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Experience the Benefits of Compound Interest

Do you realize we finance every single purchase we make? We either go to a bank or finance company and pay up interest, or we pay cash and we give up interest. But if you’re paying cash, I’m sure your intention isn’t to give up control of your money,  or isn’t to lose opportunity cost.

Today, we’re going to talk about how you could still pay cash for things without giving up opportunity costs and without giving up control of your dollar.

You may be familiar with the two main ways of financing any purchase. The debtor, who digs a hole and fills it up and just fights to get their head above the horizon, that zero line. Or the saver, who is kind of the debtor in reverse. They save up money as a matter of course, but once they have enough to make their major capital purchase, they drain the tank and they give up the opportunity cost of the money that could have been earned on their assets.

In both situations, the debtor and the saver spend a lot of their time at the zero line. They don’t get to experience any of the benefits of compound interest. You see, when you’re in debt, your cash flow is obligated to filling in that hole, to getting back up to that zero line. But when you pay cash, you’re still married to that zero line, you’re still saving as a matter of course, but you’re not really getting ahead because once that purchases made, you’ve traded your cash, that you owned and controlled, for the asset for the purchase, whether it’s a vacation, whether it’s a home remodel, it doesn’t matter. All of that cash is gone because you made a purchase.

But that can’t be what the wealthy are doing, right?

What wealthy people do is really simple. They create, cultivate, and keep their money. They keep in control of their wealth as long as possible. Now we have this question, if I want to make a purchase, we don’t want to finance and we don’t want to pay cash, how can I make the purchase?

The answer is simple, leverage. Leveraging other people’s money without draining your savings. Making your money more efficient by accessing other people’s money. We use this by leveraging the infinite banking concept with a specially designed whole life insurance policy designed for cash accumulation.

With this product, we’re able to leverage against our cash value that has accumulated within the policy, without giving up the compound interest. In essence, we’re able to take back the finance function within our own lives.

The key thing here is that we still get to make the purchase. We can make purchases for our own life, whether it’s sending our kids to college or paying for their tuition or paying for a wedding or a down payment on the house. The options are literally limitless.

What this extra step adds is a way to finance these purchases using your own money, without giving up control of the money, without being penalized by taxes, and without being dependent on banks and credit companies. 

Not to mention without having to drain down the tank and giving up opportunity costs on our money or without having to give up control of the process. We give our clients a choice. You can either be controlled by the process or be in control of the process. Which would you rather?

I would argue that most financial frustrations come from not having access to money when we really need something. When you have access to cash, it seems like opportunities naturally find you. So whether it’s a business endeavor or an investment opportunity, the options are limitless as to why you should use this cash for. And when you’re able to take advantage of an external opportunity, you’re able to earn an external rate of return on your money, as well as the internal rate of return on your money. 

That’s the continuous, uninterrupted compounding of interest.

So how does this play out? Well, you start a policy, you build up a pool of cash that you’re able to access and repay because you own and control that policy. And it’s a matter of course, you’re a saver. You’re always saving money. You’re always being an honest banker and paying yourself back. Then you’re able to leverage that money for retirement on a taxpayer basis and the leftovers get passed on to your family on a tax favored basis. 

The tax benefits of life insurance are numerous.

Number one, the cash value grows on a tax deferred basis.

Number two, you’re able to access the cash value on a tax free basis through the loan provision.

Number three, when you die, the life insurance death benefits pass outside of federal income taxes to your name beneficiary. And also, in most states, the death benefit is outside of state income tax and usually state inheritance tax.

So let’s summarize. Number one, you get to make the purchase. Number two, your money earns uninterrupted compounding of interest. Number three, you’re in control of the process. Number four, numerous tax benefits.

If you’d like to see exactly how we put this process to work for our clients, check out our free webinar, The Four Steps to Financial Freedom.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

Building an Efficient Warehouse of Wealth

Cash flow is the lifeblood of any business, and having access to cash is kind of like the lungs. If you’re a business owner, you know this and you know it all too well. When you don’t have access to cash or cash flow, it feels like you’re suffocating.

So the question is, as a business owner, how do you position yourself so you have the lifeblood and the lungs of your business working together all the time.

