Rank #1: Ep 147 - Don't Get Scammed Like I Did
May 22 2020
Rank #2: Ep 146 - Stock Market Bargains Or Money Pits Be Cautious Looking At These Industries
May 22 2020
Rank #3: Episode 75 - How Would You Like To Pay Taxes - Even If You Have a Loss? Beware, this could happen to you!
With the year end stock market losses, mutual funds could send of what is called "Phantom Income" which basically means you could be paying taxes on short term capital gains, even though you end up with losses!
Dec 12 2018
Rank #4: Episode 80 - Another Indexed Universal Life Disaster - A Near Miss!
IUL's are a disaster for so many people but it's one of the most sold products by agents. In this episode we talk about another avoided disaster.
Jan 23 2019
Rank #5: Episode 120 - The 5 Key Elements To Wealth (Simple and Easy) Episode 1
Well! Hi everyone, this is Dan Thompson with wise money tools. Welcome to this video. Today we're gonna talk about the most critical and least understood basic money principles. Now, listen closely here for just a second. Okay, I'm gonna be putting out these next five to six videos pretty quickly. As you know, I typically put one out about once a week. But this next five or six are gonna come a little bit quicker because I want these in your hands just as fast as I can get them done. Because they're the most important videos to your financial success. Okay? These are very important and I want you to miss a single one. So if you're not subscribed, click Subscribe now. Okay. Sorry, don't mean to be so dramatic, but I assume you tune in to my videos because you want to get something out of them. And I can promise you as we go through these next few videos, it's gonna hit you it like as gross as in despicable me, light bulb. Right. So the light bulb is gonna come on. And it's gonna be pretty exciting, and I can't wait to share this with you. So what we're gonna talk about, like I told you in our last video, we're gonna talk about the elements of financial success. And certainly you've heard of them before, but maybe not all packaged together. And if you want to seriously take your financial wealth to another level. You've got to know and implement what we're gonna call the five elements of financial success. And what I want to do is break down each element into a separate video or this one's gonna get too long. And I can't take the risk that you're gonna tune out. We're gonna try to keep them short, sweet to the point. So for each of these videos, take your time. Maybe watch them a couple of times, if necessary. You got it understand this so you can again, take control, grow your wealth. I'm also gonna put this video series if you will, into a mini course. And then I'm gonna put a free link to access this anytime, so that you can refer back to them without looking through my hundred plus videos searching forum. And of course, you can always share that link with your friends and family. This is stuff I wish I would have known and practice back in my 20s. This is the stuff I wish they would have taught me when I first became a financial advisor. So this course again, it's gonna be called the five elements to wealth. So watch for that link as we get going in these videos. Alright, so let's get after. Let me introduce you to this again, even though you've likely again, like I said, heard of these elements. They have to fit and balance with each other. And that's what's gonna make this film a little bit new. So we all know the world is made up of four elements, earth, air, water, fire, right? These four elements are believed to be the essential elements to life, take any one of those elements away. And the theory is life would cease to exist, and maybe even the world as we know it. Each element plays a specific role. And we needed to sustain our life. What just like these four elements are critical to our living and to our world. In the world of money investing and finance, there are five elements that have to be present, working together, him balance to build wealth, and here they are. The first one is income. This can be also called cash or in short, what we might call capital. Then there's debt. There's both smart debt and dumb debt. And we've got to figure out which is the best for you and how to get out of dumb debt. The next one is safety. This is the protection of your money that so many of us want when it comes to investing. But then there's growth. And for the most part, this is what we do. This is why we save and invest, because we want our money to grow. And finally, the fifth element is leverage. This can be used in many ways, most ways. What it does is it adds to your risk. But we're gonna talk about how there are ways or won't add to your risk. So again, this can be kind of fun. If we ignore or overemphasize one of these elements, we potentially eliminate our long term chances of a successful financial outcome. But here's what's interesting those, if you were to talk to several different money managers, financial planners, financial advisors, radio talk show host. You're gonna find that each one puts a major emphasis on one element over another. As an example, you'll find that your traditional or typical financial advisor uses the lure of growth. If you will, to encourage you to invest hoping that you're gonna build your wealth through risk and using them. They say you know, buy mutual funds, dollar cost, average, diversify, take risk, and that's what you need to grow your wealth. Then on the other extreme, you have the get out of debt guys. I often call these the Dave Ramsey, who are all about eating rice and beans and put every penny towards paying off your debt and your house and then pay cash for everything else the rest your life. Well, out of balance, what's happening is they're missing some critical elements of wealth. And just getting out of debt isn't going to build your wealth. Now I know after you're out of debt, Dave wants you to put your money into mutual funds. But now you add the risk element and you've lost time to the equation. And time is an important part of this equation. Well, we're gonna get to that as we go along, then the next group of advisors, if you will, these are the better do nothing than to lose. So they keep cash around, see these bank accounts, honey markets, they don't trust the stock market, they don't even buy, they may even buy gold and silver because the world's coming to an end, right? Basically, they don't trust anything but maybe their local bank and some little pieces of metal. Then you have the safe money guys who use investments like annuities to make sure that you never lose money and to have income during retirement. Then you got the life insurance guys who are all who also like safety, but they also want liquidity. They want to be able to take advantage of opportunities as they come along. And then finally have the risk takers and these are the leverage guys. These are the guys who build businesses and investments and they use leverage, or what we call other people's money, OPM, that formula to lever up their capital and build and grow their wealth faster. Well, on the surface, you could make an argument that each of them have some good points. So when we look at those five elements and how each one plays a role in the financial world, we've got to figure out how they balance together. Now depending on your status, your experience, your current wealth, your risk tolerance, you may lean more towards one particular flavor than another. That's why each of these different advisor types I'll stay in business. Because there are enough people who believe in their particular model again or flavor, and they jump in with them. Now, I have to admit over the years, I've been pretty much in all of these categories, depending on my age, my wealth, the economy at the time. When I first started out in 1986, I found myself in a world where you sold mutual funds diversified money, dollar cost average, you never asked any questions. This is just how you did it. You didn't ask questions like, does this really work? And is all this really necessary? Unfortunately, it took me about 13 years to realize that it's not a very good way to go. Unless you're pretty much okay, staying broke through your retirement years. I've also risked a lot of money, personal money, trading and investing. It sure is fun when it's going up. And that's so much on the way down. Well, that drove me to being a little more ultra conservative and simply protect your money, have it grow slowly, but over time, if you don't lose, what the theory is you're gonna turn out fairly well. Then you've got the leverage guy or what I can called the entrepreneur guy. And again, that's he's part of me as well. So I like to build things into grow things. And so we even started a building company several years ago, and now we develop and build homes. And it's been really good and it appears right now to be looking good for the next few years. But you have to be cautious at the same time and try to put away some profit elsewhere, as you go along and slow down, if you can kind of see what's happening before it gets too ugly. Well, the truth is balancing and understanding how all five elements work together is the only way to wealth predictably and as safely as possible so you can sleep at night, one of the very basic kids keys toward wealth, and it fits well within our element. And that is compounding. Einstein gave us one of the best quotes when It comes to money that's ever been said. He said, compounding interest is the eighth wonder of the world. Then he went on to say he that understands it earns it. He that doesn't pays it, he produced this simple formula of compounding interest. Well, simple, I guess is a relative term. Here's the formula, y=a(1+r)x
. This quote by Einstein is often quoted by financial advisors, which is fine. It's just words to many of them because they don't really understand. See, compounding is huge. And when we balance all the elements, if we look at the equation, and each one of those five elements, each one of them is a very important part. So why is the wealth we build? This is the end result. This is what we're after. This is the answer, so to speak. "a" Is the cash or the income. This is the first step, we've got to have some money. So we've got to learn to pay ourselves and put some cash in a place where we can start working with it. One is debt or being debt free. However, out of balance, this is gonna be really interesting when we get there, if we're putting too much emphasis on the debt side. Now, the "+" this could be a plus, or it could be a minus sign too, because this is the safety. This is protecting your money from losses. If we have a minus sign, we've got losses. So we want to keep that in the plus sign and make sure that we're in a situation where we have safety and protecting our money. Our is rate of return it's the growth this is where compounding comes in. And then finally "x", x is leverage and the potential for exponential growth if we use it properly. And if we don't use it properly if we use it like so many entrepreneurs and startups, it can get really kind of ugly fast. So here's the problem with financial advisors who talk about and emphasize just one or maybe two of the financial elements and leave the rest out and miss out on the total equation. As you know, from your math classes in school, if you take any part of this equation, or maybe turn a plus sign into a minus sign, the whole equation breaks down and it doesn't work. The only way the equation works is this, each part of the equation is there and managed properly. Now let me make a confession here. So I've been at this stuff, 33-34 years, some like that. I've seen just about everything out there that financial advisor sell. I've read tons of books and articles from many successful investors. They're certainly success stories in those books. And some call it Looks, I didn't call it diligence, some call it brains, whatever. They found a way to build their wealth. Some kept it. Some didn't. There are lots of businesses that have washed up and are, you know, literally down the drain. You know, 30% of new businesses fail in the first two years have been open 50% during the first five years, and a wow 66% during the first 10 years. So just because you're a business owner isn't a surefire way to wealth. What I found is that not everyone is cut out to be a Warren Buffett, Bezos OR gates, right. In fact, the vast majority of Americans simply work at a job, make a good living, have a career and hopefully have some sort of retirement at the end of that something they're left out of this, you know, dream of wealth because they don't have the time or possibly the talent or the ambition or the drive. You know, a lot of people don't want to put everything on the table and go open a business and work like crazy to make it successful. But what if in every walk of life, you could experience true wealth by combining these elements and keeping them in balance? What if it wasn't as hard as you thought? What if you didn't have to build a company or take a bunch of risk or get lucky and investments. But you could simply take advantage of the five elements, and wealth would almost grow by natural economic forces. Everyone plays a role in our economy. What I want to do is show you that no matter how you fit in there, you can be as wealthy and financially free as you can dream. I don't want to take away from you, those of you who want to be creative and be innovators, and you're driven to make the world better. That's what built America, then that's a huge part of all of this. As entrepreneurs build their businesses. They create cash flow. And they too can use the five elements if they take advantage of cash flow and setting up this side. Rather than putting it all back into their business and potentially losing that business. Again, just the statistics of what happens to businesses tells you probably ought to be protecting some of that future capital. So both the entrepreneur and hard worker can win once you know the five elements and how they work together. Okay, so now you know the five elements. Let's review really quickly the type of person that each element represents and the good and bad of each, we'll call the first one the cash club. They love to save money in an account. They do a great job of paying themselves first, but they don't grow. They don't leverage and we've got the debt free club. Now these guys get really committed. They're all in starting right now. And again, I call them the beans and rice guys. They'll sacrifice enjoyment now to live a debt free life later. They're really committed but never pay themselves first, because they're always paying someone else, a guy who they owe money to right? They miss out on both growth and leverage, which are integral to the whole equation working well. Then we've got the guarantee or the safe club. They love safety and guarantees and they're drawn to typically life products that give that guarantee and investment security. No other investment in the world focuses on security. As much as insurance companies do. They are really secure. And typically the trade off for that security is a little lower or slower growth. Then we've got the high growth of the home run club, they love to put to bed on the potential big win. And these guys are rolling the dice in the stock market or maybe crypto maybe other aggressive investments. They offer potentially high growth, but they lack the security and the leverage and it can become very risky. And then finally, we got the leverage guys. These are entrepreneurs they love to build their empire using leverage to accelerate their growth. Their priority is to use all available resources to grow that extreme focus of the business. And unfortunately, by doing that, it also brings on risk. Their confidence in themselves translates to them working for money, instead of money working for them. Okay, so that gives you a bird's eye view of each element. Which one right now fits you the most. Maybe it's a cross between one or two of them. You know, john Bogle, he's the founder of Vanguard. He's credited for saying, never bear too much or too little risk. Taking a balanced view of being neither too risky or new to conservative. So there you go. That's a great start. Probably a lot to take in. This is gonna be really excited. I can't wait to share more with you. So again, make sure you subscribe, be ready for the next video. It's most likely gonna be sooner than next week, so be on the lookout for it. If you have any questions, make sure you send your questions at wise money tools.com. I'll answer just as quick as I can. Again, subscribe. Here where to spend a few minutes talking about your situation, click on the time trade link below to schedule a time. Well, that's about it. Thanks for joining me. Now you understand the five elements to Wealth, I'll talk to you next time. Take care.
