Responsible Borrowing: How to Use Debt to Your Advantage – Episode 513             

This transcript was auto-generated and may contain errors.

[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers on this episode of the podcast, we’re going to be talking about responsible borrowing and how to use debt to your advantage. This is one that stumps most books, most podcasts, most quote unquote experts out there. So you’re going to get a different take. This is one you’ll definitely want to listen to. Well, this is going to be so fun because I actually just did a little bit of research with some AI help because I always get confused between what the lexicon called debt avalanche and what the people out in the YouTube-osphere blogosphere call a debt snowball. And then you have the whole cash flow index. And then you have Todd Langford’s opinion, which of course is all about the math and

[00:57] which is the most efficient way to get out of debt with math. And that special report will exist. So I’m actually going to save that conversation for later. I want what you brought up to be about new debt that we might choose to be responsible about taking on for building businesses and investments. So more than a how do we get out of what is typically consumer debt that we already built conversation, I want to talk about how might we actually add debt that we’re pursuing purposefully and responsibly in order to build businesses and or investing with debt. I love it. I love it. This is so good. So let’s start foundationally, which is there has to be the way that you look at it and think about it before you take the action on it.

[01:54] So you’re looking at this type of debt from a prosperity lens. You’re not looking at it as, oh, I’m scared. I can’t believe I’m going to try and do this. So let’s start there and then let’s talk about it from that perspective. Well, that is a super critical perspective that so that prosperity perspective, that prosperity thinking that must occur before any reasonable amount of debt, you know, if it’s 10 grand, fine, whatever. But if you’re looking at 25,000, 250,000, a couple million of an investment whereby you would then have a business or have an investment that was created from debt, the critical point and actually I just reread Tom Willwright’s when when wealth strategy and he makes this point as well is that that investment that you’re

[02:49] pursuing that business that you want to buy with debt, you better darn well have the confidence that that thing is going to generate the cash flow to pay off that debt or do not do the deal. And you said it so well, the amount of people that go into a business needing to take on debt or, you know, the apartment building they’re buying with mortgage or whatever it is that have that fear. I mean, that’s a losing strategy from the beginning. Now, I’m not saying the fear shouldn’t come through because you’re going to do better due diligence, check out the deal a little bit more thoroughly, maybe even Google the, you know, lead syndicator or whatever, if that is the kind of thing that you need to or the franchise or whatever it is, if it’s a business.

[03:37] Nevertheless, at some point you want to cross that off the list and say, OK, I’ve done my work, I’ve due diligence this thing, I’ve had second, third opinions on it, I’ve had the legal team look at it, I’ve had the accounting team look at it, whatever else you need to do. And now I’m done and I’m all in. That’s a prosperity thinkers approach or don’t get in. I love it. So that’s a clear line. You said I’m all in. So you’ve done your homework. I’m all in. Now what? Because most people, they struggle there. And that’s where the wannabes and the entrepreneurs, they stop. And they’re really good at talking about business and they’re really good about thinking about it. And they’re not good at pulling the trigger.

[04:24] So now you’ve said, I’m all in. I want to do it. Now what? Now, and the other thing that I think is incredibly important for taking on responsible debt is having the liquidity to overcome two or three or ten months of payments, whereby you’re not so stretched that if the deal doesn’t go perfectly, you can’t keep up with those payments and or the debt needs to be structured in a way where payments are not required. So we might want to unpack those two. Yeah, absolutely. So as an example, there are accredited investors out there. So million dollar net worth, not including your home or two to three hundred thousand of income that get opportunities to buy into investments whereby they must have the accreditation, but they also must have

[05:26] this is a requirement of the investment. One hundred and fifty thousand of liquid money. And it’s interesting because in today’s world, especially with where we are recording this in the early part of twenty, twenty three, we’ve just gone through a whole bunch of bank failures. People are pretty scared in leaving any kind of decent dollar figure in a bank. Well, in the mutual life insurance company, fabulous place to store the one hundred and fifty thousand of liquidity that is required for you to do some investments. Now, I’m not even talking about debt at that stage. I’m just talking about liquidity required for the investment. Now, let’s assume that you chose to let’s go with a business rather than

[06:08] a more passive investment. Let’s assume that you chose to buy this franchise and it is a awesome business and it’s going to cash flow. It may not be profitable right away, but it’s going to cash flow fairly immediately and you have an opportunity, but you need more money than you have with cash. So you look for some financing sources. Well, if you finance that opportunity at a bank, then you’re going to be required to make monthly payments even if you need a reprieve because maybe the business is slow in the summertime or fill in the blank. It’s a business, right? It’s going to have lean years and green years. However, if you have either that liquidity whereby you could make some of those bank payments for a few months if the business couldn’t

