Valuable Finance Insights from Tier 1 Capital

Olivia: Welcome to the Control Your Cash podcast. Today we’re going to be talking about life insurance, specifically as it relates to how to attract, retain, and reward your key employees. Hi, I’m Olivia Kirk.

Tim: I’m Tim Yurek. We’re from Tier One Capital, and we’re here to show you how to regain control of your money.

Olivia: So tell us a little bit about why executives and why companies and business owners would want to use life insurance instead of investments for attracting and rewarding their key employees.

Tim: Well, there’s a couple of reasons. First and foremost is the fact that built into the life insurance with the death benefit, a company can get a true cost recovery of the benefits and properly structured you can utilize the cash values to help you know, fund a an executive retirement plan or an exit strategy for the owner of the business and then the death benefit, if the company retains the policy, the death benefit can be utilized to cost recover all of the premiums paid and the benefits paid out of that policy.

That’s why you see large corporations, uh, for example, banks. Banks utilize What’s known as BOLI, Bank Owned Life Insurance, and they utilize that to cost recover the cost of their benefit plans, and also to fund their SERPs, Selective Executive Retirement Plans, for their key executives. And again, life insurance creates a nice little cost recovery, but then there’s other benefits.

The second benefit is, if something happens to the executive before they reach the retirement age, you have the death benefit that would kick in, the corporation would get the death benefit and then they could pay the death benefit out as a guarantee of salary continuation for the executive that was deceased.

And I think another big issue is the fact that life insurance, the cash values build up on a tax deferred basis. And what that means is the company doesn’t have to pay tax on the growth inside that policy Until they take it out assuming that cash value is greater than the premiums paid in. So there’s a lot of moving parts so to speak or a lot of little benefits that up that add up to a huge benefit to for a company to utilize life insurance as the funding mechanism for their executive benefits.

Olivia: I got ya. So, you know, in today’s world, as a small business owner, there’s a lot of competition for employees out there. At the end of the day, there’s only one pool of talent, right? And everyone’s competing for the most qualified people out there. So if you’re a small business owner and you have a key employee who’s an asset to the company, it makes sense to want to retain them because the cost of hiring someone could be to 200 percent of what you’re paying your key employee right now.

So setting up these these benefits for the employee and making them attractive to the employee. Because at the end of the day, what one out of every two employees is actively looking for another job out there, at least open to the conversation. Um, it’s important to make sure that you’re competitive with what’s out there in the market.

So you’re not losing that key employee, losing their talent, losing all of that knowledge that they hold within themselves, and then having to start over from scratch at a higher cost. So, um, how do you structure these plans to make it worthwhile for the employee to stay? 

Tim: Well, that’s a good question. And so let’s step back a little further, right?

So during the great resignation, Over 28 million people voluntarily left the workforce. They voluntarily quit their job and they went other places. Maybe places where they were appreciated more. Or maybe they were a place where they were getting executive benefits. So, that’s the first thing. The other thing is, think about this.

At the height of this great resignation, 4 million people every month left their job. And that’s especially troubling for small businesses because small business owners, the, a key employee in a small business, might be the only employee within their geographic region that holds the skill set the company needs.

We had one client, as you know, their, their project manager retired and the company literally did almost everything but stand on their head to get this guy to stay with the company. We’ll let you work, you know, Tuesday, Wednesday, Thursday. We’ll let you, you know, we’ll give you extra time off. We’ll pay you 50 percent more to work 40 percent less.

And the guy said, listen, I’m 65, I’ve worked all my life. My wife and I are in good health. We want to travel. We have plans for retirement. There’s nothing you can do to keep me. Here’s the point. It took three people to replace that guy because of the skill set that he had. And that’s something that more and more businesses are being confronted with on a daily basis.

Now, here’s another thing that has to be considered. A midsize or a large corporation is getting a lot of attention from the benefit planning companies because they have the critical mass to make it worthwhile for those businesses, to put in large benefit packages for their executives or their group of key people.

But a small business might only have one or two key people. So these benefit houses are looking at them and saying, well, you know, it’s not really worth our time to just set up plans for two people when we can go and do basically the same amount of work and set it up for seven or eight people. It’s a lot easier and well, it’s more profitable for them.

So the small business owner is really being underserved in that market, if that makes sense. So to answer your question, how do you set up these plans? Well, it starts with a meeting with the company to see, you know, what their appetite is, or how they’re being affected by what’s going on out in the workforce.

Do they have key people? If they left, what type of impact would that have on their cash flow on their business? You know a lot of times you get a guy who might be a great salesman and he uh, you know is, is doing 60, 80 percent of the company sales, and all of a sudden he decides he wants to start his own business.

Now all of a sudden you’ve just trained your biggest competitor, and oh, by the way, he’s taken all of your key customers and your key accounts. So you gotta look at what can we do to make sure that this guy stays around. And a lot of times I heard one story, um, sort of similar situation. There was a guy who was a key salesman and he learned the business and he went to the company.

He realized that he was 65 percent of the overall sales of the business. And he went to the owners of the company and said, Hey, you know, give me 10 percent equity in the business. All he wanted was 10 percent. They’re like, no, no, no. You know, this is a family business. We’re not. He said, oh, okay. He went out started his own business within a very short period of time, two years, put that company out of business.

You know, I mean, so that was really not a good move.

Olivia: Talk about a worst case scenario. 

Tim: And here’s the point we could have designed a phantom stock plan that would have. Uh, mirrored, yeah, would have mirrored the equity in the business, but it would not have given…

Olivia: Actual stock.

Tim: Actual stock or an equity position. And I bet the guy would have taken that.