Recently, Intuit did a survey of business owners all over the world, and they found that 61% of all businesses struggle with cash flow and 69% of business owners admitted to losing sleep or sleeping less due to cash concerns.

Some businesses are seasonal and their cash flow operates on a cyclical basis. Some quarters they have cash. Other quarters they’re a little light on cash.

On the other hand, some companies have chronic cash flow issues. It seems like they’re always playing catch up or they never have enough cash to take care of either running their business or growing their business. Either way, it could feel like you’re always putting out cash flow fires. It could feel like your business is suffocating and that could be very stressful. It all comes from cash flow not being as efficient as possible.

Over the past 37 years, I’ve worked with small business owners. I’ve worked with families. One thing I’ve determined is that their cash flow issues don’t have to be. It all stems from an inefficient way of utilizing their cash and their cash flow.

You see, it’s not how much money you make, it’s how much money you keep that really matters. What are you doing to maintain wealth within your business so that you’re off the debt cycle and you’re not dependent on external things in order to have smooth cash flow?

It all starts with building a warehouse for your wealth. So let’s talk about the qualities we want in this warehouse for our wealth.

Number one, we want tax advantages. We are business owners after all.

Number two, we want guaranteed access. We want to be in control of the cash and the cash flow going in and out of this warehouse.

Number three, we want a reasonable rate of return. We don’t need to hit a home run, but we want to make sure that our money is working for us 24/7.

You see, we believe there’s more opportunity in avoiding the losses, than picking the winners. Meaning that if you could make your cash flow more efficient and make this warehouse for your wealth as efficient as possible, you don’t need to hit it out of the park with investments. You’re able to maintain your wealth, keep it safe, keep it within your business, keep it within your family, and still accomplish your goals with guaranteed access to that money.

But what does that guaranteed access actually mean for you?

Well, it means that you could take back the financing function of your business. Imagine not having to be dependent on banks and creditors in order to make major purchases within your business.

Now imagine being able to restructure your current debts to build this warehouse of wealth, to finally be in control of your cash flow so you don’t have these chronic or cyclical cash flow dry spells.

But you see, the first step is creating that warehouse of wealth, because if you don’t have the warehouse, you don’t have a pool of money that you could access. Everything else is out the window. You no longer have control. You no longer have uninterrupted compounding of interest.

So let’s talk about the warehouse. What we talk about on our channel is a specially designed whole life insurance policy designed for cash accumulation, where you are able to store and warehouse your wealth, build up that cash over time, and leverage it in the future without interrupting the compounding of interest on your money.

You see, the money never actually leaves the life insurance policy. A lien is placed against the cash value and a separate loan is taken out from the insurance company. It’s a loan, so naturally there’s no tax to access that money through the loan. And you, as the business owner, get to decide the repayment terms.

What this translates to is a tool that you’re able to use as a business owner to function within your business to relieve the cash flow stress that 61% of you are facing,   and ultimately build a warehouse of wealth for your business and your family.

If you want to learn more about exactly how we put this to work for our clients, check out our free webinar, The Four Steps to Financial Freedom.

Remember, it’s not how much money you make. It’s how much money you keep that really matters.

2 Steps to Avoid the Debt Cycle

Are you stuck on the merry-go-round of the debt cycle? You don’t have access to cash and so you’re forced to borrow, and then you go and you earn profits, but all of your profits go towards repaying that debt. When something else inevitably comes up, you’re forced to borrow again. It’s a merry-go-round that goes round and round and round until you break the cycle.

It’s not hard to get into debt. In fact, it’s been quite easy up to this point. Whether it’s student loans, a credit card or a business loan, not to mention mortgages and home equity lines of credit.

Once you’re on the debt cycle, the key is not to stay in it.

The first step is taking that first step, determining what amount you can save on a monthly basis to build up a pool of cash that you own and control so that in the future you’re not dependent on financing to make major capital purchases. A major capital purchase is defined as anything that you can’t afford out of your regular monthly cash flow.

You see, understanding how the problem starts is the best first step. And basically the problem starts because you don’t have access to your own money. Therefore, you have to pay for the privilege of using somebody else’s money, a bank or credit company.

This problem is easily overcome if you just build up your own pool of money in which you can borrow or you can utilize for whatever you want. We’re talking about taking back the financing function in your life because let’s face it, every time we turn the corner, it seems as if we’re making a major capital purchase.

