E94: What if Using Cash Money is the Wrong Advice?

Announcer: Is paying cash for everything you buy really the most efficient way to manage your money? Many of us were taught to stay out of debt and pay cash for everything. But when you look at the lives of the rich and powerful, they like to use other people’s money over using their own. In this episode, we will discuss why it’s time to rethink how you use money, and how you can mimic the rich and how they use money and use it in your own personal financial situation. She’s Holly and she helps people find financial freedom.

Holly: He’s Nate. He makes sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.

Nate: All right, well, today we’re going to talk about something that may be busting some myths or popping some bubbles that people find themselves in. So just know that in a good heart and good spirit. We’re just trying to help. This is maybe a sacred cow that many of us have grown up to believe, and that is that paying cash is always the best, whether it’s our parents or whether it’s Dave Ramsey` or somebody out there who’s been an influence in our lives has encouraged us to stay clear of all sorts of debt. Never pay interest anybody as much as you can and pay cash for everything. But Holly and I are here to question whether or not that advice is the greatest advice, whether or not paying cash is really the most efficient way to use your money.

Holly: And I think Nate made a really good point in saying it’s probably how we were raised or what we were taught. And I’m going to go out there and say even prior to Infinite Banking Concept and learning how to actually take control of my money, the mentality I had was the same as most of us out there that I was taught. You pay cash for everything. You don’t want to owe anybody any money, and to always pay cash, to never be in debt. And the reality is, is that that thinking is what often keeps most of us on the hamster wheel trying to earn money, but what it does with our money, two main points of paying cash that Nate and I really want to address is number one, it keeps your money idle. Your money is just sitting there and it’s missing. You’re missing the opportunity to keep that money moving or in motion, and you save up for something and you buy it, and the money is gone. It’s been given to somebody else.

Nate: Yeah, exactly. And I think, honestly, Ray, Holly, your dad, who’s our founder for those of you who are new to the podcast. A lot of the episodes he’s been on our podcasts have been some of the most well received. So you can look through the history of that and look at some of the episodes Ray Poteet’s spent on, but he was the image of somebody who paid cash for everything. Whether paying cash for all of his cars, paying his home off in four or five years, just paying cash. Owe no man. Anything that was his mantra. And it wasn’t until the Infinite Banking Concept came along that he changed that. And he even went back, meticulously, him and his assistant ,about the 20 years previous, he had owned maybe 20 cars, for him, his wife and Holly, for you.

Holly: Yes. My primary [crosstalk 00:03:19].

Nate: And your two sisters. And just constantly, with five primary drivers, there was a lot of used cars that would be going through it. He found out that there was hundreds of thousands of dollars that he could have made if somebody had taught him how to use life insurance to buy these cars. He even had the policies, just no one told him what he could do with them. So Holly, you’re exactly right, that there’s two downsides to paying cash. And the first one of the main ones is that everybody who pays cash for everything they do, by necessity, you have to have a ton of cash sitting around. Typically that’s in checking accounts or savings accounts. I like to call that idle money. It’s money that’s pretty much doing nothing. If it is earning interest, it’s very little. And so you may not be paying anybody interest, but you’re missing out on having that money actually work for you.

In economics, that’s called opportunity costs, that by choosing to go the route of paying cash for everything you buy, you’re going to be missing out on a lot of opportunity costs, or money that that could have generated had you put it to work. And we’re going to talk about that too, Holly, in just a minute, we’re going to give some examples of that, but the first point as you already mentioned is when you’re paying cash for everything, most of the time, you’re going to have way too much money. Whether you’re saving up to buy a car and you’ve got $30,000 saved up and you’ve got this emergency fund with $40,000 in it. And we have all this cash. It makes us feel good. It makes us feel secure, but it might not be wise. And it might not be efficient use of the money.

The second one, which I think you’ve even alluded to, Holly, which was the other downside to paying cash. The two obvious ones as having idle money, and number two is having to reset the compounding curve every time you want to purchase something. So if we were to pretend you were actually making money wherever it was sitting, which is probably pretty unusual, but if you were making money, having your money work for you in some way, and it’s on this compound interest curve, when you pay cash and you spend the money, that money no longer works for you. So it has to reset and then you build it back up and then you reset and you build it back up when you reset. But we all have seen these compound interest curves. The only way to really start making any money with compound interest is to have it compound for a long period of time. And most of us that have been taught to pay cash, we never get to experience the benefit of the compound curve, because we just reset all the time.

