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More reality training! December 18, 2008

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Thanks to Doug Short at dshort.com for this chart:


This chart tracks stock prices (S & P Composite) from 1871 to now and accounts for inflation.

Shockingly when inflation is taken out of the rate of return (demonstrated by the blue line) the total return is 1.7% annually.  The red line is the normalized return turned into a constant slope.  Now do you realize why I get so upset at those charts mutual fund sales people use to demonstrate potential rates of returns for mutual funds?  That’s 1.7% return before expenses.  The average mutual fund has over 2% expenses, so you would have lost purchasing power investing in mutual funds over the long haul!!!!

This is exactly the same effect I discovered back 10 years ago when I grew concerned about my lack of financial progress.  I was doing the exact thing Wall Street told me to do, save 15% and invest in mutual funds, pay off my mortgage, control expenses.  The numbers were just not adding up for me. 

The problem is, of course, I had no wealth creation strategies in place, mistaking mutual fund investing for wealth creation.  As this chart demonstrates, mutual funds don’t even account for inflation!

Ready to take a hard look at your financial education now?  Ready to join the Shafer Wealth Academy to transform your financial life?

Why Wealth? August 1, 2008

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I have made some comments around the net about wealth creation (go figure!).  On a fairly regular basis I get a comment that calls into question the need to put wealth creation on the front burner.  Now I understand this, many people are ambivalent about money and have long-term issues with it.  But, what I find really interesting is that there seems to be a high correlation between the Dave Ramsey/Suze Orman debt is evil crowd and this antipathy to wealth.  I wonder why that is?

On one hand these folks are, dare I say it, religious, in their belief that debt is bad, yet are unwilling to take the next step to independence which is becoming a wealth creator.  They become active about getting rid of debt, yet remain passive about the other side of the equation cash flow.  One blogger even told me that a contented life is one that is debt free, where he can spend his money as he wants.  That of course makes little sense, because you always spend your money on things you want even if you go into debt to do it.  And homeless people are debt free, yet are they contented?



Then it struck me.  Ramsey and Orman ask little of their audience.  No, they only reinforce commonly held beliefs about money.  I mean who really thinks having a large amount of credit card debt is good?  Who really likes the pressure of having to make that mortgage payment every month?  When I was a young man I had a sales manager that encouraged all his young salespeople to go out and buy an expensive car.  Why?  Because then they would work that much harder, in order to make that car payment! Yes, we all like to own nice things, but hate to pay for them. 



What is the other commonly held belief Ramsey/Orman reinforces?  That finance is for the experts, not you.  You should turn your money over to someone else that knows more than you about money.  Usually, that is a combination of experts like themselves and mutual fund companies.



So it is easy to believe in what they are saying, because those thoughts already exist in our heads.  No one wants to live with the constant threat of debt collectors and the self-image destroying threat of foreclosure and bankruptcy. So we blame ourselves for our wants, falsely thinking that is the problem.  And the majority of people don’t understand how money works, so it is easy to think relying on the “experts” is the way to fix that.




This passive/aggressive act has got to go.  Passive/Aggressive behavior lets you dodge unpleasant chores while avoiding confrontation.  You see, by emotionally concentrating on getting rid of debt, you can avoid the real cause of your pain, which is lack of financial independence.  Gaining financial independence requires hard work, both emotionally and intellectually.  And a large part of that hard work is learning how money works and developing the willingness to accept the responsibility for your financial life.

So to all the followers of Ramsey/Orman, I will answer the question, Why Wealth?  Because true independence and contentment means having enough wealth to create the exact life you want to live.  It means being able to tell your boss to shove it, if you want.  It means being able to build healthy relationships with others, not based on financial need or wants.  It means taking control of your life away from anyone or anything that doesn’t value it.  All that insecurity you feel about having debt, I feel about having to depend on the whims of a boss or a company.  In a short period of time, I have developed enough wealth that if I wanted to live frugally, as you suggest, I never have to work another day in my life.  And guess what, I accomplished this through the judicious use of debt.  Is there pressure on me to make my payments every month?  Yes, but only because I want to increase the size of my investments.  If I wanted to shut it down today, I could. And that is where peace resides! The road is mine to go where I want to.   

