensive investment vehicles. So what's an investor to do?

This is a case where knowledge is power. By law, you're required to receive a plan disclosure document for your 401(k) that explains all of the fees you're paying. Unfortunately, even with the disclosure, it's not always easy to determine your “all in” cost. Completing a free 401(k) analysis will help you see exactly what fees you're paying and the steps you can take to reduce them.

When you review your analysis, it's helpful to understand the types of fees you'll be looking for, and what services each of these fees covers.

3 Common Types of 401(k) Fees

The three primary types of fees you'll see in your 401(k) plan are plan administration fees, investment fees, and individual service fees.

1. Plan Administration Fees 

Your plan administration fees cover the cost of everything that's needed to keep the plan going. This includes services like accounting, recordkeeping, legal, and trustee services. If your plan includes online account access, telephone access to customer service representatives, or a live advisor who offers educational seminars, these perks are usually also built into the plan administration fee.

Sometimes your employer will cover this cost, but it’s more common to see it passed on to the employee as a percentage of assets or a flat annual fee. The average plan administration fee is around $100 to $200 per person, per year. If your plan charges an administration fee, there's really nothing you can do to avoid it. You will want to make note of it, however, so you can include this downward drag in your performance expectations.

2. Investment Fees

Investment fees are the cost for actually managing your investments, and they're usually your biggest expense. Some of the most common investment fees include expense ratios, sales loads, and 12b-1 fees.

The annual cost of owning a mutual fund is called an “expense ratio.” It covers the expenses the mutual fund company incurs to manage the fund. Some mutual funds also have a sales charge, called a load. Depending on the type of fund, you may pay the sales load upfront or when you sell the shares. In most 401(K) plans, the load is waived. If not, you'll want to lower your fees by choosing “no-load” funds.

Related: The inconvenient truth about buy & hold

Many fund expense ratios also include a 12b-1 fee. This charge covers the mutual fund company's costs for marketing, distribution, and paying commissions to brokers. When the sales load is waived on a mutual fund, the 12b-1 fee usually makes up for it. You can find a breakdown of each mutual fund's fees in its prospectus and/or annual report. You'll want to evaluate all of the different types of fees so you can determine the “all in” cost of owning each fund.

When you receive the list of approved funds for your plan, the expense ratio for each investment option should be included on this list. You can save yourself a significant amount of money by designing a portfolio using the fund options with the lowest possible expense ratios (as long as the investment performance is comparable).

3. Individual Service Fees

Individual service fees come into play when you seek services beyond the plan basics. This can include things like taking out a 401(k) loan, rolling over assets to an IRA account, or seeking personal financial advisory services. Before you take advantage of any of these types of offers, you’ll want to find out whether there is a fee involved and how much it's going to cost you. A summary of all these charges should be listed in your summary plan description, and may also be listed on your account statements.

Once you have a firm grasp of the fees you're paying in your plan, it's time to take a closer look at your investment options and which ones you've used to design your portfolio.

How To Evaluate Your 401(k) Investment Options

When you're building a portfolio in your 401(k) plan, you can't just choose any investment you want. Instead, you're limited to the plan's list of pre-approved investment options.

To learn about the investment options in your plan, start with the brochure you should have received when you enrolled. If you didn’t receive a brochure or you can’t find it, check your plan’s website or ask your HR department to provide you with a list of allowed 401(k) investment options.

You’ll typically find that your plan offers a variety of mutual funds that fall into categories like growth, growth and income, equity income, balanced, bond, and cash-equivalent money market. Most plans also offer a selection of target date funds, and some plans give you the option to purchase index funds, exchange-traded funds (ETFs), and company stock.

So which investments are best for building your portfolio? Let's take a deeper dive.

Active vs. Passive Investments

The term “passive investing” generally refers to the use of indexed funds or ETFs. These investment options aren’t controlled by an active investment manager. Instead, they track an index, like the S&P 500. Because you’re not paying a manager for his or her research, the fees in these investments tend to be much lower.

Related: A better investment strategy than buy and hold

While passive investments generally aim to track the market, active investments strive to beat it. However, when you factor in the negative drag that high fees create, you’ll often find that passive investments outpace their active counterparts net of fees. In almost all cases, a properly-allocated portfolio made up of passive mutual funds or ETFs will be the best way for the non-professional investor to grow a retirement nest egg while minimizing the negative impact of unnecessary fees.

Target Date Funds

When you review your plan’s investment materials, one of the first things you’ll probably notice is the push for you to choose a target date fund. These are mutual funds that have a predetermined mix of stocks, bonds, and other investments which gradually shift to become more conservative as you get closer to your retirement date. While some people like the “set it and forget it” methodology these funds offer, selecting them can sometimes be a mistake.

If you’re young and have 30 or so years until retirement then you’ll start out with a decent mix, but when you move closer to your retirement date, these portfolios often become far too conservative. An overly conservative investment can lead to low returns which might not be enough to get you through all your retirement years. If you choose a target date fund, you’ll want to periodically reevaluate whether the allocation is still appropriate for your needs. Since these funds are actively managed, there’s also a good chance that you’ll be paying higher fees than you would if you chose your own allocation. In most cases, the convenience these funds offer isn't worth the challenges they create.

It should also be noted that some plans will automatically put you in a target date fund if you haven’t made your own investment election. If you’re not sure which investments you chose when you enrolled in the plan, now is the time to check.

Company stock

Many 401(k) plans also offer employees the opportunity to purchase company stock at a discounted price. While this offer may be tempting, you should generally avoid allocating more than a limited percentage of your portfolio to any single stock holding. Otherwise, you’re taking a chance of losing a significant portion of your assets if the company goes under. Worse yet, when it's your own company you could lose your job at the same time you lose your savings.

Don’t make the mistake of thinking this can’t happen to you. No matter how successful a company is, there’s always the chance that it could fail. That's not a risk you want to take.

Determining Your Ideal Portfolio Allocation

Once you understand your investment options, it's time to start building your portfolio. When determining your ideal investment allocation, start with your goals and your risk tolerance. The first part is usually easy. It requires you to decide what age you would like to retire so you can determine your investment time horizon, or how long you have before it's time to start taking withdrawals.

If you’re in your 20s or 30s, you have plenty of time to grow your investments. With an investment horizon of 25 to 30 years or longer, you'll also have enough time to recover from market losses. This allows you to choose more aggressive investments designed for long-term gains.

If you’re nearing retirement, however, significant losses could be devastating. That’s why many older investors choose more conservative options that are weighted more heavily in bonds and cash. Although this might be an effective way to minimize your losses, it will also impact the size of your gains.

Your risk tolerance is another important factor in determining your ideal investment allocation. This is a measure that aims to determine how you’ll react when faced with inevitable market losses. If you’re likely to panic in the face of a market decline, you’re better off choosing an investment allocation that will generally stay within the range of your comfort zone. This will help avoid a situation where you make a knee-jerk reaction that causes you to compound your losses.

Related: How to make more from your investing by risking less

Creating the right portfolio requires you to balance your desire to minimize losses, the need to maximize gains, and the time you have to take advantage of compounding and growth. If you choose an allocation that's too conservative too soon, you might find yourself coming up short during your retirement years.

The Importance of Diversification

While it may be tempting to put all your assets in a high-performing growth fund or a conservative bond fund, it’s never a good idea to put all your eggs in one basket. Properly diversifying your investments gives your portfolio more room for growth while helping to shield it from some of the worst market losses.

Target date funds are already diversified, but if you choose any of the other investment options in your plan, you’ll be responsible for diversifying appropriately. You can either take the time to learn about your options and develop a scientific approach to investing your money or make things easy for yourself by following the recommendations you’ll receive as part of your free 401(k) analysis.

Where to Get Your Free 401(k) Analysis

There are two websites you can visit to get a free 401(k) analysis and the entire process will only take five minutes of your time!

• Blooom
• Personal Capital

Most analysis programs will begin by asking you to enter your age (or date of birth) and the age at which you would like to retire. You’ll then typically complete a series of questions that will help determine your tolerance for risk. The last step is to link your 401(k) account to the platform. This will give the program what it needs to conduct a fast and thorough evaluation of your plan, including investment options and fees.

After inputting your information, you’ll receive a list of ways you can improve your current plan. This often includes changes that can help reduce your fees and adjustments to your allocation that will get you closer to the proper risk level. Your analysis will likely recommend changes to your fund choices that could help improve your diversification, reduce your fees, or improve your forecasted returns.

While you’ll be able to get all this information without paying a cent, it’ll be up to you to follow through on making the recommended adjustments. With that said,  these same sites also offer premium services including investment allocation recommendations, trading, and rebalancing for a flat fee. Many investors find that the convenience this offers is well worth the extra cost, and these programs often save you enough in fees to pay for themselves many times over.

401(k) Analysis Tools: Blooom vs. Personal Capital

The two free web apps we recommend for 401(k) analysis are Blooom and Personal Capital. Both sites will give you free insights into your 401(k) fees, investment choices, and forecasted performance, but there are differences:

Blooom

The largest difference is that Blooom's entire business is employer-sponsored retirement account analysis and management—that's all they do. This covers 401(k) accounts, as well as 403(b), 401(a) and 457 accounts. Because 401(k)s and other employer-sponsored accounts are all Blooom does, Blooom's premium 401(k) management services have some advantages over Personal Capital because they have direct links with hundreds of different 401(k) providers. This enables them to make changes directly to your account if you engage their premium plan.

At the same time, the fact that Blooom only deals with 401(k)s may be a limiting factor for you; if you have IRAs or taxable investment accounts, Personal Capital can give you insights into those, too. Consequently, if you only have investable assets in a 401(k)—or you are confident that your other accounts are already optimized—go with Blooom.

Personal Capital

Personal Capital, on the other hand, provides optimization tools for all of your finances. While Blooom can only make recommendations for how to optimize your 401(k), Personal Capital can analyze your other investments, including IRAs, 529 plans, health savings accounts (HSAs) and taxable accounts. Personal Capital also provides cash flow analysis tools to help you build a budget and analyze your spending. If you're interested in analyzing other investments in addition to your 401(k), choose Personal Capital.

Remember, however, that both sites' free services will merely give you recommended changes. If you want the services to implement changes on your behalf, you'll need to enroll in their premium offerings, which are quite different.

Personal Capital is a wealth management company. It provides robust free analysis tools for everybody, but it makes money by offering investment management services. If desired, you can engage Personal Capital to manage all of your investments for you. As a paid client, Personal Capital will assign you a financial advisor who will propose ideal portfolios for all of your investment accounts and execute the necessary trades for you. On an ongoing basis, your advisor will rebalance your accounts based on market movements, new contributions, or changes to your investment goals. Personal Capital's annual wealth management fees start at 0.89% for the first $1 million of assets under management. Additional assets are priced at 0.79% for $1-3 million; 0.69% for $3-5 million; 0.59% for $5-10 million; and 0.49% on assets over $10 million.

Blooom, by contrast, will manage just your 401(k) account for as low as $10 per month. If you have more than one 401(k), they can manage those, too, for an additional $90/year per additional account.

To learn more about Personal Capital, read our review of Personal Capital now.

Free vs. Paid Analysis: Does it Ever Make Sense to Pay?

In almost all cases, the free analysis is more than enough to provide you with the information you need to make good 401(k) decisions. While an investment advisor can give you a more personalized recommendation, the question remains whether it will produce greater (or worse) results, and it won’t come cheap. Many investment advisors charge a minimum of $350 just to look at your 401(k), and others charge as much as 1% or more of your account balance per year.

Related: How to be a pro at growing your wealth

Although expensive, engaging an investment manager—whether it's Personal Capital, another firm, or a solo manager—often makes sense for high-net-worth individuals who don't have the interest or confidence to manage their money or are too busy working to do so. The thing is, you shouldn't necessarily expect a wealth manager to cover their fees with improved investment returns. If they do, that's great! However, they may not. Instead, think of hiring a wealth manager like hiring a professional painter in your home. With enough time and patience, you might be able to do an adequate job painting your house and save money in the process. A pro, however, will do the same job more efficiently and, most likely, you'll be happy with the result. Hiring the painter isn't cheap, but might be well worth it because it saves you the time and hassle of painting yourself. Keep in mind, though, that the money you’re paying an advisor will drag down the value of your nest egg. In fact, over your lifetime, working with a financial advisor could cost you 75 percent or more of your retirement income!

At about $10 per month, it may make sense to engage Blooom's premium service. In fact, compared to engaging a wealth manager, Blooom is downright cheap. Of course, Blooom can only help with your 401(k), but that's perfect for the millions of Americans who hold most of their invested assets within one or more 401(k) plans.

Are You Saving Enough in Your 401(k)?

Retiring with a million-dollar 401(k) requires a two-part strategy. Completing a 401(k) analysis and following the resulting recommendations will help you reduce fees and improve your investment returns. The second part of the strategy revolves around an aggressive and consistent savings plan. This may be easier said than done, but the results are well worth the effort.

Most 401(k) plans offer an employer match of 50 to 100 percent of what you put into your account, up to a certain percentage of your salary. Neglecting to enroll in your 401(k) or not contributing at least enough to receive the full employer match means you're literally wasting money to lost opportunity. If you’re not sure you can afford to contribute the necessary amount to your 401(k), you’ll want to complete some budgeting exercises to find ways to free up this extra cash flow.

Balancing Your Savings Priorities

If you’re like most people, retirement isn’t your only savings goal. You’re likely also going to need money to buy your dream home, pay for your child’s college expenses, pay down debt, and meet other financial obligations. While this is all fine, it’s important not to let these things get in the way of saving for your retirement. Building a million-dollar nest egg requires commitment and prioritization.

You can use our 401(k) calculator to evaluate your current contribution strategy and determine what your balance will be at retirement if you don't make any changes. If you’re not happy with the number you see here, you’ll need to make some adjustments so you can get closer to reaching your retirement goal.

Some Final Thoughts

If you want to have a comfortable retirement, you need to save and invest. A 401(k) is one of the easiest ways to get started and can be an excellent way to save for your future. If done incorrectly, however, it can also cost you big money.

The key to success is to make smart decisions that optimize your portfolio while minimizing fees. Due to the complexities of many 401(k) plans, this isn't always easy.

By taking a few minutes to get your free 401(k) analysis, you’ll give yourself the gift of information that will help you make the smart financial decisions necessary to achieve your dream retirement.

Building wealth is about making smart risk/reward decisions. There's no risk in getting your free portfolio analysis today, and it might just save you from excessive fees or expensive investment mistakes.

When you think of leverage, what comes to mind?

If you’re like most people, it’s some form of financial leverage – mortgage financing or debt financing – using other people’s money.

You probably also think leverage is risky.

But the truth is financial leverage is only one of six different types of leverage. Worse yet, it’s the most dangerous leverage strategy because it increases risk as much as reward.

The other five types of leverage can both decrease risk and increase reward… at the same time!

So let’s pull these five other categories of leverage out of the shadows so you know how to multiply your wealth by taking less risk.

The Right Leverage Strategy for the Right Job

Imagine trying to build a house with only a screwdriver and a hammer.

That’s what building wealth with only financial leverage is like.

Sure, you need tools to build a house, just as you must have leverage to build wealth. But to build a house you actually want to live in, you also need saws, tape measures, chisels and levels, so you can use the right tool in every situation. Each tool has a specific function, and it must be applied correctly.

Related: How to be a pro at growing your wealth

Building wealth with leverage is the same way. You’ll need all the different leverage strategies to overcome the constraints you’ll encounter on your journey toward financial freedom – because each tool unlocks a specific limitation that holds you back from greater success.

This article will explain the other five types of leverage you’ll want to apply in your wealth plan.

1. Time Leverage
2. Technology & Systems Leverage
3. Communications & Marketing Leverage
4. Network & Relationships Leverage
5. Experience & Knowledge Leverage

Each of these leverage strategies delivers a specific solution to a specific type of constraint in your business, career, and financial plans, and many of these strategies can be used in conjunction with each other. That’s why it’s important to become familiar with all of these tools so you can get the most out of leverage in your wealth plan.

Time Leverage – How To Employ Other People’s Time So You’re Not Limited To 24 Hours In A Day

Time is limited. You can’t make more of it. You can’t save it. You spend it every minute you’re alive, and you never get to know how much of it you have left.

The only question is: What do you spend your precious time on?

Everyone gets the same 24 hours in a day, and we all have the same final destination when time ends. The countdown to that destination never stops, until it does.

There’s no question time is your most precious resource; yet, isn’t it amazing how most of us treat time as if we’re blessed with an unlimited supply?

How will you maximize the value of your time given that it’s scarce?

Let’s dive into how you can leverage time to grow your wealth and reduce risk.

What’s Your Time Worth?

Knowing the value of your time is important because it affects what you spend it on. Your hourly rate shows you which activities you should personally complete and which activities should be eliminated or leveraged away through outsourcing because their value is below your hourly rate.

The reason you’re not making as much money as you’d like is because you haven’t increased the value of your time to the level you need in order to make that much money.

How you think about your time and how you value it will largely determine the financial results you produce with that time, because if you don’t value your time, nobody else will either.

If you’re not sure how your salary converts to an hourly value then use this free calculator to find the answer. Also, The Leverage Equation has a bonus exercise that walks you through the process of valuing your time according to your income goal.

How Productive is Your Productive Time?

Typically, 80 to 90 percent of your time is used just to get by in life, leaving only 10 to 20 percent to produce something truly extraordinary with the little time remaining. That’s why success is created using marginal time more effectively.

In other words, the daily requirements of life, like sleeping, bathing, eating, preparing meals and running errands, chew up much of your time. Talking on the phone, attending meetings, clearing email, organizing your desk, and creating social media updates are all maintenance activities that distract you from what I’ll call “productive time.” The truth is, most of your day is spent on maintenance activity, leaving little productive time to move your life forward.

I’m not saying these maintenance activities should be eliminated entirely because they’re an essential part of a full and healthy life. Instead, I’m simply creating a clear distinction about what productive time is and how relatively few hours actually get dedicated to real productivity.

The only time you’re “productive” is when you do the work that directly leads to your goals, or you leverage someone else’s time to do the same.

Finding productive time requires focus, otherwise maintenance activities will expand to fill all your available time.

You must prioritize productive time or you won’t have any. It doesn’t happen on its own.

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This problem is illustrated by studies of Fortune 500 CEO’s showing that the total productive time in their day is something close to 30 minutes, depending on the actual research study.

This leads to two startling conclusions that can change your life and change what you’re able to produce with your scarce time resources.

The first principle is that success is created at the margin.

For example, one of my rules from coaching clients to achieve financial independence is: if you want to know how long it will take for someone to achieve any goal, just look at how much of their time they dedicate to that goal. Notice how similar that is to our definition of productive time.

The unfortunate truth is you likely have very few productive hours in each day to dedicate to achieving your goals. That’s why recapturing a wasted hour here and there by redirecting it to productive use is so valuable. You’re not just adding one hour to an already long 10-hour day for a 10% incremental improvement. Instead, adding one productive hour could literally double your productive time, because your long day only has one other productive hour in it.

That’s why success exists at the margin of time. Doubling your productive time by one hour might 2X or 4X your results, which could be life changing. Not only that, it reduces your risk.

The second key principle about productive time is how business systems, and developing standard operating procedures for employees as a business system, can be the most productive time of all because that’s how time literally multiplies itself.

Systems Automation: The Ultimate Time Leverage Strategy

Setting up automated business processes can deliver the greatest time leverage of all. For example, I developed an automated opt-in procedure for this website that builds relationships by delivering value to new visitors. The automation provides huge time leverage by converting visitors to subscribers and later to customers without me personally sending a single email… and the risk is zero.

This system does the work of many employees at a fraction of the cost by running 24/7 with unlimited scalability. You can surf this site and notice all the different ways you are incentivized to subscribe. There are free courses, books, calculators, PDF downloads (even in this article), resource guides, and other incentives – all operating 100% on autopilot to give value by building trust and relationship with new subscribers. It’s an entire business system that accelerates growth while reducing risk.

Related: Here’s a scientific system to build your wealth now

Compare that to producing a presentation that I might deliver one time to a single group of people. They both qualify as leverage, but the sales presentation is a project that gives a linear return on my time because it must be repeated over and over, with each instance consuming more time to produce only linear value. Both sell products and both are productive time, but the project is limited while the process is highly leveraged.

Time Leverage – Summary

The goal of time leverage is to release your income growth from the boundaries of time, and to get more stuff done without using any of your time. The Leverage Equation provides much more detail with action steps and exercises showing you how to achieve those two goals. As a quick overview:

1. The first step is to increase the proportion of truly productive time in your day. You want to recover those marginal hours that will literally double and triple your total productivity.
2. The next step is to delegate projects so you can multiply the amount of time you spend working toward your goals, thus accelerating your progress.
3. Next, increase your time leverage from linear project leverage to the more valuable process. Identify all repeating functions in your business, investing, and career that don’t need your active involvement so you can delegate them.
4. Finally, you can further increase leverage by replacing human time from the production equation with scalable business system automation using technology and systems leverage.

The goal is to get more work done at a lower cost so you can create more profit while working less. This reduces your risk while accelerating your success.

Technology and Systems Leverage – How to Set Up a Scalable Model Once So the Systems Can Do the Work Thousands Of Times

Your goal with systems leverage is to convert all activities required to run your business into standardized processes so they automatically deliver your business’s value proposition without any input from you.

The result is a scalable, efficient, profitable business that also gives you time freedom.

Systems leverage is interconnected with time leverage because you pay the price of time upfront to create the system, but the system does the work down the road without requiring your time.

I define a system as a set of standard operating procedures that produces consistent results for the business regardless of the contractor, employee, or technology using it. Think of it like the recipe you’d use to bake a cake, describing the exact steps to follow and the exact ingredients to use for each step in the process.

There are two primary benefits to systematizing:

1. Systems take the unknowns out of the business process, thus reducing risk by standardizing everything into a work flow that produces a reliable output. For example, you may not be a fan of McDonald’s restaurant food, but their success is legendary partially because the customer always knows exactly what they’ll get anywhere in the world as a result of the business systems that standardize every detail.
2. Systems leverage your knowledge into a scalable, efficient process that reduces cost and, most importantly, gives you time freedom.

Making Technology Work For You

The starting point for developing systems is to map out the standard operating procedure that defines the system. The next step in systems leverage is to add technology leverage so that tasks are completed by machines instead of humans.

Technology has a long, proven history of delivering speed and efficiency improvements. For example, technology has evolved transportation over the years from walking and riding horses to bicycles, then cars and boats, and more recently bullet trains and supersonic airplanes. Each generation of technology improves the speed and efficiency of transportation.

You can see a similar trend in communication. It began with person-to-person conversation, then advanced to telephone and radio, which then developed into television, and has now progressed to email, texting, webinars, podcasts, live chat, and YouTube.

Personal computers, smart phones, and the internet have combined with SaaS (or Software as a Service) vendors to provide affordable technology tools you can leverage as a small entrepreneur. A home-based business can now compete on equal footing with a Fortune 500 company because both the software and hardware are so powerful and affordable.

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Take the publishing industry as an example. New York publishing houses can’t compete against the flood of quality books from self-published authors operating with little risk or cost using nothing more than a laptop, an internet connection, and access to direct-to-consumer marketing channels like Amazon.

Technology has flattened the playing field by eliminating barriers to entry for the little guy. Software and hardware companies are producing off-the-shelf business systems that allow the home entrepreneur to compete at any level. Direct to consumer marketing channels give equal access for sales. The result is that bigger is no longer better, and smaller is less risky.

However, all of this access to technology tools has a downside risk as well. As you learned in time leverage, you shouldn’t do everything yourself, even if you have affordable access to all the technology tools required to complete the job.

You have to be careful not to get buried in technology by balancing time leverage principles with technology leverage possibilities. In the end, your ultimate limit is time, and all technology requires time to learn, set up, and maintain.

The 3 Stages of Systems Leverage That Every Business Must Go Through

You should expect to progress through three stages of increasing sophistication as you implement systems leverage:

1. Process map repetitive tasks into standard operating procedures so that reliable, high-quality, efficient results are produced every time with a minimum of mistakes.
2. Integrate technology leverage so that you start replacing human labor with machine labor, further reducing costs and improving results.
3. Design audit controls with checks and balances into your systems so they’re self-correcting, thus reducing risk.

Examples of the types of systems you’ll use to better manage your business and real estate assets include:

• A marketing system that delivers a continuous flow of qualified prospects.
• A lead generation system that builds a database of prospects for your business.
• A conversion system that nurtures all prospect relationships until they’re ready to buy.
• A sales system that converts prospects into customers by collecting payment.
• An onboarding system that welcomes each new customer.
• A product delivery system that delivers the value to the customer.
• A training system for employees and contractors.
• An accountability system that monitors all the other systems and shows you when any system breaks down, similar to how a warning light on your car dashboard tells you to repair minor failures.

In short, you want to create a system for every repetitive activity in your business and investing, which just happens to include most of the activities in your business and investing.

Systems and Technology Leverage Summary

This was just a brief overview of systems leverage as fully explained in The Leverage Equation.

If your goal is to own your business (rather than letting it own you), then you need to remove yourself from the production process. Convert all activities required to run your business into scalable, efficient systems that aren’t dependent on any individual.

Sure, it costs time and money to get systems leverage working for you, but those resources are well spent because the result is greater wealth, less risk, and more freedom. And that’s a goal well worth pursuing.

Communications and Marketing Leverage – How to Communicate With Millions For The Same Effort As One

The 1954 Masters purse was $5,000. Fast forward to 2003 and it was 200 times larger at $1.08 million.

The average NBA salary was $8,000 in 1954. By 2003 it had climbed to $4.5 million.

What drove the dramatic increases in sports celebrity income?

If you answered “inflation” you’d be wrong. Surprisingly, it played a relatively small role compared to the real cause.

The main reason for the astonishing growth in sports celebrity earnings was communications leverage.

And the big change that caused huge growth in communications leverage between 1954 and 2003 was television entering the mass consumer market. Television made professional sports accessible to millions around the globe; whereas before television, viewership was limited to just a few thousand local fans.

Communications leverage expanded the audience size, making the product of sports entertainment more valuable. The result was increased advertising revenue, which translated into higher salaries for those sports celebrities who could attract the most eyeballs.

Without media, how would those athletes make those huge sums of money? Who would pay them? Communications leverage is what converted sports icons into millionaires.

Now let’s contrast sports stars with teachers…

A teacher creates more value for society than a sports star; and yet, who commands the higher salary? Teachers’ salaries remain low because they lack communications leverage. Today they teach to a roomful of pupils just as they did in 1954, so the salary they command has grown little net of inflation.

If teachers want to increase their income, they need to increase their leverage. They could get on the lecture circuit, attract media attention to their ideas, write books, produce educational videos for the mass market, develop a content marketing website around their ideas, and promote related educational products.

Related: Why you need a wealth plan, not a financial plan.

The point of these two examples is to illustrate how communications leverage is the bridge that creates marketing value out of networks. Stated another way, marketers use communications leverage with networks to grow their business and multiply income, while reducing risk.

Why Communications Leverage Matters

Communications leverage affects every business and impacts your daily life as a consumer.

Anytime you feel harried with information overload, look no further than the increased reach and reduced costs of communication technology. What started as stamps, a telegraph, and a telegram, was replaced by telephones, telex, fax, and conference calls, which then morphed into smart phones, the internet, videoconferencing, YouTube, podcasting, email, and instant messaging.

Each stage of this process increased access and lowered costs to communicate information, thus lowering risk and increasing profits. The result is tremendous communications leverage for your business, but information overload for consumers.

We’re already seeing limits to how much information humans can effectively process without devolving into distraction. The instantaneous response expectations of today’s zero latency, always-turned-on communications tools have introduced a new level of worker stress.

In fact, some research shows we’ve already exceeded the point of diminishing marginal returns on communications leverage – at least in terms of quality of life, if not business efficiency as well. Today’s always-connected, over-communicated worker is maxed out, constantly distracted, and (often) burned out.

That doesn’t mean you shouldn’t use communications leverage in your business. It just means you’ll want to carefully choose only those tools that deliver the highest leverage for your time while producing the least damaging side effects.

Marketing Leverage: Increase Your Profits

It’s hard to get your message noticed. People have shorter attention spans, there’s more information in front of your customer all the time, and your message is just one of millions that is trying to get through. You have to figure out how to cut through the noise with something meaningful, or it will be too costly to connect with your target market.

The good news is that there are many individual tactics to increase marketing leverage, and they can be simplified into two strategic principles for application: find new customers and increase the lifetime value of your existing customers.

In fact, all marketing and communications leverage strategies for business boil down to just those two goals.

For brevity, here are a few ideas you can use to accomplish each of these goals that reduce risk and increase profits.

Finding new customers:

• Use technology to nurture your sales funnel
• Track and segment website traffic and subscribers according to interest
• Use content marketing to attract people with interests that align with your product or service
• Create an email list and send relevant, valuable content to your subscribers

Increasing the lifetime value of existing customers:

• Cross-sell, upsell, and back-end sell (create interrelated products at different price tiers)
• Repackage and re-purpose existing products
• Sell customers on repeat purchase programs

Summary for Communications and Marketing Leverage

Again, space limitations force this already too long article to only give an overview of all the information and exercises about marketing leverage provided in The Leverage Equation book.

Below are some key points to remember:

1. Communications and marketing leverage deliver a low marginal cost for each touch point because it’s generally priced as a fixed expense, allowing you to cost-effectively increase the frequency and breadth of communication.
2. It builds brand loyalty and trust by using technology to cost effectively deliver value through articles, courses, videos, and other educational resources.
3. It gives immediate data feedback so you can test offers in minutes for minimal cost, then correct and adjust messaging until conversion rate proves cost-effectiveness, thus reducing risk and increasing profits.

There are many tactics to increase communications leverage (upsell, cross-sell, referral systems, joint ventures, automated sales funnels, continuity sales programs, media outreach), but they all boil down to two principles:

1. Find new customers.
2. Increase the lifetime value of existing customers.

The key to success in communications leverage is knowing how to cut through all the information noise with a meaningful message that serves your customers. Give them something valuable so you’re not just adding to all the noise that already clutters their lives.

Network & Relationship Leverage: How To Employ Other People’s Resources and Connections So You’re Not Limited To Your Own

Imagine you want to travel from Los Angeles to New York.

You don’t need to own the highway or an airline. You don’t need to own a car, rent a car, pay for gas, or even buy an airline ticket.

All you need to do is find someone who wants a car delivered from L.A. to New York or has shipping needs that require an airline ticket for the baggage that you could accompany on the plane. You could provide the delivery service and accomplish your travel goal at the same time – without paying a dime.

In other words, the only thing standing between you and the trip you desire is not money, cars, airline tickets, or gas. You don’t need any of those resources. You just need the network and relationships to connect your goal with someone else’s.

Network and relationship leverage is about shifting your mindset from buying and renting resources to the purposeful cultivation of relationships that exchange value.

That’s a key point so I’ll repeat it – network leverage is based on relationships that exchange value instead of money. It might be contacts, resources, strategies, experiences, referrals, support, or any other form of value that costs the giver nothing but makes a big difference for the receiver. Giving value is how both parties support each other.

It’s an effective leverage tool because at the root of all business is a human relationship. No aspect of business exists outside of relationship, whether it’s customer, supplier, employee, partner, shareholder, contractor, or professional adviser relationships.

All business is human relationship. When you know how to leverage those relationships ethically, you’ll create more business, faster, and with less of your own resources.

But I Don’t Want to “Use” My Friends

Unfortunately, despite the huge potential value of network leverage, many people remain uncomfortable with the whole idea.

• It might feel disingenuous, like you’re analyzing relationships based on their resources and usefulness, rather than based on friendship alone.
• Or it might feel dangerously close to exploiting your friends for profit.
• Some people feel it’s insincere or manipulative—an elegant way of using people.
• Task-oriented workers may feel that connecting with people is little more than a distraction from their “real work” of getting the job done.

All of these criticisms are valid, but only if you approach network leverage the wrong way.

There’s a sincere, non-exploiting, highly productive way to build your network based on giving first that feels natural and appropriate to both parties.

Here are four simple steps you can take to make sure network leverage is done right so you feel great about the business relationships you build:

1. Decide who you want in your network.
2. Connect with those people.
3. Build the relationship over time by giving and paying it forward – never using. Be the first to offer up your contacts and resources before making any demands on the relationship. Play the long game.
4. Finally, when the time is right, you can ask for an appropriate level of help.

The best way to go about building these sorts of networks is to commit your time and energy to groups and missions where you share a personal interest. You must be genuinely interested in the networks in which you are investing your time and energy. For example:

• Volunteer or organize volunteers for a community program you believe in.
• Enroll your community in your cause.
  • For example, my kid’s school enrolls parents to donate their time in the classrooms, for fundraisers, and for community events to support their children’s education.
• Join (or create) a mastermind group. Leverage and add to the knowledge, experience, contacts and resources of others, plus gain accountability.
• Attend classes and programs that interest you. Meet and mix with the attendees and presenters.
• Teach a program that adds value to your audience and make yourself the hub of that community.

Whatever way you choose to build your network and relationships, make sure that you are adding as much value as you are receiving. That is the key to building genuine connections.

Network and Relationships Leverage Summary

No business exists within a vacuum; all business is done through relationship, which is why relationship leverage is so valuable.

Building a network is worth the effort because strategic alliances with the right people can either make or break your wealth plan. The value of a solid piece of advice at just the right time, or getting the chance to work with someone who has deep experience in your industry, can be game-changing. You lower your risk by expanding your network, and the potential reward can be huge.

Be creative and opportunistic in how you meet people, and build the relationship by focusing your efforts on giving and paying it forward. Play the long game.

Building a strong professional network of strategic contacts is something that can take years. Like investing for retirement or college, what you get out in the end has a lot to do with what you put into it. It takes effort, but the compound return on that effort can make or break your results.

With the right relationships you can accomplish nearly anything. The key is who you know, what you know, and how you ethically apply those resources.

See My Related Book…

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Knowledge & Experience Leverage – How To Employ Other People’s Expertise So You’re Not Limited To Your Own

Knowledge is the foundation of all wealth-generating processes.

Without knowledge, natural resources would just be dormant in the ground. Knowledge is what converts resources into something with economic value.

Similarly, most of the value of manufactured goods is in the knowledge behind the manufacturing processes that create them.

In other words, physical capital owes most of its value to intellectual capital, but the connection ends there because physical and intellectual capital each have very different characteristics.

Intellectual capital is different because it’s created out of thin air, retained, and distributed without any limits. It’s limitless because it’s an infinite resource (unlike land, buildings, machinery). Physical capital is limited to the resources in your control.

In addition, intellectual capital is different from physical capital because each time you transfer knowledge, the recipient is enriched, but nothing physically leaves the creator. Both can possess the same knowledge, thus creating greater abundance.

Physical capital is different because it leaves you when you give it away, making you poorer. Only one person can possess it, thus creating scarcity.

Intellectual capital grows when used and depreciates when not used. Physical capital does the opposite because it gets consumed through use and depreciates in value.

These differences are important to growing your business. Knowledge shared between two people effectively doubles the amount of knowledge capital within your business, and there’s no price to pay for that growth. That makes knowledge leverage a key tool in your wealth building arsenal.

But surprisingly, it’s an asset that’s rarely valued properly, thus opening up opportunity for competitive advantage.

One of the reasons many people misunderstand knowledge as an asset is because physical capital’s inherent limitations have conditioned us to think in terms of scarcity, but knowledge is different because you can give it freely and it can still give back to you. It operates under a different set of economics.

For example, the more I give away my knowledge freely on this website, the more the business grows. The key to lowering risk and increasing reward is to find cost-efficient forms of communication to deliver that knowledge using technology and systems leverage that create more value than they cost. Email newsletters, video, and podcasts are all examples.

The Two Types of Knowledge Capital

Leveraging intellectual capital is important because the essence of business competition is relentless innovation to develop a competitive advantage. The source of that innovation is knowledge.

Related: Why you need a wealth plan, not an investment plan.

The idea is to always work smarter, not harder. You hire people smarter than yourself and innovate for greater efficiency. You don’t have to reinvent the wheel to improve. Everything you need to know already exists if you can just find the correct source of knowledge to leverage.

But before we can leverage knowledge, it’s helpful to organize it in two different ways:

• Tacit or Unrecorded – knowledge that only exists in someone’s head, making it hard to leverage through sharing.
• Explicit or Recorded – knowledge that has been documented in some way so it’s easy to share and leverage.

Notice how knowledge and systems leverage connect. A system is where you convert tacit knowledge into explicit knowledge through a business system.

When tacit knowledge is made explicit through documentation or recording, it lowers the cost of distribution. That’s a key point.

That’s why knowledge leverage is also connected to technology leverage, because technology has created an unprecedented growth in cost efficient ways to make tacit knowledge explicit and then distribute that knowledge so it can compound.

Similarly, information sharing is multiplied through network leverage using wireless communications, high speed internet, and multi-media communications.

That’s why knowledge leverage is also related to time leverage. You don’t have enough time to do everything, so you surround yourself with a specialized team of advisors, coaches, mentors, employees, and vendors that deliver the expertise you lack so you can grow your wealth and achieve your financial goals.

Applying Knowledge Leverage

As mentioned above, you can apply knowledge leverage by hiring an expert. But you can also become the expert by mastering a subject so deeply that you become a high-demand expert in the field. This is an appropriate strategy when your goal is to increase your hourly earning capacity.

The key idea is: you become the expert who knows what others wished they knew, so they gladly pay to leverage your knowledge. It’s the mirror image of the previous “hire the expert” strategy where you become the expert that others hire, increasing your income as a result.

Supply and demand dictates that money follows that which is in rare supply by forcing higher prices. There’s no shortage of ignorance, but genuine expertise that solves high value problems is rare.

That means a proven low-risk path to increasing your income is to compound the growth of your intellectual capital first, and then sell that knowledge so others can leverage it.

The third way to leverage knowledge is to better manage the knowledge already inside your organization. Value that knowledge as a resource that must be managed and leveraged so that you don’t miss any opportunities to improve business processes or profitability through innovative ideas of staff. It costs little, and the rewards can be immense.

Knowledge and Experience Leverage Summarized

Personal knowledge and learning are limited by the time you have available and your ability to comprehend and internalize information. There’s always more to learn than time to learn it. That’s why hiring an expert who lives and breathes the knowledge you require can be such an effective leverage strategy to save you time and accelerate your wealth.

Alternatively, if your goal is to increase your hourly earning capacity, it might make sense to gather the knowledge yourself so as to become the go-to expert that others leverage.

Regardless of which path you choose, knowledge leverage is a strategic way to reduce risk and increase return to accelerate your wealth growth.

Conclusion

In summary, this entire article was a high-level overview of the five “other” types of leverage strategies (besides financial) that are poorly understood. The surprising characteristic of all five lesser-known types of leverage is how they can be used to both reduce risk and multiply return… at the same time!

The full book The Leverage Equation: How To Work Less, Make More, And Cut 30 Years Off Your Retirement Plan covers these topics in much greater detail and includes specific strategies you can immediately put to use in your wealth plan.

Knowing how to apply leverage is critically important because it’s an important part of the “make more-lose less” wealth building framework taught in my Expectancy Wealth Planning course here. This “make more-lose less” framework is contrasted with the conventional financial planning strategy to “spend less-save more”.

The problem with the conventional “spend less – save more” framework for building wealth (that you’ve probably adopted) is it lacks leverage. That makes it extremely limiting because you can end up working as hard at saving money to keep expenses down as you would just making the money in the first place.

It’s a low-leverage strategy that’s totally acceptable if your values align with a belief structure that finds minimalism satisfying, or you love your work so much that you want to spend your lifetime doing it.

But for everyone else who would like financial freedom sooner, an equally valid financial planning alternative is the Advanced Planning Framework based on making more through leverage and losing less through risk management: the “make more, lose less” framework.

There is no right/wrong judgment claiming one framework is superior because they’re both perfectly valid paths to attaining financial freedom.

In fact, most of the wealth plans from my course students include elements of both frameworks because they’re complimentary, not mutually exclusive.

The key point is to expand your awareness of the trade-offs inherent in each path so you can decide what best fits your values and life goals as you design your wealth plan. One approach is low leverage and limiting; the other approach is high leverage and unlimited.

The goal of this education is to help you make a conscious choice that fits your individual needs. Either path can deliver financial freedom, but the process and the outcomes will be radically different.

The good news is if you find the “make more – lose less” framework intriguing, then you now have a high-level overview of the five types of leverage that reduce risk while simultaneously accelerating wealth growth.

Anyone can begin implementing leverage right now, regardless of your current skill level. In fact, you’re already using leverage every day, but may not realize it.

The difference with successful people is they’re consciously prioritizing leveraged strategies at every level of their business, career, and investing to:

• Break through the constraints that limit their success.
• Reduce risk and increase reward.
• Separate their wealth growth from their return on equity equation so that they’re not limited to their own personal capital.
• Break the connection between income growth and hours worked.

The bottom line is if you aren’t making maximum use of leverage in your wealth plan using the make more-lose less framework, then you’re working harder than you should to produce less than you could.

The choice is yours…

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How can you lift a 7000-pound car without anyone to help you?

The answer is the same as how you can achieve financial independence well before your retirement age.

It’s the same solution that will get more done in a day, with less effort.

And it’s the answer to breaking free of almost any limitation you think you have – whether it’s time, money, skills, connections, or anything else.

Leverage is the strategic tool that expands your resources beyond your present limitations to produce greater results than you could generate on your own.

Leverage gives you access to more capital, more technology, larger networks, greater knowledge, and smarter systems than you personally possess.

Mastering leverage can:

• Accelerate your financial results
• Multiply your wealth
• Improve your quality of life by freeing up your time from mundane tasks
• Allow you to focus your attention on what you enjoy and are good at.

Mastering leverage analysis is how I retired at age 35, just 12 years after graduating from college with thousands of dollars in student loan debt and zero assets.

