Optimizing Money Movement – Episode 601

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[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, this episode is about money movement. Kim, why is that one of the principles of prosperity and why do so many people not apply it and understand it? Let’s dig in. What a great subject. So it’s one of the principles of prosperity because it’s a principle of prosperity. So just let’s go back to 1999, which is I think the year that I sat down and wrote those seven principles. And these are economic principles that are brought down to the level of personal finance. Typically when we think about the word economic, we think super big and global or at least country-wide, yet our personal economy is a thing. Our personal finances are part of a personal economy.

[00:56] Each household has their own economy, if you will. So these seven principles apply both economically, globally, as well as individually. And it is crucial that money move. However, in personal finance, it typically does not. Let’s again go back. Think about the economy. We saw what happens when money does not move in 2020. And we saw it in 2008. And we saw it in 2001, I think was the last time that we had. It’s not just a stock market crash that causes the problem. It’s whatever things are going on in the economy that makes everybody fearful and everybody pulls back. So using 2020, the most recent time, that is such an example of what happens when money doesn’t move. Things got scary. So why do we in our own personal economies put up with the lack of money movement in

[02:04] something like a retirement plan? Why do we put up with the lack of money movement in something like a 529 plan? Why do we put up with the lack of money movement in something like prepaying our mortgage? I mean, if you look at just those three things, those are all examples where money goes into a box, call it home equity or your retirement plan or your kids’ education account and does not move. Now, I get it. You may trade your retirement account. You may move mutual funds around in your 529 plan. That’s not moving. That’s just circling around in the same space. That’s like going to the gym and standing there and turning circles and saying, I went running. OK, so what can we do instead? But let me stop.

[02:50] Spencer, is the lack of money movement in personal finance clear? Yeah, I think so. The avenues that I’ve seen people talk about this, one, I would say generally people don’t think about prepaying a mortgage as lack of money movement or a 529 or a 401k as they don’t think of it. But when you examine the science of it, the mechanics, then there’s no movement. I think that most people are thinking of. They tend to go to extremes. They’ll say, oh, well, but day traders, they’re moving too much and we’re not talking about that. And then we talk about, you know, it could be saving a certain savings account where there’s not moving. So the principle that I get from this and I’ve seen from you time and time

[03:40] again is the movement piece. There has to be there. There’s also a control piece and these mechanisms are connected. So that’s the framework that I’ve seen from the typical world and then your world of piecing the two together. Well, so well said, because control is the fifth principle of prosperity and the principles are in an order for a reason. And you can’t typically move money if you don’t control money. So to support your statement of people don’t see funding a retirement plan as a lack of money movement because you think, well, I took dollars from my paycheck and I moved it into the retirement plan and then it came to a screeching halt. I took money from my savings account and I put it against the principle of

[04:38] my mortgage so that I could reduce my interest or reduce my debt, whichever the goal is. And then it came to a screeching halt. So that is where the problem lies. So think about this. We have been taught from the financial institutions, from the banks, from the mortgage companies to put our money to something. If you’re watching this on video, you can see my hands. The money goes to something and then it comes to a screeching halt. What we want to do instead is put our money through something. So again, if you can see my hands, money going through something can then go on to the other side and do other jobs, which is the seventh principle of prosperity, which is the multiplier effect. Well, hold on a minute.

[05:33] Now it sounds more complex, but it doesn’t need to be. Let’s use a typical mutual fund as an example. So this is not in a retirement plan. This is not in a 401k, 403b or 529 education or anything else. It’s just basic after-tax mutual funds. Well, what the brokerage house or your stockbroker wants you to do is to put that money to that account and then leave it alone. They want you to leave it in there and let it do its good job of, Oh my gosh, here’s the average of the, you know, fill in the blank, S&P 500 or whatever average you’re quoting. And if you just put the money to this account and leave it alone, it’s supposed to do its roller coaster ride and do a good job. Well, did you know that on the very application that you sign for

[06:30] opening that account is the strategy. So money movements are typically strategies. Mutual funds are things that we buy the strategy that we apply to the mutual fund is what we do. Products are things that we buy strategies or things that we do on the paperwork for the product called the mutual fund that you are going to buy is the strategy for what you can do to keep the money moving. You just skipped over it. So Spencer, I know you’re not a huge mutual fund fan, so you may not know the answer to this, but do you know what box you need to check in order to keep the money moving? I have no idea. I honestly, I have no idea. It’s cause you haven’t bought a lot of mutual funds. Wonder why. Yeah.