So here is the challenge.  If you get what I am saying.  If you want to build real peace through financial independence, then go to www.shaferwealthacademy.com and fill out the contact form.  Or just pick up the phone and call me @ 727.822.8379!  Make the road yours to take you where you want to go.

Cash Flow June 17, 2008

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This is the area that gets much attention.  Most people call it income and/or salary, which I think is a mistake.  Emotionally, calling it income or salary strongly attaches it to your job or more generally to the thought of a career.  Really, it is only incoming cash which could come from multiple sources.  Divorcing the incoming cash from the idea of work is fundamental to acquiring wealth.

Much attention goes to budgeting cash flow as it should because it is needed to feed the beast.  Here is an easy way to calculate cash flow.  Look at your main checking.  It should list your monthly deposits.  Add up your last 6 months of monthly deposits and divide by 6.  This is your average monthly deposit.  Now look at your outgoing cash.  Do the same, add up six months worth, and divide by 6.  Now look at your credit items like your credit cards and your home equity loan.  What was the balance 6 months ago?  Compare it to now.  Add the two items together.  For example, if your credit card balance was $1,000 six months ago and $1400 now add the extra $400 to the outgoing.  Vice versa if your outstanding credit is lower.

This should give you a quick look at your cash flow.  Now, if it is negative you have an issue.  Obviously, you can’t go on forever with a negative cash flow.  Some people suggest a full accounting by recording every item bought over a month.  For me, this is unecessary, but if you are inclined go for it.  

If you have little room between your incoming and outgoing then think about how to increase your incoming.  Maybe create a company which you can put together on your time off from your main job.  Many a successful company was started this way.  I always suggest working harder on incoming than outgoing money because it will create more wealth in the long run, but if you have a real spending problem, then get help.

No matter what, start thinking in terms of cash flow instead of self-limiting concepts of income, salary, career.  Those thoughts are money traps, keeping you from your potential!

Cash flow is the second most important concept to creating wealth behind working net worth, so figure it out today!

Equity Indexed Universal Life Insurance May 28, 2008

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When BawldGuy asked me to blog on equity indexed universal life insurance (EIUL), I thought no problem, since I had been blogging on it for a couple of years on both my site and others.  Then he asked me to look at the archives from Bloodhound to see his previous blogs and I knew I had to write something a little different.  In order to make sense of EIUL contracts you really need to understand the misinformation that underlie the arguments being put out by folks in books, the mass media and blogs on both sides of the issue.  You need to be clear on what your wealth creation plan is and what it isn’t.  So bear with me for a few paragraphs as I burn down the straw-men arguments before we get into the mechanics of EIUL’s.


 Usually these discussions surround a common theme, EIUL’s versus mutual funds inside a tax deferred wrapper (401K, IRA’s).   First let’s talk about mutual funds.  Mutual funds were designed to reduce risk or as financial experts describe it variance.  They were a boom to Wall Street as mutual funds induced many folks to invest in stocks, something they were not inclined to do in the past.  They have been around for 2 generations so we have plenty of data to tell us accurately how people do investing in mutual funds.



We have plenty of studies of wealthy folks too; many specifically designed to find out how they became wealthy and what wealthy folks invest in.  What they tell us is very clear.  The higher the net wealth, the smaller percentage of wealth is in mutual funds.  Or to be more exact, the super wealthy (net worth in excess of $10M), have less than 5% of their wealth in mutual funds (mostly bond mutual funds), the wealthy (net worth $1M to $10M) has only a slightly higher percentage of wealth in mutual funds, and the mass affluent ($100,000 to $1M) has close to 30% of their wealth in mutual funds (second in percentage only to home equity).  And if you look at this class closer you see a curve that continues the trend with the higher the net worth ($500,000-$1M) looking more like the wealthy and those under $500,000 in net worth having the highest percentage of their wealth in mutual funds.


