When discussing whole life insurance with a mutually owned life insurance company, dividends naturally come into the conversation. You might wonder, what exactly is a dividend and how do life insurance dividends differ from investment dividends? That’s exactly what we are going to cover today.
There are some key distinctions between life insurance dividends and investment dividends. An investment dividend is a distribution of profits from a company to its shareholders, and these dividends are taxable. However, life insurance dividends are a return of overpaid premiums and are not taxable. This is a crucial distinction.
One reason we always talk about paying income tax on the premiums is that you never want to take a deduction for your life insurance premium, even if it is for business purposes. Doing so could lead to your death benefit—the large sum of money that goes to the beneficiary—becoming taxable. It’s vital to ensure that everything is aligned properly to get the most out of life insurance.
The premiums you pay are small contributions towards the huge death benefit. If the premiums are deductible, the death benefit becomes taxable, and you don’t want that. By paying premiums with after-tax dollars, you maintain the tax advantages of the death benefit. Dividends, on the other hand, are used to enhance your policy’s cash value growth. Although dividends are technically a refund of overpaid premiums, they can be seen as profits because if you have a policy with a mutual insurance company, you essentially become an owner of the company.
With whole life insurance, policies are designed by actuaries, who typically overestimate the amount needed, which is why dividends are built into the policy. When you see an illustration, you’ll notice two sets of numbers—the guaranteed figures representing the worst-case scenario (if no dividends were ever paid) and another set based on the current dividend rate, showing how the policy could perform if dividends are paid consistently over time.
Reinvesting dividends into the policy by purchasing paid-up additions is a smart strategy. This allows you to earn interest on the dividends, which in turn increases future dividends. Over time, this compounding effect builds long-term value, with dividends being smaller in the early years and much larger in the later years.
Life insurance companies make two promises with a whole life policy. First, to pay out the death benefit when the insured dies, and second, to have the cash value equal to the death benefit by the policy’s maturity, which is usually age 121. As the policy matures, the cash value grows exponentially. If you add dividends into the mix, this process accelerates, making the policy more efficient over time.
One key thing to remember is that dividends are not guaranteed. When you get your policy illustration, the figures showing the dividends are based on the current rate, which is subject to change. However, once a dividend is earned, it’s yours—there is no risk of losing that dividend or the associated cash value, even if no future dividends are paid.
Although dividends aren’t guaranteed, many mutual insurance companies have been paying dividends for over 125 consecutive years, even through significant events like world wars, depressions, and economic downturns. While the dividend projections may not always be met, companies generally do pay something.
As the owner of the policy, you have the contractual right to choose how your dividends are allocated. You can use them to reduce premiums, take them as cash, or purchase paid-up additions.
If you’d like to learn more about how to apply this process to your business, family, or personal finances, visit our website at tier1capital.com. We’d love to speak with you in a free strategy session.
Remember, it’s not how much money you make; it’s how much money you keep that really matters.
When you own your own business, it’s common to want to expand that business as quickly as possible. Business owners often reinvest their profits into inventory or expanding the business in any way possible because hypothetically, the more money they put in, the more they can get out. It contributes to financial freedom. Today, we’re discussing how to make that cash flow as efficient as possible because, ultimately, every purchase we make is financed.
Keep this in mind: cash flow is the lifeblood of any business. According to our research, 61% of small business owners around the world struggle with chronic or cyclical cash flow issues. What we’ve found is that most of these cash flow issues are self-inflicted. It’s how business owners manage their money that holds them back.
Here’s the key: we finance everything we buy, whether it’s inventory, equipment, or even employees. We’re either going to borrow money and pay interest, or we’ll pay cash and give up interest that we could have earned.
Most people try to avoid paying interest because they see it as a loss. However, they often overlook the interest they’re giving up by paying cash. This causes a mistake when business owners pay cash for things they could otherwise finance. The same goes for paying off debt too quickly—this practice sacrifices cash flow and control at every turn.
What happens when business owners give away their cash flow by paying off debt or paying cash for things is they eventually find themselves needing to borrow money down the road. Why? Because they gave away their profits and now have no capital reserve to access when necessary.
