E119: How to Make the Choice: Buy More Assets or Pay Off Debt?

Nate: In this episode, we discuss the age-old question. Should I buy more assets or should I pay off debt? She’s Holly, and she helps people find financial freedom.

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

Nate: All right. Well, welcome back to the show, everyone. We’ve got another… We’ve been answering a lot of questions lately about infinite banking, about other things. And this is just a question that seems to pop up, not only in our circle, but in just the financial world at large, whether it’s Dave Ramsey or whether it’s Robert Kiyosaki or whoever it is, there seems like there’s always people on two sides of the aisle.

There’s the “invest every dollar that you have, borrow as much money as you can, and go buy assets as much as possible.” And then there’s the other crowd that says, “No, your main focus should be solely on paying off debt and never touch debt again.”

And so we’re going to give mainly a discussion. This is pretty unscripted for Holly and me, as is almost always. We may come with a few concepts or points, but today we’re just really going to have a dialogue that we hope will shed some light on this. What should you do? Everyone is a bit different. Everyone, their stage of life is different, but should I buy more assets right now? Or should I focus on paying off debt?

So, Holly, what is your initial thoughts on this? If someone was just to call you up and be like, “Hey Holly, I’ve got some debt. I also want to buy some assets. What should I focus on?” I mean, what would you say?

Holly: Well, I think it does definitely depend on what their goals are and where they are in life, but more often than not, my response is, “I firmly believe you should buy assets, and that it’s not always in your best interest to pay off debt, especially the debt that’s in the future or debt to the life insurance policy.” Really, if it’s debt to the life insurance policy, I say put the money in paid up additions and buy those assets. Go buy the assets and let your money or your dollar do more than one thing. Because if you’re going to buy the asset, it can go up or down. But if you’ve put the money in the policy first and then bought the asset, you’re winning because that money continues to grow, irregardless what the asset does.

Nate: That’s true. And I definitely have changed over time too. I remember when I first dove into infinite banking. I feel like this happens to a lot of people who dive into infinite banking. We think that the main goal of becoming your own banker is to get rid of debt. I try not to give that impression anymore, because it’s certainly not, and has never actually been the primary goal. But that is something that comes with the picture, really, is that, “Hey, if you want to become your own banker, do we really need to have any loans with other people?” So it can produce this pressure on some of us, if we do practice the “becoming your own banker” concept. Maybe we shouldn’t owe anybody anything. But we have changed a little bit, certainly, because it used to be that was part of the process.

If you were to talk to us like in 2010 or something like that, 10 years ago, 11 years ago, almost all of our clients were debt-free, and we would strongly encourage don’t ever borrow from a bank ever again. And some people still love that, but we have definitely changed some to say… Well, there is definitely a difference between good debt and bad debt, and not all debt is bad and not all debt that is good. So, as you said, there’s different stages of life that I think can be helpful with this. So if someone came to me and they said, “Nate, I’ve been looking at your stuff and we’ve got this car loan. We’re paying 4% on it. We owed 20 grand on it. Should we pay that off? Or should we do something else?” A lot of people think it’d be nice not to have a car loan.

So they say, “Well, let’s go pay 20 grand to pay off the car loan.” The problem is you always have to look at the alternate use of money. So while paying off the car loan and saving that 4% interest on the car loan is a helpful transaction, it may not be the best transaction for you to do. It all depends on what else you could have done with the money. And I believe that in the world right now, there are lots of opportunities. If you want to take advantage of them to earn more interest with the… In other words, I can take that same 20 grand, instead of writing a check to the car loan people, I give that 20 grand… I mean, here in Kansas, probably not where you are at, Holly, in California, but here in Kansas, you can make a down payment on a three bedroom, two bath house in Raytown, Kansas City area, something like that, and rent it out, and make it a $20,000 down payment to buy a $100,000 house.

And not everybody wants to do that though. And I understand that. In fact, I don’t want to just always buy more property. I don’t know if I’d go so far as the Robert Kiyosaki “borrow every dollar you can and buy rental properties and gold with every dollar you can.” I’m probably not there, but I would say the alternate use of money should come into play. So whenever I deal with my own clients, and we’re trying to figure out, especially those that have policies, we’re trying to figure what to do with money.

Some of them really do want to pay off debt. And I have to sometimes tap the brakes. “Well, I would like to pay off debt too, but you do realize that if we focus all your money on paying off debt, we have no other money to go do anything else. So are you sure you don’t want to do anything else?” So I think everybody has to come to that decision themselves. What is the alternate use of money? I can pay off debt. I can buy assets, and there’s a time and place for each one.