He would have, he would have loved that, right? Because now he doesn’t have any of the bad parts of the business. He just has the equity growth. That’s huge.

Olivia: Yeah. 

Tim: So. You know, again, setting up these plans starts with a, a conversation with the business owners. And then, here’s the key point, having that conversation with the executive, finding out what’s important to that individual.

And I’ll give you an example. You know, we worked with a manufacturing company out in Long Island. And we met with the executive. Oh, here’s the other thing. They had, they brought in this consulting firm, big time business consulting firm that did executive benefits from Chicago. So they bring in these hotshots from Chicago who charged them $18,000 to do an analysis that we did for, we would have done for free and they did the analysis and then they came back with a plan that the executives, weren’t interested in because it wasn’t… 

Olivia: It didn’t meet their objective, what they care about.

Tim: Exactly. It didn’t meet their objectives.

Olivia: Hey, do you care if we put this in place for you? Is this going to to make you want to stay with us? You know, is this valuable to you?

Tim: How much value will would do you see in this they saw no value in it?

They went to the company and the company said well that’s gonna cost too much to fund. It just was not from either side whether from the executive or the company it wasn’t a viable plan. So the company now has a bad taste in their mouth. And, you know, we get referred in, we come in and they’re like, you know, sitting there with crossed arms because they’re thinking this ain’t going to work because of their past experience.

So the first thing we said was, listen, we’ll do an analysis. It won’t cost you anything. So that sort of brought their guard down a little bit. But then more importantly, we sat down and found out what the objectives of the company were. Which they wanted to reward the CEO who had been there so long and they wanted to reward him for growing the company.

But then they had that CFO that they needed to do something for. That they wanted to reward him. But now doing it in a way that was beneficial or that was valuable to him. So we sat down, we had the key conversation with him. And then all of a sudden found out that you know, he had an eight year old and a six year old.

He needed to educate them, and he had gotten a late start in life. He hadn’t planned and saved money for them. So we designed a plan that would pay $60,000 per year for each of his children for four years while they were in college. In essence, we paid for their, for his children’s college education. As you know, when we delivered the plan, he was in tears with gratitude. 

Now the point is this, that guy ain’t going anywhere. He’s beholden to that company because that company is going to educate both of his children and it won’t have to come out of his pocketbook.

Olivia: Right, right.

Tim: Right, and and so here’s the deal all he’s got to do is what he’s been doing every day show up go to work. Do everything that he does and do it to the best of his ability. He’s all in on that.

Now, he’s got a greater incentive to look out for the benefits of that company. Why? Because that company is taking care of his, his responsibility, which is to educate his children. So the point is, getting to that valuable point, or understanding what’s important to the executive, as well as what’s important to the company, then our job is easy.

Then we just find a way to make it happen. And the key is there are so many different types of plans out there. We could help people to find the right plan for them. That fits their budget, might be more, you know, balance sheet or income statement friendly, and all of a sudden, now we’re adding value.

Olivia: Right, because although you’re quote unquote paying for, for this benefit, you’re also building an asset that’s on the company’s books. So it’s not, you’re just dishing out all of this money and never seeing it on the balance sheet. You have the benefit. Growing and accumulating within the plan and then also on the back end, you have that cost recovery associated with the death benefit, which is a huge deal for the company because basically of the money that you put into the plan, you’re able to cost recover when that insured passes away.

Tim: Yeah. And again, when you set it up properly, we set it up where the company would get a rate of return, not only get their money back, but get it back at an opportunity cost. So now all of a sudden they’re getting their money back. They’re getting growth on that money and they’re locking in this key person and they’re providing a benefit that is recognized as a huge, massive value for that executive.

Again, that’s the best way to do it. And You know, we’ve, as you know, we do that over and over and over again, but the key is having those key conversations. 

Olivia: Exactly. And then thinking about it from a business perspective, right, once that person dies and you get that death benefit, it infuses into the company, right?

So you could expand the company. You could create another plan for your next key employee that you don’t want to lose. And it kind of creates a momentum within the company because cashflow is the lifeblood to any business. So creating that perpetual motion by insuring these key employees is actually a good thing from a current cashflow perspective.

And then those windfalls coming in down the line as well. 

Tim: Yeah. And think about this. Most companies, you know, there’s a, we have a saying, are you insuring your PCs, right? Your personal computers. More than you’re insuring your VPs. And think about that. Computers don’t make your business what it is. You’re key people.

All of your people make your business what it is. You know, your business is just a building and its equipment. But it’s the people that are operating the equipment. It’s the people that are inside the building. that make your business successful. Doesn’t it make sense to insure them? Because God forbid, if you lose one of them, that’s going to cost you money to try to replace that person.

Olivia: I’m thinking about this from a family, a small family business perspective. Um, this would be extremely beneficial for um, those multi-generational businesses, you know, the younger generation ensuring that older generation while they’re still insurable, while you could still afford that cost, um, on that person would be a huge, a huge incentive, right?

Tim: Yeah

Olivia: A huge relief off that second generation, right? Because, you know, think about the value that that original or older generation holds within the company.

Tim: Right. And you think about, you know, the, the likelihood of a business going to the second generation or the third generation, or even the fourth and fifth generation.

It’s, the odds are insurmountable for a company to get to the fourth generation. But yet we know a lot of businesses locally and nationally that are in the fourth and fifth and sixth generation. That’s where they did the planning. That’s where they had the key conversations to make sure that everything was done properly, to make sure that the business could pass to that next generation in the most tax efficient and most effective way going forward.