This leads to what we call the “debt cycle.” Chronic and cyclical cash flow issues arise when businesses give away control of their cash flow, leaving them without a financial safety net when problems arise.
A cash flow issue is simply a symptom, not the root problem. Most people approach it by either reducing expenses or increasing revenue, but both come with costs. For example, reducing marketing expenses can lead to a dip in revenue. However, cash flow issues really stem from not understanding the bigger financing picture.
If businesses manage financing more efficiently, they gain better control over their cash flow. That’s the goal: more control over your cash flow and assets.
In our practice, we examine every financial decision through the lens of control. Does this decision give you more control over your cash flow and assets, or less? The goal is to have as much control as possible because control leads to freedom and opportunity.
When you have options, you can choose to borrow from yourself, from the bank, or pay cash. But it’s critical to make these decisions in the most efficient way possible—where you are in the greatest control of cash flow and assets.
Conventional financing methods send the velocity of your money away from you, your business, and your family. The money flows outward, and you lose control of it. However, with our process, we start taking back control of some of that money’s velocity, keeping it in an entity you own and control. This allows you to leverage and reuse that money in the future.
You’re still making the same purchases and investments in your business, but now you control the process, ensuring that some of the cash flow returns to you. As a result, the next time an opportunity arises, you have a pool of money to draw from, ensuring that your cash flow is constantly circulating back to you.
The key is that you’re still making purchases, but now the money flow comes back to you, putting you in complete control. It’s a huge difference.
When people think about life insurance, they often focus on the death benefit. But whole life insurance, especially designed for cash value accumulation, offers much more. It helps build wealth in the present, grows for the future, and ultimately creates a lasting legacy. One powerful tool in this process is dividends.
Dividends are a portion of the profits that mutually owned life insurance companies return to policyholders. If you own a policy with a mutual insurance company, you are essentially part-owner. The company’s profits come back to you as dividends, which are a return of overpaid premiums and are not taxable. If you reinvest these dividends into paid-up life insurance, your cash value compounds, growing even more over time.
Whole life insurance policies come with two guarantees: a death benefit and cash value that matches the death benefit by the policy’s maturity (usually at age 100 or 121). Insurance companies have to stash away more cash each year, so your policy naturally becomes more efficient, accumulating cash over time. You have access to this growing cash while still alive, a portion of the death benefit that you can use.
For policyholders with a mutual insurance company, dividends are an added advantage. These profits, combined with guaranteed growth, boost your policy’s efficiency. As long as the money stays in the policy, it grows tax-free, and you can access it via policy loans without interrupting the policy’s growth.
Insurance companies generate profits in three areas: mortality savings (fewer policyholders dying than expected), expense savings (overestimating operating costs), and interest earnings (earning more on investments than estimated). All these factors contribute to the dividend pool. Focusing solely on the dividend interest rate can be misleading—it’s just one part of the equation.
Reinvesting dividends creates perfect compounding. Your dividends generate more dividends, fueling continuous growth. You can access the growing cash value for retirement income, investments, or other needs, all while maintaining the policy’s growth. Additionally, your death benefit increases, allowing you to leave a larger legacy for your family, charity, or business, all tax-free.
Whole life insurance is a flexible, powerful tool for building wealth and securing your future. It grows a pool of cash you can use and leaves a tax-free legacy for your loved ones. If you’d like to explore how this can work for you, feel free to schedule a free strategy session at Tier 1 Capital. We’d be happy to help you take control of your financial future.
Remember, it’s not how much money you make, it’s how much you keep that really matter.
When we think about financial assets, we often categorize them into three types: current assets, accumulation assets for the future, and legacy assets for passing on wealth. However, whole life insurance, specifically designed for cash value accumulation, can function as all three—current, accumulation, and legacy—simultaneously.
