E8: How to Get Out of Debt

Holly: Have you been asking yourself, “How do I get out of all this debt?” Debt is crippling most of us today. In this episode, we will discuss the best ways to get out of the debt that you’re in and how to build a system that can keep you out of debt for the rest of your life. He’s Nate, and he makes sense out of money.

Nate: She’s Holly, and she helps people find financial freedom. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.

Holly: Nate, have you ever been in a situation where you’re like, “How did all these bills come due all at once?” or “How do I get out of all this debt that seems to be overcoming me? There’s a car payment and a house payment.” And you just had a baby recently, too. So with all of that was there ever this nervous sense of “Oh no! How am I going to pay for a baby and support my family and provide everything that I want to for them?”

Nate: Yeah. There’s also the thought, as I’m sure most people on here [think], “Man, I make plenty of money, but why don’t I have any of it?” Where did it go? That same type of thing—“Man, I’ve got all these payments to make to other people. I’ve got the family to take care of and everything.” And the money just finds a way to trickle out so easily. That’s a big issue for a lot of us; because the money trickle outs, we end up getting the credit cards. Then we end up having more money leave our hands due to—not only the things we have to buy but the interest cost entailed with those. So I’ve definitely found myself in that situation where there’s a month where the bills just seem to keep on coming and the income doesn’t seem to be good enough to get there. And I know I’m not alone in that just from talking to people in this world. It’s so easy to end up getting your bills so high that it’s tough to pay, and then you have to walk over to the bank to get everything paid for.

Holly: Or my husband says, “The money keeps coming in, but it just goes right back out.” It’s like that money was in there and then it’s gone. And where did it all go? And for most of us, we can’t answer that question other than it went to this bill or that bill. But at the end of the day, it’s not very much fun that we’re going to work everyday, and there never seems to be any money left to do anything fun or exciting. My daughter even asked me yesterday, “Mom, can we go on an adventure?” And her idea of an adventure is just going down to Legoland. And still I’m like, “Well, Mommy has to work. We have to put food on the table.” But my husband said, “We can go to Legoland. I can take them right now.” Because of the financial freedom we’ve found with being able to know how to get out of debt and stay out of debt.

Nate: That’s true and so fundamental. That’s exactly what this whole episode is going to be about. And I think one of the reasons find themselves in debt—and I’ll get into a couple of things here as we get into our points, but just before that—I think for some people, money stresses us out. Or it can. I know it stresses people out at times. I know people who don’t even want to take a look at where their money is going, [where] their debt is at. It’s so intimidating that they don’t even want to know what it is. The first step is going to be to truly identify some of the problems there and to take back the control of your life. Don’t let your life control you, but take [it] back and be the architect of your life. And financially speaking, the easiest way to do that is to get rid of all those hands in your pocket from the banks. So that’s what we’re going to discuss today. There’s really three main points we want to try to make in this time together about the issue of debt—how to get out of it, how to stay out of it, and how to change the scope of your life financially moving forward. The first thing we’ve got to do, Holly, is we’ve got to identify the reasons why you’re in debt in the first place. Step number one is you’ve got to identify where did all this come from and why is it here, so if you need to make some changes you can. The second step is to make a plan to get out of debt. To make a plan of action. To change some things that need be so that you can actually find a way out and start building something. And that’s the third point is to build a system that can keep you out of debt. And that’s what we’re going to start with, but before we do, we’re going to head to a quick message from our sponsors, Living Wealth.

Holly: Nate, you’ve made the point of identifying debt. Most of us, when he was talking about that, he also was talking about how people don’t even want to sit down and think about their finances because of the stress it causes, just in life in general. But if you ask yourself a question, when has anybody sat down and talked to you or taught you about money? Most of us learned about money either from our peers or from our parents. We are just trying to do the same thing our parents did, only we’re trying to spend it a little bit differently and hope that we make more money so that we have a little bit better lifestyle than our parents had at the end of our life. And it’s a concept of getting your mindset changed to understand how money works and understand this isn’t something you’ve ever been taught. And if you’ve never been taught about money and how it works, then it’s okay to be a little stressed, but part of the process is being able to understand that it’s not that stressful, but you have to identify those key points. What are some of those key points in identifying the debt?

Nate: Identifying the debt, what we mean by that is that the first step is getting a summary, go build yourself an Excel spreadsheet, have someone help you or something, where you actually list out what different debts you have. From the credit cards to the student loans to car payments or the mortgages, maybe you have some business debt. Whatever it is, just to be able to stay on top of it, you have to identify where it’s at, what it is; figure out what the interest rate you’re being charged on various things and just identify where it is. And also where it came from is kind of crucial because that tells us—[being able to] easily tell where it came from means certain things. So if you have $10,000 on a credit card here and $5000 there, and all these other things, you know that potentially a spending problem is the reason for that. Or student debt. What are some of the reasons people go to school?

