Case Study – Part 4: Couple Earning $45k Each a Year – Episode 172

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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 host, bestselling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome back to the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have bestselling financial author Kim Butler with us today and we’re going to be picking up on John and Jane Jones. If you’re following along in our podcast, you’ll see John and Jane 1.0, 1.5 and 2.0. Today would be John and Jane 3.0. So just in case you haven’t followed along so far, we have a recently married couple who are each earning $45,000 a year. They have a little bit of issue with some credit card debts and they’re thinking

[00:56] about buying a house and wondering about car loans and car debts and things like that and would urge you to kind of go back into those other ones if you want to do them in order or if you’re like me and you want to go from the backwards first then just realize it might have to take a little bit of time to get caught up. So anyway, today we’re on what would be our normal third meeting. Again, we try to break this into blocks that are, you know, these are blocks in an order that we find it’s best to take somebody through because it consciously makes sense. Now, some folks go through a meeting in 10 minutes and some folks go through a meeting that has to be broken into three. So just keep that in mind, we’re all unique, nobody has to be stuffed into any mold

[01:44] and I think that’s one of the greatest thing I’ve watched Kim do over the years is that she knows when to move quickly and when to take additional time. So welcome Kim. Well, thank you. That was a really nice compliment too. I’m grateful because I tend to have a bad habit of one gear and that would be fifth. And so I’m grateful you feel like I can go slow when needed. And yeah, absolutely. Some clients are really ready and some just need a lot of education. So we’re here to provide that if that’s the case. And one of the first things we did in this particular case study on this third meeting was go over our seven principles of prosperity. So our blog is littered with articles on the seven principles

[02:31] and the podcast has four or five or six podcasts about them, but it never hurts to just have a quick run through. So I’ll do that verbally today and then cover the couple of things that we hit on for that particular meeting, which was largely around the 401k that these particular clients had just been introduced to. They’d gotten a raise. They wanted to put all their money into the 401k actually a little bit before the meeting. And so we just dug in and looked at that carefully. But first we covered the seven principles of prosperity. And the first one is think. And so this is thinking from a prosperous mindset. And we do find it very important to identify that when you’re making financial decisions,

[03:17] it is helpful for you to have a prosperous mindset. In other words, if you’re feeling not confident, if you’re feeling scared, if you’re feeling like you’re in, oh, my gosh, I’m not sure about this mode, then it’s probably not a good time to make a financial decision. Like you need to go out for a walk. You need to go do a workout. You need to go whatever you need to do and whatever you need to do to gain some positivity, some abundance mentality to think from a prosperous mindset. Because if you are thinking from a scarcity mindset, can’t even say that thinking from a scarcity mindset, you will get stuck. And we certainly don’t want that with our finances. Any questions on that one, Todd, you want to elaborate a little bit?

[04:05] No, I would say that the best way to describe this is assume nothing. And I’m going to try to illustrate this with an example. I live in the north and in the north, we like to do this crazy thing called go ice fishing. And we drill holes in the ice and we go fishing. And you can fish pretty much every February. You can go ice fishing this particular February. It has been 78 degrees. If I was to drive my car across the lake that I fished on every year for as long as a generation can remember, assuming that because my grandpa did it and my dad did it, I probably would be at the bottom of the lake right now. Oh, yeah, that sounds cold. I love it. That’s a great, great statement. And acting as if or assuming nothing or some people even use the terminology fake

[05:01] it till you make it is what you need to do in this regard. Like put on your positive can do hat and then go forward. So the second principle of prosperity is to see. And by that we mean S.E.E. seeing the big picture. And a lot of people make financial mistakes when they’ve got financial blinders on, meaning they’re just looking at their mortgage or they’re just looking at their qualified plan or they’re just looking at their life insurance and they’re not seeing the big picture of all those three or two different things combined. So we want to absolutely be seen the big picture. We do not want to have blinders on our eyes when we’re making financial decisions. Now, Ken, the one question I would have to you on that is that we are

[05:43] starting to see for a while we had separate, you know, your estate attorney was separate, your accountant was separate, your insurance person was separate, your investment person was separate. We’ve kind of started to see those blending back together over the last few years, but we’re also kind of getting to the point where we have masters of none, where all advisors know a little bit about everything, but you don’t have the level of expertise like we used to have. Is there a way that you can have both laser focused experts and put them together at the same time? Yeah, that’s a really good question. I think ideally you would get experts and then have them meet together on your behalf maybe every three or four years.

[06:33] Now, of course, for some families, this is paramount and they’re doing it every year and for other families, it’s maybe not even necessary, especially with estate tax law being so clear in the dividing line. So, for example, your living trust attorney, they probably don’t really need to talk with your accountant every year, but maybe every three or four or five years, if you could have them just connect with each other or have them connect with you, that’s a really wise thing. And then your maybe real estate attorney in your account would be wanting to talk more often. So it does kind of depend on the area of expertise and of course, it depends on your family’s situation. But oftentimes, you as the owner of the money are the main point.