Olivia: So when you’re, when we’re thinking about, you know, multi-generational family businesses, how important is that cashflow in making sure that the business is able to go multi-generations? Um, cause you know, when, when the key person dies, when, you know, the first generation passes away, they not only, you not only lose that family member, but you also lose that family member’s mentorship and their knowledge and, and their relationships often could go with them.

Tim: Right.

Olivia: You know, you, you didn’t have those, um, relationships. You didn’t build those relationships as firmly necessarily as that first generation. So, you know, you’re up against a lot. Um, you know, when that first generation passes away and not only that, but maybe the proper planning wasn’t put in place, and you have to buy mom out of the business now.

You know, how are you going to do that when now you’ve lost your relationships, you’ve lost the revenue, um, you’re still figuring out all of the things that that person was doing? Um, the cash flow could make a huge difference in those, those situations. 

Tim: Oh yeah, and then you have another issue. And the other issue is maybe the banking relationships that the business had we’re with the, let’s say the founding generation and all of a sudden the founder dies and the bank doesn’t have the same relationship with that next generation and that next generation doesn’t have the, maybe the talent, maybe it does, but it certainly doesn’t have the relationships and all of a sudden now, you know, uh, a very good banking customer all of a sudden becomes not quite as good.

And now the bank looks at this, are, you know, uh, yeah, we understand you need more money to, you know, an increased credit line and some, some equipment loans, et cetera. We understand you need that money, but, you know, we had a great relationship with your dad. We don’t, we don’t know you, and you don’t have as much of a track record.

And your dad had all the relationships, you know, with, you know… 

Olivia: It all of a sudden becomes riskier for the bank.

Tim: It becomes a riskier proposition for the bank. But here’s the point. What could solve that problem for the next generation? Wouldn’t it be, so the problem is the death of the founding generation.

Wouldn’t the solution be, wouldn’t it be neat if you could have the, the event that triggers the problem, the death of the, of the founding generation? Wouldn’t it be cool to have that same event, the death of that individual trigger the solution to inject the company with cash.? I mean, it’s just efficiency of money.

So now think about what you could do. You can set up a succession plan for the founding generation, an exit strategy, funding these benefits. And then when the founder dies, you get an injection of cash that the second generation or the next generation could utilize to, continue to, to, to operate the business and possibly to grow the business.

It’s all possible. It just becomes an issue of, are you doing the proper planning?

Olivia: Yeah. At the end of the day, the planning is, is going to be the key. Setting up those, those documents with the lawyers, also setting up the plans that are properly funded, that have the proper amount of death benefit to allow these goals to be accomplished.

Because it is possible at the end of the day. But it’s not possible if you don’t do the proper planning. You know?

Tim: Yeah, absolutely. And so oftentimes we’ll see that where companies didn’t do the proper planning or they did the planning and it wasn’t set up properly or it was underfunded or God forbid they used the wrong types of insurance and we see that so often, um, it’s a shame, but it, it happens.

Olivia: With the proper planning anything is possible. Especially when it comes to family business or small business it is important to address these issues, make sure that proper planning is in place so that what you want to have happen is going to happen, even if you’re not there to see it happen. Many times, small business owners and family business owners are putting their heart and soul into this business only to have their years of hard work, dedication, and perseverance demolished at their death.

You know, because at death come, there’s a lot of costs. There’s a lot of things that need to happen at that time that cost money and time. So if you’d like to get started with a plan designed for your family business, your small business to make sure it makes it to that next generation or to make sure that you’re able to exit without bankrupting the business or without closing those doors.

Check out our website at tier1capital.com. Schedule your free strategy session today. We’d be happy to speak with you about your specific situation. Also on our website, we have a free guide. The six critical questions to ask when doing this type of planning. Just click on the button that says business planning guide under our free resources.

Tim: Thanks for listening to the Control Your Cash podcast. I’m Tim Yurek. Until next time.

Olivia: I’m Olivia Kirk. Have a great day. We’ll talk to you soon.

Olivia: Hello and welcome to The Control Your Cash Podcast. Hi, I’m Olivia Kirk. 

Tim: I’m Tim Yurek.

Olivia: And today we’re going to talk about the importance of controlling your cash as a business owner. When it comes to having a family owned business, cash is king. Not necessarily physical cash, but cash accessibility. 

Because let’s face it, whoever controls your cashflow controls your life and more importantly controls your business. I mean most business owners get into their own business to control their destiny. They’re sick of working for the man and they’d rather call the shots and hold their destiny in their own hands. 

Tim: So the key here is having access to cash. And one of the things that I really enjoy about working with business owners is the fact that we can show them how to get one dollar to do multiple jobs. And by that, I mean, you know, maybe they’re setting up plans to fund their succession plan, or they’re setting up plans to attract, retain, and reward some key employees, or they’re trying to set up an exit strategy.

But along the way, if they’re doing this properly, They’re allowed or they’re able to build cash and by having that access to the cash, they can use it to help grow their business. So they’re getting one dollar to do a succession plan or key person retention, but that same dollar is building up cash that they could access and leverage to grow their business.

One dollar, two jobs. And I got to tell you. That works out so swimmingly well for all the business owners that we’ve dealt with. 

Olivia: Exactly. We recently worked with a business owner. We started policies for key employee purposes. Meaning they cross purchased. One owner bought a policy on the other and vice versa to fund a buyout in the event of one of their deaths so they wanted to have that funding available at the death of whichever partner comes first. And they had no plans on accessing that cash whatsoever throughout the life of the policy. But life happens, things change. The economic environment that was there when they started these policies, let’s say five, five years ago, about six years ago.

