Debt-Free, but Out of Cash – Episode 690

Debt-free sounds like the finish line. Spencer Shaw opens this episode with the people who reach it and still come up empty: everything paid off, taxes optimized, and no answer when someone asks where the opportunity is. Kim Butler’s reply is that the point of building assets was always cash flow, and that the habit of pushing it down the road dates to the 1970s, when the 401(k) arrived and defer, defer, defer became the default. By Robert Kiyosaki’s definition, which Kim adopts, an asset is not an asset unless it creates cash flow, and Roth IRAs, 401(k)s, and many pieces of real estate do not. Kim’s cautionary tale is the neighbor of a friend in the financial business, a man around 60 with a nice home, a second home, and plenty of assets, who knocked on the friend’s door one weekend to say he was out of money. Getting assets to produce cash flow is, in her words, the single hardest thing to do in personal finance, and the thinking should start in childhood, not at the first job where everyone talks about the 401(k) and nobody mentions that the money inside it does not cash flow. There is no finish line either. Kim recalls a 45-year-old with about $4 million who assumed he was set, and points out that basic inflation triples expenses every 30 years, so the number that feels like enough today will not stay that way. For a new earner on an $80,000 salary, Kim’s first building block is unglamorous: protection. Car insurance is usually the first adult bill, and she wants that same matter-of-fact attitude applied to term life insurance and, harder still, disability coverage, so those worries come off the table and the second parallel path, wealth building, can run its long compound-interest curve. Todd Langford’s rule, quoted by Kim, that a hike is only a success if you make it both up and down the mountain covers the descent few people plan for. The practical tool is the strike number from the Prosperity Thinkers book Busting the Real Estate Investing Lies, the bare minimum it takes to live. Know that figure, whatever the zeros, and Kim says the decisions about every dollar earned above it get very clear. Show Notes

Spencer frames the problem as a sequencing failure, the same one that trips people who optimize for taxes and miss every other opportunity.
Kim allows that money in from work and money out for living is a legitimate definition of cash flow, then argues the definition that matters is cash flow from assets.
Kim notes that most employers now enroll new hires in a 401(k) automatically, so the deferral habit starts on day one.
Asked where cash flow thinking ends, Kim’s answer is that it doesn’t, and she points to the 80-year-olds in her life who still think about it, as she says they should.
Kim cites the statistics on disability at younger ages as odds that are, in her words, pretty decent, and that nobody wants to think about, talk about, or pay to cover.
Kim contrasts the two paths by speed: protection can be handled with a check or an online button, while wealth building takes a lifetime and sometimes a restart after a loss.
Spencer adds that nobody calls this the Lottery Thinkers Podcast, and describes the descent as habits already built, the right gear and the right people, and sometimes a guide.
Kim’s traveler friend set her strike number at a level that leaves room for travel, skips the Friday drink and the Saturday coffee, moves that money into a travel fund, and heads overseas while her friends wonder how she affords it.
Kim’s split for a graduate jumping from about $30,000 to $80,000: roughly a third of the difference to taxes, a third to a better lifestyle, and a third that could be saved, if it never lands in the checking account.
Kim traces the spending reflex to childhood, seven-year-olds asking to borrow a credit card for ice cream in a world where nobody carries cash and few grasp what paying off the card means.

Quotes

Kim Butler (00:01:04): “The whole point of building assets should be for cash flow.”
Kim Butler (00:01:40): “An asset is not an asset unless it’s creating cash flow.”
Kim Butler (00:05:05): “Our expenses triple every 30 years, just from basic inflation.”
Spencer Shaw (00:03:20): “All of us have cash flow problems. Some of us just add zeros to the end of it.”
Kim Butler (00:07:15): “Every person is on two parallel paths: protection and wealth building.”
Kim Butler (00:08:50): “Wealth building does not happen overnight. It occurs over time.”
Kim Butler (00:09:30): “A successful hiking trip only counts if you make it up and down the mountain.”
Kim Butler (00:13:45): “We’re wired to spend from an early age.”
Kim Butler (00:11:10): “Identify your strike number. It makes a lot of other decisions very clear.”
Kim Butler (00:14:05): “Know what to do with dollars earned over your strike number. That’s where the rubber meets the road.”

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Read the full transcript

Transcript provided by the show’s production team.

[00:00] Spencer Shaw: Podcast listeners, welcome to the podcast. Today, we are gonna be talking about debt-free but out of cash. That is something that happens to people when they have not followed the sequence of events. They’re chasing the wrong thing. I think that’s in the same people that are optimizing for tax and then they miss all the other opportunities. Kim, I imagine you’ve seen this with people as well. They’re like, “Yeah, I’m debt-free,” and you’re like, “Great. Where’s your opportunity?” And then they go, “Huh?” Kim Butler: That is the best question and the best unfortunate answer. Very well said. So yes, this is such an interesting space because really the whole point of building assets should be for cash flow. And since the, what was it, about the ’70s