To start, you don’t need to know what your first goal is going to be. The goal initially needs to be to break the cycle, build up that pool of cash so when the time comes, because it always does, you are prepared.

We often talk about being in control. Being in control of your cash. Being in control of your cash flow, and what does that actually mean? What are the benefits of being in control? Well, let’s take a look at what life looks like on the other side of the debt cycle.

The first step is being aware that you’re on the debt cycle. The second step is to make a change, start building up that pool of cash. And then after you have enough money, you’re able to leverage that cash to make major capital purchases. What does that mean for you?

By leveraging the cash, number one, you don’t have to borrow from a bank or a credit company. You can either use your own cash, which we would recommend not doing or borrowing against your cash and replenishing that money over time so that you can make the next purchase.

What we’re talking about is the infinite banking process that uses specially designed whole life insurance policies designed for cash accumulation to help accumulate and keep your wealth. By using the specially designed policy, you’re able to place a lien against the cash value in the policy and access it via a policy loan. What does this mean for you? Well, it basically means that money never leaves your policy.

A lien is placed against the cash value and the death benefit of your policy, and a separate loan is taken out from the insurance company’s general fund. Again, the benefit of this is that your money is able to continuously compound and grow within the policy, and you’re still able to access cash with no questions asked from the insurance company.

And if that was all there was to it, that would be great. But that’s not all there is to it, because the loan you get from the insurance company is an unstructured loan and basically what that means is you determine how, if, and when you repay that loan. And because of that, you get to determine what the monthly payments are. And if they’re too large, you can back them down. If they’re too small, you can increase them. If things go well, you can finish the amortization schedule. If things don’t go well, you can extend the amortization schedule. You’re in complete control of that payback process.

So the two benefits that we see that most of our clients enjoy are, number one, their money gets to earn continuous, uninterrupted compounding of interest. And number two, they control the payback process.

So what does this look like using the policy? Well, you have premium deposits building up the policy’s cash value on a systematic basis, whether it’s monthly, quarterly, semiannual or an annual basis. So it’s building up the cash value over here. And once you leverage that cash value with a policy loan, you set up loan repayments. And so you have money coming in over here rebuilding that cash value, reducing the lien against it as you go.

What that does is infuse cash into the policy from two angles, from the premium deposits as well as the loan repayments. So you’re able to get out of debt faster by using this process because you have so much cash going into an entity that you own and control, not the banks, not the finance companies.

So instead of having that money going out or leaving your control, you have the money staying in and you maintaining control. And if you look at this from a big picture perspective, you never lose control of that money. And as time goes by and compounding interest continues to work for you, all of a sudden you have an ever increasing pool of money from which you can borrow for the next larger purchase.

If you want to learn more about exactly how we put this to work for our clients, check out our free webinar, The Four Steps to Financial Freedom.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

How to Reach Your Financial Position A

When you’re starting off in business, your goals are certainly different than when you plan on exiting your business. But the question becomes how do you build within your business to get to your business Position A?

We define Position A as having enough cash outside of the business equal to the value of your business, so that your exit or your retirement is not dependent on your ability to sell the business.

Now, when you’re growing the business and you’re just starting off, it’s important to reinvest the profits back into the business so you could explode the business and grow so it could take care of you and your family.

But reinvesting your profits back into the business creates its own set of problems. According to the Bureau of Economic Analysis, 80 to 90% of a business owners wealth is tied up in the company and that makes their money inaccessible for things like repairing equipment, hiring new personnel, or growing the business.

However, as a business owner, we all have life hopefully outside of the business. You have a family, you have other goals. Maybe you want to send your kids to college, travel the world, retire one day. When all of your money is tied up within the business it makes these other goals very complicated.

And I would argue that the number one stressor that all of us face when it comes to money is not having access to it to do the things we want to do. According to a study by Intuit, 61% of business owners struggle with cash and 69% of business owners sleep less due to cash concerns.

Now, it’s one thing when you’re starting off your business to be stressed about money, but when your business is doing well, your business should be able to also take care of you. And it all comes down to how we’re using our money, how to get to position A so that you’re able to live your life now without financial stress and the health problems that come with stress, but also to know that your business is going to be able to take care of you throughout your entire life.