Yeah. That it was very different back then versus today where inflation is up. Interest rates are up and cashflow in a lot of situations is coming back down because of the squeeze on the consumer. 

Tim: Yeah. And the irony is when we, as Olivia noted, when we, we originally put the plan into effect, we mentioned to them, Hey, you could also borrow against this cash.

And they said, Oh no, we would never do that. So, okay, well, just keep that in mind because it’s certainly an option for you. Well, now fast forward to August of this year. A couple months ago, and we get a call and, Hey, how much cash is in those policies? And we told them and they said, uh, We need a loan. I said, Oh, okay.

What, what changed? You said you weren’t going to borrow. He goes, well, we bought a truck in July. We did it like we always did. We borrowed against our, on our credit line. And we got our first interest statement and it was 9.5%. How much does it cost to borrow against those life insurance policies?

Well, it was 5.35%. He said, well, we’ll take that loan. But here’s the point because they built up this pile of money Now they have the option to use it. And that’s where the freedom comes in. So in their mind They’re looking at it like okay 5 and 5.35 is lower than 9.5 and I get that part of it, but…

Olivia: That’s just the beginning.

Tim: That’s just the beginning. So he calls me and says, Hey, how do I start paying this loan back? I said, well…

Olivia: Do you want to? 

Tim: When, when do you want to? He goes, What do you mean, when do I want to? I said, Whenever you want to start. This is an unstructured loan. So that means, you decide when, and actually if, you pay the loan back and then you also decide how much and oh, by the way, if you commit to a certain monthly figure and you find out that cashflow is not as good as in the previous months as it is now, you can stop it or reduce it.

And that’s when it’s the light bulb went on for him and he’s like, Whoa, we are in control here, aren’t we? And that’s the point. You know, financing in and of itself isn’t bad as long as you’re in control of the process. And that’s the thing that I think the value that we can bring by utilizing plans that are set up for different purposes.

But now we can leverage the cash, and that provides the freedom.

Olivia: Yeah, exactly. And think about it. By borrowing against the life insurance policy, through these policy loans that are contractually guaranteed in these contracts, it doesn’t impact the net worth of the business. Meaning, whether they pay cash, financed traditionally or financed through a policy loan, the piles of cash are still the same.

They still have the asset worth X amount of dollars and they still have a decrease in cash, a loan from a bank, or a lien against that life insurance policy loan. And let’s just take a step back here and talk about the benefits of borrowing against a life insurance policy. First of all, it’s contractually guaranteed as long as they have cash in that policy, they’re able to access it on a guaranteed basis.

Because the way life insurance policy loans work is unique. In that the life insurance company is actually giving the policy owner a loan from the general account of the life insurance company, not the life insurance policy. The life insurance company then places a lien against the policy owner’s cash value.

Meaning after you borrow, let’s say $150,000, you don’t have access to that $150,000 until it’s repaid. And they charge you interest. So when you’re paying back that loan interest, it’s going towards the insurance company’s profits for the year. But when you use a mutually owned life insurance company, the owners of the company who are going to benefit from the profits that the insurance company makes are actually the policy owners.

So when the life insurance company is making that profit, it goes to the dividends. It’s passed along to the policy owners in the form of tax free dividends. Meaning when the insurance company does well, the policy owner does well. Additionally, with a non-direct recognition company, the performance of that policy isn’t going to be impacted when you take a policy loan, meaning your dividends, your growth within your policy is going to be exactly the same, whether or not there’s a loan against that policy.

The only consideration that needs to be taken into account. Is that loan interest, that’s the only cost that the policy owner is incurring on this loan. 

Tim: Yeah, and I think the thing that people miss or the point that a lot of folks miss is the fact that we finance everything we buy. So whether you finance through a bank or you finance through a life insurance company or you pay cash. Every one of those choices has a cost.

And it just, it really becomes an issue of where are you giving up the least amount of money. And I have yet to see a situation where people were not better off borrowing against their life insurance versus any other form of finance. 

Olivia: Exactly. 

Tim: And, and, and that’s, that’s purely from a numbers perspective.

But, the hidden value when you’re borrowing against a life insurance company is the fact that you’re in control. You’re in control of the repayment process. You’re in control of the borrowing process. You’re in control of everything. And because of that, that’s the key for business owners. Most business owners, again, started their business because they want to control their own destiny.

But yet the bank owns them. Now, when we can cut the bank out and put them in control. Oh, my God. That’s a game changer. 

Olivia: Exactly. 

Olivia: I mean, how many business owners have we worked with where, by simply extending the amortization schedule of their existing loans and stop, you know, giving away every single dollar we make to the bank.

Think about the impact that would have on your business if, let’s say, you were able to cut your monthly obligations in half. And instead put that other fifty percent towards an asset that you own and control and could still leverage against without impacting the growth on that asset. 

Tim: Yeah. And that’s a really neat technique.

So a lot of times what we’ll do is we’ll actually do that. We’ll extend the amortization schedule to free up cashflow and use the cashflow to fund a succession plan or a key person retention plan or an exit strategy. And now again, we have that money building up. Now we can utilize that money to ultimately go back and pay off that loan.

So now instead of taking, let’s say half of the loan and using that to build an asset, now you’re taking a hundred percent of the loan monthly loan payment and using that to build up and replenish what you borrowed and that really, again, puts the business in a much stronger position. And let’s face it, you know, the way things are shaking out, businesses are being squeezed from so many different directions.

Interest rates are up. Inflation is up. There’s turnover over on their, their workforce. You know, the great resignation. That’s a thing. That’s, you know, four million people every month left their jobs. 

Olivia: Willingly. 