Dec 05 2019
Rank #6: Episode 91 - College Grads
Now that you are debt free. What's next?
Jul 04 2019
Rank #7: Episode 92 - Offense and Defense
How the NBA can teach you to become a more savvy investor.
Jul 04 2019
Rank #8: Ep 148 - Got A Whole Life Policy? I'll Buy It
Jun 01 2020
Rank #9: Episode 110 - Discussing Six Pitfalls Pushed By Nearly Every Financial Advisor (Part 2)
Well, Hi everyone, and welcome to another wise money tools video. So in our last video, we were talking about this radio guy who was talking about the six main points about money and investing. And we got through a couple of them. The first one we talked about was getting out of debt, that seemed very obvious, I think every financial advisor would agree that getting out of debt is a good idea. The next one we talked about was deferring all the taxes, you can maximize your 401k if you have one. And at least do an IRA and maybe a Roth. So what we're gonna do is now pick up on the third one, which was, if you have more than 10 years to invest, then by mutual funds. Then we're going to quickly hit the fourth one, but don't buy individual stocks.
The fifth one by term insurance, because that's all you'll ever need. And then the sixth one was more of an absence of talking about a very important asset and that is real estate. And of course, since he's a securities broker. He's not gonna say much about real estate being an option. Because they don't typically get involved in that. So again, we talked about getting out of debt, and the strain that puts on marriages and families, it really is one of the best financial moves you can do, you can first do and that is eliminate your debt. Our banking system, by the way, is typically what does that perfectly. And so you might want to check that out, because it can really get you out of debt a lot quicker and give you capital at the end.
And then like I said, we talked about deferring taxes, and whether or not that was really a help or not, there's certainly some trade offs there. One being not knowing for certain that you're gonna be in a lower tax bracket when you retire. And that's a big one. Alright, so here we go on to number three. If you've got more than 10 years to invest, they recommend that you buy mutual funds. Alright, so this was kind of kills me. All right, it's almost to say, if you have 10 years or more, you're gonna be fine, you're gonna make money. Well, let's look at a few things at face value first. Here's a look at our real return after inflation and taxes. And what I'm gonna do is I'm gonna use an 8% rate of return. Which is basically been the average of the S&P 500 for the last 10 years, it's actually 8.18%. And these have some you know, we've obviously been in some really good years, I think you'd agree.
Remember some of my other videos where we point out that average does not equal actual returns would be really critical to watch now. Just so you can get a flavor that just because something averages 8% doesn't mean it's actually going to achieve that 8% return, there's a big difference. Sometimes it's big enough to drive a semi truck through, so don't believe averages. Anyway, again that's another video. Alright, so what I want you to do is look at this calculator that I've built here. And here's what we have, we've got $10,000 invested every year for the next 10 years. And we're gonna put in that it's done 8% every year. We're gonna throw in 2%. for inflation. We're gonna put it at a 25% tax bracket. And you can see that our future value would be $166,000. Now after tax, that drops down to $124,000.
And finally, after taxes and inflation, we dropped down to $109,000. So let's not kid ourselves into thinking that buying mutual funds for the next 10 years is gonna get you all that far. Now this particular financial advisor was so insistent that if you have 10 years, it's the only way to go. So now here we come to my real message, what I really want to get across to you right now. You could go 10 years, 15 years, 20 or even 30 years. But if you were unlucky enough to retire within a few years of 2001 or 2008, your retirement probably went right out the window. You could have had stellar years up to 2001. And then BAM 50% of your money's gone. When you hit 2001. Now think about that. Let's say you had a million bucks in your 401k, then almost overnight, it's worth half that. And this is the money you planned on retiring with, then this turned around and happened again. Honestly, in 2008 mutual fund values were down 50%, they just obliterated your retirement.
So it's really borderline absurd for these guys to say, if you have 10 years you can invest? Well, that's great unless your 9th or 10th, or even your 8th year is a 2001 or 2008. And then what did they do? Sorry, that didn't quite work out for you. But for most people, if they go 10 years, they turn out fine. Well, here we are 2019, we've had a good run these last 8, 9, 10 years, maybe almost too good. So at some point, we're gonna have a recession, a fallback, a correction, or whatever you want to call it, it's gonna happen. They always have they always will, and one is on the horizon, I just don't know how far out that's gonna be. So if you're comfortable relying on the fact that your mutual funds at these all time highs are gonna do even better over the next 10 years. Well, I might want to remind you that in 1929, it took nearly 30 years for $1,000 to be worth $1,000 again.
I think about that in 1929. If you had $1,000 obviously it dropped off the face of the planet. But then it took 30 years to be worth $1,000 again. Now I'm not trying to be gloom and doom here. I don't think there's a depression coming. I like investments. I even like the market. But I like the market when it's on sale and not at these highs. I don't like mutual funds. And I certainly don't like these guys talking about averages and throwing those things out. And I certainly don't want you to think that just because you've got 10 years that nothing could go wrong. How do these guys know that in 2029, it's not gonna be another 2001 or 2008 or heaven forbid in 1929. You know, back in the 70s, there was a basically a day a decade long of basically nothing. And if we go back a little further, in October of 1965, the Dow Jones Industrial Average was 960.
It took until December of 1980 for the Dow Jones Industrial Average to be 963. So 17 years of basically stagnant do nothing type growth, get these financial guys, and especially these radio guys want you to invest in a market at an all time high. As long as you have 10 years. Well, I'm glad they have a crystal ball. I love it if you were more empowered, more educated, a better investor and didn't rely on advisors who really have no sense of reality, and don't look at these things. And quite frankly, don't manage money, they simply send it off to a mutual fund and then charge you fees. You Meanwhile, have to cross your fingers. Hope we don't have another way during your retirement years, or your retirement could be toast. Bottom line, I don't care if you have 10 years or 50 years, knowing what to invest in understanding the investment, understanding why you're investing, understanding the financials of the investment.
You don't have to be a CPA, but you do need to understand a few numbers. And at what price should you be paying for that investment. This is the only way you're gonna have any semblance of control over your financial future. Now, lately it's not uncommon to hear from those who are trying to be patient, wondering if they should be invested in this market. They keep on asking, should I buy in man, I hate to miss out. What if the market keeps going for another couple years? Honestly, that could happen. I mean, we've got a pretty good economy right now. However, it doesn't negate the reality that from an earnings perspective, and from a price perspective. It's much higher than the cash flow, or the profits or the revenue, whatever you want to call it warrants. I can tell you that many of those who've experienced gains over the past number of years. They're probably eventually going to lose most of it, depending on how significant the next recession or pullbacks gonna be.
In other words, if we have a 30% market drop, that could wipe out three to five years of return money they thought that was gonna be there's. If we see another way, that could mean 8 to 10 years of growth wiped out virtually overnight. It may be better to be a buyer when the price is below the value. Then you can pretty much stay invested for decades, if you get in at the right time. As you you can see, financial advisors for the most part, have no interest in this. They need to sell you these mutual funds and start collecting their fees right now. Obviously, they want you to come out, okay, and they hope you come out. Okay. But they're not really thinking through the whole process. They rarely ever asked this question. Is it a good time to buy, they just basically say if you have 10 years, it's a good time to buy. They use catchy phrases like, Don't time to market or it's not about time. It's timing.
They make you all feel, you know, warm and fuzzy and all cozy. But they're meaningless terms are meaningless phrases. They're not slogans that the wealthy and great Investors live by any means. From the advisors perspective, it's well if you have 10 years or more than you should invest. And to me, that's just borderline insane. Okay, so that was a little bit of a soapbox. I'll get off that from for now. Anyway, I wish I could grab some of these advisors by the shoulders and shake some sense into them. So be careful of the same old tired advice traditional advisors have been giving for years. I always say if traditional financial planning worked. Then more people would be retiring with more money, but they aren't. In fact, so many retirees are struggling to make sure that they have at least enough money to last their life. They don't want to run out of money before they run out of life.
Okay, so I went a little long here. So I'm gonna push our next item the number four don't buy individual stocks to the next video. In the meantime, if you have any questions, make sure you shoot those questions. To questions at wise money tools.com. I'll answer them just as quick as I can. Don't forget to subscribe. If you ever want to have a quick strategy session, click on the time trade link below and we can get together and have a little conversation about your particular situation. So that's it for this video. I will talk to you next week. Take care.
Sep 18 2019
Rank #10: Episode 103 - Mortgage and Equity
Aug 01 2019
Rank #11: Episode 124 - 5 Key Elements To Wealth (Simple and Easy) Episode 4a
Hi everyone, this is Dan Thompson and welcome to another wise money tools video. We are talking about the 5 elements to wealth. And this time we're going to have a little bit of a crossover from our last video where we were talking about debt. In our last video, we were trying to determine good debt, bad debt, when to have debt, when to be using your money to build and grow. So this is kind of a crossover video. And I'm gonna talk a little bit more about what we had done in the previous video. But more specifically, we're gonna talk about paying off your home mortgage. Now, I'm gonna show you again, maybe some good debt, the power of compounding and time. So the question is, should you carry mortgage or should you pay off your house as fast as you can?
Now, I gotta say this because this is really important. Oftentimes, paying off a home is more of an emotional decision than a financial one. And I've never been one to try to talk someone out of paying off their mortgage, if they just feel like this is something they want to do. It's gonna give them all the peace of mind and safety and they sleep good at night. So that's great. And if that's you, awesome. However, in this video, we're gonna look at it purely financially, we're gonna take all the emotion out of it. And first of all, you got to realize one thing about home and especially home equity. Home Equity gets a 0% rate of return every day. We can month in forever and ever. Okay. Now, what do I mean by that? Well, we probably should describe what equity is. Equity is the amount of money you would literally put in your pocket if you sold your home.
