How Wealthy People Use Their Money – Episode 284

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[00:00] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler. Hello listeners and welcome to the Prosperity Podcast. Today Kim Butler and I are going to be talking about how wealthy people use credit cards. This is a fun subject and interesting, especially with the holiday season coming up. Wealthy people act different than the middle class or the people that are struggling. So Kim, let’s jump into this. Happy to, Spencer. This will be a fun subject and I’m curious to hear what you have on it as well. So I guess when we say wealthy, that’s always subject to definition, right?

[00:53] But I’m going to share how we use credit cards and then I’ll also share how I know a couple clients use them. So for us, they’re of course a tool of production, a tool of helpful means of getting results and mostly by keeping things separate. So we have a credit card for personal and we have a credit card for business. Those two seem fairly logical to me. I think most people that have a business would choose to have a separate credit card for it and note it doesn’t need to actually be a corporate card like a personal one’s just fine. Like for myself, my visa is personal and my mastercard is business quote, but it’s not really a business card. Of course, some people may choose to go the full route and have actual formal

[01:42] business cards, which is awesome. But I think anybody, whether they’re an entrepreneur or not, might consider having a second and separate credit card for what are quote business expenses because I believe everybody should have an entrepreneurial mindset and be developing, working on growing within a business environment, even if they’re still a W-2 employee somewhere. Maybe they use that separate credit card to purchase books or marketing programs or whatever it is that they’re learning about and the separation of expenses, the keeping accurate books and records on what you’re spending money on is a very, very important thing. And wealthy people tend to do a much better job of this probably by necessity, but I find

[02:32] then people that are not wealthy. Sound good so far? Yeah, that does sound good so far. Then I’ll add to it that I also have a third, if you will, separate credit card for our farm because we keep our farm expenses separate from all the other business expenses. And of course, my husband has a separate credit card for his business as well. We use them not to rack up expenses on, but to build opportunities with and also for convenience because as we all know, sometimes it’s just easier to put things on the credit card. It’s funny. I remember when debit cards first came out long ago, I happened to be with my parents grocery shopping and put groceries on a debit card. But of course, you couldn’t tell it was a debit card.

[03:23] It looked like a credit card. And my mom’s like, are you buying groceries on a credit card? No, mom, it’s a debit card. It’s coming straight out of my checking account. And so of course, I had to describe to her what a debit card was. And yet what’s interesting is that sometimes it does make sense to buy groceries on a credit card because, and this is something that I think, so now I’m kind of shifting into client’s use. I know clients are always interested in this and that is the building of points, right? So whether it’s airline points or just American Express points or whatever kind of points you get, I think wealthy people are conscious enough of building up points that they want to put everything on a credit card.

[04:11] In fact, we often get asked if we could have their life insurance premiums be put on a credit card. The answer is no, unfortunately. But that’s my perspective so far. What do you have to add to the story? So I totally agree with you that wealthy people like to put as much as they can on their credit card. And I go off of the same philosophy as well. So I think there’s a couple other distinctions between it and at least that I look at. And it’s this. It’s the management piece because what happens is when you use a credit card, you don’t have to be jumping into your ledger every single day and seeing what’s going on. And it also makes it a lot easier to have one big snapshot of everything. And I love the points.

[05:01] So for example, one of the things that kind of frustrated me but also made me happy was I just recently bought a new computer. And the way that computers go now is they’re not cheap. And I used it on my business credit card, not my personal credit card. And it kind of ticked me off because I didn’t get the points that I wanted on my personal credit card. But my accountant will be more happy with me. I think there’s another piece that is important to realize. And you mentioned you can have a business credit card but not in a business account. You can also set up business credit. And I think wealthy people just understand the value of money compounded with the value of time. Absolutely. Are you wanting a response on that?

[05:49] Yeah. I think what would be really valuable for our listeners is to understand how Kim utilizes the credit cards because oftentimes it’s easy to be persuaded by these gimmicks. You’ll hear people specifically in the mortgage world. They’ll say, hey, I’ve got this new process for paying off your mortgage. And what you do is you use a credit line here or you pay off this X amount of weeks or something. And to me, it says, no, no, no, complicated, not smart. And then you’ve got the Dave Ramsey group, which is do everything with cash and never leverage. And you go, no, no, no, not smart. And then you have a prosperity thought to it. And I think what our listeners would really enjoy is hearing the prosperity view, not the view from scarcity mindset, but something correct.

[06:43] Yes. And boy, is there a difference. So let’s go backwards. The Dave Ramsey thought of pay cash for everything misses a most important point that most people learn in high school or even college economics or accounting. And that’s the concept of opportunity cost. And so to back up, so you learn about opportunity cost at a corporate level, and yet it’s not applied or brought down to your own personal level. And what opportunity cost means is if you pay a dollar for something, you have to think about what other thing, what other opportunity you have with that dollar. And you don’t want to take this to too granular of a level. You’re never going to say, oh, you know, I’m hungry. Well, oh my gosh, I can’t spend $5 on this hamburger because I need to put $5 somewhere else.

