Why It Is Important to Be Financially Literate

The main selling point of any financial products is their potential gain. Most people only see one side of the coin; they don’t realize that higher potential return equates to higher risk.

Statistically speaking, we almost always end up buying financial products and solutions from someone we like or trust in person. This is not wrong but it just isn’t right if we base our decision solely on this factor.

Financial agents are divided into 3 types:

  1. Tied financial agents are agents attached to a financial institution agency force. For example, insurance personnel, unit trust consultant, bank’s personal financial advisor. They are product focused and normally compensated by commission.
  2. Independent financial advisers(IFA) are personnel providing comprehensive financial solutions. This includes value-added advisory service (investment needs analysis, tailored financial plan, wills writing, retirement planning) and financial products (insurance, investment ). They are compensated by advisory fees and product sale commission.
  3. Financial coaches are personnel providing high degree of personal interaction to assist a client in financial awareness and profiling in order to achieve financial independence. They are usually compensated by advisory fees only.

Financial agents will take a comprehensive evaluation on your financial position and goals. Then, they will identify the gaps and subsequently propose one or more financial solutions to help you achieve your goals. They emphasize on long term engagement with the client.

The paradox of “having your best financial interest in mind”

No one will ever have your best financial interest in mind better than yourself.

If you walk into a bank, and ask the financial advisor to recommend you the investment product with the highest potential return, who is to blame if you realize you are being charged a 10% fees over your 6% investment return?

Answer: Your own ignorance

Can you guarantee your agent is going to serve you diligently after the sales even if you don’t buy additional products?

Answer: No

Then why pay 6% upfront commission while you just need to pay 2% commission via a DIY online investing platform to invest in the same unit trust?

Answer: Because either you don’t know how, don’t know what you want, don’t have time, don’t care or don’t want to ask.

I am 200 percent sure this is not the attitude you adopt in your professional career. Therefore, do not be so ignorant when it comes to managing your own money.

Let me reiterate this that financial agents are trained extensively on the art of sale, not on having your best financial interest in mind.

But our own ignorance is certainly not bliss here.

So what can you do?

Everyone should get educated on personal financial concepts. You must have the very basic financial literacy so that you can evaluate your financial needs and gaps. Then only you engage your financial agent and tell him or her what you need. Let them earn their commission, but always strive to minimize your investment cost before we even talk about earning a return. Always read the fine prints of any financial products Believe me, whichever type of financial agents you choose to engage in the future, he or she would definitely have more respect for you.

Financial Products 101 Overview

Confused by all the lingo and terms concerning the various financial products? Not quite sure which product is best for you – equipment lease or working capital loan? What are the requirements for each product and are they etched in stone? Read on for a quick lesson on 7 financing products for your business or church.

SBA Loans – Loans guaranteed by the Small Business Association, but provided through your local or national bank. The guarantee is for the lender, not you the borrower. Current approvals (up to $2M) given for purchasing an existing business, partner buyouts, real estate transactions, medical professionals. Borrower generally needs 620+ credit score. Individual lenders determine which transactions they are willing to approve and specific requirements.

Equipment Leasing – Used to acquire equipment considered essential to your business. Must provide vendor estimate/sales quote for requested equipment as funds are forwarded to vendor for payment, not borrower. Borrower can own equipment at end of term or lease new equipment. Two years TIB generally required, some start-ups may qualify. Minimum 620+ credit score generally required. Lease payments can be considered business expense and often used instead of paying large upfront amount to outright purchase equipment.

Sales Leaseback – Current owner of equipment agrees to sell their equipment to lender and make lease payments to secure working capital funds. Equipment must have large secondary market; equipment deemed too specific has limited market and not a good candidate. Equipment should be relatively new, less than 18 months. Borrower must submit equipment listing that details equipment specifics offered for sale to determine value given for leaseback. Each piece should be valued over $25,000. Generally good credit expected on borrower.