[07:23] So what is it? Do not reinvest or it’s often worded as pay in cash. So the dividends and then usually separately the interest and sometimes even separately from that, the capital gains. So three potential areas, dividends, interest, and capital gains are typically in default mode, reinvested, right? The financial institution wants you to put that money in there and leave it. Reinvest, but if you will check the box, pay in cash or do not reinvest the dividends, the interest and the capital gains, you will get money moving because what will happen is your principal went in and it stays in the account, but the dividends, the interest and the capital gains came out on the other side. They went through the account and now you can take those dividends,

[08:22] interest and capital gains paid in cash. And this works really well if you have the proper structure to make sure that you’re capturing these and they’re not just getting dumped into the checking account and spent. And you could go buy something like term insurance to increase your death benefit, a liability umbrella to increase your protection or some other thing. Maybe it’s your vacation account. It really doesn’t matter what it is, but taking that money that goes through enables the movement of money to get you the multiplier effect, which means that your dollars are doing more than one job and the financial institutions giving you the ability to do it. We just don’t. So people don’t do it.

[09:05] And I’m going to use the argument that I hear every single typical book say, you know what I’m going to say? I’m paying interest. All right. So how do you just take a shotgun and blow a hole through that? We’re not talking about piercing. We’re not talking about popping the balloon. We’re just saying this just obliterate. So the financial institution wants you to compound the interest because then the account gets bigger and they get more money. So that’s problem number one. We have to realize that right off the bat. And most people do realize that, you know, we know that these institutions make money off of us. Well, that’s absolutely one of the way because a bigger account gives them bigger fees.

[09:51] That’s what compound interest does. A bigger account also creates larger taxes. So I’ll share a story that I have shared with before, where this point alone came to hit me like a ton of bricks in a way that I had never realized before, even though I intellectually understood it. I had a young couple that got an inheritance and let’s call it a hundred grand. It went into the mutual fund and they reinvested and the increase in the account caused such a big tax bill that they couldn’t pay it with their normal tax structure. They both were employed. They were both employees. They both had taxes taken out of their checks, but all of a sudden here is all this dividend interest and capital gains coming through their environment, but not in a way

[10:52] that benefited them. It stayed in the account and made the account bigger, but it was still taxed to them on an annual basis and they couldn’t pay the tax. So they had to liquidate some of their inheritance, which made even more tax so that they could pay the tax on the first part of the inheritance. I saw your reaction. I had the same reaction. I was floored and ever since I have realized that if you have a compounding account, if you have an account that’s growing, you’re going to have taxes that grow and grow. And, you know, we’re so focused on reducing our taxes. I mean, somebody talked to me yesterday. They were ready to go buy this aggressive real estate deal that they didn’t even fully understand just so that

[11:37] they could get a tax benefit when maybe all they needed to do was stop some really simple taxation going on like our emergency opportunity fund. Most people’s emergency opportunity funds are in what these days? High yield savings accounts. Taxable. Stop that. And if you have mutual funds that are outside of a tax deferred environment, like a retirement account, so if you have mutual funds that are taxable, stop that and shave the cream off the crop. Take the dollars that move through. Bring those out as they come out the other side. Go use that money for something else. You’re still going to have to pay tax in year one. But if you do what I just suggested, you will not pay tax in year two through 200, like as long as you live.

