The Cure For Lazy Assets – Episode 486

This transcript was auto-generated and may contain errors.

[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, welcome to the podcast. Today we’re gonna be talking about multiplying your money. And so if you have any lazy assets out there, and I know that sounds strange, we are going to help you see how they can be multiplied. Lazy assets, let’s step the stage for that first. Absolutely, and I have a funny story because I used to call them dead assets. And I had a client say, that’s a really strong word. Like, can you use something else? And I think I tried the lazy at that point. So whichever way you wanna word it, these are assets that, you know, a lot of people know some obvious ones. In fact, our previous podcasts talking about cash, sometimes people call cash a dead or lazy asset.

[00:53] And that may or may not be true based on your situation and what opportunities you’re preparing yourself for. But something like home equity is a good example. You know, that is an asset, the equity in your home, which is if you take the total value of your home and you have your mortgage subtracted by that, the balance of the mortgage, there is a dollar figure there in most homes, not always, that is leftover equity that truly the bank controls. You do not control it. Even if you have a home equity line, you do not control that, the bank does. And so you could argue that the home equity is a dead or lazy asset on your balance sheet. The cash value of life insurance, a lot of people mistakenly think

[01:38] that that is a dead or lazy asset on their balance sheet. And just real quick, one of the reasons that it’s not is that it earns dividends every single year at a rate that’s a lot higher than any bank or money market type dollar out there. There are other things, clearly, that most financial people would not call dead or lazy. And that is all retirement monies, all 401k, 403b, IRA, TSP, all of those kinds of things are assets that you can only choose from what your provider shares with you. You know, this list of 20 mutual funds or this list of 100 mutual funds, they’re all still being chosen by your provider and only doing one job, 529 plans, same idea. The only job those dollars can do without penalties

[02:35] is education. And thankfully, it does have a fairly broad terminology. In other words, you can pay for things like private schools and whatnot, but it is still $1 doing one job. And so any time there are dollars stuck in that environment, they are not as efficient, they’re not as effective as they could be. And sometimes there’s something that you can do about it. Sometimes there’s not. So like in the retirement environment, well, yeah, you can move it into a self-directed IRA. That helps a little bit, but it’s still completely controlled by the government, how you put it in, take it out, what you do with it, et cetera, et cetera. So I really put those types of things in that debt or lazy category,

[03:21] even though many financial people wouldn’t. Yeah, I agree that they don’t. Here’s another thought before we dive into the details. Is it possible that there is another category of lazy asset, which is when it gets too complicated or too over leveraged, meaning you’re seeing people go out there and misconstrue how they’re using life insurance or credit cards or loans or whatever. And it may look like they are busy doing something, but that busyness is actually laziness. Have you seen that? Yes. Oh my gosh. Yes, I see the question and I love it because I get probably once a month, sometimes twice a month, somebody, usually a client or it could be somebody that I haven’t met yet, asking me if they should, as an example,

[04:10] this is a great example of what you’re talking about, pay their business bills with borrowed against cash value dollars. In other words, they have life insurance, they’ve already bought it, they’ve built up some cash value and now they’ve heard from somebody or they read somewhere or they watch some YouTube about running their business bills through that dollar, that cash value borrowed against dollar to pay business expenses. And it always saddens me because that is not an efficient use of money, that’s not an efficient use of the cash value of life insurance, which should be left alone for emergencies and opportunities. Now, I’m not saying that you can’t pay one month and solve an emergency.

[04:52] Yes, that’s different. But to do it on a repetitive basis is only adding interest to your business expenses. There is no value in doing that. And this is what goes back to my earlier comment about how cash value of life insurance is not a lazy asset because it does earn dividends every single year, whether it’s borrowed against or not. And it’s funny when I help people calculate some things, you know, they’ll say, well, I also get the dividend. Well, you would get the dividend anyway. So you can’t add that to the calculation. And so it’s imperative that people really understand you’re borrowing against your cash value to solve emergencies, take advantage of opportunities. Paying your business bills on a regular ongoing basis

[05:46] does not shift a lazy asset into a working asset. In fact, in actuality, it does it the other way around. It takes a good working asset called cash value of life insurance that earns dividends every single year and actually shifts it backwards into a inefficient asset. I’m not gonna call it lazy, but actually you said it really well. There’s a whole lot of movement going on and absolutely no forward progress. Yeah, I think that’s actually something that not a lot of people talk about because they’re lost focusing on the right thing. And we see this happen all the time where they feel like they are important with their wheels turning as much as possible, but as you just mentioned, not going in the right direction.

[06:38] So let’s jump back over to whole life insurance. So we’ve mentioned, and we’re kind of trying to unpack the multiply piece of this. So we’ve gone over this piece of it where we’re getting dividends. So check, that’s working. We’re getting multiple use out of it, check. We’ve got a death benefit that we even talk about it, check. Let’s talk at also about what it looks like on our balance sheets or what does it look like for our family net worth and pieces like that, because that’s a multiply, especially in an area where people are being more cash heavy, as we mentioned in a previous episode. Well, the balance sheet question is a really good one. And I think the easiest analogy is to help people understand that at a bank,

[07:24] so any commercial bank, small, large, doesn’t matter, they have assets in tiers, tier one, tier two, tier three, and the tier one assets are the safest, most efficient, effective assets that that bank has. And cash value of life insurance is a tier one asset on the bank’s balance sheet. In their eyes, the life insurance policies that they either own themselves or have as collateral are tier one assets. And so that helps us as individuals understand that if we’re going to build a really, really strong personal finance building, let’s keep our businesses out of it for a minute and just keep it simple and personal, the most important thing at the foundation of our building is our position of cash.

