Family Bank vs Family Banking – Episode 562

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[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, welcome to the podcast. This episode is about the family bank versus family banking. There is a giant difference between the two. If you focus on the family bank, I am sorry, you’re setting yourself up for a lot of trouble. But family banking, now that’s a conversation, Kim, are you ready? I am. Thank you, Spencer. Family lineage is so important. You’ve explained that so many times on the podcast. What is the difference between family bank and family banking? I believe that the difference is what you are doing and really isn’t everything in life differentiated by what we are doing. Family banking is a verb. It tells us that there is a process.

[00:57] It really goes back to the seven principles of prosperity and principle number four, which is cash flow, because banking is a process of cash flow. It is both money coming in and money going out. And when you can layer in the concepts of perpetual wealth, which we’ve written about in our perpetual wealth book, family banking becomes very, very clear as to what your family can be doing. The term family bank is confusing because, first of all, nobody of just general American capability can own a bank. And there are laws and rules around a bank that we can’t get involved with. And so the concept becomes confusing and we get confused when trying to learn about it. If we’re learning about banking, that’s cash flow in and out.

[01:56] And every family can do that. Yeah, absolutely. Here’s a strange question. At what point does family banking and family bank intersect? Because if you as a family have mastered the cash flow portion, if you’ve mastered the principles that are taught in perpetual wealth, then at some point, you will have a family bank. So there’s an intersection there. Maybe that’s the conclusion that we’ll get to the end of this episode. But let’s go back to the process of cash flow. That’s where you start. And that’s often most of the conversations we have here, process of cash flow. So let’s start in that area. It is so important to start in cash flow because, first of all, every human being on this planet starts there, even those from wealthy families.

[02:50] The money coming in and the money going out is so much more important than any other thing. We’ve talked about this on the podcast before. It always cracks me up when people will use comments like, I’m a millionaire or he’s a millionaire because that terminology has been used literally for decades with no adjustments for inflation at all. And what matters is not what your net worth is, which is what typically people are measuring when they say I’m a millionaire. What matters is your cash flow in and out, in and out, in and out, in and out over and over and over and over. And there’s nothing more important in an individual’s or a family’s life than cash flow. And so unfortunately, there are a lot of people on the Internet that have

[03:41] used the family bank as an individual term that associated with a whole life insurance policy, some of them even worse associated with an index universal life policy. And this is where the confusion arises because banking money going in and money going out, lending money being borrowed against and money being paid back again, all cash flow elements are natural and can occur in a beneficial way in a family. But when the noun of a bank gets involved, then, first of all, insurance companies rightly get very alarmed because the life insurance product that insurance companies provide gets referred to with that noun of bank in an incorrect way and the borrowing and the lending and the paying back get

[04:42] referred to in an incorrect way. And so there are some insurance companies that have flat out said you are not to use the term bank. You’re not to use any of the words that are associated with banks like deposits, which I believe is a fair interpretation coming from the insurance companies because it is confusion. Yet we want people to be black and white in their understanding of their finances. We want them to be crystal clear on what they’re doing, the products that they are buying and the strategies that they are using. And banking is a strategy. Banking refers to that cash flow, money coming in, money going out, borrowing against, paying back. And it’s that second part, the paying back part that is so often

[05:35] miscommunicated around this space, the paying back, especially at interest, which is a centuries old, because this paying back at interest idea was very, very prevalent in the Depression in the early 1920s in America. And yet somehow our society has really lost what really boils down to the time value of money and opportunity costs, which are basic economic concepts. Yet if you look at the landscape of financial education out there these days, none of it refers to time value of money and opportunity costs, which are an integral part of banking. Absolutely. Let’s let’s actually pick apart that. So why is it that the general population are not paying attention to time value of money and opportunity costs in this family banking concept?

[06:40] Because time value of money and opportunity costs, which are interrelated, have to be calculated with a financial calculator like an HP 12 C or a Texas instrument. They cannot be calculated with a little simple calculator that you get on your phone or a handheld. Now you can get financial calculators on your phone. And Truth Concepts has recently released a individual investor version of their financial calculators. So the five financial calculators are time, present value, future value, interest rate and payment. And a financial calculator must be made to get the answers to any of those questions. Well, human beings don’t like that. We want simple. We want the easy calculator. You know, the little handheld dude that has, if you’re looking at the screen,