Tim: Willingly. And then, again, now, just to underscore, businesses are dealing with the twin challenges of high interest rates and high inflation.

It costs more for inventory and supplies. It costs more to hire new people. And It’s costing more to borrow to capitalize your business, but boy, isn’t it great if you can be in control of that borrowing process? That, that’s just a game changer. 

Olivia: Yeah, and we say it all the time, whoever controls your cash flow controls your life.

And with our client who recently took that loan to finance the truck, they’re going to wait until their busy season when their cash flow is flush. To knock down that policy loan and the key difference between traditional financing and financing with the policy loan is once they start chunking away at that policy loan. They’re gonna have access to that hundred and fifty thousand dollars that they borrowed again, so that when the next thing comes up, they’re able to rinse and repeat they’re able to finance again using those same dollars.

Tim: Yeah, and, and that’s, that’s key because every payment you make on the loan reduces the outstanding loan balance, but increases the amount of equity you’re eligible to take next month.

Olivia: Exactly. 

Tim: Or whenever, whenever that time period is, you know, whenever you want to take another loan, you know, and that was another thing that he had asked me, he said, well, Is there any limit to how many loans I could take? No, you could take a loan every month as long as there’s, or every day. As long as there’s equity to borrow against, you have the, the contractual right to borrow it.

Olivia: Exactly. And that’s, that’s, I mean, what more could you ask for as a business owner? Access to cash when you need it, plus, you’re able to accomplish other planning goals, whether it be business succession, key person planning, employee retention. Or any of the other things that we deal with that we have to deal with as business owners.

And that are a lot of times avoided because of the complexities of this type of planning. And not only that, but the cashflow that goes into this planning, you know, there’s a price tag to solving these problems, but by looking at the business overall, looking at the cashflow, looking at the debt, seeing where we’re able to free up the cashflow, you’re able to keep the cashflow the same.

Or close to the same, have minimal impact on it, because whoever controls the cash controls your life, you need cash flow, it’s the lifeblood of any business. So we want to make sure that we’re achieving these goals without pinching the cash flow, because at the end of the day, you need the cash flow, you know, and you need to accomplish these planning goals, because the longer you push it off, a lot of times the more expensive it becomes. 

Tim: You know, and one of the other things that, You know, MetLife did a survey and found that over sixty percent of business owners think that a recession is right around the corner. And if that’s the case, having access to cash is going to be the key because the first thing that’s going to dry up and it’s the first thing that dried up during the 2008 financial crisis was access to capital.

That’s when banks started calling in their credit lines and, uh, whether it was a home equity line or a business line, they closed out those lines. Now, just when things are getting tough and you need to access money more than ever, now the bank is pulling the rug out from underneath you. You know, there’s a saying that a banker is somebody that’ll sell you an umbrella when it’s sunny and take it back when it starts to rain. 

Olivia: That’s the perfect example of that. And, and as the business owner, you have to think about it from the consumer’s perspective as well, because interest rates increasing, inflation increasing, and a lot of the employees, most of the employees out there aren’t increasing their income to keep up with these increasing costs. We see that in the increase in consumer debt that’s going up quarter after quarter and is actually at an all time high all across America. They’re not decreasing their, their lifestyle. They’re not able to, in a lot of cases, they’re keeping up with their lifestyle, but the cost of that lifestyle is increasing month after month after month.

Even if the Fed is saying that, you know, inflation is at 2%, they’re not counting the things that really matter that are actually impacting us as Americans. And that’s going to be felt by the consumer as well as the business owner. 

Tim: Yeah, everything is going to certainly pass down to the consumer, right? So when the things dry up for the consumer, they start buying less.

And when they stop buying less, that affects the business. So again, having access to cash. Not only can position you to be in control, but also can position you to not be a victim of a recession, and actually put you in a position to take advantage of the recession, where now if you have access to cash, maybe you can go and buy somebody, buy some inventory from a competitor who’s going out of business.

And guess what? You’re going to buy that inventory for pennies on the dollar.

Olivia: Yeah, yeah. I mean, I, I believe more millionaires are made during recessions than any other time. And it’s not for lack of preparation. Those who have cash are going to be able to take advantage of the opportunities when they arise.

When the stuff hits the fan instead of being a victim of this recession. And the key is to have access to cash, to be in the position where you’re able to take advantage of the opportunities rather than being a victim of the external world.

Tim: Yeah. And that just, you know, being in control, having access to capital puts you in control.

And when you’re in control. Now, you’re in a position where you can start taking advantage of opportunities, and boy, there is no small price tag you could put on the freedom that that creates.

Olivia: Exactly. If you’re a business owner and you’re worried about the recession and you’re ready to become an opportunist in this next recession instead of a victim of it.

Be sure to check out our website at tier1capital.com to schedule your free strategy session today. We’d be happy to go over your specific situation and talk about how to position you to take advantage.

Tim: Thanks for joining us. We look forward to seeing you again. 

Olivia: ​ Hello, and welcome to The Control Your Cash Podcast. I’m your host, Olivia Kirk.

Tim: And I’m Tim Yurek.

Olivia: Today, we’re going to talk about why it’s not what you buy, it’s how you pay for it. That really matters. Um, Tim, tell us a little bit about, about this concept and how, how we came, came about it and why it’s so important in people’s lives.

Tim: Well, you know, it’s interesting because let’s face it, everybody thinks they’re using their money in the most efficient and most effective way because they’re following conventional wisdom. But what they don’t realize, and what I didn’t realize is that, you know, we’ve been trained by the financial institutions, by the government, by the large corporations we’re dealing with.

