Buy Term, Invest the Difference

Back in the day when I was just getting started with Northwestern Mutual as an insurance agent intern, I remember one of the older, more respected General Agents complaining about the fact that most people today, today being the middle 1980’s, did not understand that in order to invest you needed to save first.

“Oh, that’s not right!” opined every buy term and invest the difference shyster and short order chef in the country. That these two, the buy term and invest the difference proponent and the short order chef, were often the same person never seemed to make a significant impression on the American people. He had a business card and all these pretty charts and oh, I am going to be so rich!

Many of them made statements to the idea that whole life policies were a terrible investment and that protection should be split up. Buy term, invest the difference in mutual funds, and use your investments as a twofer, which is to say your mutual funds should be both your retirement and your savings.

I am sitting here for a few minutes considering the gullibility of the American people. The effort to plumb its depths is done, there is no bottom. Still, from time to time you have to sit and marvel at it.

Black Monday, 1987

Another notable memory I have is of Black Monday 1987. My General Agent was marveling over how in a conversation with a gas station clerk she could not get her mind around why everyone was so concerned with whether the banks would open the next day.

The state of financial education is not improved even a little bit, if anything it has gotten worse and the more developed one’s ignorance the more proud the person seems to be of their position.

An Opinion That Looks Like a Recommendation

To Do Lists

First, let’s get to do list #1 out of the way.

Figure out how much you have coming into the household and what your outgo is. You may have to do without some things, get another job, or start a part time business on the side.
Work your budget until you are living on 70% of what you make. Oh, I know. Wailing and guh-nashing of teeth. Stick with me, though. We will return to that in a minute.
A better option to cutting your budget is to try to generate another 42.85% income every month. That would give you the option of having 30% with which to work your savings plan.
Embrace the idea that you don’t know anything about money, for now.
Stop borrowing until you know the difference between good and bad debt.
Next, look at the 30% that is not going out every month. That is seed money for a better future.

It will become a cash cushion that will protect you against predatory loans during emergencies.
It will provide the home a feeling of secureness because whatever happens, next week to whomever the grocery shopping falls will be able to load up.
It will provide you with cash with which to take advantage of opportunities without having to choose between either the opportunity or groceries.
If a breadwinner dies, the kids can still eat, go to school, and sleep in their own beds secure in the knowledge that even though you are gone, their lives continue on.
Here is how you divide it up, to do list #2.

10% goes to cash savings
10% goes to whole life with perhaps a term rider that is convertible to whole life as your finances settle down
10% can go to tithe as your faith directs you. Or not, as you choose.
You can also choose to simply save the 30% for 4 months at which point you will have more than a months income saved in the bank.

After that, you should definitely begin a whole life program, continuing on with saving the rest. This is, in my opinion, what you should continue on with until you become educated on money.