Leverage is how 20-something millionaires achieve more financially in a few short years than most people achieve in a lifetime.

Leverage is the tool you’ll use to break through whatever limitations hold you back so you can produce greater results.

The Deceptive Half-Truths That Hold You Back

Unfortunately, most people misunderstand leverage.

For example, when you hear the term “leverage,” do you think of financial leverage, such as mortgages in real estate or debt financing?

Sure, that’s one type of leverage, but it’s only one of six! It’s also the riskiest.

The other five types of leverage multiply reward without increasing risk. Even better, when you master certain types of leverage, it’s entirely possible to increase your reward while reducing your risk at the same time!

Another common myth about leverage is that it’s exploitative or manipulative.

Maybe you’ve seen the depraved villain on a daytime soap “use” people through leverage in some shocking and morally bankrupt way. You think: “I would never do a thing like that!”

But leverage is not about “using” people. It’s about making smart business decisions that benefit all participants; and it’s about responsibly applying other people’s resources to overcome obstacles that limit your success so you can achieve greater results with less personal effort.

Leverage done right creates jobs, grows wealth, and serves people.

The 4 Pieces of Conventional Wisdom I Don’t Endorse

There’s plenty of success advice out there. Unfortunately, many of the ideas taught are really just conditional half-truths masquerading as universal facts.

The problem is: these half-truths frequently work well, and are repeated so often that it’s easy to accept them as fact.

But that’s where the danger begins, because any idea taken as fact – when it actually isn’t – will limit your ability to see better alternatives. You won’t recognize the exceptions that prove the rule.

The good news is that when you learn the pros and cons of the multiple leverage strategies you can use, you’ll see how much of the conventional “wisdom” is really just low-leverage half-truths.

Related: How to be a pro at growing your wealth

For example:

• Retirement planning is NOT just about saving and investing until age 65 (Spoiler alert: You can become financially independent at any age! You don’t have to wait until age 65; leverage will show you how to enjoy financial freedom earlier).
• Asset allocation across a diversified portfolio of stocks, bonds, and mutual funds is NOT the only way to invest for retirement (Spoiler alert: Higher leverage asset classes and investment models exist that can accelerate your wealth while reducing your risk).
• Making more money is NOT about getting a promotion, or a raise, or working longer hours (Spoiler alert: trading time for money caps your income because there’s a limit to how many hours you can work. You must learn how to separate your income from hours worked so you can make more while working less).
• It does NOT take money to make money (Spoiler alert: you can separate your wealth growth from your return on equity equation by leveraging other assets).

Don’t worry if you have subscribed to any of these conventional beliefs about investing and wealth. It’s not your fault. They’re repeated so often by mainstream media that it’s easy for your mind to accept them as true without questioning their validity.

Leverage principles will open your mind to different strategies for achieving success and breaking through the roadblocks that hold you back.

This isn’t get-rich-quick hype. It’s a provable fact based on financial science, rooted in research, and grounded in mathematics (but don’t worry – it’s just high school algebra).

The point is that it’s real, and I’ll show you exactly how it works.

Not only that; it’s common sense. You already know it’s true because the evidence is all around you.

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For example, when you hear in the news how someone went from zero to multi-millionaire by age 20 or 30, what was the mechanism? How did they do it?

With the rare exception of extreme frugality at an early age, every one of those stories involves either business or real estate success. That’s because these two asset classes offer multiple opportunities for leverage, so wealth can be created much quicker than investing through conventional asset allocation.

In fact, the research on how the rich get that way proves that the vast majority of wealth is created through business entrepreneurship and real estate.

Conventional paper asset investing through stocks, bonds, and mutual funds takes a distant third place, and even then, it’s usually after an entire lifetime of saving and compounding.

So if conventional paper asset investing is the slowest strategy for wealth building, why do financial experts promote it?

Because it’s a one-size-fits-all solution that’s easy to sell and it has the backing of academic research proving its validity.

It’s a good business model for the investment firms because it’s simple to communicate and implement; because it’s generic and doesn’t require them to develop a plan that accounts for your personal strengths; and because it doesn’t require any special adaptation to your timeline or personal goals.

It’s an efficient business model for them, but it’s not the most effective alternative for you. It’s not wrong, but there are faster, more efficient ways to grow your wealth that may match your life situation and goals much better.

If you want financial independence while you’re still young enough to enjoy it, and without being dependent on extreme frugality to make the numbers work; or if you would like to use alternative asset classes like business or real estate in your wealth plan, then you’ll want to broaden your thinking by trying strategies that are different from the generic financial advice you get everywhere else.

How Leverage Accelerates Your Wealth

Accumulating wealth comes from the compound growth of personal capital and financial capital over time. The advantage of using leverage is it doesn’t have to be your personal capital or financial capital. That’s a game-changing difference.

Leverage allows you to separate your wealth growth from your return on equity equation, and it allows you to break the connection between your income and hours worked.

Breaking these connections opens the possibility for entirely different financial strategies that can radically increase your income and grow your wealth while actually working less.

Leverage releases you from the limitations of conventional financial planning by opening up accelerated strategies using other people’s resources so that your wealth growth isn’t limited by your own time, money, skills, and abilities.

These added resources are what frees your wealth growth from the return on equity limitations and your income growth from time-for-money limitations.

But it gets even better because leverage is also the tool you’ll use to overcome the obstacles that hold you back from greater success. Nearly every roadblock that stands in your way is overcome by one of the six types of leverage.

In other words, leverage is both a tool for accelerating your wealth growth, and it’s a tool for breaking through the constraints that limit your success.

Related: Here’s a scientific system to build your wealth now

Best of all, it doesn’t have to be risky because only financial leverage both increases risk and return. The other forms of leverage can accelerate your results while reducing risk at the same time, giving you the best of both worlds.

In short, you either learn to master leverage or you’ll work far harder than necessary to produce far fewer results than you’re capable of.

Leverage principles will completely shift your thinking about financial strategy. It will give you the essential tools that you need to work smarter – not harder – in order to achieve accelerated results in your financial life.

You’re Already a Master of Leverage

Best of all, you’re already a master of leverage because you use it every day. It’s not technical or complex.

In fact, it’s so common that you don’t even realize you’re using it, and that’s why you haven’t yet consciously put it to work to grow your wealth and improve your life.

For example, every day you’re already leveraging:

• All the employees who manufacture the cars you drive (but that you didn’t build).
• The workers who created the clothes you wear, from the seamstress who sewed the item, to the textile company that created the fabric, to the farmer who grew the raw material.
• Your smartphone, which you use to accomplish many tasks – and that leverage extends beyond the functionality built into the phone to include the electricity you use to charge it and the engineering talent that designed it.

The fact is you’re already leveraging other people’s skills and resources almost every minute of your life. Leverage is an automatic part of your day. The difference is it’s just not conscious; that is, it’s not conscious until something breaks.

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A few years ago, I was skiing when a massive storm knocked down a major power line, cutting off all power to the town and surrounding area. There was no electricity, so almost nothing worked; the cell phone towers went out, and the airport only functioned because of backup generators.

Just imagine being stuck in a freezing house in a massive storm with no electricity, no heat, no lights, no cooking, and no phone or data connectivity – and you’ll begin to understand how leverage-dependent our lives have become.

Then imagine no running water as well, because, in this case, they had to drain the system to protect the pipes from freezing. That meant no toilets, no showers, and no drinking water.

None of these resources belonged to me. On this trip, I was leveraging all of them for my own use – until they stopped working.

It was a wake-up call, because the reality is that nearly every aspect of our lives is touched by leverage in some form in order to increase quality and efficiency. Leverage generally operates so smoothly that we scarcely even notice it’s happening.

But there is a big difference in how the people who become wealthy use leverage.

They’re intentional and strategic in how they apply it. They use it to accelerate results in their wealth plans.

Related: Why you need a wealth plan, not a financial plan.

With The Leverage Equation, you too will learn how to take your casual, everyday use of leverage and repurpose it into a deliberate, strategic, wealth-building strategy.

You’ll become a master of using – in uncommon ways– what is all around you every day, in order to produce much greater results with much less effort.

Applying Leverage in Your Life

Always remember that nobody gets rich without leverage.

If you aren’t employing leverage in your business and wealth plans, it means you’re compromising the speed, time, and work effort necessary to reach each level of success.

Leverage isn’t difficult to master; it’s something you can implement right away and then reap the benefits for years to come.

It’s time for you to stop working harder than you should to earn less than you could.

Leverage analysis will show you how to break the cycle of living paycheck to paycheck, so you can start building your financial future.

A life of financial freedom is absolutely possible, and the simple steps and strategies in this book (and the full Expectancy Wealth Planning course that the book is excerpted from) will set you on your way to freedom.

"Discover The Comprehensive Wealth Planning Process Proven Through 20+ Years Of Coaching That Will Give You Complete Confidence In Your Financial Future"

• Get a step-by-step action plan to achieve financial independence - completely personalized to you.
• How to live for fulfilment now, while building wealth for the future.
• No more procrastination. No more confusion. Just progress and clarity

Expectancy Wealth Planning will show you how to create a financial roadmap for the rest of your life and give you all of the tools you need to follow it.

Learn More...

How can you reliably profit from investing when the future is unknowable and the markets appear to be random?

How can you consistently grow your career and improve your earning capacity when office politics and industry change get in the way?

How can you reliably grow your wealth so that your financial goals are simply a question of “when”, not “if”?

The answer to all of these questions is mathematical expectancy.

(Don’t worry if you’re math-phobic because the principles are what matter – not the math – and the principles are simple to understand.)

Mathematical expectancy gives you a set of proven rules that guide your plans and actions so that you can dramatically improve both the reliability and quality of your results.

It works in investing, career planning, health, finance, and much more. In fact, it’s such a fundamental truth that it’s hard to find any aspect of your life where expectancy analysis can’t improve your results.

Mathematical expectancy is how you convert an unknowable and uncertain future into statistical confidence. It’s how you convert doubt into a predictable outcome.

When you understand how mathematical expectancy works, it will change how you play the wealth building game forever.

It’s All About Expectancy

Expectancy and the closely related principles of risk management and leverage are the three most important factors determining your future success.

In this article, I’ll explain expectancy using financial terms (since this site is “FinancialMentor”, after all), but please understand that what you’re learning is equally applicable to most other areas of your life. The financial world is just an obvious example because it can be easily quantified and proven.

That’s because all wealth is math, and there are two equations that govern how your wealth grows.

The mathematical expectancy equation determines your compound growth rate, and the future value equation determines what it will grow to, and by what date.

Related: Here’s a scientific system to build your wealth now

When you combine these two equations, you have a complete framework for understanding your wealth growth process. This applies to both your investing, and the comprehensive wealth plan that your investing fits into.

Unfortunately, most people have only a vague understanding of how expectancy works or what it means. Most people are turned off by math, so the topic is rarely discussed in the press or in bestselling business books (except my books here).

This is unfortunate. Readers are missing out, because mathematical expectancy proves that wealth planning is a rational, duplicable science that can be reduced to equations and principles that are safe and smart to use.

These equations define the scope and shape of the process by forming boundaries around the knowledge required, which then provides a clear direction for best practices.

More importantly, mathematical expectancy is particularly interesting because it converts the uncertainty of an unknowable future into a plannable process that is clear and scientific, and that has predictable outcomes.

How Expectancy and Probability Interact in the Real World

Expectancy goes by many names, including expectation, mathematical expectation, EV, average, mean value, mean, or first moment.

What it tells you is how much you can expect to make, on average, per dollar risked.

That definition clearly connects expectancy to your wealth growth, so let’s look at the formula:

Expected Value =

(Probability of Win * Average Win) – (Probability of Loss * Average Loss)

While that’s pretty straightforward, let’s make it even simpler and more intuitive by reducing it to just two variables: probability times payoff. It’s the probability of something occurring multiplied by the payoff when it occurs.

In other words, you already understand probability, which is the odds of something occurring. Everybody gets that. A fair coin has 50% odds of heads coming up on any flip.

Expectancy simply adds one more dimension by multiplying the probability of something occurring times the payoff you get when it occurs. That difference is critical.

For example, what happens if heads pays $5 and tails loses $2? And how does expectancy change when heads pays $7, but tails loses $8?

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Those questions are answered by expectancy, not probability.

So what you should notice is how probability is the odds of something occurring, but expectancy tells you the financial impact those occurrences have, and that’s where leverage and risk management come into play.

The key thing to notice is how the payoff dimension completely changes the math. It converts the already intuitive odds of something occurring into something different – something that eludes most people, because we're not trained to think in terms of two dimensions with a payoff variable.

Expectancy is the result of how much you make when you’re right, minus how much you lose when you’re wrong, multiplied by how frequently you’re right or wrong.

That net number is the average amount you expect to make each time you put your capital at risk, which determines your return on investment in your future value equation.

How To Convert Uncertainty into Opportunity!

Now that you know how expectancy determines the growth of your wealth, let’s switch gears and connect all the logic blocks I’ve shared so far into a single picture that shows you how it all fits together and ties both leverage and risk management as essential disciplines in your wealth planning strategy.

(Note: The analysis below, while complete, is a high level overview (by necessity) so that it can fit in an already too-long article. For full development of each idea and the actionable steps to apply in your wealth plan, please see the full Expectancy Wealth Planning course here.)

• Expectancy analysis is how you estimate outcomes that are uncertain. The fact that all your investments, business, and life plans are a bet on an unknowable future is, by definition, an uncertain outcome. That’s why expectancy analysis is required. It’s the scientific, reliable way to manage the risk of the unknown.

• Expectancy analysis is how you make smart financial decisions when all outcomes are uncertain. It gives you a scientific, rational way to reduce risk and maximize reward using leverage that converts unknowable outcomes into the closest thing to certainty you can get (without a crystal ball).

• The formula is really nothing more than probability times payoff. This stuff isn’t complicated, but it’s counterintuitive because we all think in terms of the odds of something occurring. Introducing payoff to the equation literally changes how you plan your investments, your life, and your financial future. Yes, it’s that important. It becomes a two-part, dynamic equation where unlikely events with very large payoffs, either negative or positive, have a disproportionately outsized influence on results.

• Disproportionate results have make-or-break impacts on the compound growth equation. The key principle of risk management is to control your plans so you can control outsized negative payoffs, commonly known as losses, from destroying your expectancy, and consequently, your wealth growth. Leverage is how you maximize the gains from your winning decisions.

• Designing your wealth plan to maximize gains through leverage while minimizing losses through risk management is how you tilt the payoff portion of the expectancy equation. If you can favorably tilt the payoff portion of the equation enough, then you can still profit even if you lose more often than you win. That’s how you create reliable profits out of unreliable, unpredictable future outcomes.

• Seek large, positive investment returns using leverage so you can win big when you succeed; but learn how to control risk for adverse losses during the inevitable failures by using risk management strategies. When you shoot for large positive outcomes when you’re right, while controlling risk to small negative outcomes when you’re wrong, you effectively tilt the expectancy equation to result in wealth (financial wealth, life “wealth,” time “wealth”). It’s literally as simple as that. Of course, the devil is in the details, which is what I explain in The Leverage Equation book. Your overriding goal for leverage is to tilt the payoff dimension of the expectancy equation, which is the dimension you have the most control over.

• Understanding all the implications of expectancy, and mastering the required skills of leverage and risk management as implied by expectancy analysis, are central to your success in all aspects of life, including money. It’s the single best way to take back control of your financial life from all the uncertainty inherent in putting capital at risk in an unknowable future.

I’m sure that’s a mouthful if you’re not familiar with these ideas. Again, the full course and the leverage book excerpted from that course develop these ideas fully.

However, I wanted to give you a step-by-step flow of how the logic connects – from uncertainty about an unknowable future to risk management and leverage strategies that control losses and maximize gains, thus tilting the payoff part of the equation to result in positive expectancy, or wealth growth.

Again, here’s the equation:

Expected Value =

(Probability of Win * Average Win) – (Probability of Loss * Average Loss)

Manage Your Payoff To Master Your Wealth Growth

The counterintuitive realization is that disproportionate payoffs can make you rich if you maximize gains through leverage when you’re right and manage the risk tightly when you’re wrong.

Even if you’re wrong 9 times out of 10, or even 99 times out of 100, you can still profit by tilting the payoff portion of the equation. This is how you can reliably achieve your financial goals when facing an uncertain future.

Related: How to be a pro at growing your wealth

(In case you’re skimming, please stop and really think about the above paragraph before reading on. The implications are a complete game-changer to all of your life plans – financial and personal – when fully understood. The importance can’t be overstated.)

Equally as important, you’ll want to realize how a strategy that produces mostly winning outcomes can still be a loser with negative expectancy if the average loss is larger than the average win. In fact, many investing strategies are notorious for that problem.

The Trap of Needing to Win

But focusing on payoff is counterintuitive to most people because it’s not how we’re trained to think. I believe it’s a major reason that wealth eludes most people. We all have a natural bias toward winning with high reliability.

You want to be right. It feels good to win, and nobody likes to lose. We’re taught in school that high accuracy gets an A, and mediocre accuracy equals failure. Nothing below 70% correct is even acceptable, which is absurd. Even worse, many people mistakenly view failure as a measure of self-worth.

Everyone is looking for high reliability because we’re trained to think in terms of probability, but the percentage of winners versus losers is not the most important factor to your financial success, and it’s the thing you have the least control over.

The real key to expectancy is how you control losses and maximize gains – through risk management and leverage.

It’s irrational to focus on winning versus losing because, as I said earlier, the future is uncertain, so it’s not really within your control.

You should always try your best to win, but the reality is: if you play the game, losses are inevitable. It’s just a fact of life when the future is unknowable.

For example, I lose all the time. It’s a regular part of every week of my life. I never really get used to it because I’m human like everyone else, but I’ve trained myself to accept that putting capital at risk into an unknowable future means that losing is an inevitable part of the investment process, and I have to accept that.

Related: How to make more from your investing by risking less

But payoffs are different. I actively manage my payoffs because that’s the part of the equation that’s controllable; and fortunately, the math is clear: if you do a good job of controlling losses, you can get rich relatively easily. It’s just a question of sample size.

The bottom line is: successful wealth builders are fine with losing more often than they’d like, but they’re very attached to the relative size of those wins and losses because that’s what’s most important to your financial outcome in life.

Think of risk management as the defensive half of your wealth plan to tilt payoff in the expectancy equation, and think of leverage as the offensive half of your wealth plan to tilt payoff. They each tilt payoff favorably, but in opposite directions.

When you put both leverage and risk management together in your wealth plan, the net effect is to radically tilt your payoff to such an extreme degree that your success becomes a matter of sample size. It’s not a question of if; it’s a question of when. All you have to do is implement both disciplines with persistence.

• Get the full Leverage Equation book now!: Nobody builds wealth without leverage. You either master leverage or you'll work harder than you should to earn less than you could.
• Leverage – How to Fast-Track Your Financial Goals: You can achieve any goal faster, more safely, and with less effort by using this leverage system. Find out how it works…
• Reduce Your Risk by Increasing Leverage – 5 Uncommon Strategies: You probably think of financial leverage like mortgage financing and debt when you think of leverage. Surprisingly, that's only one type of leverage. The other five types of leverage reduce risk while increasing return. Learn how…

In Summary

Mathematical Expectancy can be somewhat counterintuitive because most people are conditioned to think in terms of probability, not expectancy.

Expectancy is probability times payoff, and adding that payoff component to the equation changes everything.

Your wealth compounds according to expectancy, not probability. Introducing the payoff component to the equation emphasizes the essential role that risk management and leverage both play in your wealth growth.

Risk management minimizes losses, and leverage maximizes gains. Together, they can create positive expectancy and wealth growth even if you lose far more often than you win (low probability of success).

Payoff is particularly important because the future is unknowable, so controlling probability is difficult. You can guesstimate probability, but it’s ultimately unknowable. However, you can control payoff.

Smart wealth builders focus on those things they can control so they can produce a predictably profitable outcome regardless of circumstances. Mathematical expectancy gives you the framework to achieve that objective, and leverage is the tool that you use to create large wins, thus tilting the payoff equation to create positive expectancy.

If you found this analysis interesting, then the low-risk next step is to purchase a copy of The Leverage Equation book so you can learn how to apply expectancy analysis to produce large wins. The price of the book is small, but the value of the information makes it a no-brainer risk-versus-reward investment.

Additionally, if you can see the importance of this strategy to all your future plans, then consider leveling up to the full Expectancy Wealth Planning course that The Leverage Equation (and this article) were excerpted from.

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Click here to download the transcript of Chris's best tips for FIRE!

I love sharing FIRE case studies to inspire you.

They prove the dream really is achievable for normal people with no extraordinary financial skills.

They also unmask the dream to show how the reality of financial independence and early retirement differ from your idealized vision.

The truth is everyone hits potholes, makes mistakes, and questions if it's worth all the hard work.

Our guest, Chris Mamula, is no different.

He candidly shares his FIRE story in this interview – warts, blemishes, and victories as well.

Related: How to be a pro at growing your wealth

Despite several costly errors he managed to achieve financial freedom in just 5 years.

• Chris paid excessive fees to a financial advisor
• He bought a variable annuity within a 401(k)
• He felt “less than” when comparing himself to other FIRE success stories
• But he got several critical factors right like keeping expenses low and saving a high percentage of his income, and that proved to be good enough.

Financial freedom isn't about luck, brains, or a single great investment. It's about having a valid plan based on proven principles and taking sufficient action with enough persistence to reach the goal (exactly as taught in my Expectancy Wealth Planning course here).

Anyone can do it, and these case studies prove it.

I hope you enjoy the example Chris has shared.

And if you got great value from Chris's story then please check out the other FIRE success case studies on this podcast.

In this episode you'll discover:

• What inspired Chris and his wife to become financially independent
• Why Chris is so debt-adverse, and how it worked to his advantage
• How Chris adopted the term “dirt bag millionaire”
• The important role values play for achieving financial independence (they matter way more than you think)
• Chris's personal definition of financial independence
• How the 25x Rule, Rule of 300 and 400, and 4% Rule can give you a rough benchmark of how much money to aim for in retirement
• The mistake that occurs when you get overly focused on retiring early
• How to balance spending now versus saving for the future
• What Chris did once he realized how unhappy he had become on this journey
• How to avoid the insidious trap of “I'll be happy when I'm retired”
• The benefits of continued work after financial independence
• How to redefine what early retirement and financial independence mean, and why it matters
• Abundance versus scarcity in early retirement
• How Chris's plan reflects the “new retirement“
• The surprising reason why most people pursuing financial independence will continue to work
• Risk management for early retirement
• The key to understanding mathematical expectancy
• Why it's paramount to become your own financial expert, lest you get taken for a ride by your financial advisor
• The danger of financial advisor fees. Chris was paying over $8,000 every year!
• The tax consequences Chris and his wife faced for not doing their due diligence quickly enough
• Why it might make sense to select a fee-only financial advisor instead of one paid via commissions
• How the pursuit of financial independence changes your thinking at a fundamental level
• Why learning to be happy and present is the key
• The resources that were most helpful to Chris for investing without any prior knowledge
• Other sources of income that Chris and his wife are looking into
• Why Chris doesn't feel like he really paid a price to become financially free
• How living in alignment with your values creates happiness
• and much more….

Resources and Links Mentioned in this Session Include:

• Step 3 – Wealth Planning Course
• Can I Retire Yet? – Chris's blog
• @caniretire_yet – Follow Chris on Twitter
• Early Retirement Extreme
• Into the Wild, by Jon Krakauer
• Mr. Money Mustache // Early Retirement Police Article
• The 4% Rule, by Todd Tresidder
• Mad FIentist
• Variable Annuity Pros & Cons, by Todd Tresidder
• How Wall Street Can Legally Rip You Off – Article
• The White Coat Investor // Investment Advisors Are Not Doctors Article
• The Secret to Happiness and Why It Has Nothing to Do With Money – article
• Stock Series from JL Collins
• The Simple Path to Wealth, by Jim Collins
• Intelligent Asset Allocator, by William Bernstein
• All About Asset Allocation, by Rick Ferri
• Recommended Reading – Beginner Investing
• Coach Carson
• (Please note: some of the links above are affiliate links so if you buy a course or book using these links I will receive a little compensation. Thank you for supporting this site!)

Help Out The Show:

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If you could spare a minute to leave a review on iTunes it would mean a lot to me. Thank you so much!

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5 Free Sample Lessons

It's time to get concerned. (Ed. Note – This article was published Jan 27, 2018 – just one day after the risk-adjusted top in the stock market and before the bitcoin bubble had burst.)

It's not natural for the U.S. stock market to march relentlessly higher into extreme overvaluation with almost no volatility. It's one sided. It's abnormal.

A healthy market rotates up and down within an overall trend because there's a balance of buyers and sellers.

It's not natural for bonds to trade at negative interest rates in many parts of the world with U.S. interest rates approaching zero. It's also not natural for the yield curve to invert (hasn't happened yet, but very close) where the short end has higher interest rates than the long end.

A healthy credit market pays interest for the use of money and charges a premium for the extra risk of lending over longer periods of time.

It's not natural for people to exchange the equivalent of a new car for bits and bytes in the internet ether (otherwise known as cryptocurrency) created out of thin air by some unknown guy in the dark recesses of his computer. Nor is it natural for any sound “currency” to rise by thousands of percent in a year, or for common citizens to “mine” thousands of new “currencies” in a year to cash in on the crypto-mania.

Even worse, I can't show you what a healthy currency looks like because all currency today is “fiat” explaining the unhealthy economic backdrop that gave rise to Bitcoin (and all of these other financial bubbles) in the first place (more on that below…).

I could add real estate to this list of speculative frenzies because it certainly qualifies, but everything else is so crazy-extreme that it makes the real estate bubble pale in comparison. Obviously, that fact isn't healthy either.

Something is wrong today.

Seriously wrong.

As Warren Buffett said, “be fearful when others are greedy, and be greedy when others are fearful”.

Greed is in all the major asset classes.

It's time to be fearful.

I Didn't Want To Write This But…

This bubble bothers me more than the last three (stock market in 2000, real estate in 2007, bond market from 2013 to current).

This one is bigger, badder, and disturbingly different.

I provided written warnings to subscribers about each of the last three bubbles prior to bursting. In the past, I welcomed them as government manufactured buying opportunities for smart risk managers.

But there's something wrong with today's bubble that makes me more cautious than usual (not that asset bubbles should be “usual”, but that's the reality of the government manipulated markets we live with today).

Until now I've been passively observing the escalating overvaluation in all the major asset classes enjoying the increase in values like other investors. It's been an amazingly profitable ride.

Related: A better investment strategy than buy and hold

I even ignored the Bitcoin speculative mania as an interesting sideline – a curious, little pet-bubble if you will – until I had a disturbing realization during December as prices pushed the $20,000 per coin level that prompted this article (Yes, I've been sitting on publishing this for two months because it bothers me so much).

Something very important is happening, Bitcoin is a symptom, and the conclusion is not what you would expect. Let me explain…

How To Identify A Financial Bubble As It Peaks

I get interviewed by various media channels a couple times a week. For the past three months, every interviewer asks my opinion about Bitcoin. Also, my coaching clients and course clients are all asking me about Bitcoin.

This has only happened twice before in my career…

1. The first time was the two years leading up to the 2000 final valuation top in the U.S. stock market. Every client wanted hot stock tips for the dot-com bubble. Companies with no business model and no clients were being valued in millions. The NASDAQ sold for an insane 200 times earnings. Everybody involved in tech stocks was getting rich, and it was a “new era” because the internet was going to change all valuation rules for business (sounds a lot like the blockchain and cryptocurrency today, doesn't it?). I started getting cautious in 1998 (two years too early), sold my hedge fund investment management business to manage risk exposure, and wrote public warnings (before this site was a blog, it had a newsletter). Typical of all true manias, the emotion was so strong and the beliefs so deeply entrenched that people literally can't see the obvious. In this case, the canary in the coal mine was when one of my early coaching clients, who built his fortune in tech stocks, fired me in frustrated anger when I had the gall to advocate risk management to preserve his fortune in preparation for the bubble bursting. He believed tech stocks were in their infancy and disliked my message, so he killed the messenger. Unfortunately, he suffered life-changing losses when the bubble burst.
2. The second time it happened was during the two years leading up to the 2007 top in the U.S. real estate market. Every new coaching client wanted to get rich in real estate. People were so blinded by the consistency and reliability of the gains that the conventional wisdom was that real estate never went down. Seriously! Nobody believes that today, but that was investment truth back then. My wake up call for that bubble was when tenants for my C-class apartment buildings with credit history so bad they didn't even qualify to rent a $600 per month apartment were buying $300,000 houses with no down payment loans (they were called “liar loans” back then). I began the process of liquidating all of my investment real estate in 2005 to manage risk and it took 2 years to unwind the portfolio before the eventual decline. The canary in the coal mine demonstrating the emotion driven blindness of the time was when I was publicly ridiculed for my decision to sell and pay the taxes rather than 1031 the gains to newer, bigger properties. I'll never forget the verbal abuse by certain real estate professionals calling me “stupid” with one in particular so emotional that he was yelling at me with spittle coming out of his mouth. The subsequent decline cost many of his clients their entire life savings.

The Bubble Du Jour

I share those stories so you can see what investment bubbles look like as they occur and how people invested in those bubbles emotionally react to warning signs of problems when the bubble is in late stages. The setup in order of occurrence has been:

1. Extreme overvaluation sets up the condition for extreme downside risk.
2. Next, a speculative mania causes a final price acceleration phase resulting in an emotional peak as participants get rich. This attracts media attention and crowd psychology results.
3. Third, participants who are financially committed to the bubble become emotionally irrational and aggressive to contrary opinion.
4. And finally, certain technical indicators break down (specifics depend on the market that has bubbled), signaling the decline has begun.

I have been getting progressively more cautious over the past few years based on cycling overvaluation extremes in different markets (since all the major markets except commodities are overvalued now), but I've continued to dance while the music played because the other three warning signs weren't in place… yet.

My first word of caution came via this post announcing the bond market bubble back in early 2013. I declared in that post there was no positive mathematical expectancy (net of inflation) remaining in the bond market, and that the only sensible decision from an expectancy investing framework was to exit the asset class. While some embraced the idea, others ridiculed it because it violated firmly held tenets of asset allocation/diversification. They were blind to reality, even though the math behind the conclusions was obvious, provable, and has stood the test of time.

Overall, the response to that article was muted. The negative comments were rational indicating no emotional extreme had been reached even though the math was unequivocal. Subsequent market movement have proven the thesis (so far) with interest rates remaining today in the range where they were back on publication date, supporting the best case scenario conclusion in the article (so far) and proving investors would have been better off to reallocate to competing assets and away from bonds.

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The longevity and depth of this credit market bubble reaching a 5000 year extreme is the key to understanding why all asset classes are at a price extreme now. The credit boom is what's driving the equity and real estate booms because investors are forced to chase risk assets in search of yield, resulting in risk being mis-priced.

That's why the stock market has continued marching to new all-time highs with the most amazing, record low volatility. As of this writing, the only time the U.S. market has been more overvalued as measured by the CAPE ratio is the narrow window of months preceding the final 2000 top. Other measures of valuation besides CAPE are reaching new all-time highs. Worse yet, valuation levels lower than today's comprise a Who's Who of the worst times to invest in stocks.

Not only that, bonds, as already stated, are in uncharted territory after years of ZIRP (zero percent interest rate policy). This is important because conventional asset allocation relies on bonds moving opposite to stocks during a decline as the Fed lowers interest rates in the face of economic turmoil, but that may be difficult to achieve from the currently low interest rates.

Additionally, real estate has risen to extreme bubble valuations (but remains beneath the 2006-2007 record valuations).

Finally, commodities are hitting record low valuations relative to equities. This is also extreme, and rare, but in the opposite direction of all the other asset classes.

The point is that all major asset classes are at (or near) an extreme in valuation at the same time. That's important.

Three Ways To Value Any Asset

To understand the implications of that statement, let's first establish a common base of understanding by looking at the three ways to value any asset:

1. The Greater Fool Theory: In real estate they call it “comparable sales”, and in paper assets like stocks and bonds it's the most recent transaction. The implication is the current market price represents fair market value because it's the price willing buyers and sellers are trading at. The problem is it's absolutely useless for indicating bubbles because it really only tells you what other fools are willing to pay for something.
2. Assets: In real estate this would be replacement cost analysis, or how much it would cost to rebuild the structure net of depreciation. In stocks it's book value or Q-ratio as a measure of the underlying assets per share. This is a very important measure of risk because it tells you the premium or discount you're paying relative to what the underlying asset is worth. Extreme premiums are associated with periods of irrational exuberance delivering high risk, and extreme discounts are associated with periods of fear, lower risk, and higher subsequent investment returns.
3. Income: In real estate income it's measured as NOI (net operating income), or in retail residential it's often measured as gross rent multiplier. In the stock market it's the P/E or price earnings ratio, commonly measured through CAPE, or cyclically adjusted price earnings ratio. Income is my favorite valuation measure for indicating risk because ultimately the value of any asset is the discounted present value of its cash flows. That's fancy economic jargon for saying an asset is worth what it earns. It measures present worth based on the future benefits of ownership.

Each of these three methods separately provides a different objective measure of valuation for any asset. Interesting conclusions develop when you compare and contrast all three together.

Related: The science of investment strategy – simplified!

There are two key points to keep in mind with valuation analysis:

1. Extremes in valuation provide the most information value. Strong statistical significance occurs that effects mathematical expectancy at valuation extremes (like today).
2. The second important point is that price and investment value are two separate and distinct things that should never be confused. Failure to make this distinction will eventually cost you money.

Despite academic rumblings about Efficient Market Hypothesis and other theoretical frameworks supporting buy and hold philosophy, statistically valid investment opportunity occurs when price and investment value diverge in an extreme way. This has occurred at selected times throughout history, and more importantly (and the reason for this article) is occurring again now.

Today's Investment Bubble Revisited

And so that long-winded analysis of valuation methods sets the context for understanding our current asset bubble.

I safely call it an asset bubble because none of the major assets classes (stocks, bonds, real estate) make any investment sense when judged against the only two valuation criteria that matter – assets and income – as described above. They're all priced at or near an extreme risk premium relative to both underlying assets and income, implying several important conclusions:

1. Expected returns over 7-15 years will be lower and more volatile than historical averages. That's politically correct language for saying something unthinkable to the buy and hold crowd. We have entered a period where the risk of owning the U.S. stock market over the next 7-15 years does not justify the reward over the same time period.
2. The only thing supporting the current bull market in the major asset classes is momentum and “Greater Fool Theory” valuation metrics as described above. As long as momentum prevails the market can still rise dramatically over the short term. Momentum is a powerful force. However, mean reversion assures that all short term gains between now and the final top will be given back abruptly… and then some.
3. A smart investor should be on the lookout for the remaining bubble conditions (as described above) to be satisfied, thus indicating the final turning point because valuation and anecdotal evidence are very blunt-edged tools that can be wrong by years. Overvaluation is a necessary precursor for a bubble, but it's not sufficient. Notice how each of the previous bubble top descriptions in 2000 and 2007 discussed a 2 year window. The same is true with this analysis.

So while item 1 states unequivocally that we've already entered an unfavorable intermediate term investment horizon of 7-15 years, items 2 and 3 tells us the short term remains indeterminate until the remaining factors narrow the time window.

Stated another way, we are close to the end of this historic bull run resulting in an asset bubble of epic proportions that will ultimately result in life-changing losses to investors, but certain puzzle pieces have been missing… until recently.

The window is getting much closer to closing…

There Was No Mania… Until Now

The most disconcerting aspect of this entire bubble has been how calm it is. That's not how bubbles blow up.

Most bubbles finish off the overvaluation phase with a rapid price acceleration phase that causes sudden riches for investors, resulting in mass media attention and a polarization of public opinion. However, this final acceleration phase usually begins from lower valuation levels than we have today and usually occurs in a single market, not all major markets simultaneously. It's where all the symptoms of excess appear.

In other words, even though all three major markets have relentlessly marched to record price highs (and record low yields) creating historic overvaluation, there's been no clear indication of a speculative fever to create a vacuum underneath prices resulting in a collapse. Instead, there's record low volatility, no animal spirits, no asymptotic growth curves, no crazy stories of sudden riches. In short, until recently we've seen none of the circumstantial evidence supporting insane animal spirits taking over the market in a fit of speculative greed.

Related: The inconvenient truth about buy & hold

Every bull market top has its poster child of irrational exuberance where proven economic common sense was tossed out the window because “this time is different”.

• The 73-74 bull market had the “Nifty Fifty”
• The 2000 top was marked by the dotcom bubble and the internet revolution
• The 2007 top had insane real estate valuations supported by a belief that real estate never went down.

Which brings us full circle to today – Bitcoin – and the reason for this article warning you that we've finally entered the window of time to take risk management seriously.

BitCoin Fulfills The Speculative Mania Criteria

There is a long history of bubbles being marked by the issuance of a new “type of currency” that catches public imagination resulting in feverish trading.

• John Law issued shares of the Mississippi company (see Wikipedia article for “new currency” parallels)
• Dutch Tulip-Mania (see Wikipedia for parallels including futures trading to capitalize on speculative fever when underlying transactions were difficult similar to Bitcoin today).

Bitcoin has delivered one of the key indicators of important market tops – an irrational, speculative fever based on “this time is different”.

• Bitcoin has an asymptotic price climb.
• Stories abound of ordinary people getting instant riches from Bitcoin.
• Bitcoin is everywhere in the financial press. I can't be interviewed without being asked my opinion about it. My friends and clients are all asking about it.
• Bitcoin completely fails the two primary valuation criteria listed above for analyzing an investment – it has no intrinsic value, and it yields no income.
• Therefore Bitcoin is purely a speculation and not an investment, just as Tulip Bulbs and Mississippi shares were in years gone by. It could go to a million per coin, or it could go to zero. There is no intrinsic value except what human minds decide to give it.
• Bitcoin is rallying under the “this time is different” moniker. It's a new currency, free from government manipulation, limited in supply, and part of the digital revolution. It's different this time, because every bubble is always different every time.

But there's one problem with this analysis…

The important overvaluation we need to worry about is in stocks, bonds, and real estate; however, the bubble has occurred in a totally unrelated market – cryptocurrency.

That difference bothers me.

If the collapse were to occur in stocks, then the normal order of events should be to inflate the bubble in stocks to set up the vacuum under prices for the ensuing decline. That hasn't occurred yet, which makes this particular bubble so disconcerting.

In other words, you have bubble valuations in stocks, bonds, and real estate right now (February 2018), but no final price acceleration phase that polarizes public emotion. The extreme overvaluation level sets up the necessary condition for the subsequent price collapse, but historically that hasn't been sufficient alone. Also, the fact that all three markets are extremely overvalued at the same time is unusual and risky.

The point is there's usually an acceleration phase and public mania in the market that collapses. We've seen it in Bitcoin, but not in the other major markets.

What Scares Me About Bitcoin

I believe Bitcoin is a symptom of the real problem. It won't be the cause.

Let me be clear. I believe the blockchain is 100% the revolution that proponents claim it will be. It's going to change life in ways we can hardly imagine, just as the internet was 100% the revolution it was claimed to be back in the 1990's. That part of this story is likely real.

But just as investors in the dotcom bubble got wiped out despite the internet fulfilling its destiny, investors in the cryptocurrency bubble will face a similar fate despite blockchain fulfilling its destiny.

Related: Better investing through process, not product

So the scary part is not the cryptocurrency bubble. That's too small, too obvious, and too disconnected from important economic fundamentals to be anything more than an interesting distraction.

What worries me is the premise that's driving the cryptocurrency bubble. It's anti-government. The speculative fever is driven by the masses distrusting all government economic manipulation and fiat currency. If you aren't clear about this premise then just try to imagine Bitcoin gaining speculative interest in a hard currency world backed by gold where no inflation existed, a dollar would have the same buying power 3 generations from now as it has today, governments balanced their budgets, and there was no looming debt crisis. When you wrap your head around this strange world order you realize there'd be no crypto-mania because there would be no problem for cyptocurrency to solve.

Stated another way, the string of financial asset bubbles over the past 20 years all owe their underpinnings to fiat currency and government policy manipulation in the economy. The current cryptocurrency bubble is the most overt example.

The fact that the current bubble-du-jour is a new age currency outside of government policy delivers a disturbingly poetic reference to all that is economically wrong today with government policy and the resulting mass psychology driving the animal spirits.

In a perverse way, Bitcoin has become a positive bet against continued government success at fabricating stable economic growth through financial manipulation.

I say perverse because the normal loss-of-faith bet would be to sell risk assets and/or the domestic currency itself (the dollar).

But today's speculative bubble is so persistent and pervasive across all asset classes that it managed to create a new “long” speculative bubble that's essentially a “short” position against all the other speculative bubbles happening at the same time.

Worse yet, the public “gets it”. Disbelief in our fiat financial system is now so widespread that it resulted in an anti-government speculative fever among the masses.

Meanwhile, risk assets relentlessly march to new highs like lemmings to the sea.

I've never seen anything like it. This time really is different (sort of). But in all the wrong ways.

And now the dollar is finally breaking down, which is what you would normally expect for this emotional back-drop.

Not good…

The Other Missing Ingredient

Another aspect of bubbles that I've learned to expect is being personally attacked near the top for advocating contrary opinions that include prudent risk management. It has happened every time and marks the emotional peak where public opinion is so one-sided that the idea of managing risk invokes an emotional, irrational response. Until a few weeks ago it was missing from this bubble, but that changed as well…

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I was recently interviewed for a podcast (not listing the name because nothing is gained from pointing fingers) targeted at the FIRE (financial independence retire early) community. In that episode I pointed out how the conventional investment approach to FI (low cost passive index asset allocation in paper assets) lacked adequate investment risk management for the current market environment.

