R.O.I. or R.O.M.?

The market has been up this year, but as for us safe-money advisors, we remain bearish. We understand that it is human nature to want to chase shiny things – we just can’t help it. But repeated experience – both our own, and that of our clients – has taught us that the most basic tenant of safe money solutions, such as the Bank On Yourself concept, really is true in the long run. That tenant being, “the return OF your money is more important than the return ON your money.”

In past seminars and workshops that we have held, we presented a very simple but eye-opening example of this. I will recap this below, but sometimes a real-life example is even more illustrative.

One of our long-time clients recently moved into their beautiful new house by the lake. They had the house built over a couple of years, and financed it, in part, through their Bank On Yourself policy. They didn’t have to beg the bank for it, provide proof of income, or jump through any hoops to get their money – they just filled out a policy loan request form, and within a few days the money was in their hands. They didn’t have to sell stocks, worry about whether the market was up or down, or borrow from a 401k. They didn’t have to deplete their emergency savings, dip into their kids’ college funds, or worry about sky-high interest rates, and they can pay back their policy loans at their own pace.

This is return OF money. They know their money is there, safe and growing, whenever they need it. True, they may not have the rush of seeing their money occasionally grow by 20% in one month, but they’ll also never have to deal with the pain, stress, and worry of seeing it drop by 20% (or more) just when they might need it. And for this client – as well as many others – this is worth more than any potential “ROI” they might get in the market.

But for those “numbers people,” here is a really simple but more specific example of how the importance of actually saving money (in a safe place where you can access it) is so much greater than chasing after returns.

Let’s assume your household makes $100k per year. Let’s say you “save” 5%* ($5000) of it into a market-based product (mutual fund, brokerage account, etc.), and that you get an 8% return (a true 8% return, no numbers-fudging “averages”). At the end of the year, your money has increased by $400.

That’s not so bad, but for those who get really excited about an “up” year, let’s say this was a pretty good year for the market, and you actually got a 12% return. That would net you an extra $200, so you finish out the year with $5600 in your account. Cool. (Again, we are assuming this the actual return that YOU received on your money –  not a “market average” for the year.)

But let’s say that, instead of putting your money in the market, where it was at risk, you decided to just stick it in a bank account – no interest whatsoever – just a plain old savings or checking account. But since it is safe and not somewhere it could decline in value, you decided you could actually afford to save 6% instead – just 1% more per year. At the end of the year, you would have $6,000.

Obviously this is a simplistic example. We are only looking at one year, and not compounding the interest over multiple years. We’re also assuming a rate of return of 0% on your safe money – even in most savings account you might get a percentage point or two. (And obviously in a Bank On Yourself plan it would do even better!) And we’re assuming in the first scenario that your rate of return is actual and not an average – as we all know, “averages” can be misleading.

But overall, this example goes to show that the act of saving itself is actually more important (not to mention easier and less stressful) than chasing rate of return. And it is doubly important when you save somewhere that is liquid, accessible, AND also does have a reasonable rate of return – then you can have the best of both worlds!

One of the best places to save that we’ve found is in a properly structured Bank On Yourself plan. To request a free financial analysis and see how this safe money method could work for you, just click the orange “Get Started” button at the top right of this page. Someone will get in touch with you shortly to connect you with a safe money advisor.

* Note: Investing is different from saving, or at least it should be! A market-based product is NOT a place for your savings – these should be safe, protected, and liquid so you can access them when needed. Investing is for money you can afford to lose if your investment does not pan out as you had hoped. Many people today have forgotten this important distinction.