The ’10/10/10′ Formula of Savings Rescues Many Overstretched Family Budgets
Executive Summary: Most modern Americans overspend, assume too much debt, and fail to invest wisely for retirement. Tim Austin, a leading proponent of ‘old-fashioned’ spending and savings strategies, recommends a time-tested 10/10/10 financial formula: saving 10% of gross income for the near-term; 10% for the mid-term; and setting aside 10% for the long-term. Austin’s favorite savings tool is specially-designed dividend-paying whole life insurance policies such as those structured by Bank On Yourself’s specially trained and authorized advisors.
By Pamela Yellen and Dean Rotbart
Even back in 1975, the year comedian Woody Allen wrote, directed and starred in the movie Love and Death, the perception of whole life insurance as a savings instrument designed for fuddy-duddies and masochists was already commonplace.
There are some things worse than death”
…deadpans the film’s protagonist, Boris Grushenko, played by Allen…
If you’ve ever spent an evening with an insurance salesman, I’m sure you know what I mean”
(Read: A Savings Fish Tale: Why the Last Laugh is on Planners Who Mock Whole Life Insurance)
Meanwhile, holders of whole life insurance policies such as those designed by Authorized Bank On Yourself Advisors, were more like the Little Engine That Could, consistently climbing ahead and never once loosing a penny during those 35 years.
While no ‘Whole Life 500′ index exists to document the specific annual average performance of Bank On Yourself-style dividend paying whole life insurance versus the S&P 500, even Love and Death‘s village idiot can calculate that funds saved and compounded with interest and dividends without interruption since 1975 would yield a rich, secure and predictable financial nest egg.
Once Discarded Financial Precepts Reborn
Bank On Yourself-compliant whole life insurance policies, contrary to popular lore, actually turn out to be – and to have always been – a highly reliable savings and retirement vehicle. Indeed, many discarded money-management precepts – the kinds our grandparents and great-grandparents once treated as gospel – are, with the benefit of 20/20 hindsight, proving to be anything but out-of-date.
Ranging from the value of whole life insurance as the cornerstone of a family’s financial plan, to the concept of setting aside as much as 30% of gross income in savings and investment accounts, old-fashioned financial ideas are getting a fresh new look.
Among the nation’s most-respected and leading proponents of revisiting the financial playbooks of our grandparents and great-grandparents is Tim Austin, the 46-year-old Founder and President of the National Association of College Funding Advisors.
Austin, who knows firsthand that the old sensibilities enjoy increasing modern day currency, has educated more than 5,000 families since 1994 on how average American families can pay for college without going broke.
Like so many financial advisors, Austin began his career dishing out the same commonplace investment recipes that every other planner was serving their clients: a steady diet of stock and bond funds. When Austin’s grandmother – who lived through the Depression – asked him to safely invest $10,000 on her behalf, she instructed him: ” I want you to put me in something safe. I don’t care about the interest rate, I just don’t want to lose any money.”
Grandma’s investment, it turns out, was a defining event for Austin. Still young and relatively inexperienced, he followed the advice of more seasoned financial planners in his firm and put his grandmother’s entire $10,000 in a bond fund in February 1987. Everyone assured him her funds would be protected.
Then came October 1987 and the global crash known as Black Monday, which up until that time was the largest one-day decline by percentage in stock market history. Grandma Austin’s bond fund was not spared as it was supposed to be.
The experience caused him to rethink conventional financial planning. “It made me look at what other people were doing and I realized I just wasn’t getting – or giving – the right advice.”
So Austin charted a new course – one more aligned with his grandmother’s needs, experiences and sensibilities.
The core tenet: there is no need to ever put money at risk in order to grow it and use it reliably
Today, Austin’s typical client is 47 years of age and faces the dilemma of juggling current debt, paying for one or more children headed to college, and still setting aside sufficient funds for retirement. With his help and some individual self-discipline, Austin says that in roughly 13 years – or by the time his clients reach age 60 – they will have paid for college, be free of all bank and credit card debt, and be socking away savings.
Austin derives his inspiration from the decades of the 1940s and 1950s, when it was commonplace for Americans to set aside 10% of their gross income for short-term needs, such as a vacation or holiday gift-giving; 10% for anticipated mid-term needs and potential emergencies, including a new car, replacement of major appliances, a new roof, and college tuition; and 10% for long-term retirement planning.
For the first two categories – short-term and mid-term – Austin recommends savings instruments, including certificates of deposit, savings accounts, money market accounts and permanent whole life insurance.
For the 10% of gross income targeted for the long-term, he recommends the acquisition of multiple whole life policies, added strategically over time, and designed for income replacement. Under current tax law, when properly structured, such layered policies provide a guaranteed and predictable retirement income with little or no taxes due on it.