Surprisingly, it was the most controversial and polarizing interview in the show's history, garnering more comments in the Facebook discussion group than any other show. Listeners either loved it, declaring it the best episode yet, or they hated it. I was called a “scum bag”, my professional reputation was questioned, and I was personally attacked. People were so emotional that several said they had a hard time listening and others commented how it was “a sucker punch to the gut”.

Seriously? It's an audio interview where I discussed financial topics including risk management. What gives?

I've been on 200 podcasts and never got a reaction like that. The normal response is listeners appreciate an interesting conversation where different ideas are shared. It's just a conversation.

However, this interview was different because I made a crucial mistake. I failed to reconcile the fact that the market had reached an extreme overvaluation, thus polarizing sentiment with the fact that this community was fully invested in this bull market with no serious risk management discipline. Their own survey shows the vast majority hold 90% (or more) of their assets in stocks. Many have recently gained early financial independence, or expect to retire soon, based on their stock portfolios.

In hindsight it's obvious they'd respond emotionally and aggressively to alternative viewpoints! Dohh! Their financial security and future life plans depend on buy and hold working in the future like it has in the past.

As it turned out, this polarized emotional response was identical to other market tops where in 1999, my coaching client that made his fortune in tech stocks got aggressive and fired me because I advocated risk management to protect his fortune. And the real estate pros in 2006 cussed me out and called me “stupid” for cashing out all of my investment real estate and paying taxes to manage the downside risk. In each situation these people were invested. Their financial security is dependent on the bubble du jour continuing.

That makes their emotional response a key contrary indicator.

The Final Missing Ingredient

And so that leaves us with everything in place (almost) for a historic, final market top of epic proportions (measured in terms of a decade, or longer), except for two things…

1. 1. We have extreme overvaluation. (Worse yet, the overvaluation is in all major asset classes at the same time, except commodities, which are the polar opposite.)
   2. We have a speculative mania that has captured mass psychology. (Worse yet, this speculative mania is anti-currency and anti-government, implying loss of confidence in the system that supports the bubbles in all the other asset classes.)
   3. We have an emotional peak demonstrated by aggressive behavior to contrary opinion advocating risk management.
   4. ?????

But there are still two things missing to make this analysis rock solid.

The first factor missing is for the major markets to actually break down.

Analyzing the “break down” is beyond the scope of this already-too-long article because it encompasses market internal indicators like credit spreads, divergences between equity indices, yield curves, investor sentiment, price momentum, quality indicators, economic indicators, M&A/IPO indicators, and more. However, it's worth noting that this article is being published at the beginning of February, 2018 rather than months or years ago when valuations were already high, implying the market internal indicators are getting “warmer”.

But “warm” is not “rolled over” yet, so until various internal indicators fail, we still lack clear evidence of momentum failure. That means the animal spirits remain in control. The clock is ticking, but it hasn't struck midnight quite yet.

The second thing that's missing is how the acceleration phase causing sudden riches resulting in mass media attention occurred in an unrelated market – cryptocurrency. None of the major markets (stocks, bonds, real estate) have gone through the sudden price acceleration phase that typifies a final top… yet. That leaves open the possibility for that sudden acceleration phase to still occur.

However, your key takeaway should be how all the other evidence makes it clear how this party can only continue for the short term (from now to less than 2 years on the extreme high side, probably less). We're now at the point where this is a bubble looking for a pin. Any continued rise just gives further to fall, and any new gains should be rapidly reversed once the downturn begins. This party is on borrowed time, which is why I wanted to give this warning.

Yes, it's still possible for one (or more) of the major markets to run through a final price acceleration phase to cap things off, which is what would cause the longer time horizon pushing 2 years. But overvaluations are already high enough and there's enough anecdotal evidence in place that it's prudent to ring the warning bell and call in the defensive team (risk management) to protect against excessive loss.

How Risk Management Works

Risk management acts like insurance. It's a complete waste of money when there's no problem, but when disaster strikes it'll save you from suffering a life-changing loss.

You intuitively understand how this works with homeowners insurance where you hope that every renewal is a small waste of money, but when that rare fire strikes, insurance will be the only thing that saves you from financial disaster.

Smart investors who practice risk management have been renewing their policies without so much as a spark (market volatility), not to mention a fire (bear market), for years. It's been a complete waste.

That's about to change.

Nobody has a crystal ball so I can't tell you exactly when mass psychology will sober up, or if we'll go through a final acceleration phase in the major markets before they collapse, but mean reversion assures it's far closer and will be far uglier than any investor wants to endure on a buy and hold basis.

Related: Learn how to invest like Todd

There's enough evidence in place that it's prudent to get cautious. Yes, it would be normal to experience price acceleration from here first before collapsing which could extend the time frame up to a maximum of 2 years, but the breadth and depth of the overvaluation is already abnormal. This isn't just one market that's overvalued. It's all the major markets (except commodities).

And the cryptocurrency mania reaching mass consciousness is a warning of possible loss of faith in government economic policy solutions (“The Fed Put”), which is particularly worrisome because belief in omnipotent Fed policy is the only thing that's shortened each of the prior collapses resulting in ever increasing bubbles.

For these reasons, it now makes sense to err on the side of caution by getting your risk management strategies in place. Proper risk management will allow you to still participate if the party continues, but give your portfolio downside protection when the bubble bursts.

To help you I have a 100% free mini-course on investment risk management coming out in a few months. I'm working on it right now and it's my top priority. I'll announce it in this newsletter when it's ready. However, if you don't want to wait that long you can get all of that instruction (and a lot more) in my advanced wealth building course here. It will show you how to structure your portfolio to better manage risk, including extreme event risk.

While I can't explain all the risk management strategies that are possible, a few actionable ideas include:

• “Deep diversification” (where you diversify by strategy and source of return, not just asset class, by identifying sources of return that inversely correlate with the stock market)
• Diversify into certain business and real estate assets where the outcome is driven by a micro-economy
• Diversify into alternative assets
• Switch to an investment process that includes an exit discipline
• Increase allocation to cash
• Switch from high volatility, high beta assets to low volatility assets
• Diversify into favorably valued assets that might include domestic value plays, certain emerging markets, commodities, and commodity producers
• And much, much more

There are many risk management strategies to consider that can help you protect your wealth, but you can't wait until everything rolls over before you put them in place. Once the tide goes out, everyone can see who's standing naked.

The current extreme in valuation (and other anecdotal evidence) makes it clear that an equally extreme mean reversion is a fait accompli. It's only a question of “when”, not “if”. You don't have to predict the final outcome to benefit; you just have to prepare in advance.

I hope this warning (and this course) help you think through the issues so you aren't caught by surprise.

Click here to download the transcript of Brad & Jocelyn's best tips on making college affordable when you don't qualify for financial aid!

The cost of college is ridiculous.

You can give your child a top quality education or s/he can have a home free-and-clear plus retirement fully funded instead.

That trade-off doesn't make any financial sense.

Sure, I'm a huge fan of education. I believe in the importance of the college experience as a valuable launch-pad into adulthood, but the cost of college shouldn't be so outrageously high that you're literally making a decision between higher education versus a debt free home plus retirement security.

That's outrageous.

Adding insult to injury, college education is the only business that demands all your financial statements before deciding what they're going to charge you. Just imagine buying a car from a dealer who demands full disclosure of every detail of your net worth and personal finances including tax statements before deciding how much he should charge you for the car.

Absurd? Yes! But that's exactly how the college business operates.

Even worse, the system is rigged against most of my readers.

For example, some quality schools are running $70K per year for all-in costs meaning $280K total if you child graduates in 4 years, and $350K if s/he takes 5 years. Even if you round that number down to $250K to be conservative that's still $500K total if you have 2 kids. That's a big nut to swallow for anyone, even if you're reasonably successful. Only the very wealthy can afford to be cavalier about such a large number, and only the very poor qualify for enough financial aid that they don't have to worry about how to pay for college.

So the purpose of this podcast is to help you figure out how to afford the high cost of college when you don't qualify for need-based financial aid. It's a tremendously important subject because paying for college is one of the biggest financial issues you'll face – right up there with buying a home and funding retirement.

Related: Why you need a wealth plan, not a financial plan.

I invited two experts in back-to-back interviews that will share two different perspectives on how to pay for college. The goal of this podcast episode is to provide you with a complete education in college affordability for the affluent all in one podcast episode.

My first guest is Brad Baldridge, a CFP specializing in helping middle and upper-middle class families afford college.

My second guest is Jocelyn Paonita, who secured over $126,000 in scholarships to cover her tuition and graduate debt free. She will teach her complete system for getting enough scholarships to pay for college without ever borrowing a dime.

In this episode you'll discover:

• The six different categories of schools and the financial advantages and disadvantages of each.
• Why college is just a business, like any other, so you can properly assess the costs vs. benefits of different school offers.
• How you can attend certain out-of-state schools at in-state tuition rates.
• Why you have a better chance at scoring merit aid at a private school than a state school.
• The critical difference between merit and need-based aid.
• How your children can get free scholarship money even when they're not academic or athletic rockstars.
• A behind-the-scenes peek at colleges marketing strategies so you don't fall for their tricks.
• How the bottom 25% of an incoming class pays for the top 25%  of students.
• The four dimensions of paying for college.
• Brad's favorite strategies for reducing the burden of paying for college, including business and tax strategies.
• How to figure out your Expected Family Contribution (EFC)
• What you need to know about FAFSA and the CSS Profile.
• Why you must complete the FAFSA and CSS Profile even if you think you'll never qualify for need-based aid.
• How to use net price calculators that colleges must provide (and their downsides).
• How to set expectations with your child so you're not footing an enormous bill.
• The formula for how income versus assets are weighted in financial aid calculations.
• How to negotiate with schools to lower tuition or obtain better aid packages.
• Why it's important to begin this process sooner than later – as early as sophomore year in high school.
• Jocelyn's entrepreneurial strategy to pursue scholarship revenue as an alternative to a job.
• The exact system Jocelyn used to win half the scholarship applications she submitted.
• What it means to get into a “money-making mindset” before applying for scholarships.
• How to separate legitimate scholarships from all the scams.
• How to use mathematical expectancy principles to pick the most lucrative scholarships.
• The surprising reason you'll want to pursue smaller scholarships over the large ones.
• The unfortunate truth of how college financial aid offices deal with merit and need-based scholarships.
• How storytelling and structure are critically important to your college essays.
• How to use events and accomplishments to ‘sell' a story in an application.
• The 529 loophole every parents must know.
• and much more….

Resources and Links Mentioned in this Session Include:

• Step 3 – Wealth Planning Course
• Financial Aid Handbook by Stack & Vedvik
• Brad's website – Taming the High Cost of College
• EFC Calculator
• Scholarship Guide for Busy Parents
• Brad's podcast
• College Navigator
• FAFSA
• FAFSA4caster
• Jocelyn's Scholarship Systems course
• (Please note: some of the links above are affiliate links so if you buy a course or book using these links I will receive a little compensation. Thank you for supporting this site!)

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Quick – tell me the difference between a broker and a financial adviser.

If you're not really sure, then you're not alone.

Multiple studies show investors are confused – and for good reason. The formerly clear lines of demarcation have been blurred in recent years.

Both offer services that are becoming more similar than different, so why should you care?

The reason is compensation structure – how you pay for the financial advice you receive, and the conflicts of interest it causes.

How your financial adviser is compensated effects the financial advice you'll receive.

For example, back in the heady days when investment banks still called themselves investment banks, Merrill Lynch settled a $100 million dollar multi-state settlement for alleged wrongdoing and conflicts of interest regarding biased financial advice.

I mention this case not to pick on Merrill, but because it was a high profile, landmark settlement demonstrating a fundamental conflict of interest with brokerage advice.

Every year the financial periodicals report on similar problems with brokers accused of recommending stocks to the public when their firm has an investment banking relationship with the company, and recommending stocks that the analyst owns or the brokerage firm holds a large position in.

The list of wrong-doings also includes churning accounts, recommending inappropriate investment products, and much more.

“History shows that where ethics and economics come in conflict, victory is always with economics. Vested interests have never been known to have willingly divested themselves unless there was sufficient force to compel them.”– B.R. Ambedkar

The motivating cause for each ethical violation is rooted in compensation incentives. Brokerage firms wear too many hats and serve (get compensated by) multiple masters.

Related: How Your Financial Advisor is Taking 75% of Your Retirement Income (or More!) Video, PDF download, or Audio.

How can you possibly be an investment banker to a company and sell that same company's stock to your retail clients while representing your organization as an unbiased fiduciary giving impartial financial advice? Sorry, but it doesn't work that way.

It's the equivalent of your personal physician writing prescriptions for drugs while being employed by a drug wholesaler and getting paid a commission for his recommendations. Would you trust your health to a doctor with those financial incentives hiding behind his recommendations?

I doubt it, yet people do the same with their financial security every day.

I encourage you to confront every source of financial advice in your life with this question: “Is this person an adviser or a salesperson?” Nobody can be both at the same time.

If they're an adviser, then they're paid a fully disclosed, up-front fee for their time and advice. If they're a salesperson, they'll be compensated for their advice in other ways. It's just that simple.

The Business Reality Of Financial Advice

The sad reality is most investment brokers, financial planners, financial advisers, and financial consultants are euphemisms for the word “salesperson”. They're paid to either sell investment products or investment management services.

Their business model is driven by gathering client assets under their umbrella and then selling investment products. The more assets under management, the more product that gets sold. They aren't paid for the ability to make money with money even though that's the very skill you want from them. Time spent developing investment expertise is a distraction from what puts money in their pocket: selling.

In other words, your best interest isn't the same as your adviser's best interest, and there isn't a compensation structure in existence that can motivate them to care more about your money than their own.

They make money from their business, and you make money from your investments. That's a critical, fundamental difference.

“The popularity of conspiracy theories is explained by people's desire to believe that there is some group of folks who know what they're doing.”– Damon Knight

This isn't some grand conspiracy theory against the financial adviser community; it's a natural result of division of labor in business. Brokers are in the sales department and their job is to sell. Management does the managing and research does the research.

Each department's function is specialized for business efficiency. A broker is no more responsible for investment skills than a secretary is responsible for sales calls. Each cog in the wheel has its function, and the broker's function is to sell.

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This wouldn't be a problem if brokers and financial advisers represented themselves as marketing professionals with a product or service to sell, but they don't. They represent themselves as fiduciaries and investment experts, which is where the problems begin.

Anytime financial advice comes from someone with a product or service to sell, treat that advice as if it's coming from someone peddling used cars, computers, sofas, or any other product or service.

You wouldn't view a used car salesman as a fiduciary representing your interests, so why is your financial adviser any different? They're both salespeople who must get in your back pocket to fill their own back pocket.

I know that sounds harsh. There are many financial advisers furious with that statement, but it's true nonetheless. Their advice is impacted by how they get paid. It's not a grand conspiracy theory. It's the inherent nature of the business.

How Compensation Biases Your Financial Advice

The choices for compensation in the financial advice business are varied with no perfect solution. Every compensation package creates incentives that affect the quality of financial advice you receive.

Below are the four most common compensation structures and how they bias financial advice:

1. Commissioned Sales

Transaction commissions motivate the sales person to create transaction activity and to concentrate activity on high commission products.

It's all too common to hear about brokers being sued for churning accounts and selling high commission investments to their clients regardless of suitability to capitalize on graduated commission incentives.

Commissioned sales have the greatest conflict of interest of any compensation structure. The incentives created for the broker have no congruence to the client's interests and can sometimes be diametrically opposed.

“Fortunately for serious minds, a bias recognized is a bias sterilized.”– Benjamin Haydon

2. Percent of Assets Managed

An alternative pay structure for financial advice is “percent of assets” management fees. This is a superior alternative to commissions, though it's not without its own flaws.

Related: Learn how to invest like Todd

When I ran a successful hedge fund under this compensation structure, our motivation was to maximize consistency of returns rather than profits. The reason was simple: consistent returns maximizes client retention, which maximizes the investment adviser's profits.

Volatility scares clients away, even if it might put more profit in their pockets.

3. Profit Incentive Fees

Under this arrangement, the adviser is paid a percentage of profits from your account. This sounds great on the surface because the adviser is only paid when you make money, implying congruent interests. Unfortunately, that's a half-truth.

The adviser shares only in your profits, not the losses. This motivates the adviser to take greater risks in hopes of creating larger returns so he can get paid more.

Why? Because the capital he's risking is yours – not his. However, the money he's earning is both yours and his. From the adviser's standpoint, it's a risk-free return because the loss is yours to bear, but the gain is shared.

You may or may not end up with more profit, but you'll likely get more risk with this incentive structure.

4. Fee-Only Advice

Fee-only financial advisers are paid by the hour for financial advice. They shouldn't receive any other reward such as transaction commissions, residual trailer fees, or back end revenue.

Paying by the hour is probably the closest you'll come to getting financial advice that isn't biased by compensation. However, you should be aware that your financial advice will still be biased by the limitations of the adviser's experience, education, skill, and intelligence.

Examples of fee-only financial advice include fee-only financial planners and my educational coaching services. The sole motivation of a true fee-only adviser is to give you as much valuable financial advice as possible for the dollars you spend so you'll continue to purchase more services.

But beware of people who hang their hat as “fee-only” because few are truly fee-only financial advisers (watch for back-end kickbacks!). The reason is because “fee-only” isn't the most profitable business model, so few actually operate in its true form.

Related: The science of investment strategy – simplified!

In fact, that was one of the challenges I faced in becoming a financial coach. I could make more money if I sold financial products or managed money directly, but I believe the client is best served by separating the financial advice function from the investment product sales function.

“Reality leaves a lot to the imagination.”– John Lennon

In short, there's no perfect solution that motivates your adviser to stand in your shoes and want what you want with your money.

There's no compensation structure that can make someone else care about your money more than his own. I know that isn't what you want to hear, but reality is reality regardless of our desires.

More Evidence Against Biased Financial Advice

In case you might be thinking I'm Chicken Little claiming the investment adviser sky is falling, let me present you with a random selection of quotes from numerous investment periodicals.

The conflicts of interest inherent in financial advice are well-known by industry insiders. Only the investing public is generally in the dark on this issue.

For example, Smart Money magazine published an article titled “Ten Things Your Financial Planner Won't Tell You”, by Oluwasanmi. Below I'll quote several interesting points regarding biased financial advice taken directly from the article.

“Anyone can hang out a shingle and call himself a financial planner: there's no required training or experience.”

“‘The bulk of people who market themselves as financial advisers are salespeople,' says Consumer Federation of America's director of investment protection, Barbara Roper.”

“When Irvine, Calif.-based CFP Scott Dauenhauer worked as an adviser at a few big name brokerage firms during the 90's, he says he was constantly being pushed into selling the firms proprietary and often poorly performing mutual funds, variable annuities or wrap accounts. ‘We got pressured to sell them because the pay out was higher,' says Dauenhauer.”

“A 1997 survey by National Association of Personal Financial Advisers and the Consumer Federation found that three out of five ‘fee only' planners actually earn commissions or other financial rewards for their services.”

And if that weren't enough to convince you, Jane Bryant Quinn stated in a Newsweek article that “Financial planners who take commissions have a built-in conflict of interest – even with a disclosure, my choice would be a fee-only planner.”

“The most important matter is how the planner is compensated. Hire the planner who has no financial stake in (your) investments,” according to Forbes magazine.

Related: How to be a pro at growing your wealth

And Money magazine stated, “Start with the general practitioner – a financial planner (whose) compensation should be from fees alone.”

Bob Veres was quoted in Financial Planning magazine: “After almost 25 years in this business, I've learned that you can usually find the worst investments by looking for those that people are paid – handsomely – to sell.”

Financial Planning also ran an article by Marshall Eckblad where he stated, “Because wirehouses manufacture and sell financial products, it's hard for their brokers to claim they're agnostic.”

Again, I'm not trying to say that all financial planners and brokers are bad.

“We're all salespeople of our wares and things look a lot different from the other side of the counter.”– Unknown

There are some very good, honest people working in this conflict ridden profession trying their best to offer quality financial advice. However, you must use common sense because the conflicts and biases exist nonetheless.

It's a well-known problem inherent in the nature of the money management business.

Five Rules To Maximize The Value You Receive From Biased Financial Advice

Since nearly all financial advice is biased, then what's a person to do?

How do you still extract value in a world of conflicted communication?

Below are several tips to sort good financial advice from the bad and the useless:

1. Understand the Incentives Hiding Behind the Financial Advice

If the source stands to profit from the investment advice offered, then trash the information because it's likely one-sided and unreliable.

2. Never Confuse Facts With Opinions in the Financial Advice You Receive

Facts are hard data and numbers. They're true and knowable right now.

Opinions are the interpretations of those facts.

Opinions are useless clutter that cloud investment decisions.

Facts are what matter.

The salesman will blend the two together.

Your job is to extract the few facts from the myriad of opinions and disregard the rest.

3. Not All Financial Advice is Created Equal

You must know the adviser's background, education, training, skill, and experience to decide if his advice has merit.

“If stock market experts were so expert, they would be buying stock, not selling advice.”– Norman Augustine

For example, a hedge fund manager who has completed many years of independent research with twenty years of real-time trading experience will provide higher quality advice from a better experience base than a business school graduate trained in product sales by a brokerage firm.

The sad reality is most financial advisers are trained by their parent company to promote the party line. Seldom do they know enough beyond official policy to question the validity of company dogma.

Related: How to take back control of your portfolio

The result is they speak the company doctrine as if it were truth. In fact, they often believe it is truth.

They aren't bad people; they're just misinformed and don't know enough to know what they don't know.

You can't understand a person's financial advice until you know the shoes they're standing in. Their experience and training colors their advice.

There are several levels of knowledge in the financial advice business, and the unfortunate reality is the bulk of retail financial advice comes from the ground level where too many financial advisers dwell. You want top floor financial advice.

4. You Can't Understand a Person's Financial Advice Until You Know How Their Pockets Are Lined

Again, compensation creates incentives that affects the quality and bias built into the financial advice you receive.

Ask your adviser to disclose every single way he can make money from your money – exclude no revenue stream, no matter how small.

Will he make more if you invest more? Are there back-end kickbacks that you never see because they don't appear on any of your financial statements, such as 12B-1 fees and internal brokerage incentives?

5. Utilize Financial Product Salespeople as Information Gathering Tools Only

Financial salespeople are good for introducing investment products that can be used in your portfolio.

When they pitch you on their favorite “tools” it should be the beginning of an educational process, but you should never invest based on the opinions of these salespeople. Instead, separate the investment advice function from the investment execution function and pay for them separately to minimize conflicts of interest.

The bottom line is everything a financial product salesperson tells you should be taken with a grain of salt. Never invest based solely on their recommendations without completing your own due diligence and forming your own opinion based solely on facts.

Remember, there's no such thing as free financial advice. One way or another, you pay.

Whether it's upfront in fees, behind-the-scenes in commissions and kickbacks, or down the road in poor investment decisions that cost you far more than quality financial advice ever would have cost in the first place, you're going to pay the price for your advice.

True financial advice is paid for directly by you, and not by the company offering the financial products you buy.

True financial advice results from paying a disclosed fee for a service rather than having the fees embedded in the product for sale.

It's your money. You're responsible, and you're the only one that has to live with the results.

Nobody cares about your financial future more than you.

And that's financial advice you can depend on.

If you think the expert financial advice you receive is unbiased then I have a swamp to sell you in Florida.

You can't understand the advice you're given until you know how the person is compensated and what inherent biases or beliefs taint that advice.

The problem is most people don't understand the many problems inherent in the financial advice business. They naively trust in experts.

They're not aware of the bias caused by the advisor's current portfolio positions, or his need to sell products and services, or any other self-interests that might make his expert advice less than impartial.

Instead, most people follow the investment media and listen to professionals with the mistaken belief that expertise somehow ensures good results.

It doesn't.

The truth is there are a lot of underlying problems making your financial expert's advice less reliable than you'd like to believe:

1. Expert advice is plagued with conflicts of interest
2. Expert advice is often incomplete or inaccurate
3. Expert advice can limit independent thinking
4. Experts can be dishonest
5. Experts can be self-deceived
6. The whole idea of an investment expert is incongruent with the probabilistic nature of investing.

“An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today.”– Laurence J. Peter

In this article I'll explain the exact reasons why there's no real alternative to becoming your own financial expert.

Yes, investing is complex, and it takes work to become your own financial authority, but there's no other choice if freedom and financial security are your goals.

The alternative (trusting financial experts) has too many inherent flaws to justify risking your financial future.

Truth #1: Financial Experts Provide Incomplete Or Inaccurate Advice

Webster's dictionary defines an expert as:

“a person with a high degree of skill or knowledge about a certain subject, or one demonstrating great skill, dexterity, or knowledge as a result of experience or training.”

We intuitively believe an expert should excel in his specialized field and provide greater results than an amateur.

However, research study after research study proves the opposite is true.

For example, on New Year's Day in 2002, the venerable Wall Street Journal published its annual survey of economists for the upcoming year. Despite the fact that the economy had already been weak for nearly a year, not one of the 55 economists believed a serious decline was ahead.

Every single one of them was wrong – 55 out of 55 experts – a 100% failure rate. Even a PhD provides zero immunity from the fallacy of expert opinion.

“An expert is a person who has made all the mistakes that can be made in a very narrow field.”– Niels Bohr

This is just one of many studies documenting the failure of expert opinion.

You can also find numerous studies published showing the under-performance of professionally managed mutual funds compared to their passive index cousins. What that means is the stock picking experts running these funds have failed to show superior performance net of fees and expenses.

Related: The inconvenient truth about buy & hold

I've documented many other studies showing the failure of financial experts in this post here. There's no shortage of research proving the fallibility of expert financial opinion.

Not only are experts fallible, but much of the financial advice they offer is incomplete.

For example, the next time a talking head on CNBC tells you to buy his latest stock pick, make sure to ask yourself:

• How will you know when to sell if things don't work out?
• How are you going to know when he's wrong?
• When should you add to the position if he's right?
• How much of your portfolio should you allocate to his great stock pick?
• What investment goals and risk tolerances are compatible with his recommended advice?

Did he cover all that during his 60 second sound-bite where he touted his latest and greatest stock advice? I didn't think so.

Telling you what to buy or when to buy is only one small piece of the investment equation.

For a complete method to assessing the quality of investment advice, see this article. It provides a complete solution to the problem of incomplete investment advice.

Truth #2: Financial Experts Have Conflicts Of Interest

Not only do you run the risk of receiving incomplete or inaccurate financial advice from experts, but the advice is often tainted by hidden financial incentives, causing a conflict of interest.

Always remember that you can't judge the quality of an expert's advice until you know the financial incentives hiding behind that advice. Consider the following questions:

1. Does the advisor personally have a position in the security recommended?
2. Does the advisory firm have a business relationship with the company recommended?
3. Has the advisor been taught and trained by a firm with financial incentives to promote certain investment products?
4. Does the advisor make more if you buy that security than competing, comparable securities?
5. The list goes on and on…

The history of the conflict of interest in financial advice is documented with numerous examples because the economic incentive to deceive is so high. Every month, new allegations of hidden incentives biasing investment advice emerge.

One high profile case from the past is Dan Dorfman leaving his reporter job at Money magazine and CNBC after unproven allegations of behind the scenes kickbacks for promoting stock stories in the media.

Another high profile case was the Merrill Lynch $100 million dollar, multi-state settlement for alleged wrongdoing regarding conflicts of interest between the investment advice they gave brokerage clients and their investment banking relationships with the companies they promoted.

“The biases the media has are much bigger than conservative or liberal. They're about getting ratings, about making money, about doing stories that are easy to cover.”– Al Franken

I mention these two cases not to pick on Merrill Lynch or Dorfman because these are just two examples of many similar cases.

Instead, I chose these two because they were both high profile examples demonstrating how no expert resource is too big or trustworthy to be free of bias and conflicts of interest.

Related: How to be a pro at growing your wealth

If a nationally syndicated columnist and a top investment bank can't be trusted, then who can you trust?

If you think the answer is your neighborhood broker, then look more carefully.

Every year the financial periodicals report similar problems with local brokers accused of recommending stocks to the public. This is because their firm has an investment banking relationship with the company and they're recommending stocks that the analyst owns or the brokerage firm holds a large position in.

The list of wrong-doings by neighborhood brokers includes churning accounts, recommending inappropriate investment products, promoting high-cost products that generate fees when low cost products perform just as well, and much more.

For a complete analysis of the conflicts of interest in financial advice resulting from compensation incentives and how to protect yourself, see this article.

Furthermore, some conflicts of interest by financial experts aren't immediately obvious. The seemingly unbiased university professor calling for the demise of capitalism may have a hidden incentive to offer eye-catching headlines to promote his latest book to the best-seller list.

High profile economists whose paychecks are supported by banking and financial institutions may be reticent to give an honest assessment about the seriousness of the latest financial downturn and how it will affect the banking stocks.

Sometimes, the expert may not even be aware how his positive opinion about a stock is largely affected by the fact that he already owns the stock and is emotionally committed to the position. This is perhaps the most insidious type of expert bias.

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In fact, it doesn't matter how prominent the expert or their pedigree – they all have bias and conflicts of interest.

When Warren Buffett provided his calming words during the peak of the 2008 banking crisis and took out full page ads, we should remember he was reported to own 300 million shares of Wells Fargo stock.

When Bill Gross lobbied the U.S. Government in 2008 to bail out Fannie Mae and Freddie Mac, it was reported that 61% of PIMCO holdings were invested in mortgage backed securities.

Were these two high profile, well-respected experts offering their infinite wisdom for our greater good, or were they using the media to sway public opinion in an effort to defend their portfolios?

The truth is the financial services industry as a whole – which includes all banks, brokers, real estate firms, lenders, and everything in between – has a massive vested interest in maintaining your confidence in the investment system they earn their living from.

They all have products to sell and will go out of business if you no longer trust them. No matter how intelligent, educated, knowledgeable, and trustworthy they may appear, they all make a living selling you a financial product or service. They're all inherently biased, so buyer beware.

“If stock market experts were so expert, they would be buying stock, not selling advice.”– Norman Augustine

You would be wise to always ask yourself these two questions when receiving financial advice:

• “What's the motivation of the person saying this?”
• “How does he get paid?”

Ask these questions whether the source is your local broker, CNBC, an investment newsletter, financial periodical, or even this website.

Remember, you can't judge the quality of the financial advice until you know how the financial expert's pockets are lined.

Don't allow yourself to be unduly influenced by financial experts without first considering the numerous potential sources of bias and conflict of interest that might drive their public statements and actions.

To do this, you must develop some level of financial skill yourself.

Truth #3: Expert Financial Advice Reduces Your Critical Thinking

Another reason to become your own financial expert is to avoid the numbing impact of expert advice on your own critical thinking.

A recent study led by Gregory Berns and discussed in Wired, Discover, and CNN showed that when research subjects were given expert opinions, they ceased using areas of their brains associated with critical thinking.

“It's almost as if the brain stops trying to make a decision on its own,” said Berns during a CNN interview when discussing this effect. This can be extraordinarily dangerous when investing.

Related: Why you need a wealth plan, not an investment plan.

For example, during the study, college students were asked to make a financial choice between a guaranteed payment or a riskier alternative with a higher payoff.

One group was left to solve the problem on their own while the other group was given bogus advice from an expert (an authority economist counseling the Federal Reserve).

The students independently thinking for themselves reasoned the probabilities using critical thinking areas of their brains, while the group receiving “expert advice” tended to follow that advice while suppressing critical thinking. Amazing!

“A great many people think they are thinking when they are really rearranging their prejudices.”– William James

What makes this study so important is most people believe they integrate expert advice with their own critical thinking to make a well-reasoned decision, but Berns believes otherwise.

“Normally, the human brain uses a specific set of regions to figure out the trade-offs between risk and reward, but when an expert offers advice on how to make those decisions, we found that activity in these regions decreases,” said Berns.

In other words, we tend to defer to experts. This makes sense because we believe they know more than us. It would be logical if the investment advice was trustworthy. Unfortunately, for all the reasons cited in this article, that just isn't true.

Therefore, it's essential that you avoid the problem of suppressing your critical thinking and deferring to expert opinion by becoming your own financial expert. You must learn to trust your judgement and perform your own due diligence.

You must think critically. Don't blindly accept expert opinion.

Truth #4: Not All Financial Experts Are Honest

As if bias, inaccuracy, and conflicts of interest weren't enough, we must also consider the potential for outright dishonesty by financial experts. As much as we would like to believe otherwise, not all people are honest – experts included.

That's not to say everyone is dishonest, either. We're not alarmists here at Financial Mentor. However, you can't blindly trust someone because they're famous, wear a suit, work for a reputable firm, or appear trustworthy for any reason whatsoever.

You must rely on your own expertise by completing your due diligence and investigating further.

For example, wholeadvice.com did their own due diligence on Pittsburgh's top advisors as list in Barron's annual roundup of the nation's top 1,000 financial advisors.

You would think a reputable publication like Barron's would include only reputable advisors in a “Top 1000” list.

Well, Wholeadvice.com's due diligence found some advisors from this list with multiple customer dispute claims, including one for losses of more than $600,000 and another for misrepresentation.

These are the nations top financial advisors? Would you trust your money to them?

Many people do because they never completed their own due diligence so they have no idea what problems exist.

Another self-proclaimed financial expert, John T. Reed, who isn't without his own share of controversy, has assembled an interesting list of real estate experts that I'll partially excerpt here to further illustrate why you must always do your own due diligence before trusting expert financial advice.

Related: The science of investment strategy – simplified!

Please note that the authors listed below achieved notoriety and fame during the prior real estate boom by teaching you how to be prosperous:

• Albert Lowry, author of “How You Can Become Financially Independent By Investing In Real Estate,” declared Chapter 7 bankruptcy in 1987
• Wade Cook, author of “How To Build A Real Estate Money Machine” and numerous other money making titles, declared Chapter 7 bankruptcy in 1987 and 2003
• Charles Givens, author of “Wealth Without Risk,” was successfully sued by a former customer for bad financial advice and filed for Chapter 7 bankruptcy in 1995
• Ed Beckley, author of “Million Dollar Secrets,” declared bankruptcy in 1987 and was sentenced to federal prison for wire fraud
• Robert Allen, the author of “Nothing Down” and “Creating Wealth,” declared Chapter 7 bankruptcy in May 1996

Hmmm, something just doesn't seem right if the guys teaching you how to build wealth are declaring bankruptcy – sort of like the Lasik surgery doctor who wears glasses or the overweight guy running a diet clinic.

The contradiction undermines your confidence in the expert advice provided.

Also, it's important to remember this is only a partial list. I chose only the big name authors, but the actual list of authors with major financial and legal problems is much, much longer.

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The lesson is clear: just because someone has a book or appears in the media as an expert doesn't mean they know what they're talking about or can be trusted. Conversely, it also doesn't mean all experts writing books are crooks.

What it does mean is you must always complete your own due diligence.

You must become your own financial expert because you can't pay someone enough to care more about your money than their own.

Caveat emptor.

Truth #5: The Consensus View Expert Is Also Dangerous

Many of you may be thinking, “Todd, that's all fine and dandy, but my broker is an honest guy and none of this applies to my situation.”

That's probably true – most financial advisors are honest people trying to provide a genuinely valuable service. But that doesn't mean you should trust your financial future to them.

The problem is your advisor is probably preaching Wall Street's latest consensus wisdom to buy and hold for the long term. This has become the universally accepted truth adopted by nearly every financial advisor – including yours, most likely. (For more on the buy and hold myth click here.)

It has become the “sacred cow” of the financial world and is considered beyond reproach. Most people believe that adhering to the standard practices of the experts by buying and holding a diversified portfolio is the right thing to do.

Believe it or not, I disagree. In my opinion buy and hold is only appropriate for certain investors who understand and accept the extraordinarily high risk and poor risk to reward ratios inherent in this strategy.

Based on historical evidence, a passive buy and hold investor should expect to endure occasional 50% losses to achieve single digit compound returns net of inflation.

Why that has been accepted as the “best” investment solution for all investors at all times eludes me. It makes no sense.

Related: A better investment strategy than buy and hold

With that said, however, long-term buy and hold can be a useful investment strategy when market valuations approach low levels.

In other words, buy and hold isn't the “one size fits all” investment strategy that most financial advisors preach. Instead, it's a special case investment strategy that should be used only when appropriate.

Please note: this position is diametrically opposed to the consensus opinion provided by the vast majority of resources giving you financial advice.

“Great spirits have always found violent opposition from mediocrities. The latter cannot understand it when a man does not thoughtlessly submit to hereditary prejudices, but honestly and courageously uses his intelligence and fulfills the duty to express the results of his thought in clear form.”– Albert Einstein

You may be tempted to criticize me for disagreeing with the consensus, but before you commit that criticism to writing, please realize I've successfully taken on the consensus view several times before and been right.

For example, most experts agreed up until 2006-2007 that real estate “never goes down”. The data was clear and the conclusion was obvious for everyone to see, until the real estate crash began in 2007.

I disagreed and sold my investment real estate in 2006. That sacred cow is now hamburger.

The experts also piled on the bandwagon during the 1990s run-up in technology stocks declaring a “new era” where old valuation standards no longer made sense.

The ensuing decline caused many tech investors 70-80% losses. I owned no tech stocks during the decline. (Full disclosure: I also didn't own them during the run-up in the late 1990s because they were insanely valued long before they crashed.)

You may believe buy and hold will endure where the other consensus viewpoints failed, but I disagree. It's the current consensus that will be proven wrong in the future, just like the previous “truths”.

For example, in 1935 Gerald Loeb published the book “Your Battle for Investment Survival”. (You can download it for free on the internet.) This books' message reflected the investment industry consensus view following the Great Depression, which was diametrically opposite today's consensus view. Can you imagine someone advocating buy and hold in 1935 after the major indexes endured a greater than 80% decline? The reality is today's consensus view is as fundamentally flawed as the previous consensus views and will face the same fate. Consensus view is always a reflection of the market period that preceded it, and will have little relevance to the market period that follows it.

The reason consensus viewpoints come and go is because most financial experts aren't deep thinkers about money and investing; they're practical businessmen. They sell what people think they want, not what they need.

That's why mutual funds advertise their biggest performers. It attracts sales even though every study shows previous top performing funds tend to under-perform in the future. It's practical business, but it's lousy investing.

Humans are social animals with a propensity toward herding. The fact that everyone believes an idea is true converts that idea into truth through the mechanism of social proof. It becomes the consensus view, and only a fool (like me) would oppose that consensus view.

A practical businessman will align himself with that “truth” because it's easier to make the sale when the customer already believes what you're saying, even if it's wrong. Such is the power of consensus viewpoint.

“Few people are capable of expressing with equanimity opinions which differ from the prejudices of their social environment. Most people are even incapable of forming such opinions.”– Albert Einstein

That's why nearly all financial planners and brokers recommend you own a diversified buy and hold, asset allocation portfolio – it's the consensus viewpoint. The practical businessman knows it's easy to sell. After all, everyone knows it's “investment truth” beyond reproach, so who's going to argue with you?

If your portfolio loses money, it was just an unfortunate, temporary setback. A brief aberration. The advisor did nothing wrong because everyone knows “buy and hold a diversified portfolio” is the right thing to do…Right?

The practical businessman sells what's most profitable for his business even if it's not most profitable for his clients. This isn't some diabolical conspiracy theory, it's the way business works.

Heck, most financial advisors are genuinely caring people who fully believe that what they're doing is the right thing. They have great hearts and are as honest as the day is long.

However, they also believe the consensus view is correct, and that's the problem. They're not bad people and they're not dishonest; they're just part of the consensus and their expert opinion contributes to that consensus.

Let me repeat that point because it's critical to understand. Most financial advisors are honest, caring people doing their level best with 100% integrity to serve your needs. The problem is that means nothing when their beliefs are consistent with the consensus viewpoint.

The reason that's true is because the consensus viewpoint can never be the most profitable investment strategy for the client because security prices are determined by supply and demand.

Any viewpoint that's consensus must, by definition, represent peak demand and premium pricing – the exact opposite of what a smart investor should be buying.

By definition, the consensus viewpoint isn't a good value, yet, that's what most financial experts recommend. It happened with tech stocks in the 90s, real estate in 2006, and it's happening right before your eyes with buy and hold.

The problem is profitable opinions by definition will be unpopular due to the nature of supply and demand. That's not what practical businessmen seeking to maximize business profits (as opposed to your portfolio profits) will attempt to sell.

Stated simply, profitable investing requires occasionally going against consensus opinion when it becomes extreme. However, a profitable investment advisory business requires support for the consensus opinion.

Related: A better investment strategy than buy and hold

That's why mutual fund companies and brokerages promoted technology stocks and funds in the late 1990s. It sells well.

I can still remember when I sold my investment real estate in 2006 and paid the taxes on the gains because I wanted to go to cash rather than reinvest.

Amazingly, not one person agreed with me (except my wife, bless her heart), and many “experts” went so far as to claim my decision was foolish. After all, the consensus view back then was real estate never goes down, and the boom showed no signs of ending.

Similarly, I can remember coaching one of my clients in the late 1990s on risk management issues because his entire fortune was invested in tech stocks. My message to develop a sell discipline to manage risk was completely out of sync with the consensus view, but also correct.

His response was to fire me as his financial coach, and he went on to lose almost everything in the market decline that followed. Such is the appeal of the siren song of consensus, expert opinion.

“The great enemy of the truth is very often not the lie — deliberate, contrived and dishonest, but the myth, persistent, persuasive, and unrealistic. Belief in myths allows the comfort of opinion without the discomfort of thought.”– John F. Kennedy

You are inundated every day by the consensus viewpoint of financial experts. It's nearly impossible to escape the onslaught of mundane, superficial, consensus opinion masquerading as financial expertise.

Consensus view and the natural herding instinct of human beings is a dangerous factor that negatively affects the quality of advice offered by even the most honest, caring, and best intentioned financial experts.

