By: Dina Esquivel
My mistake—and the mistake of many others—was that all of my investments were in real estate. So as things started crashing financially, I went from owning several homes to selling them one by one due to the high monthly payments and lack of sustainable rental income.
This is my story, but I hear the same one from many other people. During the good times, many people were using real estate as their own personal ATM. It was very easy to refinance, get a second mortgage, or obtain a line of credit. The home values continued to increase, so people were not worried about borrowing money from their home because the prices continued to go up.
Why did people borrow money from real estate? Some people used their home to pay for college education for their children, to buy a new car, to take a long vacation, to reinvest in real estate, or to pay other debt.
But of course, all of this came to an end.
The same needs exist today. People still send kids to college, people still go on vacation, some people buy homes or cars, build a new pool, or fix their kitchen, and so many other things. Since the equity in their home is nearly nonexistent and since people aren’t making as much money as they used to due to the state of our economy, how are some people able to do these things?
The new personal ATMs are 401K/Retirement plans. These plans are being used for everything—except for what their purpose is, which is retirement. Many people are borrowing money over a five year period. They also cash out their retirement plan when they lose their job or when go through financial challenges. People are borrowing from their future to cover their present needs.
According to a recent study, as much as $6 billion annually is not being paid back into people’s plans. One out of ten people default on their loans. This in turn is creating a bigger crisis in retirement savings. Most people don’t think about retirement until they’re close to retirement, and they don’t have a plan. There are people who are 65 years old and still don’t have a plan. When using 401K plans or other retirement plans to take care of emergencies, people don’t realize that when they take their money out early they are subject to taxes and penalties. The money that they actually keep gets diminished by about 40% after paying taxes and penalties.
What I know now that I didn’t know then is all about financial planning and diversification. Had I planned properly, I wouldn’t have lost so much money in real estate. I learned my lesson, but there are many people who are still living the same way. They haven’t taken a minute to slow down and think about what they’re doing now and what changes they can make to be better prepared.
Many people listen to their friends and family about how to save and manage their money. The only problem is this: The co-workers, friends, or the family members who they turn to for advice are not financial planners!
I sit down with so many families, and there are so many misconceptions and such a lack of information when people depend on their loved ones to guide them. For example, I sat down with a lady who believed that if she put her money in a savings plan with the credit union she would not be penalized or pay taxes. Of course, this advice came from a very trusted friend, and it was impossible for anyone else to make her believe differently.
It is so important for people to really sit down with a financial planner to plan their future so that they truly have a diversified investment/savings/retirement plan. There should be more access to financial education in schools and colleges, at work, and in churches. People need to sit down with an expert to help them with their financial plan based on their needs and goals. Many people miss out on the basics because of the lack of knowledge. These basics are simple: Spend less, don’t live above your means, have a monthly budget, get family protection/life insurance, store up emergency savings, put a retirement plan in place, and think about long term care.
In speaking with seniors and finding out what their regrets are, many regret not preparing for retirement properly. Many didn’t realize that their savings, if any, did not grow with inflation. They don’t consider that people are living longer, which means they need more money.
The reality is this: We’re all going to die, we all have to pay taxes, and seven out of ten of us will need long term care. Either learn for free from those who have been there, or pay the price when it’s too late to turn back time. Talk to a financial planner today about your financial goals and needs!
Dina Esquivel is a Marketing Director at People Helping People Insurance Agency LLC, in Riverside, CA. For more information please visit http://www.phpdream.com or call 877.788.4366