Holly: In the beginning, and I say, yeah, 2010, 12, 13, pay off all the debt. But what happens is if you have a goal even for your family, or like me. I got three girls that are going to come up near college. Now whether they go to college or not, it’s their choice, right? But some of us, if we’ve taken all the money and paid off all the debt, then basically we get to the point where all our kids are going to school, and then we have to take on more debt, when maybe if we put it into the policy or bought some assets, we actually could’ve used that money in the future for the education or for a house remodel or whatever it may be like you said.

So I think you have to see it. What are those goals that you want to do? And how do you want to benefit you the most? And I have to say again, Nate, if it is cheaper to use the bank’s money in that, then maybe you’re better to use the bank’s money and not tie up all your money. I’ve said this before. If I want to go buy a house, I don’t really want to tie up $300,000, $400,000 into a home that I’m paying back to myself when I could use that money for something else.

Nate: Yeah. I mean, not having a mortgage is nice, but also having $400,000 in your pocket to do whatever you want is nice. So what nice do you want? And financially speaking, you’re exactly right, Holly. If the banks are offering [treat money 00:07:00], which they are today, it does stir us to want to use their money to make more money. But nonetheless, we definitely switched. So I’ve been meeting with people today, and especially those who own their own business. They have some debt and they’re trying to figure out, “Well, I’ve got some money. Should I?” And this could be money… We’re not even talking about IBC yet, Holly, or infinite banking. We’re just saying money, just generically. “Should we buy assets or pay off debt?” I mean, if you have debt at five, six, 7%, but you’re also able to turn some inventory rather quickly and make a lot more profit, my suggestion, obviously, it would be, debt in itself is not evil.

It is not bad by itself. The question always is, what else could I do with this money? So I can devote money to pay off debt, or I could devote money to expanding the business or buying more assets, and which one makes more sense to me right now. And so, I think there’s kind of two stages of life, potentially, that can come into play. One is growth mode and then one is kind of sustained mode or something like that. So if someone was 65 years old, and they came to me and they’re on the doorstep of retirement. They’re thinking about leaving their work and so forth, and they’ve got a bunch of assets pulled up and they’re holding onto this mortgage and they really feel that they should get rid of the mortgage.

I’m fine, at age 65, if you don’t want to go take risks. You don’t want to go buy any new properties. You don’t want to go do all these different things. Could it make sense, right in the doorstep of retirement, to just cut off the mortgage expense? It is possible. It could. It’s possible. But if that same person was 35 years old, and they’re like, “I’m about to go throw $200,000 over the next two or three years towards my mortgage balance, because I just can’t wait to get this mortgage paid off.” I’d say, “That is foolish. That’s not wise. Your mortgage at 3%, you’re telling me that you can’t put your $200,000 in anything else that can earn you more money than 3% tax deductible? Which would [inaudible 00:08:53] all right now.” And so I would say that definitely your stage of life can matter.

I mean, am I in growth mode or am I not? So if you talk to, Holly, to someone who was building a real estate business, they may have a few, a little properties and they want to grow. So, let’s go borrow more and start more. Let’s not focus on pay off debt yet. Let’s focus on buying new properties. But maybe when you get to 10, 11, 12, 13 properties, you may be kind of like, “Hey, I’m pretty much maxed out. I don’t know if I want to keep expanding anymore. Maybe I’m comfortable.” So then it can change to paying off debt. So I think determining, am I in growth mode or am I kind of cut expense and sustain mode and just make it more sustainable, that may help you decide if you should buy asset or pay off debt.

Holly: Well, and I think, Nate, too, that’s a really good analogy of, am I in a sustaining or am I in a growth mode. There’s people that pay off things really quickly, right? And then what they have is they’re asset rich, but they’re cash poor. And so, because of that asset, I’m asset rich and I’m cash poor, paying off the assets didn’t really help them do anything. It just tied up their money.

And then when they really want to be able to go invest in something or an opportunity, they don’t have the cash to do it. And I think that’s where you really have to say, how much money do you want tied up just on assets that’s doing nothing for you, or how much do you want to be able to control the money, really, and be able to make it benefit and work for you? And I think that’s the other thing you have to look at. If all the assets are paid off, but you have no cash, then when that opportunity comes along, you have no money to put into it.

Nate: You’re exactly right. I actually remember sitting in a hotel lobby with Ray, meeting with a client when I was kind of a newbie in the business and just shadowing Ray for the first couple of years. And it was right at the turn where we started to realize this. I remember the meeting we were in, and it was with a professional, I believe maybe a dentist or chiropractor. And he owned his own business. He had bought some policies and was using the cash value that was building up in those to pay down debt. And a lot of it was going into the home equity line of credit and mortgage balance, because that was the main one he had left. And he said he was excited to see the mortgage balance decline, but then he said, “I’ve also noticed I don’t have any money. I feel great that my mortgage is going down, but I would like to have some money to work with in my business and elsewhere.”

