Creating Family Financial Liquidity – Episode 158

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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, I have our co-host and president of the Partners for Prosperity, Kim Butler, with us today. And today, we’re getting a lot of clients that say, hey, here’s my situation. I kind of want to remain anonymous, so don’t mention my name, but here’s where I am. Where do I go next? And we love these questions and this is what Kim has dedicated her life to, is trying to figure out how to take what you have and make it better for tomorrow.

[01:02] So we are going to feed her some facts and she is going to work her crystal ball and work her magic and I’m looking forward to it. Welcome, Kim. Well, thank you, Todd. I’m looking forward to it, too. It’s interesting. This is exactly how I spend my days, listening to people’s set of facts. And it is funny to me, you know, there’s two schools of thought. The first swings way to one side, which are the Dave Ramsey, Susie Orman types of shows where somebody calls in and they ask a specific question and the expert gives answers, totally not knowing the rest of the picture. And I’ll admit, that’s a little scary to me. And then there are advisors that I know that absolutely, positively must get every

[01:49] single fact and must know where every single pennies of clients are going in order to give any advice. And I think I sit somewhere in the middle, like I absolutely need to know some pretty basic facts and I want to know some things about the overall situation beyond what I’m actually going to be making recommendations about. But I’m not one of those advisors that feels like I need to have absolutely a handle on every single penny in a client’s life. So I’m sure our listeners are going to be glad for that because nobody wants to go through three dollars and ninety five cents a day for Starbucks and et cetera, et cetera. But you give me what you got and we will have a run at it. OK, well, we have a 45 year old couple.

[02:34] They have roughly an eighty thousand dollar annual income between the two of them. They’ve managed to accumulate fifty thousand dollars in a 401k. And we do have a little bit of a debt issue. We got five thousand dollars in credit card debt that they’re currently making the minimum payments on of one hundred and fifty dollars a month. They have twenty thousand dollars in car loans, which is not bad that they’re paying five fifty a month on. Here’s where it gets tricky. They have three kids, 18, 16 and 12. And life insurance wise, they have one hundred thousand dollars worth of term insurance each. But they’re trying to figure out how, you know, they’re a little behind the eight ball on the retirement.

[03:23] But they’ve got these three kids that they want to try to get through school. So where would you tell them to start? Well, that is a great question. And this brings up a often overlooked area of people’s finances. And it’s saving this family will want to find a way to save money, to continue to save money on a monthly basis. Now, interestingly enough, I would not recommend that they restrict their savings to the five twenty nine plans or the various programs out there that are state oriented, that support college education. And the reason why is that it’s so important that people and families have liquidity that’s flexible. In other words, I understand, I get it. They want to save for their kids college education.

[04:17] But I’m going to encourage them to just focus on saving for education. And removing the restriction of the college part of it, because who knows? Maybe these kids are going to end up with an awesome opportunity for travel or a great program that they want to go to. That’s not part of the typical college curriculum or some other opportunity that they want to take advantage of as a family that is education based, but is not college for a particular child. So as disappointing as it is, I think, for families sometimes, especially when the kids are those ages 18, 16 and 12, it’s critical that this family just focuses on saving and not saving for college, not tying those dollars up where they lose control, where they can only do one job,

[05:07] where they’re absolutely stuck inside of a particular asset and can only be used to serve that single purpose. But instead, that their savings is enabling them to, so I’m just going to run through the seven principles of prosperity real quick, enabling them to think from a prosperous mindset. In other words, how can we accomplish college? It’s going to enable them to see the big picture. In other words, thinking about education more than just college. It’s going to enable them to measure opportunity costs. And college is one of the big areas of opportunity costs that we forget about as parents. So let me just run through this quickly. As a parent, if you send 20 grand to a school for a year,

[05:53] you have now lost that $20,000 for the rest of your life. And the opportunity cost to the parents for their parents’ future financial success is massive, way more than the 20 grand. Now, those children, if they truly, truly want to go to school, will find a way. They will get scholarships. They will get grants. They will do work study programs. They will find a way to get to college. And this family, because the children are so much older and the family’s kind of on the thin side, shall we say, in their finances, they’re not going to be able to save enough to send college to send kids to college in the typical routine anyway. They might be able to handle it out of cash flow. But it’s going to be way better for those kids

[06:39] to just figure out how they can get it done. So are you saying that you should increase your contributions to 401K? No, I’m not. Thank you for clarifying that. So the 401K environment is also like the 529 plan environment dedicated to a single purpose, i.e. in this case, retirement, whereas 529 is obviously for college education. And so it’s so important that we realize that that is an OK way to invest, but it’s not savings. Savings is liquid money available for use today or at least by tomorrow, you know, less than one year for anything that we want. Whereas 401K clearly locked up till 59 and a half and also dedicated typically only towards retirement. By the way, I have a story that I want to quickly share with you.

