1. Emergency fund

An emergency fund is versatile and can help protect you from a wide range of unexpected financial events. Lose your job? Your emergency fund can help bridge the gap until you find a new one. Get in a car accident and need a rental car? Emergency fund. Pet needs expensive surgery? Emergency fund. A study conducted earlier this year found that 42% of Americans don’t have an emergency fund, which could help explain why so many are stressed about money.

If you are one of those 42%, where do you start? Check out the Financial Order of Operations. Building a full emergency fund is step 4, so depending on where you are at, it may not be an immediate priority. Once it is, consider saving at least 3 to 6 months worth of expenses in a high-yield savings account. Depending on the potential financial risks you face, such as a higher risk of job loss, a larger emergency fund may be more appropriate.

2. Investment accounts

Most investment accounts aren’t meant to be accessed until retirement, but they can still reduce a great deal of financial stress in the present. 61% of Americans age 50 and older are worried they don’t have enough money for retirement. Start investing for retirement as early and often as possible. It’s rare to find someone that wishes they would have invested less for retirement, but all too common to find people that wish they would have saved more or started saving earlier. Check out our free download, “How Much Should You Save?,” to see exactly how much you could have saved by retirement based on when you start saving and how much you invest.

3. Insurance

Paying for insurance coverage can often feel like a waste of money – until it isn’t. There are many different types of insurance out there, so I want to give a quick rundown on which types of insurance coverages may be worth it.

Life insurance isn’t necessary for everyone, but if you have financial dependents, like a spouse or children, consider using term life insurance as a tool to cover your family in the case of your untimely death. Almost everyone should consider their need for homeowners or renters insurance, auto insurance, and health insurance. Umbrella insurance may be worth a look if you have a significant amount of assets. If you live close to a body of water that is prone to flooding, flood insurance may be a smart idea. Disability insurance may be a necessity if you are at risk of suffering a long-term disability that would impact your ability to continue earning the same wages.

Check out this article to learn more about different types of insurance: “What Types of Insurance Do You Need?”

4. Financial plan

Whether you are a DIYer or work with a fee-only financial advisor like Abound Wealth, a financial plan can help address some of your biggest money concerns and preemptively eliminate money stressors. A financial plan can help you identify and prioritize your financial goals and develop a plan of attack for accomplishing those goals. Without a plan for your money, you are just a rudderless ship drifting about the sea. Give every dollar a job and let your money work harder than you do.

5. Estate planning documents

If there’s one thing we all enjoy, it’s sitting down and thinking about what happens after we die, right? Nobody really likes estate planning, and it might as well be called death planning, but it can greatly reduce your financial stress knowing that your family and assets will be taken care of according to your wishes. There are three major estate planning documents that you should consider a top priority to put in place. 

A will and/or a trust can be used to designate the distribution of all assets not already covered by beneficiary designations and can also direct assets into trusts to support family members. An advance healthcare directive or living will outlines your healthcare wishes if you are unable to make decisions yourself and can designate a proxy to make decisions on your behalf if you become incapacitated. A durable power of attorney can make financial, asset, and other legacy-related decisions on your behalf if you become incapacitated.

Unexpected stressful financial events in your life are unavoidable, but being unprepared for those events is completely avoidable. By using the tools available to you, including an emergency fund, investment accounts, insurance, a financial plan, and estate planning documents, you can be better prepared for many of life’s financial risks.

Do I need health insurance?

The answer to the question of whether or not you need health insurance is almost always yes. Unless you are a billionaire and have more than enough money to cover any medical bill that could possibly arrive, health insurance is a good idea. No matter how young or old you are, how healthy or unhealthy you are, how much you dislike insurance or hate going to the doctor, you probably need health insurance. The benefits of health insurance may seem mundane; most people just save a little bit at the doctor here and there and don’t experience much savings, if any, from having health insurance. However, the greatest benefit of health insurance is that it covers you if you find yourself needing major medical care for whatever reason.

Without health insurance, what we think of as routine medical events, such as having a baby, could end up costing six figures if there are complications. It is impossible to predict when certain medical diagnoses will occur. A cancer diagnosis can happen to anyone at any time; treatments are always improving and your odds of getting a severe diagnosis may be low, but health insurance protects against those unknowns.

What type of health insurance do I need?

Health insurance isn’t always easy to understand and the options available may confuse you. While the available insurance options differ for everyone, there are two basic categories of plans to choose from: high-deductible health plans or traditional health plans. What is a deductible? This is the amount of money the policyholder pays before the insurance company starts paying benefits. The lower your deductible, the less amount of money you must pay before insurance kicks in. High-deductible plans have higher deductibles when you need care, but your monthly premium is generally lower. For 2024, a high-deductible health plan is any health insurance plan where the annual deductible is $1,600 or greater for single coverage or $3,200 or greater for family coverage. Additionally, annual out-of-pocket expenses must not exceed $8,050 for single coverage or $16,100 for family coverage.