Even if they pass every other hurdle listed in this article, they're rarely immune from the practical needs of business and the consensus viewpoint. It's a difficult conundrum for even the best experts to escape.

Again, your only solution is to develop your own, independent investment viewpoint and always complete your own due diligence on the financial experts you choose to employ.

At some level, you must become your own financial expert. There is no alternative if financial security is your goal.

Truth #6: Financial Experts Are Always Fallible – Regardless Of Their Track Record And Knowledge

Please be clear that my purpose isn't to insult financial experts or put down the financial advice industry. That serves nobody – least of all me, since I'm part of the very group I'm warning you about. They make mistakes and I make mistakes. We're all fallible.

“Education is a method whereby one acquires a higher grade of prejudices.”– Laurence J. Peter

What I'm trying to do is educate you on the fundamental problems underlying the financial advice business and make you aware that no expert is immune to these issues – including me.

I'm trying to help you see why there's no choice but to become your own financial expert, do your own investment due diligence, and come to your own, independent investment decisions.

In other words, the point of this article isn't to insult financial experts, but instead to use the inherent weaknesses built into the financial advice system to motivate you to stop trusting others and start educating yourself.

I would like to tell you there's a viable alternative to becoming your own financial expert that's easier and requires less work on your part, but I would be lying.

Believe me, if such an alternative existed, I'd already be using it because I always prefer easier solutions when available. Unfortunately, no such easy solution exists. There's no royal road to consistent investment profits.

Experience has taught me the path to financial success requires independent investing, which means I must continually educate myself to improve my investment decision process. It's not the easiest path, but I believe it's the most effective, secure, and personally rewarding path.

If you're not similarly convinced that financial experts can't be relied upon to provide a financial “gravy train”, then this last point should drive the nail in the coffin.

It doesn't matter how wise, honest, and educated your investment advisor is, you can never completely depend on his expert advice because investing is a probabilistic process where certainty is impossible.

Your chosen expert will be wrong at some point in the future with 100% confidence.

In other words, next time you watch a talking-head expert on CNBC securely proclaim how his latest, greatest stock pick will outperform the market, remember that there's no possible way he can know with anything near the level of certainty he's projecting that what he says is true. It's impossible.

The reason is because investing is at best a probabilistic outcome. Nobody knows with certainty what will happen in the future because the future is unknowable.

There are too many variables and inputs affecting the ultimate outcome – many of which have yet to occur in the future.

Every investment is a bet on an unknowable future, so certainty is 100% impossible. Every investment is at best just a probability, and every expert bet can always be wrong, mine included.

We may choose to believe the education and experience of financial experts increases the certainty and accuracy of their opinions, but we have little evidence to support that opinion and lots of evidence that contradicts it.

The term “expert” implies accuracy of opinion, but the very nature of investing into an unknowable future denies that possibility.

Related: Here’s a scientific system to build your wealth now

The truth is an “investment expert” is an oxymoron like “government intelligence.” There can never be any certainty at investing, therefore nobody can truly be held as an expert (in the true sense of the word), myself included.

That's why I always advocate risk management as the most important investment discipline. You can make educated guesses, but ultimately everybody gets to be wrong. You must manage risk to control losses when the inevitable occurs.

It's also why my first criteria for judging anyone's financial advice is the quality of their risk management discipline.

In Summary

The unfortunate truth is advice dispensed by financial experts faces a mountain of problems:

1. Financial experts have conflicts of interest
2. Financial experts provide incomplete or inaccurate advice
3. Expert advice limits your critical thinking abilities
4. Financial experts may be dishonest
5. Financial experts may be self-deceived
6. The whole idea of a “financial expert” is incongruent with the probabilistic nature of investing

When you add these six factors together, it creates an inescapable conundrum that no financial expert is immune from, and neither are you.

Yet everyday, someone will think nothing of handing over their entire life savings to a guy wearing a suit based on little more than a referral, a glossy brochure, and a standardized computer printout filled with pie charts and analyst recommendations.

Why do people do this?

It seems reasonable to believe a trained expert should do better than you at investing. You want to believe they know something you don't, that these experts operate in a confident world of certainty different from your own confusion and uncertainty.

After all, don't they have connections to resources you'll never have? Aren't they insiders with special knowledge and training?

Somebody has to be an expert at all this stuff and know what they're doing! So we hand over the responsibility of our money to experts in the hope they're more knowledgeable than us.

When we do this, we forget the conflicts of interest, bias, and other problems mentioned in this article that taints the expert financial advice you receive and diminishes the value of that specialized knowledge.

We forget that you can never pay someone enough to care more about your money than his own. It makes no sense to trust the experts when you know better.

“Where facts are few, experts are many.”– Donald R. Gannon

My own opinion is there's really no such thing as an “expert” at investing. Sure, some people have more training and experience than others, but investing is different from other fields.

Investing is a probabilistic process of putting capital at risk into an unknowable future; thus, it's antithetical to the whole concept of expertise.

In fact, what you really find with the top investment experts (as proven by their track records) is humility for their inherent ignorance and consequent reliance on risk management disciplines to protect and grow capital.

Yes, investing is complex. Yes, it takes work to learn about investment strategy. Unfortunately, if your goal is financial security, you have no choice. You must take responsibility for your financial life.

The alternative (trusting the experts) is riddled with too many problems to rely on. If you can't trust outside yourself, then the only viable alternative is to trust in yourself. That's the message of this article in a nutshell.

Think for yourself. Educate yourself. Be independent. That's the path of a successful, independent investor on the journey to financial freedom.

I hope it will be your path as well.

Disclosure

I would be remiss to write an entire article from the position of a financial expert discussing all the conflicts of interest in advice without disclosing my own.

As stated in the article, the key to discerning an expert's biases and conflicts is to understand how his pockets are lined. How does he make his money?

My primary source of income is my investments, not this business. However, this business does provide additional income through the sale of financial coaching services, ebooks, courses, and a small amount of advertising revenue from the calculators.

What that means to you is my investment portfolio will bias my financial advice since the beliefs expressed in my writing will be congruent with the positions in my portfolio. Frankly, I'm okay with that bias because it aligns our mutual best interests.

Regarding this website, I have an obvious bias to sell you my financial education products and services since that's how I get paid. No mystery there.

Notice that I've taken great pains to not have any hidden conflicts of interest. I choose not to sell investment products or services on the same platform where I give advice.

All I sell at Financial Mentor is education. That's because I believe investment education and investment product sales must be kept separate to minimize the inherent conflict of interest. You can learn more about my views on this subject in this article.

Hope that helps.

After years of educating my coaching clients on how to properly design their own investment plans, I've noticed there are three distinct types of investors.

1. Pre-Investor
2. Passive Investor
3. Active Investor

So what type of investor are you and why should you care?

• Identifying your investor type will help you know the consequences of your investment style. You'll learn the limitations and advantages that naturally result from the way you invest.
• Additionally, you'll be able to decide if the opportunity available at the next level of investing is worth the effort by understanding what the next level of investing looks like.

There's no right answer to the question, “What is the best investment type?” However, there's a right answer uniquely suited to your situation.

Only one investment type is appropriate for your plan to achieve wealth, and your job is to determine what that type is.

Related: Why you need a wealth plan, not an investment plan.

The nice thing about investor types is we all start in the same place (pre-investor), and we can all graduate to the next successive level of investment skill through education and experience.

Each investment type builds on the skills of the type below it. So no matter what type of investor you are now, the next level is just a little practice and education away.

Investor Type 1: Pre-Investor

Unless you were born with a silver spoon in your mouth and a trust fund to match, then you likely began life as most of us do: a pre-investor.

A pre-investor is simply someone who isn't investing.

Pre-investors are characterized by minimal financial consciousness or awareness. There's little thought of investing, and there's correspondingly little savings or investment to show for that minimal thought.

Some pre-investors have a company retirement plan, but that wouldn't exist had the personnel department not set it up for them.

“The trouble with being poor is that it takes up all your time.”– Willem de Kooning

The pre-investor’s financial world is primarily about consumption, which takes precedence over savings and investment.

As wage earners, they typically live paycheck to paycheck believing their financial difficulties will be solved by the next pay increase. When pre-investors earn more, they spend more, because lifestyle is more important than financial security.

For whatever reason, pre-investors haven't woken up to the necessity of owning financial responsibility for their lives and their future.

This isn't to judge all pre-investors harshly because it's perfectly acceptable for a seven year old to live in this reality. It's another thing for a 40 year old to never graduate beyond it.

Are you a pre-investor? How is your savings and investment plan progressing? Is your financial consciousness ruled by consumption needs, or are you prioritizing savings and investment?

What are you going to do to take the next step and begin passively investing so that you can move beyond financial dependence and get on the road to financial independence?

This course can help…

Investor Type 2: Passive Investment Strategy

As we mature and gain responsibility, most people graduate from pre-investor status and enter the investment world through the window of passive investing. It's the most common starting point on the road to financial security.

“Whenever you find that you are on the side of the majority, it is time to reform.”– Mark Twain

Most financial institutions, educational services, and web sites support passive investing as the proven, accepted solution. Most of what you can learn from the information available in your local bookstore or on the internet is the conventional wisdom of passive investment strategies.

Passive investing is where the retail world of investing lives. While there are no hard statistics to support my claim, I believe well over 90% of all investors fall into the passive investor category.

The passive investor type usually employs all the basics of sound personal financial planning: own your own home, fund tax deferred retirement plans, asset allocation, and save at least 10% of earnings.

If you follow these foundational principles and begin early enough in life, then passive investing is likely all you'll ever need to attain financial security.

Passive investment strategy is good for people with busy lives, families, jobs, outside interests, or entrepreneurs building businesses.

Let’s face it: most people’s lives are already full, leaving little time for developing investment skills. It's difficult to make investing a top priority despite its financial importance.

A common result of having limited time is passive investors often delegate the responsibility and authority for their investment decisions to “experts” such as financial planners, brokers, money managers, or even newsletter writers.

Related: The inconvenient truth about buy & hold

Rather than become their own expert on investing, passive investors typically rely on other people’s expertise for their investment strategy.

The defining characteristic of passive investment strategies are their simplicity. They require less knowledge and skill making them accessible to the general populace.

“Buy and hold” with mutual funds or stocks, fixed asset allocation, averaging down, and buying real estate at retail prices are all examples of passive investment strategies.

There's nothing wrong with any of these strategies, but they can have negative consequences.

Sure, it's possible to become acceptably wealthy, but the downside is it usually requires a working lifetime combined with discipline and regular savings contributions to achieve financial independence using the passive investment style. The one exception is extreme frugality because of the high savings rates and low spending rates that accelerate the timeline.

The other downside to the passive investment strategy is you'll take a lot more risk and can expect lower returns than investors who have reached the next level of investing.

That's because passive investors have no “value added” or skill component to their expected return stream so they're dependent on the opportunity in the market for investment return. Rising markets provide great returns, and declining markets provide miserable returns.

The passive investor submissively rides the market roller coaster up and down into the future and willfully bets his financial security on the hope that the roller coaster will end higher than when he started. You can learn more about the buy and hold investment approach here.

“Most people spend more time planning their vacations than their financial future.”– Unknown

While passive investing isn't without its flaws, the advantages outweigh the disadvantages for many people, making it the right course of action for them.

Related: How to make more from your investing by risking less

Passive investing is far superior to not investing at all as it starts the process of compounding returns on invested capital and has the lowest barrier to entry in terms of time and knowledge required.

If the simplicity of passive investing is necessary to get you started, then it's well worth the trade-offs because not getting started (pre-investor) is far worse.

The disadvantage of passive investing is the lack of control over your financial security. Because it's passive, it lacks many risk control strategies and overlooks the value-added opportunities available only to those with greater skills.

The result is the passive investor type endures higher volatility and possibly lower returns when compared to the successful execution of an active investment strategy.

Investor Type 3: Active Investor

Active investors build on the foundation of the passive investor. They take the process to the next level by running their wealth like a business.

The primary difference between active and passive investors is the active investor not only receives market based passive returns, but he also gains a value-added return stream based on skill; two sources of return in one investment.

This allows the active investor to make money regardless of market conditions or direction and to reduce losses during periods of adversity. This holds the potential to increase returns and lower risk.

“By the time we've made it, we've had it.”– Malcolm Forbes

A primary distinction between passive and active investment strategies is passive investors work hard to acquire and save money, but spend far less energy making their money work for them.

Active investors work just as hard at making their money work for them as they ever did earning it in the first place. In other words, active investing is more work, and that's why it is not for everyone.

The reason active investors are willing to spend that extra effort is because they understand the wealth building game is about return on capital.

Small differences in growth rates over long periods of time make huge differences in wealth – far bigger differences than could ever be realized by working toward the next pay raise.

The most important factor in building your wealth is not how much you earn, but how much your money earns and how long it compounds.

Active investors have embraced full responsibility for their financial future by not only building investment capital as passive investors, but also taking responsibility for the return on their invested capital through active strategies that add value.

Related: How to take back control of your portfolio

How does the active investor do this? By creating a plan that follows specific rules designed to exploit inefficiencies existing in the marketplace. The term for this is known as “edge” and it's identical to the competitive advantage an entrepreneur seeks in business. The competitive advantage must add more value than transaction costs take away or you won't profit.

Without getting too complicated, the only way to create an investment return in excess of market rates (passive returns) with consistency is if inefficiencies exist that can be profited from in a business-like fashion.

Investment edge creates profits that are equal to the inefficiency afforded by the market after subtracting the cost to exploit the inefficiency.

Below are some examples of active investing where real people are putting this equation into actual practice.

Active Investment Strategy Explained

Warren Buffett and Benjamin Graham are excellent examples of active investors in the stock market.

They knew the stock market was inefficient and built vast fortunes applying their analytical skills (edge) to find value in securities that the market had under-priced (inefficiency).

Contrast the return from their active portfolio management with the passive return from buying and holding index funds over the same time period, and the value added from active investment strategy becomes clear.

Real estate is an active investors dream because of vast inefficiencies in price, usage, and management.

For example, I know someone who buys large homes on large lots with separate “granny quarters” and then legally separates the properties into two titles and sells them for a fat profit.

The same thing can sometimes be done with houses that are sold with additional land attached.

“Tradition is what you resort to when you don't have the time or the money to do it right.”– Kurt Herbert Alder

Or maybe you're a real estate investor who has an eye for mis-priced homes where you can add value with a few minor improvements. Add a few windows, remodel the kitchen, and presto – you have instant equity greatly in excess of what it cost to do the work.

Sometimes, all you have to do is clean the property and make it presentable to add value and exploit how the property’s price did not reflect its true value (inefficiency).

In mutual fund switching, I know people who have built wealth by exploiting the pricing inefficiencies resulting from GAAP accounting rules.

GAAP requires mutual funds to price every security at its last trade. The problem is many individual bonds in a bond fund's portfolio don't trade every day.

Or what about the international fund with securities that are trading across time zones? Many low risk fortunes have been built by trading the disparity between reported prices in mutual fund NAV's and known values based on actual market conditions.

Whether it's value investing in stocks like Graham and Buffett (a subset of mean reversion investing), or real estate conversion/rehab, or even mutual fund switching, these are just three examples of the many ways active investors profit by exploiting inefficiencies in a business-like fashion.

The true number of active investment strategies is virtually limitless.

Related: How to be a pro at growing your wealth

In summary, the purpose of active investing is to lower risk and enhance returns by introducing the element of skill.

By developing a competitive edge that profits from market inefficiencies, the active investor creates a return stream completely separate and in addition to what the market offers. This value added return stream lowers risk and increases return.

Isn’t that what investing is all about?

The price the entrepreneurial investor pays for the extra profit and reduced risk is the time and energy required to exploit the inefficiency.

It takes effort to treat your wealth as your business and that's why most people remain passive investors.

In fact, in a classic “Catch-22”, active investing may be valuable to attaining financial freedom because of the potential for higher returns, but it's also the antithesis of financial freedom once you attain wealth because it can be as much work as a regular job.

Which Investment Strategy is Right For You?

There is no such thing as the “best investment strategy”. Each type of investing has its trade-offs and there's no single answer that will be right for everyone.

For example, some people have successful businesses and need to focus their energy on growing their business. They shouldn't be distracted by the time commitment necessary for active investing.

Other people with lower incomes or who begin investing later in life have little hope for a secure retirement without the benefit of an active investment strategy.

Active investing can become almost a necessity if your time horizon to retirement is only ten to fifteen years away and you're just getting started.

“Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway.”– Warren Buffett

Each person is unique and has an appropriate investment style at an appropriate time for them. Many people naturally progress through each of the three types of investing as their skills, experience, and portfolio grow.

Sometimes successful entrepreneurs choose to become active investors as a second career later in life to enhance and secure their nest egg.

The point being there's no single “right” answer to investment strategy, but there is a right answer for you.

Financial Mentor is dedicated to helping you take that next step to the investment level that's right for you regardless of where you're at now.

In fact, the Seven Steps to Seven Figures curriculum was specifically designed to offer you the next step in your financial education regardless of your level today.

We offer courses for pre-investors that help them commit to achieving financial freedom and stay with the program long enough to succeed (Steps 1-3). We offer courses that teach the right and wrong way to practice passive investing, and we offer courses that teach you the skills necessary to become a successful active investor (Steps 5 and 6).

All the steps combined provide a start-to-finish blueprint for achieving financial success.

In Summary: Three Types of Investment Strategy

There are three types of investors: pre-investor, passive investor, and active investor. Each level builds on the skills of the previous level below it.

Each level represents a progressive increase in responsibility toward your financial security requiring a similarly higher commitment of effort.

The advantage is each level offers a similarly higher level of potential reward and reduced risk for the effort expended.

“Money is better than poverty, if only for financial reasons.”– Woody Allen

Below are five questions to help you decide what type of investment strategy is best for your personal situation.

1. Do I have the time and desire to learn the skills necessary to become an active investor?
2. Do I have the stomach to tolerate the roller-coaster ride and potentially lower returns that come with the convenience of passive investing?
3. What's my primary goal from investing: to enjoy the financial freedom I already attained, or compound my savings to reach financial freedom ASAP?
4. Do I have enough years prior to retirement and sufficient savings already put away to rely on passive investment returns for a secure retirement, or do I require a higher level of return to meet my retirement goals?
5. What difference would it make in my financial future if I could create higher returns with less risk, thus compounding my wealth much more rapidly? What would that be worth to me and how should I prioritize it as a goal?
6. (This course will show you how to match the right investment strategy and asset class to your personal skills, resources, and goals.)

The choice is yours. What type of investor are you going to be?

What are you going to do about it today?

Americans pay millions every year to financial advisors, psychics, fortune tellers, forecasters, and assorted hucksters and gurus claiming to have some insight into the future.

The reason is because the essence of investing is putting capital at risk into an unknowable future so people seek financial forecasters in a desperate attempt to bring certainty to an unknowable future.

They want to believe these soothsayers have enough foreknowledge about financial events to make a meaningful difference.

Unfortunately, they don't, and the facts prove it.

I learned this painful lesson about financial market forecasting the hard way. It literally cost me a small fortune.

The good news is market losses have a mysterious way of helping people sort right from wrong.

You only need to touch the hot stove once to learn it's a bad idea, and investing based on financial forecasts is a bad idea.

That's why, if you walk into my office, you'll notice no financial media. No CNBC, no magazines, no newspapers, or other sources  for news-of-the-day “financial porn”.

You might also notice my bookcases overstuffed with investment books and the hard drive on my computer filled with academic research papers.

That's because certain types of information help you improve your investing, and other types of information are edu-tainment (or financial porn). Understanding the difference between useful financial advice and useless market forecasting was a lesson hard learned.

Hopefully this article will help shorten your learning curve.

What's The Secret To Sorting Good Advice From Useless Financial Forecasting?

The problem today is there's more information than anyone can consume, and much of it's junk.

You must pick and choose what financial advice you spend your limited time and attention on if you want to be financially successful.

But, how do you do that?

The first step is to become crystal clear about the difference between what's “knowable” and what's “unknowable” so that you can stop wasting valuable brain space on unknowable information.

Once you know the difference between unknowable and knowable information, you'll be amazed just how much can safely be ignored.

“Isn't it interesting that the same people who laugh at science fiction listen to weather forecasts and economists?”– Kelvin Throop

The reason unknowable information, such as financial forecasting, should be ignored is because it confuses your decision process. It appears credible, causing you to factor it into decisions, but it has no basis in fact.

It's fiction – a figment of the author’s imagination. Investment market forecasts are never a rational basis for an investment decision. Therefore, the only solution is to avoid unknowable information altogether so it doesn't muddle your thinking.

That's why I ignore CNBC and don't read most investment periodicals. Most of the information dispensed through these media channels is either unknowable or not usable.

Related: A better investment strategy than buy and hold

The primary purpose of the content is to entertain because entertainment is how the media business maximizes distribution and ad revenues.

Unfortunately, entertainment isn't what I need to maximize my investment profits – and that's what I care about. How about you?

What Is “Knowable” Financial Advice?

Knowable financial advice is factual, as opposed to conjecture. Market valuations, company statistics (assuming they aren't being misrepresented), economic statistics, and market psychology are examples of current facts that are knowable and can be quantified.

“Weather forecast for tonight: dark. Continued dark overnight, with widely scattered light by morning.”– George Carlin

Another type of knowable financial advice is historical research showing how investment markets behaved under specific conditions in the past. The value of historical research is it provides a meaningful context to current facts.

It converts facts that would otherwise be dry and empty into actionable investment guidelines.

For example, you can know what the historical ten year returns for stock averages are given certain valuation and economic conditions.

You can also know if you're currently in the upper-end of the valuation range or the lower-end of the valuation range, and what your mathematical expectation for a ten year holding period would be starting today.

All these facts are knowable based on historical precedent. The problem is that the past may not be indicative of the future. The map isn't the territory.

“The trouble with weather forecasting is that it's right too often for us to ignore it and wrong too often for us to rely on it.”– Patrick Young

In other words, you can't know the future because the future is unknowable. Using the above example, financial statistics can help you know the ten year “expectation” for stocks based on history, but you must be equally clear that you don't know what stocks will do in the next ten years.

You have an indication and a statistical expectation given certain assumptions, but don't think for one minute that you can predict the future. You can't. Nobody can predict the future with statistical accuracy reliable enough to invest on. The future is unknowable.

This may sound like a subtle distinction, but it's not – it's critical. Remember, you must be clear on what's knowable and what's unknowable if you want consistent profitability investing into a future that's unknowable. (Hmmm, that's a mouthful!)

Related: How to take back control of your portfolio

Knowable financial advice isn't based on someone's judgment, opinion, or interpretation – it's rooted in fact. This distinction is black and white, and it has the power to dramatically change your investing when you get it into your bones.

You should never put money at risk based on financial advice that's predicated on the unknowable. The unknowable includes predictions, financial forecasting, opinions, interpretations, stock forecasts, market forecasting, hunches, beliefs, or anything else not rooted in fact.

Why Most Financial Advice Is Really Just Financial Forecasting

Study the headlines, review brokerage analysis reports, and watch the investment media, and you'll quickly realize most of what passes for financial advice is really financial fiction.

It's blatant, unknowable futurism. Below are several examples:

• Ten hot stocks to own for the coming year
• Widget Inc's earnings are forecast to grow at 25% for the next five years
• Overpriced Inc. should trade in the range of $40-$60 per share
• Seven mutual funds to buy for next year
• Stocks will outperform bonds
• Real estate always goes up (an assumed truth prior to 2008)
• Our research indicates the economy will…

“If stock market experts were so expert, they would be buying stock, not selling advice.”– Norman Augustine

Notice that each of these all-too-common statements in financial literature require a crystal ball or direct connection to the Higher Power for there to be any financial relevance.

They might be blindly extrapolating past numbers to create future assumptions or communicating some conjecture about future events, but all of the financial advice above is based on the false premise that the future can be predicted.

And what happens when we invest money based on false premises? Ouch!

You can save a ton of time and money by ignoring all such nonsense. They're all statements about the unknowable because they require an accurate financial forecast to profit.

But My Stock Market Forecasting Is Accurate…

Sure, some financial analysts will make an occasional accurate call here and there, thus appearing to be great prognosticators of future events. But they can also be completely wrong the rest of the time.

The reality is a broken clock is accurate twice a day, but you would never use it to tell time. Why make the same mistake with financial advice that's really forecasting?

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Betting on someone's belief about the future when they're wrong will cost you money, and financial advice that forecasts the future is wrong all too frequently.

To understand how financial forecasters rise to stardom, imagine a pool of 5,000 financial experts who toss their hat in the ring declaring themselves capable forecasters.

Let's say they're equally divided between bulls and bears. Next year, half will be right, and half will be wrong. The right ones declare themselves certified geniuses with a “proven track record” and go on to issue their infinite wisdom for next year's forecast and write a book.

Again, half are right and half are wrong, so we now have a pool of 1,250 financial experts with documented track records. Rinse and repeat for a few more years, and a few brilliant geniuses will bubble to the top with undeniably astounding track records and best-selling books.

The only question remaining is whether their track records are truly genius, or merely statistical anomalies?

“Thousands of experts study overbought indicators, oversold indicators, head-and-shoulders patterns, put-call ratios, the Fed's policy on money supply, foreign investment, the movement of constellations through the heavens, and the moss on oak trees, and they can't predict the markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.”– Peter Lynch

You can dismiss this oversimplified example as trite, but it's taken from a proven model used by disreputable financial managers to build the trust of naive investors.

They start mailing campaigns sent to massive lists of investors (100,000+) declaring they know the “secret” to the markets.

Each month, they send predictions and continue to follow up only with those who received the accurate predictions. The inaccurate prediction addresses are discarded.

After enough accurate predictions are delivered, they can usually establish sufficient credibility and trust with investors to extract some money.

After all, the huckster just sent you 10 accurate predictions in a row. You read them yourself. He clearly knows what he's talking about, right?

Relating this story back to the guru of the day, they usually follow a similar pattern before you hear about them. They usually publish books and newsletters.

In addition, they usually predict the future based on some indicator or theory that just happens to be working perfectly at the time and provides a logical reason for expecting more of the same in the future.

By the time you know about them, they have several books in print with an impressive list of documented predictions. It's hard to deny their brilliance – until you've been burned a few times.

The end result is always the same: the indicator or theory that perfectly accounted for economic behavior in the past suddenly stops working in the future. Their rise to infamy goes down in flames, and a new guru-of-the-day takes his rightful place on the throne.

Related: How Your Financial Advisor is Taking 75% of Your Retirement Income (or More!) Video, PDF download, or Audio.

When I began in the investment management business, Joe Granville had everyone's ear. He was so influential, his forecasts moved markets – until they didn't. Robert Prechter issued an amazingly accurate forecast of the great bull market of the 80s and 90s, only to turn bearish a decade too early.

Elaine Garzarelli rose to infamy only to fall off the radar screen. In early 2009, Professor Robert Shiller from Yale University has been as close to 100% accurate as I have ever seen, and Harry Dent is attracting a lot of attention.

Out of respect to each of the above names, their mention here should be taken as the ultimate compliment. These few were the best of the best who rose to the top.

Professor Shiller has an impressive pedigree beyond reproach, and Robert Prechter is extremely well-studied, intelligent, and well-reasoned. Their brilliance is what brought them deserved notoriety. They've succeeded (at least temporarily) in achieving the impossible.

For a period of time, they successfully predicted the future, but that too will change. Even the best and brightest must fall because the future is forever unknowable.

Every forecaster faces the exact same fate – they'll eventually be 100% dead wrong – and it will usually occur when they've attracted their greatest following.

If you bet money on their predictions, the damage to your portfolio can be devastating. You must have clearly defined exit strategies and risk control methods to protect your capital when the inevitable occurs.

It's as sure to happen as the sun rising in the morning.

Nobody knows the future with certainty. It's impossible because all predictions are at best probabilistic outcomes.

Eventually those probabilities must come home to roost and bite the forecaster in the backside. It has always been that way, and always will be that way.

It's inherent to the nature of the financial forecasting business.

Statistics Prove Financial Forecasting Is A Waste Of Time And Money

In case you aren't totally clear on the completely invalid premise behind financial advice based on forecasts about the future, or you haven't read the many research studies proving this fact, I'll quote directly from a transcript taken from the infamous Louis Rukeyser's “Wall Street Week” television show where he lays to rest any doubt:

Related: The inconvenient truth about buy & hold

“Now, before we meet tonight's special guest, let's take one of our periodic looks at why every self-respecting market technician treats the sentiments of his colleagues with contempt, as we track the embarrassing record of market advisors. So come along as we are ‘Gonna Take a Sentimental Journey'.”

“An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today.”– Laurence J. Peter

“Our trip begins with the Dow at 689 on August 2, 1963, the first year Investor's Intelligence conducted the poll of market newsletter writers. With 91.4% of those surveyed bearishly calling for a short or long-term decline, and outright bulls at an all time low of less than 9%, the Dow then proceeded to rise 250 points in the next twenty-one months, which represented 38%.”

“Ten years later, in a week when the Dow was moving to new highs, nearly 62% of those polled thought the market would head even higher. And what came to pass? You guessed it. Down 470 points in twenty three months. Not surprisingly, by the time the Dow slipped to a twelve year low at 577 on December 13, 1974, the mood was glum again. More than 63% of market advisors surveyed called for further declines, and true to form, the market rose 425 points, more than 70% in fourteen months.”

“On January 14, 1977, with just 21% of advisers bearish, the crowd missed the mark once more as the Dow derailed with a 235 point loss over a period of fourteen months. And with the Dow at 784, the clouds hung heavy over Wall Street in anticipation of further declines, with nearly two thirds of investors feeling bearish.”

“The market, in turn, took off with a vengeance, rising more than 1900 points in five years. On August 28, 1987, the week the Dow touched it's then all time high at 2722, more than 60% of the advisers were, not to put a fine point to it, full of bull. Seven weeks later, the Dow, you may recall, was more than 900 points lower. On December 2, 1988, though just 21% of those polled were bullish, the lowest total since June, 1982. The Dow, then just under 2100, rallied an impressive 907 points in thirty one months.”

“If I have noticed anything over these 60 years on Wall Street, it's that people do not succeed in forecasting what is going to happen to the stock market.”– Benjamin Graham

Has anything changed in the years since Louis Rukeyser did this study on the predictive quality of financial advice for his television show? No.

In David Dreman's 1979 book “Contrarian Investment Strategy”, he analyzed 50 years of forecasts beginning in 1929. His conclusions were as follows:

1. The experts dramatically under-performed the market
2. Their forecasts outperformed only 23% of the time, meaning they were wrong nearly 3 out of 4 times
3. As an example, the top 10 stock picks from a 1971 “Institutional Investor” magazine poll of more than 150 money managers in 27 states under-performed the market and were down 67% by the end of 1974
4.  Another example came from a 1970 conference poll of more than 2,000 institutional investors asked to pick the stock they expected to perform best. The winner was National Student Marketing which promptly declined 95% in value. Two years later, this same group's prediction was airline stocks, which then declined by 50% despite a general market rise.

How's that for forecasting?

“The findings startled me. While I believed the evidence clearly showed that experts made mistakes, I did not think the magnitude of their error would be as striking or as consistent.”– David Dreman on financial forecasting

The forecasting problem isn't limited to just the stock market, either. It doesn't work in any investment market with enough reliability to risk money on.

For example, James Bianco studied more than 20 years of interest rate predictions made by a panel of prominent economists published in the Wall Street Journal every 6 months.

Amazingly, this group of the “best and brightest” successfully predicted the direction of interest rates just 13 out of 43 times. They were wrong 70% of the time.

“That the beginning of a historic decline in stock prices is near is the single most crucial fact facing every investor and portfolio manager today. Anyone still invested and not selling into this market rise is ignoring the most crucial message from the stock market pattern since 1929… Today, the only certainty is that a great bear market of Supercycle or Grand Supercycle degree is due to begin this year and carry the Dow to below 1,000.”– Robert Prechter from his 1995 book “At The Crest Of The Tidal Wave” before the Dow Jones Industrial Average rose nearly 200% from valuations around 4,000

These economists are highly trained and highly paid to predict the future of long-term interest rates, and their accuracy is worse than throwing darts or flipping a coin.

If people who spend their whole lives predicting interest rates can't get it right, what's that tell you about the reliability of your mortgage broker, financial planner, newsletter writer, or neighbor down the street?

Related: Why you need a wealth plan, not an investment plan.

Did your financial advisor wisely get you out of stocks near the most recent market top? Were your investment magazines filled with bearish prognostications advising you to become cautious? I don't think so.

Did they ring the bell at the last stock market bottom and tell you to back up the truck and load up when opportunities were greatest? Not likely. Who told you to get clear of real estate before the bubble burst? Nobody! Exactly my point.

Sure, there were a handful of financial forecasters who got one or two of these calls right. But is there anyone with a proven track record of keeping you long during each of those multi-year bull markets and deftly stepping aside before the ensuing bear?

I don't know of any forecaster reliable enough to bet money on.

So why listen?

If financial forecasters are wrong when it matters most (and it has always been that way), what makes you think next time will be any different?

Successful Investing Is About Risk Management And Business Analysis – Not Financial Forecasting

If financial forecasting is meaningless, and the bulk of financial advice is forecasting, then how should a smart investor make investment decisions? What can you rely on to create financial security?

“Prediction is very difficult, especially about the future.”– Niels Bohr

Smart investors who want consistent profits over the long-term develop an actuarial investment approach. They recognize that investing is about probabilities, not prediction.

Their decisions are based purely on known facts with the objective of managing risk and maximizing mathematical expectancy, much like insurance companies and many hedge funds manage risk and reward.

Profiting becomes a game of statistical certainty where the odds work for you rather than against you.

“It is impossible to trap modern physics into predicting anything with perfect determinism because it deals with probabilities from the outset.”– Sir Arthur Eddington

Investing in a professional, business-like fashion has nothing to do with picking hot stocks, predicting the future, guessing, taking hot tips, or any of the other typical approaches that pass for financial advice.

Instead, it's about following a disciplined, methodical investment strategy based on a known, positive, mathematical expectancy.

Related: How to make more from your investing by risking less

For example, Warren Buffett never knows what the market will do tomorrow and doesn't waste any energy on such nonsense.

He also doesn't know what stocks will outperform their peer groups over the next month or year because that's also unknowable.

“We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”– Warren Buffett

What he does know is how to buy solid companies with valuable franchises at a fraction of their inherent value. Eventually, the market realizes the true value, and Buffett makes a fat profit.

Notice there's nothing about this strategy that involves reading a crystal ball. He utilizes past history and proven business principles to understand reasonable standards of valuation while employing present day factual data to determine current mis-pricings in the market.

No prediction necessary – just facts.

The bottom line is successful investing isn't about predicting the future, and any investment philosophy that requires you to predict the future is fundamentally flawed.

I repeat: any investment strategy that requires some prediction of the future is fundamentally flawed and should be avoided.

This one idea will eliminate most investment strategies and financial advice from your life.

I learned this lesson from the school of hard knocks, so please take what I'm saying to heart. I've left millions on the investment table and wasted untold research hours mistakenly pursuing the unknowable.

Learn from my errors and don't make the same mistake. Avoid financial forecasting like the plague and your portfolio will be happier for it.

This Isn't Rocket Science, But It's Very Profitable

If you want to invest with consistent profitability, then you must become clear on what you know, and equally clear on what will forever remain unknowable.

Predicting the future is unknowable. Period!

People seek forecasters because they want to feel some sense of control over the future. It feels gratifying to study the analysts' predictions, take action, and make things happen – even if it's completely wrong. At least you tried and did your best (or at least, that's what you believe).

Humans have an incessant need to control, whether it's spouses, nature, or their finances. To accept the future as unknowable feels out-of-control to the uninitiated, and that's intolerable.

“There are many methods for predicting the future. For example, you can read horoscopes, tea leaves, tarot cards, or crystal balls. Collectively, these methods are known as ‘nutty methods.' Or you can put well-researched facts into sophisticated computer models, more commonly referred to as ‘a complete waste of time.'”– Scott Adams

However, when you learn to invest based on mathematical expectation and risk management, much of what passes for financial advice becomes a meaningless waste of bandwidth.

When you learn to accept the future as a probabilistic outcome, you're suddenly free of many burdens the ordinary investor must shoulder.

You don't have to worry about being right or wrong. Instead, just align your portfolio with current probabilities while always managing against the risk of a large outlier loss. It isn't perfect, but it's profitable over time. It reduces risk, increases return, and allows you to sleep at night.

Investing is about making money. It's business.

Predicting the future is about ego gratification for the “genius” forecaster.

Never confuse the two.

Focus your limited time and resources on investment strategies that have statistical validity based on provable facts.

Nothing else is acceptable.

Sixteen of the most common securities frauds are listed below.

Study this list and become familiar with the common characteristics of each fraud so that you recognize it when you see it and can avoid getting duped.

Educating yourself about investment securities fraud is the best defense against becoming its next victim.

Once your money is gone, you can't get it back. Protect yourself starting today.

Securities Fraud #1 – Penny Stocks

The micro-cap stock market (ie: penny stocks) has a long history of fraud, yet it attracts new investors every day.

The dream of owning the next Microsoft, Yahoo, or eBay at the start-up stage and riding it to easy riches is enough to make even a skeptic’s greed glands salivate.

The other allure of micro-cap stocks is the false feeling of big time investing that comes from buying more shares with less money.

For example, $1,000 will only buy ten shares of a $100 stock, but it will buy 10,000 shares of a 10 cent stock, and 100,000 shares of a penny stock.

Many inexperienced investors prefer 100,000 shares of dubious value over ten shares of real value. They love the idea that a single penny change in the price can double their wealth. Exciting stuff … sort of.

Unfortunately, there are two fundamental problems with penny stocks that make them ripe for securities fraud.

• Minimal information: Many micro-cap stocks fall below minimum asset and shareholder requirements for SEC reporting. Lack of information disclosure and regulatory oversight invites fraud because the risk of discovery is lower. Additionally, there’s seldom any legitimate analyst coverage or press scrutiny for many of these stocks, which further reduces information flow and lowers the risk of discovery for scam artists. Con artists will always gravitate where the risk of getting caught is lowest – which includes penny stocks.
• Low liquidity: The second problem with penny stocks is low prices, small daily volume, and minimal stock float, making them ripe for unscrupulous promoters to control the stock and artificially manipulate prices. See the example of “Pump and Dump” below for how this manipulation works. In addition, low liquidity can also make selling a large position without negatively impacting price a difficult task when it's time to exit.

The two most common forms of securities fraud in penny stocks are “pump and dump” and “bogus offerings”.

• Pump and Dump: This fraud occurs when someone acquires control of a large amount of a company’s stock and then pumps up the price. They then provide misleading and false information in press releases, spam email, internet discussion group postings, and other unverified sources. The sudden burst in promotion temporarily increases demand for the stock, causing the price to rise, which creates additional demand from momentum buyers jumping on the bandwagon, leading to further price increases. Once price momentum is established, the scam artist sells his shares and walks away from the promotion, causing the stock to tank.
• Bogus Offerings: This fraud is sold in the form of an unverifiable breakthrough technology or forthcoming large contract announcement for some unknown company. Often, the company will have no operations, earnings, or audited financial statements, and may in fact be little more than an idea or a shell.

The general rule for penny stock investing is to avoid it unless you’re an investor with specialized expertise in the business.

“You may be deceived if you trust too much, but you’ll live in torment if you don’t trust enough.”– Frank Crane

Penny stocks have higher risk for investment fraud than conventional securities, and they require unique investment skills and experience that few investors possess in order to earn reliable profits. They’re best avoided.

Securities Fraud #2 – Prime Banks

Prime bank fraud is designed to attract conspiracy theorists who believe the Rockefeller's, Rothschild's, Saudi Royalty, and other members of the privileged class have secret access to highly lucrative investments that a mere commoner like you and I can’t normally invest in.

Triple digit returns may be promised for becoming a “privileged investor” with access to the world’s elite bank portfolios: “prime banks”.

Related: Better investing through process, not product

The only problem is prime bank securities don’t exist.

Neither do other related forms of this type of fraud which include “standby letters of credit,” “revolving credit guarantees,” and other legitimate-sounding euphemisms for fictitious high yielding debt.

Avoid all forms of unconventional, high-yielding debt issued through non-verifiable sources. Be particularly cautious when the investment includes nonsense about being given access to something normally reserved for the privileged few.

Securities Fraud #3 – Institutionalized

Bull markets are often associated with a permissive social culture that can lead to brazen investment business practices resulting in institutionalized securities fraud.

Few investors take notice of lapses in integrity as long as everyone is making money and the markets continue to rise. When the punch bowl is removed, then the hangover that follows can reveal institutionalized securities fraud.

Examples include:

• Accounting Fraud: Enron, WorldCom, and other big name corporations defrauded millions of investors through “creative” accounting and inadequate disclosure during the late 1990’s bull market. Under normal conditions, an entire regulatory and oversight system exists to catch these problems, but during great bull markets, the scrutiny of regulators and auditors produces insufficient results.
• Unethical Mutual Fund Practices: Late-trading and front-running are two privileges that were granted by many mutual funds during the late 1990’s to insiders and large institutions. This gives them an unfair advantage while betraying their fiduciary responsibility to individual shareholders. The total cost of this fraud to Main Street investors will never be known.
• Analyst Research Conflicts: A long history of investment fraud can be found in brokerage firms co-mingling investment banking to institutions with investment sales to individuals under one roof. Individual investor recommendations by in-house analysts are often tainted by lucrative investment banking relationships.

You wouldn’t trust medical advice from your doctor if he was biased by sales commission kickbacks from drug companies, so why would you make the same mistake with your investment advice?

Related: 5 Financial Planning Mistakes That Cost You Big-Time (and what to do instead!) Explained in 5 Free Video Lessons

Unfortunately, many investors aren’t even aware of the biases inherent in the investment advice they receive.

