E123: Learn to Spot the Hidden and Most Expensive Option to Avoid

Nate: In this episode, discuss how the default option in almost every area of life, is the most expensive option, and how you can get yourself out of the herd to avoid the slaughterhouse. 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: Well, it’s good to be back.. I’m glad to hear everyone else listening to this podcast is back for this week’s show. But, Holly and I are pretty passionate about this episode, I believe. And we’ve been thinking, thinking, thinking, and just kind of came to a realization about something that just rings true in almost every area of our lives. And essentially, this is the concept. The default option is typically the most expensive way to get something done. So, no matter what it is, we’re all kind of set in this follow the herd herd, you get the slaughter mentality. We’re all just moving down in life. All of us American citizens are moving down in life and there’s a lot of default options that so many of us find ourselves in and they happen to be the worst options. You would never choose them. If there was a menu of choices available, it just happens to be the one that everyone’s on. So that’s the one that we’re on. And so anyway, Holly, we’re going to dive in and talk about how the default option in life is normally the most expensive way to achieve a goal, is just to take the default route to that goal.

Holly: Well Nate, the reality is, most of us are oftentimes the reason we choose that default option, is we don’t know either if there’s another option, or in our mindset, it’s going to cost us something to get out of that default option. So, we do nothing and just accept the default option. And this is going to be a call to action. Nate and I are going to say, it will cost you something to get off the default option in life. To get out of whatever it is in the default, it will cost you something.

Nate: That’s a great point. And the default is the worst way to do it, but it normally takes some sort of financial cost or some sort of energy output or something on your end to get you out of the default, into where there’s much more grass to chew on, instead of where the herd is rampaging. So let’s just look at, let’s just start looking at one aspect. Whenever you pass away, all of us have the same exact default option upon our demise to pass our assets on.

The default option at death is probate. If you just died tomorrow and you have not done any sort of planning, the default option that you have left your heirs to try to figure out is through probate. That’s where we all go. And probate, is by far the worst option to leave your heirs to deal with. In every way. If you choose probate as your default option at death… In other words, if you don’t do anything to get yourself out of your guaranteed future outcome, which would be probate, unless you make a choice today to get out of probate by setting up your assets accordingly. But if you just choose to not do anything, you will end up in probate or your heirs will end up, your estate will end up in probate. And that estate will be decimated, and pay the most taxes and legal fees and take the most time out of any option that you possibly could have chosen.

Holly: And it will cost you so much. I think when we say it’s going to cost you something, it’s not just money. It costs you money to put your assets in order. It also costs you time, energy and effort. And you’ve got to have some hard decisions and start thinking about those things. But if you don’t, it will cost your family or whoever’s left to deal with that even more time, energy and money. And it’s not just the cost of the time. It’s the cost of what they lose just by doing nothing at all.

Nate: Yeah, I think that’s a good point. So, really getting off the default option is going to cost you, but remaining inside the default always cost you more. So I think that’s just a good point to bring up. That it’s true, that if you want to get out of the future default, which is probate. If you do nothing and you just, you own a home, you have some assets here and there, you got some money saved up and you just die and you’ve done absolutely nothing, all of your money goes to the court system to be divvied up accordingly. And, the amount of fees and taxes you would have to pay through that system is immense, huge. It’ll just wipe away tens of thousands of dollars. It’s also true though, that some people don’t actually want to do any planning, because as you already said Holly, they don’t want to put in the energy.

They don’t want to actually take the time to do it. I’ll be dead anyway, who cares? Which is kind of… People think like that, though. It’s crazy. But even on top of that, you actually have to go hire an attorney for a lot of this. Not for everything, but for a lot of things. If you want to get a… you should have a will, you should have at least a simple trust set up. And the reason why some people don’t do those things, is because it costs money to go hire an attorney to drop a will and to design a trust for you. But, that’s what we’re trying to get at, though. Getting off the default is always a multiplication, orders of magnitude more effective at transferring assets. Let’s say we spend a few thousand dollars hiring an attorney to drop a simple will and trust for us, to where we avoid the vast majority of the atrociousness of probate.

