The Four Major Pitfalls of Most People's Financial Plans

0:00You are your own money Guru I don't want to be your money Guru I'll certainly give you guidance and insights but you are the one that cares most about your money I don't care who you are you know so take charge of your own financial future don't hand it off don't Outsource it to somebody else whether it's a radio host or a podcast host or a book you read or your uncle or your financial advisor only you at the ultimate end of the day are responsible for your own cash and cash flow and so forth so certainly listen to people who've been there before who can show you where the bear traps are and that's just one of them I mean there's so many there's there's familiarity bias you know where you do the thing that everyone else at at the barbecue is doing oh the latest crypto craze or whatever

0:48Else do what you want your money doing for you research what tools and and resources are out there that can implicate or or introduce you to strategies that do what you want your money doing for you and then go find tools that do it I kind of look at it backwards because most of us are just sort of handed the 401K or or even real estate and we're said hey you should just do this thing you know just go get that crypto or go get that Roth IRA or open up that credit card or go get that line of credit well what is it you want your money doing for you would be my next question is this is this tool functioning in alignment with your desires because you know a savings account is going to act different than a hedge fund you know where you put your money makes it

1:36Act different so is your is your belief system aligned with your actions if not it causes stress which goes back to the point about a peaceful mind how did you say that a peaceful mind a healthy body or a Fit Body and a houseful of Love yeah yeah if you don't have you know I would love a six-pack but I also love the taste of ice cream and so my actions and my beliefs are sometimes in conflict with each other but I think the same is true with our money we s we tend to just sort of collect a bunch of accounts for lack of a better word brokerage accounts rental properties we just start throwing them in our backpack and we just carry them on through life and then 10 15 20 years into the journey we're like man this is a heavy backpack what am I doing with 17 credit cards and four different real

2:25Estate properties in all s parts of the country that have nothing to do with each other and can't really align those properties well like you talk about doing so there's just there's a lot of I think misalignment with our beliefs and our accounts our financial accounts or our or our financial reality so those are just a few I mean we could go further down that road if you want Kirby but gives folks a taste yeah no and but that I mean that's I think it's really smart from a to to look at it from a psychological standpoint because I think we can sabotage ourselves are there any though like specific asset classes that you feel like this is where I see the most growth or the most success is it like owning a business is it real estate is it oh okay yeah yeah on

3:13The positive side of things yeah I got I got stuck in the bear traps over there but yeah on the positive side of things this is going to be General it's not investment advice on a podcast of course but honestly those short-term rentals man those are doing amazing and I see the actual balance sheets and cash flow statements and profit and loss on these unbelievable noi on short-term rentals and particularly the strategy you showed me which is I call it the work a day short-term rentals you probably have a better phrase for it how would you define this your your U we refer to them as utilitarian short-term rentals I like that simar yeah so given that you know you're you're not trying to deck it out with the the vacation rental from from you know the from the Hamptons or whatever you're just doing utilitarian

4:03Short-term rentals that to me makes so much sense in terms of cash flow expense layout you know marketing consistency I see it too when people who have have worked with you come to me and do a financial analysis and I see the balance sheets it's impressive to me so that's a good one a couple other ones for fun if you like cash flow stange strangely enough certain forms of annuities are unbelievably efficient at creating income I mean that's what they've been around doing for 2,000 years annuities okay so real estate and annuities they've both been around several thousand years I'd say that's a proven track record for success and what's interesting is and folks who don't know about Bank on yourself maybe

4:51Go back and listen to the last episode that Kirby and I did together on this show or check out my podcast not your average Financial podcast Shameless plug so Bank onyour yourself type Whole Life policies are a liquid pile of money that grow on a guaranteed basis every year so they grow every year but you have access to the money where you can use it for any purpose including buying real estate so this is where things get really interesting and where I think a lot of cohesion happens between our two communities I could borrow against my life insurance policy and go invest in a utilitarian short-term rental so now I've got this interesting play where now I've got a loan against my life insurance that's continuing to grow for me on a guaranteed basis even on the capital I borrowed so

5:39If I've got $200,000 of cash value and I borrow out 150,000 to purchase a you know a rental or a series of rentals if I'm doing down payments or whatever my policy is still earning for me on the full $200,000 even on the 150 Grand I used as collateral for that loan mean meanwhile I've also got the short-term rental I just acquired giving me appreciation in the marketplace if I'm flipping it or improving the scenario I've got a force depreciation there I've got the cash flow I've got the tax dedu deductions and depreciation there too it's just a nitroglycerin kind of partnership in my opinion they're just better together they they they blow up in a very good way so that would be an interesting play during your working years is to create all these assets like you know using

