How Families Build Generational Wealth – Episode 366

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[00:03] On this episode of the Prosperity Podcast, we’re going to dive in and we’re actually going to go a little bit longer and a lot deeper than we have in the past. So Kim, in our pre-conversation, you and I had a lot of things that we’re going to cover. This is very exciting. Me too. I love covering these things. And you’re right. We don’t get a chance to go deep because we love our little 20-minute format, but I’m excited for this longer version, a special episode. Yes. So I think here’s the premise of where I want to start from. And I’m going to set the stage with a recent problem that I solved. And then what we’re going to do is be talking about typical versus traditional. So listeners, I want to help you understand where I’m coming from.

[00:50] I last week spent a lot of time interviewing multiple accounting firms because we’re looking to change things up. And without a doubt, every single one of them was confused. They’re all after the typical pieces. And I would ask them things that we talk about here on the Prosperity Podcast. And it was like their eyes just glazed over. And there was pushback. And I realized that not a lot of people understand our language and not a lot of people fully understand. And there’s at some point a tipping point where they get it and everything changes. And I hope that we can create that tipping point in this episode. Does that sound fair, Kim? Oh, that’s really well said. Yes, because that mentality and that open mind is to tip is what we’re looking

[01:39] for in the clients that we help. And some of them have already tipped and some of them are really ready for it. So I think, you know, let’s start with the foundation of this. So most people, we they would probably come from a background of saying, you know, I’m going to save money. And then they go to this this background of, you know, trying to be conservative with their finances. And that’s wonderful. And that’s how it should be. And then they start to explore things such as using other people’s money. And then they bring in jargon from other industries. But it’s like they’re just getting a part of the picture. They’re not getting the whole thing. And where I would love for us is to one, help the listeners that have been

[02:29] responsible with their finances that are trying to do things, realize that maybe this method of just focusing on your net worth or maybe this method of overextending yourself isn’t the best option. And we can provide some clarity around that. So where should we start with this conversation? Well, I think the beginning is who is going to control the deal because the typical space that’s out there. And this is true on all aspects of our lives, is that we just don’t step up. We as society don’t step up and say, I’m taking responsibility for this. We do this with our health. And, you know, the doctor, this that the other, we do it with our finances and my broker, this, that and the other. We do it with just so many things.

[03:22] Sometimes our careers, sometimes our family, etc. And I think that America is waking up and they’re realizing that they must take responsibility. If it is to be, it is up to me. Now, doesn’t mean that it’s not me plus a team, but let’s take responsibility for our finances. And so when we do that and we realize we do still need a team, let’s step back and say, all right, there is this landscape out there of a whole bunch of different ways that we could go. And there is a very typical way to go. And this is why I like the word typical so much. And it’s that we’re going to somehow get something for nothing. We can just put in a little money and our broker or this awesome online app is just going to blast us out of the park.

[04:19] And all of a sudden we’re going to have a bunch. And I don’t know very many people that that happens to. I don’t either. And I think the other piece that I’m going to inject in here is that the waters of finance and the information has just become polluted and completely distorted. So I’m going to use a reference of the Robin Hood Hertz fiasco that just recently happened. Did you hear about this? I don’t know a lot about I know your subject to bring listeners up to speed hurts the rental car company recently filed for bankruptcy. And what would typically happen in bankruptcy is obviously the stock price is going to drop. And there’s a lot of things that are going on, volatility and uncertainty.

[05:06] And there’s an investing app called Robin Hood. And there are certain forums that people use where they communicate. Well, they collaborated as a group of people and they pumped this stock up and they made overnight millionaires complete and total speculation or it should not make sense. And so when we live in a world where basic understandings of finance don’t make sense, you almost have to throw everything out the window and see what is principled base versus what is jargon or whatever else is out there. Really well said because the potential of that speculation and the uncertainty is so appealing. We all want to have that happen. And yet in reality, it’s so speculative, so tenuous. And frankly, what’s really sad is that the people that got that win

[06:07] and like, OK, cool. Now what? Yeah, you know, I’ve heard a wise person say years ago, like you didn’t know that you were lucky and they were talking about sometimes a person gets lucky on their first time and they think it was due to their own efforts or their intelligence, but it just happened to be luck. That’s dangerous. Very, very, very. Because you can’t repeat it. And it’s not based on anything that you can learn from. So if we zoom all the way back, I think there are two separate philosophies that that separate the typical from traditional. And I’m going to make a couple bold statements and I hope that they’re on track. One is that the typical is thinking in terms of I’m going to retire

[07:01] at 65 and I’m going to live off the interest. The traditional are that the traditional thinker is looking at it and they’re saying there’s a different way than me retiring at 65, which I may never want to do, and I want control over this process. So are those two statements accurate? And then if so, we’ll zoom back. So they are. And I want to elaborate on our choice of the word traditional because it goes back hundreds, if not thousands of years. And just the concept of retirement alone, that’s typically what people talk about. And yet it has only been around a very short period of time. If you look at human history, the traditional way going all the way back to stories that we read in the Bible is people worked.

