I was able to get my hands on the New York Times bestseller Killing Sacred Cows, written by Garrett B. Gunderson with Stephen Palmer. I’ve got to admit that I was a bit skeptical about this book. After all, one of the biggest points of the book is that 401(k)’s are a risky investment for most people. One thing most personal finance sites seem to agree upon is that we should invest in out 401(k)’s and get the company match. It’s been a belief of mine. But this book has made me re-consider the 401(k) a bit. I’m not convinced a 401(k) isn’t for me but I’m re-thinking the extent to where I invest at all costs in my 401(k).
See, a 401(k) locks you into investments until retirement. Then you can take the money out but you also start paying taxes on it. Though many say your tax bracket will be lower when you retire it’s not always a definite truth. We also don’t know what will happen down the line with tax laws and such. Could taxes go up so much by the time we retire that our 401(k)’s get killed? Or could legislation change such that we lose part or all of our 401(k)’s? We’d like to believe that wouldn’t be the case but we really can’t be sure. We never thought the government would be subsidizing most major banks either!
According to Gunderson, a 401(k) is what’s called a “FBO,” for benefit of. This means it’s a type of trust held by a custodian on your behalf that could be subject the changing tax codes. It’s not money in your possesion!
Here are some other interesting points Gunderson makes in the book:
- Focus on increasing wealth rather than cutting costs. We spend so much energy cutting costs when a better strategy would be finding ways to increase wealth.
- Find your soul purpose. All the money doesn’t make you as happy ans truly prosperous as following your soul purpose.
- Understand Cash Flow vs Net Worth.
- Money is just an instrument. Many think it’s the root of all evil but all money is is a tool.
- Human life makes money.
- Mitigate your risk.
- You are your best investment.
- Producer vs Consumer. Do you help to create wealth and value or you consume things?
- Permanent life insurance (whole life) is better in the long run than Term Life insurance.
- Debt is when liabilities are greater than assets. Many think that debt is borrowing but that’s not always the whole story or the case.
- There are three types of liabilities: Productive, Consumptive, Destructive. Where do your liabilities fall?
- Don’t borrow if it doesn’t improve cash flow. Remember debt is when liabilities are greater than assets. If borrowing can improve your cash flow then it may be ok.
- Value is more important than price. Looking only at price isn’t enough.
I can’t say I fully agreed with every concept in this book but it does a great job of making you think! That’s what a good book should do. We shouldn’t blindly follow conventional wisdom assuming it’s what is right for us. We need to understand our finances and understand why we do what we do. For that, this is a valuable book that you should take a look at.
I want to pass this book on to one of you! From now until midnight EST Feb. 15th, every person who subscribes to my email feed and emails me the contest code will have an entry to win the vote. At the end of the contest period I’ll take all of the votes and pick one using an online random number generator. You can subscribe via email in sidebar or using the form below:
Have you read the book? What do you think?
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I am interested to see what exactly he says about whole life vs. term life insurance. I have read Suze Orman’s assessment of the two and she always talks about whole life insurance scathingly.
Hannah’s last blog post..Newman’s Own Coffee
@ Hannah – I’ve seen arguments that go both ways. One think Gunderson mentions is that after the first term-life insurance expires it gets really expensive to renew (at which point you are older and more likely to use it). He also argues that people rarely take the difference in cost and invest it like many financial people suggest to do. Basically you’re better off getting as much full coverage as possible.
@ Miranda – Agreed! The book as a whole is really interesting and not what I expected. He really takes a whole life’s view of personal finance and how it affects not only your bottom line but also how happy you are with your life. I makes you think for sure.
Interesting book review! I think the main thing to get out of this is to not just follow the “conventional wisdom” and to look at what is likely to be best for your individual finance situation.
Miranda’s last blog post..Is Your Attitude Toward Money Controlling Your Financial Future?
This looks like a good book to trump “conventional” wisdom. I met a multi-millionaire on my last vacation and he mentioned many of these same ideas. I say multi-millionaire, but his wealth is in real estate and he also owes millions. But the key is that has has enough cash on the books to cover all of his properties for two years without bringing in additional income. So he will be able to weather a big financial storm.
His mantra is about increasing cash flow to increase wealth, not saving in the stock market. The bulk of his wealth is income generating real estate. I learned a lot from him over a couple conversations.
Patrick’s last blog post..What is Your Financial Fallback Plan?
@ Patrick – What you are saying is some of what the author talks about in the book. It seems that we tend to view our personal finances differently than we would a business but that shouldn’t be the case. It’s important to improve our cash flow and increase our sources of income. Sometimes we may take on debt to do this but that’s ok so long as we cover our expenses.
I’m actually about 1/3rd of the way through this – slowly but surely and it really is opening my eyes a bit to a different way of seeing money. The big thing is the “squirreling your money away” versus “making it work for you”. It is a concept I’m not 100% wrapping my head around yet, but it really does make sense.
@ Hank – Yes! What if instead of scrimp and save we took what extra money we had and developed ourselves and new streams on income? It does make you think!
401Ks do not always make sense, specially if you are a business owner you should also consider the cost of administration of the program. A business owner will also look at the company match component and think, ‘I can reinvest this amount in the business growth and deliver salary increases to the employees that will beat any stock market investment product in the 401K plan in terms of total return’. The one benefit that a 401K plan delivers is disciplined investing/savings, but if you have that discipline yourself than you do not need to be locked in.
Lack of liquidity has a cost too, which everyone glosses over.
I wrote a post regarding this over a year ago which may be worth a read. Link: http://www.arohanvalue.com/2008/01/04/investing-in-401k-plans-when-is-it-not-worth-the-trouble/
I believe Lazy Man and Money also reached a similar conclusion earlier. His post can be found at: http://www.lazymanandmoney.com/5-reasons-to-throw-away-your-401k/
Sorry for self promotion, but I wanted to let readers know that there is analysis out there that they should look at.
Arohan’s last blog post..Is it Time to Buy Stocks?
@ Arohan – Good points! Thanks for the info.
“Focus on increasing wealth rather than cutting costs. We spend so much energy cutting costs when a better strategy would be finding ways to increase wealth.”
Strongly agree.
This is one of the core principals of my personal finance philosophy. A lot of the time spent on finding ways to be frugal have a lower time return than waiting tables.
Mark’s last blog post..Wow! Cheap is an Understatement!
@ Mark – And in the end, when you work on creating wealth it’s like you’re making your life and opportunities bigger rather than thinking smaller when you focus more on cutting costs.
There is a movement in congress that examines the possibility of eliminating the 401(k) and replacing it with a government managed plan (sounds much like Social Security 2, IMO):
http://simpledebtfreefinance.com/george-miller-teresa-ghilarducci-and-the-end-of-your-401k/
Does the author recommend a replacement for the 401(k), or are we supposed to kill our sacred cow and simply do without milk?
Money is not the root of all evil, LOVE of money is.
I’m with you, it looks like some of his points make sense, while others are perhaps only to make us think and reconsider what we “know”.
Joe’s last blog post..Political Interference in Bank Bailout Decisions – Disgusting!
@ Joe – I’d have to go back to the book for the specifics but he did offer alternatives. Check out his link about 401(k)’s:
401(k) Hoax
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