To use money in a way that benefits them. And, more importantly, it’s to our detriment. So, as I started realizing this, I figured that, you know, maybe it’s not what you buy. Maybe it’s how you pay for it that is holding you back from reaching your full financial potential. So that’s pretty much how I, how I sort of discovered this by accident.

Olivia: Yeah, absolutely. And, and it’s so true that everything we buy is financed, whether we pay cash or finance traditionally through a credit card or bank. Um, but what people tend to forget and don’t realize is that our cash has a cost as in, if we spend down that cash, that account balance, whether it be draining an investment account, draining our savings account, whatever it is.

We’re giving up opportunity cost on that money and that opportunity cost also compounds, right? So we have, you know, the interest we could be earning on our money now, but also the money, the interest that we could be earning on that money in the long term. And that’s money that we could never recapture.

So, you know. If you have a major capital purchase to make and you have the money in your bank account, how tempting is it to just drain down that bank account to avoid the finance costs? But what people don’t realize, and it’s easy not to realize because there’s no price or no interest necessarily on our savings account.

So you don’t see the interest that you don’t earn.

Tim: Yeah, and that’s one of our, one of the things we always tell people is you’ll never see the interest you don’t earn. And It’s funny because everybody obsesses over the interest they’re going to pay on a loan, whether it’s a car loan or a mortgage. You know, a lot of times when you see the HUD sheet and you get when you’re buying a house and you’re like, Oh, I’m buying a $200,000 house and I’m going to pay $435,000 in interest.

I’m paying more in interest than the value of the house. Well, yeah, that’s true, but the answer isn’t to pay cash because if you paid cash for a $200,000 house, you probably would be out $600,000. total, which would be like $400,000 of interest that you could have earned. So, you know, you have to look at the numbers.

And I think that’s really the point. Again, it’s not what you buy, it’s how you pay for it.

Olivia: Yeah. And the numbers, the numbers are, are actually pretty tricky once you look at them because, um, the banks know how the numbers work. That’s their job. That’s how money. But every…

Tim: That’s their, that’s their business,

Olivia: Yeah, yeah, absolutely. And you don’t logically in the human mind, you don’t think, oh, if I have money sitting in account earning 4% and the bank wants to charge me 6%, obviously, like, I’m not earning as much money on on this, this pool of money.

So I’m going to drain it down to avoid that 2% extra interest that they’re charging me. But there’s a big difference between compounding interest, growing money on a large balance, a growing balance versus amortized interest where we’re paying interest on a decreasing balance.

Tim: Yeah. And so that concept of the difference between amortized interest versus compounded interest is bedrock in the foundation of what the banking industry is all about. And it’s something if we, if you don’t fully understand the implications of amortized versus compounded interest. You’re probably going to be making some bad choices only because your fear is that you’ll be paying interest.

And, you know, uh, we joke, but, you know, it’s sort of like a caveman. Uh, you know, compound interest, good, amortized interest, bad, you know, and it’s not that way, uh, but anyway, you know, again, that’s something that once you understand this concept, the decisions you’re able to make, you’re going to make them with much greater clarity.

And you’re going to make much better decisions. You’re going to position yourself, your family, or your business to take advantage of whatever the economy or the government or the financial institutions throw at us. Which I think is a good segue into some of the data that we pulled up, uh, doing some research recently.

So think about this. Americans are being squeezed from every direction. Inflation is up. Savings is down. Our access to cash or capital is running out. And what we’re seeing are some really troubling trends. First and foremost, that consumer debt, according to the New York Fed Q4 household credit report, was up over 16.9 trillion dollars which was up 2.4% from Q3 of 2022. That’s a, that was a record. Credit card balances reached over 986 billion dollars in Q4, that was up, get this, 6.6% from Q3 of 2022. Now, the Q2 report came out for 2023, credit card balances in America are over 1 trillion dollars. This was the highest quarterly growth ever.

So let’s face it. Things are getting bad and it looks like it’s probably going to get worse. Now, on top of all of that, according to a MetLife survey, uh, of small business owners, 50% of small business owners. see inflation as the greatest challenge. And that was up 31 points over 2021. But worse than that, a whopping 71% of small business owners think that the worst is yet to come as it relates to inflation.

So, you know, they’re, they’re saying the government’s saying “Oh, inflation’s down. We’re, we’re taming inflation”. Yeah. I don’t know about that.

Olivia: It certainly doesn’t feel like it. 

Tim: Right, you know, every time you go to the grocery store, every time you fill up your, your, uh, gas tank, uh, you know, the cost of college, the cost of housing, everything is almost out of reach.

Tim: Now, Olivia, I think you had some interesting information about this, uh, pending United Auto Workers strike and what effect that’s going to have.

Olivia: So, so today is November. I’m sorry, September 15th, 2023. And I believe at midnight last night, the, um, the auto workers, the auto workers are going on strike and. There’s such detrimental effects that are going to come downstream to the consumers, ultimately, um, in the form of lost jobs all costs all across the country in the form of we’re not only affecting the three car companies that are going on strike, but also, um, all of the other people in the supply chain, whether it be parts, whether it be, um, you know, the people who make the radios for the, for the car companies, this, this strike could have. The effect of hundreds of billions of dollars and just a short time on the American economy. And that’s not to mention that the student loans are coming out of forbearance.

I think that’s going to have a huge effect on our economy, right? Because, you know, all the millennials, if they stopped paying, and majority of them did stop paying back their student loans. It was like we got a raise, you know, um, because that cashflow is no longer coming out of our pocket to go towards student loans every single month.