As a current asset, the cash value of your whole life insurance policy can be accessed at any time. You can borrow against it to pay off debt, invest in opportunities, grow your business, or handle immediate needs. This makes it a flexible financial tool that allows you to address today’s issues while keeping your long-term goals in mind. Unlike a traditional savings account, where you may lose out on interest when you withdraw funds, whole life insurance allows your money to continue earning uninterrupted compound interest while you borrow against it. Plus, it offers additional benefits like protection through a guaranteed death benefit.
As an accumulation asset, whole life insurance also serves as a long-term strategy for building wealth. Over time, your monthly or annual premiums accumulate in value, and the dividends and interest earned inside the policy grow your cash value. This provides a reliable way to supplement your retirement income on a tax-favored basis. You can withdraw the amount you’ve paid in premiums tax-free and borrow against the accumulated interest without triggering taxes. This setup helps avoid common tax liabilities that erode retirement income, such as federal and state income tax, Social Security offset taxes, and increased Medicare premiums.
Finally, whole life insurance acts as a legacy asset. When you pass away, the death benefit provides a significant sum to your beneficiaries—whether it be family, a business, or a charitable organization. This explosion of value far exceeds the amount paid in premiums and helps recapture the interest paid over the years through policy loans. In essence, whole life insurance allows you to make your money work in three different ways: as a current asset, a deferred asset for future use, and a legacy asset for your loved ones.
Incorporating whole life insurance into your financial strategy offers unmatched efficiency and control. If you’d like to learn more about how to use this strategy for your unique situation, visit our website at tier1capital.com and schedule a free strategy session.
Remember, it’s not how much money you make—it’s how much you keep that truly matters.
In today’s financial climate, many people feel the pinch as inflation reaches unprecedented levels, while salaries fail to keep up. It’s becoming increasingly difficult to manage your finances, especially after experiencing a period of “lifestyle inflation“—where spending habits increased during a time of economic boom, only to be met with the harsh reality of rising costs. This post aims to offer some relief and guidance on how to regain control of your finances amidst these challenges.
Inflation has surged by 18.6% over the past three years, while savings have plummeted by 37%. This stark contrast highlights the financial strain many are experiencing. The double whammy of dealing with both rising living costs and credit card debt, combined with contributions to retirement accounts, has left many feeling trapped. This scenario creates what we call a “double death”—a situation where your money is locked away in retirement accounts, making it inaccessible when you need it most, and at the same time, high-interest credit card debt eats into your cash flow.
Credit card debt in America is at an all-time high. The cost of living is forcing many to rely on credit just to get by, leading to a vicious cycle of debt that seems impossible to escape. Credit card interest rates can range from 20% to 35%, which means a significant portion of your payments goes toward interest rather than reducing the principal balance. This system is designed to keep you in debt, obligating your future income for purchases made today at a steep cost.
What we propose is a shift in mindset—regaining control of your cash flow and, ultimately, your life. Being heavily in debt means you’re not in control, and this financial stress can affect every aspect of your life, including your sleep. Studies show that a significant percentage of small business owners worldwide lose sleep over cash flow concerns, underscoring the pervasive nature of this issue.
Many cash flow problems are self-inflicted, often resulting from how we use our money. The combination of credit debt and retirement contributions is a prime example. Instead of the simplistic approach of redirecting all available cash flow to pay off credit card debt, which leaves you with no access to money and forces you back into borrowing, we suggest building a pool of cash that you own and control. This approach provides a safety net, allowing you to pay off debt while still having funds available for emergencies.
Building this financial safety net is key to navigating life’s unexpected expenses. By having access to capital, you gain the freedom to choose whether to tap into it, reducing your reliance on credit and giving you more control over your financial future. The strategies we often use may seem admirable—saving for retirement and getting out of debt—but when done simultaneously, they can leave you feeling just as pinched as before. By adjusting your approach, you can transition from feeling financially stuck to gaining more control almost overnight.
Ultimately, it’s about shifting your perspective to ask, “Am I putting myself in more control of my money or less?” This is the lens through which we help our clients view their cash flow, guiding them toward greater financial freedom. If you’re interested in learning more about how we implement this process for our clients, visit our website at tier1capital.com, where we offer a free web course that delves deeper into these strategies.