[06:58] handle the payments or you borrowed against cash value of life insurance. Now, I always leave emergency money alone, liquidity money alone, but let’s say you had an even higher cash value. So you borrowed against cash value of life insurance to do your franchise deal with while the life insurance company does not require consistent monthly payments, though you might want to be making them if you needed a reprieve because summertime is slow or whatever, you absolutely have that reprieve and can not make the payments to the debt while the business goes on and then pick up those payments again when the business gets back into its green period of time. Hopefully not years in that case, months, but sometimes it needs to be years.

[07:43] So that’s an additional perspective on the debt. If you have liquidity to help you make payments and if you have even more liquidity to have flexibility around borrowing, we still recommend using the bank’s money, use your life insurance borrowing ability as the backup and then even more so use your life insurance cash value emergency side of that opportunity fund the actual emergency money to be there for an emergency if you need it. That makes debt way more responsible. Absolutely. It does. So in a part of this debt, the borrowing, and again, we’re talking about borrowing for a business, real estate, some type of asset. We’re not borrow. Well, this is not a conversation about borrowing for liabilities.

[08:33] This is borrowing for assets. So at some point we’re looking at this world of interest rates that change or the terms and help us understand how you’re approaching this. Because again, you’re borrowing for an asset. How are you approaching it from that perspective? So Todd Langford, truthconcepts.com excellent, excellent mental space around the numbers and math and all things personal finance that have to do with dollar figures has for years identified 8% as the dividing line between what is good debt and bad debt or responsible debt and irresponsible debt. So 8% and below is good debt. And that’s pretty shocking if we were talking six, eight months ago, but we’re talking today when interest rates are back in the

[09:33] six to 7% range all the time. And it, you know, 8% is a totally normal number again. Whereas just a little bit ago, if you weren’t talking three or 4% debt, people thought it was horrible. And it cracked me up. I’d get a call from somebody I’m refinancing and I didn’t lock in on time and now instead of paying 3.4, I’m paying 4.1 on a 30 year mortgage. Good heavens. 4.1 is fabulous. So it’s a good perspective that that 8% dividing line can bring. Now it’s not to say you don’t take on debt at 9%. Maybe you do because maybe your opportunity is a 20% return and that’s amazing in the 9% and you’re super confident about the 20 and the 9% is just the cost of doing business. No big deal. And you know, I’m not even getting into whether it’s deductible or

[10:24] not, but just the, the spread. So nine, I should use easier math. Let’s pretend the deal is 18%, not 20. Nine to 18 is a 9% spread, but that’s actually a doubling of opportunity. You could literally say, especially if you got into this investment with no money of your own and you used all other people’s money, bank and insurance money, either of those two were, you know, your uncle’s money. It doesn’t matter just alone. That is literally a 100% improvement cost of nine gain of 18. That’s a doubling or a 100%. And that’s a whole tricky calculation in and of itself. And it took me quite a few years to get my arms around that calculation, but it’s actually very easy. If you have a financial calculator, like HP 12 C or, you know, any of

[11:13] the financial calculators that are available on the web, truth concepts has an app and you put in nine as the present value and 18 is the future value and your timeframe is one, because that’s when you measure interest rates is over a one year period of time and that is a 100% improvement. So just be clear that as a general rule of thumb debt at eight or below is very, very responsible debt. Yes. Yes. You, you mentioned one phrase in there that I think is really applicable and it’s, it’s one of those phrases that may have gone a little under the radar, which you said you’re going to be using other people’s money and I’m looking at that and I’m saying, okay, well, there’s a certain threshold in a, we’ll call it a

[11:58] target that we want to hit. So I’ll state something that has been a red flag to me. And then I’ve got a follow-up question. When a business owner comes to me or an entrepreneur, potential business owner, whatever, and they’re trying to raise capital. If they raise too little money, it’s a red flag because I know you’re not raising enough to weather the storm and it’s an immediate no every single time I won’t invest in it. So you’re saying use other people’s money, use it responsibly. We’re talking about using it as much as possible. So help us understand how you’re approaching that to get as much quote unquote OPM as possible. Yeah. So OPM can come from venture capital. It can come from banks.

