Credit cards could be a great financial tool if used properly. They give you instant access to capital and if you pay them off before the credit card due date, you don’t have to pay any interest. Unfortunately, some people get into a situation where they’re carrying a small or large amount of credit card debt that could really weigh down their ability to succeed financially.
Additionally, participating in a tax qualified retirement plan like a 401k or an IRA is a good idea as well. However, what happens when you combine having credit card debt with your participation in a tax qualified retirement plan?
Sometimes people come to us and say, Where do I get started? Do I pay off my credit card debt? Or my student loans? Or do I start saving first? And to that question, we answer, “What if you could do both?”
Credit card interest rates could go anywhere from 18 to 30% these days with an interest that high carrying any credit card balance could become stifling because of the amount of interest being charged each and every single month.
When you combine high interest rate credit card balances with your participation in a retirement plan such as a 401k, that creates a double whammy where you’re saving money in an area that you can’t access. And along the way, you’re paying a hefty interest rate just to get out of debt.
A lot of times people who are carrying a credit card balance and contributing to their retirement plan can feel stuck and suffocated financially because they have no access to cash flow. Hundreds of dollars every month are going towards credit card interest, and hundreds of dollars a month are going towards an area where they don’t have access to that money.
So where does that leave them as far as their short term financial goals? The strategy of where you’re saving your money and the strategy of how you’re using your money need to be coordinated to give you the best results.
Typically, if someone comes into our office and says, “Hey, I’m carrying this heavy credit card balance and I’m contributing to my retirement plan every paycheck”, the advice we might give them is to pause on the retirement until we could get a hold and a handle on this credit card debt, because, like I said, that interest rate can be stifling on your ability to save for your future.
And a lot of times when we see people in that situation, we’ll ask them, how long have they been doing this? And they’ll look and say, “Well, we’ve been doing this for a long time. It seems like forever.”
Well, that situation keeps perpetuating itself. Because what happens is sometimes you start getting that credit card balance paid down, but then you run into a financial or a medical emergency, and that means you’ve got to put more money on a credit card because you don’t have access to any of your money. Why? Because all of your savings is in your retirement account. Again, try to coordinate, where you’re saving your money and how you’re using your money, can give you tremendous results on the back end.
Every situation is different. A heavy credit card balance for some people may be a few thousand dollars. In some extreme cases we’ve seen people with over $100,000 of consumer debt that they’re carrying each and every single month.
But with great debt and great cash flow comes a great opportunity. With some simple shifts, you may be able to get out from underneath that credit card debt by building your own pool of cash that you have access to to start chipping away at the debts one by one.
The ultimate goal is to put you in control of all of that cash flow that you were using to get out of debt or to pay on your credit card. Imagine the impact it would have if you had control of every single dollar that you’re currently putting toward your credit card debt.
Imagine what goals you’d be able to accomplish, like putting a down payment on the house, starting a new business, paying for your car, or simply retiring one day.
This is a simple concept. If you step back, literally what we’re doing is converting liabilities into assets. Any time you can convert a liability into an asset, you win.
The mechanism of this strategy is redirecting excess debt payments from the credit card company and putting it in a specially designed whole life insurance policy designed for cash accumulation so that you could build a pool of cash that you have access to that you own and control.
As you build up that pool of cash, you’re able to borrow against the cash value within the policy and start knocking away at the credit card debt so that you slowly begin to earn more and more control of your cash flow. As you pay off those credit card debt, you redirect those payments to your policy loan so that you’re building your policy with your premiums as well as the loan repayments, and you’re able to pay off debts quicker and quicker down the line.
There are two huge advantages to this. Usually you’re paying a much lower interest rate to the insurance company. Currently, those rates are about five, five and a half, maybe 6% on the high side versus paying 18 to 25 or 30% on a credit card. So clearly you win there.
A second benefit is that as you’re paying back the policy loan, you get to use that money again to pay off another credit card and therefore have more cash flow redirected back to the policy that you are in control. And slowly but surely, you’ll have all of your debt payments coming into your policy and you own and control the policy. Therefore, again, converting liabilities into assets.
The most important step is the first one. If you’d like to get started and learn more about how we could put this process to work for your specific situation. Visit our website at Tier1Capital.com. Feel free to schedule your free strategy session today. We’d love to talk to you.
Or if you’d like to learn more about 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.