Account Receivables Financing – Also called factoring, increasingly popular form of obtaining line of credit, based on your average monthly receivables. Great way of obtaining operating capital without having to wait for your customers to pay. Approvals weigh heavily on the quality of your receivables, not as much on your credit. Receivables generally should average minimum $25,000 per month. Once approved, 60-80% of receivable is advanced to borrower after customer is invoiced. When customer pays factoring lender, the balance of invoice, minus processing fee, is forwarded back to borrower.

Working Capital Loan – This is a true loan product, reported on your credit report. Approvals generally based on overall cash flow availability (average bank balance and average credit card processing) as well as credit history. Credit score expected in 620+ range, average balances in $5,000 range. Approval amounts up to $100,000, repayment up to 12 months. Once approved, loan can be used for almost any purpose. Renewals are possible once initial loans are 80-90% repaid. Rates generally lower than merchant cash advance. Funding usually complete in 7 days.

Merchant Cash Advance – Cash advance is forwarded to borrower based on last 6 months of credit card history. Credit is not as important, but should be 500+ with no recent bankruptcies. Merchant generally must process $8,000 minimum per month – Visa, MC, AMEX and some lenders include debit card processing as well. Cash and check amounts are not affected. This can be an expensive financing product, best for those in need of quick funding, generally with no other options for securing money. Operating capital can be used for almost any purpose. Funding usually complete in 7 days. Seasonal businesses may need to submit 12 months of merchant statements.

Church Financing – equipment programs available for new and established churches. Can fund chairs, pews, audio-visual equipment, almost anything needed for the interior of your church. $5,000 minimum request, requires personal guarantor with 600+ credit. Equipment sales quote from vendor needed as payment is made directly to vendor for equipment. Church addition/construction loans also available, generally require $300,000 minimum loan request. Church financial and bank statements needed for review prior to approval.

Now you have a quick starting point to help determine which financial products best suit your needs. Be sure to be honest and upfront regarding all aspects of your financial situation when discussing and submitting your application. Credible lenders will complete due diligence activities and your request may be declined for lack of full disclosure.

New Life Settlement Legislation Could Set Stage for Other Financial Products

Texas Governor Rick Perry passed the nation’s first Medicaid Life Settlement law on June 14th. The law allows seniors applying for Medicaid to sell their life insurance policies for significantly larger amounts than the cash surrender value without adversely affecting their eligibility for Medicaid.

While seniors will be able to gain access to their money and pick the long-term facility there is huge opportunities for states to receive savings in Medicaid costs.

Previously seniors applying for Medicaid would surrender their policies in order to become eligible and spend the proceeds. Under the new law, life settlement proceeds would go straight into an account used solely to pay for long-term care. The legislation would not allow seniors to spend their settlement money on frivolous items.

Medicare/Medicaid costs are going to continue to increase as our population ages. These costs are then passed along to the state and federal government who are dealing with reduced revenue and budget cuts.

If the government continues these programs without any significant policy changes there were be significant financial consequences. Currently federal tax revenue is used primarily to pay interest on current debt, Medicare, Medicaid and Social Security. Which means a third of the federal budget will have to be financed in order to pay for other programs as well as defense. Unfortunately, the taxpayers will ultimately pay with increased taxes, reduced services and other economic woos.

Similar legislation is being introduced in New York, California, Florida, Kentucky, Louisiana, Maine and New Jersey.

The Texas legislation would ulimately save Medicaid $20 million a year, according to According to Michael Freedman, a lobbyist for life settlement company Coventry First LLC. If other states follow Texas’ lead the savings could make a serious fiscal impact.

“If life settlements and their potential for cost savings are any indicator, many states may adopt similar legislation for seniors with structured settlements and annuities applying for Medicaid,” said James Goodman, Co-Founder of CBC Settlement Funding.

If similar legislation happened in the annuities market, this could adversely affect Medicaid complaint annuties and their effectiveness.

It is currently unknown of any additional states are considering similar legislation or if states will consider introducing legislation for seniors with annuities.

Introduced in 1965, Medicaid is a health program designed for US citizens and permanent legal residents with low incomes and limited resources. It is the largest source of funding for medical and health related services nationwide and implemented on a state level.