There are four financial disciplines that are critical to getting ahead financially. They are:
And the order in which these disciplines are developed is critical.
Protection should always come first. Without protection, clients risk leaving family, business associates, dependents and creditors in a difficult spot. Protection is even more important than saving because, for a small sum, life insurance will provide several times more protection than what clients can save in a short period of time.
Saving should be the second financial discipline that people develop. The biggest catch to saving is that you need to actually save the money. Many people invest money and think that they’re saving. Investing is not saving! To count as savings, the money needs to be in a safe place that does not expose it to market risk, or any other risk of loss.
Managing debt naturally follows saving and should done before investing. There are many people who will get a much higher return by managing the debt they have before they invest. Think credit card debt, student loans or almost any other consumer debt. Managing debt doesn’t necessarily mean pay off all debt. Some debt can be good, if it provides better cash flow or better tax treatment. Managing debt means keeping the good debt and executing a plan to pay off bad debt.
Investing should always come last, not just because of the risk of losing both earnings and capital, but because people will have better financial acumen after developing the first three disciplines.
For whatever reason, many people try to acquire these financial disciplines backward. They believe that if they invest first, then they will have enough money to pay off their debts. And once debt payments stop, then they’ll be able to afford to save something. Then by the time they get around to protecting, the protection may be much more expensive, and their health may have deteriorated. This may cause the cost of protection to rise, or perhaps they may be uninsurable.
We know that investment income is not likely to replace savings, and using investment income alone is no way to pay off debt quickly. Still, there are numerous people who call our company because they want to “get enough money together so that they can start investing.”
Many of these people have consumer debt or student loans, maybe both, but they believe “investing” is “where it’s at.” Nothing could be further from the truth. Ironically, the less we know about some things, the more they seem like a good idea. It’s the axiom of “ignorance is bliss.”
Pushing The Pedals
I remember riding in our Dodge Caravan growing up. One day, my older brother (probably 7 at the time) asked our Dad, “Can I sit down by the pedals and you can tell me when to push the gas or the brake?” If you are chuckling over this innocent question posed by a thoughtful 7-year-old, then your response is probably similar to our Dad’s. I was likely only 5 or 6 at the time, and my only question would have been, “Can I do it, too?”
The truth of the matter is, we were ignorant that nerve impulses can travel at 390 feet per second (266 mph), which is much faster than our Dad could have processed the situation, given the verbal instruction, let alone having us comprehend and comply with the instructions. Besides, from the question, you can tell that we were also ignorant of the fact that each pedal has progressive function. Pushing the pedals in a vehicle is not like pushing the start or stop button on your microwave.
For my brother and me, driving was a dream. We wanted to do what Dad was doing. But we didn’t have the knowledge, experience or capability to do it safely at that time. Today, we are both good drivers, but enacting the ideas we had about driving years ago could have been disastrous. Instead, our parents started us on riding toys, then we moved up to bicycles, eventually moving up to riding lawn mowers and tractors before finally driving an automobile on the highway.
Investing is a dream for many people, even though it may seem like investing is where it’s at. A great deal of knowledge and discipline must be mastered to be able to invest successfully, and what people don’t know about investing could ruin them financially. Of course, anyone can get lucky once, but betting on luck is no way to get ahead financially. It is much more responsible to protect first, build up secure savings and manage your debt before you start investing in higher-risk areas.
You have the ability to make a huge difference for your clients’ financial future by simply adjusting their order of operation and starting them off with proper protection. But your opportunity to help doesn’t end with protection. You can do more.
What if you sell your client a participating whole life insurance policy to provide protection as well as a safe place to save, with an average to better-than-average return and tax-free dividends? Would that give your client a leg up on both of the first two financial disciplines?
And while you’re at it, what if you put a paid-up additions rider on the participating whole life policy, so that your client can borrow against their policy cash value to manage debt? Right now, some mutual companies are charging only 5 percent on policy loans. So if your client borrows at 5 percent to pay off a chunk of consumer debt at 18 percent, do you think they would be happy to not have to pay the difference? That kind of sounds like a good investment without big risk, doesn’t it?
Teaching your clients about the hierarchy of these financial disciplines, and using the right product, can revolutionize your clients’ financial future. You have the opportunity to make that difference.
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