[01:00] when the 401(k) came on the scene and defer, defer, defer, right? Everybody wants to push taxes down the road. They also often push cash flow down the road. And you know, today when we talk about cash flow, I think in most people’s minds, their first thought is their own monthly cash flow, money in that I’m earning by working, and then money out that I’m paying for living. And that’s a very legit definition of cash flow. Yet, if we– I mean, just even go back to Robert Kiyosaki, right? The whole definition from his standpoint is that an asset is not an asset unless it’s creating cash flow. And so you look at things like Roth IRAs, like 401(k) plans, you know, Roth or regular, like other IRAs, and many pieces of real estate, and they don’t cash flow. And

[02:00] so, I actually have a friend who has a neighbor who knew that the friend was in the financial world and knocked on his door in fear one weekend, and this is in a very nice area, nice homes, you know, this guy has a second home, lots of assets, and he said, “I’m out of money.” Right? Scary. And he’s you know, 60 or I don’t know, but in that age range. And so this is what happens to people when they don’t learn early on to focus on cash flow that comes from assets. And you know, we can skip the whole like retirement, whether it works or doesn’t work. The fact is, we would all like to have the freedom from the pull of earning all of the cash flow and having assets create the cash flow. And it’s truly the

[03:00] single hardest thing to do in personal finance Spencer Shaw: So where does it start? And then let’s paint the picture of where it ends, because the starting line, depending on where our listeners are, we often get young listeners that are, you know, in their 20s, fresh out of school. We’ve seen that and/or young families. And then we want people to have a target. And of course, the, the target’s different. I- you’ve used it so many times. You said all of us has cash flow problems. Some of us just add zeros to the end of it. So what’s, w- where’s the starting and then where’s the target at the end? Kim Butler: Well, it’s interesting that you say that because starting should be the beginning of time, like seven years old, you know, five. For sure right out of school, whatever that is, high school, college, you name it, right? That’s when cash flow perspective

[04:00] should start, and it doesn’t. I remember Robbie when he got his first job, everybody talking to him about his 401(k), but nobody talking to him about the fact that money put in a 401(k) does not cash flow. And of course, as we know, most employers these days, you’re automatically signed up for 401(k)s. So I really feel strongly that it should start in childhood. We should be learning about cash flow, money in, money out, what’s going on with it, how can we make one greater than the other? And then you asked about the end point. I don’t know. Death? I mean, Spencer Shaw: Yeah Kim Butler: there is no end point, and yet I know that people want there to be. I was talking with somebody the other day, he said, “Well, I have about $4 million. You know, I think that should be enough.” He’s 45, and he’s probably gonna live another 60, 70 years. $4 million is gonna fly because we

[05:00] forget the fact that our expenses, just basic inflation, triple every 30 years. Our expenses triple every 30 years. So there’s no luxury in an end. There’s no luxury or peace of mind in looking at a space and saying, “I, you know, I’m gonna have this.” Now, there are a couple financial products that you can purchase that will give you the peace of mind and the luxury to say, “I’m gonna have this. Everything’s fine.” But there are 80-year-olds in my life that still think about cash flow, as they should Spencer Shaw: Mm-hmm. So if we go back to the, let’s take it somewhere in the 20s and I’m, gonna shoot in the dark on this number. Correct me where I’m wrong, and I assume I’m wrong. But let’s say an out of college job, safe to say starting salary 80-ish thousand dollars. Is that safe? Kim Butler: I

[06:00] think so, yes Spencer Shaw: Okay. So 80, 80-ish thousand dollars, someone that’s responsible, resourceful. If they’re one of our listeners we know that they’re dialed in already, okay? So that’s good. What are the first cash flow things? Of course, emergency fund and an opportunity fund. Now they’re gonna start looking at cash flow. What are the, the first, the smallest building blocks they can put in? And then we’re gonna jump to the next after that Kim Butler: Well, it’s very boring, but it’s the protection, right? If you think about your first job as an adult, m- maybe you’re 18, maybe you’re 22 or 23, it’s often to get car insurance, right? It’s maybe not for everybody. I certainly know 22-year-olds that don’t have driver’s licenses. They’re Ubering everywhere, and that’s an option for some. But oftentimes the first actual bill that we pay, so if you think about an outflow, it’s car insurance, and that

[07:00] should open our minds to this space of protection, because every single person is on two parallel paths as they go through their life, and the first path is the protection path. It’s protection against liability, disability, lawsuit, death, things like that, and nobody wants to think about that. I get that. Yet we go and buy car insurance without really thinking a lot about that. Nobody really thinks, “Oh my gosh, I don’t know if I wanna think or talk or buy car insurance ’cause I might get in a car accident.” Nobody says that, but people will make comments about that around life insurance all the time. And yet, if they would just take the simple step of purchasing some term insurance, then they could stop worrying about, “What happens if I die?” I mean, it’s a legit worry, but cross it off the table. Buy the protection.