And that’s when Ray and I both realized maybe paying off debt isn’t everything. Maybe there are times when we should focus on growing something, as opposed to just sustaining it. You can see this, even in the world of big business. Why does big businesses, who could have all the money in the world, why do they borrow other people’s money? Why do they raise money in that way? It’s obvious that they feel that they are in growth mode at the time, that if they use other people’s money, they can turn it into a profit because they’re in growth mode. Whereas other businesses that are large, they may say, “You know what? We don’t need to borrow money. We’re going to pay off debt and become more nimble.”

So, definitely depending on… I feel like if you run your own life as a business, you can see that. When is it a good idea for me to borrow money? When am I in growth mode? What am I trying to grow my business? Whether you really have a business or whether you want to think of your financial life and investments as your business side, if you’re in growth mode, I don’t think you should focus all your money on paying down debt. I think the Dave Ramsey approach, nine out of 10 times, which is pay cash for everything and pay off your house as soon as possible and never borrowing any money ever again, I do think that is a foolish way to live life. I do not agree with that at all. There may be a time to do that, but for most people, especially if you’re good with money, I don’t think that’s the main goal.

Now, if you know yourself and you’re like, “Nate, if I start borrowing money, I’m going to become undisciplined and go deeply into a hole.” I mean, first, is there no other way to get disciplined? I guess if you have to do it, you have to do it. But I mean, it’s not financially wise to throw everything at debt, if you’re trying to grow your wealth, if you’re trying to build wealth. Sometimes it can make sense to buy assets instead, especially if the debt itself is not bad debt, whether it’s cheap car loans, cheap mortgages, or even like a business line of credit that you need to help grow the business while it’s in its fledgling stage. These things, while we may want to pay off later, it’s okay [inaudible 00:13:12].

Announcer: Are you still stuck in insecurity and uncertainty? Do you want to feel like a financial genius and confident about your future? Holly and Nate have prepared something exclusively for Dollars & Nonsense listeners. It’s called the Secret Banking Masterclass. You can gain free access to this course by visiting livingwealth.com/secretbanking. That’s “secretbanking”, all one word. The course will share with you how the conventional system stacks the deck against you, and exactly how to break free from their system. We believe in challenging the status quo. We believe in defying conventional wealth tools while maintaining traditional values. After all, most of those conventional tools only ever seem to make someone else on the inner circle rich. Visit livingwealth.com/secretbanking. That’s “secretbanking”, all one word. Ease your worry, and start your journey towards security today. Visit livingwealth.com/secretbanking. Now, back to the great episode with Nate and Holly.

Holly: You want some freedom and you want some flexibility. If you never borrow another dime from anybody again, or you always pay cash for something or for everything, then where is that… When there is an emergency or something that happens most of the time, you don’t have the money to pay for it. And you do go back into that cycle of debt. And like we said, good debt versus bad debt. If all you’re doing is maxing out the credit cards because you can’t control your spending, that’s bad debt. But there is good debt, and it’s okay to have some debt and be able to have the flexibility and freedom to use your money how you want to use it when you want to use it.

Nate: Yeah. I love the freedom and choice. That’s the same thing that I’ve dealt with in my own life. I have enough money right now to pay off my mortgage inside of my policy. I don’t need to have a mortgage, but I love the flexibility of being totally in control of that money. If I was to borrow it all out and use it to pay off the mortgage, then I’d have to go back to the bank to ask for it. So the alternate use of money needs to be involved. And the same thing applies when I have clients who are just starting out with infinite banking and they may have 20, 30, $40,000 of cash value in a policy. It’s capital. If you don’t have a policy and you’re listening to this, that’s great. You’ve got some money and it’s time to buy a new car, and you got to figure out, “Do I want to buy this car with the money I have or do I want to use the bank’s money?”

And once again, it can depend. But if you’re in that situation, you need to figure out, “I can borrow the bank’s money at 4% to buy this car, or I can use cash and it doesn’t cost me anything, but then the money is stuck in the car. Is there something else I could be doing with this money?” Maybe we need to focus more on the goal setting. In other words, if your goal is just to pay off all debt, that’s okay goal. Maybe not the best. If they talk to me about that, if they own their own business, I say, “You know what? I bet you, we could find somewhere to put this 30, $40,000, inside your business, where you’ll be happy to have it in your pocket. And if we don’t find a place, we can always pay off the loan at the car later? But let’s keep our options open instead of closing the door.”