Holly: Well, and I think, Nate, the resetting is you start at zero and you save up, and you take yourself back to zero. And the reality is, is while you’re saving up, like you said, with the idle money, somebody else is using that money. Somebody else is using that cash and putting it into motion while you’re getting a little bit of interest. But the bottom line is how exciting is it to always start back at zero and reset the compounding? Ask yourself, do you want to consistently start back at zero and have to restart over on that compounding?

Nate: I’m going to guess the answer is no. I would hope it is. So those two downsides, Holly, strike the face of someone like a Dave Ramsey or a Susie Orman or some of these talking heads that many of us have been influenced by at various times, financial experts or gurus. Dave Ramsey is the biggest proponent of saying, “Hey, pay cash for everything. Owe no man nothing.” I guess we’re here to say he’s just wrong. I think that it’s almost hypocritical to say some of the things he says because of those downsides that we’re already talking about, him saying, “Go out and pay cash for everything and pay off your home as fast as possible.” But he also then tells you that, “Hey, if you just invest in these mutual funds,” which I don’t know where he’s finding those mutual funds, but, “If you just go invest in these mutual funds, you’re going to earn a 12% rate of return.”

So my question to the audience is when would it ever make sense to throw a whole bunch of money at the principle of the mortgage, throwing a whole bunch of money at the house, when most likely your interest rate is three and a half, four and a half percent, when you could instead take that same money and put it in these magical mutual funds that earn 12%. which one is going to end up producing more value to you? And you run numbers all day and it almost never makes sense to throw all of your cash at your house. In almost every scenario, you can earn more money by choosing to take those dollars elsewhere. And the profit you can produce with that money would more than exceed the interest, you would say you’ve by paying down a mortgage extremely fast. And then that same principle applies across the entire scale of paying cash for things. Many times, it may not be in your best interest, depending on what the alternative is for you.

Holly: The reality of paying the mortgage off, and Ray, my dad, is a prime example with the last house. When he paid it off, he did, I think he said in 39 months or something like that. And he said he was asset rich and cash poor. It didn’t do him any good to pay the principle off when he could have used that same money, as what Nate’s saying, and put it in something else that’s earning more than three and a half percent. And so the reality is, is we’ve got to start looking at what do the wealthy do? The wealthy very rarely ever pay cash, even for their mortgage. The reality is Walmart doesn’t own any of their buildings. They don’t want to tie up that capital and cash in owning a building. They lease them.

Nate: Yeah. They have somebody else build the buildings, own the building, sign a longterm lease. But that way they don’t have to put any of the money in. They think they can earn more money on that capital by not owning the building. And we all know Walmart could own their buildings. They have the money, but it doesn’t make sense for them because of what else they can do with it. That’s a great example. And same thing where like Mark Zuckerberg. There was an article I read back, this is probably six, seven, eight years ago now, 2012, 2013 timeframe. And Mark Zuckerberg, the owner of Facebook, it was news at that time that he had bought, and at that, in that time, it wasn’t a crazy house. It was like a $10 million home in Palo Alto, which sounds like a pretty nice home.

But for a guy who was worth billions of dollars, that probably it was kind of frugal. The news part of it was that people were asking Mark, “Why did you take out a mortgage to buy this house? Why did you borrow money to buy your house? We all know you had enough money just to pay cash for it.” It was that very same thing. His advisor had told him, “Mark, why would you put your good dollars that you could go use with your brain and earn a lot more than the two and a half percent that this bank’s going to charge you?” Now, he got like the lowest rate imaginable because he’s essentially zero risk loan for a bank. There’s absolutely no risk of default. And so it was like two and a half percent. And the advisor says, “Don’t throw your $10 million to avoid paying two and a half percent on it. Take that money and go put it to work. And you’ll earn way more.”

So as Holly and I have been saying, the wealthy know when it, when it’s a good idea to use other people’s money and when it’s not. And the biggest problem with paying cash that most people find themselves in, and we’ve ran the numbers before. I think we even have a podcast on it, similar to this, Holly, the one that we did on emergency funds and how to rethink your emergency fund. And we told you how Infinite Banking can really become the emergency fund, but we did some numbers there. And for a $50,000 emergency fund, if you had $50,000 sitting in cash, that can be for emergencies and for the cars that you’re buying and just paying cash, having some money set aside, the amount that it costs you, real cost to you to hold that money in a typical place, a cash place, like a checking account savings account, something of that nature, it’s over $100,000.

