The Million Dollar Baby program is an INVESTMENT in your child’ future financial independence which is tied to the performance of indexed funds. There are few ‘catches‘ within the program you should know about and accept for the future benefits. The program performance tied to the performance of indexed funds and some financially savvy parents try to model the worst and the best case scenarios for they child. This article outlines few of the scenarios assuming $100/month investment for 25 years ($1200 a year, $30,000 total). How it will look like in 25 years when my child is grown enough to take ownership of the program and carry it forward?
The Million Dollar Baby program promises so many perks for a child and certainly looks too good to be true at a first sight. What is the catch, people ask, is it all too good to be true? Well, there are a few ‘catches‘. Review them and decide for yourself if these would stop you from investing in your child future.
You need an estate planning if you answer 'no' to any below questions:
Are you comfortable with the state deciding what happens to you and your most important possessions?
Should something happen to you, have you specified who will take care of your children?
Do you want your children to control their inheritance when they turn 18?
Did you know when your children turn 18, you no longer have access to medical records or influence over their medical decisions unless they provide legal documentation?
If something happens to you, do you know who will make healthcare and life decisions for you?
Have you completed a HIPAA form so select members of your family (including your spouse) will have access to your medical info?
Have you or loved ones completed an Advance Directive/Living Will to acknowledge your intentions about life support?
Should you become incapacitated, have you identified who will handle your financial and legal affairs?
Have you specified how your estate will be distributed?
Do you want your family going through a lengthy, public process known as probate at the time of your death?
The number one reason you need a living trust (part of estate planning) for is to avoid probate! During the probate period, all your assets will be frozen, which means your family might not even have access to resources to do a proper farewell for you! The process can last several years and a big chunk of your assets will go to lawyers assigned to the case rather than your family.
If you were planning to get a living trust, but procrastinating because of its costs - now is the time!
It is better to be 5 years too early than 5 minutes too late!
Wallio: from Wallet to Portfolio
Real estate prices have been going up non-stop since 2008. Look at how the median sale price for the entire USA has climbed (data from Zillow):
In some high demand areas like San Francisco and New York, the chart is even steeper. We see more and more families having significant equity accumulated in their home and questioning how to protect it. We know that letting house equity just sit is a bad financial decision from an investment point of view and one of the reasons rich people never pay off their house. Today we want to talk a little about its protection.
Picture an old churchgoer tripping on your driveway while trying to deliver a magazine and breaking a hip. Picture your beloved kid with a freshly minted driver's license hits a pedestrian. Picture yourself having a party in your house and a guest's toddler rolls down the staircase as his mom was a bit tipsy. In all three cases the very next call you get maybe from a lawyer checking how much you are worth and what kind of insurance you have. If you have assets you are certainly at risk of a lawsuit against you, and the more assets you have the more you are at risk. If you think that asset protection is only for the rich and are not counting your home equity as an asset, think twice.
Rich people use Irrevocable Trusts to build a wall around their assets. Irrevocable trusts are more complicated arrangements than simple revocable trusts. Irrevocable trusts have a current and future tax implications, usually implemented offshore, can be expensive to establish and maintain. We think that such an ultimate level of asset protection is overkill for a regular family. There is a much simpler, more understandable and FREE technique called Equity Stripping. Rich people also use this technique to their advantage. Here how it works.
Let's say you own a house valued at $500K with a remaining mortgage balance on it of $200K. You own $300K of equity which makes zero interest and is 100% at risk. To strip yourself of equity you would do a cash-out refinance for $400K ($200K to pay off the previous mortgage and $200K cash out). Now the bank owns $400K of your house and you own $100K with $200K in your checking account. A lawyer going after equity in your house will see $100K rather than $300K. Moreover, in some states, part of your home equity is protected from creditors and lawyers. This leaves little or no target for a lawyer to go after! In California, $75-$175K (depending on marital status and age) of your home equity is protected by state law which makes your home 100% protected in the above case. Isn't it genius?
