But some of these questions about key money and finance basics tripped up some of our readers – almost no one got all five answers right. Making financial decisions without knowing the correct answer to even one of these questions can easily shave six figures or more off your lifetime wealth.

So I urge you to pay close attention to the correct answers below. You’ll also find a list of our six contest winners at the end of this post.

Here are the correct answers given by readers to the five questions…

Question #1: If you finance a $30,000 car through a finance company, your actual cost for the car is the money you spend on it, plus the interest you pay, less the value of your trade-in at the end of your loan repayment period.

If you pay cash for a car, what’s your actual cost for the car?

Answer: Joe Goldsmith pointed out what many people with alphabet soup after their name don’t get – that “paying cash for the car is just another form of financing.”

John Nicholson summed it up succinctly: “If you pay $30,000 cash for a car, your actual cost is the money you spent on the car, less the trade-in value at the end of the period, plus the opportunity cost – the loss of interest that the $30,000 could have earned.”

Perry Blouin went on to calculate the enormity of the total loss you could have over 40 years because of this “opportunity cost.” And Valerie Coffman noted, “If you use a Bank On Yourself policy (to pay for the car), you make money as if you never took it out, and you make money on yourself when you pay it back. Awesome!”

As Eric pointed out, “with Bank On Yourself, you accumulate the $30,000 and when it comes time for your vehicle purchase, request a check from the insurance company, receive it within 48-72 hours and then be ready to negotiate with the car dealership.”

Using your Bank On Yourself policy to pay for major purchases also gives you access to money on your terms rather than someone else’s. You can pay it back on your own schedule without worrying about bill collectors, late fees or black marks on your credit report. It beats financing, leasing or even directly paying cash for things by a long shot.

To find out how much more lifetime wealth you could enjoy – simply by using the Bank On Yourself method to make major purchases versus the other options available to you, request a FREE no-obligation Analysis that will show you your bottom-line results. I think you’ll be amazed!

Question #2: If you have a $20 stock and it goes up by 40%, how much money did you make on that stock? (Hint: This is about a key financial principle, not a math question.)

Answer: The talking heads on Wall Street NEVER get this one and do their best to make sure you don’t figure out the blindingly obvious answer to this question!

As Ruth noted,

You don’t make any money until you actually sell your stock.”

Likewise, it makes me crazy when people talk about how much value their home has lost since the real estate bubble burst. You don’t have a REAL gain (or loss) until you sell an asset and lock your profits in.

Which is in stark contrast to the Bank On Yourself method. The gains you receive each year (guaranteed and predictable) are locked in the moment they’re credited to your policy. As for losses… well, there aren’t any. This is based on an asset class that has increased in value every year for over 160 years!

Question #3: According to Morningstar, Inc., the top-performing mutual fund for the last decade (ending December 31, 2009) enjoyed an 18% annual return.

However, the typical investor in that fund wasn’t so fortunate.

What was the annual return of the typical investor in that top-performing fund? And why was their return so different from the return reported by the fund?

Answer: Only one person – Raymond Trembath – nailed the shocking correct answer to this question (no one else came even close), and he also noted the reasons why:

“The typical investor in the best performing mutual fund of the last decade lost 11% annually, even though the fund itself rose by more than 18% annually. The reason this could happen is that all mutual funds are legally allowed only to advertise the results of their ‘buy and hold’ investors, in spite of the fact that long-term mutual funds tend to be held for less than half a decade!”

Doesn’t this typify the smoke and mirrors that the Wall Street Casino uses to pull the wool over our eyes?

If you find it hard to believe that the results mutual funds report could be so different than the results the investors in those funds get, I urge you to read the article supporting this from the Wall Street Journal.

Question #4: What percentage of mutual funds, financial advisors and investment advisory services underperform the overall market? And why?

Answer: Nick H. hit this one spot on when he said, “80% per Hulbert Financial Digest.”

And it’s not just because of the fees they charge. It’s because all the “experts” are humans, too, and are “predictably irrational,” buying and selling at the wrong times.

Question #5: You could have $10,000 in a mutual fund that reports an average annual return of 25% for four years… and at the end of the fourth year end up with only the $10,000 you started with.

How is that possible?

Answer: Doc Youngblood’s little story was such a great, entertaining explanation of this, I decided to include his response in full:

“How is it possible to have $10,000 in a mutual fund that reports an average annual return of 25% for four years… and at the end of the fourth year you end up with only the $10,000 you started with?

The key to the question’s answer is hidden in this short, simple story, but hidden in plain sight for those willing to see.

And the story? You’ll like this I promise—no animals were hurt during its filming.