Holly: The biggest reasons most people go to school is they hope that by getting an education they can get a better job and earn more money. Actually what has been happening is they go to school, they get out with all this debt, and they’re not earning nearly as much money as they thought they’d earn.

Nate: Yeah, that’s true. Most of us are out there with school debts, especially if you went into the professional world: chiropractors, dentists, doctors, and lawyers. It’s so easy to rack that up and to have that hanging over your head down the road. So we know where that’s coming from. We have the car loans. Just identify where it’s coming from. But then you also what to identify the reasons why you’re there. One of the [reasons] we find ourselves in credit card debt is because we may have seen some things that our friends had and we want that. We wanted what our friends had. We know the reasons. Or maybe it’s just because a lot of people get into credit card debt because they don’t have the money to pay for things, and the reason they don’t have the money is because they don’t live with a plan. In other words, there’s no plan to have money so there never seems to be any money.

Holly: That or they’re just living outside of their means. They know they make a certain amount of money, yet honestly you have to sit down and ask yourself, “If I only make $1000 a month and I’m spending $1200 a month, something has to change.” Because in reality, you don’t have $1200 to spend. You only have $1000. And of that $1000, if you’re spending $1200, then you’re constantly going to be owing somebody something. So really it’s a mindset, too, of changing and understanding when you sit down and you look at that debt and where it came from, what is an absolute need versus—what Nate talked about—“Oh because the neighbor had it” or you see the new ad on TV and you think, “I got to buy that.” Instead of, “Oh, do I need it?” or “Can I afford it,” we go out and buy the latest [and] greatest, whether it be a gadget or car or a new outfit or shoes. Instead of actually stopping to say, “Do I need it?” Or “Why do I really have to have it?”

Nate: Or, honestly, “If I buy this, will I have enough money or will I have to go into debt to get it?” And that’s fundamental. So the first step is identify the reasons that you’re in debt. Identify where it’s at. I would tell people that the bigger they are, the harder they fall. Some people just don’t want to do that because they don’t like seeing what is there. It stresses them out. But that’s the first step in making anything happen. And I can promise you that there is a way out. And that’s exactly what we want to get into. The second point—now that we know where we’re at, maybe some of the key issues that got us to this point—now it’s time to make a plan to get out debt. I think the first step of any plan is to get serious about it. Just get serious about getting out of debt. Make it a desire instead of trying to live off a whim. Let’s actually get a plan. The first step of any plan is to learn to live on less than you make, as we’ve already said. It’s pretty [simple]. But, Holly, we do something called infinite banking pretty regularly. That’s what we’re big fans of and what we teach people how to do. Infinite banking is all about becoming your own banker. But how can that system help people to get out of debt?

Holly: Well, Nate, the first step is that with that system you are going to start saving, and you’re going to use a life insurance policy to do that. And what I mean by saving is you’re going to be paying yourself first. So you’ve identified what you could afford, and that goes into a life insurance policy, and with that policy—the beauty of it— is that you can also borrow money from the life insurance company. And because you can borrow money from the life insurance company, the money you’ve put in is still growing at a guaranteed interest rate, yet you’re able to keep your money in motion and use that money again to start paying down debt. One of the things we do with our clients is teach them how to recapture debt. That’s what we call it. Recapturing that debt. And instead of paying all the money to the credit cards and the banks and Wall Street, what you really do is you start paying yourself that money you were giving the credit card companies. And really the key here is that when you have that plan most people say, “I want to start with the mortgage.” That big huge astronomical number. What you want to see when you’re starting off with a plan is you want to start with the smallest possible debt you have to pay it off first, and the reason why is because once it’s paid off, you’ve accomplished part of your plan. You’re putting your plan into action. And as that’s paid off, you’ve achieved a goal. If we told you it’s going to take eight years to pay off your mortgage, that’s eight years of never having any productivity in your mind versus “Hey in six months you’ve paid off three credit card debts.” That’s exciting because that money that was going to credit cards is now coming back to you.

Nate: I think that, also, part of the power of banking, on top of all the things that Holly said, the world is almost pushing us into debt because of how they’re teaching us to work with money. One of the things we’re taught to do is go out and make sure we have all our money in the 401k and the IRA, and all these other things. As soon as we put money in there, we can’t pull it right back out. Because it’s stuck in there, and they’re teaching us that that’s the best place for money to go, we’ve got—and I’ve said this many times before, probably on this podcast before—we end up living paycheck to paycheck with a retirement program. And since all of our savings and money is stuffed away for the future and we can’t even access it today, that almost forces us to go into debt because we don’t have any of our money and we can’t access it. So when something happens, we need to go out and borrow money to buy a car, we need to borrow on the credit card for all these various things because all of our money is locked up. Using a policy as a main— you’re funneling money into to get out of debt as a starting point is you can use the money while it’s still growing instead of having it sit in a retirement program. And you can use that to get out of debt. It’s a totally different mindset. So it’s extremely powerful.

