How to best finance large ticket items like homes, real estate investments, college education and even cars to keep the most money in your pocket.
Tom: Welcome to Wealth Talks where we talk about solutions, money and other things that create wealth in your life. We are glad to be here, aren’t we John?
John: Yes, it’s a great day here in Henderson, Nevada and today we’re going to be talking about buying large ticket items and more importantly, financing those items, because it’s not just the fact that we buy things in life but the way that we finance them can make a huge difference in our bottom line over a period of time.
Tom: It sure can. Of course, when we are looking at financing large ticket items we’ve got to look at what the rate of interest of those purchases are, or what is the cost of interest that we’re going to give up if we spend cash for it, or tie up other capital to purchase that.
John: Certainly, so we are talking about few different types of costs here. If we pay cash you are talking about the lost opportunity. What could we have earned with that money? If we are financing it through a bank loan, then we have the cost of interest that’s going to somebody else. What other types of interest cost can there be?
Tom: Last time we talked about the velocity of money and the volume of interest and of course that’s an interest rate that we have to look at too. Because for example, a large ticket item that everyone would agree with would be a home or some piece of real estate, and if we are paying 50% of the cost of the home and interest over a 30-year period of time, we’ve got to look at that and see if we could use the money better than just paying the house off.
Because if we can make more money than what it’s costing us to pay the mortgage, maybe it is not really important to pay the mortgage of so rapidly like everyone teaches.
John: Certainly, and something that we also have to consider in addition to just the cost of interest whether it’s interest that we lose or interest that we pay, something else that has to be considered is the risk that we’re taking especially with something like a house or real estate investment. If it’s a big-ticket item that we’re purchasing like that, do we want to have all the money tied up in that investment?
We tell stories sometimes, especially at the wealth summits, of the people who’ve contacted us from the South Eastern United States and they had bought term and invested the difference the way A.L. Williams prescribed, and they had invested the difference in real estate. But then, Hurricane Katrina came along and then the BP Oil Spill and all their property along the Gulf Coast, they lost a lot of opportunity and a lot of value on that property.
Tom: That’s a lot of money going down the drain, because those properties were paid off and they weren’t worth 50% of what they had purchased them for. And so, did it make sense for them to pay it off early.
John: Certainly. And so, with any type of investment that we look at, there is always going to be a risk involved.
Tom: There is.
John: That’s something that has to be considered along with this. How much of your savings which should be guaranteed safe and secure do you want to turn into an investment? And that’s always something that you need to consider when you’re buying a large ticket item.
Tom: We have a large ticket item in our office that is always depending on what you’re thinking but it’s a fairly large purchase price, a nice size printer that we can print and do production on. It’s not just your desktop printer but it’s a printer that runs between $26,000 – $30,000. Why didn’t we pay cash for that? We certainly could’ve afforded to John.
John: Certainly, we could have paid cash for it and if we were getting a used piece of equipment, maybe it would have been better to pay cash for it because that type of equipment depreciates quickly. But buying new when it’s going to depreciate so quickly and then having to pay the service fees on top of that not only for printing supplies but for the service man to come out, it made more sense to lease that piece of equipment.
Tom: It does, so instead of borrowing from our life insurance policy to do that, we just pay the monthly lease and the service on the lease is no cost to us.
Tom: So, we get the service for free as long as we’re leasing. Having experienced the breakdowns of these machines, we realized that that service package was well worth the cost of the lease versus paying cash for the machine by borrowing from our policy to do that or setting up some type of repayment form to ourselves for the money we used.
John: Yes, and when we are buying things like real estate, it usually doesn’t make sense to finance the whole amount through a policy loan unless it’s like a bridge loan for a short period of time. But financing the down payment out of life insurance cash values by taking the policy loan, using that as collateral makes total sense. We see that done. Our clients do that all the time, we’ve done it and it just makes sense.
Tom: Let’s talk about education, that’s a big ticket item for many people. I mean, student loan debt now is much, much larger than credit card debt in this country. I think it’s 1.3 trillion the last time I looked at it, a lot of student loan liability. That’s a huge value, anywhere from 50 to several hundred thousand dollars if you are going to graduate school. What about student loans? How do we go about financing them?
John: Well again, it depends on the interest rate that those student loans have. If student loan has fantastic interest rates 2 or 3% makes sense just to continue making the monthly payments on those and letting you continue out. The interest rates we’re seeing on student loans here lately have started to go back up again. We’re seeing things, interest rates anywhere from 5 to 8% more commonly now.
