The Secret to Effective Cash Management
There are many competing theories about how to effectively manage wealth and attain the highest return on your investment. Many investors will tell you that stocks and mutual funds are the best way to go. Others will say the highest returns come from real estate.
Where all of these options come up short is that they come with inherent, unavoidable risk and don’t truly maximize your return on investment or provide retirement security. These risks should be a red flag for you as an individual investor that dissuades you from pursuing them. That said, there are some elements of these approaches that work – it’s simply a matter of figuring out the nuggets of investment wisdom contained within them.
To gain insights into truly effective wealth management, the key is not to look at what individual investors are doing with their money, but what banks and corporations are doing. It is true that the financial industry and the corporate world have contributed significantly to problems in our economy, most notably by eroding the retirement of many Americans. However, we can learn from their track record in cash management. American corporations have achieved huge returns on their investments and with minimal risk; even after they were battered by the Great Recession, they reemerged quickly, and today they’re more profitable than ever.
Banks and corporations diversify their investments in a very strategic way that minimizes their risk and maximizes the cash flow at their disposal. As any good investor will tell you, diversification is important, and banks and corporations have mastered the most critical piece of the equation: They have figured out how to turn their investments into assets.
This is the secret to effective cash management, and you, as an individual investor, can learn from what banks and corporations are doing. Let’s explore in more detail how you can adapt their investment strategies to build your own wealth:
- The biggest corporations invest in permanent life insurance: Fortune 100 and 500 companies hold a large portion of their liquid capital in life insurance, one of the oldest financial products in this country. Wells Fargo, for example, increased its investment in life insurance between 2008 and 2009 from $5 billion to $20 billion. FDIC regulations have actually placed a cap on the amount of insurance that banks are allowed to hold because banks realize how valuable life insurance is as an asset class.
- Every dollar that corporations invest in life insurance is available for use as cash: Corporations have purchased so much permanent life insurance that every dollar they’ve invested is available for them to use as cash. That’s right – corporations have figured out how to convert their investments into assets!
- Permanent life insurance products can be converted to cash value by individuals, too: Corporations aren’t the only ones who can benefit from using life insurance to convert investments into assets. Through an underutilized strategy, individual investors can modify permanent life insurance so the entire premium they pay can be treated as cash value. It’s important to note that without this special modification, it would take as many as 15 to 16 years for all of the paid premium of a permanent life insurance policy to be treated as cash value.
- The cash value of the life insurance premium can be reinvested: Corporations use the returns on other investments to pay for life insurance premiums, and then use the cash value of their life insurance premiums to invest in more investments. When the premiums are converted correctly, individual investors can use exactly this same strategy.
- Life insurance dividends are accumulated on a tax-deferred or tax-free basis: Life insurance is one of the oldest, most stable investment products on the market. Because mutual insurance companies are not owned by shareholders, but by the actual policy owners, profits from the insurance company are redistributed back to the policyholders, typically via a steady dividend payment. For individual investors who have invest in life insurance, the rate of return they receive from the cash value and any subsequent dividend payments is accumulated on a tax-deferred basis. If done correctly, the proceeds can even be tax-free.
The secret to cash management is to study how major U.S. corporations turn their investments into assets and then seek to mimic those strategies as individual investors. Given that investing in life insurance is one of the most effective ways to turn an investment into an asset, you should work to optimize your cash management by investing in life insurance, modifying it so your full premium is converted to a cash value, reinvesting the cash value in other investments, and taking advantage of the benefits of tax-deferred or tax-free life insurance dividends.
Learn more about cash form this article on how Life Insurance is a Cash Flow Resource.