Holly: When you’re looking at it, and you’re wanting to pay off this debt, if that interest rate you’re being charged is so low, I mean, there’s 0%, right? 1%, 2%, 3%, even on a mortgage like, “Oh, I got three and a half where I got 3%.” I mean, that is a good interest rate for most individuals, for all of us, I would say. So sometimes, why do you want to go and change that and have to pay yourself, if you’re borrowing or paying yourself 5%, or you paid off the mortgage, like you said, Nate, and you have to go back to the bank to get the money in the future. We don’t know what that interest rate is in the future. You might actually have paid off the debt and tied up your money, and now you are dependent on the bank to dictate the terms and conditions of the loan that you have to agree to, to use the money in the future.

Nate: That’s right. And I think no matter what, whether you’re paying off debt or buying assets, the value of having capital in your control, just to begin with. So that’s why I may say a little bit different than Robert Kiyosaki style of things, because I believe there’s something to be said about having money, capital that you control in your pocket. So I’m of the opinion that you should have some money available to you and that you shouldn’t only have assets or only be debt free. That’s the problem.

When somebody just focused on paying off debt, they’ll throw all their money at the debt for three or four years and never have any money themselves. So then they’re broke afterwards, but they’ve got no debt. The same thing can be said about people buying assets. They buy a whole bunch of rental properties and all their money’s stuck on those properties. They got no money, and maybe they borrowed some and they put their own money in, and then a crisis happens and all these people went broke. They went broke because they couldn’t survive long enough.

And the downturn, because they had no money. They had the assets. They were asset rich and cash poor. So, I think there’s something to be said, no matter which direction you choose to go, that building up of capital first sustains both options. And I do think… We wanted to mention a few things here at the end too, because we’ve been asked questions many, many times, and we’ve answered a few of these styles of questions before in previous episodes. But, Holly, you had gotten a question from a client, very common question in this similar vein, but as it applies directly to the infinite banking concept and the policies that we use inside of IBC. So expound a little bit on your thoughts with the question that you got.

Holly: So the question really was, “Do I take my cash I have, that’s not in the policy?” So this is money that you haven’t actually put into the policy at all. “And do I pay down the principal, the loan of the policy? Do I pay that on the policy loan or if I’m able to, do I put it in the policy as paid up additions rider?” I knew the client pretty well, and I know what they’re trying to do. Like you said, Nate, they are trying to purchase assets and to be able to have flexibility and freedom with their money. But in the goal, they’re in the building mode, right? They’re in that “I am trying to grow and build wealth.” And so, my recommendation was not to pay down loans. The recommendation was actually to put the money into policies because they could, and use it. That way, they were putting the money in as paid up additions, in addition to the premium they had paid.

And the reason why I recommended that is, number one, advise them a guaranteed death benefit. And that money is more than the money they put in. So if they put $10,000 in and they get like $15,000 of death benefit, it’s worth it because you just got more death benefit in the event something happens. But the other reason is that money is going to grow tax-free for them, and it’s going to grow. But they’re also going to be able to use that money. And so, for this individual, for me, it’s… You put it in towards paid up addition rider. The reason I didn’t recommend either paying down the loan is, with the policies they have, when we repay principal, all it does is yield you the principal to borrow again. And so the money was growing. It was compounding in their policy already, even though they’d borrowed money out to use it. So it made sense to let that money keep growing because it was there, instead of just replace the principal and take it back out and use it again.

Nate: Yes. The IBC age-old question. “Should I pay premium or should I pay back my loan? Should I start a new policy or should I pay back my loans?” I mean, it’s the same type of thing. And you’re exactly right. It just kind of goes back to what we were talking about previously, that the premium, whether it’s the paid-up additions rider or whether it’s starting a new policy with this money, if you have a certain amount of money, can I put money into my PUAs? Can I put it into a new policy? That’s like buying an asset, and then obviously if I pay back a policy loan, that’s like loan repayment. The questions we still get the same. Doesn’t matter if you have policy or not. Is buying assets more important or is paying off debt more important? It’s the same solid question. And it goes back to that whole concept we talked about.

Are you in growth mode right now? Are you in sustain mode right now? Like if you are in policy growth mode were you’re trying to expand the system and make it bigger and bigger to improve the future outlook, then obviously premium is the way to go, not repayment of the loan. So premium is buying assets. That’s what we could call it. And it’s would be more for those folks on growth mode. It kind of goes back to that same thought. I’ve actually had a couple of clients who are nearing retirement or trying to figure that out too wade through this question. And, as you get closer to retirement, maybe it can start to shift. When the time horizon is less, maybe you’re not quite as much into growth mode and expansion mode, and you’re more kind of consolidating things and making things simpler, more efficient, maybe at that time, instead of focusing on buying new policies or flooding money into PUAs, maybe we would switch to repaying some of the loans and pouring money back to repaying loans.