It's the difference between what you owe and what you own. Okay, so if you have a home let's just say, it's worth or you could sell for $200,000. And you have a mortgage of $100,000. Well, basically you have $100,000 equity. It's the difference between your home's value or sales price and your loan balance. That 100k in equity, does not grow, does not get a rate of return and sits there idle everyday forever. But Dan, you say how can that be? My house is gonna be worth more in 10 years than it is today. And yes, that is true. However, think about this. If you have a home worth, let's say $200,000 today and in 10 years, it's gonna be worth $300,000. Now, it didn't matter if you owned your home by paying cash or if you had 100% mortgage. It really didn't. Your home went up value based on the market. Not how much money you put into it. So with or without a mortgage, your home went up from $200,000 to $300,000.
Now you certainly have to account for payments and interest and so forth. If you didn't own your home free and clear, but the equity in that home is always gonna get a 0% rate of return. So let's look at it this way. We're gonna take two couples, we're gonna call couple one, our accelerators because they're gonna go out and they're gonna accelerate their payments and pay that mortgage off as fast as they can. The other ones we're gonna call them mortgage yours, these guys are gonna keep their mortgage and they're gonna do other things with their money. So both start out with the same home, same down payment, same mortgage, same monthly payment. So each of them basically bought a $200,000 home, they put $40,000 down or 20% and they have $160,000 mortgage. Their payments are $1050 a month. Now, I'm not including property taxes and insurance. This is just pure principal and interest.
Now the accelerators, they heard the radio guy tell them that the paid off mortgage has replaced the BMW and so they want to pay off their mortgage as fast as they can. Now both couples have an extra thousand dollars a month for a total of $12,000 a year extra that they could put toward their mortgages. So the question is, would it be better to put that extra thousand dollars a month into the mortgage or somewhere else. So the accelerators by accelerating their payments, they're gonna pay off their home in 10 years and 3 months. So by adding that thousand dollars a month for the next 10 years. They're basically gonna pay their home off and own it free and clear in 123 months. Now once they pay that off they're really not gonna have any cash. They haven't saved, they don't have any other investments. They have all their equity in their home tied up in the sticks and stones.
Now at this point, they can finally start saving and investing because they've paid off their home. But they've missed out on 10 years, they're 10 years older, that means they have 10 fewer years to grow and compound their money. Now the other couple, the mortgagors, they decided to put their extra thousand dollars into a safe, accessible tax advantage location that averaged historically, about 7% in that same 10 years. Now, keep in mind that the Ramsey ites Davey says that after you get your house paid off, you can go buy mutual funds. And he says that they're gonna do 10 or 12%. But we're just gonna use 7% because no one's been able to figure What funds Dave buys? And we asked him all the time, Dave, please tell us which funds are you buying that are doing that. Anyway, at the end of 10 years, the mortgage yours are gonna have roughly $247,000 in their account.
Now, this is cash, they can access cash that they can use and turn into income at some point in the future as well. Now, how would the accelerators get their cash out of their house if they needed it? Well, there are two ways. They can either sell their house and take their money or they can get what's called a HELOC. A home equity line of credit. And as long as the bank's willing to lend the money, they could get some money out of their house because they put it all into the house. They don't have anywhere else to access capital, other than through a heat locker selling their home. How are they gonna generate income from there home, I guess they could Airbnb it on the weekends. But a home does not generate cash flow. Hopefully when or if they need to get some money, the bank will lend it to them. Or maybe the market will be at a really good time to sell and they'll be able to pull out some cash then.
Now remember, the mortgagors have the exact same home value, both homes went up at the same time at the same rate. So there was no difference in that. By the way, in year 10, they still have a balance of about $150,000 on their mortgage. And but they have $247,000 in cash. So the question is, could they pay off their mortgage now? Mortgage balance 150 they have $250,000 they could pay off their mortgage, couldn't they? And they would still have what $70,80,000 left over. But would that be a good idea? Would it be a good idea if they now took their money and paid off their mortgage. Well, our accelerators, as we've talked about have already paid off their mortgage. It's year 10. Again, they don't have any cash. It's all in their home. But now the accelerators can start saving $2000 a month, right? Because they don't have a mortgage and they had that extra $1000. So now they can start saving $2000 a month.
The mortgagors will keep on paying their thousand dollar mortgage and saving $1,000 in their side fund for the next 20 years. Okay, so it's been 30 years since they both moved into their houses. The mortgagors have finally paid off their home. All told over that 30 years, they paid $186,000 in interest. So for that home, they ended up paying $386,000 for their home. Oh, that sounds brutal, right? However, because they saved on the side and they compound in that fund. It has $2.4 million in cash. Now if we subtract the extra 186,000 they paid in interest, they still made over $2.2 million in cash. So can you see the power of compounding and time they use what I would call good debt into an asset a home that is appreciating. Now going back to our couple the accelerators, they were able to start saving $2,000 a month once they paid off their house. They use the same account that the mortgagors did.
But remember, they started 10 years later, because they were putting their extra money into their home. How did the last 20 years fair for them down the road? Well, their account grew to 1.4 million. That's not bad. The problem is they lost out on a million bucks by accelerating their house payments and paying off simple interest while they were missing out on compounding interest. And those 10 years made a huge difference. Now think about this, a million dollars at retirement can be a big difference in how you enjoy those retirement years. You can see how amazing really compounding is and why Einstein called it the eighth wonder of the world. You may have heard this little analogy before, but it's really incredible when you think of compounding. And that goes like this. I'm gonna give you two choices.
Okay, you can have $100,000 today right now, take it and run. Or you can have one penny today. And each day for the next 31 days. We're gonna double it. So in other words, you get a penny today. Tomorrow you get 2 pennies, then 4 pennies, 8 pennies, 16 pennies, 32 cents and so on. So which would you choose? 30 days of compounding or $100,000 today right now in your pocket. Well, you probably can't guess that this is a trick question and especially if you've heard it, because at day 31, a single penny would be worth over $10.7 million. And here's the schedule 1 to 2 to 4 to 8 to 16 to 32 to 64 to 128. And then it starts to get into some dollars we get here today 18 and now we've got $1,000 we finally broke the $1000 mark, then 2 then 5 then 10. By day 22 We have $20,000 by day 23 we have 41 then 83 and finally we get into where day 28 we break the million dollar mark. Day 29 2.6 million then to 5.3 million and finally day 31 $10.7 million.
Now that's compounding 31 periods. Now most people in their lifetime won't have 31 compounding periods of 100%. For instance, how long does it take for money to double at X%, you may have heard of the rule of 72. It's a formula that basically states that if you divide your rate of return into 72, that's how many years it takes to double your money. Now, it's not exactly accurate. But and especially as you get into higher rates of return, it even becomes less accurate. But it gives you a ballpark and it's easy to come close. So if I get 10% of my money and I divide that into 72, that basically says 7.2 years, I'm gonna double my money. Here's a table that's a tad more accurate, at 2%. And rule of 72 says 36 years, it actually takes 35. If we look at 12%, for instance, it says it's gonna take 6 years, it actually takes 6.12 and so on and so forth. Anyway, the idea is we want to find out how many times we can compound in our lifetime.
So it's not all that critical for this discussion if we're perfectly accurate. But what I want to point out is that over a working lifetime, we don't have many opportunities to get 100% compounding periods. Let's just say you start working at age 25, you basically have 40 years to grow your money unless you work past 65. But again, so let's use 10% average, which means we're gonna double our money about every 7 years. So if we divide 7 into 40, that means we're gonna have somewhere between 5 and 6 compounding periods in our lifetime. That's it. So even though it'd be nice to have 31 compounding periods and some very, very wealthy people might have a few of those. Then when we add in taxes, and costs and take away years of growth by losses. Well, I'm not trying to tell you all this to depress you. But what I want to point out is there are a couple of ways to put compounding in your favor.
One is the obvious one, start now start today. Don't let another day go by no matter how small the amount is to get compounding. The other way we can get compounding in our favor is to force accelerate the periods. Now if we go back and look at that 31 day compounding chart, but this time, let's assume that each day is 7 years, okay? If I already have $20,000 saved, I can force accelerate the process and I'm already at day 22. I find that lots of people have put money into mutual funds 401K's or other investments, and they also have some good income. We're They can start to save right away. If you can for start this concept with say $100,000. Now you're between days 24 and 25. Start with a million and bam, you're pushing day 28 already, where you get the idea. The more you can start with, the quicker you can bypass the compounding periods that seemed to be really slow grow for a while, I mean a penny to 2 pennies to 4 pennies to 8 pennies to 16 pennies.
I mean, you feel like you're getting nowhere right? Now, if you don't have the capacity, don't get discouraged. Just get started. You're gonna be surprised how much you can add to this over the years as your income grows. And then you can accelerate your compounding then I tell people all the time, you can't get back yesterday. So we've got to get started. Okay, I've got to wrap up this video because I don't want it to go too long. But we've got to touch on one other factor that goes hand in hand with compound, and it's not understood, and it's really not understood how devastating it can be to your compounding. So you've got to stay tuned for the next video or part two of compounding, if you will, because this is where we're gonna talk about that.
So make sure you subscribe. If you have any questions to him questions at wise money tools.com. Answer them just as quick as I can. If you want to spend a few minutes click on the time trade. We'll talk about your particular situation. In the meantime, we're talking about the 5 elements to wealth, and we're getting close to the fifth one and then we're gonna put this all together and wrap it all up in a nice package for you. So that's about it. Talk to you next time. Take care.
Dec 29 2019
Rank #12: Episode 107 - Your 401k vs. Your Mortgage
Hi everybody, welcome to another wise money tools video. Glad to have you with me today. So I had a really interesting conversation the other day was, and it may fit some of your situations. You know, I know a couple of you still have some teenagers at home, maybe you're in your, I don't know, early 40s, late 40s, who knows. But this couple very similar situation had a couple teenagers at home. He's got a really good job pays well has a 401k. And he's funding it to the max. So that's pretty common for a lot of people. They have a fairly good size home, and along with it a really good size mortgages. And this is kind of where our conversation started. They're worried about retirement, and having that mortgage payment hanging over their heads for years and years into retirement.
So we were just kind of casually asked me, you know, should I take the money out of my 401k and pay off my house? And I got to thinking about that, you know, there's so many variables in answering this question that I thought might be a good conversation for us to have. Because some of you might have a very similar, you know, Outlook or trying to figure some things out like that. So let's look at each of these assets, if you will individually. Let's first take a look at the 401k. Now, there's a couple things to note about the 401k. As you know, it's most likely invested in the stock market. And we've had a really good 10 years in the stock market. In fact, I was thinking the other day I was thinking Man if somebody was in their, you know, mid 20s, got their first job started funding their 401k. They really have no idea what it's like to have some kind of a recession or a bear market.