Instead, it’s going towards our lifestyle. You know, we bought new cars, we bought new houses. Um, we bought whatever we want. We have an increase in cashflow. We got a raise in essence. And, our cash flow is about to be pinched, right? On top of inflation and on top of rising interest rates, on top of the cost of housing and gas and food going up.

Now we have to start paying a large chunk of our paycheck back towards the student loans that we put off for three years now. That’s going to hurt because we all know that our incomes aren’t necessarily, rising enough to even keep up with inflation, add on the credit card debt that we just mentioned is on the rise, right?

Because the cost of living, it’s really a compound and snowball effect that this is having on our cashflow. And that’s why it makes so much sense to make that cashflow as efficient as possible. And it’s more important to do that now than ever.

Tim: Yeah, that’s such a good point, right? So just getting all of that data and looking at it, what does it mean? Okay. So because think about it, they’re reporting that, hey, the economy is healthy, its getting stronger, we’re having all this record growth. Well, where’s the money coming from? Right? So now you got to sort of dig deeper and and read between the lines and and read the tea leaves and, and what’s going on there?

Well, yeah, people are using the money that they were paying towards college debt. Now they’re using that for their lifestyle. And the old saying stands true, a luxury once enjoyed becomes a necessity. So now, when student loans start, start up again in a few months, or actually it’s in November, right? So, you know, a little over a month. Wow, that’s going to be a pinch. That’s why credit card debt is up. People are, you know, the economy might be growing, but where’s the money coming from? Well, it’s coming from credit cards. So, you know, continuing with some of the data, 66% of Americans worry that a recession is right around the corner.

That’s up 48% from a little over a year ago. Now, how does this whole thing manifest, right? It manifests, and it affects, it causes stress. And stress affects our health. It affects our relationships. So the incidence of heart attack, stroke, cancer, kidney disease, depression, suicide, every, all these markers are up in, in, on top of that, what is it doing to our relationships?

What is it doing to it’s the incidence of divorces up. Um, what is it doing to our ability to do our jobs and our ability to run our businesses? So every, you know, every splash out there has a ripple. And again, Olivia, as you had said earlier, that’s why it’s more important than ever to make sure that you’re using your money properly.

We’re not saying don’t make the purchase. What we’re saying is make the purchase in the way that’s most advantageous to you. And that will give you more control. And again, we feel so out of control in so many aspects of our lives. This will give us some, a little control in an area that quite frankly is probably one of the most important areas because financial, if you’re out of control in your finances, that causes stress and worry, and that creates issues in every other aspect of our lives.

Olivia: That’s absolutely true. You know, when you’re, when you’re stressed about money, it’s so easy to lose sleep, right? And sleep is so important for the entire, the entire system, mind, body and soul, and your ability to work effectively and efficiently and to make an impact with your kids and your community.

And, you know, if if you’re worried about money and working harder, that takes away time from spending it with your family. It takes away time from contributing to your community. It impacts so much with just this one area of your life. So it’s so important that we keep it balanced and the way that we talk about doing that is by being in control of your cash flow, you know, giving away as little of your cash flow on a monthly basis as possible and regaining control of that finance function wherever possible, because with that, then you’re calling the shots.

Not a financial institution, not the government, not, you know, Citibank or Visa. These, these principles can also have a ripple effect in the opposite way. By controlling your cash flow, by making your cash flow more efficient, you could live a more worry free life because you’re calling the shots.

Tim: Yeah, that’s so important. And you know, that’s one of our key, key themes with where, how we help our clients most is in re, regaining control of their money. And so how does this happen? Right? And I think, you know, think of what we’re up against as individuals. We’re up against the marketing machines that are financial institutions, the propaganda machines of the government, large corporations.

They’re conditioning us to accept as normal, things that really aren’t normal, things that are advancing their interests and basically holding us back again to our detriment. So we can’t get ahead financially. How many people do we talk to on a weekly basis that are saying, you know, I’m making good money, but I just don’t feel like I’m getting ahead.

They’re all financially stuck and it’s so easy to get into that when you’re following all of this conventional wisdom and doing it the way that everybody else is doing it. And that’s where I realized back in 1993, I was doing very well and, and I was stuck. I was, I was living pay to pay. And how many people, I mean.

You know, Olivia, we, we had that one client. He was a surgeon, is a surgeon, making $800,000 a year, and he couldn’t take his family on a vacation to Disney without putting it on credit cards and paying it off over a three or four year period. Now, come on. It’s not the amount of money he was making that was holding him back.

It couldn’t be.

Olivia: Yeah.

Tim: It clearly was how he was using his money.

Olivia: Yeah. I was just thinking while you were talking, one of my favorite parts about, you know, what we do is that we’re able to help, um, the whole spectrum. It’s not just the people who, who are making exorbitant amounts of money. We could make cash flow more efficient for anyone, you know, whether they’re earning $40,000 a year or $800,000 a year.

But the key is a lot of people think and have the belief that I could out earn my problems. If I just earn more income, make more sales, get a better job, my problems are going to go away and I’ll be financially free. But we know from experience with people on every, every scale of the spectrum that if you don’t make your cash flow more efficient, those problems are going to continue to grow and compound as your income does.

It just makes the problem bigger if you’re not addressing the leaky holes in your bucket, we call them. You know, um, we liken it to a bucket with holes in it. There’s two ways to fill it up. Number one is to turn up the faucet. And number two is to plug the holes and then even if there’s just a drip, that bucket’s going to fill up.

And we know this very simply from when we have a leak in the house. If you have a leak in the house, that bucket fills up pretty fast. Doesn’t it?

Tim: That’s an inside joke, but, uh, tell them about it, Liv.

Olivia: You tell them about it.