“Honesty: the most important thing in life. Unless you really know how to fake it, you'll never make it.”– Bernard Rosenberg

For example, Merrill Lynch settled with the New York Attorney General’s office for $100 million for this misleading practice (without admitting any wrongdoing, of course). Other big name brokerage firms ran into similar conflict of interest charges.

The fundamental problem causing institutional securities fraud is the greed and easy-money character of major bull markets that can result in a promiscuous business culture.

In the search to maximize bottom line profits, there’s always the risk that one bad apple will place expediency in front of integrity, resulting in fraud.

Just because an institution is large and reputable doesn't make securities fraud impossible.

Securities Fraud #4 – Unlicensed Sales Agents

Investment scam artists use the lure of high commissions to enroll independent insurance agents, financial advisors, investment seminar speakers, and accountants as sales representatives for securities fraud.

Independent agents are the perfect sales outlet because they’ve already earned your trust, but lack sophisticated compliance departments and due diligence procedures to uncover illegitimate investments.

The result is a trusted expert who actually knows little more than you about sorting fraud from legitimate investments.

Be wary if your agent offers high returns with little or no risk on viatical contracts, brokered CD's, equipment leases, factoring, promissory notes, or other unconventional investments.

Just because you trust your independent insurance agent or accountant for the professional services they regularly provide doesn't necessarily qualify them as an investment expert.

Securities Fraud #5 – Affinity Groups

Affinity group fraud is another example of mistaken trust. Investment fraudsters will exploit their victim’s age, religious, ethnic, sexual, or professional identity to gain your confidence knowing that it’s human nature to trust people who are like you.

Affinity fraud bypasses the natural distrust we have for schemes promoted by strangers.

The usual method of selling the fraud is to enroll a trusted, leading member of the group (who's seldom an investment expert) into selling the fraud to the remainder of the group.

The lure to invest is the supposed profits that will somehow benefit the church or professional organization that you want to support.

“We have to distrust each other. It's our only defense against betrayal.”– Tennessee Williams

For example, a respected church leader is sold an investment. The scam artist then informs this leader that if church members also purchase the investment, then profits can benefit the church or its favorite charity.

The leader unwittingly promotes the fraud to the congregation with the good intention of benefiting the church. The congregation invests based on their trust for the leader and their desire to support the church.

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The con man bypasses the usual distrust he experiences by using the affinity of the group.

Senior fraud is a specialized form of affinity fraud. Seniors are natural fraud targets because they've accumulated significant assets from a lifetime of saving and investing.

Low interest rates, rising health costs, and increased life expectancy have forced many seniors to seek higher returns than conventional investments provide.

In addition, their age gives them a common set of interests and concerns for fraud promoters to exploit through affinity.

This is an unfortunate combination of circumstances that makes this group a prime target for investment fraud.

Securities Fraud #6 – Stock Brokers

Always scrutinize your brokerage statements for unexplained fees, unauthorized trades, or other financial irregularities.

In addition, your broker may have recommended investments unsuitable for your particular needs.

For the complete story on what to look out for, see the article in our investment fraud series titled “Stock Broker Fraud”.

Securities Fraud #7 – Promissory Notes

Promissory note fraud takes the form of short-term debt obligations issued by bogus companies. Typically, they're sold through independent insurance agents and offer above market returns with little or no risk – “guaranteed”.

Always beware of any investment offering above market interest rates and guarantees. It's a potentially lethal combination.

Also, beware of trusted professionals selling investment products that aren't their ordinary field of expertise (such as insurance salespeople or accountants promoting investments).

Securities Fraud #8 – Advance Fees

The objective of this fraud is to steal the advance fees you pay to participate in some larger objective.

For example, you might be asked to make a series of upfront payments for a bargain shipment of heating oil, coal, or some other commodity that ultimately never arrives.

Alternatively, you might be offered an interest-free loan from an off-shore bank if you pay an application fee in advance.

Regardless of the service or product promised, the formula is for you to pay an entrance fee now for something you’re supposed to receive later – but never arrives. The fee paid is the scam artist's profit.

Securities Fraud #9 – Inappropriate Investments

Certain legal investments cross the boundary into securities fraud when they're sold to the wrong person without adequate disclosure.

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The most common investment in this category is variable annuities because of their costly surrender charges, steep commissions, and high expense structures.

For the complete story on variable annuity investment fraud see the related article “Variable Annuities Explained – What You Must Know”.

Similarly, callable CD’s are higher yielding, longer-term certificates of deposit that can be redeemed by the issuing bank. The problem with these securities is the potentially high penalty fee for early withdrawal if the investor needs liquidity.

The long-term nature and high surrender charges make them inappropriate for investors needing current access to their money.

“You may deceive all the people part of the time, and part of the people all the time, but not all the people all the time.”– Abraham Lincoln

Securities Fraud #10 – Viatical Settlements

Viatical settlements were originally created to help seriously ill people pay medical bills by selling the death benefit from their life insurance policy to an investor for immediate cash.

There’s nothing illegal about viatical settlements, but when they're misrepresented, they can become a type of securities fraud.

For example, the health condition of the seller could be falsified or even improve over time, thus impairing the return on investment.

Related: The science of investment strategy – simplified!

Alternatively, the insurance could be invalid due to fraudulent applications, or there could be no actual insurance or greatly reduced benefits making the investment essentially worthless.

Viatical settlements are complicated investments requiring specialized due diligence skills. They're not for the inexperienced.

Securities Fraud #11 – Offshore Investing

Whenever your money leaves the country, the laws that protect it don’t follow. Any investment from another country requires extra due diligence because domestic regulations and oversight don’t apply.

Few investors know the laws of their own country, not to mention the laws of a foreign country. Many of the assumptions you invest on in your own country are invalid overseas. The capability to pursue grievances may be limited, increasing your risk. Beware…

Securities Fraud #12 – Bogus Business Offerings

The calling card for this fraud is an exciting, low-risk, easy money investment opportunity in an exotic sounding business. Below are certain businesses which attract more than their fair share of financial fraud:

• Oil and Gas: Beware of “working interests” in “proven” oil and gas wells. Frauds include fake drilling equipment set on worthless land or vacant wells that haven’t produced in years.
• Equipment Leasing: Pay close attention when a company sells you a piece of equipment which it agrees to lease back for a fee. Be certain the company is legitimate and the contract fee structures make business sense. Pay phones, ATM machines, internet kiosks, or any other consumer technologies are favorites among leasing fraud.
• Franchise Offerings: “Get in on the ground floor of this can’t-miss opportunity.” Yeah, right! Legitimate franchises are everywhere, causing people to abandon their usually cautious nature when confronted with a bogus franchise. Over-inflated store results and phony testimonials are used to extract upfront franchise fees for misrepresented services, supplies, and goods.
• New Technologies: Watch out for people seeking funding for a new patent or invention sure to make you rich. Similarly, beware of investment frauds designed to imitate legitimate technologies such as FCC licenses for cell phones, wireless cable, or interactive video.

Securities Fraud #13 – Precious Metals

There are several ways you can be ripped off investing in precious metals and gems. Below are the most common:

• Grading: Coins could be falsely graded at a higher quality level than is actually the case, or a precious gem could be worthless due to undisclosed flaws.
• Safekeeping: Bullion or coins may not exist at all when they are “kept safe” in the seller’s vaults. Adding insult to injury, not only do you pay for the nonexistent precious metal, but you pay fees on top of it all to store what never was.
• Mining Fraud: Beware of investment offerings claiming a new technology to mine precious minerals from previously closed mines and worthless tailings.

Any time precious metals or gems are offered at below market prices, it should serve as a red flag for thorough due diligence.

Securities Fraud #14 – Abusive Sales Practices

Never buy an investment over the phone from a cold-caller and never tolerate high pressure sales tactics from your broker.

Abusive sales people use intimidation and careful scripting to rush you into a decision without first helping you fully understand all the risks and realities of your investment.

If the caller or salesperson refuses to take “no” for an answer, then just hang up or walk away. You deserve better.

Securities Fraud #15 – Internet

The changing face of communications technology provides new tools for the investment scam artist to exploit. First was mail, then the telegraph became a popular tool for investment scammers. Next was the telephone, and now it's the internet.

“The secret of life is to appreciate the pleasure of being terribly, terribly deceived.”– Oscar Wilde

The internet has made investment fraud more efficient and effective. Con artists can purchase lists of targeted groups, use automated data-gathering tools, and post to discussion groups at almost no cost and with complete anonymity.

With a few clicks of a mouse, fraudsters can reach millions of people by building a website or entering various chat rooms. One person could use many of these web-related tools under various aliases to cheaply and easily create a virtual facade of legitimacy with little risk of detection.

Related: How to take back control of your portfolio

Another example of internet investment fraud is online newsletter publishers who are paid cash and securities to tout certain stocks.

This isn’t illegal; however, the biased advice must be disclosed. Watch out for newsletters that bury information about who paid them, the amount, and the type of payment in fine print so you never see it.

By the way, at Financial Mentor, we never tout individual securities. Our independence and lack of bias is essential to the credibility of the educational service we provide.

You should verify all investment advice from unknown sources online by checking reputable sources offline – be skeptical. Remember, almost anyone can make himself appear to be an established and successful company for very little cost online.

Don’t be dot-conned.

Securities Fraud #16 – Ponzi Schemes

Last, but certainly not least, are Ponzi schemes. Named after Charles Ponzi, a swindler from the 1920’s, these pyramid schemes promise high returns to lure investors. It uses the money from new investors to pay previous investors.

The large payments to early investors add credibility to the fraud, which convinces skeptics to invest and further fuels the fraud’s growth.

Little or no actual investing ever takes place, and the fraud blows up when regulators step in or an insufficient number of new investors enter to pay off existing investors.

In Summary – Three Principles of Securities Fraud:

I hope you enjoyed our quick tour of the securities fraud world. It may not be a fun subject, but it's necessary to understand.

In summary, there are three principles you should take away from this discussion…

1. Regulated, domestic securities and dealers have a lower risk of fraud than their unregulated and offshore counterparts. That doesn’t mean you can drop your guard against fraud with regulated securities. Quite the contrary, as evidenced by the sections on broker fraud and institutionalized investment fraud. All it means is the risk of investment fraud is lower when regulation is higher, but fraud still exists regardless of regulation.
2. Investment fraud comes in many forms and changes with the times. Con men usually attempt to sell the fraud by appealing to people’s desire for easy riches and use tools of deceit to separate you from your money. See our article “The Top 26 Warning Signs of Investment Fraud” for the complete story.
3. Your first line of defense against securities fraud is a healthy dose of skepticism and information that educates you to recognize fraud when you see it. Your second line of defense is a thorough due diligence process that uncovers the less obvious cases of investment fraud before you ever lose a dime. For a comprehensive checklist on investment fraud due diligence, see the article “Investment Fraud Due Diligence”.

If you invest long enough to build wealth, then the unfortunate reality is you’ll almost certainly encounter securities fraud.

Educate yourself now so that you can avoid becoming its next victim.

Forewarned is forearmed…

My first investment was a complete loss.

I know that doesn't make for ego pleasing, cocktail party conversation, but it's the truth.

In this article, I'm going to tell you the whole story about how I lost 100% of my invested capital many years ago, and the investment mistakes I made to create this disastrous result.

But first I want to tell you why I'm doing it.

There are two points to this story:

1. Losing investments can be great teachers. You'll learn from every investment mistake you make, and you can also learn vicariously from other people's investment mistakes so that you don't have to make the same error yourself. Each investment lesson learned can help you avoid a loss in the future, which can turbo boost your lifetime investment performance.
2. Losses are a natural and normal result of making investment decisions, and the key to long term success is what you do when they occur. You must learn from your investment mistakes so you don't repeat them. You must also cut your losses once the mistakes are recognized so they don't grow to unmanageable proportions.

The truth is I've made more investment mistakes and incurred more losses in my investment career than this website has space to share – that's why I'm such a great teacher :-).

“The most important thing in life is not to capitalize on your gains. Any fool can do that. The really important thing is to profit from your losses. That requires intelligence; and it makes the difference between a man of sense and a fool.”– William Bolitho

It's also why I'm a successful investor today.

Below is the story of my first investment – a total loser. Go ahead and laugh at the foolishness. We all start somewhere, and this story is proof positive that I was not born a great investor.

Investing is a learned skill, and the lessons contained in this story can help you avoid the same mistakes I made so you can become a more profitable investor.

The Worst Investment Mistake I Made

This story begins shortly after graduating from college, when the book “In Search of Excellence” was a nationwide bestseller.

I had been hired by Hewlett-Packard (which was featured in the book) and placed on the fast track to success.

My business background was extensive for a zitty-faced college graduate, and I had aced my GMAT test scores in preparation to begin an MBA degree program at business graduate school.

In short, the future looked so bright I had to wear shades.

“Sometimes your best investments are the ones you don't make.”– Donald Trump

While at Hewlett-Packard, I befriended someone in the credit department who knew about this “hot new tech company” that was buying HP mainframe computers to run its business.

Its stock was listed in the NASDAQ pink sheets. My buddy had the inside scoop because of his job doing all the credit analysis for financing the computer purchases.

Well, being a brand new investor with zero experience or savvy, I plunged all the money I had saved for graduate school into the stock.

This decision proved to be one big mistake from the beginning.

Below are a few of the more obvious mistakes I made with this investment:

1. I bought on a “hot stock tip”.
2. I risked money I couldn't afford to lose.
3. I had no buy or sell discipline – no investment strategy.
4. I bought a story rather than business fundamentals.
5. I had no risk management plan to control losses.
6. I put money at risk without an exit strategy in place first.

From Profit to Loss with No Investment Strategy

At first all appeared well as the stock nearly doubled in price. The problem was I thought this growth in value was because of my superior stock picking skills – wrong!

I had no clue that new issues are often supported by the offering company during the initial distribution phase to attract investor interest.

Related: How to take back control of your portfolio

I didn’t know that rising prices and hype are frequently used as tools to distribute stock to naive investors like me.

7. Don't play a game you don't understand fully. I knew nothing about the new issue game and was gambling rather than investing. I had no competitive advantage and there was no mathematical expectation to my investment strategy.

“Every experience is a lesson, every loss is a gain.”– Sri Sathya Sai Baba

Soon the stock hit its all time high, and I was making good money. I had visions of becoming the next Peter Lynch or Warren Buffet as I labored under delusions of my financial intelligence.

Getting too confident was my next mistake:

8. Don't confuse brains with a bull market. Even the dumbest investments can create temporary gains when the wind is at your back.

Immediately following on the heels of the all time high was a rapid descent in price that swallowed all previous price gains. I was in despair as the position went from a winner to a loser in a short time.

Magically, just as I began to worry, I got a call from my broker. It seemed as though he could read my mind and knew about my worries. Duhh!!

He extolled the virtues of the company and told me all the good news about “big developments soon to be announced” and how the price was “certain to make new highs and create enormous profits.”

“If you have made a mistake, cut your losses as quickly as possible.”– Bernard M. Baruch

My greed glands began working overtime as I swallowed all of the broker's bull – hook, line, and sinker.

Not only did I hold my losing position in the stock, but I even added to it by buying additional shares.

(The gulping sound you hear in the background is me swallowing my pride as I write this.)

Here are the last group of mistakes I made:

9. I bought based on news.
10. I let good money chase after bad: averaged down.
11. I didn't understand the incentives of the advisor and the biases it created in the advice given.
12. I didn’t protect my profits, and I didn’t control my losses while they were still manageable – no risk management.

I could add even more mistakes to this list, but I think you get the point.

The punch line to this story is the stock never looked back and went straight to zero.

Related: Better investing through process, not product

I lost 100% of everything I invested which was most of what I had at the time. Ouch!

I never did go to graduate school. I decided to get an education investing instead, and I've never regretted that decision.

My Worst Investment Mistake Was Cheap Tuition

This first investment was the first of many tuition bills I paid to the school of hard knocks during my journey to investment success, and it was also one of the most painful.

What made it so painful was that I had no idea what went wrong. All I knew was that all the money I had worked for and saved for graduate school was gone, and I had made the decisions that caused it to happen. I was confused and hurting.

My question for you is: how many of the above investment mistakes are you making? How much are these mistakes costing you?

“The worst mistake investors make is taking their profits too soon, and their losses too long.”– Michael Price

One of the key factors to my investment success is that I always try to learn from my mistakes.

I constantly improve my investment skills by studying each losing investment to understand what went wrong with my strategy, and then I set up disciplines to assure I never make the same mistake again.

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Over time, the investment lessons learned from this process of dissecting investment losses has paid returns many times in excess of what the losses cost.

In other words, I took the pain of this financial catastrophe and used it as motivation to learn what works in the markets, what doesn't, and why.

I didn't just say “oh well” and write off the loss to bad luck, tough market conditions, or faulty investment advice.

I didn't labor under the false premise that it wouldn't happen again or the market would come back.

I never deluded myself into believing more of the same investment strategy might make me a lucky million by finding the next Microsoft or IBM.

What about you? Are you using any of these excuses to dismiss your investment losses as not reflecting a fundamental flaw in your strategy?

“The willingness to accept responsibility for one's own life is the source from which self-respect springs.”– Joan Didion

Instead, I took responsibility for the loss. The reality is if it happened once, then it could probably happen again.

The only solution was to figure out what caused the problem in the first place so it could be avoided in the future.

Taking self-responsibility for your investment losses is the first step to improving your investment strategy so you can become a consistently profitable investor.

Nobody starts out as a great investor. Proper investing is a learned skill.

Related: Why you need a wealth plan, not an investment plan.

You now have indisputable, written proof that I began life as an investment idiot. Few people make more mistakes on their first investment than I did.

You can't do any worse than lose everything. Yet, I'm a successful investor today, and it's largely because I've learned from my mistakes.

Investment Risk Management is the Key

The final mistake on the list, #12, is probably the most crucial mistake to avoid. You must always invest with a risk management discipline. This is critical. Never violate this rule.

“The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning.”– Charles Tremper

If you make all of the other investment mistakes, you might still recover over the long-term if you don’t make Mistake #12.

The key to a consistently profitable investment portfolio is to control the losses for each individual investment.

The way you do that is through risk management. I violated this principle by allowing the stock to go from a winner to zero.

Controlling losses in each investment lowers the risk profile of your portfolio, reduces its volatility, and can increase its return.

This isn't opinion, it's mathematically provable. I’ve spent decades researching investment strategy and haven’t found an exception to this rule. That's a big statement, so please read it carefully.

Controlling losses when you make an investment mistake should be your primary concern. Learning from your losses should be your secondary concern.

“Cut your losses and let your profits run.”– American Proverb

Four Questions To Ask So You Profit From Your Worst Investment

Below are four questions to ask yourself when an investment loses money so you can turn a bad situation into something that creates a long-term benefit.

1. What flaw in your investment strategy caused the loss? (Hint: Blaming the loss on market conditions, bad investment advice, or bad luck isn't acceptable because that’s not self-responsibility. You must determine what you did to cause the loss because ultimately you're at fault.)
2. How are you going to limit the amount of loss so it doesn't become catastrophic? What's the exact mechanism and process?
3. What changes are you implementing in your investment strategy so that this loss serves as a springboard to greater, more reliable profits in the future?
4. What's your basis for believing this investment strategy change is valid? What studies, research, and market history can you cite as evidence showing your conclusions are factual and will lead to more consistent profits in the future?

The answers to these four questions could be worth a fortune to you over your lifetime.

They can turn each temporary loss into a long-term profit as you improve your investment skills and knowledge with every mistake made.

These questions can springboard your investment performance by focusing your attention on what works, what doesn’t, and why.

It’s important that you ask these questions after every investment loss because what you do with your losses will ultimately determine your wealth.

I’m living proof of that truth.

How can you tell the difference between false prophets and legitimate financial advice?

How do you know if the financial expert sitting across the desk can actually help?

Is his primary interest to pad your pockets, or his own?

Below are 12 questions to consider before placing your trust in anyone claiming to be a financial mentor, advisor, money manager, expert, or guru.

This list results from a lifelong career as both an investment advisor and financial educator. It's a common sense, insider's guide to financial advice so you don't get ripped off.

1. Is The Financial Advisor Already Doing Exactly What He Advises You To Do?

The advisor must have a successful track record practicing exactly what he preaches. Nothing less will suffice. What that means is:

1. Don't get your investment advice from someone who built his wealth through marketing investment advice instead of actual investing. This holds true for many big-name financial gurus, money managers, brokers, and advisors.
2. Don't get your investment advice from someone whose primary function is to sell investment products (stocks, bonds, mutual funds, etc.) because it's an inherent conflict of interest that biases the advice you receive. This is especially true for most stock brokers and financial planners. Instead, separate the investment planning function from the investment product sales function. Pay for each separately.
3. Don't get your financial advice from academics with lots of fascinating theories but little real world experience. Real world practicalities differ from theoretical academic assumptions.
4. Don't get your financial advice from authors and writers who are paid to write, not invest. Their skills and experience are for writing – not investing.
5. Don't get your stock investment advice from someone who built his wealth in real estate or business because success in one field doesn't necessarily equate to success in a related, but different, field. The critical issues to success in each field are subtly but significantly different.
6. And last but not least, never accept financial advice from anyone who isn't already financially successful because they lack one necessary qualification: proven results. That includes your Uncle Bill, parents, friends, coworkers, and anyone else you know who has an opinion (doesn't everyone?), but no results proving the quality of that opinion.

In short, only learn from those experts who have “walked the talk” before you and can speak from personal experience with integrity.

Related: How Your Financial Advisor is Taking 75% of Your Retirement Income (or More!) Video, PDF download, or Audio.

There are many self-proclaimed gurus out there, but few have gotten muddy in the trenches at the school of hard knocks and emerged with enviable results and valuable lessons to share.

You're better served moving on to someone who can speak from actual experience doing exactly what they're advising you to do.

2. Is The Financial Advisor Still “Walking the Talk”, Or Is He “Marketing the Talk?”

When I became a real estate investor, I sought out experts to teach me a wide variety of investment strategies, including foreclosures and tax lien investing. What I learned surprised me.

Many of the big name gurus no longer practiced what they preached. They did the tax lien or foreclosure business years earlier, and switched to selling instructional courses about their experience once market conditions changed.

The fact was they no longer invested according to what they were teaching.

“Walking the talk” means doing the same thing with their own time and money that they recommend you do. If they recommend you invest a certain way, then it should be good enough for their portfolio as well. If not, then why?

Always act cautiously when someone is pitching an investment if their money isn't at risk exactly like yours will be.

Related: Learn how to invest like Todd

The fact that my tax lien and foreclosure teachers weren't investing in tax liens or foreclosures at the time was important information. It raised a red flag and motivated greater due diligence. After a little more digging, I learned the reasons why, and it saved me a lot of wasted time and money.

Anytime someone is selling you an investment or educating you on an investment strategy, find out what they're doing with their own money. You should be concerned whenever someone isn't investing using their own advice.

The one exception to this rule would be when the advisor's financial goals and needs are so different from the student's that different strategies for each party are appropriate.

3. Will The Advisor Show You Actual Proof That His Financial Advice Works?

If your advisor is a successful investor, then they should have verifiable results to back it up. If they won't show you proof, then you should wonder what they're trying to hide.

For example, I have an extensive list of client testimonials for my coaching services, newsletter, and educational products providing independent testimony to their results and value.

In addition, I provide references of past and present clients to those prospective students who are seriously considering a coaching and mentoring relationship and want to verify the service quality.

The real proof, however, is in my actual financial results. I have more than $1 dollar in liquid net worth for every dollar I have ever earned in my lifetime as verified by Social Security Administration documentation.

Very few people can pass this test. Do you have more money sitting in investment accounts than you've earned over your lifetime?

The only way your liquid net worth can exceed your lifetime earnings (placing a zero value on your home and business assets) is if you inherited a lot of money or you're good at managing your personal finances and investments.

Results speak the truth – accept nothing less.

4. What's The Financial Advisor's Background, Education, Training, Skills, and Experience?

Not all financial advice is created equal.

A hedge fund manager who has completed many years of independent research with twenty years of real time trading experience will provide advice from a higher quality experience base than a business school graduate trained in product sales by a brokerage firm.

Learn from the best and accept nothing less.

The sad reality is many financial advisors are trained by their parent company to tow the party line. Few financial advisors have completed any independent research to provide a basis for forming their own investment opinions.

Their knowledge is often limited to official policy, traditional practices, and company dogma. The result is they speak the company doctrine as if it were true because that's all they know.

They aren't bad people: they just don't know enough to know what they don't know. The net effect is you get bad financial advice.

Related: How Your Financial Advisor is Taking 75% of Your Retirement Income (or More!) Video, PDF download, or Audio.

You can't understand a person's financial advice until you know the shoes they're standing in. Their experience and training color their advice.

There are several levels of knowledge in the financial advice business, and the unfortunate reality is the bulk of retail financial advice comes from the ground floor level. You want top floor financial advice.

See My Related Book…

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For a complete listing of resources to investigate the background and experience of your investment broker or financial advisor, please see the related articles in this site under “investment due diligence” and “investment fraud prevention“.

5. Has The Financial Advice Been Tested Through Multiple Market Cycles?

Building and preserving wealth requires a full-cycle perspective.

You must not only make money during rising markets, but you must also preserve that wealth and control losses during declining markets. Anything less is only half of an investment strategy.

Beware of the “one-hit wonder” that gets lucky by investing in the right place at the right time and then goes on to write books about his financial expertise. Don't be misled.

Just because someone loaded up on technology stocks or real estate before a bull market handed him sudden wealth doesn't mean he knows anything about how to preserve that wealth during the next down cycle, or how to grow it through different market cycles in the future.

Related: How to be a pro at growing your wealth

If you're not clear on the importance of this point, then check out the legal and financial history behind people claiming to be financial experts. The internet makes the process of uncovering dirt on anyone remarkably easy.

You might be surprised to find out which “experts” have a history of bankruptcy, financial, and legal problems (their names aren't listed here to avoid legal hassles).

They might be masters at marketing and leverage who ride high on the wave of their latest endeavor, but their checkered history shows an inability to manage risk and preserve that success through a full market cycle.

Just because someone is famous doesn't make them immune from this rule.

Make sure the financial advice you receive has been tested through inflations, deflations, bull markets, bear markets, nuclear melt-downs, Presidential assassination attempts, and anything else you can imagine. Murphy's Law is “law” for a reason.

Anything that can go wrong will – and at the worst possible time – so make sure your financial advice can manage risk for the worst outcome and profit under all reasonable assumptions.

6. Are You Being Told The Negative Along With The Positive?

There's no perfect investment strategy. Anyone claiming to have one is either self-deceived, or a liar.

You don't understand an investment until you know all the ways you can lose money with it.

“A piece of advice always contains an implicit threat, just as a threat always contains an implicit piece of advice.”– Jose Bergamin

If the person offering you financial advice isn't forthcoming with all the potential problems (so you can make a fully informed decision), then you aren't getting the whole picture. You need to know the risks as well as the potential rewards. Settle for nothing less.

Similarly, if your investment advisor isn't forthcoming with his mistakes and losing experiences, then they're either inexperienced or dishonest.

I have made more investment mistakes than I have room to share with you here, and I've also made enough good decisions to have done very well over time.

Every investor makes mistakes, and every financial strategy has an Achilles heel. Learn them, or risk being blindsided.

7. Does The Financial Advice Over-Simplify An Inherently Complex Subject?

Buy and hold is one of the simplest investment strategies available. You can explain how to do it in just a few paragraphs.

Yet, it would take an entire book to fully understand the risk versus reward implications of this strategy in your portfolio today.

Highly trained financial experts using identical data to prove their points can't agree on even the most simplistic financial advice such as buy and hold, let alone more complex financial issues.

Be wary of financial advice that's reduced to clever sound bites or appears to be cut and dry. If it's that obvious and simple, then it's probably wrong or incomplete.

Most financial issues, when deeply understood, are subtle shades of gray. They require a depth of understanding that leads to a well-considered decision.

“Honest advice is unpleasant to the ears.”– Chinese Proverb

When you encounter financial advice that makes the investment process sound easy, just assume it's a sales technique.

Salespeople know the average investor is averse to complexity and wants his financial decisions handed to him, neatly packaged, on a silver platter. For that reason, they simplify the analysis to make the decision easy for the client so they can get the sale.

Building wealth isn't easy, and investing properly isn't simple. If it was, more people would succeed at both. However, they don't, and the statistics prove it.

No matter what the gurus tell you, building wealth takes persistent work, well-developed plans, diligent follow-through, and involves risk.

Related: The science of investment strategy – simplified!

I know financial advice like this won't maximize my sales, but it gets results for those who are willing to follow it.

8. Is The Financial Advice Driven By Facts or Opinion?

Never confuse facts with opinions in the financial advice you receive.

Opinions are useless clutter that complicate investment decisions. Facts are what matter.

Most financial advice blends the two together, and your job is to extract the few facts from the myriad of opinions so you can disregard the rest.

Examples of opinions include:

• A forecast for the economy
• What price levels a stock is expected to go to
• What a company is expected to earn
• What industries should grow the best

Ignore all such nonsense because it requires an accurate forecast for the future, and forecasts have conclusively proven to be unreliable through multiple independent studies.

“To know the true reality of yourself, you must be aware not only of your conscious thoughts, but also of your unconscious prejudices, bias and habits.”– Unknown

Facts worth knowing include current valuations and what those valuations imply about expected returns based on historical precedent.

Other facts include what's happening now or what has happened in the past, as contrasted with opinions about what's expected to happen in the future.

Facts are true and knowable right now and include hard data and numbers. Opinions result from the interpretation of those facts.

Never confuse opinion with fact because it can muddle your thinking and lead to erroneous conclusions.

9. Is The Financial Advice A Complete Strategy Or Just A Half-Truth?

What good is a buy recommendation without clear criteria for when to sell? What good are sell criteria without a clear strategy for reinvestment?

Beware of any advisor providing a buy recommendation without simultaneously providing clear criteria that would invalidate that same advice and force a sell. Quality investment advice provides a complete process of buying, selling, and reinvesting.

Even more important is that all buy, sell, and hold recommendations are based on thorough historical research indicating a positive mathematical expectation.

Anything less is gambling.

Related: Why you need a wealth plan, not a financial plan.

In short, all investment advice must be a complete process in order to be actionable. It should be based on a proven, positive mathematical expectation to reliably profit and meet your investment objectives.

Is your financial advice providing all the information you need to take proper action? Is it based on someone's beliefs, forecasts, or hunches rather than quantitative research and historical precedent? If yes, then it's gambling rather than investing.

10. Is Risk Management A Primary Focus, Or An After-Thought?

Risk management is what separates professional investors from amateurs.

It's how your investment portfolio can earn consistent returns through a wide variety of market conditions. For that reason, I would never trust a financial advisor whose first concern wasn't managing risk and preserving capital.

“I violated the Noah rule: predicting rain doesn't count; building arks does.”– Warren Buffett

Unfortunately, most financial advice focuses on making money – the offensive half of investing – because that's what sells best.

Risk management teaches you the defensive half of the investment game by showing you how to control investment losses when adversity strikes.

A complete financial strategy requires both halves of the investment equation to earn consistent returns with a favorable risk to reward ratio. Anything less is a dangerous half-truth.

11. How is Your Financial Advisor Compensated?

You can't determine the validity of the financial advice you receive until you know how your advisor is compensated for providing it.

For example, magazines and other media are driven by subscription and/or advertising revenues. Therefore, the publisher has an incentive to provide financial advice that maximizes those revenue streams even if it's diametrically opposed to your best interests.

Stock brokers and financial planners are often compensated by commissions and other incentives which can affect their recommendations.

Related: How to make more from your investing by risking less

This is why their financial plans seldom include direct ownership of investment real estate or building a business even though these are two of the most common ways to build wealth (click here to see our entire wealth strategy course so you can retire earlier than old).

“Free advice is worth half the price.”– Robert Half

You should always separate the financial advice function from the investment product sales function, and you should pay for them separately. Anything less causes a conflict of interest.

At Financial Mentor, the only thing we sell is financial education to help you retire early and wealthy. We have no hidden incentives from investment product sales or advertisers to bias what we say.

We never tout stocks, mutual funds, or any other investments, and you should be wary of financial advice from anyone who does.

Our job is to help you understand how the financial world works and what it really takes to build wealth.

When you're armed with the proper knowledge, then you can take control of your financial future and make the best decisions for yourself while ignoring all the biased and conflicted advice you receive from others.

12. Is The Financial Advice Generic, Or Is It Designed To Your Personal Needs?

One size doesn't fit all.

You're unique with different goals, resources, abilities, and needs compared to everyone else. Does the financial advice you receive take those unique characteristics into account?

It's not enough for your financial advisor to type your personal information into a computer and have it spit out a pseudo-customized financial plan with glossy pie charts designed to gather dust on your office shelf.

A computer can't know your skills, interests, and abilities, and these very attributes are what you'll be leveraging to build financial security.

You need a personalized wealth plan that serves as a step-by-step blueprint on your journey to financial security.

Similarly, beware if your financial advice is coming from a one-size-fits-all seminar or generic “mentorship” program. The odds of it fitting your individual needs are very slim.

The same goes with newsletters and magazines that can't possibly provide advice specific to your personal situation. After all, how can information simultaneously provided to millions of people at the same time be personalized to your needs?

That's why I designed the Seven Steps to Seven Figures course series into individual step-by-step modules. You only have to take modules appropriate for your personal needs. You don't have to waste time on inappropriate or unnecessary information.

You start your education based on what's most important to you now and end where you want so you get only the information that's right for you.

In Summary

Always remember that information from investment product sales people and the media should be taken with a grain of salt and a pound of caution.

Never invest based solely on their financial advice without completing your own due diligence and forming your own opinion based solely on the facts provided to you.

Ask first if the financial advice you receive can pass these twelve questions. Otherwise, don't put your money at risk:

1. Is the advisor already successfully doing exactly what he is advising you to do?
2. Is the advisor still “walking the talk”, or is he just “marketing the talk?”
3. Will the advisor provide documented proof that his advice works?
4. What's the advisor's background, education, training, skills, and experience?
5. Has the advice been tested and proven successful through multiple market cycles?
6. Does the advice provide a balanced viewpoint with both positive and negative attributes, or is it a one-sided sales job?
7. Does the advice over-simplify the inherently complex nature of investing in an effort to make the sale?
8. Is the advice based strictly on facts or does it include meaningless opinions?
9. Is the advice a complete investment process, or a half-truth?
10. Does the advice focus primarily on risk management and capital preservation?
11. How is the advisor compensated? What are his conflicts of interest?
12. Is the advice personalized to your needs, or is it generic?

Learn how to manage all the confusion surrounding the conflicting and contradictory financial advice so you can make well-educated decisions that are appropriate for your unique path to wealth and independence.

When you know how to sort good financial advice from bad then you can make smarter, more profitable investment decisions. I hope this due diligence checklist helps.

Let's begin with a story…

In the early 1990s, I managed a portfolio for a successful hedge-fund.

We operated multiple investment systems, each with a unique risk profile. One of those systems was a long-short equity portfolio.

We hired a reputable, big-name, institutional brokerage firm to transact the trades for our account. We agreed on a commission rate to fairly compensate their services.

Unfortunately, fair compensation wasn’t enough. They wanted more.

“Fraud is the ready minister of injustice.”– Edmund Burke

How Wall Street Legally Deceived Me

The first symptom that something was wrong was when I noticed inconsistent trade execution. I tracked the market for each stock when I called in my orders (yes, we used the phone back then), and noticed most trades were well-executed.

However, an occasional trade would come back significantly out of line with market pricing at the time of the transaction. The difference was always in the expensive direction.

I questioned the broker on these trades but he couldn't find a problem … yet the problem persisted.

To make a long story short, I did some research and determined that each of the poor executions were NASDAQ listed stocks, which this particular brokerage firm made a market in.

Apparently, the law allowed that firm to add a “markup” beyond the ordinary bid-ask spread to securities they made a market in – without disclosing it to me.

In other words, not only were they collecting the agreed upon commission on these transactions, but they were also charging an additional markup beyond normal bid-ask spreads that was diametrically opposed to the intent of our agreement.

When you're doing millions of dollars in trades, this can take a lot of money and move it from your pocket to your brokerage firms'.

The broker feverishly denied any such allegations (he lied) until I offered the account to a competing broker in the same office if he could prove my concerns.

Believe it or not, this broker provided internal documents proving his co-worker's misdeeds in an effort to steal the account (scumbag). I fired them all and moved the account to a competitor. There's no honor among thieves.

Related: How Your Financial Advisor is Taking 75% of Your Retirement Income (or More!) Video, PDF download, or Audio.

The purpose of this story is to show that even knowledgeable investors can be ripped off when Wall Street is legally allowed to hide the truth.

The brokerage firm did nothing illegal and there was no basis for a lawsuit; yet, the broker knew his actions were out of integrity because he went to great lengths to hide the truth. He took money he wasn't supposed to take and that isn't okay.

“It turns out that an eerie type of chaos can lurk just behind the façade of order – and yet, deep inside the chaos lurks an even eerier type of order.”– Douglas Hostadter

How can both realities coexist – clear wrongdoing, yet nothing illegal?

How does Wall Street covertly take money out of your pocket without committing investment fraud, and what can you do to protect yourself?

That's the purpose of this article.

The Antidote To Investment Fraud – Full Disclosure

I believe it should be illegal for any broker, financial advisor, fiduciary, brokerage firm, salesperson, or anyone else having contact with a client's money to receive any compensation or distribute any payment related to that account that isn't clearly disclosed upfront and direct in the form of a financial statement.

Written disclosures in contracts aren't adequate because few people read or understand them, and not having any disclosure is completely unacceptable. You must show the client the money – that's the key point.

In the previous example, it should have been illegal for my broker to receive compensation on the dealer markups without my receiving the same information on my financial statements.

It shouldn't be legal for them to hide that flow of funds from me. I never would have uncovered the fraud had I not been tracking each transaction closely and gone to extraordinary lengths to gain access to internal brokerage documents.

Related: The science of investment strategy – simplified!

Few people have the time and energy for due diligence like this. When you place an order to purchase a security, you trust that it will be executed at fair market price.

Allowing additional transaction costs to get netted into the price shown on the transaction statement so it’s hidden from your view is unfair.

Why should you care? Transaction costs are a critical component of many investment strategies.

Knowing your true transaction costs can make or break some investment strategies. It’s essential information to the investment decision.

“For a manipulation to be effective, evidence of its presence should be nonexistent.”– Herbert Schiller

It’s not fair for a broker to agree to one level of commission and pocket additional compensation behind-the-scenes that the client hasn't agreed to.

The money is flowing from your pocket to theirs and you don't even know it. You can't see it! That's an intentionally deceptive practice.

Only when the client sees the money does he have the information necessary to understand what financial incentives are affecting his investment account.

In theory, regulations exist to protect you from deceit like the above example, but Wall Street lawyers are clever.

They've figured out how to satisfy the regulators in legalese-filled documents that few read and even fewer understand while simultaneously hiding the money trail that tells the real truth.

They've supplanted straightforward financial disclosure with impenetrable legalese disclosure.

I support the written language disclosures currently in use because they're necessary and valuable. Unfortunately, they're also inadequate.

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Full disclosure should require reporting statements that show all payments and money flows associated with a client's account. No hidden charges, no behind-the-scenes kickbacks, and nothing covert is acceptable.

The reason the money trail is an essential disclosure is because dollars and cents are intuitively clear to the average investor where legalese is not.

There is absolutely no justifiable reason for not disclosing this information. All the money is fully accounted for internally by the brokerage firm. Why shouldn't the client see it? What are they hiding?

This one solution would unravel many of the legal yet deceptive practices that influence investment product sales. It’s a disclosure practice whose time has come.

What's The True Cost Of Your Mutual Fund?

Mutual funds report their returns on a net basis. The NAV, or “net asset value,” represents the market value of your shares and is net of all fees, management costs, and expenses associated with your investment.

The price you see is the NAV, but what happens to all the fees and expenses you're paying? Where do they get disclosed?

The answer is they are buried in the prospectus – that legal document almost nobody reads, but everyone should.

What you see in your account statements (the documents most investors read) are net numbers that never mention all the expenses and fees you're paying.

NAV pricing gives the intuitively misleading impression that there's no cost to owning your mutual funds since you never directly pay it or cut a check.

You may know those fees and expenses exist somewhere in the financial ether, but I've never spoken to an investor who can tell me how much they paid for the services of their mutual funds.

The fact is mutual fund expenses and fees vary widely. It’s critical information to your investment decision. To be fair, all this information is clearly disclosed in the prospectus.

Additionally, a significant advantage of net pricing is the ability for investors to compare a wide variety of fund performances without adjusting for varying expense and fee ratios.

In other words, net pricing isn't necessarily a bad thing. There are advantages that make the practice worthwhile.

However, they should balance the practice with proper disclosure in dollars and cents in your account statements showing exactly how much you paid out in fees and expenses.

When they show you the money, there's no confusion. Additionally, the information is readily available, so why hide it?

For example, imagine a hypothetical fund that pays 1.25% in management fees, .25% in 12B-1 fees, and .50% in expenses.

If you saw a return of 10% last year, you may be surprised to learn you actually made 12% with this fund. The rest got siphoned off behind-the-scenes in fees and expenses. You just never saw it.

“Observance of customs and laws can very easily be a cloak for a lie so subtle that our fellow human beings are unable to detect it.”– Carl G. Jung

However, if you received an account statement showing $2,000 coming out of your $100,000 investment, there would be no confusion about the cost of owning that fund.

You might start wondering if their services are really worth $2,000 each year, which is exactly the kind of thinking process they don't want you to have.

Similarly, if you notice better performing funds in your portfolio that were siphoning off much lower fees and expenses, that would be valuable information that might affect your investment decisions – information that's hidden from your view right now.

