Safety & Liquidity

Protecting your Assets

These products are the financial building blocks of any good financial map! If you are going to accelerate the pay-off of debt in your portfolio, this is definitely the place you want to start. Savings is the catalyst to any good financial plan!

Saving takes discipline and the ability to visualize the impact of future actions. When paying off debt, there is an important principle to consider; we should invest in things that have similar risks to the things we are paying off.  Investing money in the market, only to find out when we are ready to pay-off the debt that the market is down extending our pay-off for a number of years, is frustrating and  deflating.

 

There is nothing "flashy" about the products and services found in this section. They are not likely to produce double-digit returns,. However, predictable returns can motivate us to consistently save.

These habits can help us to balance our budget, establish emergency savings, pay-off our debt, and build a stable financial base. Learning to save and paying off our debt are critical skill sets we must have to become financially self-reliant!

"The only real security a man can have in this world is a reserve of knowledge, experience, and ability."

Henry Ford

Banking Basics:

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Basic Banking Services!

Your bank should work for you! Most have checking, savings, photo deposit, debit/ credit cards, and bill‑pay to make your life easier.

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Low Interest for the Foreseeable Future:

Many people believe we are temporarily in a low‑interest rate environment... low rates are here to stay! Compounding our interest by budgeting and paying off ou debt can help us to maximize our interest without maximizing our risk!

Short‑term Operating Cash!

We all need money for paying bills, entertainment, short trips, etc... The bank/credit unions are a great place to put operating cash!

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Show Me the Money!

Most banks reserve less then 3% of you capital and they rely on the FDIC to protect the rest!

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How much is Insured?

The FDIC raised the insurance amount from $100,000 per account to $250,000, but what does this really mean? Raising the amount of protection reduced the FDIC’s ability to protect our funds by two thirds.

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How safe is the Bank?

Banks are required to provide FDIC insurance for their accounts, but you should understand the real protection this offers you! The FDIC can only protect a fraction of the funds on deposit. You should keep your long-term savings elsewhere to protect and secure it properly.

Understanding your Bank:

How does a bank make money?

They pay you interest on the money you deposit.

They reserve some & loan your money to others?

The charge fees & spreads on the money they lend?

The more they lend the more they make…

The FDIC insures deposits in case the bank can’t pay.

How do they protect your money?

The FDIC promises to pay you back…

     Banks reserve (0% to 10%) depending on their size.

     How much does the FDIC protect $250,000…

     Neither the FDIC or the banks can pay you back...

     The bank is not the place to keep long-term cash!

Is the FDIC a good fiduciary?

In 2014 the FDIC insured 9.7 trillion in deposits.

The FDIC also insured over 300 Trillion in Derivatives?

Does the FDIC have enough money to pay you back?

In 2014 the FDIC had 25 Billion in reserves…

The FDIC has a 500 Billion line of credit (to pay 310 Trillion).

What does all of this mean?

The FDIC is relying on the government’s help…

     The banks are a great place to keep short-term cash!

     Do NOT keep your long-term money in the bank.

     Neither the FDIC nor the banks can pay you back...

     One regional bank failure can put your money at risk!

The FDIC: Know the Facts!

If the FDIC knew they were insolvent in 2008 and 2009, why did they raise the FDIC limits? To restore our faith in the system? To make us feel good? Whatever the reason, it kept us from panicking.

The FDIC has a longstanding approval from the US Government to extend them a 500 billion dollar line of credit! So, they are backed by the full faith and credit of the US government.

While it may be true that the FDIC is just ONE medium bank away from collapse, don't panic! Find someone you trust to help you plan for the future!

We must learn from the past and adapt. Don't wait until you are forced to make a different decision, get some options today... and take control of your future!

FDIC is Insolvent (House FLoor/C-SPAN)

Dan Burton asks House how FDIC can raise deposit insurance thresholds when they are telling the House they are insolvent.

Washington Mutual Taken Over by Chase

​JP Morgan Chase buys WA Mutual at the last moment. FDIC claims the failure of WA Mutual alone would have bankrupted FDIC!

Compound Interest (Getting interest on your interest)

Albert Einstein said compound interest was the 8th wonder of the world! Compound interest is a very powerful but often underutilized tool! In the model below, you can see the dramatic difference between simple and compound interest, based on a 12% rate of return or savings rate.

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How does Compound Interest work?