But we would not have done that while we were in growth mode. So, it really depends on each individual’s position. You may be a person who’s really just got a ton of premium already and congrats to you. And maybe it would start to make sense to pay back some of the loans you had. Certainly individualized, but I think that the growth mode and sustain mode concept can be helpful there. Am I trying to grow the system and make it bigger and bigger? Or is it pretty big enough for me now, and I just kind of want to make it a simplified sustainable system? Maybe I’ve got some extra money, I’ll throw it in as loan instead of expanding now. And everybody has to decide where they’re at, but as Holly said, for the most part, premium and pay [inaudible 00:23:01] does more for your future than simply repaying a loan. So that’s eight out of 10 times, is probably the option for most people.

Holly: And I think you do have to say exactly what we’ve been saying from the very beginning. If you’re in, later on in life, and you’re in a sustain mode and you want money or something to be able to live off of, and you don’t want to actually have to start a whole new policy or get that started, then it might be that, “Hey, yeah, I’m going to pay the loan back. And it gives me more to live on later on in life.” But the reality is, nine times out of 10, Nate, maybe even nine and a half of 10, put it into premium, in something that is growing because it causes growth in the policy, not just in death benefit, but in cash to be able to use an excess.

And that’s what we really have to look at is, what is the value if I put this money in the policy and how does it work for me? And, if you’ve got policies and you don’t want to start a new one and you can dump it in an existing one that makes sense, but ask yourself where you’re headed. Are you reaching the sustain mode or are you still in that growth mode? And Ray is 73 years old and I still think he’s in the growth mode. I don’t- [crosstalk 00:24:10]

Nate: That’s a good point, yeah. [crosstalk 00:24:11]

Holly: He said before he’s in the growth mode. It’s not in a “hey, I’m slowing down and I want to be able to sustain,” it’s “I want to keep driving this and making it grow. And the more I make it grow-” [crosstalk 00:24:23]

Nate: Yeah, premium is the only way to do that. [crosstalk 00:24:25] You’re right. You’re right. So, I mean, if you want to continue to grow the system bigger and bigger, it’s got to be through the form of premium. It’s got to be through buying assets. People’s goals can change. So Ray’s obviously always going to be in growth mode and there’s no retirement ever for him, but I know some people who, in the real estate business that they’re in, they’ve got quite a few properties and they may think at this point, “The amount of rental income I’ve got now is great. I may just focus instead of expanding and complicating things, I’ll just pay off some of the mortgages on these properties and pour money into there to free up some more cashflow as opposed to trying to buy new assets.”

There can definitely be a switch for everybody, but I’d say most people listening to this podcast are probably more in the growth mode side, as opposed to simplifying and sustaining side, which would mean I would point you, if you were my client, to focus on finding investments and buying other assets or investing in your business in ways that produce larger amounts of value, than focusing all your money on just paying off the mortgage, paying off the car loans, paying off the student loans, and then having nothing to show for it other than no debt. No debt is great, but producing profit and having assets can be even better depending on where you’re at. Any last words here, Holly, before we can close it down?

Holly: Just ask yourself, what’s more important, right? Growth or sustainability? And, remember you want to be able to have the freedom to control that money. And, in some ways, when you’ve put it all in assets, because you paid everything off, you kind of lose the buying power that that money generates to be able to have the flexibility to go and do what you want to when you want to.

Nate: Yeah, I think that’s a good point. You’re exactly right. And that there’s a healthy level of debt and a healthy level of assets for every individual based on their own emotional makeup. You had to find that for you. What’s a healthy level of debt? And what is, at the point where it’s causing you stress? And one thing that can solve both of those, whether it’s a healthy number of assets or healthy number of debt is honestly having capital. You need to have some capital buildup. And that’s what IBC specializes in, building capital that you can deploy either to pay off debt or buy assets, but you want to have a solid base of capital. That way you’ll never get into a situation on either side of being asset rich and cash poor. Nonetheless, we hope you enjoy this. We hope it provided some clarity, but this has been Dollars & Nonsense. If you follow the herd, you will get slaughtered.

Announcer: For free transcripts and resources, please visit livingwealth.com/e119. Dollars & Nonsense podcast listeners, one more thing before you go. Ease your worry and start your journey towards security today. Visit livingwealth.com/secretbanking. You’ll gain instant free access to the special one-hour course holly and Nate made for you. Again, that’s livingwealth.com/secretbanking.