Have you ever heard of the term “group think”? A group think experiment was done that demonstrated our natural instict to conform with the crowd. Do you remember the old show “Candid Camera.” It started back in 1948. I want to share a little clip from one of the old episodes… so old its black and white.
 Funny Elevator Psychology |
This is not far off from what is happening in our society today. William Wollman, who was Chief Economist of Business Week wrote the following in his book The Great 401(k) Hoax:
“The 401(k) will turn out to be the greatest systemic financial hoax ever perpetrated on an unsuspecting public.”
There are a lot of articles and books that indicate the origins of the government sponsored plans, but a lot of it relates to wall street and company lobbying. It became beneficial to offer the 401k within the company, to reduce company taxes. I will write more about that later, but suffice it to say, there are some major issues with government sponsored plans.
Changing our mindset requires that we have a paradigm shift. Stephen Covey, in his book 7 Habits of Highly Effective People, emphasizes this idea with the following story:
Two battleships assigned to the training squadron had been at sea on maneuvers in heavy weather for several days. I was serving on the lead battleship and was on watch on the bridge as night fell. The visibility was poor with patchy fog, so the captain remained on the bridge keeping a eye on all activities.
Shortly after dark, the lookout on the wing of the bridge reported, “Light, bearing on the starboard bow.”
“Is it steady or moving astern?” the captain called out.
Lookout replied, “Steady, captain,” which meant we were on a dangerous collision course with that ship.
The captain then called the signalman, “Signal that ship: We are on a collision course, advise you change course 20 degrees.”
Back came a signal, “Advisable for you to change course 20 degrees.”
The captain said, “Send, I’m a captain, change course 20 degrees.”
“I’m a seaman second class,” came the reply. “You had better change course 20 degrees.”
By that time, the captain was furious. He spat out, “Send, I’m a battleship. Change course 20 degrees.”
Back came the flashing light, “I’m a lighthouse.”
We changed course.
What course are you on? Many of us are too busy following the crowd that we don’t realize that our battleship is heading straight for the rocks. I believe in a concept that demonstrates a completely different financial approach, one that may require a paradigm shift. I believe that we need to understand how to become our own bankers.
401k balances have made a huge decline over the past few years, but market declines may not be the only reason for such occurrences. Expensive fees and high managerial costs can contribute to a large portion of those costs.
I came across 2 videos that explain some of what’s happening here. I highly recommend the one about 401k fees. If you have a 401k then these aren’t just interesting videos, but things you need to know.
The 401k Fallout
The Truth Behind Hidden Fees in 401k Plans- Parts 1,2, and 3
According to creditcards.com, the average credit card holder has a credit card balance of $15,788 at an average APR of 14.48%. This creates a minimum payment of about $315.76.
According to Miamiherald.com, the average American has a 401k balance of $66,900.
According to msn.com, the average car loan balance is $24,864, with an average monthly payment of $479.
According to the U.S. Department of Commerce, the national savings rate is around 6%.
According to Census.gov, the average income is $49,777.
The 401k is often offered in many workplaces, some of which you are automatically opted-in, but is it the right direction to retirement?
Apart from the uncertain taxes, fees, and the market itself, one of the 401k’s major downfalls may not be the investment vehicle’s performance, but the predicament it creates in the overall financial equation…allow me to explain.
As we’ve previously discussed, the Average American’s finances are all but pretty, but why does that happen? There may be a reason for it all, and I believe that reason is the 401k and government sponsored plans in general.
There are 2 things that everyone needs. First is that we need capital. Capital is what allows us to live day to day. Small capital contributes to our everyday purchases at the grocery store, electric bills, and lots of other small scale items. Additionally, however, we need larger amounts of capital to cover other purchases, such as: buying a car, paying for braces, paying medical bills, adding another room to the house, and the list goes on. The second need we have is a place to put that capital. We like our capital to produce more of itself, so we attempt to place our money where that can happen. We often tend to utilize a 401k or other government sponsored plans for that particular purpose. This long term orientation may be good, but it seems to be coming with a price, and that price is becoming very expensive.
Our Average American looks like this:
- Average 401k balance of $66,900 (Miamiherald.com).
- Average credit card balance of $15,788 at an average APR of 14.48% (creditcards.com). This creates a minimum payment of about $315.76.
- Average car loan balance of $24,864, with an average monthly payment of $479 (msn.com).