In fact about the worst year we had was right at the end of last year in 2018. The market tumbled and basically lost all the earnings throughout the year kind of turned out to be a breakeven year but still nothing all that devastating. So for a good decade, we've seen this market pretty much be on a decent projector. Okay, so one of the question was, you know, how long is that gonna last I mean is are we gonna be in this situation where the market is just gonna keep on going keep on going for years and years to come? Well, who knows, we may have another year to we may be coming to the end, I don't know. But recessions you know, and bear markets are really a normal part of the economy, we have to expect them at some point.
And they're actually kind of good, we're gonna see a typical recession hit at some point. It's probably gonna take a decent chunk of returns and earnings from a lot of people's 401ks. It's possible when a recession hits that somewhere between two and five years, sometimes even more of all the growth that you had over those years can be wiped out. When that market finally takes a breather and falls back into we'll call it normal territory. And what I mean by normal territory, I kind of look at that Shiller P/E ratio as a good overview, kind of a 30,000 foot overview of where we're at. And currently that Shiller P/E is still over 29, which means investors right now are paying $29 for every dollar of earnings. So as an example, let's just pick a company, let's say Walmart, as our example, let's say they make $1 on a share stock well invested right now are paying $29 for that $1.
Now to again, for perspective the median P/E the median price earnings ratio is closer to 14 or 16 times earnings. So in other words, dollar earned investors pay somewhere between 14 and 16 times as a median. Now let's contrast that to Amazon. Amazon's price earnings ratio is 93 times earnings. Okay, and apples is right around 8. So you can see there's a lot of variance in the different companies out there. But as a whole, the market is looking at a P/E ratio about 29. And that again, is much higher than it's probably gonna be at some point. So when this market does take a fall, it's gonna be who knows, it could be a year or two might even be just a short time. But what often happens is a market over corrects and drives these P/E ratio is even lower than they should be. That's when buying opportunities are plentiful. And that's when we like to become investors.
Okay, so now we look at this 401k. It's probably done very well over the last, you know, 10 years, like we said. When the market finally resets, he's probably gonna take a who knows 15, 20, 30, 50% hit on his account value? How much will that be hard to say. But it wouldn't be far fetched to think that it's gonna have at least a 20 to 30% hit. So let's just say he's got half a million dollars in his 401k. Over these years. He might expect to lose $100,000 or more. Now in 2008, a $500,000 401k dropped to 250,000, or even less, we affectionately called the 401k a 201k because they were literally cut in half for so many people. Okay, so that's the 401k dilemma and what we're looking at, and you know, what's our best move there. Now let's look at the house, he says that they are kind of house poor, in that the mortgage takes up a significant part of their income.
Now, let's not beat up on them too much. But as they probably realize, now they would have been much better off getting into a home that wasn't so burdensome as far as the mortgage payments. Now on the flip side, they live in an area where real estate's been doing well and their home value is growing the promise someday, when they retire, unless they have other investment income, they're probably gonna need to access the equity in their home, just to get through retirement. This might require them to either sell the home to get the equity out, or maybe even do a reverse mortgage to supplement their income. Who knows. Now they may have looked out, and they've got more house and they should have bought but the equity appreciation is building capital and again cash that someday they may be able to use. Now on the downside, if we go back to 2008, this type of home little higher end home is are the types of homes that fell dramatically some lost 50% of their value.
So that could potentially wipe out a lot of their equity that they've had over the years. Now have to understand one concept about equity. If I were to ask you what rate of return is equity get? So many of you would likely answer that it grows about the rate of home values in your area. And that would make sense, right? But if you live in an area, let's just say where home prices are rising by 3% a year, you might say that equity grows at 3% a year. However, it's really wrong. Okay. Equity gets a 0% rate of return every year, every week, every day forever. You say hi, well, how can that'd be my house goes up? Well, let me prove it to you this way. Let's suppose we have two families, they both buy a home for $300,000 on the same day, same neighborhood, same values, okay. One pays cash.
So he has no mortgage, he put the entire purchase price $300,000 into his home. He technically has $300,000 in equity right? Now the other one finances his home 100%. And I know you really can't do that these days. But it's this is just kind of a show my point. So this family technically has no equity as they put no money into the home. Now, in this case, on a $300,000 home this fame, this family's gonna have about a 1500 dollar a month house payment. And then as include taxes insurance, but both families have to pay those costs no matter what. So let's just say that in five years, both homes grow at a average rate of 3% per year. And so now there were $350,000. So both families have increased their net worth, if you will by $50,000. More than obviously they paid for the home. But here's what I want you to see, the equity in their homes actually grew at 0%.
You see the family that paid cash for their home, has a home where $350,000 they grew by $50,000. The family who had no equity in their home also grew by $50,000. You see the amount of equity in their home, or the amount of money they put into it had no bearing on the growth of the home's value, the market price of the home is what drove the equity. The point is own your home free and clear or have a mortgage is really not going to have a bearing on the price or the value of your home. Now, you could say that this family that put $300,000 cash into their home had a rate of return over those five years of 16% total, or about 3% a year. The exact Return of the homes market appreciation, the other families paid 1500 dollars per month for five years. That's a total of $90,000 that they've put into payments.
Now it's difficult to come up with the exact return because the $90,000 was put in over 60 months, not just from day one at 1500 dollars per month. However, the return on investment would be close to 55% or about 11% a year. So the leverage of using OPM, that's other people's money. In other words, having a mortgage actually enhance the return for this family. Now, here's one thing that I'm adamant about. When it comes to paying off your mortgage, I will never tell someone not to pay off their home, no matter how much better it could be by carrying a mortgage. I'm simply pointing out that there are two sides to the story and you have to do what's best for you and your family. Now, going back to our family in this situation, what they did is they might be regretting having such a stifling mortgage payment. What they may find at the other end, though, is that they've built much more equity and a better return on investment by having a mortgage.
So there's always trade offs. I'd prefer to have a low to moderate mortgage, be able to save more money and use your capital to increase your net worth by investing in other opportunities. Which is why we love our banking system, it's a place you can save tax free gives you access to that capital for their investments along the way, when assets or investments go on sale. Okay, so now we have to separate the two assets, we get the 401k, we've got the home, the question comes to me again from this family. Should we take the money out of the 401k to pay off the home and free up the monthly income that they then could save? I think the only way we'll know the perfect answer to this question is to have a crystal ball and see the future. See if the market is going to tank and his 401k is going to lose $100,000 then of course, it'd be really good idea to take that money out now at the peak right?
Even after paying taxes, you'd be better off to have his home paid for with money that he pulled out of this 401k. On the flip side, if he pays off his home, and dumps all that money into his home and then his home value drops. He may never be able to sell it and recover his investment. It's also possible that he's been living in the home long enough that even if it dropped by 20% in market price. His mortgage payoff would be low enough that he could recover what he's put in. For instance, maybe bought his home for $500,000 homes now worth 800. He owes $100,000 on a mortgage, he pulls it out of his 401k and pays it off. So he pays off his home. And then let's say his home dropped to $600,000. Well, he can still recover that hundred thousand dollars that he put in to pay off his mortgage.
Ultimately, he has to determine which scenario poses the most risk for them. If he pays off his mortgage, have a mortgage payment to save each month. That is if he will, sadly, many people soak up that extra money now that they don't have a house payment and put it into their lifestyle. They end up spending more and buying more stuff, which would make the situation even worse. Now, if the market keeps going up, and the home values keep increasing, he's probably better off doing what he's doing. Now, remember, equity gets a 0% return every single year. If the market tanks, they may wish they had pulled money out at the peak and paid off their house. And now they have a mortgage payment that they were making each month freed up again so that they could invest it and hopefully buy things at lower prices.
He and his wife may have this deep down desire to pay off their home no matter what the calculation say. And again, that's a matter of principle and a lifetime goal. There's really nothing wrong with that many people to that even if it's better financially, to have a mortgage. Again, I'll never tell somebody not to do that. The alternative, like I said, is to have a banking system where you can build up your capital thing, you've got options, you have the option to pay off your house, you have the option to be the bank, you have the option to sit on the sidelines when markets are high, then get involved and buy when they go on sell. You have safety liquidity tax advantages, which can add up to more peace of mind and the investing principles that work. Ok. So now see what was posed to me.
By the way, this was at a wedding reception, and we had about 10 minutes to talk, which is why I don't know all the details and specifics. But I wanted to throw this out to you and get your take on it. What would you do? What are your values when it comes to your home and retirement savings? It's a great discussion to have because thousands of families are probably facing a similar circumstance, maybe even you. I think we could come up with a good plan with more if we had more specifics. But the best plan of all is to buy a home with a moderate mortgage, save, save, save, build capital and become an educated investor. Then wait for opportunities to come along. And when you can buy $10 bills for $5. But you have to have a process to build your capital, which again, is why the banking system can work for so many people.
Okay, so that's it. I'm anxious to hear your comments and your question. If you have direct questions, send them to questions at wise money tools.com. I'll try to answer them just as quick as I can. If you want to just get into the conversation, feel free to leave a comment as well and give an idea of what you would do. If you would like a strategy session where we could talk about your specific situation. You can sign up at the time trade link below. Always subscribe and we love to hear from you. That's it till next time. Thanks for joining me. Take care.
Aug 28 2019
Rank #13: Episode 106 - Debt Free In Nine Years Or Less
Well, Hi everyone, and welcome to another wise money tools video or podcast depending on how you contact with us. So in this video, I want to talk about something that may not be so easy to talk about. You know, one of the hardest things when it comes to money and finances is kind of talking about debt. Right. Now all that, before you click away, I want you to hear me out, this isn't gonna make you feel more stress or guilt. But I want to offer you a potential solution. Okay. So money and finances is one of the leading causes for arguments in a marriage. And sadly, it's one of the leading causes of divorce to as part of our that argument, it's always about spending in debt. You know, debt can really Weigh Down a marriage.
This is a topic, you'd better figure out pretty quickly. If for no other reason, just have one less thing to argue about with your spouse. That can cause stress. Simple as that in life is hard enough. When you add to it the financial stress and debt, it just gives you a potential power cake. Now debts such an easy thing to get into and such a hard thing to get out of. But banks and credit card companies, they love it, when you shackle your income to paying them for as long as they can keep you coming back. You got to learn how to break those ties, and at the very least, you become the bank. So here's how you may think about it. You know, what if you could get out of debt, on average in 9 years or less, including your home without changing your lifestyle or budget.
Okay, now hang on there for a second. See getting out of debt, it's kind of like dieting or losing weight. There's plenty of fad diets out there, all of which I'm sure work for some people. But the only diet that really works long term is the one you can incorporate in your lifestyle and enjoy it. I remember the water diet where you drink gallons of waters every day risk of drowning just to shed some weight. The problem is you just can't live like that. Well long term Anyway, after 15 or 20 days and your eyeballs are up to here with water. It's just not sustainable. Then there are fasting diets, you know where you fast, like 18 hours every day. Again, you may shed some weight, but it's the thought that you have to live this way the rest of your life and starve every single day.