6:27Your your model of util AR and short-term rentals I've got an extra credit here for this but let me hush for a minute any feedback on that idea of using Bank on yourself designed whole life insurance right alongside the utilitarian short-term rentals I love I love that idea I think that the the a lot of people hear that and if they're not familiar with it they hear Bank on yourself and then they hear Whole Life policies and they're like confused like is this a bank account or is this insurance or so I I've heard you know I talked about a lot of times and I'm still there's a lot of details I still get fuzzy on so would could you break it down for people who are who are interested in what you just talked about but do it in a way that like a third grader could understand like me yeah who has

7:16A mindset of a third grader and do it in very layman's terms of how this actually works what what this vehicle actually is at a very simple level it's a contract if you like real estate you only like real estate because there's a contract backing it if you don't have a contract to that property all you have is squatter's rights would you agree yeah so insurance is another contract that's all it is so I like contractual wealth I don't like paper wealth because paper wealth is just paper profits 401K up and down up and down you know stocks same thing but a contract says I have a unilateral right to X Dollar on this date you know today I'm worth X tomorrow I'm worth X Plus Y and so on and so on so much like a real estate

8:05U contract a whole life insurance policy is a contract and it says the insurance company is obligated to do certain things okay just like your your renter is obligated to pay you rent for example well the insurance company is obligated to do a few things number one pay my family if I croak that's always a good idea yeah two if I don't croak and that's my plan by the way they'll give me more Equity every single year in my contract so sort of like your mortgage when you have a 30-year mortgage you're paying that mortgage down they don't know what your house is going to be worth but they can guarantee the mortgage will be paid off in 30 years so I have a contract a whole life contract that says on year one your cash value is X and then it's a guaranteed increase of your cash in year two three four typically we

8:54Design the policies to have as much Equity as possible right up front so you're asking like a third grader let me see what I can do here CU I just talked to a real estate investor let me talk to a third grader your money has to live somewhere what if you could put the money somewhere where it would grow every year you always had access to it it never got taxed again and if you pass away too soon your family gets everything you'd hope to build for them if you had lived to be 121 years old now if that strategy was out there and it was over 200 years old would you feel comfortable repositioning some of your money that's currently at somebody else El's Bank into your own bank got it okay so so you can almost picture it as a bank account that you're putting you're you're you're investing money into and then you can

9:42Use it for whatever purpose you want yep and borrow against your own bank account so that's where the bank and the yourself idea comes from and I guess what's the big advantage to the doing it this way instead of putting in a bank account well when you put money into a bank account that's fine but whose bank is it it's somebody else's bank right it's it's Jamie Diamond's bank or it's Bank of America's bank or whatever that's okay but how much one how much interest are they willing to pay you probably not a lot two don't they tax you on the interest that they do pay you they do yeah they charge you they tax you interest or they tax you on the interest that you earned in your savings account but the most problematic piece to save at somebody else's bank is

10:32They are using your money on your behalf and then you break compound growth every time you try to touch your own money so let's say I go to the the bank of Kirby and I drop 10 grand in there as a deposit what is if Kirby's a smart Banker what's he doing with my money is he just going to put it in the vault no he's going to loan that money out right if Kirby's a smart Banker how how much interest is he going to pay me he's going to pay me about 1% 5% interest right what's he going to loan that money for probably 15% 30% if he's a good shrewd Banker how much of Kirby's money was in that deal zero zero how what was his rate of return infinite is the answer yeah so that's a

11:20Great deal if you can if you can swing it now you'd have to have several million tens of million tens of millions of dollars and a bank Charter to open up the smallest little local Brank bank branch however if you can borrow against your life insurance policy you can do that same strategy for modest amounts of money when I withdraw money out of Kirby's Bank how much interest am I now earning again zero right I I broke the interest whenever I withdraw that money it it breaks the compounding but when I borrow against my life insurance policy my money is still there I'm using it like a kind of like a line of credit like a home equity line of credit on your house I borrow against my policy and it continues to earn interest and and grow as if I had not touched the money kind of like your house doesn't stop appreciating in

12:09The neighborhood just because you open a hilock so similarly though I can repay the loan to my policy on my own terms so unlike a HELOC there's no monthly required payment and unlike a home my policy will grow guaranteed the house is not guaranteed to always go up in value so this I can say for sure it's impossible to be underwater or short on your policy you can certainly be underwater on a mortgage you know you can certainly be underwater on a mortgage we saw that in 2008 but you will not be underwater with a life insurance policy because the policy grows every year on a guaranteed basis okay that was super helpful so a practical example then going back to your example of the the short-term