Imagine we are duck hunting and I shoot. I miss by a foot behind the duck. So I quickly aim and shoot again. I miss by a foot in front of the duck.

By the law of averages, I hit a bulls eye. By the law of dinner, my plate is still empty.

So, if your mutual fund reports an average annual return of 25% for four years, does that mean you’ve got more money in your account?

Let’s play:

Four years later you still have a $10,000 balance. But not once did the rate of return equal 25%. Here’s the percent change for each year: 100-50+100-50. So we add that up (100%) and then we divide that by four years to show our average rate of return is 25% for four years.

Wait! A 25% average rate of return is supposed to be a great thing, right?

Follow the cash in the example above—did the cash increase? The numbers above show one scenario with a 25% average rate of return and ending up with exactly the same money you started with.

However, 25% annual compound interest is a great thing. Take a look:

Year One: $10,000 becomes $12,500 at 25% compound interest.
Year Two: $12,500 becomes $15,625
Year Three: $15,625 becomes $19,531.25
Year Four: $19,531.25 becomes $24,414.06

Were you like me and confused about the two definitions? It’s very common to confuse them AND to assume that the average rate of return is a linear type of activity, one year after the next being the same. Average rate of return and compound interest are not the same.”

(For the record, you’ll find no smoke and mirrors when you see the bottom line numbers and results you could get when you add Bank On Yourself to your financial plan.)

Now for the list of our six contest winners…

There were so many insightful answers that it was hard to pick out only six winners. (All are being notified by email.)

The best entry, picked by our Bank On Yourself team, is Doc Youngblood, who wins a $100 Amazon Gift Card! (Doc – I guess you can tell your wife she was right!)

And the two runners up, who’ll get their choice of a $25 Dining Gift Certificate or a personally autographed copy of my best-selling book, Bank On Yourself: The Life Changing Secret to Growing and Protecting Your Financial Future, are:

1. Eric

2. Raymond Trembath

There were also three winners who got at least one question right, who were randomly chosen to win prizes. The winner of the second $100 Amazon Gift Card is Robert N.

And the two randomly chosen winners who’ll get their choice of a $25 Dining Gift Certificate or a personally autographed copy of my book are:

1. Carl Schoner

2. Rita

Thanks to everyone who participated in this blog contest. You are all winners for thinking – and seeing – through the conventional wisdom about money and finances that has cost so many people so much in lost money, lost time and broken dreams.

Would you be prepared if you suffered a 30% pay cut?

A shocking new report reveals that the average person’s pay levels off when they’re in their 40′s.  After that, about all you’ll be likely to count on will be cost-of-living adjustments to keep pace with inflation.

That will come as a real surprise to many people who assume their pay will continue to rise as they get older.

And if you lose your job while in your 50′s, you’re likely to remain jobless longer than when you were younger, according to the report.

Read this sobering and well documented article from the Wall Street Journal.¹

What’s your best self-defense?  When planning for retirement, assume the only salary increases you’ll get will be cost-of-living adjustments.  And identify a worse-case scenario – such as a 20% pay cut during your final ten years in the workforce – and try living on that income and putting the rest into savings.

A surprising reason why consumer spending is so slow these days

A paper by a Federal Reserve Bank of San Francisco researcher reveals that the recession has so far cut spending by $7,300 per person from what it was during the housing boom.²

That equals about $175 per month less being spent by each person, on average.

What’s most fascinating is the question the paper’s author, senior economist Kevin Lansing, posed…

People are wondering why consumer spending is so slow these days.  What they should be asking is:  Why was it so strong in previous years?  You’re comparing it to an artificial economy that was driven by debt.”

Looking back, how do you feel about all that money we Americans were spending when we were treating our homes as ATM’s?  Did you avoid falling into that trap?  If not, did the stuff you bought give you lasting satisfaction?  If you could turn back the clock, would you do anything differently?

Tell us in the comments box below…

When refinancing your home doesn’t make sense

While treating our homes like they’re ATM’s was dangerous to our financial health, a new trend has emerged that is equally dangerous.

Anxious to shed debt and prepare for retirement, people are now opting for larger monthly mortgage payments and shorter-term loans.

In the first quarter of 2011, an astonishing three out of four homeowners who refinanced their mortgages paid additional money at closing in order to reduce their balance.³

To me, this is a classic – and potentially very dangerous – example of following the conventional wisdom.  Didn’t we learn anything from the real estate crash and crisis?

None of the payments of principal you make into your home make money for you.  The equity in your home earns a zero rate of return, and it’s also not liquid.