It's just unpleasant and you end up giving up. There's thousands of diets just like that. It's very similar to getting out of debt. There are a bunch of theories and ways you can get out of debt. But the ones that require you to change everything about your lifestyle. And the debt programs that are gonna make you suffer if you will just don't work long term. Now Dave Ramsey has a great way to get out of debt. For some it works. The problem is Dave's is kind of like an army drill sergeant. He's bent on making your life miserable and break you any way he can. Doesn't make it pleasant. And it seems like he's almost sadistic trying to make you miserable just to get out of debt. I call it the rice and beans diet. You live on rice and beans never go out for entertainment, no vacations, no life, and put every penny half towards your debt. And sometime in the future, you're going to finally be out of debt.
Now this may work not saying it doesn't. But for so many, it's just not sustainable. It's so miserable, that you begin to wonder why even go to work at all, all your income goes to the banks and credit cards and you're eating rice and beans for the 30th, 90th, 200th day. There's no enjoyment in life, but things happy as he watches you suffer every day. For those who can do it great. We had a debt, however, for the vast majority are probably gonna fail. There'll be so miserable and frustrated that it won't take long to fall back into the bad spending habits again. Just to get a decent meal might drive you off the plan.
So what you need is to have a debt elimination program that can let you basically keep your lifestyle with some minor adjustments. But it's livable. Like dieting, if you have a program that lets you enjoy life, enjoy food, maybe add a little exercise, curbs some of the most harmful foods and incorporate some healthier foods. You're probably gonna feel better, you're going to look better. And it's a sustainable and enjoyable lifestyle. That's the only way a diet works long term. Because it's not a diet, there's not a time frame or a way cull, it simply becomes your way of life. Getting out of debt doesn't have to be all that misery and pain either. It's about small and simple lifestyle change is that can last. Now it's a really easy approach. It's kind of a step by step approach. And it goes something like this.
First, you got to formulate your game plan, a plan that you can live with that doesn't stop your heart. Think of your income, as if it's filling a bucket, and the bucket is full of money. That's like having holes at the bottom of the bucket. And it's all seeping out. Every time you put money in, it pours out of your hands and goes to the bank and credit card companies. The next step is to see if we can find where you might be losing some of your income, oftentimes, unnecessarily or unknowingly. Then what we want to do is redirect money that may not be doing as well for you, as maybe getting the debt paid off would. As an example, Sometimes a retirement plan and other savings plans are giving you a lower return on your money than paying your debt off would be.
Once we have figured that out. Then we set up a business banking system where eventually you will control the capital and spending without the need for banks. But what you need is a step by step plan on how to save what debt to pay off first, when to pay off the next one, and so forth. Once you get the second one, the third one, obviously, you're at some point going to be completely out of debt. And it's not as hard as you think. And it doesn't have to be drudgery either. You don't have to go on some crazy fad diet to lose weight, and you don't have the rice and beans to get out of debt. Look, I know some of you may seem like a steep mountain to climb, I get it. But if you have a desire to get rid of it, it can be done. And again, without changing your lifestyle dramatically.
There's some peace of mind even some power that comes when you control your money instead of it controlling you. You don't have to go on a starvation program and load up on rice and beans for the next five years either. In fact, you don't have to dramatically change your lifestyle at all. There's a much greater chance your debt elimination program is gonna work and be successful if it becomes part of your lifestyle. So you have to think about getting out of debt, and not necessarily all the sacrifice that goes with it. Let's see if we can't make it really easy for you. If you'd like to have a strategy session and see how this might work for you, just click on the time trade link below. Grab a time that works for you. And we'll have a quick little discussion. And as always, if you have any questions, shoot them at questions at wise money tools.com. I'll answer them just as quick as I can. If you have any comments or thoughts, put them down below and I'll try to respond to those as well.
So I hope this has been informative. I'm excited for those of you who are really committed to getting out of debt, but doing it without drastically changing your lifestyle. And again, I asked the question, if you could see a way to get out of debt in 9 years or less, without dramatically changing your lifestyle with that be of interest to you. Would that help you in your financial situation? That's it. Well, good to have you. I'll see you next week. And until then, take care.
Aug 28 2019
Rank #14: Episode 79 - Be Smart With Your Money and Mortgage - Don't be this guy!
This guy made a couple of bad financial choices and is now living a substandard retirement. Don't be this guy!
Jan 16 2019
Rank #15: Episode 122 - 5 Key Elements to Wealth (Simple and Easy) Episode 3
Everybody, this is Dan Thompson with wise money tools. Thanks for joining us on this video. So in the past couple videos, we've been talking about the five elements to wealth. And today we're gonna talk about one of the other elements. Remember our formula, y=a(1+r)x. And each one of these things has it's own little element. That's part of it a is our cash, pay yourself first. One is our capital and debt equation. How much money can we grow? How much money have we saved? Our is the growth that can either be a plus or minus, depending on the safety and risks that we take. An "x" is the leverage or exponential growth that we get by using leverage. So in this video, we're gonna talk about 1. Okay, we're debt and capital fight against each other. I think we'll all agree that debt can be a wealth killer. I mean, it takes money that you could be saving, growing and compounding, and you're sending your capital or your cash or your money to someone else. The problem is, if all we do is concentrate on our debt, and never pay yourself first. They there's a little battle there because you could be missing out on years and years of compounding, while you're trying to get yourself out of debt. Now Dave Ramsey, he's kind of the Guru of getting out of debt. And for the most part, I would agree with him, but I call his particular formula of getting out of debt, the beans and rice formula. Because he's all about literally sacrificing every single dollar towards getting out of debt and living just as frugal as you possibly can. And again, getting out of debt is a good thing, but done wisely and in order. So Dave kind of reminds me of talking to some of those older guys. You know, the guys kind of like the early 1900s great, great, grandpa types. They remember the day when they didn't have electricity. They ate gruel once a day, they had to walk through four feet of snow to school and it was uphill both ways. You know, it's just life is so easy right now and they try to compare what it used to be back then. Well, Dave kind of reminds me of the guy who wants you to live like that. No enjoyment, no entertainment, you put all that on hold you don't go to the movies. You don't do anything fun. You're just getting out of debt, debt, debt till you own your home free and clear. And it kind of reminds me of the movie, Oliver, you know, little kid holding up his bowl. And he says, Please, sir, can I have some more? Please, Dave, may we go to the movies? That's kind of what it feels like to me. I mean, He wants you to forget about life, forget about fun, and you just pound and pound and pound and take it out of debt look and I get it. There are a lot of people who live paycheck to paycheck. And they do it because they're paying so much debt. And debt can be a looming obstacle over a lot of families heads. So we do watch out of debt. The problem is you could also miss out on years of growth and compounding, if every extra dime goes to someone else. Now, I don't know the exact balance for your situation. But you've got to strike a balance. You got to get out of debt for sure. But you also need your money to grow and compound so that you can start to build toward your wealth. As a rule of thumb, if you're getting a return that's greater than your debt interest. Then maybe paying off your debt is probably not the best move and you can do other ways you can go about other ways to do that. As an example, if the interest on your loan or your debt is let's say 8%. And you can only get 1% at the bank, yikes. Well, it's probably best for you to pay off that debt. One misnomer is when someone tells you that you're making 8% on your money. If you pay off a loan that has an 8% interest rate, say I get what they're saying, but it's really not true. It's a lie. You're still in the hole 8% you're just not making that 8% on the other side. So you're paying out 8% and you're losing 8% from your cash flow, because it went out. So by paying off your debt, if you have an opportunity to start actually saving at 8% but you're not making a percent on your money, then you're on a treadmill. What I'm trying to say is this, if you can only make 1% on your money in the bank, and your debts 8% is probably best to pay off the debt. Because your growth or your savings isn't even keeping up with the cost of debt. But if What if you could save your money say at 9%? Or maybe even better over time? What then would it be better to save that money and begin growing and compounding sooner or to pay off the 8% debt, then we have to consider both good and bad debt. Yeah, there is such thing as good debt. And it might be defined as borrowing to buy an appreciating asset, such as a home. Bad debt can be defined as buying a depreciating asset, such as maybe some clothes or even a car. However, as much as David like you to pay cash for your cars, and other major purchases, he never considers opportunity costs. It may actually cost you more to pay cash than to finance a car. What you need to understand is how money works, how to take advantage of that knowledge and the benefits of when and how to use debt. The problem is with fanatic debt reducers mentality, they're gonna miss out on the one thing that we all run out of every single one of us. We start to lose it every day and that is time. We also live in a very low interest rate environment, and saving your money in the bank just isn't gonna do it anymore. On the other hand, oftentimes debt costs are so low, that it's not hard to supersede that cost of money with the compounding of your money. Now, you may have heard of two types of interest. Basically, there's simple interest and there's compounding interest. And understanding the difference can be huge and help you make good financial decisions as well. Simple interest is how most debt is structure. Okay. Suppose I make an investment of $1,000 had a simple interest rate of 5% With simple interest, I'm gonna get that 5% every year until I get my investment back. So let's just say it's gonna be a five year investment. So I get $50 each year for five years, or a total of $250. It might look something like this. Here's my thousand dollars, 1st year I get $50, 2nd year $50, 3rd year $50, 4th year $50, 5th year $50. Okay, now using that same 5% but now let's use compounding interest instead of simple and let's see how that turns out. In year one, I get fade paid 5% which is $50. But then in year two, because now my account value is $1050 I get paid 5% on my thousand of course, but I also get 5% on the 50 I made last year. So I'm getting paid 5% on 1050. So it looks like this year one $1050, years two $1102.50, year three $1157.63, year four $1215.51, year five $1276.28. If I compound at 5%, I have $276.28 earn interest 76 more dollars than if it was simple interest. Well, you may be thinking, well 27 bucks isn't that big of a deal, right? But as you get into larger sums of money, and more time, this can be huge. Now, since dead is typically simple interest calculation, and many investments are compounded oftentimes. It's better to keep productive money growing and compounding, while paying simple interest and using smart deaths. Now, is this always the case? Absolutely not. First of all, I'm not really a big fan of debt to begin with. So we got to control that but going back to Einstein's quote. He talks about interests and he says he who understands it earns it. He who does not pays it. The question is, can you do both? The one thing that's rarely discussed when it comes to making purchases for cash, and what I've mentioned with Dave is that he always misses out on what's called opportunity costs. Suppose I have to buy a car. Now both Dave and I would agree that buying the least expensive car would be the best. However, Dave has a no excuses no qualms no alternative way you go and you pay cash for that car. But what they misses is that even paying cash has a cost. See, I can either borrow money and pay interest, or I can pay cash and lose interest. If I take cash out of a productive asset or for go putting money in a productive asset. So that I can purchase a car my money loses the opportunity to grow and compound literally forever. Once it's in a car, I've got a depreciating asset that's guaranteed to be worth less every day that I drive it. If my cash can be used to help grow my money at a greater rate than the simple interest I may be paying, it might be better off to finance the car and let my money continue to grow and compound. I use this simple example. Suppose you can lend your money or invest your money at 10%. And let's suppose that the cost of financing will be 4% doesn't make any sense at all to take your money from an investment earning 10%. So you can avoid paying 4%. So in this case, to take my money from the investment. I give up the opportunity for that money to earn money, which again is opportunity cost forever. Okay, So hopefully you get the idea that can be a killer, no doubt. However, there might be ways to use smart debt capital used wisely can benefit you for a lifetime. That leads me to the next video where we're gonna talk about compounding and growing your wealth. You don't want to miss it. In the meantime, just think about this. Think about the debt you have the amount you're paying out, and is there any way you can curtail that? Is there a time in your life where it might be smarter to be growing your money, then paint all your income out to someone else? That's really the balancing question that we have to make. And it's not sometimes really easy to figure out, but we can figure that out together. Well, don't miss the next video. Make sure you subscribe. If you have any questions you have any questions at wise money tools.com. I'll answer them just as quick as I can feel free to make comments below as well. And if you ever want to talk about your particular situation, just click on the time trade link, and a few minutes together, that's about it till next time, these are the five key elements to wealth. We're gonna be on to the compounding and growing next. So, take care.