 

We recently had the good fortune of helping a client of ours who had been with us for 37 years retire. He had an offer on his business and it was an offer he literally could not refuse. But the great thing was he waited for the best offer. Why? Because he was in Position A. He had enough cash equal to, actually greater than, the value of his business so that his retirement was not predicated on his success of selling the business. His retirement was predicated on the success he had for the past 37 years.

When you’re not dependent on the outcome, you’re able to make clearer, better financial decisions. And the way to get to that position is by taking care of the business in the beginning, but also saving outside of the business so that you’re able to take care of yourself and your family and your financial future.

If you’d like to get to your Position A so that you have enough money saved outside of your business, as well as a thriving business, because too is better than one. Be sure to check out our website at Tier1Capital.com to schedule your free strategy session today.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

How Important is a Clearly Defined Succession Plan?

Being in business with your family could get tricky. For example, a recent study showed that two thirds of small business owners plan on passing their business down from one generation to the next. Yet, of those respondents, only 18% had a business succession plan that was clearly documented and communicated within the business.

There are two main reasons why business owners fail to plan for the future. The first is that they literally don’t think that they can afford to retire. 37% of respondents said that they didn’t think that they could afford to retire from their business. And we all know that cash flow is the lifeblood to any business. So it makes sense if you don’t have the cash flow to try to avoid it. But what if there was a way to find that cash flow within your current expenses to fund this planning?

If you’ve worked for the last 30 or 40 years, building your business, the last thing you want to do is strap the business with payments for retirement plan for you. But at the same time, you’ve put your blood, sweat and tears into this business for the last 30 or 40 years. You deserve to use that business for retirement. So it’s a double edged sword.

The second reason that business owners fail to plan for their succession is, they don’t want to let go. Statistically, business owners retire later than their employees and later than the average American. On average, a business owner retires at age 72 versus 66 for their employees and 64 for the average American.

If you think about it, it makes sense, though. A lot of times when people start a small business, the reason why or one of the main reasons why is because they want to be in control. They want to be in control of their own destiny and their livelihood. So the very thought of giving up control can cause stress and anxiety for the business owner who’s been in control for 30 or 40 years.

However, holding on for too long can have some negative side effects. When a business owner stays on too long, there are three negative effects. Number one, it can slow the growth of the company. Number two, it can limit your successors. People aren’t going to wait around forever before you decide to retire. Additionally, they’re not going to put their heart and soul into growing the business if it’s only helping you and not benefiting them. And third, it can literally bankrupt the business. And think of this. Business failures have increased by 226% over the past decade.

Our specialty is helping business owners plan a strategy to set them up for retirement success, as well as set the next generation up for success within the business. We do it in three steps. First, we show you how to regain control of your cash flow so that you can utilize that cash flow to help fund your exit strategy without taking away from the viability of the business.

Secondly, we can help you to incentivize key personnel to stay on, to help you to grow the business and fund your retirement without bankrupting the business. And more importantly, these plans could help incentivize key personnel to maintain their production, help grow the business, but also provide them with meaningful benefits to secure their financial future. And number three, we’ll help facilitate the difficult conversations that have to be made between family members and key people so that everybody’s on the same page and everybody’s pulling in the right direction.

The bottom line is this: with proper planning, business succession can go smoothly. It could take care of the founding generation and generations to come. If you take care of the business, the business will take care of you.

If you’d like to get started with this type of succession planning, check out our website at Tier1Capital.com 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.

The Magic of Compounding Interest

Unless you’ve been living under a rock, it’s clear that inflation is running rampant. In fact, it’s at a 40 year high. Spoiler alert, it’s not Putin’s fault.

They call inflation the stealth tax. It’s not written in our tax code, but it affects each and every single one of us. Some more than others. So if you want to combat inflation, there’s one secret. It’s called compound interest. Albert Einstein, once called compound interest the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.

We have a perfect example on illustrating the magic that is compound interest and we’re going to lay that out with a magic penny. This penny doesn’t exist, but if it did, it would double every single day for 31 days.

So we start off with a penny. Day two, it’s two pennies. At the end of seven days, it’s worth $0.64. At the end of 14 days, we have $81.92. After 21 days, we have a whopping $10,485.76. And as we continue to grow, day 28, we have $1,342,177.28. Just three days later, we’re looking at a whopping $10,737,418.