Staying with mutual funds, let's look more closely at the 12B-1 fees many mutual funds pay to financial representatives as a “marketing fee”.

This fee provides an annual trailer of revenue to the advisor for parking a client's money with that fund company.

It’s an incentive for the advisor to discourage that client from changing investments to generate another commission. It helps the broker keep “Keds on his kids” without having to make transactions.

“There is a wide difference between speaking to deceive, and being silent to be impenetrable.”– Voltaire

Again, these fees are fully disclosed in the legalese of your fund's prospectus, so there's nothing illegal about them.

The problem is not one investor in 10,000 can figure out how much a 12B-1 fee costs them in terms of decreased fund performance due to greater expenses, and very few even know what a 12B-1 fee is or what rate they're paying.

Yet, if the client's financial statements showed the payment from the fund company to the broker, virtually every client would understand exactly what a 12B-1 was and how much it costs them.

Why make it so elusive? What are they trying to hide?

This data is essential for the client to know. You need to see all funds flowing out of your account so that you have the information required to make a fully informed investment decision.

If the broker is paid based on money in the client's account, then the client should see what gets paid. Anything less is unacceptable.

Related: The inconvenient truth about buy & hold

Unfortunately, I've never heard of those payments being overtly disclosed. Instead, they're buried in never-read legal documents and paid covertly behind the scenes.

What are they trying to hide?

Please don't misunderstand my point here. I have no heartache over mutual funds and my attack isn't pointed at them. I see great value in certain types of mutual funds and utilize their services in my own portfolio.

I’m merely using them as an example of a system-wide problem of inadequate financial disclosure that negatively affects investor's decision abilities. You must show people the money. Anything less is inadequate.

Telling someone about expenses and fees in a disclosure document is one thing, but showing them the money on their account statement so that it's personal is something else entirely.

Disclosure documents are sterile and detached; dollars and cents in a client's account are personal and real.

I coach clients through the process of building their own portfolios, so I've seen how their investment decision process is affected when they learn about all the hidden fees and covert payments on Wall Street.

It’s essential information to making well-educated investment decisions, yet it’s hidden from most investors.

Why would any company hide these details if there was nothing wrong with what they were doing?

Think about that for a minute…

Brokerage Firms Deceptions Revealed

Just so you don't think I'm picking on mutual funds, let's broaden the discussion about hidden fees to include brokerage firms.

Again, the problem is system-wide and isn't isolated to any one group.

For example, did you know that investment brokers often receive graduated commission structures to motivate the sale of certain investment products over other products?

The full intention of this practice is to induce the pedaling of the more profitable goods even if they aren't the best deal for your portfolio.

Would you want to know that your broker is getting an extra incentive to talk you into a specific investment? Of course you would.

Related: Learn how to invest like Todd

Does that ever get disclosed to you, the client, when you're getting pitched on the next great investment? Of course not, because it would ruin the sales pitch.

Graduated commission payments can bias the investment advice you receive. It’s valuable information that should be disclosed at the point of sale and should appear in the transaction confirmation.

But have you ever heard one example of this disclosure being made, despite the deception occurring uncounted times daily? Never.

It’s not enough to just speak the truth. It must be the whole truth and nothing but the truth. What you don't disclose is just as important as what you do disclose.

Burying written disclosures in impenetrable documents while hiding the money trail shouldn't be allowed.

I'm not picking on brokers any more than I’m picking on mutual funds. The problem is system-wide. It’s part of the way Wall Street does business, and it needs to change.

For example, did you know that many brokerage firms sell your trades to the highest bidder? They can shop your trade executions based on what's most profitable to them… instead of you.

The way it works is when you enter an order to buy 100 shares of XYZ stock, there are three components to your total transaction cost:

1. Commission: This is the one cost most people understand. It’s the most apparent component and is fully disclosed, but it’s usually the least significant component of your total transaction cost.
2. Bid-Ask Spread: Every market has a buy and sell price – the bid and the ask. The difference between these two prices represents profit for the market makers and dealers transacting in that stock. When buying stock, you pay the premium half of the spread, and selling stock earns you the discounted half. The spread can be quite expensive in illiquid stocks, but declines as liquidity increases.
3. Slippage: This represents the difference in price between when your order was entered and when it gets executed. For example, in fast moving markets, prices can move quite far between the time your order gets entered and the time it’s executed.

“What is the difference between unethical and ethical advertising? Unethical advertising uses falsehoods to deceive the public; ethical advertising uses truth to deceive the public.”– Vilhjalmur Stefanss

The combination of these three components represents your total transaction cost, yet most investors only pay attention to their commissions.

That's the number they see disclosed on their financial statements. The other two components get buried in the price you pay (or receive) for the security.

That's why many brokerage firms pad their pockets by selling your orders off to the highest bidder. It doesn't show up on your statements. You aren't any wiser because the money trail isn't disclosed, and they get richer.

It's a classic conflict of interest because your profits require best execution, but their profits require highest bidder for the order.

Given the fact that your brokerage firm controls your order flow, who do you think is going to win in this conflict of interest? The net effect is paying the lowest commissions may cost you a fortune because it may result in the highest total cost transaction.

That means you must look at total transactions costs – not just commissions.

But don't take my word for it. According to Michigan Senator Carl Levin, “Payment for order flow is a good deal for the broker, but too often a bad deal for their clients. The SEC needs to get after this problem quickly and aggressively.”

Similarly, an SEC investigation found certain unnamed brokers “improperly emphasized payment for order flow in deciding where to send orders.”

In other words, your order was executed based on what was most profitable to the brokerage firm instead of what was most profitable to you.

That isn't right. It should be illegal. It’s a clear break of fiduciary responsibility.

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But it doesn't stop at order flow because the investment advice you receive to place these orders is biased by clandestine financial incentives.

Merrill Lynch settled with the New York Attorney General for $100 million on allegations of recommending stocks to their brokerage clients in an attempt to garner favor in their investment banking business.

Other large-name brokerage firms have been investigated for similar allegations by the SEC.

Again, this problem is widespread on Wall Street. It’s the deceptive way business is done. According to a New York Times article, “When Hidden Fees Erode 401(k)s”, some fund companies rebated part of the administrative fees paid by employees as part of their 401(k) back to the employers or outside plan administrators who hired them.

Doesn't that sound like a hidden conflict of interest you would want to know about? Since when should you be paying your employer out of your retirement plan assets?

And if you think these kickbacks don't really matter, think again. According to the same article, a hypothetical 401(k) where you invest $5,000 per year for 30 years with a 10% annual return would grow to $863,594.

A mere .25% kickback will reduce that amount by $40,883. That's nearly 5% of the compounded value of the account.

Fees matter… a lot! That's why Wall Street aggressively charges them.

Related: How to be a pro at growing your wealth

If fees were 1% (like on many smaller 401(k) plans) the reduction in account value would be $151,387. Ouch!

In short, not showing you the hidden financial incentives and behind the scenes payoffs is a widespread, very expensive problem.

What Can You Do To Solve The Problem?

The solution is simple: Wall Street needs to show all payments and flows of funds having any relation to a client's account directly on the account statements in dollars and cents.

Net pricing and hidden payments must end, and all financial incentives that bias investment advice must be disclosed at the point of sale. Show me the money flow.

My opinion is Wall Street doesn't disclose the money flows, biased advice, and graduated commissions for one simple reason: they don't want you to know. They have something to hide.

Look at your own life – when you hide facts, isn't it because you're doing something wrong? Is Wall Street any different? This isn't some grand conspiracy theory, but is simply common sense.

“Nothing is easier than self-deceit. For what each man wishes, that he also believes to be true.”– Demosthenes

Some might claim I'm too pessimistic about Wall Street; however, I see my skeptical stance as merely balanced.

I love the investment business, but I hate the way this industry hides its financial conflicts of interest.

If something walks like a duck, quacks like a duck, and looks like a duck, then it’s probably a duck. There's no value in deceiving ourselves.

If a used car dealer recommended a specific car, would you trust him and blindly buy the car? No, you would get it checked out because you implicitly understand his financial incentive biases his advice.

Unfortunately, the financial incentives biasing the investment advice you receive aren't as obvious because they're hidden from view. That's what must be fixed.

Investment companies are no different from car companies. Everybody has something to sell, including you and I.

Peddling used stocks and bonds is no different from peddling used cars … except people trust used stock salesman because the conflicts of interest are better hidden. This allows the veil of fiduciary responsibility to persist in the mind of the customer.

My goal is to lift the veil of fiduciary responsibility from your investment decision. You're responsible for your investment decisions because nobody cares more about your money than their own. Believing otherwise can be expensive.

False belief in the fiduciary myth gives an unfair advantage to Wall Street. The truth is Wall Street isn't working for your best interests.

They're working for their own. They peddle investments to make a buck – that's their business and there's nothing wrong with it.

What is wrong is how they're allowed to get away with an extraordinary number of deceptions in order to maintain the veil of trust, giving them an advantage over you.

When you trust, then you don't watch carefully, and that can cost you money. As this article has shown, you need to watch your investments very carefully. You shouldn't trust.

I tell you this information not to scare you away from investing because that won't do you any good. Nobody ever grew wealth or preserved wealth by avoiding investing.

Wall Street may not be perfect, but it’s the only game in town for paper assets.

You have no choice except to work with what you've got – warts, blemishes, and all. The empowering choice you can make is to invest with both eyes wide open so the ethical shortcomings don't cost you money.

Stop trusting and start asking hard questions. Knowledge is power.

Finally, I don't want to give the wrong impression that Wall Street is filled with pirates. Many good people are doing their level best to provide the greatest service possible in this conflict-ridden industry.

I have friends and family members in the investment advice business who are honorable and ethical.

This isn't an attack on all the good people in this industry, but it’s an attack on the industry-wide disclosure system that's hiding the truth from individual investors.

My job as an educator is to help you become a more informed, educated investor.

Approaching all investment advice with a skeptical eye and carefully uncovering all the hidden costs built into your investments is part of making smart investment decisions.

I know this isn't a fun topic, but reality is what it is whether we like it or not.

The bottom line is Wall Street has something to hide, and they prove it every day by hiding it from you and I. When they stop hiding, maybe I’ll start trusting.

In the meantime, forewarned is forearmed. Knowledge is power.

Use this knowledge to make better, more informed investment decisions so you put more money in your pocket… and less in Wall Street's pocket.

Investigators and prosecutors can't protect you from investment fraud.

Even with secured, regulated investments, you should always assume fraud is a possibility.

The front-line of defense against investment fraud is an educated and skeptical consumer. You must protect yourself. That's why due diligence is necessary.

The reason investment fraud succeeds is because people are lured into emotional decisions by con artists without first completing their due diligence.

Due diligence is what forces you to look behind the façade, uncover the facts, and make a well-reasoned decision.

Unfortunately, due diligence also takes time and effort, and the sad reality is most people spend more time planning their vacation than they spend on investigating their investments.

“Let the fear of danger be a spur to prevent it; he that fears not, gives advantage to the danger.”– Francis Quarles

Con artists are different. They do their homework first. They learn persuasion techniques designed to convince you to buy on faith without investigating.

They study the characteristics of affinity groups to create a sense of trust and common bond. They have well-rehearsed answers to common questions.

In short, they're professionals out to get you.

Related: How Your Financial Advisor is Taking 75% of Your Retirement Income (or More!) Video, PDF download, or Audio.

If it's worthwhile for the con artist to spend so much time and energy preparing a strategy to scam you out of your money, wouldn't it make sense for you to spend a little effort to prevent his success?

Below is a step-by-step due diligence process to help protect your portfolio from investment fraud.

Each step in the process becomes increasingly difficult for the investment to pass and increasingly more cumbersome for you to apply.

For that reason, start at the beginning, because few investment frauds can pass even the most basic tests.

This will keep things simple and only require you to implement the more detailed due diligence questions on rare occasions.

Investment Fraud Prevention – The Business Common Sense Test

The first thing to notice about investment fraud is it's usually promoted by promising a high return on your investment.

Easy money, get-rich-quick returns are almost universally appealing to less experienced investors.

It’s a powerful sales tool. But do returns in excess of market rates pass the business common sense test – our first test for investment fraud?

The reality is investing is nothing more than the application of capital to business.

As a result, your return on capital must be consistent with the laws of a competitive business environment. The high returns must make business sense.

“Nature never deceives us; it’s we who deceive ourselves.” – Jean-Jacques Rousseau

Above market returns only make business sense if a competitive advantage exists that you can exploit, but other potential competitors can't.

The reason is because excess return on capital (above market rates) will always attract sufficient new capital to lower those returns back in line with the expected risk.

It's called competition, and the only time it doesn't hold true is when artificial barriers limit capital inflows, or a proprietary investment edge exists that can't be exploited by competitors.

Below are two questions to help you apply the business common sense test for any investment:

(1) How exactly does this investment strategy create above market returns? What is the competitive advantage?

Ask yourself if the answer you're given is complete, thorough, and makes business sense. Is the answer glib, laced with jargon and techno-babble, or is it simple and straightforward?

Do you understand the competitive advantage well enough to explain exactly how it works to someone else? If you can't explain it, then you don't understand it.

(2) What are the barriers that will lock out competitors so that additional capital and supply doesn't force returns down to market level?

There must be a legitimate business reason that returns will remain excessive. Again, does the answer pass the common sense test or does the explanation sound like something from the Top 26 Warning Signs of Investment Fraud? Can you explain the reason why to a friend in every day language?

Fully exploring these two questions should help prevent investment fraud right from the beginning. In order for an investment to pay you above market rates of return it must have a competitive advantage and barriers to competition.

Related: A better investment strategy than buy and hold

If it doesn't, then it can't pass the business common sense test for legitimately offering above market rates of return.

How The Sales Person Reacts To Your Due Diligence Questions Is An Important Clue

As you begin asking due diligence questions, it’s important to notice the quality and tone of the sales person's response. This can provide you with vital clues to the quality of the investment he's peddling.

Serious questions are a symptom of a serious buyer, and honest salespeople know it, welcome it, and respect it. They have nothing to hide and they'll attempt to simplify their answers so you can understand the investment and make an informed decision.

Buying investments should be a professional, businesslike experience – not warm and fuzzy like a trusted friend, nor too cold and abrasive like a distant competitor – but just right, like a professional you respect.

“Never value the valueless. The trick is to know how to recognize it.”– Sidney Madwed

Watch out for the “Friendly Fred” fraud sales tactic where you feel too guilty to ask pointed questions because he's such a nice guy. After all, how could you not trust such a charming person?

Alternatively, the salesperson might become cold and use intimidation tactics to make you feel stupid and derail you from getting the answers you deserve.

Excessively warm and cold sales tactics are designed to bring emotion into the sales decision and derail common sense. That's a key point.

Another tactic sometimes used by investment fraud promoters is to respond to your questions with techno-babble terminology so you become too confused or intimidated to ask more questions.

They might claim the investment is too technical to understand or get irritated with your questions. The purpose is to keep you from looking behind the façade and finding the truth.

What you want is a professional sales environment where a rational, fully informed decision can be made. You want to ask your questions and get straightforward answers.

Never allow trust, friendship, or emotion to get in the way of that task. It's your money, and investing is serious business.

When you don't understand an investment, it doesn't mean you're dumb, it simply means the investment doesn't make sense.

If they make you feel dumb, then go ahead and be dumb and get your questions answered anyway. Be like “Columbo” from the TV series and be dumb like a fox.

“Blinding ignorance does mislead us. O! Wretched mortals, open your eyes!”– Leonardo Da Vinci

Never be intimidated or allow the con man to sidetrack you with flippant answers that lack substance. Con artists are second only to politicians in evasion and double-speak.

Don't allow their manipulative tactics to derail you from getting behind their façade. Never settle for anything less than a complete and detailed understanding that allows you to make a fully informed investment decision. Drill them on the details until you get the answers you deserve.

It's your money. You're taking the risk. You deserve to know what you're getting involved in. Accept nothing less.

Investment Fraud Protection: How Can I Lose Money?

If the proposed investment passes the business common sense test and your sales person is providing reasonable answers to your questions, then the next step in due diligence is to understand all the ways you can lose money with the investment.

Why? Because you can't understand an investment until you know the risks. Investment fraud is often sold on the basis of high returns with little or no risk, but this sales appeal is pure nonsense.

“Approach each new problem not with a view of finding what you hope will be there, but to get the truth, the realities that must be grappled with. You may not like what you find. In that case you are entitled to try to change it. But don’t deceive yourself as to what you do find to be the facts of the situation.”– Bernard M. Baruch

Every investment includes risk of loss and anyone who tells you otherwise is either a liar or self-deceived. There's no such thing as a perfect investment.

The investment business is a constant battle between risk and reward. You can't have one without the other.

Related: How to take back control of your portfolio

I've detected investment fraud in hedge funds just by noting track records that were too good to be true. Later discoveries by regulatory authorities verified my suspicions.

I've researched thousands of investment strategies and never found an exception to the rule that every investment has risk, either in terms of purchasing power loss, opportunity cost, or outright capital loss. There are no exceptions. All investments have risk.

To discover the risk of loss, ask the promoter the following questions, and don't be surprised if you have to press hard to get thorough answers:

1. What are all the conditions under which this investment will lose money?
2. What's the worst market environment for this investment strategy?
3. What assumptions or correlations must remain valid for profits to continue?
4. What crazy, impossible to imagine situations would result in losses if they actually occurred, no matter how remote the possibility of their occurrence?

Until you uncover the risk inherent in the investment strategy, then you don't understand the deal. If the risk doesn't appear, then the investment probably isn't legitimate or you don't understand it well enough.

Additionally, be wary of guarantees. The more an investment is touted with a guarantee, the more I want to know what I am being guaranteed against.

Guarantees are frequently marketing tactics designed to make you accept claims at face value, invoke trust, and make your decision easy so you don't look deeper into the issues. Don't fall for it. There's no free lunch in the investing game.

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Because investment fraud is often sold as low or no risk, one of the primary tasks in due diligence is to uncover all the ways you can lose money on the deal. You must know the risk because your objective as an investor is to balance risk with reward.

The only way to do this is by fully understanding the risk before ever committing a dime.

Investment Fraud Prevention: Selling To Individual Investors

As a former money manager, I can tell you that selling to many small investors is the most difficult way to gather capital.

If you're an individual investor being sold on the next great investment, then ask the promoter why he's trying to attract capital from “the little guy” rather than large institutions.

Underlying this question is the logic that it doesn't make business sense for a legitimately great investment organization to bother with all the marketing costs and headaches of many small investors.

They can attract all the capital needed (with a lot less hassle) by doing business with institutional investors.

“Integrity is the recognition of the fact that you cannot fake your consciousness, just as honesty is the recognition of the fact that you cannot fake existence.”– Ayn Rand

This may not sound nice, but it’s the business reality of money management and investing. Great investments will be marketed to large investors because it’s the most cost efficient way to raise capital. The little guy is left with the retail level stuff.

Related: How Your Financial Advisor is Taking 75% of Your Retirement Income (or More!) Video, PDF download, or Audio.

The primary reason investment fraud is marketed to individual investors instead of institutions is because individual investors rarely do their due diligence, and institutions nearly always do their due diligence. That makes small investors easier prey.

For that reason, be extra careful when non-traditional investments are marketed to individual, non-accredited investors in denominations under $100,000.

It’s another warning sign that should prompt you into even more detailed due diligence as shown below.

Due Diligence Checklist for the Promoter

If an investment made it this far in the due diligence process, then it probably merits investigating the background of the promoter as follows:

1. Verify that the person and company offering the investment are registered with your state's securities regulator. You can contact the North American Securities Administrators Association (http://www.nasaa.org / 202-737-0900) for your local securities regulator's contact information. Request a copy of the offering from the regulator and determine if there are any complaints or actions recorded.
2. Contact FINRA (the Financial Industry Regulatory Authority: http://www.finra.org /301-590-6500) and the Securities and Exchange Commission (http://www.sec.gov / 800-732-0330) to determine if the company and promoter are registered. Request a copy of their offering and check for complaints and actions filed.
3. Determine the state in which the company is incorporated and use the National Association of Secretaries of State http://www.nass.org to find the contact information for the appropriate Secretary of State. Some state's information may be limited to officers and directors lists, and other states may offer more complete information such as annual financial statement filings or business plans.
4. Check with the Better Business Bureau http://www.bbb.org and state attorney general to see if there are any complaints filed against the company.
5. Verify all claims of patents, trademarks, and large contracts. Large contract claims can be verified with the counter-party and intellectual property claims can be verified whether completed or pending at http://www.uspto.gov the U.S. Patent and Trademark Office.
6. Search Google by trying keywords such as the company name, promoter name, investment name, and anything else you can think of. What's the buzz? Your goal is to find negative or contrary postings that might refute the promoter's claims or make you aware of previously unforeseen problems.
7. What are the track records, backgrounds, and histories of the person and company soliciting the investment?

8. How long has the company been in business?
9. Verify the company offices and address by physically inspecting for existence. Prestigious addresses can turn out to be little more than a mail drop location.
10. What background information can you obtain about the officers, directors, and other key personnel for the investment?
11. Review recent financial statements for the company. Have they been independently audited by a reputable accounting firm, or are the statements self-prepared?
12. Can you obtain a contact list of other investors for further due diligence? Be wary of handpicked reference lists. Determine the credibility of the references by discussing their background, knowledge, and level of due diligence. Just because they're happy investors doesn't mean the investment is legitimate. They could be self-deceived.
13. Are there any current or pending lawsuits or bankruptcies against the company or any of its officers or directors?
14. Determine exactly how the promoter will be compensated by the company if you purchase the investment. How does this compensation compare to competing investments? Above market sales compensation is a symptom of potential fraud.
15. Your local library can provide many other resources for researching companies and investments. For example, you can learn about the company, credit reports, lawsuits, judgments, liens and much more. Resources vary widely depending on your library so check with your local librarian.

Due Diligence Checklist for the Investment

Very few fraudulent investments should make it this far in the due diligence process. Most should be weeded out by now. However, here are a few more actions to add to your checklist to flush out the remaining few bad apples.

Related: Better investing through process, not product

1. Verify that the investment offering is registered with your state securities regulator and/or the Securities and Exchange Commission. Depending on capital and shareholder requirements, it may be exempt from SEC registration, but should still be required to register with the state. Get a copy of the offering document and read it.
2. Beware if the only written material you receive is a glossy brochure. Demand a prospectus and/or other legal disclosure documents as required by law.
3. Make sure you’ll receive regular written reports updating the investment. Review past issues of investor reporting for completeness, accuracy, and disclosure.
4. Determine how the funds solicited for investment will be used. Will the funds be segregated from other accounts available to the business?
5. What's the basis for the purchase price of the investment? Does it represent fair value?
6. What does it cost to own this investment? Are there any annual fees, holding charges, custodial fees, or hidden charges? Let the promoter know you want a complete disclosure of every last penny required to own this investment.
7. What is the liquidity of the investment? Can you sell it whenever you want to? Is there a ready market of buyers? What are the expected transaction costs when selling? What are the restrictions to selling?
8. If you're not confident or lack experience in a particular investment, then consider consulting with a third party such as your attorney, accountant, or registered investment advisor for a second opinion before investing.
9. Maintain a file with all correspondence and notes from conversations. Print a hard copy of all online solicitations noting the URL, time, and date. Get all claims, guarantees, and terms of the deal in writing. If it's not in writing, then it's not real.

Due Diligence Checklist Summary

The con artist's biggest fear is an informed investor. He doesn't want you to ask detailed questions; therefore, asking questions is exactly what you should do. Be a cautious and skeptical investor by investigating before you put money at risk.

If all of this sounds overwhelming, don't despair. Rarely will you have to complete the entire due diligence checklist to flush out an investment fraud. Most frauds won't make it past the first couple of tests.

However, if you're suspicious, then this checklist will help you find the information the con artist doesn't want you to uncover.

“We are never deceived; we deceive ourselves.”– Johann Wolfgang von Goethe

When asking your questions, never allow a salesperson to rush you into a decision. Don't be influenced by the charisma, kindness, or enthusiasm of the salesperson.

Additionally, don't take everything you read and hear at face value. The wise investor goes slow enough to ask their questions, reflects on the answers, and gets written confirmation of verbal statements. Don't be afraid to sleep on your decision for added perspective.

Related: Why you need a wealth plan, not an investment plan.

Remember, an ounce of prevention is worth a pound of cure. Due diligence may be a pain in the neck, but it’s also necessary. It’s simply a part of investing. Accept it, or pay the price.

Remember, once a con man gets your money, it's gone forever. The only solution is to do your homework upfront so the con man never gets the money in the first place.

This article may not be uplifting, but the unfortunate reality of investing is you must be skeptical because fraud does exist. People get cheated every day.

“You may be deceived if you trust too much, but you’ll live in torment of you don’t trust enough.”– Frank Crane

Likewise, there's no value in paranoia because most regulated investments and dealers are honest.

It won't serve you well to walk through life believing there's a con man lurking around every corner ready to steal your money. However, you should be cautious and realize you’ll eventually turn the corner and stand face to face with a con man.

You must be prepared when that day occurs, and this due diligence checklist will provides the answers you need.

Most people want wealth, but few will do what’s necessary to create it.

Why do people want certain things, and never take action to achieve them?

What subconscious thought process causes a disconnect between desire and doing what’s necessary to fulfill the desire?

The reality is almost anyone regularly employed, from ditch-digger to doctor, can achieve financial freedom with relatively minimal effort.

Surprisingly, almost nobody will.

All you have to do is start living by specific, proven financial habits early enough with sufficient consistency. The result will be financial freedom with almost total certainty.

Anyone can do it, yet studies prove fewer than five percent actually reach the goal. It's absolutely amazing.

Why do so few people succeed at creating wealth when so many desire it… and it’s not that hard to do? It makes no sense.

After all, financial freedom can have a powerfully positive impact on the quality of your life. You can live your dreams unencumbered by the shackles of financial constraints. You can eliminate money worries and stop spending so much of your lifetime working to earn it.

Instead, you can travel, play golf, relax, read, or do whatever you most enjoy. Wealth is a very alluring goal.

Yet, while most people dream of financial freedom, very few will turn those dreams into reality by taking the necessary action. Why?

This question has been one of the great mysteries of life for me. It ranks right up there with Black Holes, the Pyramids of Egypt, and “what is electricity”. (Frightening to know what financial coaches think about, isn't it?)

The Problem People Face When Creating Wealth … Solved

The mystery of why people don’t take action to fulfill their dreams was finally put into perspective when I read a statement from heart surgeon Christian Bernard.

This doctor claimed to have no sympathy for people who lacked the will power or commitment to stop smoking.

At first, this might seem like a heartless statement (pun intended), but you should pay close attention because his observation is very important.

What he observed is that he never had a heart transplant patient who couldn't stop smoking on the spot once they faced surgery. This is a critical and very telling point!

Faced with a massive coronary, surgery, and possible death, people were suddenly able to give up smoking. However, if you tell them about the health benefits of not smoking, you get nothing.

Until the client looked death right in the eye, he would just keep the habit up knowing full well that it was slowly killing him.

Dr. Bernard’s insight on smokers teaches us several lessons about human behavior that explain why most people are so amazingly unsuccessful at creating wealth.

First Principle For Creating Wealth

The first lesson we can learn from Dr. Bernard is that people are generally more motivated to avoid pain than seek pleasure.

“What we pleasure, and rightly so is the absence of all pain.”– Cicero

In the smoking example, the patient would continue smoking because stopping was painful. However, smoking gave immediate pleasure.

The health impact wasn’t as compelling to the smoker as the transient pleasure of the next cigarette, and the immediate pain that would result from not smoking it.

Once the heart surgery became imminent, the health impact was undeniable, painful, and very much in the patient’s face.

At this point, the smoking ends because the dramatic pain of surgery and possible death greatly outweigh the lesser pain of quitting smoking, or the transient pleasure of another cigarette.

People smoke because it gives them pleasure and quitting is painful. They stop smoking only when forced by a more compelling pain: surgery or death. That’s very important to understand.

The exact same issue occurs in creating wealth.

Related: Why you need a wealth plan, not a financial plan.

I can lecture on the benefits of saving and investing until I’m blue in the face, and people still won’t do it.

It’s a pleasure goal in the future that requires you to endure minor pains and inconveniences right now to achieve.

“The same refinement which brings us new pleasures exposes us to new pains.”– Edward Bulwer-Lytton

To get someone motivated enough to overcome lethargy, take risk, and confront the fear of change necessary to create wealth, there would need to be an immediate and substantial pain greater than the alternative of doing nothing.

Unfortunately, not building wealth won’t cause you any pain – at least not today.

There’s no motivator like surgery to force you into action. Because of that, few people proactively take action.

Let's face it, the consumer lifestyle (which is antithetical to creating wealth) isn't that bad on a day-to-day basis. You pay your bills, drive an acceptable car, take a vacation, eat good food, and go out once in a while.

Your life is full and so is your tummy. Your pain threshold hasn't been reached or you would do something to solve it.

The rule is simple: you’ll do what it takes to create wealth when the pain of your financial reality exceeds the price you’ll have to pay to do something about it.

You know you should save, invest, and learn about personal finance, but it’s nebulous, and the consequences of putting it off aren’t immediately painful.

Like the smoker who slowly but surely inhales himself to poor health, the typical consumer slowly but surely spends himself into financial emphysema.

The reason is because wealth and financial security has no immediate call-to-action until it’s too late. In fact, not building wealth today gives you more time and money for other activities (pleasure).

Where’s the pain to motivate you into action now? It doesn’t exist… until it’s too late. And that’s the problem.

Second Principle For Creating Wealth

The second lesson we can learn from smokers about human nature is we're more interested in preserving our current comfort than maximizing our future comfort.

We prefer to have our transient pleasure now, even if it implies substantially negative long-term consequences in the future.

Related: How to be a pro at growing your wealth

For example, every long-term smoker alive is aware of the significant, negative health consequences of their actions. Yet they go right on puffing away because the health consequences are in the future and unknown. The pleasure is present and known.

They're more driven by present, known pleasure than future, unknown pleasure. This is a key point!

The same thing occurs when creating wealth. It requires you to make known, short-term sacrifices (pain) to reach an unknown, long-term goal.

This isn’t an easy sell, and it’s one of the major reasons why fewer than five percent ever retire with financial security.

Below is a sampling of comments I’ve heard reflecting this dilemma:

• “Retirement is so far in the future that it’s like another lifetime. Why bother with all the hassle right now when there are so many other urgent issues competing for my limited time and money? I’ll get around to it someday. There’s plenty of time.”
• “I’m afraid to take on investment risk because it could result in losses. I don’t like to bet my hard earned money on an uncertain outcome. Who knows what will happen? I worry about investing.”
• “I don’t understand investing and don’t like all the math and numbers. Learning about it makes me uncomfortable.”
• “Living on less than I earn so I can save and invest the difference means sacrificing lifestyle today. I really want the new car, new outfit, or swimming pool now. Maybe I’ll begin investing next year.”
• “Learning about investing and personal finance means spending time today for a future benefit tomorrow. I have other things that are bigger emergencies like work, phone calls, television, soccer practice, and making dinner.”

“The world is so constructed, that if you wish to enjoy its pleasures, you must also endure its pains. Whether you like it or not, you cannot have one without the other.”– Swami Brahnmananda

How many of these examples can you relate to? Each illustrates how proactively building your wealth requires you to regularly seek out and tolerate short-term pain and discomfort.

This creates resistance because we’re motivated to seek immediate pleasure now. Pain and discomfort demotivates us.

The reality is life will always provide you with alternatives to building wealth that bring more immediate pleasure.

Similarly, there will always be a more pressing emergency or fire to put out in the short-term than building wealth today.

Wealth is a long-term goal that will never appear important in the short-term – and that’s a problem.

If you want to succeed at creating wealth in your lifetime, then you need a different paradigm than most people typically live under.

You need to find immediate and deeply gratifying pleasure in the act of building wealth. You need to change your viewpoint from sacrifice to satisfaction if you ever want financial freedom.

But how do you do that?

Short-Term Thinking Kills Your Chances Of Creating Wealth

What gets people into trouble with smoking (and wealth building) is short-term thinking. You give greater priority to what’s most immediate rather than what’s most important.

That’s a critical point, so read it twice. Wealth is important, but it’s never urgent.

If you want to create wealth, you must prioritize your life in a different way. You can’t prioritize according to urgency or you’ll never succeed.

Imagine what would happen if you began prioritizing how you spend your time and money according to a long-term perspective.

Related: Here’s a scientific system to build your wealth now

It would turn every example in this article on its head and reverse the outcome.

In other words, short-term thinking is our automatic mode of operation. We deal with what’s immediate and compelling because it's a survival mechanism hardwired in our DNA.

However, modern society has advanced to the point where this survival mechanism is more harmful than good. Your life could be greatly improved if you learned to balance short-term decisions with a long-term perspective.

If the smoker prioritized the long-term, she would never take another puff. The short-term pleasure from the nicotine would pale in comparison to the long-term health consequences of smoking.

Similarly, if you prioritized your long-term financial health, then your spending, saving, and investing patterns would completely change.

The short-term pleasure of the expensive new outfit or car would pale in comparison to the long-term pleasure of financial freedom.

“Lost wealth may be replaced by industry, lost knowledge by study, lost health by temperance or medicine, but lost time is gone forever.”– Samuel Smiles

The reality is most people make daily decisions based on daily concerns. If you want to create wealth, you need to make daily decisions based on long-term concerns.

This may sound like it requires super-human discipline, but that’s not my experience (or the experience of my coaching clients).

It’s really just a change of perspective that results in changed priorities. It’s easier than it sounds.

Your objective is to get into balance by emphasizing your most important, long-term goals in every daily decision you make.

You don’t need to worry about emphasizing short-term concerns because the outside world will automatically take care of that for you.

Your consumer desires will be well-nurtured by advertisers, and other relationships in your life will all demand their needs be met.

The short-term urgent stuff takes care of itself, so you must take care of the long-term.

Only you can prioritize what’s most important to you by balancing your long-term needs with all the urgent matters of the day. If you don’t do it, then nobody else will.

The unfortunate reality is your long-term goals will never happen unless you proactively make them happen.

The Illusion Of Short-Term Pain

The truth is saving, investing, and learning about personal finance is inconvenient.

It requires you to take time and money away from other activities that provide immediate gratification.

Most of us are busy, and the last thing we need is something more to do. This is a primary obstacle to creating wealth.

The problem is if you don’t overcome this obstacle, then you set yourself up for even greater pain in the long-term.

If your goal is to minimize the total pain in your life, then it’s much easier to confront mole hills of short-term inconvenience than it is to dig out of a mountain of long-term pain.

If you want to retire early and wealthy, you have to stop thinking short-term and start thinking long-term.

Satisfying every short-term need will crowd out the ability to satisfy long-term goals like wealth, health, and fulfillment. This is a critically important concept.

For example, you may prefer to read the latest bestselling novel instead of a book on investment strategy.

There’s nothing wrong with that unless that’s all you read for twenty years. After twenty years, most of the fun reading will be long forgotten, and the price you'll pay for prioritizing entertainment over usefulness will be a lower financial intelligence.

The consequence of low financial intelligence is reduced investment performance, more mistakes, greater losses, and less wealth.

“There is no expedient to which a man will not go to avoid the labor of thinking.”– Thomas A. Edison

Similarly, you may desire a pint of gourmet ice cream more than a little exercise, and there’s nothing wrong with that in the short-term.

However, if you make it a regular habit, then there'll be health consequences to pay over the long-term.

Additionally, there’s nothing wrong with driving a nice car and wearing fancy clothes that fill the closet of your expensive home.

However, after twenty years of prioritizing current lifestyle over wealth, the compound effect is staggering.

Your easy opportunity for creating wealth through long-term compound returns will be wasted, while all those coveted consumer items will be worn out and gone.

The point is that what appears to be the least painful solution in the short-term is usually the most painful alternative when viewed from the perspective of twenty or forty years.

This is a key point! There’s nothing wrong with giving yourself a treat occasionally; the goal here isn’t austerity.

The focus is creating long-term habits that take you toward what’s most important in your life.

Your regular habits are what matters because your health, wealth, and happiness are largely a result of your daily habits.

“Do something every day that you don't want to do; this is the golden rule for acquiring the habit of doing your duty without pain.”– Mark Twain

If you want to solve the problem of short-term thinking, just begin habitually making your decisions from the perspective of twenty or forty years.

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It will dramatically change your decision-making process, and it’s at least as valid as the alternative.

After all, what could be more painful than working all your life only to retire in poverty?

That’s the long-term consequence of poor financial habits.

Do you think it’s easier to deal with the relatively minor inconveniences of saving and investing now, so you can comfortably compound those assets into a secure retirement? Or would you prefer a little cushier life now at the expense of desperation and fear as you approach your golden years?

What seems more painful to you?

Long-Term Wealth Is The Least Painful Alternative

What's it going to take to motivate you into action so that you can retire early and wealthy?

Are you going to be the financial equivalent of the cardiac patient who lives for transient, short-term pleasures, only to wake up at fifty or sixty years of age when the long-term consequences are undeniable?

Or are you the rare individual who can see the writing on the wall and proactively balance the long-term consequences with short-term realities by taking action now?

I emphatically encourage you (picture me pounding my fists on the table and screaming at the top of my lungs) not to procrastinate.

Financial freedom will not magically take care of itself no matter how much you trust in the future and believe in the abundance of life.

You must proactively create it. Period. Don’t live in denial.

I’ve been coaching clients on this transition from short-term to long-term thinking for years and the process follows a typical pattern:

1. The first 90 days are difficult. You’re fighting all of your old habits and support systems that reinforce your old behavior. An initial period of self-discipline, accountability, and support is required to get you over the hump. (That’s what Step One and Step Two of Seven Steps To Seven Figures helps you with.)
2. After the first 90 days, your new support systems and habits are in place and your commitment to the process is ingrained. It becomes much easier, but you’re still subject to potential backsliding.

3. After the first year, the rewards of your new behavior become self-evident and reinforce the validity of your new habits. Your bank account is growing and your knowledge about investing and finance is improving, which gives you positive feedback. More importantly, you begin to feel different. You feel stronger, happier, and more fulfilled as you begin living in congruence with what’s most important in your life. You’ve made the transition.
4. The final stage is when you can look back on your old way of living with dismay. Just as a non-smoker has difficulty understanding why anyone would voluntarily pollute their system with toxins, the wealth builder can’t understand why anyone would voluntarily choose to set themselves up for long-term financial difficulty. It just doesn’t make sense when the alternative is so easy. Your new patterns are now part of you and the process of building wealth isn’t only enjoyable, but the rewards make it positively addictive.

Ultimately, the whole process of creating wealth changes over time. You transform your focus from the superficial and immediate to the deeper and longer-term.

Where you used to be in love with your actions, you instead learn to love the results of your actions.

In other words, people smoke because they love to smoke. The action of smoking gives them a warm-fuzzy. They don’t love the long-term effect of smoking.

“The victory of success is half won when one gains the habit of setting goals and achieving them. Even the most tedious chore will become endurable as you parade through each day convinced that every task, no matter how menial or boring, brings you closer to fulfilling your dreams.”– Og Mandino

Similarly, people don’t save because they love to not consume. Instead, they save because they love the long-term effect of financial freedom.

Their passion for the long-term effect over the immediate action is what allows them to build wealth. It’s all about what you focus your attention on.

You can either look at short-term actions or long-term effects. Neither is right or wrong, but the difference in results is transformational.

Once you’ve made the change, actions that used to feel inconvenient or painful such as saving, controlling spending, investing, and growing your financial intelligence now become enjoyable.

Your long-term context and the obvious benefits of your regular actions have transformed inconvenience into desire. You no longer require discipline because you’re merely doing what you want.

Related: Why you need a wealth plan, not a financial plan.

In the end, what you learn from the process is that pleasure, like beauty, is in the eye of the beholder. It all depends on your frame of reference.

The key is to choose a frame of reference that best serves you. Financial coaching and the Seven Steps To Seven Figures courses can help you make that change.

You Must Make One Of Three Choices

In summary, there are three paths you can choose from:

1. No action. You do nothing now and you’ll do nothing later because what looked difficult now will become overwhelming later. You never prioritize wealth and financial security because you don’t take self-responsibility. The result is you rely on Social Security, family, charity, and local social services for your subsistence in retirement. You become dependent rather than independent.
2. Long-term pain. You procrastinate on building wealth by prioritizing short-term needs until you reach your pain threshold in your later years. By then, the alternatives available to create wealth are limited because compounding your way to wealth requires time, which is now gone. Leverage and/or extreme austerity become the primary paths to reach your goal. You may still achieve financial security, but the actions required will be more drastic, the risk will be higher, and the outcome less certain.
3. Short-term inconvenience for long-term freedom. You start building wealth today even though it’s a hassle at first. Over time, you notice fulfillment and satisfaction from honoring what’s important in your life. As your wealth grows, you find enjoyment in continuing the habits that are in alignment with your deeper values and commitments. You look forward to your future with confidence and security because you acted with self-responsibility by creating wealth and independence.

Every day in every way you’re making one of these choices whether you consciously know it or not. Every action and decision either moves you closer to wealth or farther away.

Choosing one of the life scenarios above isn’t optional. One of them is already your reality.

“Good habits result from resisting temptation.”– Ancient Proverb

When you live choices one and two, you’re violating the wealth creating principles discussed earlier. You’re more motivated by avoiding short-term pain than seeking long-term gain.

You’re also more motivated by transient, immediate pleasure than future, unknown pleasure. You haven’t equated how small daily actions cause long-term results.

You’re prioritizing what’s immediate over what is important. You need steps one and two of Seven Steps To Seven Figures.

If you aren’t sure which choice you’re heading toward right now, then just look at your financial results over the last three to five years. They’ll show you with absolute certainty which choice you’re currently living. Results never lie.

But your past is only history. It merely points the direction of your future by showing the results of your current habits.