Holly: And, Nate, one of the key points there is a lot of us maybe have even been told that whole life insurance is a bad thing. Don’t buy whole life insurance. Buy term; invest the difference. But one of the keys here is to understand that banks (bank- owned life insurance) banks are the biggest buyers of whole life insurance in the whole world. Banks are in the money business. So if they’re in the money business, would they be buying a product that didn’t produce money in some way for them? Keep their money in motion? No, they wouldn’t because when you go to the bank and you make a deposit at the bank, they then go and loan it out. They don’t leave that money just sitting there to collect dust; it has to be in motion. Well, with a life insurance policy that you guys can start, you will be doing just what a bank does—you’re going to keep your money in motion instead of locking it up like Nate says. You’re going to have retirement income. But you’re going to be able to have money that keeps growing, and you’re using it at the same time.

Nate: You can even build your wealth through recapturing your debt. So instead of being in debt your whole life in various ways with mortgages, cars, credit card debt, student debt, business debt, and paying all this crazy amount of interest to other people you’re never going to see again and having a 401k on the side and hoping it grows well, instead of doing that you can build the same thing with a policy and actually recapture all that interest and use that to boost your retirement income even further down the road, get more of it down the road because of how you worked with your money. Instead of letting money sit, you were able to work with it and increase your results. It’s extremely powerful. So that’s the second— make a plan to get out of debt. We suggest that infinite banking is the best thing you can ever do as far as a plan is concerned to get out of it. List your debts from smallest to largest, as Holly said. Start saving money in a policy. Use the policy to take over the debt, and start paying yourself exactly what you had been paying everyone else. You can build a really big system, and you can get out of debt much quicker than you thought you could just by simply changing your process and getting serious about it. That’s how to make a plan. The third thing is you want to have a system that can keep you out of debt. So it’s one thing to get out of debt; it’s another [thing] to keep you out of debt. And that’s what, Holly, you were talking about recapturing.

Holly: Yeah, recapturing your debt. And it goes in with number two, that plan. Once you get out of debt if you’ve really identified how you got there and what happened to get you there, then you’ve also learned the tools to not put yourself back in that situation. And the biggest key is you still have to live within your means. Or live on less than what you make if you want to stay out of debt. But recapturing debt is something that we do, and we work with families on understanding how money and everything that you do in life is financed someway, that we are paying somebody something every time we make a payment. And that payment is going to be either deposited into somebody else’s corporation or company or bank account or it’s going to be a deposit into yours. The way to recapture your debt is to systematically understand how money works and literally understand how to pay off your debts, and then moving forward, every purchase you make, you’re going to be paying yourself versus going to the bank to borrow the money.

Nate: Exactly. And with recapturing, we really mean it’s one thing to get out of debt, but if all you do is you work so hard to get out of debt the conventional way, and you don’t have a plan to recapture (in other words, we say recapture, we mean pay ourselves back) I find so many people get out of debt once, and then they find themselves back in it in no time. And it’s because they haven’t really changed their process. They’re still doing the same things. They don’t have a place that can hold the money, so it gets spent. They just haven’t changed their mindset on things. So when we teach people to get out of debt and to recapture their debt, we take it a step further. It’s not just about paying off debt; it’s about getting the money back. And if all you do is focus your time paying off debt, what do you do once it’s out? Many times people don’t know what to do, and they find themselves, because they haven’t changed their process, right back where they were. The key is as soon as you pay off—let’s say you pay off a car loan. Let’s say the car loan was for 60 months, and you were able to build up a policy and pay the thing off using this banking concept in 24 months. You got this debt paid off; you feel really great about yourself. The next step is you’ve got to make sure you pay yourself back the same thing you would have paid a bank for the next 36 months. So now at the end of that time period, you’ve not only got your car paid off, but you’ve got a lot of money available that you can use to finance the next car and not have to get in debt at all. And the same thing can be said about a credit card or a student debt is that instead of focusing on getting the debt paid off early, get it paid off early but focus on recapturing it. That’s where people don’t take it to the next step and that’s why they always have to stay in debt because even if they get it paid off early, they wind up with no money when it’s time to go buy the next car or go on vacation because they didn’t recapture it.

Holly: And we’re really talking about building a system that doesn’t make you work any harder; it only means you’re going to change who the money goes to—and that would be yourself. So you’re not going to have to work any harder, and you don’t have to change your lifestyle, but if you’re out there and all you’re doing is working harder and buying more assets or getting into even more debt, then basically you become asset rich in your mind, but you’re cash poor. It doesn’t do any good to pay off the car loan in 24 months if in 36 months later you don’t have any of the cash and you’ve got to buy a new car. It didn’t do you any good versus the person who just paid it off over the 60 months. So you have to understand to really recapture it is changing your mindset and understanding that the only difference here is changing who the money goes to; instead of the car dealership or the bank or the credit card company, it’s going back to you. But you have to be willing and disciplined to pay yourself back. You can’t steal the peas. What do I mean by that, Nate?