[07:20] You’re the quarterback. And so it’s your job to identify when there’s an area that you need to pull two professionals together and then also identify when it’s not so important and you make the decision on your own, maybe with one advisor and go forward. Super. So third principle of prosperity. So we have think, see, it’s measure. And measure seems really obvious in the financial world, but that’s actually not what we mean by this. When we use the term measure, we’re identifying opportunity costs. And opportunity costs are something that many financial advisors do not deal with at all. And you measure an opportunity cost by first identifying it. It is something that we learned about in high school and college

[08:07] economics and accounting, but it’s rarely applied to our own personal lives. And a really easy example is if you’re going to pay car insurance premiums and you are having a low deductible, which means like a $250 deductible, and so you’re having higher premiums, that could be costing an extra, let’s just call it $200 a year. Well, 200 bucks, not a lot of money, but $200 invested at, say, 5%, say for a driving lifetime of 60 or 70 years is a lot of money. And that’s an opportunity cost. So you made a decision, even if it wasn’t on purpose, by having a high deductible, sorry, a low deductible, you’re going to have a high premium. Well, if you could have a high deductible, then you’d have a lower

[08:59] premium, and again, that differential, let’s say it’s a couple hundred bucks, you multiply it out times an interest rate, times a certain number of years, and that is measuring opportunity cost. And then, of course, you want to adjust your strategy to get some of that opportunity cost back, because otherwise it’s serious ice cream cones spilled on the hot cement, gone, and we don’t want that. And again, same thing we were talking about before, the way that you see your finances at age 25 versus age 45 could make major difference in this, in the way that you measure. Absolutely, and you always want to be looking at things over a good 30-year period. I think people make a lot of mistakes sometimes measuring finances over a

[09:48] short period of time. So even if you’re, say, in your 60s, you don’t want to be measuring something just over 10 years. You want to be out there at least 30 years or so. All right, so think, see, measure. The fourth principle of prosperity is flow, and by this we mean cash flow, and we mean both in and out. So cash flow in is pretty obvious. We talk a lot on this podcast about bridge loan investments and other things that provide monthly cash flow in, but monthly cash flow out is just as important, and I don’t mean money for dinner and groceries and car payments, et cetera. I mean savings, savings as a verb, like monthly savings, which for a lot of our listeners is in the form of paying their life insurance premiums

[10:36] and their pay-to-pedition writers. So saving or putting monthly cash flow out on a consistent basis is a very critical habit to have and something that you want to make as automated as possible, which is why the life insurance premiums idea works so well. And you could do it annually as well. That would be fine, but that cash flow, both in and out is super critical. I think it’s one of your favorite ones, isn’t it? Well, you know, in analyzing somebody’s finances, if you have someone who really understands flow, an emergency or an opportunity can come along, have them devastate their net worth or reduce their liquid cash. And because they have that cash flow system in place, it will replenish itself.

[11:25] Now on the flip side, if you have somebody who has an amazing investment that is maybe appreciating, but yet they don’t have the sufficient funds to maintain the cash flow in their life, a lot of times they are forced into a selling that or bringing in a partner or something. And it ruins the projected cash flow they were looking for in the first place. Absolutely. And I’m so glad you brought up the emergency opportunity fund because that dual word is so critical and it’s such a great job to have our money do be an emergency slash opportunity fund and frankly, life insurance, whole life insurance in particular does the best job of that that I know in its skill as a liquid account, but available for use as

[12:15] well as small growth, small because it’s savings, not investing. So that’s four, which is cash flow. The fifth one then is control. And by this, we mean you maintaining control over your money, not putting it in a situation where somebody else has a fence around it or a box or some limiter on it, a timeframe wise or legal issue wise or tax law wise or what have you. So again, fifth principle prosperity is control and we want you to have control over your money. Super. I think I like, you know, this is once again, another one of those negotiable things where, you know, depending upon the amount of cashflow that you have and the amount that you have in your opportunity fund, you may be willing in certain parts to delegate that control more so if you

[13:10] think the investment is worth it. Whereas if it’s, you know, getting down to those last few dollars, you’re going to want to probably want to keep, keep as much control as you can, correct? Yes. Well said and good for identifying because sometimes absolutely giving up a little control for say 10 years is worth getting a particular investment. Giving up till you’re 59 and a half, I’m not so sure about that. All right. So the sixth principle of prosperity is move and by this we mean moving money through assets. So you want your dollars to be going in one side of the asset and back out the other. We have lots of examples of that. The bridge loans again is a good one. Life insurance, of course, is a good one.

[13:53] 401k’s as an example are not a good one. And that’s what we’re going to be heading into real shortly here as we cover this with these particular clients and their 401k plan. And then I’ll just hit the seventh one quick. And then Todd, you may have comments because move and multiply go together so well anyway, and when you’re moving your dollars, you get to have a multiplier effect. In other words, that dollar gets to do other things. It gets to do other jobs. It gets to perform other benefits when it’s movable and money that’s movable can multiply money that is multiplied is movable if the two are not there, I find if one is not there, then the other can’t happen. It makes absolute sense. And again, back to that same 401k scenario you were just talking about.