I want to say it was like $130,000 over 30, 40 years of a life of a guy just paying cash for everything. It was huge amounts of money that you could make by changing where that money was being held and having it be put to work, and Holly, one of the best places that we know to change that mentality and to start getting out of paying cash for everything and losing and having to have these downsides is the Infinite Banking Concept. It essentially is the answer for the missed money that most cash guys have.

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Holly: Nate, what it allows you to do, if you’re a cash person is to put cash somewhere, for a better word, store it, to store your cash. But then basically, instead of resetting compound when you want to use the cash and buy something, you don’t reset compound, you take a loan out and the cash continues to grow. So you’re not losing that. Plus, you’re not losing the interest that it will grow by and you can even pay yourself the interest. So you’re actually are making money while never losing money.

Nate: Exactly. I like to say that whenever you use a policy as your new financial management focus, as opposed to bank accounts, like what most of us have, when you use a policy, it feels like you’re paying cash, but without the downsides of paying cash. It feels like we’re paying cash for things, because if I go borrow money from my policy to buy a car, I walk onto the lot and I pay cash for the car, and I have the same feeling. And then I don’t have a set payment to somebody else and having to go through an approval process and all that. I just ask for the money. It gets into my account. I go pay cash for something. And I start paying me back, my policy back, at my own pace, however long I want to, whatever payment level I want to have to rebuild it so I can do it again.

It’s the same. It feels like I’m paying cash for something, but without the downsides, as you already mentioned, that whenever I take a loan against my policy, my cash value doesn’t reset the compound. It’s compounding on the full amount. And so I never have to start back over at zero. I get to avoid that downside. And I also get to avoid the downside of having idle money, or missing out on the opportunity for it to grow, because in a policy, it’s going to be growing whether or not I have loans out or not, just the cash value itself. It’s going to be earning, let’s say four to 5% interest, something like that, as it’s growing. So I don’t have to sit there and earn half a percent and miss out on the opportunity for my money to grow.

And that’s the exact way of thinking that the rich have, which is, “Hey, maybe it doesn’t make sense to leave a whole bunch of money liquid doing nothing. And instead, let’s put our money to work.” Even if that means having to use other people’s money, and in the case of Infinite Banking, the other people’s money is a loan from the insurance company using my policy as collateral to receive the benefits that we’ve already just mentioned.

Holly: I think the simplicity of it is often what sometimes people are like, “Wait, I’ve been taught one thing my whole life, and now you’re teaching me something completely different.” And the simplicity of it is you are just adding one step, really, in the plan of you saved the money. You’re just putting in a policy. Now you’re borrowing the money from the life insurance company.

Nate: And I guess that that’s what goes through most people’s brain is especially for the cash people. They have a hard time figuring out, “Well, why would I take a loan from a policy? I don’t want to pay interest anybody. I don’t like the word loan.” And we need to understand that there’s different transactions in the financial world that actually might be more effective at building wealth than simply just throwing up a big cash pile and spending the money and stirring up a big cash balance, spending the money. In reality, the wealthy don’t operate that way. At least not normally. And we would suggest that we mimic more of that mentality. We still love having liquid money. I mean, I’m not brave enough to do what some of these people do. I like having the liquid money.

I just don’t want it to be in a bank account that’s making somebody else rich. I want it to make me rich. A policy is a great source to do that. If you have a different way to make this system happen, where you can make a ton of money and have the feeling of paying cash with the downsides of paying cash, if you can create a way that I can jump in with no risk, or very little risk, and make a ton of money, similar to what we can do with Infinite Banking, then please tell me, but I haven’t been able to find it. That’s why we’re big proponents of it. That’s why the banks buy so much life insurance. That’s why corporations like Walmart buy so much life insurance on their employees. It’s because they see that it’s really the only tool that does what we’re trying to say it can do. And so it’s because of that, we should buy a lot more of it than we already have if at all possible.