[12:38] And so this idea of compounding interest is valuable. I mean, yes, we want to do it some of the time, but we need to be super conscious of what it’s doing to us, how it’s affecting us, and especially for people that are trying to still grow money where compounding is so prevalent. It is not always the best strategy. You know, the lessons in here are about the movement of money, but the deeper lessons are being able to explore and understand the games that we are playing and some of those games we’re just up to our neck in, and we don’t realize the game that we are in. Absolutely. And we’re fish in water. Exactly. They’re, they control what that is. And you can only move so much. I mean, that’s great.

[13:40] If your life is relegated to a very small pond and that’s where you want to be controlled. Sure. You get free movement within that area. What you’re teaching is from our previous episodes. We’re going to think prosperously. There’s, there’s not limitation to it. This is really helpful, Kim. What would be a final call to action or point for listeners? Is there an exam of looking at what’s going on and what areas don’t have movement? And then what’s a first step to getting that? Absolutely. So let’s just go back to the three that we’ve talked about. I’m guessing most of our listeners are not pre-paying mortgages, but still that is a thing. So if you’re doing that, please stop doing that. And let’s look at those dollars going somewhere else.

[14:35] And on the qualified plan arena 401k and 403 B retirement plans, make sure we’re only contributing up to the match level M A T C H anything over because most people recommend that you contribute to the max level M A X do not do that. Anything over. Let’s look at those dollars going somewhere else. I’ll get to the somewhere else in a minute. And then the five 29 plan, frankly, all the dollars going there should be looked at going somewhere else. Now, where’s the somewhere else? The very obvious one that’s super easy is whole life insurance premiums. And so as most of our listeners know, when you pay a whole life insurance premium, you are building cash value that is not taxed. And so where our, so the fourth thing are emergency

[15:20] funds that we’ve talked about. It’s fine if you want to have a little bit in a high yield savings account or your local bank or whatever, but for the bulk of your opportunity funds, you have got to get that in an environment that’s not taxed because you’re going to have an opportunity fund for the rest of your life. And so again, the whole life insurance can be a place where by your opportunity fund is stored, still growing at about the same rates that the high yield savings accounts are growing at, but it’s not taxed, which is a huge benefit to most people because the taxation is shaving a good 30% off the return. So you think in your high yield savings account, you’re earning four when you’re really earning three.

[16:03] Well, the life insurance is going to earn four, which is more like six because of the taxation. So, and no, I’m not double counting and going those two directions. I’m being very careful with my example. So it’s very important that we look at all of our dollars and optimize them, which means to get them to do the most that they can do. We’re not trying to get them to be as big as they can. That would be nice, but usually as big as they can requires risks that often cause them to be as small as they can. Very scary. We’re seeking optimization, which is the most efficient space for the dollars where it can grow and ideally not be taxed. And if it is taxed, it’s taxed once, maybe twice and then never again.

[16:51] And we are also at the same time making sure the tax tail is not wagging the financial dog, which is kind of what my example guy was doing. Like, oh, let me get this real estate deal because of the tax benefits. Well, hold on. Let’s make sure the deal is good first. So we’ve talked about basically five specific things there. High yield savings accounts, the prepay the mortgage, the retirement plan arena, the regular mutual funds, and then the real estate deals that sound so appealing, which absolutely are appropriate for some people. But let’s do the little easy things first that can make such a difference. And am I a big proponent of whole life insurance cash value? Absolutely. Is paying your premium going to benefit that

[17:35] cash value? And so we need to remember to think about the word premium very carefully because it’s not like car and home insurance premium. Yes, it is going to benefit your cash value. Does that grow without taxes? Yes. Is that basically never taxed as long as that policy is enforced? Yes. Why am I such a big proponent of all these? Because they work. Because they work. How about focusing on the things that work? And my final take is this. They work and you have control. So they work for you, not just the company or not just your company, but they work for you, the individual. So Kim, excellent episode. Thanks for sharing for any of you listeners. If you’re trying to figure out where to prioritize, how to place this together, send

[18:29] an email to hello at prosperity thinkers.com. Thank you for listening to the prosperity podcast to take control of your money and have it work for you. Visit prosperity thinkers.com.