Debt: Easy As Pie – Episode 022

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your hosts, bestselling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have my co-host, bestselling financial author, Kim Butler with us. Welcome, Kim. Thank you, Todd. I’m so glad to be here. Always looking forward to our discussion and we’re just loving our listeners’ comments and so happy to answer questions. It’s interesting in today’s world. People really like to dig around and kind of do some of their own research and a

[00:45] podcast is a great way for people to get some information that they may not want to share face to face with an advisor or even over the phone. So we welcome the questions and we’re happy to tackle them as specifically as possible. We’ve got some good questions today that I think we’re going to pick up in a further discussion about mortgages. Super. And what we’re going to be talking about today is we’re going to be talking about debt. And a lot of people would say, well, you know what? Debt has absolutely nothing to do with investing. And I think the first thing we would want to say is if you think that you can keep your debt separate from your investments, then you are trying to look at two halves

[01:27] of the same pie and you need to realize that you’ve got one pie. What do you say to that? Absolutely. I love the analogy on the pies. And I always will use somebody’s wallet as a similar comment where you have one wallet and it’s affecting everything in your entire economic environment. In fact, I’ll also use the term personal economy. You have only one personal economy. And so you have to look at both debt and investing. You have to look at both insurance and investing. A lot of people will also try to separate out that insurance bucket. And then there’s another comment that I hear from time to time, and that’s the difference between having debt and being in debt. And I think that’s a critical distinction as well, especially those that like to

[02:17] take a very biblically based approach to their life. The concept of having debt versus being in debt is very important. And just as a quick description, having debt is, for example, having a million dollar home and a $800,000 mortgage. Being in debt is having a million dollar home and a million five mortgage and no other assets or a $20,000 credit card bill when you’re 18 and don’t have a dime to your name. That’s being in debt. So that’s an important distinction as well as the connection of every literal piece of our personal economy. It’s all connected. Our insurance, our debt, our investments, our savings, our income, our taxes, our net worth, our cash flow. It’s all one pie, one piece of the personal economy.

[03:11] Absolutely. Well, let’s jump right into our listeners questions here. And the first question is going to be about peace of mind and about being debt free and about how peace of mind is about banking on yourself or getting away from banks. And is it possible to have that peace of mind and get away from banks and still be connected to the banking world by having a mortgage? Absolutely. So there is definitely a school of thought out there that says disconnect from every bank and mortgage possible. And as a matter of fact, there’s even a group of people that are trying to help get rid of the Federal Reserve. And just like a couple of shows ago, this is not a political commentary. This is a financial or an economic commentary.

[04:00] And I have to admit, I think the Federal Reserve doesn’t really play an important role. I mean, they try to, but they really shouldn’t be playing an important role. And so I would be fine if they did away. But when you’re looking at our own personal economy, there’s a difference between trying to disconnect from the banking world in terms of borrowing for larger opportunities, investments and running our businesses and doing that kind of thing. And mortgages, mortgages hold a place in the debt environment different than any other loan out there. And that is because of their current tax deduction. So the understanding that getting out of a mortgage may provide some peace of mind, the understanding that there’s a school of thought that

[04:51] says you do not want to have any debt with any bank of any kind, that is not an economic decision. Neither one of those are economic decisions. So if your peace of mind dictates you having to pay it off home, then that is what you should do. Even if that’s not the best economic decision. And if your peace of mind says I don’t want to have a relationship with a bank in any form, no matter what it does to me economically, then that’s fine. Pay off your mortgage. But for everybody else, and since the bulk of our conversation is the most efficient economic environment you can get your personal economy on the most efficient basis, then we want to look at mortgages differently than any other debt out there for a couple

[05:35] of reasons. One, the tax deduction that I’ve already mentioned. And two, the control. And I have to believe that control of money, control of dollars where I do not have to go to a bank to ask for them is more important and actually gives me more peace of mind than having that money tied up in equity in my home. Now, you could argue that if a paid off home is control, possibly, but we know that you still have to pay taxes and you still have to abide by whatever rules around like, for example, if you live in a community that has a homeowner’s association where they could take your house away if you’re not abiding by the rules, that’s a different story. But you as an owner want to control your assets and a paid