[12:53] It can come from insurance companies. It can come from family. And it is so important that a business has that runway so that they can make responsible decisions. So quick story on this. I remember when Todd was working on our solar shop. So we have a rather large solar shop, like a building that has all the solar panels on the top of it and has the batteries and all the pieces and parts that need to go with that underneath it, as well as some additional space, because it had to be really big to have as many solar panels as we wanted. And he had numerous decisions that he had to make in that project, which we took on debt to do. And there were examples of where he could spend a little bit more money,

[13:44] but get a much higher quality fill in the blank. Wires, tools, you know, individual pieces and parts that needed to go with the whole system. And Todd is always a longevity thinker. He is always make it as big as possible, as reasonable, but as big because you know, you’re going to grow into it. We wish that you had made it bigger if you didn’t, et cetera, et cetera. You’re going to probably use it longer than you think. So build for long-term, buy for long-term, strategize for long-term. That’s always how he has thought. And I’ve been so grateful over the years when we built our home and now building this shop, because he’s absolutely right. Like every single thing that you think might be short-term, it’s not.

[14:36] It ends up being long-term in terms of pieces and parts and products. And there’s so much human labor involved in getting that stuff in. You don’t want to go cheap on wiring or, you know, the clamps that hold the panels on the roof or any of that kind of things, you don’t want to have the human labor of replacing it. Nor do you want to have the risk or the concern that it may fail. And so this is just one of those times where if he hadn’t have pushed the envelope and the cost of the project probably was a good 25% more than we thought it was going to be, which is standard, right? Like always, always go into a construction project knowing it’s going to take at least 25% more money and at least 25% more time.

[15:24] And then you get so much better results because of it. And so that’s an example. Now we were working with a line of credit, so it was no big deal. It was collateralized by our life insurance policies. So it had a ton of flexibility and we were able to do every single thing that we needed and wanted to do to make that shop and that whole solar system, which now literally powers our house and our office. And we will be working with 20 years from now, 30 years from now, there will be battery replacements that have to occur, but the shop and everything else about it will literally be in operation probably 40, 50, 60 years from now. Yes, I love that. The title of this episode is Borrowing Responsibly.

[16:16] And so what’s interesting about thinking of it this way of responsibly is that it’s a paradigm shift to approach it the way that you are. Meaning if we follow the traditions responsibly, a person would think, I have to get it at the very best price of this. And that’s not the responsible way of looking at it. You’re looking at it from a longevity perspective. And yes, there are things that we’re going to get the best price on that might not matter. So you’ve helped frame this responsibility. And hopefully what we’ve done from this episode is that anyone that’s on the fence about getting an additional asset, they’re going to say, okay, I now have a tool of a life insurance policy that I could use.

[17:10] I can now have a definitive number of 8% interest. And I’m going to look at this and be able to weather the storm. And I’m going to use as much OPM as possible. All right, let’s go. So you’ve created a math formula that sets a person up for better success. Now, of course, for all of the asterisks in this episode is if you’re buying a restaurant, good luck. No, but for real, I’ve owned a restaurant. Luckily I sold it and it was great, but that’s a whole other conversation. This is one of those conversations that you’re teaching to be responsible from a prosperity perspective that very few understand. Well, it is so awesome that in America we have entrepreneurial opportunities that go forever and we can also be clear that

[18:02] they’re not for everybody. And so one of the most valuable things I think for people to consider as it relates to responsible debt is the type of borrower that you want to be. And so there are people that have entrepreneurial bones in their bodies. They’ve probably had them since day one. There are all kinds of things out there that can help you figure out whether that’s you or not. Uh, one of my favorites is a gentleman that I know from strategic coach named Gino Wickman. And he has a book called entrepreneurial leap. And it is a leap that people take a leap of faith, a leap of risk, uh, you know, a leap of opportunity when they leave the corporate job environment and go to the entrepreneurial job.

[18:48] And, and it’s also awesome that those that don’t want to take that leap that are more comfortable being the followers are just as valuable in America, in, you know, Canada, and really the whole world, because our businesses would not be as good if we didn’t have the people that were willing to follow the system and do the work and show up day after day and provide the service or whatever it is. So I think it’s really critical around the arena of responsible debt that you get super clear on what works best for you. So well said. Kim, thank you for sharing your thoughts and the frameworks, uh, helping all of us understand how we can approach this from prosperity. Perfect. Thank you. Thank you for listening to the prosperity podcast to take control

[19:50] of your money and have it work for you, visit prosperity thinkers.com.