Nate: Stealing the peas is found in R. Nelson Nash’s book called “Becoming Your Own Banker,” which is the book that got us started on the track of how this whole banking thing works with a policy and how to make it work in your life. He talks about a can of peas on a grocery store’s shelf that costs the grocery store something. So let’s say the grocery store has this can of peas; it costs them 57 cents to buy the can of peas, and they sell it to us for 60 cents. Whatever the numbers are, I don’t care. Essentially, what people would think: this grocery store is in business; they’re selling these peas … but normally if you owned that grocery store, the chances that—let’s say your wife or husband was shopping—the chances that they actually went past the cash registers and paid for the food that they got are slim. If you owned the grocery store, you’re saying it’s my food. I highly doubt that most grocery store owners, when they go get their groceries, pay retail price back to the store. But the issue is whenever you take a can of peas off the shelf, and you don’t pay for it as an owner, you’re going to have to sell probably 20 cans of peas to recoup the cost of that one can in profit. And that same thing happens for your money. If you think of money as the same way as you think of a can of peas, then as soon as you take some money off the shelf and you don’t replace that, you’re going to be hurting, you’ll have to work harder, you’ll always have to be working harder to make the profits that you want to make with your money when doing that.

Holly: It’s just like when we go borrow from our savings account that we have for that rainy day fund. And we go and take $100 out with every intention of paying it back. We have every intention of paying it back. But we never do. So, basically, we’re going to have to work even harder to pay it back. And even if we did pay it back, say I paid it back six months later. Often times, I don’t pay it back with interest. I just pay it back at the $100 I took out. And because I didn’t pay it back with interest, what I’m doing is saying my dollar is not as valuable as the bank’s dollar. So part of the recapturing is that you do pay yourself interest because if you had borrowed the money from a bank to buy a car, you’d have to pay them back. And if you owed the credit card company, you’d have to pay them back with interest. Part of paying yourself back and recapturing is understanding the key and one of the principles here is that with that plan you pay yourself back with interest. So you really understand that your dollar is just as valuable as any dollar you had borrowed, whether it be from a bank, a credit card company, a friend, a car dealership, anything—even for student loans, you borrowed it from the government—that you pay it back, but you pay it back with interest because they charged you interest. So you need to charge yourself interest.

Nate: That’s exactly right. The first step in getting out of debt is to make a plan to get out of debt. The second is to build a system to keep you out of it. And Holly is right, if you don’t pay yourself back just like you would have paid somebody else back with interest, then you’re probably going to wind up coming back to the bank or the credit card to get money instead of being able to use your own. So the best system out there that we can find to getting out of debt and staying out of debt is using this idea of becoming your own banker—the infinite banking concept—and using a policy as your main source of savings because it allows you to use it now and also produce income later. And because you can use it now, it’s very easy to stay out of debt and pay cash for things in life and not have to crawl to a bank and pay them out the wazoo for money because you’re now in the banking business. That’s the three points. Identify the reason you’re in debt. Identify where the debts are. Make a list of them, smallest to largest, and start chipping away at it. The second [point] is to get a plan to chip away at it. Make sure you’re following the plan. Plans can always change, but if you just keep doing what you’ve always done, you’re going to get the same results. So it may take some changes. Get serious about it. Lastly, build a system. Make sure that after you’re out of debt, you know that you have a system that allows you stay out of debt for the rest of your life so you’ll never get that stress of “I’m making all this money, but where’s it going?” You’ll know exactly that it’s coming back to me because I am now the one who is getting all the payments because I got the banks out of my life and I started my own.

Holly: The key here is really what Nate said is that you have to be willing to sit down and stop and identify the debt. And we want the best for you. The only way you’re going to be able to get out of debt and stay out of debt is with those three points Nate said. Identify the debt. Make that plan. And build a system that you can work with and understand. We don’t want you to work any harder, and we don’t want you to change your lifestyle. All we really want you to do is to be able to change who the money goes to so that it comes back to you and, eventually, hopefully, in the future, your family and future generations as well.

Nate: This is a key podcast. It’s time to get serious about money. It’s time to get serious about getting free. And one of the best ways to do that is to get rid of the banks in your life. They’re enslaving us. We’ve got to find a way out. Becoming your own banker and creating that system is a perfect way to do it. This has been Dollars and Nonsense. If you follow the herd, you will be slaughtered.

Holly: Get free resources and transcripts for this episode by visiting livingwealth.com/e8