So it is very clear that those that invest primarily in mutual funds are planning to be in the $100,000-$500,000 net worth category.  Now there are some real reasons for this and they can be summed up quickly:

  1. The rate of return people get from their mutual funds is meager.  Study after study has pointed out that individuals’ rate of return from mutual funds on average ranges from 7-10% BELOW market returns (Dalbar, Inc. Vanguard, etc.).  Average fees range from 2-4% of value for mutual funds.  Employer managed 401K’s have the highest fees sometimes as high as 6%;
  2. People don’t consistently put money into mutual funds as they are instructed to, because life intervenes and the money is used to cover expenses; and
  3. The experts advising folks on mutual fund investments actually cause folks to have a lower rate of return than if they did it themselves.


The bottom line is that when your advisor or the mass media you are listening to tells you to invest in mutual funds they are putting you on a plan to have low six figures in net worth in today’s dollars.  One can reasonable assert that investing in mutual funds will not make you wealthy, only keep you from being poor.


Tax deferral programs (401K, IRA’s) were designed by the government for two reasons.  One was to encourage folks to save money.  It should be noted that it was never thought to be the only retirement vehicle, but an adjunct to defined benefit pensions and social security.  The second reason is to increase tax revenues.  By giving a tax break as you put the money in and taxing it as you take it out, even getting a meager rate of return will assure greater tax revenue.  It is pretty simple to understand.  From these meager beginnings 401K/IRA’s have become the only retirement vehicle most people have outside of social security. 


Those that oppose the use of EIUL’s accurately state that most people upon retirement have a decrease in income, and tend to move down a tax bracket.  And they also accurately point out that the advantages of EIUL’s goes up as your retirement tax bracket goes up.  So for those who plan to have a drop in income and/or a drop in tax bracket EIUL’s might not be advantageous.


By now you are probably wondering why I am talking about mutual funds and 401Ks instead of the topic at hand EIULs.  I am trying to bring some clarity into the readers’ thinking in order to break down certain categories in your mind.  Categories created by folks surrounding investing, retirement, wealth.  Frankly, most people are on a snipe hunt when it comes to creating wealth through mutual funds.  They are looking at the amount of fees charged, or which mutual fund returns slightly better than others last year, or speculation on how much their 401K’s will be worth somewhere in the future.  Frankly, all that stuff doesn’t matter.  It only appears to be important because of the categories you have created and put mutual funds/401Ks into; retirement funds or wealth creation.  Truly, mutual funds don’t belong in those categories; they really belong in the asset protection category or more specifically the asset transfer category.  I know that is a hard pill to swallow, but if you really look at information I have given you, and really think about it, you will understand why.  You really are just moving some of today’s income into tomorrow’s income hoping to account for inflation.


Now let’s talk about the EIUL.  It is a life insurance contract.  Life insurance is designed to solve two problems.  The first is to protect against the loss of income in the case of death of an income producer.  The second is asset protection from the tax man.  Life insurance like mutual funds will not make you rich.



So let’s burn down those straw men right now.  Neither mutual funds nor life insurance have demonstrated the ability to make their owners wealthy.  Anytime a mutual fund salesman/financial planner/CPA tells you that the rate of return from mutual funds is 8, 10 or 12% they are not being entirely truthful.  (Don’t respond with your own fantastic returns from mutual funds, it simply doesn’t matter in this argument).  Planning to live on less money in retirement than in your working life is planning to fail, no question about it.  And not planning to have enough assets to have to protect them from the tax man is not what I call a real wealth plan.


Now it’s time to put the pedal to the metal.  Everyone who is planning to have a net worth less than $500,000, please raise your hand.  Everyone who is planning to have a big drop in income when you retire, please raise your hand.  Everyone who has no dependants or who plans to not have dependants and/or who plans to not have any assets to protect, please raise your hand.  O.K., all those with your hands raised, EIUL is not for you.