[14:42] You may feel like you’re moving or you’re multiplying your money through a 401k because you have different investment options inside the 401k, but if it can’t be moved outside or you could not use that to put it into a better multiplying situation outside of the 401k, you really have lost, well, that’d be number five control. Yes, absolutely. Isn’t it fun how they all go together? And so with John and Jane, that’s exactly what we did. We helped them understand that what they thought they were getting on their 401k was accurate only because they were looking at it over a very short timeframe. So we used a rate calculator and we said, you’ve got this much money and it’s going in and here’s the five year timeframe.

[15:34] And it looked like they were earning 15%, 15.06 to be exact on their qualified plan. But what we helped them realize that after the tax deferral benefit and after the counting for the match, which is a tough thing, a lot of financial calculators actually get this wrong. Match dollars are not actually the client’s dollars. They are the employer’s dollars. And so they bump up our rate of return. But when we pull these back down because of the management fees and the tax deferral, this particular 401k was earning like less than 4%. And so obviously that’s not good. So what we said to them is what if we could actually increase the rate of return on your 401k, though we would be decreasing the actual dollars in it.

[16:36] And of course they were very interested in having the rate of return increased, but then they were a little skeptical like, well, where would you make up those missing dollars? So what we did is reduce the 401k instead of putting in the max, M-A-X, we had them put in the match level only, M-A-T-C-H. We’ve talked about that before on this podcast, but essentially that’s the most efficient way to deal with the 401k is put in only to the match M-A-T-C-H level. So by doing that, we bumped their return up a percent or so of a spread. I think it went from four to five, which of course that’s like a 25% increase. And then we took their dollars that had not been matched. We paid taxes on them because of course, since they weren’t going in the 401k,

[17:33] they would now be coming to John and Jane’s income, paid taxes on them and then put the net difference into their whole life insurance policy. And this was the kind that had the maximum pay to petition writer on it. So that net difference was both premium and pay to petition. And we were able to make up the entire amount of money that we had lost by reducing the 401k contribution. So there was $198,000 of difference from strategy A, which was M-A-X 401k to strategy B, which was M-A-T-C-H 401k, $198,000. And we were able to make up that difference from the life insurance cash value worth $213,000. Now, of course, this is all predicated on assuming interest rates and assuming dividend rates, et cetera.

[18:34] But the bottom line is we took away $198,000. We gave them back to $13,000. And that enabled them to have more flexibility, control, liquidity, use, and equity, our little clue acronym that we use around our life insurance all the time enabled them to have more clue than they’d had before. And it enabled them to also either get rid of some term insurance that they were paying for, or go ahead and keep the term insurance and just add more whole life to it. So with absolutely no change in cash flow, we were able to increase the rate on their 401k, get them permanent life insurance, and actually have a little bit more money than the strategy they’d been using prior to coming to visit with us. And Kim, I just have to point out that so much of the information

[19:25] that you just covered is visual. If there’s somebody who’d like to see the numbers or where would you recommend they get more information on this concept? Yeah. Email us and we’ll send you a video of a similar case study. The numbers are a little bit different, but the idea is the same. And so we have these whole truth videos that we’ve been putting out over the last three or four months in our blog, we would put a link to a video and they have a special sign in and everything, but if you’re really curious about a particular aspect of the case study, send us an email, hello at partners, number four, prosperity.com. Let me know what area of interest you have and I’ll happily shoot you the specific video that addresses it.

[20:09] Again, that’s hello at partners, number four, prosperity.com. Super. Well, I think that’s a lot of help. A large portion of us just really need to see the numbers to kind of lock this in, but we have all levels of investors that are contacting us with a lot of different questions. And I just, before we leave, I want to point out that a lot of people don’t realize that that money inside that 401k is extremely limited. Some employers will allow you to borrow against it at 50 cents on the dollar. The only true way for nearly all employers to allow you to have access to that money is you actually have to separate yourself from that employer, meaning you basically have to quit your job. Is that not correct, Kim?

[20:53] That’s correct. You know, there was supposedly a legal change that made what’s known as an in-service distribution or in-service withdrawal available, but I’m not finding many people have it. So it is something to deal with. And also I wanted to point out, we have a book that covers the 401k quite clearly as well. And that’s busting the retirement lies. So if you’re interested in looking at it from a book standpoint, you can grab that on Amazon. I’d encourage you to get the physical book because there are copies of calculators in it that again, are not going to play out real well on the audio portion. Super. Well, again, these are all questions that are coming in from our listeners. We continue to, uh, to enjoy serving you.

[21:35] So keep those questions coming in. This is No BS Money Guy for the Prosperity Podcast and special thanks to Kim Butler. We’ll see y’all again soon. 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.