Dec 18 2019
Rank #16: Episode 131 - You Have A Golden Goose - Making Golden Eggs! (You just might not know it) Part 2
Hey everyone, Dan Thompson here with another wise money tools video. You know, last week I talked about the Golden Goose and how important that was to start saving your eggs. And we alluded to the fact how important it is that those eggs have time. Time to mature, to hatch to become other geese and then build even more eggs from there. So one thing that we all need, and we all run out of, and that is time, right? Well, our geese need some time. They need the again the time to hatch them to produce more eggs and then to hatch those eggs and on and on and on. However, if we don't give ourselves enough time, then we end up scrambling trying to make up for last time. I see this regularly, I get desperate calls from someone that might be 5 or even 10 years away from retirement. And guess what? They haven't even started preparing and now they're in panic scramble mode. So there's two things regarding time that can devastate our future plans. You've heard the phrases, adding fuel to the fire or to make matters worse, so it's bad enough not to be saving. But to make matters worse, or to add fuel to the fire is to add or to take away losses. In other words, to add fuel to the fire is we save money, but then we lose it for a minute here. Let's talk about starting today right now. This can have a huge impact on your future. If you are saving right now, then saving and doing the right things with your money so you don't lose it. It's critical. I don't care if you've delayed or made some bad choices, and you're 30 or 50 Or maybe you're already in your 60s. You really just can't delay another day. And those that have saved losses are the other factor in people not being able to reach their goals. It's bad enough again that we lose money, but it has a greater impact if we lose time. Time is a limited component of life. We can't lose time, and losing money is losing time. Sadly, I hate to admit it, but I've lost money in my lifetime. You know, when I first started, I follow the traditional financial planner path and for many years, that's how I thought things had to be. I also have lost money in things like the.com bust, that lost money in 2008. I've also made some other financial moves, it didn't turn out so well. So I'm guessing many of you are in that same boat. Most of us did that because we didn't think there was a any other way to build wealth that in order to get the reward, we had to take risk. And Wall Street's always preaching risk and reward. But that's not true. There's some very sound investments that you can eliminate the risk and still have the reward. What we want to do is take some income, or some return of our golden eggs. And we want to take some money off the table protect that and put a pile over here and let those eggs produce more geese and produce more eggs. What's more is this. What if you didn't have to take any risk at all? What if there was a safe way to grow and compound often times faster than the typical risky investments that you hope are gonna pay off? So we're gonna talk about that as we go along, but again, in this video I want to talk about how important time is. So the other day I was talking to this 32 year old guy, what I did is I showed him the basic concept of time. And it even took me back as to the power of time. And specifically starting today with more, no more delays. So here's the scenario. He was making some pretty good money. But he wasn't saving anything to speak of. So we figured that if he just saved one golden egg that he was producing each year, that would be worth about $10,000. Okay, so watch this. We went back, we took the historical returns of this particular strategy of leveraging and using the balanced 5 elements to wealth strategy, and we plugged it in. Now, if he began right now, at age 32. And at age 65, he started to take income based on repeating the exact history in that timeframe. He would be able to take out about $200,000 a year, tax free. Now I know sounds crazy, I get it, that's much more. In fact, it's double what he's making right now. And most people are told by their financial advisors that they're gonna have to live on less, even 50% less than what they make today. But again, that's because of financial advisors assume you're pretty much gonna be broke or dead broke, and you have to live off the 4% rule. Anyway, using this income based on historical facts, it turned out to be pretty nice. What I want to impress upon you is this. He started talking about as we went along, you start talking about that he wanted to pay off some debt first. Because the guy on the radio told him that was the most important thing he could ever do. And he also wanted to save on I can't remember what it was but he needed to buy something and he wanted to save up there or save for the next year to buy it. Well, basically what he was trying to do is say, hey, Dan, this is all great, but I need to delay saving those eggs for just one more year. And then I can get started, you know, pretty heavy. And I don't know if either one of us thought one year would make that much of a difference. So what I did is I backed up the calculator, and I showed him this. It was the cost to delay one year. If he starts at age 33, instead of at age 32. And instead of saving that golden egg this year, he spent it. So his income at age 65 went from $200,000 a year, down to $165,000 a year. That's a difference of $35,000 a year. Now let's just assume you live 25 years into retirement. That turns out to be an $800,000 difference. So 1 year delay so that he could pay something off or save up for something that he could buy, ultimately cost him $800,000 potential and potential income. But watch this. What if he delayed 5 years like so many people do in this world? You see a lot of people are listening to Dave Ramsey, which I believe he's like the debt elimination King. But so many times people are delaying the savings in the compounding. Because they feel like they need to take all their money to pay off debt. For some reason, Dave thinks that by paying off debt, it's gonna make you wealthy. Well, the real problem is, you're never gonna get to real wealth if you miss out on 2, 4, 10, 15 years of growing your golden eggs. So if this guy delayed 5 years, let's just assume that he's got just a ton of debt and needs to pay that off first. So his income would go from $200,000 down to $99,000, almost $100,000 a year difference, just so that he can say and yell that he's debt free. Now, don't get me wrong, debts a killer, we need to get out of debt be better if you just never went into debt. But missing out on compound in yours can sometimes be much more devastating than having a little debt over your head. All right, well, in that same 25 years, if he was down, or if he had reduced his income almost $100,000 in his 25 year retirement span, at $2.5 million dollars less income. So that's what's wrong with our current financial education system today. Honestly I as much as I want this guy out of debt, he would be better off carrying debt for another little while. So that he could save some of his golden eggs, rather than give them all to the banker. Now again, don't get me wrong debts a killer, but not because of the interest repay. It's because of the last eggs that we lose. And we don't give those eggs time to produce those golden eggs are a big deal. So the first rule should be again, don't go into debt. If you have to get some bigger tickets such as a home and maybe a very, very, very, very cheap car. Then do it after you've been able to save your at least your 10% of your income. At least get to the point where you're saving that one egg from day 1. Man if a young kids coming out of college and they get their first job, the very, very, very first thing they You should do is pay themselves first. Get used to taking that first 10% and paying yourself, then if you need to use a little bit of debt to build buy your house, maybe a very, like I say, very inexpensive car. At least you're putting away your golden age, giving up those years of compounding. So that you can put all your income toward debt is much more costly than the debt itself. You with me? Let me give you one more quick example. Paying off your home, man that can be a very satisfying event. And I don't ever want to tell somebody they shouldn't pay off their home. Sometimes that's just a really emotional thing. But it's a big ticket purchase and over the years. If you carry a mortgage, it can get very expensive, so to speak. However, let's go back to the video I did a few weeks ago where we look that an example of someone who had an extra thousand dollars a month. And they were told the best investment they could make is to pay off their mortgage, get out of debt, and jump and shout. They heard that paid off mortgage has replaced the BMW and thought that was the way to wealth to be debt free. So they have a choice, they can start saving some eggs right now. That would then produce another goose and then that goose would produce more eggs and that those eggs would produce more goose and on and on. And we would just have this huge linear family tree of the power of compounding. Or they can take that money and pay off a 4% mortgage. So it would take them about 10 years to pay off the mortgage. If they added that thousand dollars a month. And better yet, they're told that they're gonna save over 300,000 in interest. So essentially, they're gonna delay compounding for 10 years and put that thousand dollars toward their mortgage each month. Now let's just say this couples 35 years old today, in 10 years what they will do is they will save their current house payment of 1500 dollars and the extra thousand dollars that they're using to pay off their house right now. So in 10 years, they're gonna now begin to start saving, they're gonna save $20500 a month with the hope that it's gonna catch up fast. And what the guru's never calculate is that those missed 10 years of compounding and last time is huge. So our first couple is gonna pay off their house as quickly as possible and save $300,000 in interest that they would have paid. Then they're gonna take $2500 a month or $30,000 year starting at age 45, until retirement at age 65. Well, here's the result, using our simple and easy strategy using historical numbers, not that they can't be repeated, but they are historical. Their income at age 65 would be $146,000 a year. Not bad, pretty decent retirement, I'd say right. It's a little more than they're making right now. So their lifestyle wouldn't have to change at all, really. Now in the typical Wall Street world, that incomes is probably gonna be about half that much. Now, our other couple, they also would like to start saving but instead of putting it into their house. They're gonna keep their 1500 dollar house payment each month for the next 30 years. But they're gonna take the additional thousand dollars a month or $12,000 a year that they could put turn towards paying off their house. They're gonna put it into the acceleration strategy. So what's their income at age 65 projected to be? Drumroll. $232,000 a year tax free over $90,000 a year more by having those extra 10 years of compounding. Now, again, this is historical. I can't really say that's gonna happen in the future, there's a pretty good statistical chance it'll come close over a 25 year retirement, that's $2.25 million in additional income. Because they compounded 10 years longer, even though they only save $12,000 a year that add massively outperformed saving $30,000 a year 10 years later. So the couple who delayed compounding for 10 years while they did pay off their mortgage, they found it to be a very costly alternative. Now to be completely fair, the couple that paid their mortgage, what they do they paid $300,000 more in interest to the bank, because they carried that mortgage for the full term. So my question is, would you trade $300,000 for an additional 2.25 million. Now, even though the interest is already accounted for in the net result. Let's just take $300,000 off at 2.25 million, and we still are $1.9 million ahead. So that my friends is the power of compounding and time. Okay, so that's it for this week. If you have any questions, make sure you send me the questions at wise money tools.com. Don't forget to subscribe. You don't want to miss the video. And if you want to take a few minutes and see how these strategies how the acceleration and the leverage strategy might work in your situation, click on the time trade link below. We'll spend a few minutes together and see if it's a good fit for you. Other than that, thanks for joining me. Talk to you next week. Take care.