Remember, it’s not about how much money you make—it’s about how much you keep that truly matters.
You often hear that whole life insurance is a lousy investment and that’s kind of true in the sense that life insurance isn’t an investment. Investments inherently have risk and that’s not the case with the whole life insurance policy.
With the whole life insurance policy designed for cash accumulation, you could expect to earn anywhere between 3% and 5% over your lifetime – but understand that’s not how the policy starts off.
Starting a new life insurance policy is kind of like starting a business. If you were to start a business today, you wouldn’t expect to become profitable in the first year, the second year or even the third year – but usually from the fourth year, that business will become profitable and hopefully will continue to grow year over year. The same holds true with a whole life insurance policy designed for cash accumulation. In the first year, you might have access to 40% of what you pay in premium. In the second year, it might be 60% or 65%. In the third year, 90% or 95%. But from the fourth year on, you should be generating a profit year over year in that policy and it will only get better from that point forward because of the way the policy is designed.
Basically, for each dollar you pay in premium from the fourth year on, you could expect your cash value to increase by more than one dollar. As mentioned, life insurance isn’t an investment because there is no risk. Once that money is credited to your cash value, that value will never go down.
On a cumulative basis, we would expect the break-even point to be somewhere between year seven and year ten. For example, if you paid a hundred thousand dollars in premiums over 10 years, you would expect your cash value to be a hundred thousand dollars in those 10 years and maybe a little higher. After that, the cash value and the accumulation value will continue to grow year after year.
The key here is that the so-called financial experts will judge life insurance on those first 10 years and say it’s a lousy investment. But what they’re completely ignoring is the fact that you could still access that money through the loan option or the loan feature in the policy. Taking advantage of the loan provision can allow you to not only generate that internal rate of return, but to generate an external rate of return on your money. This can allow you to make all of your other savings and investments much more efficient. Keep this in mind: You have the internal rate of return – that isn’t going to be interrupted by accessing that cash using policy loans PLUS you’re able to put that money to work for you somewhere else and make an external rate of return on an actual investment. Once you make the money on your investment, you can cash out and repay your policy loan and realize your profit.
Can I use my policy in the early years – before the break-even point?
A lot of times people come to us with credit card debt and they’re paying a very high interest rate which is taking up a lot of their monthly cash flow. An example of how you could use your policy is to repay that credit card debt using a policy loan and then rebuild and replenish your cash values so that it is accessible again in the future. Basically, you could take a loan against your life insurance cash, pay that credit card off and then redirect the payments from your credit card to repay the policy loan until the loan is paid off. Not only do we have a lower interest rate, we also have control over that payment amount every month. If you run into cash problems, you could back off on that payment. But if you are cash flush, you could pay that debt off faster and you’re actually building an asset for yourself.
Another way that you could access that money either in the early stages of your policy or the late stages is to borrow against your cash value to make an investment whether that’s into stocks and bonds, crypto currency, gold, silver or real estate.
The key is using the cash value in your life insurance policy to make your other money substantially more efficient.
Only in a whole life insurance policy, you can have access to the cash values without draining the tank. Basically you’re able to continuously earn compound interest and access that money to make an investment that will potentially earn you a higher rate of return. You have the policy earning the 3% to 5% over your lifetime at the same time you also have the ability to earn a higher rate of return on investments like stocks or real estate. Whether it’s to make an investment or to pay off debt, the bottom line is that you’re making your money more efficient. Your money is working in more than one place at once. That makes your money more efficient and ultimately puts you in a stronger financial position.
What about getting a margin loan or borrowing against the equity of my real estate?
It is possible to access money from other sources like a home equity loan or a margin loan on your investment portfolio. However, whole life insurance is the only financial tool that allows you to access money and know for sure that you’re going to have a greater account value at the end of the year than you did in the previous year – when you take a loan against your life insurance cash value, the compounding of interest is never interrupted. Your policy continues to perform as if you had not accessed any money.
With a margin loan, the underlying investments might decline and you may have a margin call – once again putting further squeeze on your cash.