Well, yeah. It might cost you $3,000 but you’ll save the family $50,000. So, in other words, there’s typically an order of magnitude difference between staying inside the default and leaving. The same thing goes Holly, if you want to move to another one, the same goes just in simple tax strategy. The default tax strategy is to pay the most income taxes that you possibly can pay at your income level. That’s the default tax strategy. If you do nothing except for get your W2 and your 1099 or your income statement from your corporation and just file your taxes yourself with no idea what you’re doing. The most expensive tax strategy, you’ll end up paying the most taxes that you possibly can for the amount of income that you made.

Holly: And, the reason you end up paying the most is you don’t know what a CPA knows. And we immediately think, oh, I’ve got to get my stuff in order to the CPA. I’ve got to send them this, I’ve got to do this and I have to pay the money to do that. But, I know so many individuals that I’ve talked to in the last, no joke, couple of weeks, that if they would’ve actually had a CPA on board with them and they own their own businesses, or they have this money, whether it be in 401(k) or things like that, they could have taken out money last year by avoiding the penalty and stuff and significant money. But, because they didn’t know, because they do it all themselves, they left money on the table. And we’re talking about tens of thousands of dollars that they’re leaving on the table.

And I simply said, well, why don’t you have a CPA? Well, because that costs money. We just try and do it ourselves and keep our receipts and put it the program. And, that’s what we pay. And, I could not believe the thousands of dollars they just leave on the table. And if they just simply known, hey, this is a new law, or for this year, you get to do this. I mean, Nate and I did a thing on taxes are on sale this year. Should go back and listen to it. But, a lot of the reason we know the stuff is because we both have a CPA, and they’re in your corner, they work for you. Their job is to inform you and and help you so that you make the best possible decisions moving forward.

Nate: Yeah. So, the default estate plan is to pay the most amount of taxes and legal fees that you possibly can. The default tax strategy is to pay the most amount of income tax that you possibly can. It’s the most expensive route not to get out of those default estate planning and default tax strategies. You typically have to hire a professional. I mean, that’s just the normal way to do it. And, I would also just go out and say that if you have a super simple tax deal where maybe you just work a W2 and you just don’t have much going on, it’s true, you probably could do it all by yourself. You probably could. But, the amount of individuals who are contractors who get a 1099 income. Or even business owners, who’ve just been with the same accountant for a long time, a buddy of theirs or something. I’m not a tax expert, but I’ll hear some people talking. I mean, what you’re doing is crazy. I know maybe you even have a guy doing it, but they’re doing such a bad job. You need to jump ship or something.

Holly: Really, it is the buddy or the cheapest, they’ve gone the cheapest route possible, or no route at all, right? And the buddy did it, but the buddy’s not necessarily informed or they’re not, they just start up on it. And I don’t know about you, but the best thing I’ve ever done, or one of the best things I ever did was get a CPA that knows the tax laws and how to help me the best. And it’s deductible if you have your own business. You get to deduct some of it.

Nate: Yeah. I’m sure there are some people who have a CPA and they’re probably just overpaying them. They’re not producing a lot of value. And so I understand that there’s some cynicism there, but we’re just trying to prove a point though, that the default option in life, in almost every area of life, typically is the most expensive option. So, I’m aware that some people have been paying way too much for CPAs and they just haven’t been working very hard on your case, and you’re just not getting much value from them. Well, then change that. But nonetheless, there’s a lot of you out there. And a lot of us, in just America in general, who are paying way too much in taxes and don’t even realize it because we’re just taking the simple route. If it wasn’t for Ray’s influence in my life, I guarantee you I’d be paying a lot more in tax than I am today. But just some simple tax strategies that he taught me, that he learned from his CPA, that I was able to implement and work with my CPA to create has created a lot of tax deductions that I would have no idea I could have taken advantage of.