[06:27] off home does not put food on the table. Well, and I think it’s important to remember too, especially if we’re listening to our grandparents or in this case, I guess you might even have to go back to your great grandparents or if you ever want to see a good movie, if you watch It’s a Wonderful Life, the way the mortgage business used to work was that a lending institution, a financial institution, whether it be a bank or a lending company would lend money out while they were taking deposits in and the only way that they were able to satisfy those depositors was to be able to call the note. So literally what could happen is, is it was completely possible to make all of your mortgage payments on time

[07:13] and then be told, look, you’ve got 60 days, you’ve got 90 days to come up with the balance of your mortgage. Otherwise, you could go into foreclosure. And I think this created a fear in this country that the only way you knew that you could keep your house was to pay your mortgage in full and you had the little mortgage burning party with the silver tray and all of that. We don’t live in that environment anymore. There are no callable mortgages like that anymore and some of that fear and phobia has transferred from one generation to the next, even though the reason for that fear and phobia has long since been forgotten. What do you think of that? Well, that’s very true. And it’s like a lot of things that we listen to our

[08:03] parents and grandparents and do what they say. And that’s a good thing. We should, but you also should also always dig deeper and find out for yourself what the whole truth is. One of the sayings that my husband, Todd Langford, loves to put forth is if something sounds too good to be true, you need to do more research. Whereas that saying usually ends if something sounds too good to be true, then it probably is. So with mortgages, it’s tough to do research because there’s so much misinformation out there. And as we talked about on earlier podcasts, it’s often that the mortgage isn’t even analyzed properly. So if peace of mind is our goal, then yeah, maybe we pay off the mortgage. But I think the listener had some other questions.

[08:55] Let’s see if we can dig in on this a little bit deeper and get some clarity around the mortgage and the whole truth around the mortgage and where the best place is for extra money. Should we be prepaying our mortgages? And what about when we’re older? What do we do with that timeframe? Super. Another one of the questions is the issue of how much interest I pay to the mortgage company over 30 years versus the income tax deduction. So it’s the IRS versus the mortgage company is the way he phrases it. Yeah. Wouldn’t we like the IRS to compete with the mortgage company? Well, it is true that with mortgages today, we do get to deduct our interest. And it’s one of the few remaining deductions that are available.

[09:38] And it is also true that with the 15-year mortgage, you’ll pay less in interest. But what is not true is that that costs you less. And we have to bring around our principle of prosperity that is measure, which is principle number three and the measuring of opportunity costs because we always have to look at an interest rate applied to that interest deduction and what that money can turn into. And so this brings about the comment that people will often also bring up, which is, well, do you really invest your tax savings? So here we are, we’re in a 30-year mortgage, we’re paying the higher interest and we are then getting the tax deduction. Do we really invest our tax savings? And the answer is yes.

[10:35] And that may surprise people because most people think they don’t invest their tax savings, but they do. Because if you do not have to pay more to the tax man, then those dollars stay invested. And even if your quote investment is sitting in a bank account, those dollars remain on your side of the table, they’re in your economy. So yes, we actually do quite literally, naturally, automatically invest our tax savings, or I guess we could say we keep them invested. Got it. All right. And then of course, the next question that we want to move into is concerning the issue of a reverse mortgage. One, should you be in a hurry to pay off your house so that you qualify for a reverse mortgage? And then two, how do you feel about reverse mortgages in general?

[11:29] Well, I’ll answer the second one first. I love reverse mortgages. They’re tax-free income, they’re fabulous tools, they’re very, very helpful, they’re under a lot of attack. Some people don’t like them, some people don’t feel that they’re safe, the government, of course, is heavily involved with them these days, so they’re going to be changing as we go forward. But I think the real question is, do you put yourself in a position to be able to take advantage of a reverse mortgage? And I would say maybe, or depends, like so many answers are, so let me cover both sides of it. If you’re, say, in your 60s, and you want to work towards getting a home paid off in the next, say, 20 years or even 30 years,

