E54: How to Avoid the Fees of Opportunity Cost

Nate: In this episode we will discuss the impact that opportunity cost has on your money and how you can avoid missing out on the wealth caused by idle dollars or misused dollars. 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: Today we are here to talk about something that if you’ve been around us before we’ve kind of eluded to I’m sure plenty of times in the podcast and in some of the teaching that we do, but there’s a principle that underlines the Infinite Banking concept that we do teach about on the podcast. It underlines a lot of the financial decisions that you’re going to make. That’s this idea that you finance everything that you buy in one way or another. You finance everything that you buy. Kind of also can be called opportunity cost. Holly, what do we mean when we say you finance everything that you buy?

Holly: I think most people think that they only finance something Nate if they go through a loan process such as even purchasing a car. They don’t actually understand that even if they pay cash for a car they’re still financing it. The way they financed it was when they had extra dollars they basically put them away and saved up for that car. So in a way they were financing it, but in an unsystematic approach verus somebody who goes and finances a car through a bank. When you think of financing only through a bank or a loan, or an entity that gives us money instead of understanding that even we finance our utility bills, we finance the gasoline that goes in our car. We finance all of that whether we realize it or not.

Nate: There are really only two ways to purchase anything. You can either borrow the money from somebody else, in which case we know that many times we have to pay them back, not only what we borrowed but also with interest of course, so it’s costing us interest to use their money, whether it’s to buy a car, whether it’s to go on vacation and use the credit card, or whether it’s buying a home. That’s the typical way that we think when we finance. But when you pay cash for something you miss out on all the interest that those dollars ever could have earned you. The money’s gone and all the money that it could have earned you is gone as well. You’re either going to borrow somebody else’s money and pay them interest, or you’re going to use your own money, spend it, and lose all the interest that your money could have earned you if you kept it.

That’s where we’ve come up with this principle that you really do finance everything that you buy. You’re either going to pay interest to someone else, or you’re going to use your own money and miss out on the opportunities you had if you still had that money to go and invest or save. That’s where opportunity cost comes in. It’s a fancy word in economics where it says everything not only has a real cost where you spend money or you invest money in something, but the opportunity cost is what could you have done with that money if you didn’t to chose that. What opportunity, what amount of wealth, what profit did we miss out on by choosing to do that with it. That’s where this principle comes in.

Holly: Like you said we truly only associate that word with borrowing money instead of understanding that that’s not really what’s happening because we gave our money away and we just have to save up for the next thing. It’s a way of financing it, it’s just not a systematic approach and it’s not actual something that we think about as oh I paid cash. We don’t realize we lost anything because we’ve never been taught we lost that interest, or we always though we’re going to pay ourselves back sometimes and we never pay ourselves back either. We don’t even associate that the money we gave away maybe we should pay back in a systematic approach to ourselves because it really was, if we want to talk about, it was financed by us.

Nate: I think it’s funny that you mentioned that. We talk to people when we’re talking about Infinite Banking and they kind of come in and they may think that this system is really about getting out of debt or something like that. They say well Nate I don’t have any debt, I pay cash for everything. Kind of simply saying I don’t finance anything. What good is this to me if I never borrow money? It’s not just that. You really are financing everything. You’re choosing to either build up cash, as Holly you’ve been saying like make payment to you and your savings account and build it up and then spend it, and build it up and then spend it, and build it up and then spend it.

You do pay cash for everything, but that comes at a cost, especially because most of the people who I know who pay cash for most of their purchases they’re not earning really anything on the money that they’re actually using to build up and spend, so they’re missing out on quite a bit of wealth. Whereas of course the other guy who is financing it in the conventional sense and borrowing money, of course they have to pay interest. But you really do finance everything that you buy.

Infinite Banking can kind of help with this, these dollars that you’re missing out on in a couple of ways. I think that’s where we want to get to here is how you can avoid following prey to opportunity cost and how much wealth can be built or destroyed by choosing not to understand this principle. We’re going to get into that here right after this quick break from our sponsor.

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Holly: Welcome back to Dollars and Nonsense. We’re talking today about opportunity cost and how we finance everything.

Nate: Holly brought something up before we got on this podcast and started recording was we make decisions with money that impact a lot more things than just the here and now. Where the decisions we make now can certainly affect where we’re going to be in the future. One of the things that we’ve noticed can really impact is things that are impacting retirement, and with kids going to school, and the cost of that. Holly, can you bring forward to the audience really how some people are probably hurting themselves or feeling the impact of this missed opportunity that their money is not working for them enough because of some things that we were probably taught as not necessarily a bad idea?

Holly: Well one of the things that’s happening more and more is that people are using, especially parents but maybe even grandparents, are using their retirement program or their retirement money to help fund a kid or grandchild’s education. The way they’re doing that is taking it out of their actual retirement program and they’re putting it into a 529 program believing that they’re totally helping their kid and their child. Yet, what they don’t realize is that they’re giving those dollars away to the child to capitalize on education, but the reality is what they don’t tell you with 529 programs is that that’s one of the things that actually hinders or hurts a kid in receiving financial aid is if you actually set up one of those programs for them.