[07:32] nothing other than addition and subtraction and multiplication and division. So grade school math is not the same as financial math. And furthermore, if people get hung up with opportunity costs, which is an economic concept that we all learned about in high school and college econ, but we all forgot about it because it was taught to us in the realm of these large corporate case studies. Opportunity costs was never brought down to our own individual level. But think about it. Opportunity cost is just the opposite of opportunity. So if and again, this is where time value of money comes in. If you have a hundred dollars and I get that hundred dollars from you and I’m going to give it back to you in 30 days, you’re going to want back

[08:22] more than your hundred dollars. You’re going to want the opportunity that you could have done with that hundred dollars, even if it’s, you know, buy a nice dinner, right? It it’s a trade and then there’s opportunity. Well, that opportunity as a plus has opportunity as a minus, which is called opportunity cost. And this is where people get confused. And when they want to get involved in barring against their cash value, which is a lot of the activity around a family bank, if banking is not properly taught, then people want to make those payments back with things that are flat out in correct, like simple interest, which doesn’t even exist or not paying the loan back at all, which is even worse and letting the death benefit pay back perfectly

[09:14] fine if you’re 95 years old. But the general person listening to a YouTube is not. And so these are areas where there’s just an unfortunate lack of education and thoroughness because they’re shortcutting the system and trying to get to the fun, appealing thing of the idea of family being without fully educating on the actions around family banking. You’re explaining and one, this is what’s interesting about this is that you have decades of this experience. And so you’re able to take something that’s complex and make it simple. Because I’m not a licensed advisor. I get to just ask great questions, do a ton of research, which is fun for me. And and I try and in my research, I draw a bunch of parallels

[10:04] and I look at where we are as a society and the financial education. And I’m going to lump in a few things, push back wherever makes sense. Is that cool? Absolutely. OK, so if we go for normal people in the family banking, because that’s cash flow, I’m going to relate typical people as like Dave Ramsey. You know, this could be, you know, early in careers, mid career. I don’t know where it would be. And they’re avoiding debt because they don’t have the financial literacy or financial education to make wise decisions. Is that a good assumption? Yes, I think that’s well said. And there’s even a fear element in there. Oh, my gosh, debt is bad. Exactly fear. So that’s the product that’s being sold is fear.

[10:58] I love that. So then the next level, we have a lot of people that maybe they broke and free from that. They have some savings. Everyone should have your emergency and opportunity. If you don’t have that, make sure you just like subscribe to the podcast and listen to all the episodes and you’ll hear it and be like, OK, I know I have that one. OK, so we have that in place. But now we get into a world where people are going to have mortgages. They might be taking out car loans. That’s often one of the pieces, an automobile loan where they do not factor in their opportunity cost. Will you touch on that? Why the vehicle auto loan dumping all your money into your next fifty thousand dollar car is just horrific

[11:47] and why you’re penalizing yourself. So paying cash for a car causes us to forget that while we may not have an interest payment, we still have an interest cost. And I will admit to you, as a professional, this took me years to understand. So I’ll try to explain it in a way that I can shortcut the learning curve for our listeners. If you pay fifty thousand dollars for a car in cash, you had to remove that fifty thousand dollars from an account that in today’s world is probably earning five percent because most people’s emergency and opportunity money is either earning five percent in a life insurance company or five percent in a bank. When you remove dollars from an account, that dollar can no longer earn the interest in that account.

[12:46] And then when you pay cash for the car, you are now losing the interest that the account was earning on the fifty thousand. So, again, while you don’t have an interest payment because you don’t have a car payment, you still have an interest cost. And it’s worse than a car loan because that fifty thousand dollars that you remove from your five percent account is now gone for the rest of your life. And the calculation goes fifty thousand times five percent times however long you’re going to live. That is the opportunity cost of that decision. Whereby, if you took out a car loan and let’s just pretend that the car loan cost you five percent and is a five year car loan. Well, then you have an interest payment and an interest

[13:38] cost for five years and then you’re done. And so obviously, it’s not always right to get a car loan because we’re speaking on a podcast to the public. So every situation has to be looked at individually. Nevertheless, maybe that example will help wake people up to the detriment of paying cash because cash has a cost. Your own money that you spent came from somewhere and wherever it came from, it was doing a job and you’ve now removed that ability. And so there’s a cost to that. And it’s really very easy to calculate. But it’s not spoken about in most financial education, financial literacy that I see out in the marketplace today. Yeah, it’s absolutely not. So the same could be said, and we’ve had the topic on 15 year

[14:37] versus 30 year mortgage, and the same could be said for someone that decides to pay cash for a house. I will throw one asterisk in there, which we have discussed before. There are some people where it’s just peace of mind to own the house outright, just peace of mind to buy the car with cash because that’s how they want to live. That’s OK. So we’ll call that level two. Level three that I often see is when it can actually be really dangerous on this family bank and family banking stuff. And that’s where some people they may understand finances a little bit. They may have their emergency and opportunity funds in place. They may have heard about family bank or family banking. And sometimes it gets a little squirrely.