[12:09] and then turn around and do a reverse mortgage in your 90s, that is a fabulous strategy, and I’m all for that. If you’re in your 30s, however, and you want to work on paying your mortgage off in 30 years, say, by age 60, so that you could do a reverse mortgage then, that I am not a fan of. You’re going to get better reverse mortgage results in your late 80s and 90s. So, of course, I can hear the naysayers, oh, my gosh, I’m never going to live that long. Yes, you are. For most people in their 60s, they’re easily going to live well into their 90s, and some of them well over 100, even 110. For people today in their 30s and 40s, we’ll easily be living over age 100. I mean, there’s just more and more proof of that every day,

[12:56] and, of course, medical science is continuing to improve, and people’s life expectancies are getting longer because we’re getting healthier, et cetera, et cetera. So the reverse mortgage is fine, but I don’t think that that should be the goal. The goal should be to use your money, all of the extra dollars that you have, the most efficient way possible, all the time. So if when you’re in your 60s to 90s, let’s say, and you don’t have anything else to put your money into, if you want to go ahead and prepay your mortgage, then fine, turn around, do reverse mortgage. That’s great. That can work. But if you can find investments that are safe, that are better in rates of return than your mortgage cost,

[13:38] then you’re better off putting that extra money in investments. Now, of course, first of all, we want to put extra money in a place where we can get at it. A liquid account, cash value of life insurance is great. But once you’ve got an emergency slash opportunity fund, you’re better off adding to the life insurance and then moving on and doing investments. And it’s pretty easy to find investments that pay more than the mortgage costs. So I guess that means we would be better putting our money there and not prepaying the mortgage at all, no matter what age we are. Super, which leads us right into the last question, which is, if I have extra monies per month, am I better off to pay it to the mortgage company

[14:24] or to start whole life policies? Yep. And the easy answer is, from an economic standpoint, you’re better keeping control of your cash, which means you put money in a place like a whole life cash value where there’s no taxes, where it’s completely liquid. You can literally liquidate it, or as we know, you can borrow against it. Because if you put extra money against a mortgage, that money is potentially gone. Not only does the bank control it 100%, but the value of the house could go down and wipe it out entirely. Or you could have your house taken from you because even if you’ve paid extra on your mortgage, if you’re not current on your payments, the bank can and will take your house. So any time the house is partially paid off,

[15:16] literally up to 99.9%, it is at risk to be taken by the bank. Now, of course, hopefully that wouldn’t happen. You keep making your mortgage payments, but why not have the control? Plus, you still have the issue of a paid off home does not put food on the table. I can’t tell you how many times as a banker I have had people make double house payments. So let’s just use, for example, $2,000 a month on $1,000 a month house payment for a year. At the end of the year, the person loses their job and that minimum $1,000 a month house payment is still due. The extra $12,000 that they paid is meaningless. And worse than that, because the person has lost their job, they no longer qualify for a mortgage.

[16:05] So I couldn’t lend them the extra money that they paid back if I wanted to. Yep, it’s not an efficient way. And we do it because we’re afraid and clearly that’s not a good thing to do. So keep educating yourself. We have lots of material on our website partnersforprosperity.com and the download that’s available there is called Financial Planning Has Failed. We address the mortgage very briefly in it, but the seven principles are there. And if you can put those seven principles on your bulletin board and look through them every time you’re thinking about making a decision, then I think it will help you make stronger financial decisions with a base of economic reasoning behind them. So partnersforprosperity.com,

[16:54] what you’re looking for is the Prosperity Accelerator Pack and that will have some information for you. And then in another, I’m not gonna promise, 30, 60, 90 days, we will have another book out called Busting the Interest Rate Lies and it gets into the mortgage discussion very thoroughly. Got it. And then did you have a free gift for our listeners today? Absolutely. Financial Planning Has Failed. And so the link to that is, hmm, help me. Do you have that on the top of your head? Is it partnersforprosperitybackslashebook? I think so. partnersforprosperity.com slash ebook. So you can either sign up for the Accelerator Pack and get the ebook and all the other information or you can just go to p4p.com slash ebook

[17:45] and get the book itself called Financial Planning Has Failed. Super. Well, this is No BS Money Guy Todd Strobel again with our special guest, Kim Butler, saying thank you so much and keep sending in those questions. We do take them very seriously and we’d love to make a show just to answer your questions. Take care everybody. 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.