[07:40] And of course, everybody’s heard of Princeton. And I know it’s very difficult to get into Princeton. But Princeton has now started a program where you go to school tuition free in exchange for a percentage of your income for nine years. No way. Where did you hear about that? It was on it was a news article that came out. How interesting. Well, and I also just saw recently where Kalamazoo, Michigan, has free college for its residents. Now, you cannot move there in high school. You have to have been in Kalamazoo during your elementary and junior high years. But it’s trying something of what must be a similar structure. That’s very, very fascinating. That will be a very interesting thing for us to watch as we progress.

[08:32] But it’s something that families need to be so careful of, because there’s a lot of families, parents that are just really obliterating their own financial futures in an effort to get these kids to school. And the kids will get to school if it is the right thing for the kids to do. There are other ways from the investor side of it, though. I mean, not I’m just saying, I mean, not only is it great that the kid gets a free education, but that’s not a bad investment to invest in somebody who’s going to be a medical doctor or, you know. I mean, I’m just saying this is a true win win situation. I mean, I just that’s the part that excites me about it, is that we don’t need to subsidize anything. I mean, the investors get a rate of return on their money.

[09:23] Sure, the losses have to be figured in or whatever. But it’s a maximum term of nine years. And I mean, think of what a doctor makes his first nine years out of residency. So you’re absolutely right. It’s a perfectly acceptable viewpoint to take that outlook on it. And for some families, that’s the right thing to do. And for other families, it’s not. And so I’ll sing the praises of those that view education as an investment, that have the capability to get their kids to school. And sometimes further on beyond just the regular four year college. And yet, what if let’s just take the other side of the picture for a minute. What if the child was interested instead in forming a business or doing some travel that would help them

[10:14] form a business and the family invested in that instead? That’s what I’m saying. It’s not the family. It’s a stranger outside person. And I mean, they probably would look at, you know, if you put together a business plan and prove to these investors that you had an idea worth investing in, they probably would invest in that, too. Got it. OK, I missed your point. I missed your point. It’s not your family. It’s I mean, literally outside. Well, really what it is, it’s Princeton graduates that have said, hey, you know, we’re going to interview a kid by kid basis. And you convince me that you’ve got, you know, not just every kid off the street gets this. You convince me that you’ve got a not only a but a plan

[11:09] after college of how you’re going to make money. And you sell me on that idea and I’ll invest in you. Very cool. I’m just thrilled to hear it. Of course, at this point, we need to bring up Peter Thiel’s opportunity, too, which is he’s one of the co-founders of PayPal. And he was paying Todd. You may have the facts on this better than I do. One hundred thousand dollars to get a kid to not go to school and instead support their business. Was that the amount? It was something like that. But yeah, no, I I am absolutely, you know, I mean, to invest. You know, I was looking at the school that I graduated from the tuition is now thirty nine thousand dollars a year. And some people came out with a teaching certificate.

[12:02] Yeah. To have a thirty thousand dollar job and spend almost half a million dollars to get there. I’m not trying to tell people what they should and shouldn’t do. And God bless every teacher that’s out there, because I believe, you know, they’re dedicated to what they do. But I mean, those student loans can never be paid off. Right. Absolutely. And as we’ve shared on the podcast, we’ve seen that in other instances where the student loans are sometimes three and four hundred thousand and the people are making thirty or forty thousand a year. Yeah, it’s not going to work. OK, so we got an eighty thousand dollar income. We’ve got a little bit of debt. The Dave Ramsey School of Thought is going to be, you know,

[12:47] get the house paid off, get the cars paid off, get the credit cards paid off. And if you can somehow another die debtless and penniless, you won. Can’t say I’m interested in that story. So, you know, this is one of those times when I would want just a little bit more facts. So I’m going to ask you a couple of questions. You can make up the answers or tell me what you think or whatever. So what kind of interest rate just on average? Are we looking at for this debt? Well, I mean, you know, they’re paying about six percent on their car loans. They’re paying 15 percent on their credit card debt. And they have about a five percent mortgage. OK, so clearly we want to go after the 15 percent credit card debt.