You can choose to change those habits right now, thus creating a new future. You’re responsible. You can change.

“Men's natures are alike; it is their habits that carry them far apart.”– Confucius

You don’t get lung cancer in one week and you don’t achieve wealth overnight. Cause and effect are linked by habits repeated over long periods of time.

You don’t have to do anything extraordinary to quit smoking or build wealth. You just have to do ordinary things consistently and habitually well.

It requires persistence over time and that’s why it’s hard to live even though it’s easy to understand. It defies the basic human desire for immediate gratification.

It’s why so few people achieve wealth even though it’s relatively easy to do. It requires discipline and a different way of thinking.

The choice is yours. You can choose daily habits that take you toward your long-term goals, or you can choose daily habits that provide transient gratification.

You can pursue long-term pleasure, or you can choose to avoid short-term pain.

Which is most important to you? What are you going to do about it?

The choice is yours.

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Traditional retirement planning has it all backwards.

You know the drill…

You sit down with your broker or financial advisor and plan your retirement on the assumption that having enough money is all that matters.

Sure, it's important, but it won't create a fulfilling retirement. You need to start the process somewhere else.

What's the most effective way to transition from career to retirement?

How do you make plans that are more significant than just money?

In this article, I'll give you a five question process that takes you step-by-step from fulfillment through finances so that you not only learn how much money is enough to retire, but you also connect your retirement savings to a plan for a fulfilling and happy next stage of life.

How To Prepare For Retirement: What And Where?

There are tons of retirement planning books and courses, but very few focus on setting dreams and goals for retirement (the “what” and “where” questions). Instead, most of the information is about getting your finances in order (the “how much” question).

Yet, fulfilling your dreams and goals is what a healthy retirement is all about. It provides direction and connection, gives a sense of purpose, develops creativity, brings satisfaction, and builds a sense of fulfillment during retirement.

In other words, it's critically important. After all, who cares how much money you have if you aren't living the life of your dreams and excited to be alive each day?

“To accomplish great things, we must dream as well as act.”– Anatole France

Even though most books downplay the “what” and “where” issues as secondary, we bring them front and center stage when it comes to preparing for retirement because these two issues play a doubly critical role.

They not only determine how fulfilling your retirement will be, but they also influence (to a large extent) when you will retire and how much it will cost. In short, you can't do serious retirement planning without first answering the “what” and “where” questions.

You've probably already taken baby steps with these questions by forming a vague vision for your retirement. Now it's time to fill in the missing pieces by getting detailed.

Related: Why you need a wealth plan, not a financial plan.

Sure, you intend on reading more and playing more golf during retirement, but take it a cut deeper. What are you going to do with the 2,000 hours a year you used to spend working?

You can only read so many books and play so much golf. How are you going to create a life filled with meaning that extends beyond tomorrow's tee time?

The important point is to be excited by what you're heading toward – not what you're leaving behind.

Yes, it's good to be done with “workin' for the man”, but that excitement is only going to last for a month or two before the reality of a retired lifestyle settles in.

If you don't have something worth waking up for each morning, then you're setting yourself up for disappointment – a disappointment that's all too common for many new retirees.

Dreaming and planning for the next phase of your life can be exciting. It's like turning the clock back on your golden years to early adulthood where the world was your oyster and the possibilities were limitless.

Recapture that youthful spirit of adventure because you're freer now than you were back then. Your retirement is limited only by your creativity.

This is the time to rekindle forgotten dreams, long ignored values, and passions suffocated by career responsibilities.

Many people mistakenly envision their retirement as a winding down period, which is fine, if that's your preference. But the likelihood is reasonably good that you'll be spending 30 years or more winding down, which isn't everyone's cup of tea.

One alternative is to consider your retirement as the opening chapter in a whole new life adventure and see where that takes you.

Make a list of all the things you would like to do once you have more time:

• What new contributions can you make?
• What passions can you develop?
• Where would you like to volunteer?
• What new things would you like to learn about?
• What new places would you like to see?
• Where would you like to live?
• What experiences would you like to have?

Now is the time to do these things, because if not now, then when? You're not going to get many more chances.

“You see things; and you say, ‘why?' But I dream things that never were, and I say, ‘Why not?'”– George Bernard Shaw

A key point during this brainstorming process is to refrain from editing your thoughts. Don't mortally wound them with practicality before they take their first breath. Just dream and trust where it takes you.

You'll have plenty of time later for the dream-stealers to re-organize and rationalize your dreams, so don't make the mistake of editing your dreams with rationality now.

No harm ever came from letting ideas take life, so accept them as they flow out of your head without any judgment and write them all down – no matter how zany and impossible.

You don't have to act on them, and you can always edit later.

After building your list of dreams, gather up your spouse and a favorite bottle of wine and share your dreams together.

One coaching client did this exercise and was shocked to learn that his visions of cross-country travel in a motor-home with a fly-fishing rod and backpack didn't blend well with his wife's dream to live in a downtown high-rise condominium near shopping and restaurants.

It's better to negotiate these issues now rather than after you've emotionally and financially committed to a certain path.

Related: Here’s a scientific system to build your wealth now

Don't be surprised if you find it hard to conjure up a new vision for your life after decades of career dominating your personal identity. I run into this obstacle frequently with my financial coaching clients, so don't feel alone.

Go easy on yourself and work with the process. Even when you imagine new roles in life that sound satisfying, it may be daunting to figure out how to get started and make the transition. Don't worry.

This is a perfectly natural response because you're entering uncharted territory. It's okay if the water appears murky at first. You have 30 years to grow accustomed to it, so just get started. Dream your ideal retirement lifestyle and write it down.

Figure out a reasonable next step and start there. Fine-tuning can happen later. The key is to work at it until you have something so compelling, you can't wait to get started. That's how you know you're on track.

“If one advances confidently in the direction of his dreams, and endeavors to live the life which he has imagined, he will meet with a success unexpected in common hours.”– Henry David Thoreau

Places to look for clues to your passions include current hobbies and recreation, fantasies, and dream careers that you always thought sounded ideal. Consider looking in the “help wanted” section to see what grabs your interest.

Go to the bookstore and spend hours browsing for the sole purpose of noticing what interests you.

• Where do you spend your free time now?
• Where do you spend your extra money?
• What are your strengths that might be fun to develop?
• What weaknesses would you like to overcome?

Talk to existing retirees who seem to be having a ball to get more ideas.

In short, make it fun and instill a sense of adventure. It's your life, and now is the time for you to live it.

The important point of this discussion is to have interests you're passionate about. Ending a career is going to leave a big void in your life to fill. You want interests that absorb you and motivate you to wake up early and stay up late.

For some, it could be volunteer work. For others, it might be a second career or serious hobby, and still others might discover their passion in foreign travel. The key is to find what it is for you.

If you would like help, then consider how our retirement coaching might be the perfect support system during this transitional period to sort out the issues.

Preparing For Retirement: When Is The Best Time?

Once you have a vision so compelling you can't wait to get started living it, then pick a date for when you'll turn this dream into reality.

Picking your retirement date is the “when” part of retirement planning. It's a necessary precursor to running the cash flow and income projection scenarios required for the “how much” part of retirement planning.

When you retire will affect how many more years you can save, how much longer your savings can grow, your expected pension benefits, and your Social Security benefit.

See My Related Book…

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In short, much of your financial situation (“how much”) hinges on your answer to “when”, and also on the answers above to “what” and “where”.

Only after you have answered the when, what, and where questions will you have built the proper foundation to accurately determine how much it will cost.

Preparing For Retirement: How Much Money Do I Need?

You've probably built a rough guesstimate of your projected retirement financials in the past.

Now that your retirement vision and date draw closer, it's important to put a fine pencil to tightening up the calculations.

You must determine how much your clarified vision for retirement will cost and how you'll afford it.

Completing a final check is important because pension plan rules, Social Security, and asset values have a remarkable tendency to change (usually in the wrong direction).

The last thing you want to do is quit your job and lock in your Social Security and pension benefits only to find out you were actually a few years and a few dollars short of achieving your goal.

Related: Why you need a wealth plan, not an investment plan.

What follows is a simplified version of the “how much is enough for retirement” question. For a thorough analysis covering all facets of “how much,” read my book titled How Much Do I Need To Retire?

Below is a brief overview:

1. Budget:

Now that you're close to retirement, the “spend 70-80% of current income” rule of thumb should be replaced with real numbers.

Dig into your current spending and get real about how your spending will change based on your answers to the “what” and “where” questions.

Are you going to travel, play golf, and dine out frequently, or do you have some inexpensive hobbies that will absorb the bulk of your time? Are you going to downsize your home, move to Belize, or stay put?

Once you've estimated a retirement budget, you may be concerned if it's actually workable. Can you live comfortably on it? If you're not sure, then try test-driving it.

Now is a great time to practice organizing your life, downsizing, and living within the lower budget constraints if that's the direction you're heading. You still have the income from your job to bail you out if the whole plan is a mistake.

Not only will you build confidence in your budget when retirement day comes, but you'll also increase your savings for retirement due to the reduced spending.

“How much time he gains who does not look to see what his neighbor says or does or thinks, but only at what he does himself.”– Marcus Aurelius Antonius

2. Consolidate:

Now is the time to round up all your 401(k)s, pension benefit statements, retirement plans, savings accounts, insurance statements, and other financial documents into one pile.

If this proves to be an onerous task, then it's telling you something.

You may want to consolidate some of these accounts for greater efficiency and arrange them into a methodical system. Consider automated deposits, electronic bill paying, and look into services that allow you to view all accounts from one location.

By simplifying and automating your assets and record-keeping functions, you'll gain greater control, simplify the financial process, and free up time for enjoying your retirement.

3. Social Security:

Request a statement that shows how your monthly benefit is affected based on your expected retirement date. The general rule of thumb is the earlier in life you lock in benefits, the lower your monthly payment will be.

You may choose to wait longer to increase the monthly income, or you may have more than enough right now to begin living your dreams. Just make sure to research the alternatives before you commit.

Regardless of your chosen retirement date, it's a good idea to apply for benefits three months before you expect to begin collecting so you don't miss a payment. Mark the date on your calendar.

Also, consider using direct deposit so you don't miss a check while out traveling through the Amazon jungle or climbing the Himalayas.

4. Defined Benefit Pension Plans:

Now is the time to get intimate with all the nitty-gritty rules, timelines, and options affecting your pension plan benefits.

Similar to Social Security, your monthly benefit will be affected by when you begin. The longer you wait, generally the greater the monthly benefit.

However, an additional layer of complication exists in pension plans because you may have a choice between taking the money over time or in one lump sum.

Deciding which is best for your situation is a complicated formula involving expected lifespan, expected investment returns, personal goals, and other issues that may require the support of a financial coach or a fee-only financial planner.

5. Savings Withdrawal Rate:

Total all your retirement savings accounts including your 401(k). According to the experts, you can theoretically spend 3-4% of that total in the first year, and adjust for inflation thereafter.

There is much well-reasoned and well-supported disagreement on this subject. For the complete explanation, read “How Much Do I Need To Retire?” located elsewhere on this site, or you can use the 4% rule as a rough and dirty guideline for now.

See My Related Book…

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6. Gap Analysis:

After completing steps one through five above, your answer to the “how much” question is simply a matter of adding up your income sources from items 3-5 and subtracting your proposed expenses from item 1 to see if there's enough.

If there's a surplus, then congratulations – you're a retirement planning genius and ready to embark on the next phase of your life secure in your income needs.

You can afford to chase your dreams assuming your budget calculations are reasonably accurate.

However, if you're like many who have more dreams than income, then this course can help you close the gap and secure your financial future.

Do the calculation now before continuing to read so that you know where you stand.

How Can I Boost Retirement Income?

Many people find calculating their retirement number a sobering experience. How much turns out to be not enough.

If you came up a little short, then fear not. There are many ways to close the savings gap and find that missing money, but it all boils down to two things – increase retirement income or decrease expenses.

Let's begin with strategies to grow the income side of the “how much” equation first, and then we'll examine the expense side of the “how much” equation in the next section.

1. Delay Retirement:

Every additional year you work is another year of earnings that can add to savings, and one less year of living that is paid for out of savings.

Additionally, delaying your retirement date could increase the monthly benefit you receive from both Social Security and your pension plan, further adding to retirement income.

Put all four of these factors together and the financial effect can be dramatic.

Try running various scenarios on your retirement income using later retirement dates to determine if this strategy can help fill the retirement savings gap.

2. Phased Retirement:

Maybe an encore career is in the offing for you. There are many social, emotional, and (of course), economic benefits to continuing to work after retiring.

The added income can go a long way toward lowering the savings burden required to make ends meet, and if you choose new work that you truly love, you might find it beats 30 years of endless free time.

Look at your income gap and decide if there's a way to earn the missing money that would also be rewarding and fulfilling for you.

3. Savings Withdrawal Rate:

Just because the expert consensus on first year savings withdrawal rates is 3-4% doesn't mean it's right for you. It's a generalized standard that by definition isn't personalized for your situation.

Related: The inconvenient truth about buy & hold

You might have a family history of early death, poor health, or an unusual skill for growing your investment portfolio at higher rates of return. See the book How Much Do I Need To Retire for alternative formulas, or take the complete wealth planning course here that includes alternative asset classes and strategies.

The difference can be significant and possibly enough to make up that shortfall in retirement income.

4. Convert Other Assets To Savings:

The diamond ring from your ex-husband that you never wear, the mink fur coat from Grandma, the boat that was used once in the last two years, and other valuable assets that are seldom enjoyed can all be sold off to boost your savings.

What valuables do you have that you don't need or use?

5. Convert Home Equity To Savings:

For many people approaching retirement, their home equity can exceed their savings. Converting a chunk of that equity into income producing assets by downsizing, moving, getting a reverse mortgage, or using various other strategies can close the gap between income and expenses.

For a complete listing of strategies to convert home equity into income producing savings, read 27 Retirement Savings Catch-Up Strategies For Late Starters. You'll also find many more tips in that article not mentioned here that can help you close the savings gap.

Each of these strategies alone, depending on your personal situation, has the potential to increase your retirement savings enough to solve the “how much” problem.

When you put them all together, however, they're a powerful set of tools that can substantially change the income side of your financial picture.

Now we'll look at the expense side of the “how much” equation.

How To Prepare For Retirement: How Can I Reduce Expenses In Retirement?

There are two sides to the “making ends meet” equation, and so far we have focused only on income. The other side, expenses, is at least as important, and often easier to solve.

The reason is because it's often easier to figure out how to live on $1,000 less per month (1,000 * 12 months = $12,000 per year) than it is to find an extra $300,000 in savings (300,000 * .04 percent savings withdrawal rate = $12,000 per year).

The two scenarios are mathematically equivalent in terms of balancing a retirement budget, but there are many more fun and creative solutions to reducing spending by $1,000 per month then there are ways to surface $300,000 to $400,000 in savings.

Yes, spending just $1,000 per month is roughly equivalent to the $300,000 in assets required to support that spending. Shocking, but true. It's known as the “Rule of 300”.

Let's look at a few possibilities to chip away at the expense side of your monthly budget without diminishing lifestyle.

1. Move To A Lower Cost Area:

For people living in high cost areas where housing prices have soared, think about relocating to a lower cost housing market. Consider moving out-of-state or possibly to a new country.

The price differentials between certain housing markets can be enough to fund a significant portion of some people's retirement needs.

For example, $300,000 of equity harvested from your home reinvested at 7% produces $21,000 per year in income, and your expenses such as insurance, maintenance, property taxes, medical, and food will likely drop as well.

The savings can be substantial, and the new location could be even more enjoyable than where you currently live.

“The real measure of your wealth is how much you'd be worth if you lost all your money.”– Unknown

2. Downsize Your Home:

For those who love where they live and want to stay in the same area, consider harvesting some of your home equity by scaling down to a smaller, low-maintenance, less expensive house.

This creates a double-win for your savings because you increase investment income while simultaneously reducing or eliminating certain expenses such as mortgage payments, utilities, maintenance, property taxes, insurance and more. Not to mention having less house to clean and care for.

3. Pay Off Your Home:

Retiring your mortgage before you retire from work can significantly improve cash flow and lower your risk of failure if your financial situation takes a turn for the worse.

One strategy to achieve that objective during the pre-retirement phase is to refinance your mortgage or increase your payments so the payoff date is the same as your expected retirement date.

4. Low Cost Leisure:

Golf and travel can be expensive (or affordable) depending on how you plan these activities.

You could spend an entire summer touring Alaska in a car or camper for the same cost as a two week cruise.

You can golf or ski for an entire season on bargain senior passes for the same cost as a few days at a high-end resort.

You can travel full-time, year-round, throughout the world for less than it costs to live an ordinary lifestyle in some areas of the United States.

Get creative and stretch those leisure dollars because recreational fun has little relationship to how much it costs.

5. Become Debt Free:

Interest paid is money wasted, and it's antithetical to your retirement lifestyle. You should be collecting interest as a retiree – not paying it.

Prepare for your retirement by paying off higher rate, non-deductible debts like credit cards and automobiles. Get in the habit of only buying what you can pay for right now.

Eliminating all debt is a simple strategy to lower your expenses without lowering lifestyle. Debt makes the banker rich – not you.

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6. Eliminate Unnecessary Expenses:

Professional affiliations, second homes, sailboats, and extra cars are all examples of things that might not be necessary for your retirement plans and could reduce your expenses if they were eliminated.

Consider cutting the financial cord on adult children that are out of school and not disabled. They should no longer be financially dependent on you after their education is complete.

If your retirement budget is tight, then there's no room for excess of any sort. Eliminate all those unnecessary expenses now.

7. Revisit Your Insurance Needs:

As you prepare to exit the work force and enter retirement, your insurance needs will change. Things like disability insurance and life insurance may no longer be relevant and could save you money if eliminated.

Alternatively, you may decide to re-purpose your life insurance away from income protection and toward estate planning.

Similarly, to protect the assets you've accumulated, you may consider raising the liability limits on your homeowners and auto policies. Examine umbrella, long-term care, and supplemental health insurance policies.

In short, revisit your insurance needs to determine what's really necessary and appropriate. Your life is changing, and so should your insurance coverage.

In summary, there are many ways to reduce expenses without reducing lifestyle. The joy you experience in retirement is more a function of your attitudes and interests than your budget. It's about experiences, not stuff.

Get creative in how you reduce spending and you may find that “how much” is more than enough.

What Else? Bonus Pre-Retirement Ideas To Consider:

Once you've solved the “what”, “where”, “when”, and “how much” questions in preparing for retirement, there's one final thought to consider: what else?

What other strategies should you consider that can make a positive difference as you enter the home stretch to a life of freedom, fulfillment, and financial security?

1. Estate Planning:

If you die without proper estate planning, it could create unnecessary heartache for those left behind and needlessly waste a significant portion of your assets on taxes, attorney, and probate fees.

Have your lawyer review your will, trust, estate and gifting plan, account titling, powers of attorney, and beneficiary designations to make sure everything is up to date and appropriate for your stage in life.

Related: How to be a pro at growing your wealth

You want to be certain that you and your beneficiaries are properly protected. Death is an absolute certainty with the only question being when. Best to get it done now, and get it done right (estate planning that is – not death).

2. Organize Necessary Documents:

When that fateful day arrives and you're incapacitated or dead, someone has to complete your affairs. Do them a big favor and organize all the necessary documents in one place so they don't have to stress about missing anything.

“Don't agonize. Organize.”– Florynce Kennedy

If you choose to keep the documents in a safe deposit box, then keep a duplicate file at home for accessibility and an additional set with a trusted family member or attorney.

Below is some of the information that should be contained in this file.

• Location of safe deposit box key and listing of what's inside the box
• A master list of all financial accounts with account numbers, contact information, and addresses. Include everything on this list that produces at least one statement annually such as annuities, life insurance, investments, loans, etc.
• Wills, Powers of Attorney, Medical Directive, Trusts, and other Estate Planning documents
• Marriage certificate
• Burial paperwork
• Property deeds and automobile titles
• Military discharge paperwork
• A list of valuables and collectibles

3. Health Care Insurance:

U.S. Government Medicare doesn't kick in until age 65, so you may need to consider self-insuring if you retire before 65 and your employer doesn't extend health insurance coverage to retirees.

Even after Medicare begins, there are many costs not covered. For that reason, you'll want to investigate private “Medi-Gap” policies and build that cost into your retirement budget. You may also want to consider long-term care insurance and decide what's appropriate for you.

Learn the rules for Medicare and Medi-Gap applications and mark the necessary dates to begin on your calendar. Applying late may cause delayed benefits or increased premiums, so make sure you know the rules for your situation.

Health care is an extremely dangerous area of retirement planning because the cost of betting wrong can be catastrophic. Proper insurance devours retirement income, but no insurance runs the risk of destroying retirement assets.

If you underestimate health expenses, you may not be able to afford the quality care you desire, or you may use up a lifetime of savings in the process. There's no easy answer, so budget liberally in this area and hopefully you'll be pleasantly surprised.

In the end, always recognize that your future health and associated health care costs are unknown – and there's nothing you can do about it. Every retirement plan is fundamentally incomplete because of it.

4. Get Healthy:

There's no point in working a lifetime to save for your golden years only to die of a heart attack or other debilitating disease before you have a chance to enjoy it all.

The reality is you no longer have the advantage of youth to offset bad habits, so you must work hard to make up for the difference.

The human body is amazingly resilient and can bounce back from years of abuse when given proper diet, exercise, and rest. A strong health regimen can save you big bucks in health care costs, and it can add more years to your life while adding more life to your years.

5. Borrow Now:

While debt is best avoided for most retirees, there are rare circumstances where new debt can make sense, such as financing a downsized home or a new RV for traveling.

The reason it can make sense to do it now (before retiring) is because it will be easier to qualify while you still have earned income. You may be able to negotiate lower interest rates and better terms than if you wait until after retirement.

In other words, the general rule is to avoid debt, but special exceptions can apply.

6. Vacations:

Make a list of the areas you might consider moving to during retirement and use your vacation time while still working to visit them. Take the area for a “test drive” so you can see how you like it.

If you enjoyed it in the winter, go back in the summer as well. Who knows, it might end up becoming your future home.

7. Prepare Your Home:

If you're thinking of moving or downsizing your home during retirement, then get it ready now. Clear the clutter, complete the repairs, and update whatever is necessary to optimize the sales process to your advantage.

8. Second Opinion:

Retirement planning is complicated, so get a second opinion from a fee-only financial planner. Heck, the stakes are high enough, you may want to also get a third or fourth opinion.

You may be surprised by how much expert opinions vary depending on background and assumptions (and the financial incentives of the advisor!!). You can learn more about our group retirement coaching services here.

The reality is you're making critical decisions that will impact your financial picture for the remainder of your life. The stakes are too high to rely on any one person's judgment – including your own.

The fact is there are more questions than answers:

• Should you take monthly payments from your pension, or a lump sum distribution?
• Should you take Social Security now or later?
• Should you buy long-term care insurance or accept the risk?
• Should you buy Medi-Gap coverage or self-insure?
• What order should you begin withdrawing from your various savings accounts to maximize tax advantages?
• Should you convert savings to an annuity? If yes, then how much?
• Should you follow traditional asset allocation models by ratcheting down risk and focusing on income investments, or should you accept market risk in pursuit of growth by remaining invested in equities? How much, and for how long?
• Can you use alternative assets like real estate and business entrepreneurship to close any gaps or increase income for any given amount of equity?
• What percent of your savings can you withdraw every year? What are the assumptions behind that calculation?
• How should your estate be organized for maximum benefit to you and your heirs?

There are many more questions to consider, but this should be enough to motivate you in seeking professional help. The issues are so complex and the consequences of a mistake are so serious that an experienced planner and tax expert can be worth every dollar you pay them.

This isn't a situation where you want to cut corners. Educate yourself first, then get a second opinion to make sure you didn't miss anything critical. It's cheap “insurance”.

In Summary

Retirement is something you worked your entire life for. As you enter the home-stretch make sure you complete this final checklist of preparations so you know you've got everything ready.

These final working years offer a unique opportunity to prepare. A few carefully chosen last-minute strategies can make a big difference.

If you've made it through this article, then you've already separated yourself from the masses. Numerous studies show most workers haven't estimated their retirement expenses and income needs or put together any sort of retirement plan at all. You're a cut above.

By beginning with the “what” and “where” of retirement planning and determining the “when”, you set the stage for not only creating a fulfilling retirement, but also accurately estimating the “how much” so you're not faced with fiscal surprises.

Don't be misled by traditional retirement planning literature that overemphasizes the “how much” of retirement savings.

Sure, it's an important part of your retirement plan, but as you saw above, proper life planning, goals, connection to others, appropriate insurance, home ownership, and being debt free are all similarly important.

There's a much bigger picture to planning a fulfilling and financially secure retirement, and this step-by-step course provides an exact road map so you can get there. Enjoy the process and enjoy your golden years. You deserve nothing less.

"Discover The Comprehensive Wealth Planning Process Proven Through 20+ Years Of Coaching That Will Give You Complete Confidence In Your Financial Future"

• Get a step-by-step action plan to achieve financial independence - completely personalized to you.
• How to live for fulfilment now, while building wealth for the future.
• No more procrastination. No more confusion. Just progress and clarity

Expectancy Wealth Planning will show you how to create a financial roadmap for the rest of your life and give you all of the tools you need to follow it.

Learn More...

Are your plans for wealth and financial freedom on target, or behind schedule?

Below is a quick and dirty self-test that will show you, at a glance, how your wealth building measures up.

I also include a few tips to improve your future results.

But before we can start, we must first agree on the best financial measuring stick to use.

The obvious answer is net worth, but it's not that simple. There are some nuances that must be considered…

Average Savings By Age: A Quick Way To Measure If You're On Track For Building Wealth

Is a 30 year old with a $50,000 net worth necessarily less successful at building wealth than a 60 year old with $200,000?

The 60 year old has a lot more money, but a lot less time.

How do you take into account age differences, inheriting money, lifestyle differences, and lifetime earnings differences?

In “The Millionaire Next Door” by Stanley and Danko, the authors provided a reasonably workable formula for judging your success or failure at building wealth. The formula is as follows:

“Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.”

This formula is hardly revolutionary because it’s little more than a twist on the classic 10% savings rule. It’s a tried and proven formula based on sound mathematics.

While it isn't perfect because there are many additional considerations such as inflation, taxes, and interest rates to factor in, it does provide a useful approximation that serves as a quick, simple, and easy-to-calculate snapshot of how well you’re progressing toward financial freedom.

For example, if you were a 35 year old earning $100,000 per year with no inheritances, then you should have a net worth of $350,000 because ((35 x 100,000) / 10) = 350,000.

Related: Why you need a wealth plan, not a financial plan.

A person in this situation would be considered “on track” for reasonable wealth accumulation. He isn’t a super achiever, but he isn't lagging either.

Now it’s time for you to calculate your number using your age and earnings.

Have you calculated it yet? If not, please do it now before reading on.

Are You An Exceptional Wealth Builder?

Stanley and Danko went on to create two variations to their basic formula.

People whose net worth is twice as large (>2X) as the formula would indicate they are prodigious accumulators of wealth (PAWs).

People whose net worth is less than half their expected number (<.5X) are considered under-accumulators of wealth (UAWs).

These two benchmarks are as good as any at cutting to the chase and telling you how your personal financial management skills and investment skills are measuring up. Are there valid criticisms about the accuracy of the analysis? Absolutely yes! However, they are useful benchmarks considering it's a simple rule-of-thumbs.

Remember, judging by results is often harsh, but always fair.

“It is the sign of a weak mind to be unable to bear wealth.”– Seneca

How are you doing? What were your results? Are you a PAW, a UAW, or are you stuck somewhere in between?

This is your wake up call. You’re being given a health check-up on the journey to retire early and wealthy. Is your financial strategy sick, or are you looking like a world class runner?

Are you on track or behind schedule?

Related: How to be a pro at growing your wealth

I've run quite a few scenarios using Stanley and Danko's formula, and I've concluded being a PAW is a very realistic, if not conservative, standard for satisfactory progress toward achieving normal financial security and retirement.

I encourage you to test this formula yourself and run your own scenarios. It doesn't take long to figure out how anything less than a PAW is living on financially shaky ground.

Why? Because true financial freedom results when your passive income exceeds your expenses.

If you look at the results of PAW status and apply current interest and inflation rates, you’ll quickly see that for many situations and assumptions, you wouldn’t want to retire with anything less than PAW status.

For example, a 60 year old married couple with $100,000 annual salary would need to have $1.2 million or greater to be PAW's.

Not a bad sum, but take out home equity and multiply the remainder by the current interest rates. You’ll find you’re getting pretty thin for someone accustomed to living on $100,000 per year. (See the How Much Do I Need To Retire ebook for a complete analysis)

They aren't going to starve, but abundance wouldn't accurately describe their situation, either.

In other words, PAW status is a reasonable minimum threshold of wealth building you should aspire to.

“Early to rise and early to bed makes a male healthy and wealthy and dead.”– James Thurber

It’s worth taking the time to evaluate your progress. You’re being given a sneak preview into your future while you still have time to take corrective action to improve your situation.

If you’re a PAW then congratulations, you’re doing great.

If you’re less than a PAW, then this course will show you exactly how to play the wealth building game smarter in the future and improve your status.

How To Accelerate Your Wealth Building

Avid readers of this site already know I diverge from conventional financial experts when teaching you how to accelerate your wealth building.

The reason is simple – the traditional approach rarely works.

Related: How Your Financial Advisor is Taking 75% of Your Retirement Income (or More!) Video, PDF download, or Audio.

Stanley and Danko make the classic mistake of immediately focusing on the “how-to's” to help people understand what it takes to get wealthy.

They teach you how the millionaires became millionaires. That’s the focus of the bulk of their book.

In fact, that’s what most wealth educators focus on. They teach you how they achieved financial freedom and which particular path to wealth worked for them.

The focus is on the mechanism – not the cause. Below are some common wealth building themes taught by popular gurus.

1. Leverage is the key to building wealth.
2. Wealth exists within the tax code.
3. You must develop your competitive advantage.
4. Find your niche and your passion: your wealth will follow.
5. Invest in the stock market.
6. Invest in real estate.
7. Build your own business.

The assumption in most wealth building courses is that the path is the key – not the person.

Teach any student how you did it and they’ll duplicate your success. Give them the tools and they’ll have what they need to put them to good use.

Sorry, but I’ve coached many clients to financial success over the years, and that’s a fatally flawed assumption. It just doesn't work that way.

The reality is humans aren't computers. You can’t input X and get a predetermined output of Y.

Just because one person followed a particular path to wealth doesn't mean anyone else can duplicate their success using the same strategy. Humans aren't that simple.

“All prosperity begins in the mind and is dependent only on the full use of our creative imagination.”– Ruth Ross

If it was that simple then everyone who wants wealth would already have it. The internet and your bookstore are filled with more “how-to” courses on investment strategy and wealth building techniques than you could consume in a lifetime.

Everything you need to know already exists in print, yet you aren't wealthy. Something besides “how-to” knowledge must be necessary since there’s no shortage of it. But what’s missing?

The reality is learning any particular path to wealth won’t do you any good until you first learn how to get on the path and stay on the path in the first place.

You’re the cause of your wealth (or lack thereof) and getting clear on your commitment to building wealth is the critical first step that will make or break your success.

The how-to mechanism will naturally follow when your commitment is clear.

Without a clear commitment, no amount of “how-to” can help your success.

In fact, when I first began coaching clients, I made the exact same mistake as everybody else. I naively believed that teaching people the “how to’s” of building wealth would work for them just like it worked for me.

Just show people the tricks of the trade and they’ll emulate the success of the teacher.

Needless to say, it didn't work. What I learned is that “how to’s” aren’t what most people need to succeed.

Related: Learn how to invest like Todd

What separates people who achieve wealth (PAWs) from those who don't (UAWs) is the “why”. You must get crystal clear at a deep, emotional level what this journey to wealth is all about for you.

Here are 12 questions you can ask yourself to gain clarity.

1. What does building wealth mean to me?
2. What will I get by becoming wealthy?
3. How will financial freedom positively impact my life?
4. How can I build wealth congruent with my deeper values?
5. What price will my family pay for not building wealth?
6. What price am I paying today because I'm not financially free now?
7. What will my life look like once I have financial freedom?
8. What are the obstacles that have kept me from building wealth up until now? How am I going to overcome them?
9. Why should I prioritize my time, energy, and money to make financial freedom happen above other activities competing for my limited available resources?
10. Why go through all the effort? Why not just relax and enjoy the day?
11. How can I build wealth and still lead a balanced and fulfilling life?
12. What’s wealth building really all about for me and how does it fit into my life?

“Wealth is the slave of a wise man. The master of a fool.”– Seneca

Clarity around questions like these will strengthen your commitment to building wealth. This will motivate you toward consistent and persistent action.

Your drive for wealth must become deep enough to prioritize the actions necessary to reach the goal.

If your “why” isn't strong and clear enough to make building wealth a priority, then it won't happen.

See My Related Book…

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Life will always distract you with something else more important. It’s as simple as that.

Having the “how to's” without the “why” is like owning a car without gas in it. You won’t get very far or go very fast because the “why” is the fuel that creates action.

Without fuel, the vehicle is a motionless, clump of metal.

When you get the “why,” then the “how to’s” will follow. That’s the great, unspoken secret that I learned in coaching people like you to build wealth.

The “why” is what drives you to take action, and the “how-to” is the tool or mechanism by which you implement the action.

A tool without the impetus to use it is useless. A driven person will persevere until he finds the right tool – and that makes all the difference.

That’s why successful people persist in their success despite changes in market conditions that might force them to abandon or replace their “how-to” strategy.

They just correct and adjust their plans because the “how-to” is merely a mechanism or tool, and their drive is the real reason for their success.

The drive that results from their commitment to financial success causes them to find solutions no matter what gets in their way.

Conversely, you can give a proven formula for building wealth (perfect for current market conditions) to an uncommitted coaching client, and they’ll still fail.

Again, the “how-to” strategy is just a mechanism or tool. It’s not the critical element that leads to wealth.

Related: Here’s a scientific system to build your wealth now

PAWs choose many different paths to financial freedom, but the common denominator they share is a strong “why” that firmly commits them to building wealth.

Stanley and Danko missed that essential point, but that’s why they’re wealthy.

How To Find Your “Why” For Building Wealth

Many people are fortunate and find their “why” on their own. No course is required.

I discovered my “why” when I was in high school, and I’ve coached others who were equally clear about their “why”.

Unfortunately, this is the exception rather than the rule. They're the lucky few who can build wealth using how-to information.

The rest (likely you) get stuck in a frustrating loop where they learn great information but fail to implement successfully.

They know what to do, but they just don't do it “for some strange reason”.

That's why commitment based on a compelling “why” is the make or break step to financial freedom. Unfortunately, it’s a step that’s seldom completed.

The reason it’s the make or break step is because life is filled with distractions, and most people have conflicting values and desires that muddy the process of gaining clarity about building wealth.

While the information necessary to complete the process on your own is available, it’s spread out among various sources and disorganized, making it hard to assimilate.

That’s why I wrote a step-by-step system that walks you through the process of developing your personal “why” so you can successfully build wealth.

It's a complete course of instruction showing you everything you need to know, and it includes the support systems you need to put it into action and produce tangible results.

Remember, this self-test is your wake up call. Are you on track to financial security? Either you’re a PAW, or you're not. The results never lie.

Anything less than a PAW means you’re behind the curve which puts financial security for you and your family in jeopardy.

Don't take my word for it. Run the numbers yourself. The results will speak for themselves.

If you keep the financial habits you have now for the next three years, where will you be three years from now? Five years from now? Ten years? What are you going to do differently?

When you get clear on your commitment to building wealth by knowing your “why,” then you’ll transform the results you produce.

I've done it with numerous clients, and it can work for you too.

You can learn more in this course here.

"Discover The Comprehensive Wealth Planning Process Proven Through 20+ Years Of Coaching That Will Give You Complete Confidence In Your Financial Future"

• Get a step-by-step action plan to achieve financial independence - completely personalized to you.
• How to live for fulfilment now, while building wealth for the future.
• No more procrastination. No more confusion. Just progress and clarity

Expectancy Wealth Planning will show you how to create a financial roadmap for the rest of your life and give you all of the tools you need to follow it.

Learn More...

Click here to download the transcript of Brennan's smart business advice for aspiring or stuck entrepreneurs!

The business entrepreneur path to financial freedom has many advantages over real estate and paper assets.

• You can grow your wealth faster in business than any other asset class.
• You can achieve personal freedom, the real goal of financial freedom, long before you're actually rich because your passive income is not connected to equity. It's driven by business systems instead.
• You get personal benefits besides just financial wealth including purpose, community, contribution, and a creative outlet.

Unfortunately, the business asset class is the least-discussed path to wealth, even though most people who make the Forbes 400 list are there because of it. The same is true for people profiled in The Millionaire Next Door.

If you want financial independence earlier than old or you need to catch-up on retirement savings because you don't have enough, then this episode is for you.

However, there are risks to growing a business as well. That's why it's important to choose the right business model congruent with your values. The right model will support your success, but the wrong model will leave you feeling stressed and resentful.

Related: How to be a pro at growing your wealth

To show you how fulfilling business entrepreneurship can be, along with the upsides and downsides, I invited Brennan Dunn, owner of Double Your Freelancing, to the podcast.

Brennan has a long entrepreneurial success streak. He dropped out of college, freelanced as a web designer, started his own agency, then started a SaaS (software-as-a-service) business, and now has a very satisfying lifestyle business.

While Brennan loves his business now, he had to learn many lessons the hard way. These lessons are typical of what most entrepreneurs go through, which is why it's better to learn vicariously through Brennan's experience rather than reinvent the wheel.

So if you've been interested in starting your own business, or you want to accelerate your journey to financial freedom, then this podcast is for you.

In this episode you'll discover:

• How Brennan went from being a college dropout to having a six-figure business, to ultimately having two seven-figure businesses.
• What drives Brennan's entrepreneurial streak.
• The idea of community and why it's so important to a fulfilling life.
• Why being an employee wasn't satisfying to Brennan, despite earning six-figures at the age of 21.
• How employment limits your creativity and how more possibilities open up when you're a business owner.
• How freelancer's blow it by not viewing their work as business ownership.
• How freelancer's and business owners undercharge by using the wrong pricing model.
• Why you need to view your business as a solution to a problem, rather than just a job.
• How to make the service you're offering more valuable by digging deeper into what your potential client actually wants.
• How Brennan re-positioned his marketing to get more clients than he could handle… at higher rates also.
• The valuable lesson that drove Brennan to sell his successful 11 person agency business serving big-name clients around the world.
• Why business owners need to focus on recurring revenue rather than one-off projects.
• The difficulty in productizing a service business and creating uniformity, especially with employees.
• The essential role of business systems automation to scalable growth and freedom.
• How a buyout offer can make you re-think your business model.
• Why Brennan's dream business model required total strangers paying him.
• How to not end up being an employee in your own company.
• How a SaaS (software as a service) business ended up being the opposite of what Brennan wanted, even though it looked great from the outside.
• How to achieve exponential success by listening to your clients.
• The reason why Brennan's lifestyle business is so much more satisfying than his other endeavors.
• How your values determine your business model.
• The Socratic Method Brennan uses to set his business apart and serve his clients better.
• Brennan's tips on how to price services so clients can't say no.
• Why Brennan wouldn't stop working on his business even if he received $50 billion.
• How a lifestyle business can give you the freedom you've always wanted, even before you get rich.
• …and much more

Resources and Links Mentioned in this Session Include:

• Step 3 of the Seven Steps to Seven Figures Course
• Seven Steps to Seven Figures course series
• The Millionaire Next Door (Book on our recommended reading list)
• Forbes 400 List
• Brennan's site, Double Your Freelancing
• Double Your Freelancing Conference & Meetups
• Double Your Freelancing Academy
• Double Your Freelancing Rate Course
• Free Course – Charge What You're Worth
• @brennandunn on Twitter
• (Please note: some of the links above are affiliate links so if you buy a course or book using these links I will receive a little compensation. Thank you for supporting this site!)

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5 Free Sample Lessons

Figuring out how to buy life insurance online should be a simple, straightforward financial decision.

Unfortunately, the insurance companies love to make it complicated so they can increase their profits at your expense.

The key to a smart decision is to ground yourself in the correct principles from the beginning so you don’t get led astray.

In a nutshell, you want to:

• Buy only the amount of life insurance coverage you need.
• Insure only those risks you can’t afford to accept.
• Buy life insurance for the minimum term required.
• Buy life insurance from a reputable broker or insurer.
• Buy your policy at the best price possible.

I’ll show you exactly how to accomplish these five objectives by following these 4 key principles:

Don’t get confused by the salesman’s pitch. Focus on the one thing that matters – insuring your life. That means not getting distracted by complicated insurance products with bells and whistles. If it’s complicated, then it’s probably the wrong choice.

Don’t buy life insurance as an investment or as a retirement planning vehicle (except in extremely rare situations explained elsewhere in this smart consumer’s guide).

Buy life insurance to protect your dependents from lost income if you die. Leaving your family indigent is a risk you can’t afford to accept, so transfer that risk through life insurance.

The way you accomplish this is by buying life insurance from an experienced, independent agent or an online life insurance broker. There’s more to getting the best deal than just getting a cheap quote online. An experienced, independent agent costs you nothing and knows how to qualify you for the best rate class resulting in the overall lowest price.

That’s it! As I said, it's a simple decision when you know what to do and have proper guidance.

Life insurance salespeople don't want you to have this advice!

Instead, they want to up-sell you on the many features and benefits of their complex investment alternatives. These sales tactics are intended to confuse you into overpaying, buying features you don’t need, or buying the wrong type of life insurance altogether. In fact, research shows that if you already own life insurance, there’s a 2/3 chance you’re paying too much!