Holly: This isn’t something that just Nate and I are promoting or whatever. You actually have to start asking who is actually buying and purchasing these types of policies. And it is the wealthy and they’re never, ever, ever the growth of their money. They’re never leaving it sitting. They are constantly keeping their money in motion. Even if they’re using other people’s dollars, they’re taking that loan and putting the good principal dollars that they would have spent if they paid cash to use in some other vehicle of investing, in some other way of earning more money. And so if we do not get out of the process of just saving up our money and resetting compound, we’re never going to be ahead. And this is the only product in the world that works this way, where you actually can borrow the money from the life insurance company, and you’re never resetting your compounding and you’re able to buy what you want. You just have a loan to the life insurance company that you’re going to pay back.

Nate: Every time we make a payment back to the insurance company, it reduces the loan balance of the policy, which increases the amount that we can borrow dollar for dollar. So it’s just like putting money into a checking account or into a savings account every time. We don’t have time for me to really do that comment justice. So maybe we’ll leave that for a different time. It’s the only thing that I know that gives me the feeling like I’m paying cash, but it takes away all the downsides of paying cash so I can operate more like the wealthy do, or more like the corporations do with their capital, as opposed to acting like the average Joe. Doing things the way the average Joe does it will give you the results the average Joe gets. And that’s why it’s very important to not follow the herd. Because if you do, you’ll just get slaughtered.

Holly: What Nate said is key. When you make a loan repayment or pay back any or a portion of that loan to the insurance company, it grows for you dollar for dollar that you have to use again. But the reality is that instead of giving it to the bank per se, and they’re making all the money and the shareholders of the bank are making the money, your loan repayments and borrowing from the life insurance company, you are a shareholder. So you are helping the company grow and earn money by repaying that debt versus if you give it to the bank or somebody else, you’re just helping them.

Nate: Exactly right.

Holly: You’re just giving that money over to the shareholders. And when you take it out of the bank, you get zero, right? And you reset the compounding. At least this way, you don’t reset compounding. You get the benefit of borrowing the money and keeping your money in motion, and you get the benefit of being a shareholder would that insurance company, so you’re reaping profit by repaying, a loan. Have you ever thought about, “Hey, by me actually paying myself back, I’m actually being able to make money.” So it really does change your feeling of security. I don’t know about you, Nate. I don’t ever mind making a loan repayment at all to the life insurance company, because in some ways I just feel, I am, I feel like I’m paying back myself because I’m a shareholder.

Nate: It’s hard to tell people, “Hey, here’s what happens” until you feel it. You take out a loan and you make repayments, and then suddenly at the end of repaying, it, you have more than what you put in to repay it. And you have all that money that’s just different than a car loan, where you send somebody payments and that money’s gone. A mortgage, you send them payments, you don’t get that money. But with the policy alone, by the way it’s structured, it’s totally different. As we kind of end and wrap up, the main thing I’m encouraging you to do is to be creative. Paying cash is a simple way to live life and that’s good, but it’s also not a profitable way to live life. And so I don’t care if you do the Infinite Banking Concept as a way to start making more money than just your typical paying cash.

Or if you, if you can be creative and think of a different way to do it, go for it. But just, at least where I thought we could put a thorn in your shoe or something to where, hey, maybe paying cash is not what the wealthy do. And it’s not all that it’s set out to be. It can be possible to manage money differently, to use money in a different way and just become wealthier, become more profitable without really doing anything different as far as like changing your lifestyle or earning more money or anything, just by changing how you’re working with the money. It’s just becoming more efficient.

So be creative. Whether you want to do Infinite Banking as a way to increase your profits without changing your lifestyle. Or if you can think of another way. I know that there’s potentially some other ways, maybe some that involve a little bit more risk than what I would like to take to be able to do similar things to this, but either way, it’s your life. Be creative with it. Don’t just follow the herd. Any last thoughts on your end, Holly?

Holly: I would just say that if you do have questions, we would love to talk to you. You can just email podcast@livingwealth and Nate or myself will respond. Be creative with your money. Don’t just listen to what somebody else is telling you to do. Actually look and see around you what other people are doing. If the wealthy aren’t doing it, then why aren’t they doing it and why should you do it?

Nate: Exactly. And always remember, if you follow the herd, you will get slaughtered.

Holly: For free transcripts and resources, please visit livingwealth.com/e94.