[07:57] They found work that they love. They pursued their dreams. They continued to serve until they died. That’s how it should be. I’m going to state something that you helped me out with and it may help listeners because I fell down the typical path. So there are certain personalities out there that have different radio programs without naming names. And they talk about being out of debt. And to me, that was very important. So I went the path of paying cash for cars and paying cash for real estate. And someone on the other side of this podcast helped me see the light and start to do things a little different. So one, how is it that you pulled yourself away from typical to traditional and then we’ll break down a lot of

[08:56] these other mechanics? Sure. Well, I practiced typical financial planning for five years and it was a joy. I thought I was doing the right thing. I had a quote financial plan for my family. I had a quote financial plan. Now, this is pre-internet. So think binder, pretty graphs, colored charts off of our new cool color printer, a whole bunch of assumptions made about the future questions like at what age are you going to retire? And the 25 year old goes, that’s so far in their future. They have no idea. And the 50 year old goes, well, 65. Isn’t that what everybody says? And it’s actually my mom who was a kindergarten teacher her entire career, two classes a day. I can’t even fathom that. That said, these questions that you’re asking me for this

[10:02] financial plan that you’re trying to make for us, like they don’t make any sense. I have no idea what age I want to retire. And I certainly don’t know what I want to have happen when I die because that’s another question. Like when you die, you know, do you want this, that, the other thing? And I want to try to help you. So this is my mom talking, but I, I don’t get these questions. Like I can’t really answer them. I can give you an answer, but it has nothing to do with my life and how I think. And my response is like, okay, mom, that’s cool. But just answer the question. Just give me a number. I have to put a number into the computer for the computer to be able to spit out this financial plan.

[10:42] Well, as all good daughters do, right? This questioning of my mom’s about the assumptions in the financial plan starts to niggle at me and continues to do that for a year or two before I finally sat back one day and went, you know what? All of these financial plans that I’m printing out on my cool color printer are mathematically correct. And they have nothing to do with the people’s lives whom I am giving them to. This is a farce. This is a bunch of false peace of mind. And I’m scared to death. This is not good. I’ve spent five years. I got a professional designation. I got a whole bunch of licenses. And along with that came a whole bunch of activity in the stock market. And I was meeting with these people when the stock market

[11:37] was cratering in the mid 90s. And I’m feeling horrible because they’ve lost money. And I finally said, this is not right. There’s got to be a better way. I cannot do this anymore. The pit in my stomach is too strong. I am not handing out another financial plan. Do you think that a lot of other advisors and I should say clients, did they feel the same way once you realized that? 100% because you know what I had to do next? I had to call all, I don’t remember, four or 500 clients that I had at the time and tell them exactly what I told you, Spencer, when you said, well, I’ve been paying cash for my real estate. Well, I had been having people prepay their mortgages and I had to call them and tell them

[12:27] I’ve learned new information. That’s not the best strategy, including my parents. I had to call people and reverse recommendations that I had given them. And most of them said, yeah, I hear you. I really wasn’t sure either, but I did it because you made sense at the time, but I hear your new information and that makes more sense. And I’ve had advisors, sometimes 20 and 30 year in the business, typical financial advisors say the exact same thing. Like I resonate with your story so much because I have had that same pit in my stomach for years, sometimes decades, but I didn’t know what else to do. So I just kept doing what I’ve been doing, but it’s not the right thing. And so, yes, clients and advisors,

[13:24] they kind of knew they just didn’t know what else to do instead. I want to try something. I’m going to put you on the spot. So typically when we put each other on the spot that really we extract something beautiful. So I want you to have that conversation with me and think of a listener, someone that’s in their 40s or 50s, someone that has been responsible with their money, someone that has worked hard, business owner type. And they went the typical route and now you are shining a light, you’re pulling the curtain off and you’re saying there’s a different way. Have that conversation with me. Absolutely. So some of the typical things are everything looks like an investment and savings, the habit of savings,

[14:21] like a verb and the noun of savings, like the actual liquidity are not addressed at all. I meet people all over this country with no liquidity. It’s scary. And so that’s the first thing. And they know it. They’re like, yeah, I don’t really have any liquidity. Now, yes, they may have some stocks that they could sell so they could create liquidity. Yes, they may have some real estate that they could borrow against, but we both know back to the first part of our discussion that that is not taking the responsibility yourselves. That’s hoping that you could sell a stock when it was up if you needed liquidity. That’s hoping that the bank would give you a loan against your real estate. That’s not liquidity that you can control.

