Get Rich

A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life. – Suze Orman

Insurance is not an Investment

Term Insurance1

I’m sure that somebody has already tried to sell you an Insurance policy (anything but Term) at some point of time in your life, actually it might happen multiple times. The worse is if we walk into the trap ourselves, in the hope for higher returns, guaranteed income or some savings on taxes.

I was at the bank yesterday and one gentleman walked in. He was a new customer that was going to bring in funds to the bank. While opening a savings a/c, he asked the customer service manager for advise about Mutual Funds. Lo and Behold, the bank rep immediately suggested a Life Insurance policy instead and started to talk about its benefits. Within no time, the customer was convinced. I sat there helpless, couldn’t do much as I was at the wrong place and at the wrong time.

These incidents are not new to me, I have been in that customer’s shoes long ago and continue to come across such situations with my friends and family where I have to warn them of these products. The Life Insurance policies are the worst investment products. They come in different packages such as Universal, Ordinary, Variable, Whole Life, all kinds of Annuities (USA), ULIPs (India) etc. I don’t think there will ever be an end to these. So what’s so terrible about them?

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Why I Am Leaving Goldman Sachs

I hope you have read Greg Smith’s letter by now. It takes a great deal of courage to do something like this. I wrote about the very same issue in one of my earlier posts:

“Hiring wrong Financial Advisor: The Big Financial advisory firms such as Goldman, Merrill, Credit Suisse and other prestigious ones are the Worst. Even the firms like Fidelity and Schwab that are portrayed as Customer Friendly are bad. Your best bet is to work with a Fee based Independent Financial Advisor.”

Now you get to hear it straight from the horse’s mouth.

But if you have been in the corporate world long enough, this shouldn’t come to you as a surprise. I have found such ethical issues with all the Fortune 100 companies that I worked for and it is not limited to financial or brokerage industry either.

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I have got an x amount, where should I invest?

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This is the question that we usually ask when we have amassed a decent balance in our savings or checking account. For some, it might be 10K and for others a million. The amount is irrelevant. We are willing to venture out and ready to take risk as long as the return is higher than the savings accounts or fixed deposits.

Should we invest in real estate, mutual funds, stocks, gold or insurance? We turn to our accountant for advise, watch or listen to stock channels and other investor friends. We start reading Money, Fortune, Kiplinger’s or other personal finance magazines. In addition to all this, the endless hours are spent surfing Morningstar, MSN money, Motley Fool and other financial websites, researching the best performing mutual funds, industries or stocks.

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The Magic Number

Most of us have wondered about this by now i.e. how much is really enough to retire comfortably. In case you haven’t, I am sure you will at some point in near future.

Actually “Retiring” is not the right word, I should use “Financially Free”. Many of us want to start a business, pursue our interests and hobbies, travel, spend more time with the family. There can be many reasons to leave the corporate world. But before we take the plunge, we need to be absolutely sure of our investment plan that will allow us to live comfortably without having to work again.

I have wondered about this number and studied extensively on the subject for the last 4-5 years. I also spoke to many friends and relatives to find out their monthly expenses. The idea is to keep it simple to begin with. We will make an assumption that we have already paid for our house, cars and have separate buckets/savings for kids college education and for any other major medical expense. It is easy to come up with these numbers or any other one time(like settling costs) expenses.

What I’m going to focus on right now is the corpus we need for our recurring monthly maintenance expenses like food, utilities, clothing, transportation, kids school education etc. I will use two separate examples: one for living in the US (similar to other developed economies) and second: Living in India (similar to other developing countries).

Regardless where we live, our investment plan or the Freedom Portfolio (like the term?) 🙂 will have to ensure following three things:

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Passive Income – Important pillar of Financial Freedom

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Passive Income means that you don’t have to actively work for it. In other words, these are not your earnings from primary job but from investments such as Real Estate, Bonds, Stock dividends etc. It is a regular income that doesn’t require much effort.

I first heard about Passive income in the book called Rich Dad, Poor Dad (highly recommended for starters). I’m not a Robert Kiyosaki fan by any means. Perhaps I was in the beginning as his books gave me enough motivation to map out a definite plan for financial freedom. We all need different level of teachers, mentors at various stages in our lives.

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