And sure, it costs me money to hire a CPA and have them do some of this stuff. But the amount of savings and tax that I get is worth way more than that, because the default option is most expensive. I mean, we can keep going.

Holly: Yeah.

Nate: The default retirement option is to claim Social Security.

Holly: Yep.

Nate: It’s the worst one, it’s the most expensive option. Just paying your FICA taxes for years, and then just getting your little Social Security check. You can barely stay alive on Social Security-

Holly: Or even live on it.

Nate: And that’s the default. So hopefully if you’re listening to this, that’s not your plan, to take the default there. But then, the default retirement planning option is actually not even that much better than Social Security. In other words, the default everybody’s under, if you’re an employee of some variety. You work in America. The next option though, for most people, is the default investment for retirement that they realize, oh, I don’t want to be in the complete default route.

I’m going to take the next closest thing, which would be investing in retirement programs and mutual funds. That’s the next default. You just, you get a job. You get plugged in with the 401(k) system. The 401(k) is typically the most expensive way to achieve your goal. Your goal for most of you, by putting money into a 401(k) is to one day be able to retire, hence you putting money into programs. So, that’s the thought, that’s the goal. And it happens to be that the most expensive way to do it is many times is through the retirement program, the 401(k). And by expensive what we mean is, you’re going to have to put more of your dollars into the 401(k) in order to achieve an income in the future, as opposed to using those same dollars to go do something else outside the 401(k).

Typically, the problem with a 401(k)… I don’t think we have enough time to go into it. You’ll have to look at past podcasts, honestly. To really get it will [inaudible 00:12:26] by this. But because of the withdrawal rates are so low, you can only pull 3% to 4% of your 401(k) value out each year in retirement. So that means that for every $1 million in your 401(k) or IRA, you’re only supposed to be pulling $30,000 to $40,000 out for every $1 million, because of the volatility of the market. You don’t know how much is going to be there. So they’ve done studies and tests and say, what withdrawal rate can we get a pretty high, 90% probability of success that we won’t run out of money? And they say a withdrawal rate of 3% to 4% of your value, so that means for every $1 million that you have in a 401(k), you’re can only take out $3,000 to $4,000. Well, if you built up $1 million in almost any other place that’s worth anything, you can pull out a much a higher income level.

Holly: And ask yourself, how many people really have $1 million in their 401(k) when they go to retire?

Nate: It’s very few.

Holly: So when you think of that, what we’re saying is, this all costs you something. The default for a 401(k) is because you really don’t have to think about it most of the time.

Nate: You don’t. That’s exactly right. It’s the easiest. You’re right. There’s no energy on your end. Just do it because everyone else is doing it.

Holly: Yeah.

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Holly: What we really want to talk about too is, our default option for money is just put it in a bank and leave it. And this is your most expensive option. If you ask wealthy people or individuals who had to build their wealth, they didn’t do a by putting it or leaving it in a bank account.

Nate: I think people are very surprised when I say, the most expensive way to build wealth is to use bank accounts.

Holly: Yeah.

Nate: That’s the most expensive way to build wealth. And they’re like, “What?”. Well, yeah. If your goal is to build wealth, the most expensive thing you could do is deposit money in bank accounts. And that kind of surprises people, because most people are so used to having free bank accounts. I have a free checking account. I have a free savings account. It’s not costing me any money to put my money here. Well, that’s great, but it’s actually costing you a fortune to have deposits at bank accounts. For whatever reason, we missed this, for the same reason that we missed the default option in estate planning, because they’d have to hire an attorney. It costs money. The default option in tax rates is to hire a professional to take a look. The way to get out of the default, excuse me, is to pay somebody else to do it.

Holly: Yep.