Feb 02 2020
Rank #17: Episode 111 - Discussing Six Pitfalls Pushed By Nearly Every Financial Advisor (Part 3)
Well! Hi everyone, welcome to another wise money tools video. Glad you could join me. So we're pushing into part three if you will, on the six major items that most traditional financial planners talk about and push as their financial planning practice. And we're on to number four. Number four is something that I pretty much disagree with wholeheartedly from traditional financial planners. And that is don't buy individual stocks. Now, let me say I can see where that comes from. Because most people who buy individual stocks sadly, get their tip from going to breakfast with a friend go into their barber. And this is where they're getting their advice, that does not work. But this is a silly argument that over the years has been pushed down investors throats by financial advisors, who basically just aren't willing to give up control and their fees, I can only go by the greatest investor, arguably ever.
And that's Warren Buffett and his sidekick Charlie Munger, they essentially say something like this, if you understood how easy this was, financial advisors would not exist. Now, there are some advisors who work with estates and businesses. And there's certainly gonna be a market need for that. And there's a lot of reasons that financial advisors can do some good. But from the investment side, it's not too likely in our modern technological age, that you need someone holding your hand to buy mutual funds. In fact, you're better off for the most part, just buying the index, a low cost index on your own since managed money underperforms the end index more often than not. But the real way to build your wealth is understanding individual stocks.
When you look at an individual stocks, you want to look at it as if you're buying the company as a whole. So let me make it kind of easy. There's really a four steps process that you need to know to be a good investor. And by the way, there are now ways that you can simply follow gurus as well. You want to invest exactly how Warren Buffett does, you can actually track his portfolio. And there are brokerage firms that you can literally just buy into that style or those companies that Warren Buffett owns through Berkshire halfway or you can just buy Berkshire halfway. Anyway, there's several you can use, and just copycat and simply follow what they're doing. So if you like what a particular guru has been doing, and the kind of things that he talks about and teaches, you can just copycat.
Anyway, so back to the four simple steps. Each step carries with it further explanation, but I'm gonna have to save that for further videos and get into those details. And I'm gonna have it in my investment course, because it does take a little bit more to develop. But we kind of want to look at this from a 30,000 foot view. So first off, you want to make sure it's a company, you know, you maybe even love this company. You certainly buy from them in some fashion, you understand what they do, and you can figure out how they make money. Start with companies again, that you buy from and that you trust, that's a really good start. Next determine what their competitive advantages if you know what their competition is, who their competition is, why they have that competition, why not? What makes them stand out from their competitors?
Can you see them in business and even growing for the next 10 years. So the next thing you want to do is look at what's called the intrinsic value of the company. This is often referred to as the book value, it's really pretty simple. If the company totally went out of business, liquidated all their assets, what does one share of stock? What is one share stock worth? So if they liquidated, one share stock was worth $10. That is the intrinsic value or the book value of the company. Next thing we want to do is we want to know some numbers. And again, you don't have to be a CPA, you don't have to go too crazy. But there is a short list of numbers that you want to know. You certainly want to know the the revenue of the company how much they're selling each year, and the revenue they bring in.
And then the cash flow of the company, the free cash flow of the company, what kind of debt they have. Their ultimately what their profit is, and then what their growth has been over the last number of years, say 10 years and see what how that's transitioned over the last decade. And actually, these numbers are really easy to find in pretty much Google, what's the cash flow of XYZ? What's the cash flow of Google, what's a cash flow, Costco or whatever. Once you have all that you can pretty easily determine what a fair price to pay for the company is. In other words, you want to pay a price that you feel like you're gonna do well with over the next 10 years. But here's the real key and kind of the last part, you want to build in a margin of safety. That means that when you come up with that fair price, you want to pay 50% less than what you think the company's worth.
So if it appears, you could pay $10 a share for this company. And it'd be a really good buy for you, then you want to be patient and wait until you can buy that for $5. Now, this takes some major patients, Warren Buffett sitting on 100 and $510 billion in cash, because he's very patient. He wants to make sure he buys with a margin of safety. And again, Who should we be a copycat? You know, Who should we be following the greatest investors out there. And what a margin of safety does as well is it protects us just in case our numbers aren't perfect, and then we're off a little bit. Alright, so to end all this, what you're gonna find is that it's really not that hard to find what the market value of a company is. Then we have to be patient wait for a pullback, a recession, a crash, we're gonna call it and then like Buffett, we can buy wonderful companies at a bargain price.
Oftentimes, an event can trigger this as well. Probably one of the best examples I can give us a few years ago, you might recall this Chipotle Mexican Grill, wonderful restaurant very well run. They had a little D coli scare with some of their chicken. And man, their stock just dropped off the planet. Well, that was become events that maybe become a really good buying opportunity. Because you feel like. Okay. Chipotle's gonna clean this up, they're gonna do what they can to make this so that never happens again. Very well managed, that gives you opportunities to buy. So look for events along the way, then you can apply this just about to any other investment that you're interested in. You don't have to be just in stocks, you can do real estate, buy a business, maybe you want even do some lending, there's a lot of things that you can do using the same similar principles.
Okay, well, we got a little far off little too long again. So I'm gonna have to hit the final two items in our next video. So what's left, the last two items are by term insurance, because that's all you're ever gonna need, again, promoted by many traditional financial advisors. And then the last one isn't necessarily an item but it's the absence of an item. It's the absence of talking about real estate being a viable option as well. So if you have any questions, shooting the questions at wise money, tools.com answer just as quick as I can. Don't forget to subscribe. If you want to have a quick little strategy session, click on the time trade link below. Otherwise, stay tuned and we will talk to you next week. Until then, take care.
Oct 04 2019
Rank #18: Episode 109 - Discussing 6 Pitfalls Pushed By Nearly Every Financial Advisor (Part 1)
Hi everyone, and welcome to another wise money tools video. Glad you could join me today. Well, on August 28th on Wednesday, I was driving back from the hospital, where I got to go check out my newest grandson had makes an even dozen. And in a few weeks, we're gonna get number 13. So it's been pretty exciting. So we're excited to welcome Jeremiah to the family. Anyway, on the way home, I was listening to traditional financial planner on the radio, pretty much pushing the same old ways that I don't think work. And you might ask, How do I know they don't work? Well, it's pretty simple. And I've been doing for almost 35 years now. And the fact is, if traditional financial planning worked, more people would be retiring in comfort, peace of mind and have the wealth they need.
But they're not just about every day, you can talk to someone who did the traditional methods, they deferred all the money they could into their 401k thought that would that by buying mutual funds and just investing forever. That they were gonna be in great shape that if they paid cash for stuff, that they had a reasonable mortgage and they worked off paying off their house and be debt free. Well, that by the time they finally got to retirement, they would be in great shape. problem is that's not really happening. They still don't have enough money to give them a predictable, worry free retirement, you know, having all the money and income they need to at least last as long as they do. Well, this guy was going on the same old tired things basically went like this, there's kind of the six little things, and I want to talk about the six.
The first one was get out of debt. Okay, I can agree with that. We could talk about how to do that. And maybe some different ways, there's a lot of different strategies for doing that. Number two was to defer all the taxes you can and maximize your 401k if you have one, or at least an IRA, maybe a Roth. The third one was if you have more than 10 years to invest by mutual funds and don't care where the market is or where it's going to be. Number four was, don't buy individual stocks. And number five was by term insurance, because that's all you're ever gonna need. Number six was. And of course, since he was a securities broker, number six was basically the absence of talking about real estate as an option.
Alright, so now I think it's critical to dive a little deeper and get a better understanding if each one of these items on the list. You see some make sense, some are misunderstood, some aren't applied properly. And some are simply illusions and do not work and should be avoided. I want to keep these videos short enough so that you can digest it quickly and not be too overwhelming. So let's see how far we get. First, get out of debt, well, you don't have to be a brain surgeon to realize debt kills most financial plans. What's really sad is that you probably know that debt and financial problems are the cause of the majority of marital arguments. So you'll be happier if you can eliminate debt in your married life. Until you're out of debt, your investments are also gonna suffer as returns are always offset by the debt.
For instance, if you're carrying debt at 12 and 18%, on credit cards, there aren't very many investments that can offset that cost. Even a debt at 5 or 8% is hard to offset every single year without fail within your investments. Now, what am i mean by that? So let's suppose you have a debt of 10% interest. And you have a choice, you've got some money over here? Should you invest? Or should you pay off the debt? Well, if you don't think you can do better than 10%, every single year with no losses, then you're gonna be better off using that money to pay off your debt. For that investment to pay off, you're gonna have to do better than the 10% that you're paying in interest. In other words you kind of get a 10% return, just getting rid of your debt, then once you get rid of the debt, you want to stay out of debt. The main thing is most people will get a better return on their money by knocking out their debt first, rather than trying to find investments at double digits.
Well, for now, let's not include your home mortgage in this because we're gonna talk about that more later. But let's get rid of all your other debt, pronto. Did you know that nearly 35% of the average American families income goes toward debt 35%, that's 35 cents out of every dollar. So think about how much money that's going to the bank and the finance companies rather than your pocket. However, few advisors want even talk about this to you. And because in order for you to work with them, you've got to invest, they've got to charge their fees. So even though debt might be the best thing you can do, oftentimes advisors don't talk about it. So getting out of debt huge. And in most cases, the best way to begin building your wealth. What I would love to see more people do and I wish we taught this in high school in grade school even. Let's just not even get into debt, let's figure out ways to avoid debt, teach kids to stay out of debt, they're gonna be able to build their wealth so much faster.
Okay, so the second one was to defer all the taxes you can into retirement plans. Now, this is promoted by more than just this guy, it's really pushed by pretty much all the financial entertainers on the radio. It's pushed by CPA is just about anybody you talk to about money is gonna push that you need to put as much as you can and defer as much tax as you can. This one needs some understanding of what's really happening here. Understand that there is no way to get out of the taxes in a retirement plan. Let me say that again, there's no way to get out of the taxes in a retirement plan, someone sometime is gonna pay the taxes. This could be you, your spouse, your kids, your dog I don't care who someone's gonna pay those taxes. When you defer taxes, all you're doing is betting that your tax rat bracket will be lower in the future than it is now. It's as simple as that most people have saved in a retirement account for their own use.
In other words, they save to eventually use this money for themselves during retirement. And again, there's only one way to win in a retirement plan. Just one simple way. If you're in a 30% tax bracket currently. The only way to win is to be in a lower tax bracket, such as 20 or 25%. When you eventually take that money out, pretty simple, right? If you're in an equal or higher tax bracket, when you take the money out, you lose. One other thing to note is that when you defer a tax, all you are doing is investing the IRS is money along with yours. Now let me give you an example. Suppose you save $1,000 a month into a retirement plan. And you're in a 25% tax bracket. That means you're deferring the payment of $250 in taxes. Essentially, what happens inside of that retirement account is there's two sets of books going on.