[15:08] So that’s one of the first things that we wanna take a look at. And then the opposite side of that is the investment world and many of them have good investments, real estate deals or maybe other things that they’re confident about. And yet I meet a lot of people that have the entire net worth of their investments in the stock market that could crater any day of the week, any month of the year. And while we certainly don’t hope for that, that’s a very scary element. So again, they’ve abdicated control and responsibility to either some cool app on their phone or the broker that they use and they could experience another 2008, like why didn’t we learn our lesson then? Well, we didn’t. And so now here as we record this in the middle of 2020,

[15:59] we’re back in the potential of having another major, major correction where people 401ks become 201ks overnight and that is not a fun picture. So just those two things alone are major starting points. And then of course we have the whole third area of debt and financing and your question that you brought up. In meeting with people, are you really finding that people don’t have savings? Yes. I can’t even fathom that. It’s amazing. I know. Like what would be typical for someone in their mid 40s that’s at the peak of their earning potential, kids starting to come up the ranks and maybe thinking about college and that. What is typical for someone because I really want to get into the head and my goal of this episode

[16:52] is to hopefully address some of the questions and concerns that people are too embarrassed to ask. Yes, yes. So what happens is they have the bulk of their assets either in their business or their 401k plan. And clearly neither of those things are liquid at all in any form. I don’t care what you think you might be able to do. They’re just not liquid. And then there may be some additional after tax money. So not in the business, not in the 401k, just regular dollars, but they’re usually very small, 10, 20 grand, maybe 30 grand. So here you have somebody that’s earning three or four, maybe even 500,000. They’re spending it all. They may be even a W-2 employee and they feel like the only tax break they can get

[17:45] is that precious 401k contribution. And they just haven’t learned that there are strategies out there that can drastically reduce their taxes with proper investment structures, primarily oil, that give a tax deduction today and also potentially opportunity funds. I mean, those are new things that people just have not learned about. And again, whether they’re a business owner or somebody with a large 401k and maybe IRA balances and that kind of thing, the ability to have liquidity, which we call an emergency opportunity fund, and this is part of why people don’t have it, it’s only been called an emergency fund and nobody wants to be overly focused on an emergency fund. So they get 10 or 20 or maybe even 50 or 100 grand in there.

[18:38] It’s also relative because cashflow issues do not go away. They just get bigger zeros on them. And so if you’re in a family, you’re making half a million a year and your net worth is a million five or five million, it doesn’t really matter. Liquidity for you should be three or $400,000 because that’s what enables you, first of all, to solve emergencies. Oprah Winfrey’s is $7 million, okay? It’s just a relative percentage, really, of the overall picture. And yet people stop at, say, 100 grand because they aren’t thinking opportunities also. They’re just thinking emergencies. And if we don’t have liquidity for opportunities, then opportunities will never present themselves. We must be in a position to have immediate,

[19:29] I’m talking less than 10 days, cash available or we’ll never get the great real estate deal or the super cool opportunity for oil or an opportunity zone fund or whatever it is that sometimes presents itself that must be acted on quickly and with a lump sum. There’s a lot to unpack in there, that’s good. So I want to, before we talk about someone not being able to take advantage of the opportunities or being aware of the opportunities and taking advantage of those, I want to step back and get into the mind of the person. So I would imagine, and you have this perspective, you’re meeting with people, even though a high net worth individual and with a high net worth individual, you typically get a keeping up with the Joneses, correct?

[20:19] Yes. Okay. So earning $300,000, $500,000 a year, whatever that is, what I’m seeing and what I’ve realized is that I would imagine a lot of these people are scared to death and they can’t have an honest conversation with others to one, be vulnerable and maybe they’re scared to ask certain questions and two, maybe they’re scared to even have that conversation with themselves. Are you seeing that? Yes, for sure, because they, like all of America, have not gotten any personal financial training other than what they might pick up in mainstream media, which is just as dangerous as the radio personalities that we spoke of earlier and it is embarrassing and you and I did a podcast on like taboo subjects,

[21:12] money unfortunately is one of them, death of course is another. So we go through our lives, our parents didn’t get good personal financial training. Anybody that’s taken any kind of finance and econ in college, it’s all about the corporate space and anybody that wants to get into quote finance goes either the stock brokerage direction or into some corporate finance. So here we are, we view personal finance as like the little guys game and so anybody with decent net worth and income has gotten there by their own hard work as you said earlier and yet they don’t really know the principles and the foundational steps of building but more importantly, maintaining wealth and of course that’s embarrassing

[22:04] because they are good at what they do. They’re incredibly good to be earning that kind of income or have a business that’s putting off that kind of revenue and yet our society is just not good at admitting when we don’t know and our society is not good at discussing the taboo subjects and you said it well of course we don’t want to look ourselves in the mirror and have the conversation with ourselves because we know that we must get out there and continue to produce and continue to do our good work because we don’t have the emergency opportunity fund and so that’s embarrassing. Essentially they’re creating a trap and they don’t realize they’re creating a trap because they don’t have the emergency opportunity fund.