[13:33] There’s no doubt about it. That is a drag on this family’s environment. But the six percent, let’s see, car loan and the five percent mortgage are efficient debt. And the mortgage, of course, is deductible. So it’s probably even less expensive than that. The car, probably not, depending on the environment. You know, do they own a business? Can they deduct some car expenses, et cetera? But it’s so important to understand that there are places for as little as twenty five thousand. Now, I realize maybe this family doesn’t have twenty five thousand today. But if they can make it a goal to get to twenty five thousand, then they can get an investments that earn seven or eight percent. And seven or eight percent is better than five or six percent.

[14:19] And so if you have investments that are available at seven or eight percent, you should not pay off your debt at five or six percent. So are you saying that instead of maxing out your 401K, you should redirect those funds? Potentially. So let me ask one more question. If you said it, I didn’t write it down. Is there 401K matched? Um, actually, I don’t have that information, but go through both scenarios. OK, so assuming that it’s not matched, then I would have them consider stopping the 401K because right now, today, every extra dollar that they can put against that 15 percent debt is literally going to earn them 15 percent net of taxes and fees in their overall economy. Now, it’s not the same as earning it in an investment,

[15:10] but it’s literally getting their dollars to get that kind of growth. So if they do not have a match MATCH on the 401K, I would have them consider stopping that contribution just for a period of time. Now, if they do have a match MATCH, then I would have them lower their contribution to the match level and fund only enough to get the match and then use all those other dollars to really work hard on the credit card debt. And again, reiterating, not paying any extra on the student loan or car or mortgage debt. Sorry, you didn’t say student loan, but on the car or mortgage debt. Got it. And, you know, again, the kids being responsible for finding their own way to college in this particular situation, I mean, could make the difference between,

[16:09] I mean, being able to have a life that’s enjoyable once you stop working versus literally having to work your entire life, isn’t it? Absolutely. And sometimes working your entire life is a good thing, but everybody wants a choice and flexibility and control. So these are things that saving and to be clear again, I’m not talking about saving into a 401K. To me, that’s an investment, but saving where the dollars are liquid. And as our listeners know, but just in case you’re new to this podcast, our favorite place to save is the whole life insurance product at a mutual life insurance company, not a stock company, and not using universal life. But the beauty about whole life is that you do not have to have a lump

[16:59] sum to start it. If you have an extra hundred bucks a month or 500 a month or two thousand a month or whatever it is, that’s what you start it with. And the building of that savings as a habit and the building of that savings as in literal dollars being saved is a critical step that this family will want to take. And again, that’s another one of the things that I mentioned in the beginning that we really didn’t discuss was the fact that each of them feels protected because they bought a 20 year hundred thousand dollar term. And what are the odds that they will outlive that term? Yeah, huge. And what’s interesting is the 20 year term is not as much of a problem as the hundred thousand is. So this family, because they’ve got a lot of children,

[17:49] a lot of obligations, a lot of responsibilities, they are going to want to have more term insurance. And as big of a believer as we are in Hawaii, we’re an equally big believer in having term insurance so that you can have your family protected in the event of death. So the cheapest term insurance they can get right now is what they should go get in addition to the goal long term to start adding whole life. And that term insurance will provide the protection for their family if death does occur. That’s a super important and very inexpensive step that they can take. Awesome. And I think you wrote a book on life insurance. Maybe that would be the appropriate thing to discuss now. Absolutely. We have one called Live Your Life Insurance,

[18:39] and it primarily covers whole life and how you can use it as a savings vehicle, both savings as a verb, as well as savings as a noun to hold on to the savings, the place to store your cash, in other words. So Live Your Life Insurance is available on Amazon. It’s an audiobook. You can get it as a Kindle book. You can have it as a physical soft copy book. And it’s Live Your Life Insurance by Kim Butler. It’s a quick little 100 page read. And there’s actually a new book out there as well called Busting the Life Insurance Lies. Now, this is a much more thorough deep dive into life insurance. And frankly, I would recommend the Live Your Life Insurance one first. But the Busting the Life Insurance Lies book does go deeper

[19:23] into helping people really understand what life insurance can be doing for them and how it works, both in this case term insurance and whole life insurance. That’s awesome. And I would, like I said, recommend that our listeners reach out, start educating themselves. Again, a lot of what you may hear on this podcast is probably somewhat controversial to what their local life insurance agent is telling them, isn’t it? Absolutely. And that’s why we have fun with it. Well, once again, if you are a listener, we appreciate you. And if you want to send in your particular information, again, we don’t mention names, but we would be glad to discuss your financial situation so that you can listen to it

[20:15] because any question that you have, I guarantee you there’s a few other thousand people out there asking the same one. So again, this is No BS Money Guy Todd Strobel. Thanks to all of our listeners. Take care and we’ll see you 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.