So what happens is they move the money out of their retirement program into that 529 program, the kid may or may not use their education, but it’s in that 529 program and now when the kid goes to apply for financial aid or grants they actually are hindered because you actually set up the 529 program. You’ve taken that money away that you were going to maybe live on in the future to help fund a grandchild’s or a kid’s education and actually you ended up hindering them and in a way hurting them, as well as you affected your retirement program and that money. If the simplicity was, sometimes you get penalties to because you took it out early, or you have to pay additional taxes, even if you put it in the 529 program, it just depends on what type of retirement program you have to move it over. The reality is that you believe you’re doing something good and actually what happens is it does directly affect what financial aid that student receives.

I think we need to actually do more understanding. We say a lot, find out what really is going on before you make those financial decisions because it sounds really good. If you simply, in my opinion, taken one step different and you hadn’t put it in a 529 program and you actually put it into a life insurance policy for that child to use or that grandchild to use, you will be way better off in the long run because it won’t hurt them in regards to the financial aid.

Nate: Another key there when we’re talking about opportunity cost or missing out on wealth is that we can go ahead and we’ll use those dollars that we had kind of set aside maybe for retirement or some other things, and we spend a whole bunch of money trying to help our kids go to school without debt because we don’t want the kids to be in debt to somebody else and be a slave and start off their life with a whole bunch of debt necessarily. But the impact of that is not seen as much right away as it is 20 years ago when you not only of course don’t have the money that you spent to help your kid go to school, which I do think is admirable and good to help your kid go to school, but you not only don’t have that money … Let’s say you have three kids and they cost each of them, even if you only had to do $50,000 per kid for four years total, so you have $150,000.

That would be pretty low in the grand scheme of things today if you really wanted to get them all the way through unless they got some other scholarships and things. But it’s not just the money that you spent, let’s say it was $150,000 for three kids or something like that, it’s all the money that those dollars can no longer earn from you that is actually the bigger culprit here of destroying the future wealth that could have been created of course if you hadn’t spent it. That’s a little bit where Infinite Banking can come in is that so often we’ll put money into a 529 plan, or we’ll save it up to make a down payment on a home, or we’ll do something where we’ve got money that has a specific purpose to do it. Then once we put it to work for that purpose the money has been spent now. If it’s set aside for college we build up all this money solely to send the kids to school, and then we spend it. We spend $150,000 to send the kids to school, whatever the amount is for you.

That money is gone now. It no longer has an opportunity to grow. It no longer has an opportunity to do anything other than its one purpose. That is where Infinite Banking, we try to help people never miss out on this because with IBC, with Infinite Banking, whenever you do have a policy built up and you choose to use that as your source of funding, you don’t have to actually liquidate the account to go do something and suddenly have that money all gone. That’s what’s amazing about it. I mean amazing, it’s just math but it’s really cool that it has this structure built in place to it that you can actually borrow against the fund so the cash value can continue to grow as if all the money’s there because it is all still there, we just borrowed against it. As we put it back in, we have the entire principle balance is still compounding and earning dividends even though we may have spent it to go to school.

We can help avoid missing out, I mean we still have to spend the money. I mean the money we still spent the $150,000, but we don’t actually have to miss out on the wealth that those dollars could have built because they can still be in the account and still grow. That’s really one of the ways that IBC can help us avoid missing out on opportunity cost. Whether it’s something as big as college or as simple as buying a car, or doing braces, or going on vacation, all these little things that we spend money on, little and big, that not only cost us real money, but cost us opportunity money that we try to help bring back together to where we can continue to make money and build wealth without going broke in the interim and having to start over and reset every time.

Holly: The key there is the fact that the principle keeps compounding. It’s uninterrupted compounding that takes place in the policy. Most of us when we give money to our kids or we’re trying to set something up better for them, we think in the future dollars that we’re helping them out, that we’re helping them achieve something.

I’m going to be honest and as a mom I would never want to be a burden to my kids, but what’s happening more and more is because parents and grandparents use that money to try and capitalize to help their kids they do become a burden because their dollars aren’t worth as much in the future number one, and number two they don’t stretch as far as they used to and cover as much cost, so they don’t have as much money to live on. We’re just trying to help you guys understand there’s another way, or a better way, to actually provide not only for your kids education and let them pay it back to you. Or even if you don’t want them to have to pay it back to you, at least use a program that actually continues to have uninterrupted compounding and tax free growth to help you later on in life as well as them.

Nate: It’s something that we don’t think about opportunity cost or the fact that we finance everything that we buy, but if we started bringing that in some things start being a little bit more clear. The real cost is not just how much money we’re spending, but also what we can do with it. So it is true, that’s one of the reasons we talk about it, and if you take our free beginners course we talk a little bit about that at the very beginning of that course and how the numbers really work. Then you can avoid having to reset every time. We’re so used to saving up money and spending it, saving up money and spending it, saving up money. We always have to reset, so we’re only earning interest on whatever the balance is at that time until we spend it.