What if you need or want access to some or all of that money now locked up in your home, but you can’t sell or refinance it or you’d have to take a big loss to do it?

Life has a way of throwing us curve balls when we least expect it.

Think about this for a moment:  What if you had enough saved up that you could pay off part or all of your mortgage if and when you choose to?

Isn’t the real key to financial security and reducing money stress about having options and choices?

This won’t happen if you’re saving and investing using the “hope and pray” method most Americans do in the Wall Street Casino.  That’s a sure-fire recipe for financial insecurity.

But it can and does happen for savvy Americans who use the Bank On Yourself system of building wealth safely and predictably.

I’ve always been open about how I walk my talk and use the Bank On Yourself method.  I even post copies of my own policy statements on this website.

Rather than pay down our mortgage faster, my husband and I have always taken out 30-year fixed-rate mortgages.  The lower payment allows us to save more money in our Bank On Yourself plans, and, as a result, today – if we choose to – we could write a check to the bank and own our home free and clear.

But we’d much rather have that money in our Bank On Yourself plans where it is working much harder for us.  Plus, we can get access to that money any time we want or need it by answering just two questions: 

How much do you want… and where do you want it sent?”

This won’t happen overnight, but almost anyone can do what we did.

The Bank On Yourself system gives you many additional advantages, including:

• You can borrow your equity in your policies and they will continue earning interest and dividends as though you’d never touched the money (NOTE: Only a few companies offer this feature)
• You set your own repayment schedule, and if you have to reduce or skip some payments, no one will hound you or put a black mark on your credit report
• You don’t have to sell or liquidate your investments to get access to capital
• While you do pay interest on your loans, the interest ultimately benefits you, as explained in detail on pages 100-103 of my best-selling book
• You control the money in your plan – there are no government restrictions or penalties on when or how much money you can withdraw or borrow from your plan
• You can take a predictable, guaranteed income in retirement from your plan, with little or no taxes due, under current tax law
• This is an asset class that has increased in value every single year for more than 160 years
• You would need to get a 7-8% return in a taxable account, like a 401(k) or IRA, in order to equal the return of a properly structured Bank On Yourself plan.  But you don’t have the risk or volatility of stocks, real estate and other traditional investments to get that!

1. “The Other Midlife Crisis,” by Ellen E. Schultz and Jessica Silver-Greenbert, Wall Street Journal, June 18, 2011
2. “Fed Says Recession Cost $7,300 Per Person in Lost Consumption” by Vivien Lou Chen, Bloomberg.com, July 11, 2011
3. “When Refinancing Doesn’t Make Sense,” by Jilian Mincer, SmartMoney, July 11, 2011

Brave new world of financial planning?

Can a new blood test tell you how long you’ll live?  And if you knew how long you would live, would you change your financial life?

A blood test showing how fast people are aging will go on sale over the counter in Britain later this year.  It measures the length of your “telomeres,” structures at the tips of your chromosomes.  Scientists now believe these are the most accurate measure of how quickly you’re aging.

Financial planners say the test could add more science to their practice.¹

As one financial planner noted…

From a financial point of view, it would be great information to have.  But from a psychological standpoint – that’s a hard question.  I don’t think I would want to know.  I think it would make me depressed.”

How would you feel about knowing when you’re likely to die?  And how would your financial decisions change as a result?

Tell us in the comments box below…

New Research:  Most Americans in deep financial hole

The financial status of American households may be even darker than we thought, according to a new study by the National Bureau of Economic Research.²

Some of the highlights (or should we say “lowlights”) include:

• Lack of Financial Literacy – less than 10% of respondents correctly answered basic questions on economics and finance in every-day life

• No Financial Safety Net – only half have enough rainy-day funds set aside to cover them for three months in the event of a severe loss of income
• The majority have done no retirement planning
• Many don’t have a clue how their retirement account is invested

The myth of American financial competence

Are the “masters of the financial universe” corrupt?  Or just plain incompetent?

This article from Forbes ³ summarizes the recent massive missteps of financial giants like Goldman Sachs, JP Morgan Chase, Citigroup and Bank of America, along with the burgeoning disaster in public and private pension funds.

The author asks…

Do you have faith in your financial leadership to do more than maximize their annual bonus?”

We’d like to know your thoughts on this in the comments box below…

1. ”Get Ready for DNA-Based Financial Planning,” by Laura Rowley, Yahoo Finance, May 25, 2011
2. “Most Americans Haven’t Planned for Retirement and Other Areas of Concern,” by Mary Pilon, Wall Street Journal, May 6, 2011
3. ”The Myth Of American Financial Competence,” by Robert Lenzner, Forbes.com, May 31, 2011

Forbes Magazine Shocker:  Why your 401(k) isn’t what it’s cracked up to be!