Now, for the rest of you, here is how it works.  Permanent life insurance has two sides, an insurance side and a cash value side.  The cash value side either earns a fixed amount of interest or in the case of a variable universal life can be invested in the stock market.  Equity indexed universal life insurance is of the fixed interest type, although your interest credited is connected to a stock index.  EIUL’s have a floor in which the interest credited can’t go below and a ceiling in which the upside is capped.  So you know each year the cash value of your life insurance will go up between those two figures, say 2% and 12%. So each year, you look at how much the benchmark index (usually the S & P 500) goes up or down and you know how much your cash value will appreciate.  Now here is the key provision.  You can access your cash value through policy loans.  The loans costs are generally no more than the interest credited (companies have different plans so make sure you understand how your company treats loans).  When you take out a loan against your policy there are no tax implications as long as it was set up correctly initially.  You are under no provision to ever pay back the loan.  Now previous to 1982 you could load these contracts with as much cash as you wanted.  Many of the wealthy loaded up their contracts with massive amounts of cash, enough to get the attention of the IRS.  The IRS subsequently put limits on how you fund the cash value and how much insurance you need to go along with the cash.  So the strategy is now codified into tax law.  Follow their guidelines and you have no tax problems.


Properly structuring these life insurance contracts now means minimizing the face value of life insurance, which maximizes the cash value.  The cash value increases in value depending upon the index, but never goes negative.  By maximizing the cash value the cost of insurance stays low.  The contracts I sell have a rider on them that precludes the owners from taking out so much cash that the insurance is not covered, keeping these contracts from lapsing and a taxable event occurring. Surrender fees generally stop at year 10 to 15, but the point is once you fund the contract to keep it for life, so surrender fees are really meaningless.  Expenses and commissions are front loaded, so it takes about 10 years for these contracts to really start performing.  That means if you are in your 60’s this strategy probably doesn’t make sense for you. 


Anytime during the contract you can access your cash value with a policy loan tax free.  Some people use them for retirement income, while others use it as a bank, purchasing automobiles and paying the policy back instead of occurring interest by getting a bank loan.  They can also be used as a reserve account for emergency funding.  This liquidity and flexibility is what makes them so attractive to folks like me and BawldGuy.  What rate of return can one expect?  Well, I run them with 6.5%, but the historical amount (using data back to 1950 and plugging in that historical figure is 7.5%).  I like to be a little on the conservative side.  Once again, the point is to transfer assets so as to protect them from the tax man, not create wealth.  Look, the bottom line is an unleveraged investment must get a rate of return well over 12% to really build wealth; neither mutual funds nor EIUL’s are likely to get that high of a return!


So what is the bottom line?  You use real estate investments to create the wealth.  Leverage, depreciation, 1031 exchanges, etc. all do the wealth creating.  Then you protect those assets against the tax man by using EIULs.  And if something bad happens to you, your family is protected.


When you take away all the “straw men” arguments it all gets clear.  Protect or not protect assets?  Protect or not protect dependants? Accept a moderate rate of return for these benefits?


You choose? 

How Best to Incubate a Downtown? April 16, 2008

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The proposed new baseball stadium in downtown St. Petersburg is creating quite the controversy.  Not surprising given the budget cuts coming down the pike because of the new homestead amendment and lowered real estate values.  But, I’ve noticed there is a real divide in the thinking of the folks for and against the proposal.

This is a gross oversimplication but I believe holds much of the truth in it.  Folks who are against the project tend to think in terms of scarcity, competition for limited resources and “us against them.”  They tend to think that there is a limited supply of wealth and they are against the Ray’s getting any more, especially if it might take a little tax money for it to happen.  Whether its parking or consumer dollars spent, or tax money they look through the glass of scarcity.  Parking is limited, so the Ray’s will overwhelm the available parking. Consumer spending will all go to the baseball team, starving the other businesses.  Better spend our tax money on helping the poor not on helping the Ray’s.  We don’t trust the mayor, City and/or the Ray’s.