[08:17] It is our emergency slash opportunity fund, again, best stored in cash value of life insurance, but also stored in bank money markets, even CDs, brokerage money markets, savings accounts, that type of thing. Those are all tier one and you could liken it to building a home. If you’re going to build a two or three story home, you’ve got to have a stronger foundation than if you’re just going to build a one story home. If you’re going to build a 10 story building, you’ve got to have a stronger foundation than if you’re going to build a one story building. And so it enables people to really get clear, I believe, if they can see their cash value of life insurance and their other cash as a position of streaks that is already employing

[09:03] the multiplier effect and the principle of move. You’re moving money through your life insurance, not to it. And the reason it’s through it is because the dollars are going in and then they’re creating dividends. They’re creating, like you said, the dust benefit. You could even have waiver premium writer. You could have long-term care writer. You are getting a guaranteed growth of cash value separate from the dividend. Then on top of that, you’re getting the dividend plus you have the ability to borrow against it. I mean, I have a long list somewhere. We’ll have to do a little podcast of just the number of jobs that a dollar is doing in life insurance. And the easiest thing to compare it with is real estate

[09:41] because a dollar so easily also has that multiplier effect with real estate. And then of course you combine the two, you really get a one times three, one plus one equals 11 environment. But back to your question, it is dollars at an insurance company, not at a bank that are your strongest assets on your personal balance sheet because the mutual insurance company, so we’re talking Guardian, Northwestern Mutual, New York Life, Mass Mutual, Lafayette, Penn Mutual, Mutual Trust, One America. There’s probably a few more I could rattle off. Foresters comes to mind. The mutual life insurance companies, not the stock held life insurance companies. Those are typical public companies, not what I’m talking about,

[10:29] but the mutual life insurance companies, which are the companies that provide that whole life product and have for over a hundred years, most of them some of them 160, 70, 80 years are the strongest financial institutions in our country. They are stronger than banks. They are stronger, really. What’s gonna say the government, I’m gonna let that one go, too much political garbage behind it anyway. But if you’re looking at financial institutions, the mutual life insurance companies and their ability to withstand all of the myriad of financial environments that they have had to withstand over those 150, 60, 70 years are the strongest position. So don’t you want that on your balance sheet? Absolutely.

[11:16] I’m pulling a correlation that I’m gonna experiment this thought with you for a moment. So you’re talking about the most sound companies out there. They’ve been around a hundred plus years. We know the phrase risk equals reward. I didn’t say that’s a truth. I said the phrase and I’m Kim Butler language right now. So I’m good. That’s a phrase. It does not mean it’s true. Risk equals reward. Generally speaking, would you say that these companies are not risky and doing risky things? Correct. In fact, probably the main reason that they are still around 150, 60, 70 years later is that they do not do risky things. And yet they still are getting growth. They still are getting their dollars to multiply.

[12:09] So what can we as individuals learn from that? Yeah, absolutely. So I love that you’re piecing this together that we can learn from that. It has me thinking about a trend that’s been going on. Really it’s kind of hit the real estate investing space over the last several months, which is Airbnb arbitrage. Are you familiar with this? Yes, do explain. So what a lot of people are doing is they’ve seen this increase in short-term rentals. So in a real estate investor, well then go to a homeowner and they’ll say, hey, I’d like to rent your house out, or they’ll go to an existing Airbnb person. They’ll now pay that mortgage payment and then they’ll go and hustle and get that Airbnb. They’ll furnish it in many cases,

[13:03] they’ll go out and they’ll service the listings and it does work for some people. Now, as we’ve mentioned at the beginning, there’s things that we could do if we run all of our expenses through our life insurance policy as a business, we may be busy just being busy. And I think that we can learn a lesson. I didn’t say that it’s bad in all situations, but we can learn from this by taking multiply a little too far, can actually cause us to go backwards instead of forwards. That’s correct. And again, the learning by watching what the financial institutions do. And I think in a lot of cases, banks are somewhat similar in that space. For the most part, fairly conservative, but the banks take the multiplier thing one step too far

[13:55] in the fractional reserve environment. Life insurance companies do not do that. And that is a huge lesson. Absolutely huge. You dropped some like truth bombs inside of this episode. This was good, really good. For all of our listeners, if you are the type that you need to get some more information and to really sink in and understand this, this is an episode that is related to a blog post. So if you need to read, we’ll attach this episode to it so that you can go even deeper. Also, there’s a way for you to sign up for the newsletter, or you can go and purchase the books and read books, or as you’re on this podcast, you can listen to additional episodes. See, we’ve multiplied that. So we’re using that principle here,

[14:45] but we’re not going too far where we’re recycling and just spitting out garbage. So I think we’re living proof right now in this podcast. And so important that we walk the talk and live the principles that we practice and preach. So true. Thanks for sharing this, Kim. Enjoyed. Thank you for listening to the Prosperity Podcast To take control of your money and have it work for you, visit ProsperityThinkers.com.