[07:33] I mean, you’re not going to, you don’t, in other words, you don’t calculate the opportunity cost of a hamburger, but you do want to count the opportunity cost of what you do with your money. And so it’s important to remember that we essentially are financing things, even if we’re paying cash and what we’re financing them with an actual interest rate of what the dollar could have been doing elsewhere. Every single family has their own opportunity cost interest rate. And it’s essentially what the highest and best use of their dollars are. So in other words, if you have an awesome investment and it’s earning 10%, then that is your opportunity cost rate at a gross level. I’m not talking about after taxes or fees or anything else.

[08:27] Similarly, if you have credit card debt, then again, you know, we talked about separating out wealthy from maybe middle class. So wealthy people probably don’t have credit card debt, but if you did have credit card debt at 10%, then again, your opportunity cost would be at 10. If you had credit card debt at 12%, your opportunity cost would be at 12, because any dollar that you spent somewhere else didn’t go into your awesome investment at 10 or your credit card debt at 12. Now, obviously, awesome investments can’t handle five bucks or they can’t handle a thousand a month or whatever. They probably need lump sums. And yet the point is still made. And one of the other reasons I think people are really missing

[09:07] the opportunity cost issue today is that liquid money is earning nothing. So we think it has no value, but that’s not accurate. So if you have $100,000 in your savings account and you choose to pay $40,000 cash for a car, you say, well, I haven’t financed it. But in actuality, you have because you took $40,000 out of the $100,000 in your savings account, which now only has 60 grand left in it. And again, where we lose track of what’s going on here is that because our savings account isn’t really earning anything, we think it has no value, but that’s not accurate. You and I, Spencer, and our listeners know that liquid cash can be earning 3% or 4% net, net, net inside a life insurance policy. So if you choose to take 40 grand and pay cash for a car,

[10:03] in a sense, you’re missing the opportunity for that liquid cash to earn 3% or 4% inside a life insurance policy. So when Dave Ramsey says that you don’t have any interest payment, he’s accurate, but he doesn’t break it out that you still have an interest cost. And this is that opportunity cost. This is the 3% or 4% that your liquid money could earn or the 10% that your invested money could earn that you are giving up by paying cash for a car. That’s not an easy subject to get our arms around. Do you think the explanation is good enough to get people started? Yeah, I think that’s clear enough for people to at least get the wheels turning. And there are other episodes when we go more in depth about this as well.

[10:48] Absolutely. In fact, I really want to turn people to a specific episode that you and I did on that mortgage line of credit idea that you brought up. And so maybe you can find that for us and throw it in the show notes because it’s an important thing that comes from a scarcity mindset and does not match up with the seven principles of prosperity or the prosperity economics thinking that we want people to have. And you said it well, extra payments on good debt like mortgage debt, not smart. Absolutely. You know, I am looking here at a website, this is on Forbes and it’s a Forbes article and it says 63% of Americans don’t have enough to cover a $500 expense. That’s shocking. 63%? 63%. So, you know, it makes you look at that and there is a lot of understanding to realize,

[11:45] okay, one, you can use a credit card to leverage and you can use it for the life cycle, but wealthy people pay it off every single month. Absolutely. Wealthy people aren’t going to have tens of millions of dollars just sitting around because it feels good in the bank account. But they’re also not going to have zero in the bank account. So there’s a fine line to walk and some with a prosperity mindset to be on. Absolutely. And it’s so wonderful that we can have the credit cards as a tool of convenience and yet not be beholden to the downside of them, which is creating a lot of debt oftentimes for things that are not really needed. You know, when you actually look at the balances that people have on their credit cards

[12:30] and you ask them to go back and think about what caused that balance to get there. A lot of those things are what Robert Kiyosaki would call as a doodad, which is something that’s not really necessary. Something that’s certainly not generating wealth and capacity and prosperity mindedness, but instead something that is truly a cost. And that’s not what we want on our credit cards. Absolutely. So I think as we wrap up, there are a couple of prosperity points we can pull out. One is wealthy people pay off their credit cards every single month. They’re disciplined enough to keep their expenses separate. So if you have a business, keep it separate from your personal. Two, they are oftentimes looking for ways to leverage.

[13:16] So they get points or whatever that may be. And three, they are looking at everything with a prosperity mindset. So even if they can buy it, doesn’t mean that they should buy it. How about that? Well said. Great summary there. Back to point number three, that really matches up with principle number seven, which is the idea of multiplying. And multiplying doesn’t always mean actual leverage, and yet many times it can. And I think it’s important for people to dig in, do their own study of how can they get dollars to multiply. Sometimes with leverage, sometimes as in a credit card example, where it’s dollars and then points, that’s getting $1 to do two jobs there. And there are products that do that very well too,

[14:00] like the life insurance and real estate deals, oil and gas deals, all of those types of things have a very multiplier impact on our wealth. And that’s what we want to be looking for. Well, thank you, Kim. I enjoyed this. And what we’ll do is in the show notes, make sure to link up to the different articles we’ve written about. And hopefully you as a listener can see how a person with wealth approaches their money. And it’s a little bit different. And in the long run, I can tell you which one’s going to win. So thank you for listening. And what you can do for us is make sure you hit that subscribe button. And if you like what you hear, please leave a review that helps us spread this message to other people.

[14:40] So thank you again for listening to another episode of the Prosperity Podcast. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.