The Value of Borrowing Against Your Savings – Episode 112

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your hosts, bestselling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have bestselling financial author and president of Partners for Prosperity, Kim Butler with us. How are you, Kim? Very fine, thank you, Todd. Super. Well, today we’re going to be talking about the value of an uninterrupted compound interest curve. That’s a big mouthful. It is, but it’s such a cool subject. All right. Well, why don’t you, you know, this is going to be one of the few podcasts where

[00:52] there are some downloadable materials. We’re not sure how they’re going to be in there, but they’ll either be a link or a tab at the bottom. So when we’re talking about examples that gets a little complicated may help to print those off. Excellent. Yeah. Thanks for bringing that up at the beginning. So the reason that this comes up is there’s a lot of life insurance agents out there using this terminology. And so clients have picked up on that and started to ask the question, what is this uninterrupted compound interest curve thing? So I’ve used the Truth Comes Up software. So that’s available to anybody at truthconcepts.com and the maximum potential calculator to prove the drastic difference that you can have just at the high level

[01:41] by borrowing against your savings rather than withdrawing. So the typical family deposits money into savings and then withdraws. And deposits and withdraws and deposits and withdraws throughout their entire lifetime. And that quote savings could be a savings account or it could be cash value of life insurance. It doesn’t matter because the borrowing against strategy can be done with either a savings account or a life insurance policy. So let’s just keep the facts simple for this audio portion. And again, as Todd said, there are downloads of the two different pictures of this story because of what happens to uninterrupted. And this is a really simplistic view of it. But again, the typical family that deposits and withdraws, deposits and withdraws and

[02:44] deposits and withdraws, finally in their let’s say 50s, gets serious about saving money and then goes forward depositing, depositing, depositing and either never withdrawing or depositing, depositing, depositing, borrowing against, borrowing against, paying back, paying back, borrowing against, paying back, borrowing against, paying back. So in their example, from age 50 to age 70, if they are depositing $10,000 a year at, say, 4%, they’re going to get $309,000, whereas the family that figured this out at age 30, so from 30 to 70, double the time, does the same thing. $10,000, $10,000 every single year, same 4%. They have $988,000 40 years later. And so I just want to identify the massive amount of difference.

[03:56] Now, of course, there’s a difference in time. And so you’d say, well, the two calculators are not comparing apples to apples, but they can be. Because if, as a family, in your 30s, so I’m going to admit that in your 20s, it’s pretty hard to do unless you’ve really got a great income environment and pretty low expenses. But let’s say that by your 30s, you finally get it around to the place where you can deposit money and then borrow against it, deposit it and borrow against it and pay it back, deposit it, borrow against it, pay it back. If you can do that for 40 years versus the family that doesn’t get their financial acts together until their 50s and then can only do it for 20 years, we have a tripling of the dollars, $309,000 to $988,000.

[04:50] So a doubling of the time, a tripling of the dollars. Now, clearly we have not brought into this discussion, the cost of borrowing against the money. But you have to separate that out because the cost of borrowing against it has to be applied to whatever you’re doing with the dollars. In other words, let’s say you’re borrowing against your life insurance policy or you’re borrowing against your savings account at a 3% rate. Okay. You can do that today. Where’s prime today, Todd, do you happen to know? About one and a quarter. Holy cow. So I, I personally know somebody that had the ability because of their cash value to borrow at prime. So I’ll use my three example that I was going to use anyway, because not

[05:42] everybody can borrow at prime. And it’s often prime plus one or something like that. But because of this person’s cash value, he was able to go into his bank and borrow at prime. So let’s say that you could borrow at 3%, borrow against your cash value or against your savings account. Again, it doesn’t matter. And you had a 7% loan. Now, Todd, you and I, for our clients have a place where they can get a 7%. Excuse me. I said loan. I meant investment. We know where people can get a 7% investment. So if you have your ability to borrow at three and invest at seven, that’s fabulous deal. We could calculate that, but let’s not get too bogged down in the numbers, let’s just acknowledge that your 3% cost of borrowing goes

[06:31] against your 7% investment. That leaves your 4% cash value alone. So in essence, you’re getting the four plus you’re getting the seven at a 3% cost, and that is a fabulous deal. But you can also do the same thing, even if the borrowing against your savings account is for an expense. Like my patio furniture example earlier, I got the patio furniture. I physically sat in it. I made use of it during the year or two that it took us to pay it back. So in that example, of course you still have a cost and your gain is not as measurable because it’s not an investment, but it’s physical furniture. Now, some people might call it a vacation or they might go get a car or they might do a down payment on investment property or whatever it is.

[07:22] But we need to be conscious of getting ourselves into the place where we can save first and then borrow against that savings, pay it back, save again, borrow against that savings, pay it back, save again, and again and again and again, and this is what gives us the value of the uninterrupted compound interest curve, which in the same timeframe gets us many more dollars or in our example, in the doubling of a timeframe, it’s us triple the dollars. By the way, just would like to add that that 7% investment is for accredited and non-accredited investors, $10,000 minimum investment, one year time commitment. You get a check every month. That’s correct. I think it’s a $25,000 minimum investment. Is it 25 now?

[08:19] Okay. Sorry. Yeah, I think it’s 25. But still that is available to anybody, any single person that has $25,000. So that’s a great goal. So if you’re wondering where to start, you build up cash value until it creates your emergency fund first. We always want to get that handled first, and then you leave that alone. Then your next goal is to build up at least $25,000 so that you could borrow against it and then go invest at seven and you don’t have to borrow against your cash value at a life insurance company, you can borrow against your cash value at a bank and get the lower rate right now. Super. And if as far as timeframe goes, the absolute best time for you to invest was probably 20 years ago.

[09:09] But since we can’t figure out how to do that, the next best thing is to get started today. Absolutely. So bring in your questions. We’d love to help email us and we will help. Hello at partnersforprosperity.com is a great spot for any kind of questions on any financial subject. We love to talk about it. Super. Well, once again, this is No BS Money Guy Todd Strobel. Special thanks to Kim Butler. Take care everybody. 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.