A stunning article appeared in this week’s Forbes.¹ Here are a few of the revelations you absolutely must know about, if you participate in a 401(k):

Compare…

How does a 401(k) compare to the Bank On Yourself Method?


• 71% of 401(k) investors believe – wrongly – they pay nothing to participate in their plan, according to a recent survey

• On average, participants in small plans (which includes 90% of all employees) pay 1.9% in fees annually!

• Even paying fees of just 1.5% could wipe out one-third of your nest-egg

• In spite of all the noise about “fixing” the 401(k) through new disclosure rules that will be going into effect, they “could cause some 401(k) services to get even more costly.”

Is repaying debt a “moral” issue?

Not long ago, it would have been unthinkable to many Americans to walk away from the debts they owe on their home mortgage and other obligations.  Today it’s commonplace.

This article explores whether our government’s attitude towards debt has encouraged that.²

Has your attitude about repaying debt changed in recent years?

If so, we’d like to hear how and why in the Comments box at the end of this post.

Why your retirement is much riskier than your parents’

More than half of Americans are now at risk of facing a significant retirement income shortfall, according to the latest National Retirement Risk Index.

This article gives four reasons today’s workers will be retiring in a substantially more challenging environment³

Eight reasons a 30-year mortgage beats a 15-year one

Many people have learned the hard way that the idea of paying off your mortgage as quickly as possible may be a noble goal, but tying up such a large sum in a home can be devastating.

This article gives eight great reasons you would be better off with a 30-year mortgage.⁴

What do you think?  Tell us in the comments box below…

1. “Find The Fees” by Emily Lambert, Forbes Magazine, June 06, 2011
2. “Debt: A Moral Issue”, by Paul Johnson, Forbes Magazine, May 18, 2011
3. “4 Reasons Your Retirement Is Riskier Than Your Parents’”, by Alicia Munnell, SmartMoney.com, May 23, 2011
4. “The 15-year vs. 30-year mortgage debate”, MSN Money, by Len Penzo, May 25, 2011

Is a “look out below” stock market crash looming?

By some key measures it is – corporate profits have only commanded as large a share of national income twice before – in 1929 and 2006, and those years preceded the past century’s two worst  financial collapses.

Knowledge is power, so I encourage you to read this article on The Invisible Stock Bubble¹ from SmartMoney.com.

Pamela Yellen interviewed on NPR:  Teach teens how to manage money

Bank On Yourself company founder Pamela Yellen was recently interviewed on National Public Radio’s “Your Money Coach” program about how to teach teens financial responsibility.

Listen in (or read the transcript) for some surprising advice.

Quick!  How fast can you get your hands on $2,000?

Nearly half of Americans say they definitely or probably couldn’t come up with $2,000 in 30 days, according to new research.²

If faced with an unexpected expense in the next month, many people would have to resort to extreme measures to cover it.

Learn more about the best ways to create a family emergency fund.

Is a college education worth the price?  More than half those surveyed say no

This recent study³ reveals why a majority of people don’t believe the benefits of a college education are worth the cost.

Want to see a very interesting take on the difference between “college” and “education,” the benefits of self-education, and the one subject everyone should absolutely study?

Read the article, “Congratulations!  Now Stop Being a Wuss,” by John Carlton.  John is a member of a MasterMind Group of successful entrepreneurs I belong to.  He has some very perceptive ideas on this topic you may find of interest.

WARNING!  John doesn’t mince any words and he tends to pepper his blog with sailor language.  If that offends you, please do NOT read this!  And if you do, don’t say I didn’t warn you…

Read John’s article here.

We want to know what you think!  Tell us in the comments box below…

1. “The Invisible Stock Bubble”, by Jack Hough, SmartMoney.com, May 24, 2011
2. “Nearly Half of Americans are Financially Fragile”, By Phil Izzo. The Wall Street Journal, May 23, 2011
3. “U.S. College Education Isn’t Worth Price, Pew Report Says”, By John Hechinger, Bloomberg.com, May 15, 2011

Carl Richards, the Behavior Gap™

Over the years, he noticed that the actual real-life returns the average investor gets are dramatically lower than the return of the average mutual fund.  He named this phenomenon the Behavior Gap^TM and began devoting his energy to explaining why the Behavior Gap exists and what constitutes smart investor behavior.

Carl recently shared his surprising insights, tips and strategies with me in an audio interview.  I hope you’ll listen to it today – I know you will find it very helpful!

You can listen to the interview by pressing the play button below, or you can download the entire interview as an Mp3 and listen on your own player or iPod…

You can also download a transcript of the interview here.

