401k Plans Cause Credit Card Debt – Episode 370

This transcript was auto-generated and may contain errors.

[00:01] Well, Kim, one thing that you always do is read books. So I’d like to start out the podcast finding what’s the favorite book you’ve read recently. Eleven Rings by Phil Jackson, the basketball coach of the Bulls and the Lakers fame. A to die for book even if you do not like basketball or any of its players at all. It was a genius book. I loved it and it referenced another book which I read a long, long time ago that I now want to reread called Tribal Leadership. And the most amazing thing about the Phil Jackson book is that the teams that went to level four and five, which I’ll explain here real quickly, were able to win championship after championship after championship and the teams that got stuck at level three

[00:58] could only win one. And it’s because level three is I’m great and you’re not. So think like the early days of Michael Jordan, the early days of Dennis Rodman, etc, right? Like we all remember them. They were so obnoxious. Level four is we’re great, but they’re not. In other words, our team is awesome, but the competition is lousy and so we can kill them. Are you ready for level five? I am. I hope that it evolves to something even better. It is. It’s we’re great, the competition’s great, the refs are great, the people that clean the gymnasium are great, the fans are great, and we are all in this together. That is some serious innovation and cooperation. Yep. And those are the teams that won three, four and five championships in a row.

[01:58] I’m going to do this and this is something you don’t know. But I want to say I feel like this podcast that we’ve created is a level five. Like we have got the most amazing listeners, would you not agree with that? I do. And I’m so grateful because they send in awesome questions. And also, as you know, we have stated publicly, like we don’t view anybody out there as competition. Like there are other life insurance agents that listen to our podcast and get value out of it. And we love that. And there are prospects who may never become clients, but they get value out of our podcast. And we love that. And I could go on and on. And it is, it’s a teamwork effort. Everything is. Absolutely. So one thing that you can do as a listener is send in your questions so that we can talk

[02:52] about it on the podcast. So today’s topic actually comes from someone other than us, which means that it’s a topic that’s circulating in the brains and we should discuss it. So it’s going to be about 401k plans and how they cause credit card debt. When I heard this, I didn’t correlate 401k plans and credit card debt and the causation. So let’s start there and really roll up our sleeves and get into it. Absolutely. And you’re right. It’s a complete disconnect when you hear just the sentence, 401k plans cause credit card debt. You’re like, those have nothing to do with each other. Well, yes, they do. And here’s why. And especially this has been evident in the spring and summer of 2020. And that is because people, especially younger people, start out and they are told to

[03:43] max out M A X to max out their 401k plans, all of their savings ability, like savings as a verb, the act of putting money away, typically is going into that 401k plan, which is now locked up until they are 59 and a half and not available, especially if they’re still employed at that particular employers without taxes and penalty. And so because their sometimes only asset is now locked up and untouchable, they are forced to turn to credit cards. If an emergency comes up, if an opportunity arises, if they lose a job, if they need money for whatever reason, clearly there’s nothing wrong with using credit cards every month and ideally paying them off. I would even go so far for the younger generation who’s just starting to earn

[04:40] an income and just starting to build savings. If something big comes along like a plane ticket and you need to take two months to pay it off, there’s nothing wrong with that at all. However, what’s happening is because people are out of work month upon month upon month and or maybe they’ve been furloughed, which if they have, they may not even have access to their 401k and they are forced to turn to credit cards. So the fact that they maxed out their 401k and didn’t instead start saving money in a boring, liquid, controllable savings account at a bank or frankly money stuffed in a jar or literally under the mattress, but money that to use our old clue acronym that we like so much, C for control is money where you can control it, L for liquidity,

[05:44] is it liquid so you can use it now, U for use, can you use it for whatever you need to use it for, emergencies or opportunities and then E for equity, I mean maybe that’s going to come a little later, but do you have the ability to control money that’s liquid so that you can solve problems with it and our current younger generation and many many many of our older generation do not have assets other than their 401k plans and so that 401k plan is causing them to get into credit card debt. Now, has the credit card debt that we’re talking about here, I would imagine that that is mentally taxing on them because it feels like one, they’ve added it and two, now they’re trapped in something that they can possibly never get a hold of.