High-deductible health plans (HDHP) come with the added benefit of HSA eligibility, which is one of our favorite retirement savings vehicles. If you are healthy and not expecting any medical expenses outside of a few visits to the doctor, an HDHP may be worth considering. Even though you will pay more if you experience a major medical emergency, an HDHP is infinitely better than not having any health insurance. Plus, choosing a higher deductible plan may save you money each month on premiums and give you the option to invest in the extremely powerful HSA.

Major medical needs can’t always be predicted, but some, like having a baby or opting for an elective surgery, can be. If you are generally healthy but will experience one of these events in a given year, it may be worth opting for a traditional insurance plan with better coverage, at least temporarily. The additional monthly cost may be worth the savings you get if you were to reach your deductible or out-of-pocket maximum. If you have medical conditions that require a great deal of care or are at an age where your medical expenses have increased significantly, a traditional health insurance plan may be the right choice for you.

How can I save money on health insurance?

Choosing the right type of health insurance plan for you and your family can help you save money by minimizing premiums, or if you have more medical expenses, maximizing the amount that insurance will cover. But insurance may still seem very expensive even after picking the right plan for you. Is there anything you can do about it?

Unfortunately we can’t fix the health insurance industry in the US, but you may have some options to make your plan more affordable. If you have health insurance through your employer and it isn’t working out for you or your family, try talking with your employer or HR to see if there is any possibility they may add additional health insurance options in the future. It may be worth looking at options outside of your employer and shopping around to see what else is available. Be wary of certain health share plans that aren’t actually insurance and aren’t subject to the same regulations. These plans can be less expensive, but aren’t legally required to pay claims and have other drawbacks such as limited or no coverage for preexisting conditions.

Make sure you know the ins and outs of what your plan covers so you know the best, and financially optimal, ways to seek the medical care you need. It may be cheaper to use a service like GoodRX to fill prescriptions instead of billing them through your insurance.

Nobody enjoys paying for medical insurance. Chances are you are paying for significantly more than you are receiving, but if you are one of the “lucky” ones who receives more benefits than they pay for, you are likely experiencing a major medical event and it’s pretty hard to be grateful for insurance coverage under those circumstances. No matter how much you dislike health insurance, you can’t go without it. Over 60% of personal bankruptcies are partially or totally caused by medical debt. Choosing the right health insurance plan for you and your family has the potential to save you money and give you access to super-powered tools like HSAs, but can also help put your mind at ease knowing an unexpected medical emergency won’t destroy your finances.

Became disabled, either temporarily or permanently, is significantly more likely to occur than an early death. Yet many Americans have life insurance but not disability insurance. Is disability insurance a necessity and how much coverage should one look for?

Are you ready to take your finances to the next level? Check out our Financial Order of Operations resource that outlines the nine steps anyone can take to build wealth and reach financial abundance.

Is it ever a good idea to use permanent life insurance for long-term care expenses as opposed to self-insuring or purchasing long-term care insurance?

Are you ready to take your finances to the next level? Check out our Financial Order of Operations resource that outlines the 9 steps anyone can take to build wealth and reach financial abundance.

As you get older and buy a house and/or have children, should you be thinking about buying life insurance? If so, which kind should you buy? Want to know what to do with your next dollar? You need this free download: the Financial Order of Operations. It’s our nine tried-and-true steps that will help you secure your financial future.

When does it make sense to self-insure instead of using term life insurance? Or does it ever make sense to no longer use life insurance? Want to know what to do with your next dollar? You need this free download: the Financial Order of Operations. It’s our nine tried-and-true steps that will help you secure your financial future.

Infinite banking, also commonly called “bank on yourself,” is a way to use whole life insurance to build savings and leverage cash values for self-financing. It seems like the name of this concept changes once a month. You may have heard it referred to as a perpetual wealth strategy, family banking, or circle of wealth.

No matter what name it’s called, infinite banking is pitched as a secret way to build wealth that only rich people know about. Those practicing infinite banking use it as an alternative to keeping money in the bank or investing in the stock market. How does infinite banking actually work and is it worthy of your time and money?

How infinite banking works

Infinite banking requires a dividend-paying whole life insurance policy, which can be over 20x more expensive than term life policies. You can use other types of permanent insurance, but dividend-paying whole life works the best because premiums do not go up and cash value whole life policies have a guaranteed rate, which is a minimum percent the cash value grows each year. Because of this component, infinite banking is often pitched as something that is “guaranteed” and “can’t lose money.”