Nate: And what I mean by this is, the default option is always, free right now, cost money later. That’s the default option. The reason why it’s default is it doesn’t cost us anything right now to do this. But it’s going to cost us a huge amount of money later on, but that’s what’s happening inside bank accounts. Yeah, it doesn’t actually cost you any money to put money in there. But, if you are going to choose to build wealth, let’s just make it kind of an exaggerated case where we have an individual who literally chooses bank accounts as their wealth building vehicle. They’re not going to do real estate investment. They’re not going to do infinite banking policies. They’re not going to do 401(k). Any extra dollar they have, they’re going to put it into their bank account, their checking account or savings account at the bank.

It’s going to be extraordinarily difficult to pool together enough money to be financially independent by solely using a bank account. Nobody does that. But for whatever reason, almost everyone has accepted the fact that some of their wealth building objectives need to take place inside of bank accounts. But, it’s actually the most expensive way to build wealth that exists. I mean, your 401(k) is typically better than a bank account. Building up money in a bank account is the most expensive way to try to get wealthy. But it’s also the default for a lot of people. Especially the poorer you are. The lower the income of the individual, the more likely the majority of their wealth is sitting in bank accounts. That’s just, typically the way it works.

Holly: You have to think about why does it cost you so much money, while my bank account is free? It’s not about the free piece. Who is the only person putting money in that account?

Nate:That’s a good point. Me. I’m the only one.

Holly: So, if you’re the only one putting money in, then you’re the only one creating that wealth. Nobody else is helping you create any wealth. That’s why even the bank account is worse than the 401(k), because at least sometimes there’s a match or it’s growing by more. But, when you’re the only one putting money in the account, that’s it. It’s just you.

Nate: You’re exactly right. Yep. And it’s hard to get some people to do. So for those of you who have followed our podcast for a long time, we were big believers in the infinite banking concept, which is really the way out, at least we believe; the best way out of the banking world is to become your own banker through Dividend-Paying Whole Life Insurance. And there’s a whole concept around it. One of the biggest gripes about the Infinite Banking concept is that it costs money to open a policy. It doesn’t cost me any money to put money in my checking account. But, if I was to open up a policy and move this money out of my bank account into a policy, I’m not going to make a profit day one of opening the policy. And it just goes back to that same mentality that pervades most of society, is that the free, easy default option is always the most expensive option.

The way to get out of it typically, is going to cost some money. But, the return for leaving the default is always orders of magnitude greater than staying in. So, it’s right. I mean, it’s that same thinking. The default at estate planning is probate, and it’s the worst one. The default tax is to pay the most amount of tax you possibly can at your income level. It’s the worst one. The default retirement is just to claim Social Security and do nothing else. That’s the worst way to do it. And the default for money is just to let it sit in bank accounts, and that is the worst thing to do. Now, it may cost some money to get out of the default, but if an average person is going to sit on $30,000 on average at any given time in their emergency fund, savings account, checking account style lifestyle. It could be less than that, it could be more.

But the average person we work with, that’s probably kind of low, but nonetheless, we have $30,000 sitting in an emergency fund style thing. That’s actually worth to you over a lifetime, about $150,000 if you were to move that out of the default banking option into the better Infinite Banking option. And so we’re talking the actual cost to leave it there as $120,000. And, that’s a huge pill for someone to swallow. Now, the problem with the cost is that the banks don’t tell you that. They don’t say, well actually, there’s other options that can make you $120,000 more than leaving it here. All they say is, hey, it’s free to leave it here. No, it’s not. It’s a lie. The default option is almost always the most expensive way to achieve a goal.

Holly: And Nate, you got to leave it there. You got to leave the money there in order to have something later on. You can’t use it. If you use it, you don’t have it. So when you put it in the bank, you either have to just leave it there and never touch it. Or you have to, when you touch it, replenish with a weaker dollar in the future. So the reality is, is that it is the worst option. You guys have to do something. It’s going to cost you money, yes. It’s going to cost you time and energy, but you have to do something. If you don’t do anything, all you’re going to do is be that cow, go into the slaughterhouse. You’re going to get slaughtered because you did nothing other than the default of what everybody else was telling you to do.