12:57Rental because I think a lot of listeners are in this camp where they want to buy a high cash flowing rental property if you've got 50,000 of cash sitting there and you were just to go out and buy a short-term rental or if you had 50,000 that you put into this policy and then borrowed it back out to yourself what like tactically like what are the tangibly what are the difference what's the difference in the deal so in a practical example if you have a $50,000 cash sitting in your policy and you went out to bought a short-term rental is that what you're asking versus savings account versus yeah you just have cash sitting there it's not in a policy you don't have a policy you just have cash you're

13:45G to go out and put a down payment down on a property so let's say that I had never heard a bank on yourself and I had saved up money in my savings account and I could go get a short-term rental I could withdraw that money to go put the down payment down or whatever for that short-term rental great I've got the short-term rental I've got all the advantages that Kirby talks about on this podcast let's say Kirby on the other hand you've set up a bank onyour sdesign policy correctly structured now I'll quickly mention a lot of people have heard of this strategy and then go talk to their nearby insurance guy or their financial buddy and get a poorly designed policy incorrectly designed and they think they have what we're talking about when they actually don't so we can talk about that for a minute with our time left but let's

14:34Say Kirby has it correctly designed you borrow against your life insurance you go by the real estate you're still the owner of the real estate the the seller of your real estate has no clue how you bought the polic the property it's it it doesn't he doesn't know that it came from your policy he just sees you signing the check for 50 Grand you know so meanwhile you have this asset in your policy earning interest dividends and growing for you and it can be then repaid if you wish with rent or income or any other you know if you flip the property someday or whatever else you can use it to pay off the loan so the the difference would be Mark sitting over here paid cash I only have one asset to my name the property Kirby on the other hand has two assets to his name the

15:22Policy and the property got it okay that makes a lot of sense I appreciate that yeah so if you can go ahead and explain then what what I guess you mentioned some well earlier you you were talking about the potential downfalls of you mentioned like self-directed Ira policies which is a big thing that a lot of Real Estate Investors use I guess how do you compare something like that to to to this strategy because I think that's where a lot of people default when they think about retirement using assets to buy real estate yeah there's certainly a whole you know another show we could do on

16:10This topic so don't let me go too far a field with our time here but we have we have all these options and I I'm a big believer in self-directed life believe me I think there's a great satisfaction that comes from being able to direct where things are going especially when it comes to our money or our Investments and a lot of folks know that you can put your IRA money with anything you can get gold crypto real estate whatever and put that inside your IRA and we call those sometimes self-directed IAS here's where I have a problem with real estate and I know I might be touching some hot wires here you know with this audience so I'll be very candid here I I understand sometimes that's just where your money is and you have to use your IRA for real estate and that probably beats your mutual funds you probably could get at the local shop down the

16:59Street you know the financial shop however when you put real estate into an IRA you're losing every tax advantage that comes with real estate everyone all you get is a tax deferral at that point you lose depreciation you you lose the mortgage interest deduction interest on on mortgage interest cannot be deducted it's really hard to get loans against this you cannot loan against an IRA typically banks are going to have a harder time approving loans within your IRA for mortgages so you're going to end up with higher rates typically and then there's the problem of getting the money out of the IRA think about this when you are 72 years old current rules say that you're going to be forced to take money out of that Ira whether you need it or not called a required minimum distribution

17:48Now this means you've built up this nice portfolio of real estate let's say and now you're forced to sell that real estate on a certain schedule that may or may not align with your interest or the market like what if you have to sell a property to satisfy the irs's required minimum distributions when the market is tanking how would that feel you know so what if I could still do all of my own personal investment decisions buying and selling my real estate as I wish but totally outside of the government's you know OverWatch and put it into a policy portfolio instead keep that money in an LLC or keep the properties in an LLC use my policy as a means by which to acquire and then manage those properties and then here's the extra credit I I briefly alluded to early in the episode every

18:37Whole life policy can itself transform it can transform like a you know butterfly to you know caterpillar to butterfly it can go from a whole life policy that let's say you used your whole life policy for 40 years you bought and sold 10 different real estate properties you used it to repair your properties you sent your kid to college with the money but now it's time to retire and you've got a million bucks in your cash value life insurance with a bit of paperwork basically a week of week of you know back and forth with the insurance company you can transform that whole life policy into an annuity and the annuity then can provide for you a guaranteed lifetime income as long as you live supplementing what you might get from all your real estate so it just becomes another quote unquote rental but without all

19:26The trash termites taxes tenants and toilets a