And so, in those cases it’s usually good idea to start paying those loans off so that you can recover the money back in. But the thing is with the student loan too is you have a very long time-period, generally speaking on those loans. They might not be scheduled to be repaid for 20 or 30 years. Is the amount of interest that you’re going to recover, the volume of interest like we talked about last time going to be worth the money that you sink into those student loans to get them paid off, and that’s a consideration.
Tom: And that’s what we help people do, is to weigh those options and to set it out and say look if you could use this money and put it through the Perpetual Wealth Code and create lots of velocity with it, let’s see if you can make more money than what you are going to make just by paying this student loan off earlier.
Tom: It’s all about the money management and not always is it best just to kill a debt just because it’s a debt. Like we said time and again, debt is not a dirty four-letter word.
John: As long as it’s managed correctly.
Tom: As long as it’s managed correctly. Debt is one way that we allow the economy to expand in a good way because otherwise we might all still be hoeing our own garden and raising our own pig to produce the food that we need, but it’s that ability to leverage other people’s money that’s allowed us to specialize in society and become the productive abundant society that we are.
John: People with student loans that does make sense to pay off, they have a couple of choices. They could either pay it off with income instead of saving that money or they can choose to save first so they get a return on their money, and then leverage their savings to turn around and pay off the student loan over time.
For most people, in most situations that we’ve seen like this where it does make sense to pay off the student loans, it’s better to save first usually on a vehicle like a life insurance policy where they get a baseline guaranteed internal rate of return in that policy. And then if the money management side makes sense, they could take a policy loan and pay off those student loans, transferring the amount they were paying to the student loans now coming back to repay the policy loan.
And over time that provides more cash value build up which equals a bigger internal rate of return in their pocket at the end of the day, when they’re ready for retirement or to finance other types of investments in their life.
Tom: John, that brings up another question. Let’s say that I know that if I could buy a piece of equipment or a tool or invest in a product that I know that is going to produce a certain rate of return for me over the next 5 or 10 years.
Does it make sense for me to put the money that I have saved into a life insurance policy first before I buy that equipment? Or would it be better for me to buy the equipment knowing that I’m going to get that growth for the next 5 to 10 years and use the growth that the equipment or the investment made for me to buy the life insurance policy?
John: Generally, the second way. Generally, by investing in the equipment then using the income from that to purchase the policy.
Tom: And one of the reasons of that is, if that opportunity is knocking at your door and it’s there and you are that sure of it as a business person, then buying the life insurance is going to take away part of the capital that you need to get the equipment or make the investment.
That doesn’t mean that you should not cover that liability with some type of coverage. Maybe it’s that you need to have a convertible term policy right at the very first because if something happens to you then there’s a liability in that equipment, not being able to produce what it was going to produce or that investment.
But oftentimes we see people thinking that the policy is going to do some magic by putting it in there first, before they make this purchase. And so, it’s important to realize the difference. You’re talking about a student loan delaying the repayment of it faster versus something that we know right away is going to be a benefit.
John: Yes. And there’s a very important difference there, because with the student loan like I said earlier, it’s a long timeframe. So, why not get the money working for you, we’re getting a small internal return to the policy growth, and by paying off the student loan then you recover the money you were directing there to come back to you.
That’s a little bit different picture than taking and making an investment right upfront in a piece of business equipment or some other type of investment that’s going to create an income.
Tom: I remember learning that from Nelson Nash way back, one of the first sessions I ever took from him. He compared it to a sinking fund method. Years ago, businesses were taught that if you buy let’s say, a tractor or you buy a conveyor belt or you buy even a copier. We know that copier is not going to last 30 years, so we need to be thinking about when is the depreciation schedule up, when would it be most effective for us cost wise to replace that.
We need to be saving that money right now so that when the copy machine or the combine or the tractor or the conveyor belt breaks down we’ve got the capital to replace it, and that’s what we use the policy for. As the savings vehicle for that sinking fund, because now when we replace the copier or the conveyor belt or the tractor, whatever it is that we’re replacing, we don’t lose the growth on the money that it took to do that with.
John: Yes. Any business that is running like that, whether it’s planning for the future and saving up money, they have to have that money sitting around somewhere. It might as well be in a place that is guaranteed safe and secure and providing something more than just a savings account.
And that’s exactly what the life insurance gives us. It allows us to maximize the money that we’re saving whether it’s for the business or whether it’s for our personal future. The nice thing with that is we get a bonus of the death benefit because you can figure all the internal rate of return on premiums versus the cash values in the product. But that doesn’t consider the death benefit then, which becomes like a bonus.