[22:45] Correct. Okay, what are some of the aha moments? So it could be one of those questions that someone saves for the end of a conversation with you or maybe they were too embarrassed and they send with the follow-up email. What do those questions look like because I want to get into the heart of that. Yeah, well let’s pick up that third component of the debt and the financing of things because people really just have wrong information and again it’s promoted by the radio personalities promoted by the media. I’m disgusted sometimes when I read the various comments even by quote professionals with a string of letters after their name as to how things really work and your debt example specifically

[23:39] paying for investment real estate with cash or even primary residence with cash is a great one and it boils down to a comment that I’ll make that I think is a really high level easy to understand comment and then a deeper one and the high level easy is there is a difference between having debt and being in debt and Spencer as you so nicely shared you were super focused about getting out of debt and there are certainly some people that believe that there are some very long-standing reasons to do that yet we forget that as an example if we own a million dollar piece of real estate and we have $800,000 of mortgage and I’m not necessarily talking primary residence although it’s true of primary residence as well

[24:33] that is not being in debt that is having debt and there’s a huge huge difference so that’s the surface level thing just ask yourself am I in debt in debt would mean I’m 25 years old I have a job I have an apartment and I have $30,000 of student loan that’s in debt and yes that’s an issue and that is maybe somebody we can help maybe we can’t but that person still has a lot of personal financial education that they can learn about and get started properly whereas the person that has an asset with debt on it is not in debt they have debt and that’s a big difference so that’s the surface and then the deeper is this issue of opportunity cost and opportunity cost is something that we all learned in econ in probably high school if not for sure in college

[25:31] we learned it also in accounting again it was applied to big corporate case studies of which none of us can remember and yet opportunity cost affects literally everything we do and it can be taken a little too far an example of taking it too far is well I’m going to spend five bucks on this hamburger um but it has an opportunity cost so it’s really like $7 so I’m just not going to eat well that doesn’t work the other side of learning about it is I have an opportunity to do something like an opportunity was presented to me but I have no cash to take advantage of it and so I lost that opportunity and that’s scary and we can measure it and most typical financial planners do not even talk about opportunity cost

[26:23] much less know how to measure it and it is something that impacts every decision that we make so literally in the morning am I going to eat a donut or am I going to have a protein shake well there’s an opportunity cost if I choose a donut I could feel horrible later if I choose a protein shake then that will set me up well I’ll probably perform better you know there’s this whole long list we get that and every personal financial decision has the same kind of idea so maybe I’m going to take a little money and prepay my mortgage well that has an opportunity cost because now what I built is something called home equity and I do not control my home equity the bank does and I may have a home equity line of credit

[27:08] that may get taken away which means I do not have access to that asset called home equity that’s an opportunity cost instead I could have put that same amount of money into something that I did control so that when another opportunity let’s say there’s an opportunity to make 15% on a real estate deal and when that comes along I need to have a lump sum to do it well now that measuring stick is the 15% my opportunity cost of the money that I was going to make a decision with I was either going to prepay my mortgage or I was going to just keep it liquid available for use the measuring stick to identify and measure the opportunity cost is the 15% real estate deal that I might not be able to do because I did the prepay mortgage

[27:59] whereas if I kept the money liquid I could do the deal and that is never talked about in typical personal financial circles yeah definitely not does a lot of this psychologically come down to fear or greed and making a decision based off those two I think so and as we’ve talked on previous podcasts when you make a decision out of fear it’s usually the wrong decision and that’s hard I mean there are times when you have to make a decision and so it’s so much better to get yourself in a positive mindset to do whatever it takes go out and do jumping jacks on the lawn play with the dog sing listen to music do what you need to do to get yourself out of fear when you have to make a decision but our society has gotten so focused

[28:51] on these typical financial planning ideas and these ideas that we have to do things that are controlled by Wall Street and the banks and even the large insurance companies and the media and so anything else is scary and that’s just not accurate so I’m going to kind of push back in a little bit and I have a question that will help me get some understanding so from what I understand the one approach is to be extremely conservative and to pay off your mortgage early and to save as much as you can and to take on no debt or very limited amount of debt correct? Correct so that’s one and then we have on the other side which is when people they read certain books or listen to certain things and then they start to use the words of like OPM

[29:48] I’m using other people’s money and then they over leverage themselves and while that may work at some times I have seen in the long run most people get crushed when they’re over leveraged like that so for me I’m a lot more conservative than the OPM side even though I do help us understand that in what you’ve seen on the OPM side of things Well I think you said it well there are absolutely times when you should be using other people’s money and a mortgage is a great example of it and so the first personal financial step that most people will take is some type of a residence and without a doubt you want to put a minimum down payment and then use the bank’s money to have a mortgage ideally a 30-year fixed mortgage

