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What if I only have a small amount of $$ to invest? March 13, 2009

Posted by shaferfinancial in Finance.
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One of the members of the Uncommon Financial Wisdom tribe asked me this question:

“I don’t recall in any of your previous posts, where small amounts such as $50 per month were used for EIUL’s.  Can you post on such a topic?  The numbers I see thrown around are massive amounts that someone at my level cannot currently afford and so a more targeted aspect to people my age and ability I think may need to be addressed.”

There is a short answer and a long answer to this question.  You know I am going to give you the long answer!!!!

First thing one should do is to build up a reserve fund.  This can be done a couple of ways, but I like putting everything into a money market fund at a discount brokerage until you have reached a pre-planned amount usually about 2-3 months worth of expenses.  Then you split the amount into two piles. One to continue to be put into the reserve account until you are at 6 months expenses and the other an investment pile.  With the investment pile I suggest concentrated investments in solid companies.  Here is where I personally do Berkshire Hathaway and HCN.  But there are many good solid companies out there.  Spend the time it takes to build up your reserves researching companies.  Find no more than 6 and then do in depth research looking for cash reserves, dividend payouts, income, and of course macro items like what does the company do and is it viable going forward.  I use Berkshire Hathaway as the gold standard but you can use other companies if you find them.  If you work in a particular industry then choose the industry leader and put it on your list because you inherently know much about it to start.  Once you have found 2 or 3 companies then start investing in them either by their DRIP programs or quarterly purchasing of shares.  Why quarterly?  Because it will keep transaction costs down.  Since you are young you shouldn’t worry about the gyrations of the stock as long as nothing fundamentally changes.  You need to make it your business to keep up with each stock you are investing in.  Look at every report that comes out.  Read what others say about it [but don’t let that be a determination of selling it].  Monitor the industry.  Monitor its management.  If you keep the total number down to 5 or less this won’t become overbearing to your time.  One more concept, I suggest investing outside of the tax deferral wrappers [401K, IRA’s, Annuities].  Why?  Because you are so young that there are going to be times you might want to gain access to your investment dollars and I would rather pay long term investment tax than penalties and income tax to gain access to the money!  You maintain control of the money, rather than the government and its rules placed on tax deferral wrappers.

Now, that is long term money, and high risk. [Remember risk means variance]  Don’t fool yourself about the strategy that it is an easy way to retirement riches.  If you keep in your mind it is risky, then you will keep focused on watching the companies in depth.  Bottom line you need to accept and manage that risk in order to have a shot at a decent retirement.

$50 into an EIUL is not a great idea.  Fee’s and expenses are too high at this small amount, the insurance aspect is too low for your needs.  Buy a low cost term policy from a highly rated company [even if the highly rated company costs you a few dollars more] if you have a family and need immediate protection.  At your age you can purchase a $500,000, 20 year term policy dirt cheap as long as your health is good.  But remember rarely are these policies exercised so this is only a quick risk reduction technique to protect your family.

Now here is the hard part for folks.  Barring temporary unemployment or underemployment [which we know is an issue now], if you don’t have $500-$1,000 spare cash at the end of the month, then you need to change things.  I suggest a combination of the Ramsey/Orman frugality and increasing cash flow.  That means a second job or sending your wife to work or starting a business.  It has to be done.  Figure out a way to get that extra $$.

Now when you have your reserve funding done, you have figured out a way to get that extra $$ in the household you can think about an EIUL.  This is the low risk aspect of your finances in my book.  Stay away from the variable products because they have much market risk and we are seeing the results of that market risk now.  Let’s say you have $600 at the end of each month for investing.  I suggests splitting that into two pots; one for your high risk stock investing and the other for low risk [and low return] vehicles.  So you now have $300/ month for investing and $300/month for an EIUL.  Now you can get someone like me to set up the EIUL in your favor, minimizing fees and commissions, face value, etc.  Remember most insurance people will be looking out for their pocketbook over yours so make sure you come to me or someone like me who is upfront about the fees and commission inherent in these vehicles.  Also remember after 10 years or so, you have built up another reserve account [inside the EIUL], that can be used by you in emergencies or even to avoid interest expenses when making major purchases!  And you also have that insurance to protect your family. 

So looking forward 10 years on this plan; you have 6 months of reserve in a money market fund, you have been putting $3,600 year into stock of solid companies, and $3,600 into an EIUL.  So you have now built a solid foundation on which to protect yourself and your family from emergencies.  You have 10 years of experience investing and have the ability to reach out and do other things, like invest in real estate with reasonable down payments and reserves. 

It is not easy in this environment to think through this future and when I say 10 years it probably sends shivers down your spine to think that 10 years of  hard work just to get to a place of being able to start your real wealth creation, but most likely something good will happen to you and your plan to make that 10 years very fulfilling!  Maybe that business you started for spare cash becomes successful beyond your imagination, or you find a place of employment that respects your skills and you move up.  Or you find a new career that suites your needs better.

 

********This blog post and blog, as all blogs are, is for amusement purposes only.  It represents the author’s, who is not a registered investment advisor, opinion only.  Before taking anyone’s advice, even registered investment advisors, do your own research, and come to your own conclusions.  If you are new to finance, or even if you aren’t but just haven’t found a way to build wealth, having a mentor or wealth coach is critical.  Of course, the author suggests himself as a wealth coach, but be forewarned that even then he won’t being telling you what to do, but educating you and helping you manage the risk of whatever decisions you make.  Bottom line, you are responsible for your own finances and blaming anyone else or the economy or the president, with a dollar will get you a cup of coffee, but not at Starbucks!******************************************************

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Comments»

1. Joshua - March 13, 2009

David:

Great post and show of intellect good sir! About the middle of the article I was thinking, “How can I use this strategy to invest in real estate?” and sure enough a couple of paragraphs later you answered my question.

This is a great idea and one I may start implementing very soon (currently laid off and so funds are limited). I’m down but definitely not out (in fact I’m using the time to fix up my house a bit and catch up on projects I’ve been too tired or occupied to complete/start).

Thanks again David for the great advice!

2. wonker - March 19, 2009

Interesting blog, I’ll try and spread the word.

3. matt - March 31, 2009

This blog’s great!! Thanks :).


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