The flow chart below shows the basics of how infinite banking works. You, the policyholder, put money into a whole life insurance policy through paying premiums and buying paid-up additions. This increases the cash value of the policy, which means there is more cash for the dividend rate to be applied to, which generally means a higher rate of return overall. Dividend rates at major providers are currently around 5% to 6%. Paid-up additions, or PUAs, have no ongoing premiums but one-time loads of between 5% to 10%, typically.

The entire concept of “banking on yourself” only works because you can “bank” on yourself by taking loans from the policy (the arrow in the chart above going from whole life insurance back to the policyholder). There are two different types of loans the insurance company may offer, either direct recognition or non-direct recognition. Direct recognition loans are subtracted from the dividend-earning portion of your cash value and you pay interest on the loan. Direct recognition loans don’t really work for infinite banking. Taking loans from the policy is such a big part of infinite banking that it doesn’t work if taking out the loans takes away from your cash value and costs you money to interest.

Non-direct recognition loans are loans where the amount is not subtracted from the cash value earning dividends. While you continue to earn dividends on the loan amount, you do have to pay interest on the loan still, and your interest rate could be higher than the dividend rate. One feature called “wash loans” sets the interest rate on loans to the same rate as the dividend rate. This means you can borrow from the policy without paying interest or receiving interest on the amount you borrow.

Is infinite banking a good idea?

The draw of infinite banking is a dividend interest rate and guaranteed minimum rate of return. It’s pitched as something that can never go down, unlike investing in the stock market.

The drawbacks of infinite banking are often overlooked or not mentioned at all (much of the information available about this concept is from insurance agents, which may be a little biased). Only the cash value is growing at the dividend rate. You also have to pay for the cost of insurance, fees, and expenses. Whole life insurance policies can have administrative costs, loads/commissions for the agent, loan fees (in addition to the interest you pay on the loan), and surrender fees. Companies that offer non-direct recognition loans may have a lower dividend rate. Your money is locked into a complicated insurance product, and surrender fees typically don’t go away until you’ve had the policy for 10 to 15 years.

Every permanent life insurance policy is different, but it’s clear someone’s overall return on every dollar spent on an insurance product could not be anywhere close to the dividend rate for the policy. The costs – expenses, fees, commissions, loads, interest – are just too high in aggregate.

To give a very basic and hypothetical example, let’s assume someone is able to earn 3%, on average, for every dollar they spend on an “infinite banking” insurance product (after all expenses and fees). This is double the estimated return of whole life insurance from Consumer Reports of 1.5%. If we assume those dollars would be subject to 50% in taxes total if not in the insurance product, the tax-adjusted rate of return could be 4.5%.

To be clear, in a very generous example, someone may be able to make about 4.5% doing infinite banking. We assume higher than average returns on the whole life product and a very high tax rate on dollars not put into the policy (which makes the insurance product look better). The reality for many folks may be worse.

This pales in comparison to the long-term return of the S&P 500 of over 10%. Right now, in September of 2023, many savings accounts are paying over 5%. Infinite banking is a great product for agents that sell insurance, but may not be optimal when compared to the cheaper alternatives (with no sales people earning fat commissions).

What are the benefits of infinite banking?

Here’s a breakdown of some of the other purported benefits of infinite banking and why they may not be all they’re cracked up to be.

1. Control

The simple idea behind infinite banking is that you can be your own banker without taking loans or relying on a normal bank. However, you don’t actually have more control over your own money. Your cash is locked into a complicated insurance contract with limited access. If you want to leave, like you can at almost any time with a savings account or Roth IRA custodian, there are substantial surrender fees involved for typically the first 10 to 15 years. It is common to see surrender fees 10% to 35% of the cash value.

2. Protection

At the end of the day you are buying an insurance product. We love the protection that insurance offers, which can be obtained much less expensively from a low-cost term life insurance policy. Unpaid loans from the policy may also reduce your death benefit, diminishing another level of protection in the policy.

3. No market volatility

Permanent insurance products may seem attractive to investors with a low risk tolerance that like the idea of never losing money. While your cash value may not decrease in value, you can lose money by surrendering your policy early. The table below shows real numbers from a real policy that a friend of the show was kind enough to let us analyze – notice that you would not break even by surrendering the policy until over 15 years in.

How much do you need to start infinite banking?

The amount of money you need to do “infinite banking” is another huge drawback. The concept only works when you not only pay the substantial premiums, but use additional cash to purchase paid-up additions. The opportunity cost of all of those dollars is tremendous – extremely so when you could instead be investing in a Roth IRA, HSA, or 401(k). Even when compared to a taxable investment account or even a savings account, infinite banking may not offer comparable returns (compared to investing) and comparable liquidity, access, and low/no fee structure (compared to a high-yield savings account).