[30:43] and your down payment if you can get an FHA loan great 3% otherwise 20% is probably best because that does eliminate some other costs in terms of private mortgage insurance etc Then the next step that people tend to take is some type of investment and of course it is available for debt to fund an investment I was just talking with some people this morning they wanted to do a cash out refinance on an investment property and get some more OPM and then go do another deal Well for the types of deals they want to find they’re difficult right now and so increasing debt using more of OPM didn’t make sense and the numbers just don’t play out Where the challenge lies is most people don’t really have a way

[31:44] to do a good job of calculating the rate of return on investment property and so thinking back to our larger discussion here I really have to be so so grateful to Todd Lingford and his Truth Concepts calculators as well as his Truth Training because while I got the conceptual things around all of these discussions that we’re having it is very important we are talking about personal finance to be able to prove and verify all of these strategies and so the ability to grab a calculator and prove out whatever it is that we’re thinking conceptually is so critical and so this capability of getting clear on what the cost is of OPM and looking at the whole thing big picture which is super hard to do

[32:41] because of course you want to analyze you want to grab that Excel spreadsheet if you’re that type or some type of a calculator and get in there and analyze it but you’ve got to step back and see the big picture and people that are just constantly using OPM and doing deals typically are getting a lot of benefit because of appreciation on their deals and so we have counseled our clients forever and ever as an example because most OPM deals are real estate deals make sure that you are asserting and affirming and analyzing your deal without any appreciation and our society is so focused on net worth and appreciation and growth we forget to be focused on cash flow and so the ability to first of all

[33:35] analyze a real estate deal and identify a particular rate of return that that deal is going to earn because my example this morning is they could get access to money at 4% or something like that well the investment that they were looking at was only a 5% return that just isn’t going to make sense not long term unless there are a whole bunch of other ancillary things so that’s an example of where OPM like yes great do it but make sure that what you do with the other people’s money is actually going to work and it’s going to get you a return that warrants the risk of increasing debt so in my mind a lot of the OPM at least I’m correlating OPM a lot with speculation in many cases is that accurate

[34:28] correct absolutely not principled investments but speculation and hope that the thing will appreciate and that it will work because of that appreciation and I’ve seen it to be and it’s not to knock anyone because you know a lot of times it’s someone that’s been successful in their career they’ve saved up some money they have good credit they’re you know educating themselves and then they want to get into SFR like single family resident investing or whatever that could be and then they start to use OPM which is a great method if you want to get ulcers and I have a heart attack early which I’ve seen like it can cause a lot of stress especially in a market like we’re in right now so the other side of this

[35:14] is alternative investments and it doesn’t sound like alternative investments is necessarily so speculative and completely tied on the OPM yet it’s also not for someone that just started out so help us create this bridge to understand all of that landscape yes so to me the definition of an alternative investment is anything that’s not in the stock bond and mutual fund market now a lot of people will say oh well you could do a REIT R-E-I-T real estate investment trust that’s still in the stock market you’re still depending on a function of the stock market to get your growth and what’s interesting is there are alternative investments for non-accredited people and so we do have access to a few things

[36:07] that will be able to accept a small amount of money because typically somebody that’s not accredited you’re just dealing with smaller dollar figures nothing wrong with it we all start somewhere and be invested so to me the definition of an investment which is different than the definition of doing speculation is that the money will grow and for accredited investors I usually like to see if we can get low double digit returns that’s my definition of an investment without a loss of principle well for a non-accredited investor they’re not in 2020 and probably for the foreseeable future they’re not going to get low double digit it’s probably going to be half of that yet the maintenance of principle

[36:57] is so important and believe me I’m not perfect I have absolutely lost my own money I’ve lost clients money getting a deal whether it’s an investment or speculation where you absolutely positively will not lose principle is not easy there are some things that you can do and I think the most important thing is to set that as a desire an objective because if we go into this space and we just think about swinging for the fences and we think speculatively well that’s probably what we’re going to get whereas if we go after an investment again make your own definition of what an investment is but something that earns whatever rate of return you’re seeking within reason thankfully I think people are

[37:45] becoming a little more reasonable but always cracks me up you know I don’t do a deal unless it’s 20 percent great how’s that working for you and sometimes it can but the idea of being clear of what you want is so important because then that’s what you’ll find and again that’s where it comes to your team of people and thankfully we have a lot of resources that have just been ferreted out over time and so much of what I do when I make a decision about investments is who are the people behind it of course Todd comes in with his calculators and verifies improves everything which is a great one-two punch I guess yet being clear is a really important part of it and understanding the difference between speculation and investing

