The way it works, at least in theory, is this: You buy an insurance policy on yourself, or your business — the more expensive, the better. Then you pay premiums on that policy until you die, or run out of money, whichever comes first.
And if you've paid enough and long enough, you'll have acquired so much wealth with your insurance policy that you won't need to worry about losing anything else. The fact that you paid for your policy upfront gives you a built-in hedge against inflation and helps keep the cost of living down.
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As a result, even if the value of all other investments goes into a free fall, your insurance policy will always be worth something, because you already own it. In short, by investing in insurance policies, you're buying protection from disaster. That's why I think it makes sense to most people to invest as much as possible in them.
When we talk about insurance, we often mean life insurance. Life insurance is indeed the most common form of insurance in use today. But the truth is, there are many different kinds of insurance available. For example, you could also insure your house, car, boat, jewelry, art collection, or any number of other possessions.
An eye-opening encounter
One day, you could find yourself talking to an insurance agent, who tells you he'd just bought a new insurance policy himself. He explained how it worked, and what it would do for him when the time came.
You might think to yourself that you should probably do the same. So you go home and start looking around for a good deal on an insurance policy for yourself.
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Fortunately, you find one that sounded perfect. It covered everything you wanted, and the premium was very reasonable. All you had to do was a sign on the dotted line. At first glance, it will look like a real winner!
But then you took another look at it. And suddenly it dawned on you. There was an insurance policy that was guaranteed not only to lose money but actually to end up costing you money. What's more, it wasn't even really insurance. It was a gamble. Not a smart one, either. The odds would be stacked against you.
So you walked away from it. Instead, you decided to invest the money you'd saved by skipping this particular policy into some stocks instead. You figured they might do better than this new insurance plan did. You may not have known it yet, but you would have been making a big mistake if you went along.
Insurance policy companies make money for themselves and not you
You see, there's a lot more to insurance than meets the eye. It's not something you want to put all your eggs in one basket with, take lightly, or play around with. You may not realize that at the time, though. Instead, you make the mistake of thinking of insurance as something you buy, hoping to make money from it.
That's a fine idea, in theory. But the reality is, it doesn't work out quite like that. Insurance companies don't just sell you a policy and walk away. They hang onto your money and keep investing it for you — until you come back to collect it.
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And when they do, they charge you a fee to buy your policy back. That's right, after all that, it turns out that insurance companies aren't really in the business of helping people protect themselves. They're in the business of making money. Period.
In fact, it's been estimated that insurance companies only give out around 1 percent of the total amount of insurance policies sold each year. The rest of the money stays where it is, invested. So your money ends up working harder for insurance companies than it ever does for you.
And that's exactly what happens when you buy an insurance policy.
This brings us back to the question of how to invest wisely. If you want to make money, the answer isn't to go buy an insurance policy and hope for the best. You have to be smarter than that.
Investing the right and secure way
Instead, let's talk about investing the right way — the safe and secure way. The kind of investment that will make sure you come out ahead.
Let's start with the basics.
First off, you should never bet the farm on any single investment. You shouldn't even try to. When it comes to money, one bad decision can ruin you. That's why it's so important to diversify.
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If you tried to put every dollar you could possibly spare into a single stock, you'd be taking a huge risk. Even if you were lucky enough to pick the winning company, you'd still have no guarantee that you wouldn't lose everything. Your money would be too concentrated in one place, and you'd leave yourself open to disaster if the company failed — which, statistically speaking, it eventually does.
That's why it's generally considered a good idea to spread your money around instead. Diversifying means putting your money into several different types of investments. This lets you protect yourself from the ups and downs of the market. So when one investment falls, you've got others rising to take its place. That's how smart investors make their money.
But that's not the whole story.
Smart investors also look for ways to maximize the returns on the money they already have. Which is where mutual funds come into play.
Mutual Funds, what are they?
Mutual funds are groups of investors who pool together to buy shares in a number of different companies. Then, the fund managers decide how to divide up these shares among themselves.
Once the funds are set up, the money is pooled together and managed by professional investors. These experts know what to buy, and when to buy it. That saves you the trouble of figuring it all out yourself. Plus, they monitor the investments constantly to make sure they stay on track.
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The mutual funds pay the professionals a percentage of the profits they earn for managing the money. So it costs them nothing to help you. In exchange, they get a cut of their earnings. And since they're investing on your behalf, you don't need to worry about keeping up with the latest trends.
This is a simple example of a typical mutual fund. There are many variations on the theme, however, and each has its pros and cons. For example, some funds use hedge funds to protect their investments, while others focus solely on stocks. Some have a small number of investors, while others have hundreds or thousands.
Whatever type of fund you choose, always remember two things. First, don't put all your eggs in one basket. Second, never put more than 10 percent of your portfolio into any single investment.
Now that we've talked about the basics, let's move on to a much more complicated subject: taxes.
Taxes, are they avoidable?
Taxes are tricky. No matter what you do, there's a very real chance that you'll end up paying more than you planned to. And when you do, you're losing money. It's a terrible feeling. You worked hard to earn it, and now someone else is taking most of it away from you.
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But that's the thing about taxes. They're unavoidable. At least, most of the time. We can't escape them. Not entirely, anyway. There are plenty of loopholes and tax credits that might save you a little money here and there. But most of those are only available to people who are willing to jump through all kinds of hoops.
Still, there are a few simple strategies you can follow to minimize your tax burden. One of the easiest is to choose the right retirement account.
You see, there are actually several kinds of retirement accounts. Each one offers a specific benefit. And depending on your situation, you may find that one kind works better for you than another.
For example, IRAs are great for low-income earners and the self-employed, but they're not nearly as useful for high-earners. Roth IRAs are perfect for everyone else. They offer benefits to both low- and moderate-income earners. Plus, they're good for anyone who expects to get a big refund at the end of the year.
So what's the catch?
Well, you'll probably have to pay taxes on any money you withdraw from your IRA before retirement age. But that's a relatively minor price to pay for the tax advantages you receive.
Speaking of tax breaks, did you know that you can actually deduct some of your medical expenses from your taxes?
It's true! Most people don't think this applies to them, but it does.
If you paid to treat an illness, disease, or injury in 2017, you might be able to claim deductions. Just make sure you keep your receipts and paperwork in order.
Of course, the IRS doesn't just give you a deduction if you have an expensive illness. Any condition that keeps you from working is also eligible. So long as the doctor says you're unable to work, you can get a deduction for that.
Here's another common misconception. You won't automatically qualify for a deduction just because you had a lot of medical bills. The IRS looks at your income level first. If it thinks you made too much money, they'll say no.
In fact, even if you do qualify, you aren't guaranteed to get a deduction. Your total medical expenses will determine whether or not you get anything back. And sometimes, you'll still owe the government some money. But it's worth trying, especially if you're going to get a bigger refund.
The bottom line is that there's no way to avoid paying taxes altogether. But if you take advantage of every possible loophole, you can reduce your tax bill significantly. Try not to overlook any opportunities, because they could really add up.
It takes time to be financially stable
There's so much to talk about when it comes to finances. It's impossible to cover everything in one article. But hopefully, I've given you enough information to get started.
The first step to getting rich is to start saving money. When you have extra cash, put some aside for your future.
Then, come up with a budget. After that, try to stick to it. And finally, make sure you check your credit score regularly. This is the best way to ensure that no one is using your name without permission.
Remember, it takes time to become financially stable. But you can do it!