Okay, you have $750 and the IRS has $250. It's the same account, you get to choose how it's invested. However, this $250 is the IRS is money. It always has been and always will be, the IRS gets all the growth over the years to the only way you get some of that money is to prove later in life that you're in a lower tax bracket. When you take that money out. Now, let's say you invest this $250 each month for the IRS and you get a 10% rate of return because you're just this wonderful manager. And you're gonna do this for the next 25 years. What that means is the IRS is money's gonna grow to $331,000. Now again, that's the IRS is money, you're gonna see it in your account, you're gonna see that your thousand dollars per month actually grew to $1.3 million. However, when you retire, if you retire at a 25% tax bracket, it's a breakeven, the IRS is going to take their $331,000. They're gonna be happy that you manage it really well for them. Now, if you're in a 20% tax bracket, well, then you win.
Because now you only have to give the IRS $260,000, you saved an additional $75,000. Or I should say you got $75,000 more over the years, by only having to pay them out $260,000. The IRS is still pretty happy by the way, you paid them 340% more in taxes. Now, let's add one more issue to the mix here. In a 401k, you're gonna be very limited on what you can actually do with your funds. You're gonna be forced to buy into the mutual funds that were chosen for you. And that might be okay. But oftentimes the fees and costs and even the lower returns make it so that it's not all that attractive. Okay, so what's the answer here? Well, for some, it may be wise to do a three bucket approach, when it comes to your taxes, you may think about this, you may be in the lowest tax bracket you're ever gonna be in. Because I know you hear the same thing I do these politicians want more and more of your money.
So what does that hold for future taxes, if I was looking at 20 or 30 years. I would be thinking man, there's a good chance, it's going to be a higher tax bracket for me than it is right now. If you don't know for certain that you're gonna be in a lower tax bracket. You may want some of your money in what's called an already taxed bucket. And then put it in a location where you can control and access it managing yourself. This is what we use our banking system for it gives you access to capital. Once that money's in there, it should matter. It's never taxed again, if you manage it properly and you'll have access to it to take advantage of opportunities. Now, you may also want to do a Roth IRA for some of that. That means you've got to pay the tax, but then you'll never pay tax on the growth of that over the years. And just because your employer gives you a match doesn't mean that's always a great deal.
Again, costs, fees, performance and your tax bracket, it's gonna have a lot to do with the overall results. Okay, so I went a little long here, I don't want to go this long every time. So we're gonna have to pick this up on the next video, we're gonna pick up those next few items. But I want you to see this list. One more time of the things that we want to talk about in these next couple of videos. I want this to get you thinking, I hope you realize that traditional financial planning and CPA advice may not be the best after all. Again, I say if it was working, why aren't more people retiring wealthy? Well, there's a lot more to this story a lot more we need to understand. We're gonna dive in a little bit deeper. A man I can't tell you how important it is to stay informed. Be educated. Empower yourself to make your own financial decisions.
In the meantime, if you have any questions, shoot them to questions at wise money tools.com. I answer just as quick as I can. Don't forget to subscribe. If you want to have a strategy session with me take a few minutes talk about your situation. Feel free to click on the time trade later. Hello, and until next time. Hope you have a great week. Take care.
Sep 18 2019
Rank #19: Episode 105 - Trade Wars and Real Estate
Hi everyone, and welcome to another wise money tools video. Glad you could join me today. Maybe you're on the podcast driving, glad to have you as well. So we're gonna talk about trade wars. I mean, this has been a big deal, it's dropped this stock market. Today is the fifth of August and we've had a 1700 point drop in the last a week or so. So there's a lot of people scared wondering what these trade wars with China gonna do. Basically what happened was, Trump said that if you guys don't start playing by the rules, we're gonna increase our trade tariffs on you by 10%. come September first, on our agriculture was like $300 billion worth of goods.
And so rather than China backing down, they played that. They played hardball. And they said, Okay, well, then we're gonna quit buying so much goods. And then they really played the, quote unquote, trump card, and they devalued their currency. Now from a world global, kind of working together perspective, they weren't supposed to do that. In fact, the Fed should be all over them for doing that. So should all the other countries, because when they devalue their currency, what happens is when Well, first off, if you're in China, and now you want to go buy American goods, or really goods from any anywhere in the world, your currencies just been devalued.
So now it costs you more to buy goods from other countries. How that can be good if you're in China, because it's going to persuade you, if you will, to buy more Chinese goods. What it does to Americans, is it with that devalued currency? Now we literally can go in and buy more goods from China cost us less money. The question is, will are, will we do that, and that's where this whole trade Ward is trade war is gonna take us is who's going to who's going to flinch first, who's going to back down first. Now, I'm not trying to say trade wars are good or bad or indifferent.
But I kind of get the idea we've been kind of kicked around pushed around in our country and the trade imbalances with many countries for decades. And it is kind of nice to see that we're finally standing up for ourselves and saying, Hey, you know what, this just isn't fair. It's not fair to our manufacturers. It's not those fair to those who like to import export good. So let's get more on an equal playing field. Not to mention, China does a really good job of stealing our intellectual property, and taking advantage of patents and so forth over in their country that are theoretically internationally patented. So there's some reasoning behind trying to get this all back on good footing.
However, in the meantime, it can sure cause some turmoil. We've talked about this before, the stock market loves predictability, reliability. And anytime there's any kind of a shake up. Yeah, the jitters go through. And you can see what happens. I mean, just even today, part of that 1700 point decline today was over 700, just in and of itself. So the markets do not like it when they can't predict what the future is going to look like. And we can't right now, we do know that agriculture is gonna get hurt, to some extent, because China is going to back off buying some of our agricultural products.
And again, with the devalued currency that they've will, as they devalued their currency, it's gonna affect our import export, as well. So it's interesting, I don't know how it's all going to turn out. But one question that was asked to me from a really good friend, is this the time to buy a house or wait for houses, they that this person was told that housing was gonna drop dramatically because of the trade war? I don't see that correlation, because most of the materials that we use to build houses are American, they're here. We don't import a lot of stuff, especially from China, when it comes to building houses is really not going to affect land prices much.
So I don't see that as a big issue. But they were really concerned, hey, if I buy a house, or should I wait for housing to take a massive correction. That's probably not something that we have to worry about to this point. But we do have to worry about technology, computers, those kinds of things, because that could definitely be affected by these trade wars. So just a little update, not sure where this is gonna go. Not going to not sure who's going to flinch. First. I do hope that sooner or later, cooler heads prevail, and we get back on a fair trade and a balanced system throughout the country. That can be good for everybody both in China, America, anywhere else that we import and export goods.
Alright, that's about it. You have any questions, shoot them to questions at wise money tools.com. Be happy to answer them as quick as I can. If you have any comments or thoughts, have some ideas on how this might turn out. Feel free to express those as well below. And until next week. Talk to you soon. Take care.
Aug 15 2019
Rank #20: Episode 121 - The 5 Key Elements To Wealth (Simple and Easy) Episode 2
Hi everyone, Dan Thompson here, if you remember, we're talking about the five elements to wealth. Now remember the formula created by Einstein. He called it the eighth wonder of the world. It's compound interest, y=a(1+r)x. If you recall, why is our outcome? This is the answer, right? This is our goal. This is our wealth. Now the first element that we have to understand is "a" and "a" equals cash. Okay, we might call it cash, we might call it capital, we might call it funds or money or greenbacks or bones, or whatever else you want to call it. What it boils down to goes way back to the famous book that you should have all read. If you haven't, you need to read it. It's called The Richest Man in Babylon. It's a great book, easy read, very easy to comprehend too. In this book The very first principle to becoming rich. I kind of like to say wealthy, because for some right now the word rich has taken kind of a negative meaning so we'll probably say wealthy. But he always said the richest man anyway, stay away from politics right now. The first principle is drumroll, pay yourself first. That's it. One of the most basic principles in life is to put yourself in the front of the line. Look, you're the one putting in 40-50 hours a week working, you're the person who should get the first part of your paycheck. Way, way too many families live paycheck to paycheck, and they never have a dime left over at the end of the month to save or pay themselves. They pay their loans or credit cards, utilities. Everything else gets paid, but they don't pay themselves. So starting today, this minute, I don't care what your financial situation is, you need to start paying yourself first, how much? Well, depends on your situation, I would shoot for at least 10%. At kind of a minimum, maybe you can't do 10 right now. But get something so that you feel like you're accomplishing that goal of paying yourself. Eventually you want to get that up to about 20%. But here's a deal. Once you see how all this fits in, you're gonna want to try to figure out how you can pay yourself 100% and put it through the five elements to wealth before you start taking income. But anyway, you'll see how exciting this is as we go along. Although it's not gonna be possible. Maybe right now, the main thing is start with something today. You got to figure out how to get that started and then we'll figure out how you can do more. Now in his book, "Rich Dad Poor Dad" Robert Kiyosaki taught the Same principle, he said that his rich dad taught him to pay himself first. So in his book, he says pay yourself first. It's the power of self discipline. If you cannot get control of yourself, don't try to get rich. Wow! If you can't control yourself, don't try to get rich. It makes no sense to invest, make money, and then just blow it. It's the lack of self discipline that causes most lottery winners to grow broke. Soon after winning millions of dollars. It's the lack of self discipline that causes people who get a raise, to immediately go out and buy a new car, take a cruise. He says, of all the steps this step is probably the most difficult to master if it's not already part of your makeup. Now, I'd venture to say that personal self discipline is the number one delineating factor between the rich, the poor and the middle class. So that's pretty powerful. If that's the factor between the rich and the poor. Then let's get some discipline and put ourselves out in front of the line each and every payday. All right? And the power of cash and having it that cash flows amazing. So you work you get paid. If you pay yourself and save and invest first, then pay your bills. You're gonna be amazed at what can happen. And don't worry what to do with it just right now, right? We're simply wanting to take that action and start saving, paying herself first each and every payday as we go along. It's gonna make perfect sense where to save and invest it. But it all starts with us. Without this part of the equation, the cash equation, really nothing else matters. If you're not able or willing to pay yourself first and look out for you and your family. Put yourself at the front of the line, you're always gonna struggle to build your wealth. I don't care if you have debt up to your eyeballs. And Dave Ramsey tells you that suck it up and eat rice and beans three times a day, it's wrong. You have got to put yourself, you've got to put something in your pocket, you've got to get the compounding machine working for you. Okay, so that is element number one, cash, money, capital, whatever you want to call it. The only way this works is this if you have some cash to do something with and paying your self first is how we're gonna build that cash. If you are fortunate enough to already have cash to already have other investments that you can access? Well, you're just gonna be that much further ahead. As we go through this whole process. You're gonna be able to jump ahead a few time periods as we call them in our five elements, but I'm jumping ahead of myself. I really do get kind of excited about this I can't wait to share it all with you but we've got to go one step at a time. So that this becomes a way for you to understand and then ultimately become the captain of your own financial ship. So that's it for this video. That is element number one. Stay tuned for element number two. If you have any questions, shoot them to questions at wise money tools.com. Don't forget to subscribe. Can't wait to see again. Until next time, take care.
Dec 13 2019