[38:39] so I think on the far side of alternative investments like the extreme speculation would be Ponzi schemes you know what I mean and we’re not talking as saying an alternative investment is a Ponzi scheme what I’m defining is when we hear about deals that are too good and a person is trying to get outside of what is typical they’re jumping into something that is untrue have you seen that happen as well? Yes very very accurate statement and a difficult one to ferret out because the investment space is full of legal documents that are hard to read and so it’s why I go back to people it’s so important that you have people that you can trust with the work and verify the work but the people get you started

[39:34] so I actually took some notes on that and I’m going to follow up with three pieces so when you mentioned you should focus on the deal that you want and the person so I wrote down who the next thing I wrote down was time and then the next piece I wrote down is complexity are those the elements that you’re looking at or am I missing something different? No I think that’s a good start I think part of complexity of course is the tax space and so again you know who’s your team because your financial person has to have a little bit of tax knowledge they’re not going to be the CPA and know all the ins and outs but so many people let the tax tail wag the financial dog and so they have an opportunity

[40:16] let’s say to sell a property at a profit but they can’t find anything else to buy and they force themselves into a 1031 exchange because they’re so focused on not paying tax that they end up getting a bad deal that is not effective or efficient and so often people just are not aware of some additional tax plays i.e. can I get a tax deduction today even if I’m a W-2 employee even if I maybe can or cannot do real estate that will reduce my taxes but let’s not be letting the tax tail wag the financial dog in other words let’s realize that you know what we made a profit on this investment when we make a profit we pay some tax that is an okay thing to do is there an abdication of responsibility when you go to someone

[41:11] and do an alternative investment or should there be a different filter at looking at that? Definitely as I’ve made clear I think this abdication of responsibility is a problem and so there’s a fine line between getting help and then abdicating responsibility and so the way that I approach it is you’ve got to go into learning mode and you’ve got to pay attention so roll up your sleeves and read the book or watch the video or listen to the podcast or do whatever it is that you need to do to learn it’s one of the first questions I ask prospective clients how do you like to learn? Do you learn better by reading watching or listening? So again there’s some self-knowledge there get clear on how you learn

[41:56] and then go about learning and let your team get you started so you’re pointed in the right direction because you don’t want to just go to Google and start trying to learn there yet when you get pointed in the right direction then take the time to learn make it a priority so that you can get the learning done and then you can go back and get your additional questions answered and do whatever verification needs to take place and then as our listeners are so familiar with my all-time mantra of go slow and start small I remember I was helping a client they had a $300,000 IRA we talked about three or four different things and I heard a month later oh I put the whole $300,000 in one deal I know gulp right

[42:49] and what happened to go slow start small what happened to spreading it out a little bit and we just get too excited we get too emotional oh this sounds great I’ll just do it here it’s easier well the good things in life are not always easy sometimes it takes a little bit more learning a little harder work a little bit more time etc so back to your three things time absolutely one of them spend the time to get the learning that you need and spend the time to find the team that you really really resonate with so if we go that example of going slow and starting small I think it tunes back to something I’ve heard from other angel and smart investors which is starting with something where you’re not going to be devastated

[43:37] if that capital is lost do you go on that same philosophy absolutely that is why go slow start small is so effective and furthermore you will make a decision with a smaller dollar figure if you’re trying to you’ve got a million dollar 401k you’re rolling over and you’re going to try to make a decision on that that’s too hard to make so you’re likely to just sit and do nothing which isn’t good either I didn’t even think about that you know doing nothing is actually in many cases a worst penalty correct because feedback okay I’m taking notes as we talk listeners just so you know this is really helpful for me and here’s where it’s also helpful because I’m looking at this and one thing that we didn’t cover

[44:22] is the vehicle of whole life and that is used as the emergency and opportunity fund and I’ve found at least from conversations and what we’ve seen emails come in that oftentimes a person wants to go from like zero to a hundred really fast or I’ve seen in the other spectrum where they just never pull the trigger so help us understand both of those pieces yeah whole life is such an interesting product talk about traditional it’s been around forever and there’s so much misinformation about it out on the web and interestingly enough it doesn’t work really well with lump sums and so in your example people once they learn about it they just want to go all in well it’s really better to take your monthly savings

[45:09] or your annual savings or quarterly however you’re doing your savings the act of saving like a verb and build a whole life policy with that to create that emergency opportunity fund and save your lump sums for actual investments because the really good investments require 50 grand a hundred grand and whole life is that position of emergency opportunity or liquidity if you will and again the really good investments they require 150,000 or 250,000 kind of depending on what level of the game you’re playing of liquidity so so often here I’ve got an accredited investor and they’re ready to go and can pursue all kinds of cool alternative investments but they don’t have the liquidity that is one of the requirements