Nate: Yeah. It’s amazing that I’ll talk to people who have hundreds of thousands, if not millions of dollars in cash in a bank account. And you try to figure out why they’re doing that, because it’s a terrible idea. There’s no reason to do that. And you’ll ask them, why are you doing this? And the main reason is they’ll say, well, I don’t know what else to do.

Holly: Yeah.

Nate: I don’t really want to be in the stock market. I don’t really trust that. I don’t really want to invest in real estate. I don’t understand it enough yet, or this and that. So they’ll just say, I’m just going to stick with the default. The default option sucks, everybody. The default option in life in almost every area that we talk about and we keep going. But I mean, we’ve already said enough, really. I feel like, are giving examples, but it just, you keep going.

But all that to say, a lot of people will bring that up. They’ll say, well, I didn’t know what else I could do with it. And then whenever you try to show them, well, you could easily become your own banker through Dividend-Paying Whole Life Insurance, and this is how you could do it. They look at it and for whatever reason, there’ll be concerned because they’ll pay a premium in the early years and not all the premium goes to cash value. And so, they’ll just end up staying where they’re at and it’s foolish. It’s the most expensive way, because if the goal is to have your money working efficiently, and if the goal is to build wealth, the bank account is the worst way to do it. Any way would practically be better than that, especially becoming your own banker. It’s for the same reason that not everybody does a simple will or trust, or why some people pay the maximum amount of taxes that they possibly can at their income level. The same reason why many people retired just on Social Security income, they chose the default. It’s the worst option, but they didn’t have to pay anybody anything. And they didn’t have to put forth any sort of energy to learn something new.

Holly: Well Nate, in their mind, it was the cheapest option.

Nate: Yeah. And it’s actually the most expensive. It’s deception.

Holly: It requires a little sacrifice. Without realizing it, it became the most expensive option and cost them the most. I mean, I tell clients all the time, the worst thing you can do is just leave your money sitting in the bank doing nothing. That’s the worst thing you can do.

Nate: It’s the default, but it’s the worst. There’s no way around it. The only reason why you would leave it there is ignorance, right? I’ll talk to somebody they’ll say, I just didn’t know there was another way. But once you learn another way, you’re kind of at a loss for excuses. You have to kind of make things up to rationalize why you’re going to stay in the default option. And they never really make any sense. But nonetheless, the default option is normally the most expensive way to get things done. Whether it’s estate planning, whether it’s tax planning, whether it’s investment, whether it’s banking. The default option is normally the most expensive option. And typically, to get out of the default, you’ll have to pay some money or put forth some sort of energy. Sometimes it’s both. But once you get out, the return you’ll receive by getting out is typically orders of magnitude greater in wealth or in taxes saved or in probate costs saved and so forth and quality of life and retirement.

All these things. Typically orders of magnitude better to get out of the default option. We understand, Infinite Banking is not the default. We’d like it to be maybe one day the default. But right now it is the way out of the default. It’s far more profitable than the default. It’s actually quite easy to implement. It just takes a little bit of time to understand. And it is true, you, you will not make a profit day one. But nonetheless, you’ll spend a little bit of money to get things off the ground to make hundreds of thousands or millions of dollars tax free in a system that would have just been not yours, had you chosen to remain in the default. Any final words, Holly, before we close it down?

Holly: Do something.

Nate: Get off your keister.

Holly: Make a choice to do something. Get off the default option, whether it be with banks, whether it be with investments, retirement, death. Do something. The worst thing you can do is just leave your money sitting there doing nothing for you. The worst thing you can do is to do nothing at all.

Nate: Exactly. It’s easy to do nothing. It just costs a lot. So I hope this was an encouragement to you. And maybe if you listened to this, maybe this kind of convicted you a little bit to get some things done, whether it’s tax planning, estate planning, banking planning, investment. But just, it’s time to try to get out of the herd and move forward. And this has been Dollars & Nonsense. If you follow the herd, you will get slaughtered.

Holly: For free transcripts and resources, please visit livingwealth.com/e123.

Announcer: 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.