I mean you could just go through your whole life, and Holly we talk about this in webinars with people, we talk to someone who finances every car and they borrow money for every car they’ve ever bought. We have people who’ve paid cash for every car that they bought and everywhere in between. We asked both of those people how much money do you have from all the cars you bought. The answer is always zero. The car guy’s got no money. He maybe hasn’t paid interest to anybody, but he doesn’t have any money. He’s just building money up and paying cash, building up and paying cash, and he ends up back with no money at the end of the day. Then the other guy who finances, of course he doesn’t got any money that’s why he having to finance it. He’s just paying somebody else back with interest and having to redo that every time he buys a car.

But if you were to get off that system, and even though you may have spent money to buy a car, to have it still be growing for you, you can actually get off that zero where you can have $100,000, $200,000, $300,000 over your life just with cars. We like to show that as an example because it’s something that we all do. But if it works for cars it can really work for almost anything. If you start using the policy we can recapture some of these missing dollars, some of this opportunity cost. We did a podcast on the emergency fund idea earlier, which was kind of about that. The amount of money that you’re losing, that literally you don’t have because you’ve got idle money sitting around not doing anything that could be put to work, maybe in a policy, and be able to still use it for all the things you want to use it for.

Holly: We think sometimes we limit it just to our financing of a car, or education, or a mortgage. We think of it in that terms instead of actually looking at it even the simplicity of if you own a home and making money on your property tax. I mean I’ve been doing that for six years now. I never worry when the property tax bill comes due because I’ve paid myself back and I’ve paid it back so many times, and the interest is earned so much now over six years I’m making more money on paying for my property tax than actually what I’m giving them. Just being able to sit down and see that with somebody, like yesterday I was talking to a client and just helping them understand what they were going to gain by using their policy and purchasing a car and doing their taxes, they were so blown away that they just were like why didn’t somebody tell me this sooner.

I think that’s what’s exciting is being able to give people hope that even when you’re paying that property tax it doesn’t become such a burden to you when you have a system in place to actually get all that money back and the interest that you would have lost just by giving it away.

Nate: One point Holly if I could before we wrap up, just make one more point I guess was that with Infinite Banking sometimes we’ll hear, it’s a good question because it comes from this idea of opportunity cost, I’ll hear well Nate is using a policy to build wealth, is becoming your own banker using these policies, is this better than X. Whether it’s my 401K, or whether it’s investing in real estate, or is it better. That question of course is kind of hard to answer, but in reality what we’re trying to do with Infinite Banking is avoid that either/or type of mentality. We’re so used to having to kind of make decisions that are really, whether you’ve thought about it or not, based on opportunity cost. You’ve got to choose where you’re going to put the money and your goal is to put the money in the most efficient profitable place that you can to avoid missing out on opportunity cost that your money’s not working for you very well.

The cool thing, the great thing about Infinite Banking, is that we can avoid missing out because we don’t have to leave the money in the policy. We’ve already kind of talked about it within the spending, whether it’s maybe kid’s education or cars and being able to pull money out to go do those things and have the account still grow, which is really great, but we can do that same thing using the policy to fund other investments or other places that you feel would be very profitable and want to take advantage of. Nelson Nash, the creator of the concept, talked about this in his book quite often to. IBC, one of the main functions is to make sure you never have to miss out on money. Whether it’s being able to pull from it to invest somewhere else, never missing out on that opportunity, like you may have had to if all your money was in the 401K, you certainly are going to miss out on opportunities along the way if it’s locked up.

With IBC it’s never locked up so you can not only avoid missing out on money that could be made just from spending it on these very things that we’re going to have to spend money on anyway, but you can also avoid having to choose necessarily between a policy and something else because you can always just pull from the policy to fund it and have two things. If you guys were kind of questioning this or whatever it is, one of the main goals of the policy is to avoid missing out on money that you should be making that so often it just goes by the wayside, we never even know we missed out on it.

Holly: And I think missing out on the opportunity not only leave a legacy, but actually understand truly how money works. That’s one of the concepts too is just what is money and how does it work. We really want you guys to understand just we finance every single thing we buy in this world, and the reality is do you want the money constantly going away from you, even if you’re paying cash it’s leaving you, or do you want it to come back to you.

Nate: I hope this podcast helped you guys see some things. Once you know about opportunity cost, once you really realize that it exists and that there are ways to position yourself, whether it’s Infinite Banking or not, but certainly Infinite Banking can help, ways to position yourself to avoid missing out on money, future money that you should be able to make, I think you can help solidify yourself financially a lot better and make decisions with a lot more wisdom. Guys this has been Dollars and Nonsense. If you follow the herd, you will get slaughtered.

Holly: For free transcripts and resources please visit livingwealth.com/e54.