[08:00] And then what I skipped over is the middle space, which is a much harder one, in my opinion, and that’s disability. Because the statistics show that chances of disability, especially in those younger ages, are pretty decent, and nobody wants to think about that or talk about that or spend money on that. And yet, if those three areas, liability, disability, and death, so putting car insurance in the liability space, aren’t handled, then the other parallel path, so I said we’re on two parallel paths. One is protection. Well, the other one is wealth building And the challenge with wealth building is think about a compound interest curve, so like a hockey stick, right? Starts in the bottom left of your graph and goes up to the top right. That’s the curve that you want to be on for wealth building. You know, maybe it’s smooth, maybe it’s not, doesn’t really matter for today’s discussion, but wealth building does not happen overnight. It is

[09:00] something that occurs over time. You have to put money in, it has to grow. You don’t lose it. Sometimes you lose it, and then you have to start over again or, you know, back a few clicks. So wealth building is something that occurs over time, whereas protection, we can literally write a check, you know, push the online button and get the protection area handled, whereas the wealth building is a lifelong endeavor, not only up the mountain, the first part of the hockey stick, right? But as Todd Langford loves to say, “A successful hiking trip is only deemed successful if you make it both up and down the mountain.” Spencer Shaw: So, so many people don’t talk about down the mountain. Kim Butler: No Spencer Shaw: and down the mountain is absolutely critical. When you were talking you were mentioning the wealth building it’s a long-term thing. And in my mind I’m listening, I go, “We certainly don’t call this the Lottery Thinkers Podcast

[10:00] because that’s not… Or the Gambler Thinkers Podcast.” It’s just, it’s not that. It’s very intentional. Now, you’re talking going down the mountain. That means wealth habits that have already been built, so the muscle to get up the mountain. It means the wealth ecosystem, meaning you’ve got the right gear, the right people that you’re hiking with. And it also means that you have maybe depending on how difficult the hike was, you have someone that’s guiding you about it. So I think about all of those things. When we’re talking about this category of having built cash flowing assets for ourselves, and then we see people that have cash sitting, and then they see the, the, the little monsters that live in their head. They go, “Well, I’ve got this mortgage still, and I’ve got this cash in the bank. What should

[11:00] I do?” how can you quiet those voices for them, Kim? Kim Butler: I think the seeking of what we like to call a strike number, so this is in our “Busting the Real Estate Investing Lies” book, is helpful for people. So a strike number is the absolute bare minimum that would enable you to live. So mortgage payment, car payment, little bit of food, some protection, you know, the insurances that you have to have, et cetera. It’s a lot lower than a lot of people think. I mean, not for everybody, and low shouldn’t be the goal, right? We don’t wanna live our lives with a race to the bottom. But if people will just identify that strike number, it makes a lot of other decisions very clear. So, for example, I have a friend that is a avid travel nut. I mean, she just wants to be traveling, and she enjoys her home life and has a, a, a job that’s somewhat flexible, but she needs to be at

[12:00] home for long periods of time and then she can go travel. She doesn’t earn a lot of money, but because travel is so important to her, she will forgo drinks at the bar, you know, on a Friday night, coffee on Saturday morning with her friends, like whatever the things are, she will so happily avoid that. She hauls her water bottle everywhere and saves, literally, “Oh, you spent 50 bucks on that drink? Okay, then I’m putting 50 bucks in my travel fund.” So she won’t spend the money at the thing. She will literally go put the money in her travel fund, and she goes overseas all the time, and her friends are like, “Oh my gosh, how can you afford that?” Well, it’s because she chose her strike number at a level that enables all those other things. And you could flip that, right? You– And I love doing this with the younger set. “Okay, you’re gonna earn 80 grand a year. You have been basically used to living on, call it 30 grand a year,” you know,

[13:00] whatever stipends were available while you were at school or whatever. That’s a big difference. So, you know, chalk up a 30% of the difference to taxes, chalk up another 30% of the difference to just you are gonna wanna upgrade your lifestyle a little bit. That’s still 30% of the difference. So if you take the difference between the two, and that’s 100%, now we’ve got a third to taxes, a third to extra lifestyle, a third. And so whatever those dollars are, I can’t do that math quick enough, but it’s a large percentage of their income that could be saved. And what, what happens, and we’ve talked about this on the podcast a lot, is that it doesn’t get saved because it gets put into their checking account and gets spent. And they’re… They’ve been wired to spend. We’re wired to spend from an early age. This is why you have seven-year-olds asking for a credit card and or at least to borrow yours so they can get ice cream. You know, nobody has any cash,

[14:00] everybody has cards, and they don’t have any concept of what it means to pay off that card at the end of the month. So it’s a necessary step to be able to learn the habits that enable the clarity around that strike number. So okay, is it 10 grand a month? Is it 100 grand a month? It doesn’t matter what the zeros are. And then know what to do with dollars earned over that strike number. That’s where the rubber meets the road. That’s where the difference gets made Spencer Shaw: Oh, that’s great. When I look at our conversation that we’ve had, we’re, we were talking about having this cash, and we were talking about early career and these transitions that happen. And essentially what you’ve done is you’ve provided some clarity and some certainty. There are different types of protectionisms that we need to put in place. And for you listeners, if you

[15:00] are unclear on what those are, send an email to hello@prosperitythinkers.com. That’s a special email for all of the podcast listeners, because there are specific things that you can do, and earlier on in life, the lower it will cost and the better off that you will be. Kim, this was cool. Thank you so much for sharing today. Kim Butler: You’re welcome

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