This smart consumer’s guide will arm you with all the knowledge you need to learn how to buy life insurance online. I’ll also give you some uncommon savings tips that most agents won’t tell you, so you know how to get the best deal possible.

Let’s begin…

Life insurance companies have an unfair advantage

The starting point to making a smart decision and learning how to buy life insurance online is to first understand life insurance sales from the other side of the transaction. That’s because life insurance is an unfair game where the insurance company holds all the cards.

• They have teams of actuaries armed with reams of research based on mountains of data identifying risks and costs with great precision. It’s their profession to know exactly how to price risk so they profit. You have none of that knowledge.
• They have marketing experts who research all the latest consumer hot buttons and carefully craft features and benefits into their policies to motivate you to part with your money. It’s their profession to know the psychological triggers that get a person to buy, not yours. You have none of that knowledge.
• They have teams of lawyers who carefully craft the terms and conditions of those fancy policies with carve-outs and special exceptions to limit payouts. You probably wouldn’t recognize the relevant issues buried in the legalese even if you read every single word of the policy. Again, they have the knowledge advantage there as well.

In short, life insurance companies aren’t dumb.

They know how to define and price risks in ways you’ll never understand, and they’re in business to maximize their profits, not yours. This is not a conspiracy theory, and there’s nothing unethical about it. It’s just smart business.

However, you need to be an equally smart consumer by carefully defining the role life insurance will play in your financial plan so you buy on your terms, not theirs. That's the key to how you get a great deal.

Related: How to be a pro at growing your wealth

For the overwhelming majority of buyers that means buying life insurance focused on the death benefit (without bells and whistles) because it’s a competitively priced commodity product allowing you to compare apples to apples and make a smart consumer decision. It provides the essential risk management function you need in your financial plan at a fair price. It’s the level playing field you want to operate on.

Conversely, the playing field you want to avoid is complex life insurance policies filled with multiple riders, special terms, or contractual investment and retirement planning benefits that attempt to differentiate the product from the competition. That game gives the insurance company the advantage because each product is specialized, making it nearly impossible for the consumer to compare and price accurately.

The key point is there’s nothing inherently wrong with life insurance as a financial product. It’s been around longer than you and I, and it will be around long after we pass because it serves an important, legitimate consumer need. It’s an indispensable financial tool for the right situation (explained below…).

However, you must be a smart consumer and educate yourself to buy it right so you don’t get tricked by the sales tactics.

3 rules for buying life insurance

When you learn how to buy life insurance online the right way, life insurance is an expense, not an investment. That’s because the smart way to buy life insurance is for risk management, not investment return.

Always remember that all forms of insurance, including life insurance, are negative expectancy bets (they pay less to the average consumer than it costs, net of investment opportunity cost).

Again, this is not a conspiracy theory. It’s inherent in the nature of all insurance businesses. The insurance company must take in more value from consumers than they pay in benefits so they have enough money left over to pay the salespeople, company overhead, and to pay a profit for investors.

The consumer, on average, loses with all forms of insurance.

But that doesn’t make life insurance bad. Quite the opposite is true.

Life insurance provides an essential risk transfer function in your financial plan. You want to insure away those risks that would cause losses you can’t afford to accept. If your family relies on your income and would face financial difficulty should you unexpectedly die, then properly purchased life insurance is the best solution to managing that risk.

Yes, it’s a negative expectancy bet, but when you’re that exception who dies during the policy period, then life insurance will be the single best “investment” you ever made with a payoff that dwarfs anything else you could do with your money. The value of the death benefit will provide a lasting gift that your family will always thank you for, making it an essential purchase in the right situation.

Related: How to take back control of your portfolio

So the fact that it’s a losing bet (on average) for most buyers doesn’t mean you don’t buy life insurance. Instead, it means you buy it the smart way with these four clear objectives in mind:

• Purchase it only for the valid financial purpose of transferring risk you can’t afford to take. (i.e. don’t buy it for investment or other reasons except in extremely rare special situations as described in other articles here.)
• Buy the minimum amount you need.
• Buy it for the minimum time required until you accumulate sufficient assets to self-insure, or until you no longer have dependents that need the benefit.
• Hope that you flush 100% of your premium money down the toilet because that means you lived a long, healthy life and never needed the risk transfer… and that’s a good thing.

In other words, life insurance bought right is no different than buying any other type of insurance. It’s protection from disaster because it’s irresponsible to burden your family with unmanaged risk. You hope it’s a complete waste of money because it sucks to die early.

If that confuses you then it’s only because you’re confusing life insurance with investing (which makes unethical life insurance sales people very happy). Life insurance bought right is not an investment. Instead, you want to pay the company a fee to accept a risk. The company pools that risk and earns a fair business profit for the service.

That’s the smart, cost-efficient way to buy life insurance.

What type of life insurance should I buy?

Most people should only buy term life insurance and avoid other kinds of life insurance that advertise a cash value option; these include whole life insurance, permanent life insurance, or universal life insurance.

Here, we'll explain why term life insurance is best for the vast majority of people. But first, let's explain the two types of life insurance:

• The simple type of life insurance that satisfies the valid risk transfer function described above (term life insurance).
• The complex type of life insurance where companies exploit their unfair advantages described earlier to create product differentiation designed to confuse the consumer so they can suck money from your pocket into theirs (all other kinds).

The sad truth is the life insurance marketing game has morphed from a simple risk transfer sale into a complex puzzle where savvy companies design complex investment and retirement products under a life insurance wrapper with carve outs and riders that consumers have difficulty understanding or pricing correctly. These riders provide a complex array of benefits designed to hook consumer hot buttons motivating a buying decision that, more often than not, is not appropriate.

The absurdity of mixing insurance with investing should be intuitively obvious:

• You don’t buy health insurance as a profitable investment, do you? Of course not! You buy it to transfer the risk of huge health care bills if you get sick or injured.
• You don’t buy fire insurance on your house as an investment, do you? It’s a risk management tool in the event your house burns to the ground so you can rebuild it without going bankrupt.
• The same is true with auto insurance, disability insurance, and every other type of insurance you can imagine. They’re all risk management tools in your financial plan.

So why is life insurance the one exception that’s sold as an investment?

Answer: It isn’t.

You would laugh at your auto insurance or health care insurance company if they tried to double your premiums by tacking on some sort of contractual investment product with complicated pay off terms. It’s not why you buy those insurance products. It wouldn’t make any sense.

Think of life insurance the same way and you’ll make a smart decision.

Let’s get more specific with examples…

The right reason to get life insurance

The starting point of the discussion is to decide if you need life insurance at all.

According to LIMRA’s Insurance Barometer, the top 3 reasons people buy life insurance are:

• To cover burial and other final expenses
• To replace lost income
• To pay off the mortgage

As stated earlier, if you don’t have sufficient assets to allow your family or business to pay their bills in your absence, then you need life insurance. Simple enough.

Yet, here are some disturbing statistics…

• Half of Americans say they would be adversely affected by the death of their family’s primary breadwinner in 1 year or less. (Source: LIMRA Study)
• 40% of households with an annual income of $100,000 or more also report they would feel significant impact within 6 months of the primary breadwinner’s passing.
• Combine this with the fact that the majority of Americans (54%) say it’s unlikely they’ll purchase life insurance in the next 12 months (according to a study by LIMRA) and there’s an obvious problem.

A large segment of the population has a legitimate financial need for life insurance. Their dependents or business would suffer due to lost income or services if they died. They need financial protection in the form of a death benefit. But they don’t have life insurance.

Why does this happen?

Nobody wakes up in the morning contemplating their unexpected death. Nobody wants to spend money on an insurance product they hope never pays off. Basically, the whole life insurance topic isn’t fun. The result is the blissful pursuit of avoidance through one of the following three flawed rationalizations:

• The most common reason people fail to buy life insurance is because they’re oblivious to their need and never really think it through. (That probably doesn’t apply to you since you’re reading this article.)
• The second reason is you falsely believe “it can’t happen to me”. That’s obviously nonsense since people die without warning every day so it’s totally possible that it just might happen to you. Improbable, yes. Possible? Absolutely!
• You confuse probability with expectancy. In other words, the probability of you dying prematurely is crazy small, but that doesn’t matter. Expectancy should drive all your financial decisions (not probability) and expectancy is probability multiplied by payoff. When payoffs are unacceptably large and negative, then the smart decision is to transfer those risks through insurance (despite the low odds of occurrence). It’s just smart financial risk management and it’s the reason you should use insurance products in your financial plan.

If the above describes you in any way (where you have legitimate need, but haven't taken action yet), we recommend obtaining a free quote from our recommended resource, as they make it fast and easy.

The application can be completed online in less than 3 minutes, and their system will shop your quote based on your personal situation to find the best priced policy from more than a dozen vendors covering the entire industry. We've provided a PDF guide that walks you through the 4-step process in case you want a preview.

They're very professional and efficient, the process is easy, and you won't receive telemarketing calls from different vendors after filling out their form,

The wrong reason to buy life insurance

Unfortunately, most life insurance is sold, not bought.

The reason is simple. Life insurance has limited market appeal when you only sell a death benefit. As stated earlier, nobody wants to contemplate their death or spend more money. It requires a serious conversation about the risk of dying prematurely and leaving your family behind. Nobody wants to think about that. It’s not an easy sell.

That's why life insurance companies prefer to wrap a bunch of other benefits into the product so it has more sex appeal as an investment (read my expose on whole life insurance here). It’s clever marketing to dress the death benefit up in investment clothing creating product differentiation and expanding market share into the investment industry to increase total sales and profit. It’s good business on their part, but it’s not good for your wallet.

Always remember it’s not called “investment insurance” or “retirement insurance” for a reason. It's called “life insurance” because its proper function is to insure your life.

Don’t fall prey to those sales tactics.

Should you ever buy universal or whole life insurance?

However, there are two other major types of life insurance that outsell term 2:1 – universal life insurance and whole life insurance.

These are both forms of lifetime or permanent life insurance, which I would rarely recommend, except in specific business or estate planning scenarios. (These RARE situations are fully explained in the articles explaining each type of insurance in our Smart Consumer’s Guide To Life Insurance series.)

The underlying problem with permanent forms of life insurance is you must pay for the rest of your life.

• The likelihood that you’ll need to protect your dependents for the rest of your life only occurs in rare circumstances. That means you’re committing to a lifetime added expense you don’t need, which then leaves less money for achieving other important financial goals.
• Secondly, you’ll likely have sufficient assets at some point in your life to eliminate the expense by self-insuring what risk remains in your later years. Again, that means buying permanent insurance will cause you to pay an unnecessary expense for a risk transfer service longer than you actually need it.

Surprisingly, the ACLI reports that roughly 2/3 of all individual policies sold in the U.S. are permanent plans, despite these policies not being the best deal for many of those consumers.

Remember, your goal is to purchase the valuable risk transfer death benefit at the lowest cost possible for only as long as you need it because (on balance) it’s a losing bet for the average consumer.

(Sure there are exceptions to the rule, and life insurance salespeople are quick to point out those exceptions to sell the more expensive insurance. But those exceptions merely prove the rule that most consumers must lose. After all, somebody has to pay for those exceptions, the commission to the sales people, the overhead to the insurance company, and the profit to the insurance company investors, and that somebody will likely be you.)

Therefore, smart consumers should think in terms of minimizing their life insurance costs while still properly protecting their family and business relationships for legitimate risks.

That means only purchasing the coverage you need (plain vanilla life insurance death benefit – no bells and whistles) for only as long as you need it (not permanent, and not for the rest of your life, but for the appropriate term).

For example, I don’t own life insurance because my wife and I have accumulated enough assets and planned for my passing in such a way that my family can live comfortably without me. Sure, I’m irreplaceable as a father and husband, but financially, they’ll be fine without me.

I’m “self-insured” because there’s no financial risk remaining to insure.

Your goal should be similar – to use term life insurance as the lowest cost solution to protect your loved ones (and/or business) only during the time necessary so you can dedicate all remaining financial resources to achieving self-insured status as quickly as possible.

Related: Here’s a scientific system to build your wealth now

Think about it for a minute… buying permanent insurance is an implied admission that you’ll never achieve financial security, will likely fail at your financial goals, and die poor one day because you’re using insurance to inefficiently leave an asset behind that you failed to accumulate on your own. Is that really the financial plan you want to follow?

“Buy term and invest the difference” is a cliché because it’s true. It’s the smart, efficient way to allocate your scarce financial resources because you’ll spend the minimum necessary on life insurance so you have the maximum possible to dedicate to investing toward your goal of financial independence and self-insurance.

Always remember there are commission hungry (or self-deceived) salespeople that will try to divert your attention from those fundamental financial truths (it’s a negative expectancy bet where the average consumer must lose) by pitching you on more expensive products sporting features and benefits that extend beyond the purpose of insuring your life from a risk you can’t afford to take.

If you encounter a salesperson playing that game then just move on, even if it’s your brother’s-sister’s-cousin-in-law.

There are plenty of honest, reputable, independent life insurance agents who will help you find just the right coverage you need at the lowest possible cost without any of the sales games (my recommendation is here, and yes, this is an affiliate link.

Where to buy term life insurance online

To buy term life insurance online, visit an online broker like Policy Genius. You'll answer a few simple questions about your age and health and get instant online quotes with no obligation. If you decide to purchase a policy, an agent will walk you through the steps to buy either online or on the phone.

What do life jackets, seat belts, umbrellas, and life boats have in common?

When emergency strikes, the only thing you care about is they do their job.

You don’t care about color, brand, or special features.

You just need the protection to work in time of danger or discomfort.

… And that’s term life insurance.

Term life insurance is a “no frills” life insurance policy that offers low-cost death benefit coverage at a guaranteed level premium for set periods such as 10, 20, or 30 years. It's a commodity product that's competitively priced and consumer friendly.

It’s the financial life boat your family (or business) needs if you die unexpectedly.

To get a quick quote, we recommend Policygenius. It compares quotes from more than a dozen providers across the entire industry so you can get the best deal on your premium and get the right policy for you and your family.

Video: How to get the best price on life insurance in 3 minutes

Here's a quick one-minute video tutorial that shows you the simple 4-step application process, so you know what to expect:

Prefer reading? We also have a PDF outline that shows you the application process, complete with screenshots, that walks you through everything. Click here to download the PDF outline and then click here to complete your application.

Where's the best place to get life insurance quotes?

The best place to get life insurance quotes is an independent life insurance agent or an online life insurance broker like Policy Genius, not a captive agent who represents a single life insurance company.

Buying life insurance is also one place where I wouldn’t suggest relying on a referral.

Why? Because most consumers know less than you about how to buy it right, so just because a family member or church friend is an agent for a big name company or is happy with her agent means squat.

As stated earlier, you want to buy from an independent agent who can shop the policy for you and can get you the best quote from many competing firms, preferably firms known to specialize in your situation. Never buy from a captive agent.

Captive agents (or career agents) are typically only able to sell products from one life insurance company, or are highly incentivized to sell one company’s products.

For example, if you ask a Northwestern Mutual, Farmer’s, State Farm, or New York Life agent for a life insurance quote, you are extremely likely to get quotes from that particular company only. There’s nothing wrong with that since they openly and fairly represent that company’s products. However, independent agents represent multiple companies so they can “shop the market” to find the best deal for you.

Also, don’t make the mistake of thinking that “shopping the market” is as simple as getting a “price comparison” from one of those online life insurance sites. That quote will only be valid if it takes into account specifics about your health and family history. Anything less ignores the role that health class ratings play in the actual price you'll pay.

That's why we recommend this online quote service. Policy Genius gives you the convenience of getting a quote in just a few minutes, without salesman hype, shopped from more than a dozen carriers across the entire industry, and includes health class rating information so that you know the quotes are accurate.

Generic quotes that don't include health and family history information will likely assume best rate class resulting in a price that may be different from what you would actually pay:

• Preferred Plus (PP) (the lowest rate, and what you usually see published)
• Preferred (costs 25% more than PP)
• Standard Plus (50% more than PP)
• Standard (75% more than PP)
• There are also multiple “sub-standard” classes, each 25% more expensive, usually called “Table A through H” or “1-8”.

Here’s the important point… research shows less than 20% of life insurance applicants qualify for the best rate, and different companies rate different personal conditions in different ways. There is no standard.

• So if your mom died of cancer (family history), some companies will penalize you for this and some won’t.
• If you had a DUI a few years ago (driving history), some companies will decline you and some will approve you.
• If you’re 25 pounds overweight, you might still qualify for some companies’ best class, but will be priced higher for the 2^nd or 3^rd class at other companies.

And there's a surprisingly long list of conditions that could impact your rate class (which explains why less than 20% of applicants qualify for the best rate!):

• Diabetes Type 1 or 2
• Cancer history
• Overweight
• History of heart disease
• Stroke
• High blood pressure
• High cholesterol
• Elevated liver or kidney numbers
• Sleep apnea
• Anxiety
• Depression
• Epilepsy
• Tobacco use
• Family health history
• Hazardous occupation
• Dangerous hobbies (scuba diving, sky diving)
• Pilot's license
• Criminal history
• Driving history (tickets, DUI)
• Drug or alcohol history
• Foreign travel or citizenship issues

A knowledgeable independent agent will know which company to use for your particular situation based on his/her depth of experience shopping many, many policies to these different companies.

The agent’s job is to direct your business to the company who will approve you at the best rating class, not to simply pull up the best rates from all the companies and stick you with the company offering the lowest rate online (because you might not qualify for it after you submit your application).

The way it's done in practice is the agent will run trial quotes for you at multiple companies because even with extensive experience it's difficult to tell exactly how different combinations of health and personal conditions will effect the rate class you qualify for at each company. The agent should shop the policy for you by composing an email listing all relevant conditions and personal history to solicit an offer for insurance from each underwriting department. The goal is to find the company that'll qualify you for the best rate class because that's nearly always the best price.

In other words, just because a web site quotes you the lowest priced insurance company doesn’t necessarily mean that’s the best price you could actually get approved for given your particular circumstances.

Why you should avoid buying life insurance from captive agents

The opposite problem occurs when you shop life insurance using a captive agent representing a name-brand product line. This could cost you as much as 50% to 100% more for comparable coverage.

Sure, they might try to tell you that “all the companies’ rates are within a few bucks of each other,” but the research doesn’t support that claim.

Take the example of a 50 year old male, non-smoker, in excellent health, looking for a $500,000, 10 year term policy. Below are 4 sample quotes (taken near the date of publishing) for comparison.*

• Protective Life Insurance Co. – Custom Choice UL, 10 Year No Lapse – $276.77/year
• Primerica Life Insurance Co. – Custom Advantage 10 – $352.50/year (costs 28% more)
• Farmers New World Life Insurance Co. – Value Term 10 – $416/year (costs 51% more)
• New York Life – 10 Year Level Term – $437.50/year (costs 58% more)

*Quotes are for illustrative purposes only. This is not an offer for insurance. The quotes represent each carrier’s top tier, non-tobacco rating, and are subject to change.

The first thing to notice is how the quote from Protective is the lowest price and would likely only be provided by an independent agent, but that’s only half the story because all of these quotes assume you’ll qualify for each of these companies’ best health ratings (as discussed above), which may not be true.

What if you have a minor health concern, like taking medication for blood pressure? You can still qualify for Protective’s best health rating, but there are many companies out there who don’t allow blood pressure treatment in their best health category.

So let’s say you applied to Name Brand Company A, and instead of qualifying for their best health class, you got penalized one rate class for the blood pressure treatment.  Now you’ll pay about $520 per year, an 88% increase over Protective’s rate.

Do you see the problem?

It’s not just about finding the best quote. It’s about finding the best quote from the company that will qualify you at the highest rate class given your specific life situation. The difference can be a 10%-70% savings, and no, that's not a typo.

To find out exactly how to save the most, get a no-risk, no-obligation quote from the quote service we prefer so they can qualify you for the best rate class (click here).)

Buying life insurance is about finding the best quote from the company that will qualify you at the highest rate class given your situation.

More life insurance agent tips you may not know

• Be wary of dealing with a new agent because he or she is a family member or friend. Rookie agents can cost you a LOT of money. Experience does matter.
• Check your agent’s license status (how long they’ve been in business, complaints, and which companies they represent) at your state’s department of insurance website. For example, you might try this search query in Illinois – “Illinois department of insurance Broker/Agent search”
• Is your agent successful? This tip is optional because it’s a bit nosy, but ask your agent, “How much premium did you place last year?”  You’re looking for an answer over $100,000, which means they’re probably making 6 digits. Sure, there are good agents making less than a 6 digit income, but the more product you move, the more experience you get with the companies, and you’ll likely get more balanced advice from an agent who doesn’t desperately need your business to put food on the table.
• When an agent quotes you, ask if they can share their screen with you via Skype or send you a screenshot of the quotes they’re seeing. You want to be sure they are quoting you the best rate, not the 5^th best because selling that particular company or product helps the agent win a sales contest.  NOTE: It’s perfectly acceptable to not quote you the best rate listed if the agent knows you can’t qualify for that rate due to some personal or medical history issue.

In summary, there are many ways to buy life insurance:

• You can buy online from a web site quoting rates, but you won’t know which companies you actually qualify for given your personal situation.
• Alternatively, you can turn to a captive agent specializing in a specific company product line, but that may not get you the best rate.
• Or you can turn to an experienced, independent agent who can help you shop it out at no additional cost to you so you get the best rate for your particular life situation (click here for my recommendation. You'll get a free quote and they'll follow up to answer your questions.)

How much life insurance do I need?

A life insurance agent’s commission is a function of the value of the policy they sell.

That means they have an incentive to calculate your life insurance need “generously”.

Smart consumers do their own calculation first so they have a benchmark to compare with the agent’s analysis.

For example, let’s assume you’re 40 years old, make $100,000 per year, and plan to work another 25 years.

An agent might look at that and quickly recommend $100,000 per year multiplied by 25 years resulting in $2.5 million of coverage. Unfortunately, that’s not the smart way to do it for the following reasons:

• You probably don’t need to replace 100% of your income – Your family may spend less due to decreased living expenses once you’re out of the picture.
• Excludes investment return – Your spouse will likely receive interest and capital gains on the assets over time, supplementing the capital provided.
• Don’t double dip – Most life insurance calculators (mine here included) factor in the costs to pay off every debt or future obligation you’ll ever have, but your current income factored over 25 years is already paying for those debts, causing you to over-insure for a double payoff. Once those debts are paid that means your income needs will drop accordingly.
• Your spouse can work – Most people don’t like a perpetually sedentary life. Your spouse could choose to return to the work force once the children are raised, or after a period of retraining and education. In other words, you may need to only provide for a few years of income loss as a result.
• Short life expectancy – Not to be morbid, but if you’re a 50 year old female getting coverage on yourself to protect your 60 year old husband who is obese, has diabetes, smokes, and has had two heart attacks, it may be a reasonable bet for you to only buy a 10 or 15 year term policy.
• Other Income Sources – You may not need to replace every nickel of your earnings. Social security often pays out to a surviving spouse, and many pensions and annuities are set up to continue paying to the surviving spouse.
• Calculate Your Own Needs – based on your unique situation using my calculator here so you can factor all these variables in. It’s not perfect, but you’ll have a much better idea of how much you need than simply relying on a quick calculation by an agent with an incentive to sell you more insurance than necessary.

Related: Why you need a wealth plan, not a financial plan.

Remember, you want to buy the least amount of coverage necessary, for the lowest price, for the shortest time period required, to manage your risk. That’s because the less you spend on insurance (remember, you’re hoping it’s just a wasted, but essential, risk management expense), the more you have to invest for your financial independence.

The 10-20x your income rule

For example, plugging the numbers from above in my life insurance calculator using $100,000 in income for 25 years of work yields a $1.6 million dollar need instead of $2.5 million. That’s 36% less using the standard assumptions built into the calculator without changing the “living expense” to $75,000. Obviously, additional tweaks could make that number even more affordable.

This takes us to a common rule of thumb used in the industry: your ballpark need will run between 10 – 20 times your annual income, depending on your personal situation.

But with that said, rules of thumb should generally be avoided in favor of a calculator that will take into account the exact circumstances you face to arrive at a number that best reflects your real need.

NOTE: To understand life insurance in business (and how much is appropriate there) as well as using life insurance to pay estate taxes, please see related posts in our Smart Consumer Guide To Life Insurance series here).

What are the best life insurance companies?

When you buy life insurance through a broker or agent like Policy Genius, you will receive quotes from multiple life insurance companies. When choosing a life insurance policy to buy, choosing the best life insurance company based upon that company's financial health and policy terms is as important as choosing the lowest priced premiums.

Not all life insurance companies or policies are created equal.

The criteria you’ll use to analyze a company are as follows:

• Financial health
• Product choice
• Price

Surprisingly, these factors result in less differentiation than you might expect. Let’s look at the reasons why…

How to evaluate the financial health of a life insurance company

The generally accepted best practice for assessing financial health is to purchase only from a company with a rating of “A-” or better from A.M. Best.

Financial ratings matter because your insurance company must have the financial resources to make good on their promise to pay up if you die.  An “A-” rating means the company’s ability to meet its ongoing claims obligations is “excellent” in the opinion of A.M. Best. That’s a good thing.

With that said, just about all the big players are rated “A-” or better, so this is less of a factor than you might think. While you absolutely should check the insurance company’s rating before buying, it rarely becomes an issue in the buying decision.

NOTE: The only reason you wouldn’t go with a top rated company is if you have a “hard to place” medical or personal issue preventing you from being approved at other companies. You might need to do business with a “B” rated company in that instance.

In addition, there are 3 reasons to look beyond this generic rating system and dig a little deeper when assessing company financial health.

1. Most life insurance companies do business under the umbrella of a larger financial institution or parent company that can help financially if needed. For example, Banner Life Insurance is owned by Legal & General, Reliastar Life is owned by Voya Financial, and Pruco Life Insurance is owned by Prudential (as of this publication date).
2. Additionally, if a life insurance company isn’t doing well then its life insurance policies typically get bought out by another company. The “life insurance book of business” is highly profitable even if the underlying company is struggling. That makes your policy obligation a sellable asset that usually gets taken over by a financially stronger buying company.
3. Finally, each state has a state guarantee association, which all the companies transacting business in that state must pay into. The association’s job is to help failing companies from going belly up, but if that’s not possible, they help to ensure the policies are bought out and claims are paid. But be careful because most states limit payouts from the guaranteed fund to $300,000 maximum for each insured. You’ll want to check your state’s limits.

To be safe, again, I would try to avoid companies rated lower than “A-“, but if tough medical conditions limit your choice to a B rated company, then just dig a little deeper to decide if it merits further consideration.

How to compare term life insurance policies

Always remember that the commodity benefit you’re buying with term life insurance is the death benefit for a specified period of time, usually 10, 20, or 30 years.

Related: Better investing through process, not product

However, as I said earlier, life insurance companies love to differentiate their products to gain a sales advantage. This practice makes it hard for you to do a straight price comparison because each policy has different bells and whistles that must be accounted for. For example…

• Some companies might include a “Chronic Illness Rider” giving you access to some of your death benefit (while you’re still living) if you get confined to a special care facility.
• Other companies may offer an “accelerated death benefit” rider, allowing you to take some of your death benefit early in the case of terminal illness.
• Still other companies limit your policy choices based on the state you live in, or your age. For example, many companies stop offering 30 year term at age 50 or 55, but at least one company (as of this writing) offers their 30 year term up to age 57.

The only problem is consumers are notoriously bad at valuing these arcane benefits.

• What is the likelihood it will pay off?
• If it does pay off, what’s the real value?
• Is there special language or carefully crafted legal exceptions creating narrow definitions and qualifications in the terms thus lowering the value of the benefit?

Again, the rule is simple – pay only for what you need, and for as little time as you need it.

If you have a specific condition or family history that indicates a specific rider might be important to you then consider it. But be wary of adding bells and whistles just because they sound nice because each is priced to give the insurance company more money than it costs them.

They’re in this business for a profit and they know the risk pricing game inside-out, so be careful.

The rule is simple: buy the least amount of coverage necessary, for the lowest price, for the shortest time period required, to manage your risk.

How to compare the price of term life insurance quotes

As stated above, if you have perfect health with no preexisting conditions and no family or lifestyle history to warrant concern, then company selection is primarily based on price and financial strength.

However, if you have any health, lifestyle, or family history issues then you want to seek the insurance company that’ll rate you at the lowest health rating, thus resulting in the lowest premium.

In other words, there are two dimensions to getting your best deal – price, and the health rating you qualify for.

The advantage of an experienced, independent agent is s/he can help you identify the best company that will deliver the best rating and price for your individual situation.

And of course, I have my recommended resource here. Just grab a free quote now and see for yourself. You risk nothing and it takes less than 3 minutes. Again, we offer a free PDF walkthrough that will guide you through the quick 4-step process.

13 life insurance savings tips

Finally, now that you have the big picture on how to get the best deal in life insurance, we’ll close things out with a few less common life insurance savings tips so you have all the tools you need to make a smart decision:

1. Set Up Your Death Benefit as an Annuity Stream (10%-30% Savings) – Most people buy life insurance to replace their income if they die. However, the policies they buy are set up to pay one giant lump sum death benefit. The alternative is to give your beneficiaries exactly what they had before…a regular income. There are a few companies that'll discount their regular premium by 10% to 30% if you set up your death benefit to be paid out over 10 to 20 years.

In other words, instead of giving your wife a $1 million dollar death benefit, why not give her $100,000 for 10 years? This is especially helpful when the beneficiary lacks financial skill or has other financial responsibility issues leading you to believe a lump sum payment may get squandered.

2. Stagger (or Layer) Your Policies (10%-30% Savings) – Just as you can ladder CDs, bonds, or annuity maturities so you have money at predictable time periods in the future, you can do the same thing with life insurance and save money at the same time.

For example, let’s assume you need $1 million of life insurance today, but you expect that need to decrease over the next 20 to 30 years due to your other investment plans.  Many agents would try to sell you a 30 year term for $1 million, but it might be more cost efficient to buy two policies: a 15 year term for $500,000, and a 30 year term for $500,000. This will give you $1 million of coverage for the first 15 years and $500K of coverage for the remaining 15 years to reflect decreased financial need resulting from increased assets in your later years. This better reflects your real financial need and lowers your costs at the same time.

3. Take an Exam (10%-40% Savings) – “No exam” policies are terrific for agents. They cost 10% to 50% more, which then puts more commission in the agent’s pocket. The sales appeal to the consumer is convenience, but at what price?

The truth is there are few situations where it makes sense for you to buy a life insurance policy without taking an exam. This becomes obvious when you think about it from the insurance company’s perspective. Their goal is to write policies on people who won’t die during the term. That’s how they maximize profits.

They’ll ask personal questions on your application, pull medical records, your driving record, etc., in an effort to price your risk of death. Help them out and let them confirm that you are healthy in every way with a full exam. Consent to the blood and urine tests, a blood pressure test, and provide accurate height and weight. It won’t cost you anything but time.

Insurance companies know full well that people with pre-existing conditions will pursue “no exam” policies; thus, they price those policies at a premium to reflect the increased risk. If you’ve got nothing to hide, then consenting to all health tests will save you money by pricing your policy at a lower rate class.

4. Exercise and Eat Right for 1-2 Weeks Before Your Exam – Few people realize the health benefits of eating right and exercising, even for a short period of time like 1 to 2 weeks.

If you're not clear about this, then just watch the Biggest Loser and notice how morbidly obese people routinely get off their blood pressure and diabetes medications within a few weeks of starting the show.

MedPageToday.com reported:

“One man with a hemoglobin A1c (HbA1c) of 9.1, a body mass index (BMI) of 51, and who needed six insulin injections a day as well as other multiple prescriptions was off all medication by week 3, said Robert Huizenga, MD, the medical advisor for the TV show.”

The body has an amazing, self-healing ability. Treat it right (even for a short period of time) and it will naturally try to find homeostasis – a more balanced, healthier state.

Additionally, few people realize how stringent life insurance companies can be with their underwriting.  If your cholesterol surpasses their maximum level allowed for the best class, even by a few points, you’ll get placed in their 2^nd best class.

… and that will cost you an additional 25% for 10 to 30 years!

Same thing goes for weight and many other lab levels they consider. They have strict guidelines. One extra health class can cost 25% more, so aim for the best health class possible. Give yourself the best chance to test well by exercising and eating right during the weeks preceding your exam.

5. Pay semi-annually or annually instead of monthly (4% to 8% savings) – Paying in lump sums reduces the insurance company’s administrative costs which comes back to you in lower premiums.
6. Bundle Policies – Usually, name brand carriers aren't the best deal, and they can often have strict underwriting requirements for health conditions (as discussed above) further increasing costs. However, there is one exception worth looking into – some insurance companies offer multiple policy discounts. In other words, if you already have your home and auto policy with one company then it's worth a phone call to find out if adding life insurance would qualify you for a multi-policy discount. If you're seeking a lower coverage amount (less than 500K) then it's possible that discount might be enough to make a difference.
7. Break Point Discounts – Insurance companies usually charge less per thousand of coverage at specific break points. The most common break points, or “banding” discount levels, are at the $250,000, $500,000, and $1,000,000 coverage amounts. So anytime your life insurance need estimate puts you under one of these round number break point levels make sure you also get quotes at the next break point above what you actually need. There's a reasonable chance you could get the best of both worlds – pay less money and get more coverage  at the same time – and that's a good thing.

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8. Replace Your Mortgage Insurance – Mortgage life insurance pays off your mortgage if you die. It's effectively a declining value term policy because the outstanding balance on your mortgage declines (amortizes) over time. A 20 or 30 year term policy will typically cost less while still providing the necessary protection.
9. Buy A Second-To-Die Policy (10%-20% savings) – This savings strategy will usually apply to a dual-income married couple trying to provide for their children or for life insurance used in estate planning. The policy is significantly cheaper because it will only pay out when both people die.
10. Group Insurance For Serious Medical Conditions – If you have a known, serious medical condition it can be difficult and tremendously expensive to buy life insurance. One solution is to find large group policies through work or other organizations you're affiliated with. The underwriting is sometimes as simple as age, gender, and whether or not you smoke, making qualification easy. The savings can be extraordinary depending on your actual health condition.
11. Free Insurance – Mass Mutual offers free 10 year $50,000 term policies to individuals between the ages of 19-42 with a household income between $10,000-$40,000 under their Life Bridge program. Check it out if you qualify.
12. Don’t Wait / Buy Now – If you’re healthy and need the coverage then waiting can cost you. Premiums can rise by 5% to 12% for every birthday you wait. Plus, you also incur the risk of developing an adverse health condition that might increase your premium. It never gets cheaper to wait so why take the risk?
13. Finally, consider shopping your life insurance every 2 years – Your health may have improved or new products may come to market that could reduce your premium. You don’t know unless you ask.

If you want to pursue any of these money saving strategies, then simply get your automated quote here. At the end of the quote process, you'll be given the choice to fill out the application asking for a licensed agent to give you a call. During that call, the agent can customize the policy to your personal needs based on any of these ideas.

Conclusion

In summary, learning how to buy life insurance online can be confusing. Smart consumers keep it simple by a following a few common-sense rules.

• Limit what you buy to just what you need by insuring only those risks you can’t afford to take for the minimum time necessary. You do the same with every other insurance and consumption item in your life, so why should life insurance be any different?
• Don’t confuse life insurance with investing by getting sold on complicated policies with lots of bells and whistles. Just buy it for the risk management protection. You do that with every other type of insurance in your life, so why should life insurance be any different?
• Keep it simple, and don’t get swayed by smooth talking salespeople. Only buy from an experienced, independent agent who can qualify you at the best rate class for the best deal by selling only what fits your needs (not what gives him the best commission or sales bonus).

If you stay away from whole life and “no exam” policies and follow the rules in this guide, then you’ll be well-armed to make a smart decision on your life insurance purchase.

And if you have any questions or want a quote, then contact this recommended independent agency because they walk-the-talk with everything taught here. Just grab a free quote and they'll follow up to help you!

Prevention is your best defense against becoming an investment fraud victim, and there are numerous articles on this site educating you on how to avoid investment fraud.

However, if you’re reading this article, it's likely too late for that message.

The typical first response to realizing you're a victim of investment fraud is a combination of anger and embarrassment. You got a raw deal and it doesn't feel good.

“One ought never to turn one's back on a threatened danger and try to run away from it. If you do that, you will double the danger. But if you meet it promptly and without flinching, you will reduce the danger in half.” – Sir Winston Churchill

You may be tempted to sweep the mistake under the rug and get on with your life by putting it all behind you.

That’s a mistake…

You're Not the Only Victim of Fraud

You’re unlikely the only victim, and every day the investment fraud goes undetected, more people will be hurt by it.

By complaining to authorities as quickly and loudly as possible, you're doing your best to fight back against the con man while also increasing your chances of recovering any lost money.

It’s not a perfect solution, but it’s the best you can do under the circumstances.

You might be pleasantly surprised to learn that according to Bruce Sankin, an auditor and mediator for NASD, “91% of investors who knew their rights and first mediated and then arbitrated recovered part or all of their investment losses.”

See My Related Book…

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That’s a valuable and worthwhile statistic to know. It should be highly motivating to take action if you believe you're a victim of investment fraud.

However, to understand the above quote, it's important to create a distinction between stock broker fraud at a legitimate firm and investment fraud by the firm itself. Each requires a different course of action to seek remedy.

How to Report Fraud

If you're facing stock broker fraud within a legitimate firm, then your first step is to complain, in writing, to the broker first and the branch manager second.

People who follow this procedure are the ones getting the results Bruce is citing above.

However, there are times when the whole company is crooked. In that case, pursuing corrective action within the same firm is not likely to work.

It makes more sense to turn to the regulators for additional help.

Related: How Your Financial Advisor is Taking 75% of Your Retirement Income (or More!) Video, PDF download, or Audio.

Below is a list of regulatory resources for filing investment fraud complaints when your grievance with the offending firm isn't getting resolved:

• Securities and Exchange Commission: Email to enforcement@sec.gov, fill out the online complaint form, fax 202-772-9235, or mail to SEC Complaint Center at 100 F Street NE, Washington, D.C. 20549-5990. You can also call them at 202-551-6551.
• State Securities Regulator: Visit the national web site at http://www.nasaa.org for local regulators and an online complaint form or call 202-737-0900. You can email at cyberfraud@nasaa.org .
• National Association of Securities Dealers regulatory branch (NASDR) now called FINRA for Financial Industry Regulatory Authority: http://www.finra.org, online complaint form, or call 800-289-9999.
• Federal Bureau of Investigation (FBI): You can find local offices on their web site at http://www.fbi.gov
• Better Business Bureau: http://www.bbb.org
• Your local District Attorney’s Consumer Protection Unit
• Your local Postal Inspectors Office if mail was used as part of the investment fraud process

“Your only obligation in any lifetime is to be true to yourself.” – Richard Bach

Remember, con artists can’t get prosecuted and your money can’t get returned if you don’t speak up. You don’t want the con man to get away with it, do you?

The sooner you contact these resources, the greater the likelihood that you'll stop the investment fraud from victimizing another person like yourself.

Help others while helping yourself by complaining promptly.

Who knows, you might even get some of that lost money back…

Click here to download the transcript of Tess' best tips on finding true happiness and fulfillment!

How will you define yourself after you retire?

Who are you without your career?

The unfortunate truth is most people attach their self-definition to their professional life.

This results in unexpected emotional difficulty when you achieve financial independence or retire early.

You're not alone in this mistake. I did the exact same thing. It's a common problem.

I incorrectly believed retiring early meant living the “pro-leisure circuit” with endless vacations and eternal bliss – no worries in the world.

I wish life was that easy, but that's not how it works.

Tess Vigeland is the author of Leap and former host of NPR's Marketplace Money. She lived her dream career for 20+ years, never giving thought to what might be next because she never expected to quit.

When it came time to take the leap she was completely unprepared.

Tess and I both learned the hard way what stands on the other side of career and share our research and experience so you don't make the same mistake. It doesn't have to be a problem as long as you know what to expect and how to prepare for it.

In this interview we give you the inside scoop from direct experience so you can avoid the obvious potholes we stepped into.

I've coached many of my clients through the process of financial independence, and I went through it myself. Figuring out who you are and what you stand for when your career isn't in the picture is key to your fulfillment, and the sooner you do it the happier you'll be.

In this episode you'll discover:

• How to deal with your fear of risk and uncertainty following career change.
• How to define yourself without a career.
• What will be your new success metric, and why does it matter?
• The three common signs that tell you when it's time to leave your job or make a change.
• Why your career must honor your values, and what happens when it doesn't.
• The insidiously dangerous role of self-doubt when your career ends, and how to stop it.
• How to find balance when you're personally identified with your work.
• How Tess coped with losing her identity as a celebrity public figure.
• The critically important role community plays in your life, and how to find it after financial independence.
• How career gives you a sense of purpose, and where to find that purpose after you achieve financial independence.
• How to overcome the challenge of creating your life from a blank canvas.
• The key differences that separate financial independence from simply making a career change
• The one mistake you must avoid after your leap.
• What the “adjacent other” means for your career.
• Several case studies, including how one woman left corporate America and reinvented her career.
• How to deal with the expected fallout from family and friends.
• The importance of building your tribe of friends that understand and support leading an unconventional life.
• …and much more

Resources and Links Mentioned in this Session Include:

• Step 7 of the Seven Steps to Seven Figures Course
• Step 3 of the Seven Steps to Seven Figures Course
• Seven Steps to Seven Figures course series
• Leap, Tess Vigeland's book
• FM 013: Simple Financial Planning – The Only 6 Ideas You Need to Know with Philip Taylor
• World Domination Summit
• Tess' WDS Speech
• The Law of Precession, from R Buckminster Fuller
• Tess Untethered
• Tess on Facebook, her author page, Instagram, and Twitter
• (Please note: some of the links above are affiliate links so if you buy a course or book using these links I will receive a little compensation. Thank you for supporting this site!)

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