Now that, my friends, is the power of compound interest.

What’s the problem? Why aren’t we all multimillionaires? Is the problem market fluctuation? Is the problem taxes? Is the problem fees? Or is the problem a combination of all of these and something else?

Absolutely something else. The biggest culprit to compound interest is draining the tank. You see, when it comes to compound interest, there are two factors to consider time and money. Time is something we can never get back. So each and every time we drain that tank down to zero, we stop the compounding of interest. We’re no longer earning money on our money. We start back at the zero line and we have to make up all that time that we lost originally.

So let’s carry on with this magic penny example. What would happen if we drained the tank after 22 days? Hey, we may have enough money in there to buy a car. And are we going to go to the bank and finance to buy that car?  Heck, now we have the cash. We’re going to lose money to interest paying the bank back? No, we’re going to drain our tank. Pay cash. Cash is king. But let’s take a look at what happens when we do that.

On day 22, we have $20,971.52, enough to buy a brand new car. Now, instead of having $10.7 million, we got to start over and go back to day one. But we only have nine days left for compounding.

You had the potential to earn, hypothetically $10.7 million, but because you made that one decision on day 22, your tank is only worth $2.56. That is why we never drain the tank. And that is the power of compound interest.

So this is where we talk about the seen and the unseen. We see the interest that we’re going to pay on a car loan, and that is not acceptable. Because let’s face it, debt is bad. We spare ourselves of the embarrassment and the pain of paying interest on a car loan, and we drain down our tank and we utilize our savings.

But what we don’t see and what we’ll never see is the interest we could have earned had that money been compounding. You know that we always say you’ll never see the interest that you don’t earn. And this example really underscores how much you don’t see, and more importantly, the value of continuous compounding of interest.

If you want to combat the effects of inflation and that eroding effect on your money. We do have control over is our own personal economic system and what our money is doing for us. And part of being in control of your cash flow is earning continuous compounding on your money, especially when it comes to combating inflation and making sure your money is as efficient as possible, which is something we talk about all the time. Small minor adjustments on how you’re using your money can have tremendous impact on the bottom line.

If you’d like to get started with your compound interest curve so you’re able to use your money and never drain that tank, check out our website at tier1capital.com to schedule your free strategy session today.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

Are You Utilizing Your Cash Flow Properly?

 

In America, family businesses and small businesses are the backbone of our economy. 50% of all employees in America work in a small business. But small businesses don’t come with small challenges. Today, we’re going to talk about the cashflow implications of having a small business.

According to a recent study, 69% of business owners either lose sleep or have trouble sleeping because of their financial cash flow issues. And that was in 2019, before the pandemic.

Lack of sleep causes stress, and stress has been linked to chronic disease, stroke, heart attack, diabetes, depression, not to mention the stress that’s put on relationships by cashflow being pinched.

On top of this, small business owners are facing the twin challenges of high inflation and high interest rates. In essence, you’re paying more for your employees, you’re paying more for your supplies, and you’re paying more for your money. This is further pinching your cash flow and putting you at a very strong disadvantage.

The question becomes how do you make your cash flow more efficient so that there’s less stress within your entire business and your family? And the amazing thing is most business owners don’t even realize this, but they have the cash flow available. It’s just not being utilized properly, or they may be just looking at things the wrong way.

If you’d like a second perspective and see where we could help make your cash flow more efficient so that you’re able to relieve this financial stress. Check out our website at Tier1Capital.com to schedule your free strategy session today.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

Saving and Eliminating Debt by Leveraging Your Current Cash Flow

I would argue that the number one source of financial stress comes from not having access to money when you really need it. The perfect example of this comes when you end up in too much debt than you could afford. It ties up your monthly cashflow and leaves you in a position where you just are trying to get out. But often people neglect to save and secure their own financial future before getting out of debt.

Total household debt is up to $16.9 trillion for Q4 of 2022, and of that, nearly $1 trillion is credit card debt. Credit card debt had grown by 6.6% in Q4 over Q3. That’s the largest quarterly increase ever recorded.