Because generally after, say anywhere from 7 to 12 years, the cost of an insurance policy, a life insurance policy that’s been written correctly, is usually washed out. That means the cash value is equal to or greater than all the premiums that have ever been paid into the policy.
Tom: And we’re talking about guaranteed cash values, they’re not total cash values.
John: Yes of course it depends a little bit on age and health as to where exactly those numbers fall. If we’re looking at an older person, somebody that is in their 70’s or even 80’s, then you may not see that come back in the cash values but perhaps the death benefit.
Tom: So John we’ve talked about purchasing homes, we’ve talked about student loans, we’ve talked about business equipment and what not. But the second biggest expense of most families is probably the car, that’s probably the second biggest ticket item that they’re going to buy. Does it make sense to borrow money from a life insurance policy to buy a car today?
John: With interest rates so low, generally you can get a lower interest rate than the policy interest rate is charging. For example, a few months ago we went to buy a car and the effective interest rate was a 0% offer. But there’s two different prices, one for cash, paying cash, it’s a little bit lower than if you finance it. So that means that there is a little bit of interest worked into that. The interest rate came up to about one 1.6% interest. Still that is lower than the interest on a policy loan that we can get right now anywhere from 4 to 6 percent.
So in that case it makes sense to take the bank loan, because we have the money in the policies that we could pay off that bank loan if we needed to. It’s not like we’re going into debt because we have the money as collateral to back that up. So, it just makes sense to use the cheap money.
Now here’s the thing, we can go ahead choose to pay ourselves back like we were paying 4 to 6 percent back to the insurance company. Hey, we might even choose to pay 8% back. It’s a way of disciplining ourselves to save a little bit extra.
Tom: So how do we do that. We still have the payment now to the car and you know we’re paying them 1.19% or whatever it is and we make that payment monthly. So how would we effectively pay ourselves 8%?
John: Well you could simply create another amortization schedule. I have a frog in my throat. You can simply create another amortization schedule at 8% or use a quick financial calculator to figure out what the payment would be at 8%.
Then you take the difference between the payment for that number that you get from the calculator and the amount that is going to the car company or the financing company every month, and you simply put that into your money manager account.
Tom: So then you know this goes back to the three D’s, you know you’ve got a desire, you’ve got to make a decision, you might have to make a choice and you have to discipline yourself. Those are the three things, the three D’s that make the perpetual wealth code work. Without them you’re just buying a life insurance policy.
John: And that could be a great asset.
Tom: It can be a great savings account, an asset, it can be a great benefit for your loved ones after you pass, but it’s not going to magically produce lots of capital for you. It takes desire, determination and discipline.
So, the discipline to make that payment is made a whole lot easier by going to moneytools.net and setting up those little amortizations, use the little calculators to find out what the difference would be if you had taken a policy loan and chosen to pay it back at 8% and just make sure that contribution gets back put in your money managers account or back into the policy if you want to.
John: That’s totally, exactly right. In a nutshell that’s the process. And of course, it varies a little bit depending on what you’re financing and how you’re implementing the perpetual wealth code in your life, and that’s what we’re here to help you with.
Tom: It’s all about money management, that’s where it boils down to and that’s why we record these podcasts every week. Because we want you the listener, to understand the facts about what it means to leverage life insurance and have it grow wealth for you. Without the facts you might be led astray and to think that the policy itself is going to meet the magic bullet.
But it takes desire, determination and discipline and that’s why we wrote, Winning Your Financial Game. It’s because it gives you the 20 mindsets that you have to change in order for this concept to work for you. John, we just finished a study guide for Winning Your Financial Game and that’s available to our listeners if they want to call our office 702-660-7000. That is a powerful study guide that’s going to take you through the process of changing the way that your mind has been programmed to think about money so that you can be your own money manager and win your financial game.
John: That’s right, and in a few resources for today as we’re talking about buying large ticket items. We talked about funding the education. There’s a video on our YouTube channel. You can check out for example how this works, by implementing life insurance in the process. You can also on our YouTube channel look up the car financing video, see how this process works for financing cars, and then you can also for doing real estate and buying your homes, things like that. You have a video that’s on our YouTube channel as well about having fun with the real estate. The presentation that you gave at one of the previous wealth summits. Great resources, you can find them all of those on our YouTube channel, and we’ll be back here next week, where we talk about solutions, money and other things that create wealth in your life.