General Eisenhower said that plans are worthless, but planning is invaluable. He was referring to war, but it also applies to our personal financial planning. In his excellent book, The Psychology of Money, Morgan Housel said something similar when he told us to plan on your plan not going according to plan.
So if plans are worthless and don’t go according to plan, where do we start? The basic tenet of personal financial planning is to live on less than you earn. While that may elicit a great big “Duh!” you’d be surprised (maybe not) at the number of people I meet who do not live on less than they earn, and some in fact spend more than they earn through the (mis)use of credit.
I find that most people are more concerned with the earnings on their savings than with the amount saved, which is putting the cart before the horse. A person saving $100/month at 2% will come out ahead (by more than 25%) after 20 years of a person earning 6% but saving just $50/ month. The lesson: be more concerned with the amount saved than with the return. That’s not to say that the return is unimportant, because it is. It’s just not as important as the amount saved.
It's exciting to save for a special item or event such as a new car, a downpayment on a summer home or a child’s wedding, but we should also save for . . . nothing. Life throws many curves at us, many of them unanticipated. And while it’s unrealistic to prepare for catastrophes, we can and should prepare for emergencies.
It makes sense to segment our savings into categories, such as emergencies, specific items/events, retirement, and unclassified. If that sounds like a lot of savings, it is, and that’s the point. Most Americans save an abysmally small portion of their earnings and while you may not know it during their working years, you certainly can tell in their later years. They are the seniors greeting you at Walmart and the boomers working in the fast food joint.
So what does all this have to do with life insurance? Well, life insurance just happens to be an excellent vehicle to accumulate some unclassified savings. A quality mutual company will produce fixed income-like returns over the long term, for those who are young and healthy. For those not so young or in optimal health, the returns will be a little less, but as mentioned, the returns are secondary to the amount saved, especially when the principal is guaranteed.
There is an old Chinese proverb that says the best time to plant a tree was 20 years ago, but the second best time is now. The same can be said for life insurance and saving.