[15:29] They start to do these things where it’s like, OK, I’ll get a home equity line of credit and I’ll juggle this around or I’ll use a family bank for everything I do. It’s the same kind of people that tend to like do the credit card points like churning where they open a credit card every several months. So they get all these miles to travel. That’s dangerous to me. Do you see it the same way? I do. I think it’s a natural human interest in getting a shortcut. But in the financial world, getting a shortcut can be dangerous. There really is no other word for it because we deal with our finances our entire lives. It is absolutely a long game. And the learning is not overly difficult yet. Very, very critical.

[16:20] It’s hard to know where to get that learning. But if you can find somebody that you trust, you can be assured that every financial that you decision, every financial decision that you make is done with clarity and efficiency. And you don’t have what essentially is robbing Peter to pay Paul sometimes literally, sometimes more figuratively, like what you were speaking about with rolling the credit cards or using the credit cards just to get the points. But then there’s that ripple effect, right? It’s what else is happening? That unintended consequence that you get maybe on your credit score, as an example, or your own habits, because you think that this vacation is free or that this particular thing that I’m going to get to do,

[17:08] I got away with doing something. So I’m all about health hacks and technology hacks. But frankly, when it comes down to your finances, slow and steady and very boring, but very efficient when the race. Absolutely, it does. So that takes us to level four, which you touched on. And that is taking that traditional approach, knowing that is long term. And from the beginning of our conversation, I said, we’re going to intersect family banking and family bank. And so taking those two together, a family, a bank itself, they know the values that they stand by. They have certain rules and a charter that they live by. A good family banking would be the same family banking as well. And family bank is going to be based off of principles.

[18:04] Now, where it messes up and we saw this happen and call it 2006 through eight is that they got away from that. And we’re kind of seeing that happen again. And so, again, let’s tie us back to those principles and let’s wrap this up with the family banking and why we’re not going to become family banks. So I’ve heard that people in their financial lives have a seven year memory, seven year memory. And so oh, wait, no, nine have been forgotten. And it’s so important to have a set of principles that you operate with. It’s why we put out our seven principles of prosperity in every form that we can, including with animals and pets, right? To help people learn the principles, know the principles, and then either choose to adopt them for yourself

[19:05] or create your own from them. And having principles clear, having values clear as family members is so, so helpful. And I’m honored that we have the perpetual wealth book out there. I am super grateful to Kate Phillips for helping me write that book. Super grateful that we have our prosperity pets book out so that the kids can do some learning around the seven principles as well. And Spencer, your team and helping us write that book. And then we have our prosperity pledge for those that want help. A lot of people are able to read prosperity pets and perpetual wealth and do all the work on their own. And that’s fabulous. But for those that want help, we have the prosperity pledge membership where they get my help implementing these ideas

[19:55] within their family so that they get all of the value. And this is something that is sustainable for not only a lifetime, but for generations. Yes, so good, so good. I’m gonna do one final tie-in, which is this. You have the decades of experience for a person to be able to have that pledge or recall like that guidance that goes through. What happens is you don’t have to take decades to learn it. You can shortcut the learning process. And I’m not using shortcut in the term of like financial shortcut. You don’t do that because simply they don’t exist. And if you think they do, this probably isn’t the podcast for you. But what you can do is. That’s a mental shortcut. Exactly, exactly. And that’s the same thing that happens

[20:51] with these family banking concepts. When you’ve gone through and again, take the intersection using that language, you have that family bank. For that second, third, fourth generation, they’ve instilled those values that they get to live in perpetuity. That’s what’s amazing. And it’s a joy to be able to guide alongside those families that are doing that work. Awesome. Kim, it’s great. I really admire that you take the work and in some simple terms are able to teach these concepts. For any of you listeners, you can go to helloatprosperitythinkers.com, send specific emails. You can also take a look inside of the show notes for the resources that we have. Thank you for listening to the Prosperity Podcast.

[21:48] To take control of your money and have it work for you, visit prosperitythinkers.com.