In real estate, the value of your real estate could appreciate or it could also depreciate, it depends on the market conditions. Also, with a real estate loan, you have a structured repayment versus with a policy loan where you can determine the payment terms in the sense that if you want to put $50 a month on the policy loan, you could do that. If you want to put $300 a month on the policy loan, you could do that. If you don’t want to put anything on the policy loan, you could do that as well. There’s no one telling you what the repayment schedule is.
Here’s another thing to consider. What if you just drain your savings to make the investment? What’s the difference there?
We had this situation with a client who started a policy. They had about $5,000 of cash in the policy. They coincidentally have a $3,500 credit card bill that’s due and they wanted to pay off the credit card. The husband wanted to borrow against the policy because he sort of understood the concept of leveraging life insurance and the power of using this method. The wife was a little hesitant and wanted to use money from their savings account instead of a policy loan. They had $20,000 in savings and she said, “Well, let’s just take $3,500 from the savings, drain down the tank. Then we could leave the money in the policy to use for our home improvements.” What they’re missing is the fact that before that transaction, they have access to $20,000 that they own and control. If they drain down the tank to the tune of $3,500, they don’t control $20,000. They only control $16,500 and they’re still earning the interest in the policy because they didn’t access the money. But if they don’t take the money out from the savings and they borrow against the policy, they will still control $20,000 and they will still earn interest on the $5,000 – even though they accessed $3,500 against the policy. That’s what we call opportunity cost. We don’t only consider the money that we’re using – we also consider what that money could have earned us had we invested that money.
Whether it’s to pay off debt or pay a lower interest rate against the policy versus credit cards or whether it’s to make an external investment by accessing the cash value in your life insurance. Life insurance could allow you to generate that external rate of return on investment opportunities and still guarantee that you’ll get the internal rate of return on your cash value that you have accumulated in the policy.
Remember, it’s not how much money you make, It’s how much money you keep that really matters.
If you like this post, don’t forget to leave us comments down below on what you think about this topic.
Want to learn more about this topic, check out our free web course to see how our process works. If you are ready to talk, feel free to schedule a free strategy session today to get started.
“We focus on the lifetime capital potential tank because that’s where the greatest opportunity lies for you to improve the efficiency of your money, improve your cashflow, and ultimately increase the amount of wealth that you’re able to accumulate over your lifetime.”
Up until 1993, I was exactly like you. I was making great income, but I was living pay to pay. The reason I was living pay to pay is because I was doing everything by the textbook of conventional wisdom. I had a 15 year mortgage and was paying extra on the mortgage. I was maxing out my retirement account. I was paying cash for as many things as I possibly could, but embarrassingly, I had credit cards and I had to borrow money from my father in order to pay my mortgage. The reason my cashflow was being pinched was because of the things that I was taught to do by the so-called experts.
There are two factors that can really pinch your cashflow. The first is an unsteady income. This could be whether you are a business owner and have a cyclical business cycle, whether you’re a sales person and commission comes when commission comes or maybe you’re an employee and you were expecting a bonus that didn’t come through. These things can really tighten up your monthly cashflow and leave you feeling stuck.
The second factor we’re going to look at is when unexpected major expenses come up, whether it’s tuition for kids or an annual premium for insurance that you’re paying, or maybe you need new tires or car repair, or we all know how bad it is when your refrigerator breaks and you’re forced to go out and buy whatever’s available at the store. All these things could really leave a dent in your personal economic model and leave your cashflow feeling tight.
So let’s take a look at this model. This is what we refer to as a personal economic model. We all have one. This is how we show how money works in our lives. Let’s start with income, your income, all the income that you’ll ever earn in your life. We’ll go through this lifetime capital potential tank. It’s the largest tank, cause it has the most money flowing through it, but it doesn’t stay in there. It flows through this tube and hits your lifestyle regulator. Your lifestyle regulator is where you have choices. You can either spend all your money or you could force some up into your future lifestyle tanks, your investments, and your savings.
