Monday, October 22, 2012

Put and Take vs. Put and Keep Part 3: Put and Keep Accounts

In the previous part of this blog series we discussed put and take accounts. Put and keep accounts differ from put and take accounts in many ways. There are two types of put and keep accounts. The first is similar to the frame of your house; this is the safe put and keep account. The second is like the roof of your house; the risky put and keep.

When building your financial house, we want to help you select ways to minimize wealth transfers. One of the best ways of minimizing unnecessary wealth transfers is to understand what they are and ways to minimize them.
A good example of this is the process of financing a car. When you finance a car, there are a lot of costs involved. If you were to purchase a new car every 5 years for the next 30 years, you would not only have to transfer interest for a car but also transfer what you would have earned on that car over those years. 

If you purchase a $30,000 car at 6% financing for a 5-year term, over those 5 years, you will pay back the original $30,000 in principal and also $4,799 of interest. That would make your total monthly car payment $579.98.

If you were to purchase a car in cash and then purchase an identically priced new car at the end of every five-year mark for 25 years, if the money you saved in interest alone ($4,799), were invested in accounts somewhere, the money could have grown to over $90,000. 

The point of this example is to remember that everything we do has a cost. A put and keep account will allow you to buy a car with cash or negotiate for the most favorable interest rate possible. If you have a piece of property, a guaranteed sub-account of a 401k1, a max-funded permanent life insurance2 policy, a CD3 or brokerage account4 you can borrow against them. When you borrow against an asset its value still continues to grow. For example, if you borrow against a piece of property, the value of that property can grow regardless of whether there's debt against it or not.

We do not advocate borrowing against properties or other investments simply to borrow against them, to create tax deductions or to propel lifestyle. We recommend carefully examining how we can utilize a put and keep account to minimize our wealth transfers.

Saving for retirement can be difficult. At Kemp & Associates, we want to help you navigate through the difficult and exciting journey of retirement. If you need advice, contact us today.

"401(k)" Wikipedia;

"Permanent life insurance" Wikipedia;

"Certificate of deposit" Wikipedia;

All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.

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