Buy term, invest the rest is a financial strategy that families and individuals have used for to protect themselves in the case of an unexpected event, while also creating wealth for themselves by investing the rest. Let's explore that
There tends to be a slight disconnect when it comes to life insurance. It’s never been explained to the general public—and by general public, I mean everyone—or in your Principles of Personal Finance 001 class in college, assuming you were a business major that is. So, in most cases, life insurance has been considered a want rather than a need and therefore has always been deemed non-essential, a waste of money. People have been programmed to believe that the best life insurance is the cheapest life insurance, which then sparked the phrase, “buy term, invest the rest.”
If you aren’t familiar with this concept, it’s a fairly easy concept to grasp. Instead of opting for the more expensive whole life option, you buy term insurance and invest what you would’ve spent on whole life insurance into a potentially higher yield savings or retirement account. By doing so, the idea is that you’d have a higher rate of return on your investment and would’ve done it for much less than you could’ve in whole life insurance.
First off, I want to point out that there is no “right” or “wrong” strategy, there are simply strategies. Financial strategies are just that—strategies. Think of these strategies like a tool belt and you are the operator of that tool belt. You can use your tools however you see fit.
The question you have to ask yourself when implementing any strategy is, does this strategy align with what I want, where I want to be, and how I want to get there. No financial strategy is perfect, every single one of them has flaws and deeper meanings to connect the dots of your financial journey.
That being said, there are a few things to consider when implementing the “buy term, invest the rest” strategy that should be highlighted.
What is “the rest?”
Just to reiterate, the thought process behind this strategy is to use the difference between the amount of a term policy and whole life policy to put towards an investment vehicle. For instance, let’s that you’re quoted at $40 for $500,000 in term insurance for 30 years of coverage. Just as an example, let’s assume that $500,000 in whole life insurance, paid up 30 years after the contract was started, is $400. By definition “the rest” in this example is $360, which should be invested into a separate account, thus you are making that $360 more efficient in the long term. Pretty sound, fundamental financial advice that could certainly advance your financial journey.
“The rest” often can be misunderstood though. Many definitions of this particular strategy would say that “the rest” would be the cash flow that’s leftover at the end of each month. So, for instance, after you pay your bills, expenses, discretionary spending, etc. you then “invest the rest”—meaning you invest what’s “leftover." However, this may lead to you finding inconsistencies in how much you’re actually investing, thus, you have no true roadmap or projection of where your investment account(s) will actually be in the future.
Furthermore, “the rest” insinuates everything is after-the-fact.
What do I mean by that?
If you are actively approaching your financial strategies from an after-the-fact state of mind, you’re setting yourself up for a long line of inconsistencies and fluctuation in your accounts where you've invested “the rest.”
The ole adage, “pay yourself first” has been the slogan of wealthy individuals, families, and businesses for thousands of years because it’s coming from an offensive mindset, rather than a defensive mindset-- there's a plan in place, if you will. This isn’t always the case, but it’s important to note—“the rest” should really be phrased “the difference” or “the spread” or even “the savings.” But let’s be honest, that doesn’t rhyme and isn’t fun to say.
Does the concept fit your financial system?
There’s so much “blanket” advice in the financial world.
Pay off your mortgage early.
Don’t pay off your mortgage early.
Buy term insurance only.
Whole life is the only way to go.
Bitcoin will be the new currency.
Bitcoin is trash.
… and so on and so forth.
It’s no surprise, really. Go to a Facebook post and read the comments on literally any bit of financial advice—everyone has their own way, opinion, thought process, and most importantly goals.
The bigger question people should ask themselves is: “what’s my financial system and how do make sure it helps me get to where I want to go.”
One of the humble brags that I have about what we do at Lyv Fin is urging people to follow our system and following the system ourselves. We call it the Order of Wealth for a reason—it’s an order in which you achieve wealth so you can live the life you want to live, worry free.
Now, whether you use our system or the next financial firm’s system, buy term invest the rest, should simply be used as a tool to your tool belt.
Remember, you are the operator of your financial tool belt. Implement these systems with the tools you see fit!