Conventional wisdom tells us that we should focus on getting a high rate of return on our investments. That’s what most financial advisors do. They focus solely on the yellow tank and showing you how to get a higher rate of return, probably taking on additional risk. But our focus is different. We focus on the lifetime capital potential tank because that’s where the greatest opportunity lies for you to improve the efficiency of your money, improve your cashflow, and ultimately increase the amount of wealth that you’re able to accumulate over your lifetime.
So let’s take an example of exactly how making your money more efficient can improve your personal economic model. Let’s take a look at wealth and income potential. Let’s assume you’re age 42. Do you plan on retiring at 70? Your current income is $100,000 and you don’t expect any increase in your income and you don’t have anything saved to this point, but you could expect an investment return of 5% at your retirement age of 70. Your income potential would be $2.8 million. It’s a $100,000 of income times 28 years, gives us 2.8 million. Your wealth potential would be about 6.1 million. That comes from investing your full $100,000 of income over that 28 years.
Obviously it’s unrealistic to think that you can save 100% of your money because there are expenses that come along with our income. Whether we like it or not first and foremost are taxes, we’re going to put you in a 30% tax bracket. Now that’s federal state, local gas tax, real estate tax, and any other taxes that you would encounter on a day to day living. Our wealth potential now is reduced to $4.2 million. Additionally there’s debt. The average family pays 34 and a half cents of every dollar to service their debt. That’s student loans, car loans, vacation loans, you name it. Now our wealth potential is reduced to 2.1 million and then we have lifestyle, groceries, utilities, insurances, and hobbies. Now we’re down to $600,000. Again, conventional wisdom wants us to focus on getting a high rate of return. Well, let’s assume we can go from 5% to 8%.
They have to take some risks to do it, but now our wealth potential goes to a million dollars and to them, it can’t get any better than that. But again, the reason you can’t get ahead is because your cashflow is pinched. The reason your cashflow is pinched is because of taxes and debt. What if we can show you how to reduce your taxes from 30% to 25%, look at the effect that has on your wealth potential. Keep in mind, we’re going to reduce your investment return from 8% to 5%. So you don’t have to take any risk in order to do it. Our wealth potential grows from 600,000 to 900,000. It grows by 50% just by reducing our taxes by 5%, but we’re not finished.
We could also show you how to control your debt. If we can show you how to reduce your debt from 34.5 % percent down to 20%, look what happens to your wealth potential. Now you’re at $1.8 million just by reducing your taxes and controlling your debt. Now, all of a sudden you’ve tripled the amount of money you’re able to save. We’ve done all of this without having to reduce your lifestyle in order to do it. That’s the value of controlling your cashflow. This is how you can get ahead without having to earn or generate additional income.
Here’s the good news. If you’re ready to get rid of that stuck feeling, all you need to do is stop giving up control of your money. We always say, it’s not how much money you make, it’s how much money you keep that really matters. It’s not your income that’s holding you back, it’s not your rate of return that’s holding you back. It’s the inefficiencies in your cashflow that are stopping you from getting ahead.
Once you focus on what’s important, control of your cashflow, each and every decision becomes more and more clear and you’ll know exactly what to do. Our process focuses on identifying exactly where and how you’re giving up control, Whoever controls your cashflow controls your life.
“That’s exactly why our process aims to put you back in control of your cashflow, so that you can build a pool of cash that you have access to when you need it with no questions asked.”
When people come to meet with us, they have the mistaken belief that the reason they’re stuck financially is because they don’t earn enough income. Well, we have a secret. We have clients who make $50,000 per year, and they’re stuck financially. We have clients who make over $800,000 per year and they’re stuck financially. Now, if you’re making $800,000 per year, it’s not your income that’s holding you back.
We’ve cracked the code. What we found is, it’s not your income that’s holding you back, it’s how you’re using your money. By making your cashflow more efficient, plugging the holes in your leaky bucket, you’ll be able to experience true financial freedom.Let’s face it. Most financial frustrations arise from the fact that we don’t have access to money. Whether it’s to expand our business, educate our children, or take our family on a vacation. We’re forced to turn to banks and credit companies to get access to their money. In the process, we’re literally obligating our future cashflow to them. We found that whoever controls your cashflow, controls your life.