The Rule of 72:

The Rule of 72 will approximate how long it takes your money to double at a given interest rate. Just divide the interest rate (8%) into 72, and it would take approximately 9 yrs. for your money to double!

Rule of 72 - Behind the Math

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Inflation Explained

Inflation:

Today, the " new normal" even when inflation is low, it is generally higher than deposit and savings rates. In order to keep up with inflation, we need to put our money to work. In order to outpace inflation, we need to start saving early and we need to systematically eliminate our debt, so add these payments to our retirement "nest egg."

Bank Products and Services:

Checking:

Most checking accounts are non-interest bearing. These accounts help us use our earnings to pay our monthly bills on time.

Bill Pay:

Take advantage of your bank’s “bill pay” services, most give you 20 or 30 transactions a month at no charge. You can save some money on stamps and set up automatic payments as well.

Savings/MRS:

Savings rates are extremely low currently and those who think we are in a low rate environment may be disappointed. As was stated before, savings rates are going to be flat for a very long time. These accounts can be used to save for Christmas, vacations, furniture, cars, etc.

Certificate of Deposit (CD):

These accounts usually pay a little higher rate of return than general savings of money market accounts. Most of these accounts require us to commit for a specific term or period of time. The longer the period of time, the higher the interest rate. In addition, if you terminate the CD early, there is an interest penalty based on the term you choose.

How do Annuities Work?

Annuities

There are several different types of annuities! These savings instruments are offered by insurance companies and are sold by some banks! Annuities are a great way to increase your rate of return and improve liquidity, especially with lower interest rates. Annuities today are paying up to 15 times more than general savings accounts and several times what CDs are currently paying.

(SPIA) Single Premium Immediate Annuity:

These annuities provide a steady income stream for someone who is looking to invest a lump sum of money. SPIAs can pay income to one or more parties or a surviving spouse, and the income stream can even be paid out for a specific term 10 yrs, 20 yrs, or for life.

Fixed Annuity

This annuity pays a fixed rate of interest for a specified period of time (5, 10, 20, or 30 yrs), and the interest is generally deferred until you start taking interest payments. Most of the time, interest can be deferred until 70 1/2 when the IRS requires we take required minimum distributions during retirement.

Fixed Indexed Annuity

This type of annuity is classified as a fixed annuity because there is no risk of loss. While these annuities are attached to market indexes for growth, most insurance companies allow you to choose from multiple indices (S&P 500, Dow Jones, NASDAQ, Russell 2000, Hang Seng, Etc…) without investing directly in the market. The insurance company tracks the growth of the index for particular points chosen by the client (annually, monthly, etc…). If the chosen index loses value during the interest period chosen, no interest is credited for that period. This is how they eliminate the risk of loss. If the index increases in value during the time period chosen, you get either a percentage of the gain or a fixed cap based on your index grows. Once your gain is posted, it is locked in and the future value of the annuity increases. Most indexed annuities have fixed rate guarantees to protect against multiple years of index losses, even though this has never happened. These annuities also have liquidity features and surrender penalties based on the choices you’ve made. Most allow a 10% penalty free withdrawal annually and some have cumulative withdrawals up to 50% of the account value (increasing by 10% a year if no withdrawals are made for up to 5 years). Most indexed annuities accumulate 4 to 7 times what a CD would pay in interest and between 10 to 20 times the current savings account rates, and the interest made is deferred until withdrawals are taken from the annuity. Annuities can be incredible tools for providing guaranteed income in retirement, if the proper annuity is selected. However, income guarantees should never be confused with interest rate guarantees. Talk to an annuity professional for specific planning opportunities and strategies.

Variable Annuity

This type of annuity is linked directly to the market and IS subject to market losses like stocks and mutual funds. These annuities are used sometimes in place of market-correlated investments. However, at times, financial representatives may highlight the guaranteed income aspects of these annuities and this is often confused for a fixed interest rate guarantee. This is NOT the case; annuities are subject to market losses and gains, and they DO NOT have guaranteed interest provisions! This type of annuity is not safe and can be illiquid based on the current market value of the account. If you or someone you know is considering this type of annuity, please talk to a professional you trust before signing.

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Life Insurance

Life insurance can also be used as a solution for long-term savings. To compare different types of life insurance as a viable savings option, please contact a trusted financial professional. Should you have questions about how to best utilize life insurance as a "family bank" or savings option, click on the button below.

To get more detailed information about life insurance visit our Risk Management page by clicking on the "Learn More" button.

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