Folks who are for the project tend to see abundance and creativity.  This will only enhance the downtown business community by bringing in more folks and making them walk or take the trolley to get to the field.  A successful baseball franchise will carry over to other successful enterprises.  If more parking is needed, then more parking will be built creating more profitable enterprises.  $1.3 billion in constuction can only be good for the economy.  The additional taxes from the redeveloped current baseball site will help keep my taxes in check and make available more to help the poor.  Cooperation between City, private enterprises, and citizens is the key to keeping the City vibrant.

Folks, two different orientations to reality.  Two different paradigms.  One falling apart, the other gaining steam.  What you see is a blending of the old conservative/liberal categories into something unrecognizable by their adherents.  The under 40 crowd gets it inherently, while the over 40 crowd hangs on to their way of seeing the world by their fingernails.

Now, I have repeatedly pointed out that wealth creators see the world in a very different way than others.  This is a perfect example of the difference!  The real question for St. Petersburg is how best to incubate a vibrant downtown?  By assuming scarcity or cooperative ventures?

Wealth Creation and Relationships April 2, 2008

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John D. Rockefeller noted early on that business works better when people cooperate.  He spent his early years trying to get his fellow businessmen to cooperate in order to negate the boom and bust environment of oil production.  However, he largely failed in this endeavor having to use other means to bring market discipline to the oil industry.

This early business insight has proved to be prescient.  Long term wealth creation requires people to develop relationships based on transparency and ethically upright behavior.  Whatever short term advantage is engendered by fraud and dishonesty, proves to be illusory.

Mortgage originators who leave a trail of foreclosed properties and bankrupt individuals are now working in other fields.  Investment advisors who claimed outsize returns now are feeling the wrath of their clients undersized portfolios.  Businesses are bankrupt or bought out for pennies on the dollars.  The government attempts to reset its obligations to consumers who feel victimized.  But the truth alludes all these folks.  The government can’t protect you from yourself.  You are best advised to work with people who provide transparency and behave in a ethical manner.  It makes no difference if the business is run out of someone’s home or is a well established mega-corporation, these rules still apply.

Build relationships with people you do business with.  Start small and develop the trust over time.  Value their expertise and experience fairly.  If you do business with the lowest bidder, then understand that you will get less expertise, value, etc. 

Building relationships is critical to long term success in wealth creation.  Never forget it! 

John D. Rockefeller, Debt, and Wealth Creation March 26, 2008

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The Shafer Wealth Academy (www.shaferwealthacademy.com) is dedicated to teaching people about how wealth is created and making a independent life.  We can learn from the success of others.  It is really unfortunate that so much is not taught in schools about wealth creation and the financial world. John D. Rockefeller was the wealthiest man in the history of the world even more wealthy in his time than Warren Buffett and Bill Gates are now.  He was known as an exacting, very conservative, man whose first job was a bookkeeper.  To him the business world was an exacting world where numbers spoke volumes and everything else was secondary.  He spent his last 40 years of his life in retirement and is known as one of the greatest philanthropist ever. His Standard Oil company was demonized by the press and broken up as a monopoly by the politicians.

But how did this bookkeeper, who grew up relatively modestly, become wealthy?  His first company was a partnership with two older gentleman (he was 20) that was in the commodity business.  He felt his partners were purely speculators and wildly unpredictable.  He was the sober one, that constantly reviewed the books and made decisions based on pure rational thought and the numbers.  Where did the division appear between the partners and John D.?  In the 1860’s, during the Civil War, Rockefeller borrowed $100,000 from the banks to expand his oil refinery business.  The partners, these wild speculators, were aghast.  Now, $100,000 was alot of money back then and the companies profits were less than $17,000 at the time, so we can see that there was some reason for their concern.  But to the not yet 25 year old Rockefeller, this was what the numbers told him.  He believed the oil business was here to stay and he wanted to be a big player in it.  So for him, borrowing this amount was not a risk, but a neccesity.  His main concern was that the bankers would look at his partners and decide they were too great a risk.  So Rockefeller used this schism to jettison the partners and buy the company for himself.  The bankers trusted the sober, meticulous, Rockefeller and had no problem lending him more money as the numbers told Rockefeller to do.  Later in life, after he was already the richest man in the world, he would eschew the banks and borrowing money, but that was more about his personal issues with bankers like JP Morgan, and his lack of need for more capital than anything else.

