Do you realize that we finance every single purchase that we make, whether we pay cash or borrow? Conventional wisdom has taught us that debt is bad and should be avoided at all costs. So what’s the difference between financing and debt?
Let’s start off with defining what debt actually is. Debt is making a purchase any other way than out of monthly cash flow, which means you have to finance. Now, what people don’t realize is if they borrow from a bank, they understand that they’re financing with the bank. What they don’t realize is that if they’re paying cash, it is actually a form of finance. It’s called self-finance. So you’re either going to pay interest to a bank or give up interest by paying cash. There’s no other way around that.
This concept is called opportunity cost, the cost of the interest that your money could have earned had you not spent it. One of the basic things that I’ve seen is that most people don’t realize that most or all of their debt is incurred to pay or fund current lifestyle expenses. They’re paying for their current lifestyle by either borrowing from a bank or a credit company, or liquidating assets. This is more true than ever with sky-high interest rates as well as inflation. The costs of goods and services are sky-high right now, and our income oftentimes isn’t keeping up.
So let’s look at some data. In Q4 The New York Fed came out with their household credit report. Household credit is up $16.8 trillion, which is up 2.2% from Q3 of 2022. Credit card debt topped $986 billion in Q4, which was up 6.6% from Q3 of 2022, which was the highest quarterly growth rate ever recorded. Now, in Q2 of 2023, credit card debt soared over $1 trillion for the first time in history. So, yes, debt is up. So the proof is in the pudding. Most people right now are supporting their current lifestyle. They’re not reducing it because the costs of goods and services are going up. They’re maintaining it using their credit cards.
So again, let’s take a look at what debt is, right?
When you’re in debt that means you’re obligating your future earnings to pay for something you bought today. Now, if you don’t have the assets to back up the cost of the purchase, you’re in debt. What we’re talking about is collateral. Does your debt have a piece of collateral to support that debt should something go wrong?
For example, a car loan has the collateral of the car. A mortgage has the collateral of the property. You’re not in debt If you borrow $10,000 and you have $10,000 in assets. If you borrow $10,000 and you don’t have $10,000 now you’re in debt. And if you’re liquidating your assets because you don’t want to be in debt, eventually, you deplete all of your assets and now you’re stuck with only one choice, which is to finance. Trying not to get into debt, only to get into debt doesn’t make sense. It’s a slippery slope.
One way to combat this is with a specially designed whole life insurance policy designed for cash accumulation. With these policies, we’re able to help our clients build a pool of cash that they own control and have access to with no questions asked. That way they’re able to collateralize against that cash value access money from the insurance company and go off and purchase their major capital purchases, whether it be cars, weddings, vacations, other investments, real estate property, or starting your own business. The possibilities are endless.
The key is the insurance company will not loan you more money than what you have in equity in your policy. So you’re never in debt. You’re financing your choosing to use somebody else’s money to make your money more efficient. That’s the moral of the story. How can you make your money more efficient by using other people’s money? And that’s what we teach our clients. We teach them the difference between debt and finance, and we teach them how to choose the right path for them.
If you’d like to get started with a specially designed whole life insurance policy designed for cash accumulation, be sure to schedule your free strategy session.
And remember, it’s not how much money you make, it’s how much money you keep that really matters.