[46:00] and I get it it’s not fun to talk about emergency money it’s not fun to have money sitting in the bank earning one percent taxable and this is why whole life does such a good job of first of all providing you a better place to store such liquidity that’s earning three or four percent tax deferred and that’s after all the costs and also supporting that habit that’s so critical to build of saving again saving is a verb i.e. putting money away every month or every quarter or every year and then a little bit of tax benefits which is handy and more importantly then that is a foundation that you can build on for the rest of your life whole life is designed to be used for all of your life that’s why it’s called that

[46:49] and what people typically do in this space that don’t have whole life is they use a savings account or a money market account or money in the mattress wherever they put their cash and then when an emergency or an opportunity comes along they withdraw it so your typical person builds it up draws it down to zero builds it up draws it down to zero builds it up draws it down to zero they go on about their whole life handling emergencies or opportunities in the same way drawing their liquidity down to zero and then they die and they have nothing to show for all of that activity all along their whole life well if instead they bought whole life really at any age I mean it up until you’re in your 80s

[47:33] it can work of course it’s a little better when you’re a little younger and they borrowed against it and paid it back borrowed against it and paid it back borrowed against it and paid it back for emergencies and opportunities then first of all they would have something to show for it out there in their 60s 70s and 80s called cash value that would have been paid back all along the way and then second of all when they died because last time I checked death was a guaranteed event I think it still is right yeah when they die then there is a tax income tax-free death benefit that comes in to replace all of the opportunity costs that they’ve dealt with their whole life all of the income that is no longer going to be earned

[48:20] and provides again a lump sum of dollars that now the family can go forward with and create that same strategy again of emergency opportunity fund that’s borrowed against paid back borrowed against paid back borrowed against paid back and this is what families like the Rockefellers do where every generation has whole life insurance purchased on their lives and that means that the buckets get filled back up upon death whatever those buckets are could be lost money due to poor investments could be opportunity costs could be taxes all kinds of things get filled back up again and again and again and this is what makes wealthy families stay wealthy whereas those that do typical financial planning

[49:11] start over at every generation so it’s not really I’m speaking in terms of like whole life it’s not really an OPM but it’s not typical as well so is it more of like call it alternative finance or what would it be? Well it’s interesting that you use the words that you did because it is OPM in that when you borrow against it you’re getting the insurance company’s money you’re not getting your own money your own money stays inside the policy and keeps on growing and there’s nothing magical or fancy about it just is the way that it works no different than a CD secured loan would be so you are getting the advantage of OPM because the money that you get from the insurance company against your cash value

[50:01] is the insurance company’s money and then I love what you said about its alternative financing because everything that you buy like we said earlier has an opportunity cost which basically means everything is being financed now again we can take this a little far you’re not going to say well my $5 hamburger has an opportunity cost so it’s really $7 so I’m not going to eat and that’s taking it too far however paying cash for a house you did essentially just finance that with dollars let’s say you got inheritance you have half a million dollars you found a house and you’re going to buy the thing for half a million dollars of cash well that half a million dollars came from an investment it came even if it was

[50:50] just a savings account earning 1% it came from somewhere and so now you have an opportunity cost that you are so opportunity cost implies loss you have lost the opportunity for that $500,000 to be invested and it’s not just measured at the 1% where it was it’s measured at the maybe 9 or 10% where it could have gone and so when we measure opportunity cost which is essentially what the cost of financing is we have to think not about our measly little savings account but the highest and best use of the money which is the best investment we know so if you’re one of these people like we were kidding earlier that does say oh you know every deal I do is 20% well awesome then your opportunity cost measuring stick is 20%

[51:48] and so I hope you can find some 20% deals because some of this other stuff that you’re doing over here that has opportunity cost is pulling you negative 20% one thing that you mentioned right before this little conversation probably two or three minutes ago was what whole life does is it creates legacy wealth and generational wealth and so in my mind I was thinking through my friends and thinking through other people that are doing it the way that everyone else does which is saving up putting it in 401k paying off the house early putting money into the market and the problem with that is hey that’s great even if you’re high income let’s say you’re making 300 a year that’s great but the problem is

[52:37] by the time you retire you will probably outlive your money or if you don’t outlive your money that money is going to be gone within what five ten how are you seeing that five or ten years of their death the children the inheritance they just bleed through it and it’s gone is that typically what it is is it really that fast two or three the statistics are so so disgusting so two or three years that’s awful so what’s the difference that would be someone that has worked hard obviously they’ve they’ve been diligent in what they’re doing they’re trying to do a lot of the right things but we look at someone that’s going off of a whole life way and really approaching it differently how long does that wealth last