Austin’s 10/10/10 approach avoids all conventional bank and credit card debt. Instead, he recommends clients pay cash for their larger purchases, such as a car or even a home, or utilize Bank On Yourself-style whole life policies to self-finance major expenditures, effectively repaying themselves over time with interest ultimately ends up in their policy accounts.
In fact, Austin’s experience has shown that the average family could increase their lifetime wealth by $500,000 – or more – simply by financing their cars and vacations through their policies, without taking on the risk or volatility of stocks and real estate. (To find out how much more wealth you could have by using this method, request a free Bank On Yourself Analysis.)
While our grandparents and great-grandparents instinctively followed a 10/10/10 style of living, now it’s typical for Americans to spend 30% or more of their gross income on mortgage interest, credit card debt, car payments, and other installment loans.
“Pretty much in today’s world, consumers have swapped debt payments for the 35% of their income that used to go into savings and investing,” Austin says. Depending upon one’s tax bracket, he notes, 30% or 35% of gross income can actually represent as much as 50% of net income.
Listening to the Wrong Prognosticators
“Over the past 30 years, it has become very easy to accept the idea of a car payment,” Austin notes, “Whereas in the 40s and 50s, no one would have thought about having a car payment. They would have paid cash for the car. They would have saved the money and then they would have paid cash for that vehicle and they would have started saving again for the future.” Except for the ultra-wealthy, the idea of acquiring a new car every two or three years was unheard of.
Not only have Americans come to accept debt-financing for many purchases, Austin says, they also have lost the discipline of saving 10% of their gross income for the long term. Here, Austin believes, the main culprit is obvious: 401(k) plans and the unrealistic returns promised by the financial advisors who promote them.
The mantra for many employees has been and remains to invest only 3% to 5% of gross income in a 401(k). Then, assuming their employer matches their contributions and that their 401(k) portfolios will grow at an average annual rate of 12% for decades to come, the typical American now assumes – wrongly – that should be plenty enough money for retirement.
Reality, as tens of millions of 401(k) investors learned in 2008, is not quite as rosy.
The 401(k) promise, Austin says…
Allowed people to have this illusion that they really didn’t need to put as much money into the retirement savings category. The higher you forecast their expected rate of return, the less the consumer believes they actually have to save out of their income.”
“Americans,” Austin adds, “have been substantially misled on what needs to go into their IRAs and 401(k)s in order to hit the numbers they need to have.”
In late 2010, conventional financial wisdom, much like Love and Death’s Boris Grushenko, continues to mock those who recommend or purchase whole life insurance policies.
But back in 1942, according to a report titled, Family Spending and Savings, published by the U.S. Bureau of Home Economics, a majority of Americans viewed life insurance, annuities and endowment policies as a preferred method of savings. And time has proven them – not today’s naysayers – correct.
“It was very common that the whole life insurance agent would be coming around on Friday mornings to collect the $1 or the $5 premiums,” says Austin, who was born in 1964, but has extensively researched the period. “Those policies were very commonly used for emergency funds, car loans, business loans and such.”
Austin believes so strongly in the value and utility of permanent dividend paying whole life insurance policies that before his clients ever put another dollar at risk, he advises them to work with a Bank On Yourself Authorized Advisor to structure one or more policies tailored to their needs and budget.
(To get a referral to one of 200 advisors who have met the rigorous requirements to be an Authorized Advisor, request a free Analysis that will show you the bottom-line numbers and results you could have if you added Bank On Yourself to your financial plan.)
Austin’s general rule of thumb is for his clients’ first step toward financial recovery to be to accumulate roughly two years of average expenses in a whole life policy that is consistent with the Bank On Yourself approach.
Austin, himself, helped develop and leads the nationwide Bank On Yourself Authorized Advisor training program, so he understands the power of these advisors to help their clients restructure their entire approach to savings, spending and investing.
Savings Come Before Spending
Ideally, Austin points out, individuals would begin following his recommended 10/10/10 formula at the time they accept their very first job. After setting aside his recommended 30% of gross income, what remains for the newly employed worker would constitute his or her living expenses. “What remains is what you’d go out and coordinate your lifestyle around.” (For those who can, Austin recommends keeping lifestyle expenses under 50% of gross income. His best clients, he notes, knock spending down to less than 40% of their gross income.)
(Read about how the Bank On Yourself method allows people to take advantage of opportunities that inevitably arise.)
While high school and college graduates in the 1940s and 1950s were accustomed to such pragmatic ‘home economics’ – as the field of personal finance was known back then, most men and women who walk into Austin’s Troy, Michigan office these days come peering into what they believe is the financial abyss.
“They are looking at college bills, looking at retirement, and just not seeing how the heck they are going to be able to do all this stuff,” Austin says. “The reality is that if they stare ahead to age 70, it is going to be overwhelming.” If he added to their trepidation by recommending that they immediately begin saving 30% of their gross income, Austin realizes his shell-shocked clients would walk out, saying, “Well shoot, I don’t have a chance, I might as well just give up.”