But wait, what about that $200K sitting in your checking account? Shouldn't you protect it too? And what about the increased mortgage payments? Before you were paying off a $200K loan balance while now you have a $400K loan balance. Yes, you are right on both accounts. This money needs to be invested in financial instruments protected from creditors, losses, and lawyers, and it must be earning interest above of what you pay for the mortgage. Depending on your needs and residence, these could be Fixed Index Annuities, Index Universal Life Insurance, some state pension plans or others. Please consult your local professional specialist to see what is available to you.
Let's assume your new mortgage is at 4% and your annuity (or other investment) makes 6%. In that case, you are essentially making 2% on $200K from day 1. That is $4K a year. Don't forget that this 2% is compounding! In the above scenario your $200K compounds to $700K in 30 years! Not a bad check written to yourself for protecting your home equity, right?
Cash is king, knowledge is everything.
Wallio: from Wallet to Portfolio
To own a house is to check a box off American dream for many people. Many people become attached to their house because this is their home, a place where kids grow up, a comfort zone we run back from stressful jobs and traffic jams. No wonder so many businesses built around people attachment to their house and people fear of creditors. There are myriads of ads on internet suggesting how happy one becomes when he paid off the house. Hey, just look at this dancing fella... he paid his house off... he has extra money to spend now... he owns the house now... why don't you refinance with us and pay off your house faster too? Well, if you do you might be making a mistake. Do you know rich people never pay off their houses? Keep reading to find out why!
One person I know followed advise of his relative, set his family life aside for 15 years and put every penny into repaying his house mortgage as soon as possible. When he did, he indeed got extra money in his pocket and decided to go and get a professional financial consultation from a local licensed professional (doctor for your money). When advisor heard the story, he instantly stated that the guy made a big mistake by repaying his house. He advised the family to buy another house, never pay it off and rent out the house they paid off already. Why? Because numbers don't lie. See for yourself below.
Before we start, take a minute and ask yourself a few simple questions.
Question 1: What interest rate bank paying you for equity in your house?
The right answer is "0%". Regardless of how much equity in your house you own, $100K or $500K, it is just that - equity. It grows and shrinks along with your house value, with market fluctuations, but nobody paying you any interest on it.
Question 2: How much of your house equity is at risk in case of a sudden market downturn or court order?
The right answer is "100%". If the housing market turns down, you lose your equity. If somebody sues you for whatever valid or made up predatory reasons, the court will demand you to sell your house and pay damages to victim or predator. You can lose your equity entirely or partially but the bank never loses its share of your house. That is how mortgages are structured.
Question 3: If you consider equity in your house as an investment then how good is an investment that brings 0% interest and carries 100% of the risk?
The right answer is 'bad'. In fact is is not an investment at all. Investment is something that earns money. Equity in your house is not earning money. It is storing money at 0% interest and 100% risk.
I hope now you understand why rich people never pay off their houses! They are financially educated. As house prices go up, and equity in their house grows, rich people take equity out and invest in instruments that bring 8%-12% interest and protected from loses, creditors and predators. We will show you two scenarios with specific numbers below. This will change how you see your house equity, bring you more money long term all while it is still live in your sweet home!
When people see this, they struggle to believe. People asking where is the catch. There is no catch! Numbers don't lie. Rich people know that and constantly pulling money out of their houses and shift risks back to banks. Let's play few "what ifs" here:
What if the market turns down and my house worth half of what it was?
Both brothers may continue to live in their house as long as they continue payments. Brother B has more cash so he is better off. Both can go to a bank and try to renegotiate their mortgages. Brother B has a better chance because he has less equity in the house and less to lose in case of foreclosure (he shifted more risk on a bank). Both may decide to foreclose on the house. Brother B, however, has the cash to go and buy another house (or two).
What if the market turns up and my house worth double of what it was?
Well in that case both brothers have a nice and equal gain of equity. It does not matter if you own 100% of the house or 10% - gains are yours 100%, not banks. Brother A will do nothing and just enjoy extra equity he might have to himself when he sells the house. Remember when he sells the house he might even pay taxes on the gains he had gotten. Brother B will refinance the house, take equity out and invest. Brother A will continue making 0% on his equity and carry 100% of the risk, while Brother B will start getting 8% compounding gains and no risk. He will use these money to buy another cheap house if market crashes.
Cash is king, knowledge is everything!
Wallio: from Wallet to Portfolio
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