It’s clear that Americans are being squeezed from every angle. Inflation is up. Interest rates are up and savings is down. It’s getting harder and harder to make ends meet. So it’s no wonder that people are charging on their credit cards. But when you charge on your credit card, what are you actually doing? You’re obligating your future income to pay off that credit card debt and with the interest rate so high, some credit cards are 25 to 30% APR these days. It could be a very heavy interest expense, but it’s what people need to do to get by. However, once you’re in credit card debt and you’re trying to get out, the natural reaction is to put all of your monthly cashflow, all of your extra money towards that debt because it’s draining you.

What people neglect to take into account is that even if you got all that credit card debt paid off, you’re still just at the zero line. You’re no more financially secure than you were when you were buried in debt.

You went from a position of having very little cash flow and no access to money, and now you’re out of debt, but you’re still in a very precarious situation financially.

This is why we think it’s important to both pay off your credit card debt, but also save for your future, to accumulate a pile of money that you own and have full liquidity use and control over to protect you and your family.

58% of Americans have less than $5,000 in savings and 42% of them have less than $1,000 in savings. Most families out there have a very difficult time absorbing a $400 medical bill. And let’s face it, how easy is it to rack up $400 in medical bills today?

Parkinson’s law says that expenses rise to meet income. So if you’re not diligent on saving your raises, guess what’s going to happen? Your expenses will rise to meet your income.

Another way to look at this is with the student loan debt. A lot of people stopped paying their student loans during the pandemic because of the forbearance. Didn’t they in essence, give themselves the raise? What’s going to happen when those payments resume and their cash flow is going to be pinched for the amount that they’re going to have to repay back to the student loans?

You know, we talk about this all the time, but really, there’s no such thing as a free lunch. Our capital also has a cost, and sometimes we don’t recognize that. In essence, what’s happening is we’re taking care of our current lifestyle wants and completely ignoring our future lifestyle needs.

One of the ways we help our clients is by using specially designed whole life insurance policies designed for cash accumulation so that they’re able to build a pool of cash that they’re able to leverage to pay off their credit card debt and achieve their other financial goals without interrupting the compound interest curve.

If you’re interested in learning more about how to manage your debt and your savings, check out our website at Tier1Capital.com to schedule your free strategy session today. Or if you’d like to learn more about how exactly we will put this process to work for our clients, check out our Four Steps to Financial Freedom Webinar right on our homepage.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

The Hidden Cost of Paying Cash

When it comes to accessing other people’s money, it’s clear that capital has a cost. For example, when we have a credit card debt, we know that we’re paying a lot of interest towards that debt. Same thing with student loans or mortgages or any other debt.

However, a lot of people fail to remember that our capital also has a cost. And we call that opportunity cost. The cost of not investing that money and spending that money instead has a cost. And that is what people fail to recognize.

It’s easy to forget that our capital actually has value when we have it in the bank earning next to nothing. However, if that money was invested, what could that money be earning for us? What if we took advantage of an opportunity in business or an investment or anything else? We would be earning an external rate of return on that money that we couldn’t earn within the banking system.

And you see, the important point here is having access to capital. When you have access to capital, opportunities will seek you out.

I’d argue that all financial stress actually comes from not having access to money when we really need it. So that’s why a lot of people save in the bank. We have access to that money, there’s no penalties, we may not be earning any interest, but at least we could get our hands on it if we need it.

The point is that safety of principle and accessibility to your money has a cost. One of the biggest mistakes that we see people make, whether it’s on a business basis or a personal basis, is not recognizing the value of their own capital. They completely ignore the value that their own capital or accessing their own capital has to them as an investment.

We talk about this all the time, continuous compound interest. You not only lose that money, but you also lose the potential that money could have earned you if you had left it invested. That’s called opportunity cost and it’s amazing how seemingly smart and great financial people completely ignore opportunity cost.

But it makes sense. I mean, conventional wisdom tells us that debt is bad and that cash is king. What you expect from them? However, conventional wisdom may not have our best interest in mind.

Another thing that we found is that people obsess over what they see. In other words, I’m not going to pay 8% to a bank in order to borrow money to buy a car. I’ll pay cash and pay nothing. Again, they obsess over what they see. The 8% they’re paying, but they completely ignore what they don’t see, what their cash could have earned them had they not paid cash for the vehicle? We accept as normal what the system has conditioned us and taught us to accept as normal whether or not it’s true.