So rather than asking his clients to slam on the brakes and jam their financial throttle into full reverse, Austin patiently counsels those who seek his help: “You begin where you are.”
For starters, Austin asks clients to help him put their monthly budget under a microscope. His goal: to begin reducing the percentage of their gross income that is directed at debt service to under 20% – and to do it as painlessly as possible.
“I have been specializing in this area for 20 years and I haven’t met a family, no matter what income level they are at – from $40,000 a year to $400,000, to $1 million – that I haven’t been able to find some very simple things within their monthly budget that they can trim using some very simple tweaks,” Austin says.
“So you start where you are, trying to find those dollars — $500, $600, $1,000 a month” to redirect to a whole life insurance policy, he explains. As the cash value in a Bank On Yourself-style policy accumulates, Austin’s clients are able to use their policies to self-finance short-term and mid-term purchases.
Austin favors whole life policies that are consistent with the Bank On Yourself strategy because they have provisions that permit policyholders to continue earning interest and dividends on the cash value of their policies, even while borrowing funds against that very same cash value to pay for the kind of expenses that families previously financed with bank loans and credit cards.
NOTE: Not all companies pay the same dividend on borrowed funds. An Authorized Advisor can recommend companies that meet all the requirements to maximize the power of this strategy. You can get a referral to one when you request a free Analysis.
“If we look at Bank On Yourself from an engineering perspective, it is an economic machine that is built to get better with time,” Austin says. “What happens, once you get policies going, is they snowball. The more purchases that you finance through these special life policies, the more that these policies are going to snowball and snowball.”
For some clients who are able to build up a large cash value in their policies, the Bank On Yourself strategy actually permits them to purchase and self-finance a home – forgoing the need for a conventional 30-year mortgage.
“Thirty years from now, not only is all of the money that you paid returned to your (whole life insurance) policy, but you are going to have all of the growth from compounding interest, dividends and then some,” Austin explains. And when the policies are properly structured, the funds grow in a tax-free environment.
A House is a Home, Not An Asset
Austin believes that housing choices and home mortgages are at the root of many American’s current perilous financial state.
In his grandparents’ day, those who needed to take out a mortgage to finance the purchase of a home put as much down as possible and signed up for a 15-year mortgage, which they paid religiously. Moreover, once in a home, families remained there.
For baby boomers and subsequent home-owning generations, the trend has been to take on 30-year mortgages with as little down – if anything – as possible. Moreover, Austin notes, during the course of their lives, today’s adults are likely, on average, to purchase four or five homes – often progressively more expensive – during the course of their lives.
Doing so dramatically reduces the opportunity to build equity, even while monthly principal and interest payments on a mortgage soar. “During the first ten years of a typical 30-year mortgage, about 86% out of every dollar is interest,” Austin explains. So for those who flip homes regularly, most of their housing dollars are lost to interest alone.
Many of Austin’s clients eventually come to realize how much better off they’d be trying to pay for their children’s college tuition and approaching retirement had they stopped at home number three or four.
Austin also bridles at the notion put forth by so many accountants and financial advisors that a home is an asset. He doesn’t view one’s home that way and neither did his parents, who purchased their first house in 1958 and continue to live in it today, long after their sole mortgage had been paid off.
“My father never believed that his home is an asset,” Austin says. ”He has always believed it’s a liability because my mom asks him every single year to change the carpet or make other improvements. They redid the kitchen a few years back. He has got a pool to maintain. And he’s got to pay taxes on the house.”
Austin acknowledges that his parents’ home may one day prove to be an asset for him and his siblings. But his parents intend to remain in their house as long as their health permits – and even if they do eventually sell it, they’d still have to live somewhere else, he reasons.
Never Too Young To Learn
In addition to working with the parents of college-age students, Austin tries to convey his reborn 1940s and 1950s fiscal sensibilities through programs that he and his staff conduct for high school students and even those children who are elementary-school age.
If past can be made prologue for these students, Austin believes, they will grow up and enjoy a lifetime of fiscal stability and growth, unlike the baby boomer generations who pooh-poohed the common sense wisdom of their Depression-era parents and grandparents and now face such economic turbulence.
Most of today’s students are open to revisiting the financial planning wisdom of a bygone era, Austin says. To the extent that he meets resistance, either from the students or parents, he is undeterred.
“It is a fight worth fighting,” he concludes.
About the Authors:
New York Times bestselling author Pamela Yellen is the originator of the life-changing Bank On Yourself system and related personal finance strategies. Pamela has worked as a consultant to successful financial advisors for more than two decades.
Pulitzer Prize-nominated investigative reporter Dean Rotbart has reported on business and financial topics since 1979. His editorial and research clients include numerous Fortune 500 companies and leading communications agencies.
© 2010 Hayward-Yellen 100 Ltd Partnership