Balance Sheet View:
|
|
Balance Sheet | |
| 401k Value | 66,900 | |
| CC Debt | (15,788) | |
| Car Loan | (24,864) | |
| Total |
26,248 |
|
From a balance sheet perspective it doesn’t look to bad, but let’s take a look at the annual cash flows:
| Profit / Loss | ||
| Interest Earned/Paid | ||
| 401k | 6,900 | |
| Credit Cards | (3,789) | |
| Car Loan | (5,748) | |
| Total | (2,637) | |
The cash flows demonstrate that even with a 10% annual return on the 401k, the average American loses money every year, and a substantial amount.
The predicament is access to capital. As I’ve discussed, we need capital, and we need it often. When we contribute to these types of plans, we lock up our money into a system that detriments our financial plan. Instead of borrowing from my own funds, and paying myself back, I am required to either contribute less to my retirement, or to look for capital somewhere else. I miss out on all the money I pay to another financial institution, dollars that I could be putting right back into my own pocket. This lack of access to capital means our average American is paying someone else for the use of capital, capital that he has. This predicament is the reason that many Americans find themselves at retirement age with a small nestegg. They have fought income interest against interest expense, and have lost the battle consistently. They have a bad structure, because they base it on the unaccessible money in their 401k or government plan.
You Be the Bank is a concept that teaches how to create the correct place for wealth to be stored so that your capital is accessible. It helps you grow interest earned with interest earned. Money goes back into your pocket. Without such a basis, you are a part of a never ending struggle, with no control over your financial future.
Jake
Before diving too heavily into some financial topics, I thought it might be appropriate to introduce myself, and show you why my interest falls where it does today. To do so, I feel it is appropriate to introduce you to my father, who is the main reason that I’ve been involved in the financial industry. My father is a 25 year veteran of personal finance. He has been involved in many different aspects of finance, all of which fall into the category of personal finance, both for the business owner, and the layman. Since I’ve always looked to him as someone I wanted to be like, my whole life has been, in some way or another, involved in the financial world. Since I was little, I developed a desire to be in the same business.
In 2004 I left my home and homeland, and traveled to Italy. For 2 years I put my life aside, at my and my family’s expense, and dedicated myself to serving the people of Italy. My days consisted of many forms of service; teaching principles of the gospel to the Italian people, giving time in homeless shelters, helping the disabled and elderly, and many other forms of service. It was a great experience. It taught me basic principles that serve as a foundation for my life, with honesty and integrity being near the top of that list. When the time came for me to return home, and refocus on my own personal life, it was important for me to start thinking about what I would do to provide for both myself and my future family. In this search I knew there were three things that I wanted: to provide for my family, to work for myself, and to maintain the foundation I had built those 2 years in Italy.
I began learning more in depth the things my father taught to his clients. He demonstrated many concepts that rang true with what I desired to do. I wanted to help people to create a financial situation that they would be excited about. I didn’t want to have to worry about everything crashing, and my door being the one they knocked down with anger. The concepts that my Dad was utilizing helped people create wealth without the risk that is often associated with that venture. I fell in love with these concepts, and they seemed to create a win win situation for everyone.I saw value in it for myself, and I knew that others would find value in it as well.
Since then I have been heavily involved with these concepts, and will attempt to introduce to you some of those same concepts. Everything that I share will involve what I, myself, live and practice. I will be heavily involved with the questions and comments that you make here, and will try to clarify what I am trying to express.
Jake
Dec
So I’ve been heavily involved in a lot of internet related ventures when it comes to my business. I’m not in the internet marketing business, per say, but it can’t be denied that I have spend many hours creating and maintaining strategy to promote my business on the internet. Though my next post will most likely be a little more of an introduction to myself, I would like to introduce you here to the start of my personalized business blog- if I may.
After a lot of hours placed behind the lighting of my LCD computer screen, I decided it might be time to create more of a personalized blog that didn’t involve other partners, more of a personal blog that dealt with one of my favorite subjects… Finance. This blog will deal highly with the topic of Finance, as well as money in general. It may also delve into some tax, government, and conservative thoughts that do, essentially, relate to the topic of Money and Finance. This may be considered a type of financial journal, a story of conversative finance that demonstrates sound principles of money, and how to create control, eliminate risk, and grow rich.
Enjoy!
Jake