Here’s what you’ll discover in this interview…

• Why 80% of all actively managed mutual funds and investment advisors underperform the overall market
• The #1 biggest mistake individual investors make over and over again… and why most will keep making it
• The keys to being a smart investor
• How to determine if you should be investing in equities at all
• The real key to happiness (it isn’t what you might think!)
• How to practice “radical self-awareness” so you control your money rather than letting it controlling you
• Why happiness is directly related to how much you focus on the things you can control
• How to increase your wealth and happiness by focusing your energy on three things you do have control over!

You can listen to the interview by pressing the play button below, or you can download the entire interview as an MP3 and listen on your own player or iPod…

You can also download a transcript of the interview here.

That’s the conclusion of a recent Wall Street Journal study.¹ But the most shocking revelation is just how big the gap is between how much retirement income people will need to maintain their standard of living… and how much they’ve actually saved:

Many have less than one-quarter of what they’ll need

And how are they dealing with this challenge?

Facing shortfalls, many are postponing retirement, moving to cheaper housing, buying less-expensive food, cutting back on travel, taking bigger risks with their investments and making other sacrifices they never imagined.” ¹

Like Carol Dailey, who is continuing to work at age 71 because her 401(k) took a hit in the 2008 market crash.  She also cut back spending for entertainment and food, and is substituting boxed wine for the ones she used to enjoy from her favorite vineyards.

Her financial advisor is planning to help her be able to retire by shifting her assets into riskier investments that can “return 10% a year.”

Hmmm… I wonder if that’s the same financial advisor who advised her on where to invest her money prior to the 2008 market plunge?

If people could take more risk, and do it successfully, why haven’t they been doing that all along?

Isn’t that the classic definition of insanity?

How much more evidence do we need to know that 401(k)’s and “doing all the right things we were told to do financially” aren’t working?

Not everyone has been a loser in the high-stakes Wall Street casino game…

401(k)’s “were a gold mine for money-management firms.  In 30 years, the 401(k) went from a small program to a multi-trillion dollar industry supporting thousands of financial planners and money managers.”¹

The cards are stacked against you as an individual investor.  And truth be told, most Americans have no real financial security.

Wall Street’s average performance over recent decades has been flat at best, with long-term treasury bonds – the “turtles” of the investment world – outpacing Wall Street’s “hares” for the past 40 years.

Even in bull markets, if you are like the average investor, you will wait too long to buy and then compound your misery by selling too soon.  What money you do manage to preserve could very well be subject to annual fees and taxes that will chew up a hefty chunk of what should have been yours.

What’s left, the scraps, will be your only financial legacy.

If that isn’t awful enough, you get to spend months and years of your life, hands clenched and veins popping, worrying about where your money will land on the roulette wheel that is Wall Street.  Hint: Only the dealers are certain to win.

So, what lessons have we learned from two decades of “doing all the right things” with little to show for it?

1. “Retiring Boomers Find 401(k) Plans Fall Short ”, By E.S. Browning, The Wall Street Journal, February 19, 2011

Maybe you don’t quite believe what I’ve been saying for years.  This article confirms exactly what I’ve been trying to tell you…

This article is must-reading for anyone who’s been scratching their head and wondering…

If what they say about the long-term returns you should be able to get in the stock market is true, how come I’m not rich?!?”

Please pay particular attention to…

Myth #1: “This is a good time to invest in the stock market”

Myth #2: “Stocks on average make about 10% a year”

And the article author’s insight into Myth #10: “Stocks outperform over the long term” is priceless.

I’ve quoted many sources confirming what this Wall Street Journal article says.  How many more sources do you need to hear it from, before you request a free Analysis that will show you how much your financial picture could improve if you added Bank On Yourself to your financial plan?

It became a best-seller. And, according to a recent article in the Wall Street Journal titled “Lessons of a Bull Market That Never Happened” (9/20/09):

Back then, the only people subject to sustained derision on Wall Street were those who dissented. Anyone who warned that shares might disappoint was ignored. The few predicting a crash — let alone two — were considered cranks.

Yet, in spite of the current stock market rally – one of the steepest in history – the Dow is STILL below where it stood in September 1999!

How many times during those years were your hopes raised, only to be dashed again and again?

Wall Street has some “dirty little secrets” they don’t want you to know about, but I reveal them all here.

Interestingly, one of the authors of that book recently said he still believes the Dow will hit 36,000.  Meanwhile, there’s some guy now predicting the Dow will go down to 1,000!

What do YOU think will happen… and why? You can voice your thoughts below…