[53:27] after they pass if the personal financial education has been taking place all along the way which is what it should have been doing the whole idea behind perpetual wealth so you used good words it’s legacy oriented it’s family it’s generationally oriented and we have a whole book on the idea of perpetual wealth is that not only do you have the whole life death benefit that is coming into that next generation but you also have the personal financial education to go with it and the philosophies strategies habits and mindsets that also go with it so that that next family who by then you know if you think the typical person passes away let’s say at age 100 well their adult children or let’s call it 75

[54:22] who now have adult children that are let’s call it 50 or 40 something in that range who are now teaching their adult children that are in high school this is what perpetual wealth should do and this is such an awesome role that grandparents of any age can play and again maybe it admits being wrong maybe it admits being humble maybe it admits look we didn’t do it this way we wish we had let’s teach those younger generations and that’s why I have so much fun working with kids that are just starting jobs and getting into the adult world because you can make such an impact on that person for generations to come with really very little money you know your 25 year old kid can buy a whole life policy

[55:14] and this sounds a little weird because they don’t have any children themselves they’re probably not married they may or may not own a home but they can buy a whole life policy for two to three maybe four or five hundred dollars a month and set themselves up for a lifetime of financial success boring at the beginning yet so effective so efficient so optimized and then all the education that can go with that so that they don’t get stuck in the trap of over abuse of other people’s money too much focus on paying down debt and then what frankly I love people that have just completed a pay down debt strategy they’re ready to go with a clean slate but the typical pay down debt strategy people don’t teach the good strategies

[56:04] for and then what and so that person no matter really what age they are so somebody that’s older that has a lot to work with great then let’s get whole life in place and get some alternate investments if you don’t have a lot to work with well then let’s get the education and the principles down so that you can pass that on and let your perpetual wealth be more than just the money and the death benefit that you’re handing down to the next generation you know I didn’t expect that the conversation would actually go to perpetual wealth like that and to legacy as I read over my notes and I think of our conversation we’re coming up you know this has been a lengthy conversation it’s been great that it really comes down

[56:50] to a person making the decision that they are going to either just leave a little bit of money for their family or hopefully they don’t outlive their money or they’re actually going to change the dynamics of their family and the legacy forever it’s one of those two things and that’s it like am I drawing too hard of a line or is it really that’s what it is I don’t think so not at all and do you know what the class of 2020’s tagline is know what some have story we have legacy and of course the reason for that is because of what we dealt with in the spring and early summer of 2020 but let’s make it more positive than that let’s make the we have legacy part there because we do and we will and we’ll create it monetarily

[57:47] and if not also philosophies and the mindsets that’s the other important part of legacy yeah I would argue you don’t have those things whatever wealth you created will be gone just look at the Vanderbilts a hundred percent yeah I think for our listeners hopefully this is one of those episodes where you’ve been able to deep dive and you see what you may be doing well regardless of where you are and if you have great earning potential and great earning now and you don’t have savings well hey you did something wonderful by earning a lot of money and if you don’t have a lot of money but you’re listening to this podcast it means that you’re doing something well by getting on track but you have to stop at some point

[58:28] and look at the opportunity cost of your life and your legacy and I think we all owe it to ourselves and our legacy to put something in place that’s going to outlive us and it’s not for ego I think it’s simply because you’ve seen it on other episodes there’s a great chance that within a few years we’ll be living to be 120 years old technology is going to change and if we base our worlds off of the same assumptions it’s going to be scary in the future with people outliving their money and this is what I see is the only way that we can actually wake everyone up and change well said and what a fun job we have to do it with certainly is for listeners we’ll put an email inside of the show notes that email is hello at partnersforprosperity.com

[59:21] it goes directly to Kim and the people there at partners for prosperity you can ask questions you can and those questions could be hey what are the best alternative investments those questions could be what books should I read or it could be something about your specific use case I’ll put that in there but you can also just from listening here share this episode with friends we’ve tried to make this episode one that could be listened to from someone that’s in high school all the way up to someone that’s maybe getting ready to retire and we don’t like the word retire but so you can understand the span does that sound fair Kim? Well said Spencer I’m so glad that we got to have this conversation

[1:00:04] because those that have listened to us for a long time I think will really benefit from the high level overview as well as the deep dive and those that are possibly newer can really get a sense of the principles and the philosophy that we operate with and so if you’re curious again whether existing or new to us I have a variety of special little one pagers that just summarize some of these key points so if this is something that you’re curious about that hello at partners number four prosperity let me know what it is and I’ll return to you a one pager that compares the typical financial planning method versus that of prosperity economics which is what we’ve coined our traditional work we’ll put a link to that

[1:00:57] and we really appreciate you investing your time with us as we’ve invested time in you today so thanks for being a listener on this show thank you for listening to the prosperity podcast to take control of your money and have it work for you visit us at partners for prosperity.com if you liked this episode make sure you subscribe and leave a review