[06:34] Have you seen the same thing happen to a lot of people? Yes, absolutely and it really saddens me because it is the recommendation that is given out across the typical financial planning space. Every article you read, every person that you talk to, my son who’s been at work now a couple years, he had to just literally stop listening to people who were badgering him about contributing to his 401k because he did not want to have his money locked up. I’m taking notes of this because there are a few things that I think are correlating to that. One, I remember talking with a friend of mine that has ownership in a payday loan place. Now, some people, we can frown upon that, we’re just going to look at it as information

[07:25] only. Now, he owns this and he explained he wanted to change the industry because the interest rates are so high and he wanted to make it possible so that these people wouldn’t be using their services. I know that sounds strange, but he wanted to make their lives better. They provided education, they provided opportunities, no one wanted it. He said the typical person that came there just wanted to have cash on hand. It’s like they didn’t realize what their opportunity costs were and what kind of trap that they were getting into. We’ll call that a blue collar problem just to summarize and the 401k problem would be more of like a white collar problem. That’s how I’m kind of seeing it in my head.

[08:13] I would agree and it’s so prevalent in our society and sad that people don’t desire a little more education, a wider perspective, and yet every human being, me included, gets stuck into mental paradigms like that from time to time where we’re just blinded or worse because we think we know something or we think we know what we want or we think we know what we don’t want. We’re not even open-minded to stretching just a little bit to see a different point of view. If you’re sitting across from the table, someone that’s 35 years old, they are looking to transition, new careers, so they get to talk with a new HR department. How would you paint the new path, a new vision for them, Ken? Absolutely. My first question is where do you store your cash? What do you have in your

[09:15] savings account that’s extra in your checking account? Not next month’s bills, but what’s extra? Where are you storing your liquidity? I guarantee you nine out of 10 people do not have a good answer for that. Either number one, they have no liquidity or number two, they have it, but they don’t have a good place to store it because here in the middle of 2020, and this has been the case for quite some time, the, quote, normal places to store such liquidity are the bank savings accounts, which are earning less than 1% and are taxable and have a whole host of other issues to go along with them, or the brokerage house’s money markets, which are also around 1% and taxable and have an even larger laundry list of issues

[10:06] to go with them, number one of which is they can actually be less than a dollar per share, which means you could put in $10,000 and only have 9,500 to show for it. Let’s hope that doesn’t happen, but it can, and maybe bonds, maybe CDs. These are the places that people store cash. They don’t have a good answer. Either they don’t have any, they don’t have a good answer, or they have it, but they don’t have a good place to store it, so they don’t have a good answer. I think our listeners, one, need to look at their situations, assess it, have some cash, have it at home. I know it’s kind of hard if you think about that mattress money, because it’s not doing anything for you. One of the things that you’re stating right here is to have cash. Have cash on hand so that you have control

[10:47] and so that you can make wise decisions and you’re not subject to whatever else happens, because I think 2020 has been the craziest roller coaster that we have seen in a long time. Is that right? Absolutely. To finish out too, your question for that person that’s going to now go to their HR department, assuming that they already have cash stored, then they could go ahead and contribute to their 401k plan, but only up to the match level, MATCH, not MAX. And there are a lot of companies these days that are not even providing matches, and so if that’s the case, I think you need to seriously consider whether you want to be locking money up or not, and yet those that do provide matches, that’s a pretty easy decision. Yeah,

[11:37] contribute up to that match level, but not to that MAX level. You’re so much better taking the difference and paying taxes on it and storing it in a place where you can get your hands on it. Wonderful. Well, listeners, this was a question that came from an outside party, so this was a topic that you wanted to hear. We wanted to cover it on the podcast for you. If you have additional topics or questions, please send them in to hello at partnersforprosperity.com. Thanks for listening to this episode. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.