Borrowing allows one to create leverage.  It is why most people are able to create wealth through their homes.  And it is why most people fail to create wealth elsewhere.  Understanding the numbers and what they tell you is not as hard as most people would have you believe.  The Shafer Wealth Academy will teach you how.

Now, there are many people out there that will tell you debt is bad and should be avoided at all costs.  No doubt credit card debt to buy consumer goods is not the best thing to do; John D. would be flabbergasted at such outlandish consumerism!  But, debt to take advantage of business opportunities is a different animal.  Financial leverage, building business leverage, and leverage to create value is one of the basis for creating wealth.  When evaluating investments the first thing one should look at is the leverage created.  If no leverage is created, then the returns can only be miniscule.  It is the law of money.

I wonder if all those financial planner folks who advise their clients and write books about avoiding debt, really understand that they are making sure their clients will not become wealthy?  I assume they are more concerned with not getting sued than in helping their clients create wealth.  At the least they are participating in what many workers for Wall Street companies describe is their goal; Turn your clients wealth into your wealth!  Warren Buffett describes Wall Street as a place where people drive their Rolls-Royce to Wall Street and turn their money over to people who ride the subway to work!  

Learn about wealth.  Learn about Leverage.  Don’t turn your money over to Wall Street.  Sage advice from those that have created wealth. 

Design Your Life to Be Exactly How You Want It! March 11, 2008

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Yesterday, my son and I rode downtown from our home to get a couple of items at the grocery store.  My neighborhood is right on Tampa Bay, so we ride through the neighborhood waving at our neighbors and stopping occasionally for a short chat while gazing on the water.  We then go past the Salvador Dali Museum, riding on the back side looking for dolphins in the bay.  Next is a marina with sailboats gently rocking back and forth and then a university.  Finally, past a condominium project and into the Publix parking lot.  The whole way accomplished on sidewalks, a must for the safety of my five year old.  On the way back I think, I could not have planned my life any better!  Then it hit me.  I did plan my life.  When my wife and I bought in our neighborhood, downtown St. Petersburg was not developed in any way like it is now.  There was no grocery store, no ice cream stores, no upscale condominiums.  Truth is, much of that was just starting to be put on the planning board when we bought.  But, we purchased in our neighborhood specifically because it was urban.  We felt all along that we did not want to buy into a suburb or a gated community.  We imagined, even back then, being able to walk/ride downtown to go to restaurants, art galleries, etc.  We felt strongly that if we were able to have children that is the life we would want for them.  And it happened!  Perhaps we got lucky.  But the bottom line is that we took a chance at creating our life exactly how we imagined it and it happened. 

I have taken another chance recently.  I have mentioned before that I have taken advantage of the slowdown in mortgage origination to build a new business.  This business allows me more freedom than ever thanks to modern communication methods.  It also combines my love of teaching with my wealth creation knowledge.  The Shafer Wealth Academy is now officially up and running.  If the idea of having a Wealth Coach is intriguing to you please check out my web site (www.shaferwealthacademy.com).

Helping people build wealth is something I have enjoyed doing immensely.  I think this is a step forward in that goal, allowing to more directly impact people’s wealth creation.

Please know I will continue to blog and am very thankful for my readers!

Yours  in Wealth Creation,

David Shafer

Hello world! October 1, 2007

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Hello. I have been fortunate to combine my two professional interests, finance (B.S. Florida State Univ.) and social science (Ph.D. Brandeis Univ.), into my work as a Wealth Coach. This blog is dedicated to creating knowledgeable consumers who with a better understanding of wealth creation, finance, and money will be able to build a better future for themselves and their families. I believe the current state of financial/retirement planning is really about what Wall Street and the Lenders want individuals to do, as opposed to what the evidence demonstrates works for folks. Hope you find the ideas and information useful, educational, and entertaining.  If you find this blog unique and interesting please go to my wealth coaching web site: www.shaferwealthacademy.com.