Here’s a perfect example. Let’s assume you have $25,000 sitting in a bank account, a savings account, earning 4% interest. Now, I know they don’t exist today, but just go with this example. You want to buy a car, You need to buy a car. And the car coincidentally cost $25,000. So you say to yourself, I don’t want to cash in this account because I don’t want to lose that interest rate. I’ll call the bank.

So you call the bank and you find out that the car loan will cost 6% interest. So now you’re thinking, okay, if I pay 6% interest, that’s 2% more than the value that I could earn in my savings account at 4%. I’m not going to pay 6% interest. I’ll cash out my savings account and give up the 4%.

But the banker says, Oh, no, no, no, no. It’s actually going to cost you less to finance at 6% and your account will grow by more earning only 4%. Do you believe him?

Now, think about that. You mean to tell me I’m going to earn more money at 4% versus paying 6%? That doesn’t make sense. But the numbers are true.

The $25,000 in your bank account earning 4% is compounding the interest is being accrued on a growing balance. So at the end of five years, because that’s how long typically a car loan is, your account balance is going to be $30,524 and some pennies.

Now, conversely, if you finance the vehicle, borrow $25,000 at 6% interest for five years, the payment is $483.32. And if you add up all the payments for 60 months, it’s going to equal $28,999 and change. That’s what you’re going to pay. And you could have earned 30,524 and that’s what you would have had had you not paid cash.

It’s a bit of a paradigm shift. But the point of the matter is that your assets have value, whether you’re taking advantage and earning interest on them or not. It’s important to put your money somewhere where it’s safe. You have full liquidity use and control of your money, so you’re able to take advantage of continuous compound interest on your money.

But again, it’s really simple to obsess over what you see, paying 6%, and completely ignoring what we don’t see, the interest that we would have earned had we not paid cash. And we always say, you’ll never see the interest you don’t earn.

If you’d like to learn more about our process and how we put it to work for our clients so you’re able to make better financial decisions, visit our website at Tier1Capital.com to schedule your free strategy session today. Or if you’d like to learn more about exactly how we use this process to help our clients, check out our free webinar, The Four Steps to Financial Freedom found right on our home page.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.

Are You Saving Enough to Reach Your Retirement Goal?

It’s pretty safe to say we all have one goal in common, and that is to eventually retire. Today, it’s harder than ever to save for your retirement. Americans are being squeezed from so many different directions. Income is down, inflation is up, the savings rate is down. How are we going to be able to save as well as live and survive to get to retirement?

One day you’re going to want to turn your income off, stop working and start taking distributions from your accumulated funds. We call this Position A. Having enough money saved up and accumulated to support your current standard of living, adjusted for inflation, so that you don’t run out of money before you run out of life.

So how do you know if you’re on track to meet this goal? How do you know if what you’re saving in your company 401k plan, 403b plan, IRA, or other investments is actually going to get you to your Position A.

Well, there are four questions that everyone needs answered in order to know whether or not you’re on track. First and foremost, what rate of return do you need on your savings and investments to get you to Position A? Second, how long do you need to work in order for you to get to Position A? Third, how much more do you need to save in order to get to Position A? And number four, how much will you have to reduce your current lifestyle in retirement in order to not outlive your money?

Knowing the answers to these four questions is vital to make sure you’re on track to meet your Position A. Another thing to note about these four questions is that the answers are going to be noted in future dollars, meaning adjusted for inflation. Currently, inflation’s between 6 and 7%, so the government says, and we want to make sure that you have enough so that your dollars could buy the same amount in the future as they’re buying today.

The point is, this is not a simple calculation.

The fact of the matter is we’re trying to hit a moving target and in essence, we’re trying to plan for certainty during uncertain times. However, as with any goal, in order to know how to get there, you need to first know where you’re going, and then you can make a plan on how to achieve that goal of getting to your Position A and retiring so that you’re not going to run out of money before you run out of life.

 

If you’d like to know the answers to the four questions as it relates to your specific financial position, check out our website at Tier1Capital.com and hop on our calendar for a free strategy session. We’ll be able to answer them in about 15 minutes.

And remember, it’s not how much money you make. It’s how much money you keep that really matters.