Tim: Well, I guess, I guess their tenant left the hose on…

Olivia: Oh, my goodness. So we have a. We have a double block and the tenant left the hose on our usage quadrupled in one month and like, what the heck is going on? But it was just on very low for a long time. And it really makes an impact.

Tim: Yeah. So that’s the point. And you make a good point. Entrepreneurs, business people, sales people, we all think that we could earn our way out of anything. There’s, there’s no problem that we have that can’t be solved by the next sale, or the next, you know, bunch of sales, or the next large sale and we’re always, you know, everything’s on the come, but the problem is, okay, let’s say those, those sales come, come about and, and that you realize that you get this big sale and you have this big commission or this, you know, large amount of revenue coming into your business. If you don’t plug the holes in the leaky bucket, you’re going to go back to using the money in the way that you’ve been trained to use it, again to your detriment, and then eventually you’re going to be back to square one again. And what you’re doing is you’re losing time in this process. And that’s our most valuable asset.

Olivia: Yeah, let’s, let’s give an example of that. So one of, one of the biggest, I’ll call it mistakes that business owners are making and an easy way to adjust the cash flow is looking at your debt, your business debt, the amount of money that’s going out to creditors to lenders every single month, right? Because we all know we all think I should say that debt is bad and that it’s not good to be in debt because of that control factor, right?

When you’re in debt, you’re out of control of your cash flow. So as those sales come in, it’s natural to want to pay off those debt as soon as possible, you know, get the shortest amortization schedule possible, um, put extra money towards those payments. But when we do that, what’s actually happening, it happening is we’re decreasing the amount of cash flow that we have going forward.

We’re giving it all away to the control of the banks and the creditors. And then we’re left with a little piece. We don’t pay ourselves first. We don’t build a pool of cash for ourselves along the way. So that. We’re totally dependent. It’s backwards, but we’re totally dependent on the banks and creditors.

The next time we need to make a purchase the next time we need access to money because we don’t take this first step of creating a pool of money that we own and control and could leverage against in the first place.

Tim: Yeah, so if you don’t, if we don’t create our own pool of capital, we have to use somebody else’s. So that’s one of the, one of the things we see so often is business owners, they’re in a race. I always call it. They’re in a race to get out of debt so they can get back into debt. So, right? So they go from a situation where they have debt and they want to get out of it.

So they pay that debt down as quickly as possible, ignoring the idea of saving or creating their own pool of capital. And then, because they don’t have all their money, then because all their money went to the bank to pay that debt, another opportunity comes along, or an emergency, a piece of equipment breaks down, or an opportunity comes where you could buy a business or some, you know, some accounts and then all of a sudden you need capital. Well, you don’t have any capital. So what do you do? You go hat in hand back to the bank. And what does the bank say? Okay, no problem. You’re a good payer. We’ll, we’ll gladly give you this loan. And then here’s the question. Whose money are they giving you?

If you went back to the same bank. They’re giving you back your own darn money and they’re charging you interest and fees and you got to qualify to get it. Well, why don’t you just cut out the middleman, create your own pool of capital, and then you’re in control. Now you can loan it at your discretion, back to yourself or your business and pay it back at your, at your discretion, back to yourself.

From yourself and from your business. So, you know, these are some of the principles that we teach. But again, the foundation here is what? It’s not what you buy, it’s how you pay for it that matters.

Olivia: Yeah, and another thing that another scenario that could happen there is because you’re at the mercy of the bank for access to that money. If your credit isn’t, not in tip top shape. And especially now that the banks are squeezing, they’re not, they’re not loaning out as much, there’s a good chance that you may not qualify for money.

And then what, you know, you gave the bank all of your money, paying off that debt as quickly as possible. And now they’re saying, we’re not going to give you any more money. Um, and then you’re kind of really stuck because you’re not able to grow and expand and continued on your financial journey in the way that you want it to.

And that’s not a good situation either.

Tim: And this is, this is the reason why you want to create your own pool of capital. So you don’t have to jump through anybody else’s hoops to get to your money. Because think about this, when the economy slows down, if the economy slows down, what have you, what’s going to be the first thing that dries up for a business owner?

What’s going to be the first thing that dries up for an individual? Isn’t it going to be your access to banks, capital, or to money? And we’re seeing that now, right? Interest rates are rising. So it’s going to cost more to buy a house. And now you have to, you have to either buy less of a house or not qualify for a loan.

So all of a sudden your choices are going, are narrowing. But again, think about it. If you had your own pool of capital, you don’t have to play by the bank’s rules. Now you’re in control. You can go to the seller who, let’s say you’re, you’re looking at buying a house. You can go to the seller and say, Hey, you know, 250.

I can give you 225 cash, take it or leave it. And if, again, you have to be willing to walk away from that deal. But if that’s the case, now you, you let, let them make the decision as to whether or not they want to accept your offer. And again, if you’re willing to walk away from the deal, who’s in control, you or them?

Well, obviously it’s you. 

Olivia: Yes, absolutely. And those things that we believe are moving us forward financially are actually designed to move financial institutions and the government ahead financially because they have a lively head to think about as well. They have a bottom line. But if you’re ready to increase your bottom line and increase cash flow, you’re, for your family and your business. Be sure to check out our website at tier1capital.com. You could schedule your free strategy session today. We’d be happy to speak with you one on one about how we could make your cashflow more efficient, how we can move your family, your business forward financially, not just now, but for generations to come.

Thank you so much for joining us today on The Control Your Cash Podcast. We look forward to seeing you in our next episode. Be sure to subscribe wherever you listen to your podcasts. We’ll see you next time.