That’s exactly why our process aims to put you back in control of your cashflow, so that you can build a pool of cash that you have access to when you need it with no questions asked. Here’s an example of how our process helped transform a cashflow problem to true financial freedom. We met with a client about three years ago, he was an accomplished business owner earning over $400,000 a year, but he was still struggling to pay for things like private school, expanding his business, providing for his family and not to mention every quarter when taxes were due, he was drawing on a credit line to fund those taxes.
Now, as an entrepreneur, his natural inclination was to earn his way out of this problem. But after meeting with us, we identified the leaky holes in his bucket, which were primarily the fact that he was paying down his debt too quickly. He was literally taking profits from his business and transferring those profits to the bank to pay down his debt. The bank now controlled that money, those profits in his eyes, he was building equity, but he didn’t control that equity. Consequently, when it came time to pay his quarterly taxes, he didn’t have any access to money cause he gave it all to the bank. So what did he have to do? He had to draw on his credit line. When we asked him to sort of take a step back and look at what was happening, he was paying down this debt, but he was increasing this debt. Our question to him was, are you making any progress?
So let’s take a look to see how our process transformed his situation. Step one was to slow down the rate at which he was paying down his debt immediately, that increased his cashflow by over 40% per month. Now we didn’t change his revenue at all. The amount of money going into his pocket every month was exactly the same. What changed was the amount of money he was keeping. Step two was to redirect some of that money to build a pool of cash that he owned and controlled so that he would have access to it when he needed it in the future, to reach his financial goals.
Three years later, we’re proud to announce that he’s sitting on over $850,000 worth of cash. Imagine how that would feel. If three years ago you were struggling to pay your quarterly taxes and now today you’re sitting on $850,000 worth of cash. Now understand the power of this process. He’s not working any harder. His cashflow hasn’t changed. The only thing that changed is how he was using his money and because he regained control of his cashflow, he’s now regained control of his life.
” It takes discipline and focus in order to save for the future. “
This picture is what we refer to as the personal economic model. The fact of the matter is, everybody has a personal economic model. We use this diagram as a tool to show people how money works in their lives. The ultimate goal is to get to position A, where there’s enough money in the future lifestyle tanks, the risk and the safe tank to support our current lifestyle in retirement and through our life expectancy. So let’s take a look at how money works in our lives.
Let’s start by taking a look at how money enters our system. You’ll notice over here, we have the lifetime capital potential tank. You’ll also notice that this is the largest tank on the screen. That’s because anytime we earn income, whether it’s at our job, maybe an inheritance, maybe we will win the lottery, all that money flows through our lifetime capital potential tank. It doesn’t stay in there and it goes right through this tube and then hits the tax filter. Did you put the text filter on your personal economic model? No, none of us do.
It comes pre-installed on all the models and the government puts it there. What it does is, it diverts money from our lifetime capital potential and it diverts it into the government’s personal economic model. Once the money flows through the tax filter, we then reach our lifestyle regulator. This is where we have some choices. We can either save some money for our future lifestyle, or we could spend 100% of our income on our current lifestyle. After money flows through and is spent on current lifestyle, there’s no getting it back into our system and it makes it very difficult for us to reach position A. Rather than consuming all of our income. We have a choice as to how much we save for the future. Notice, that our future lifestyle tube is pointing upwards. It takes discipline and focus in order to save for the future.
Now we have some choices. We could either put money in the investment tank or the savings tank. Notice that the investment tank is labeled “risk”. There’s no lid on that tank. Depicting the fact that we have the potential to possibly lose some money in that tank. Alternatively, we can put money in the savings tank. The savings tank has a lid on it depicting the fact that we could never lose money in that tank. As long as money is in that tank.
Remember the ultimate goal is to get to position A, where we could turn off our income and we have enough money in both of these tanks to fund our lifestyle through our life expectancy. But what happens if your lifestyle regulator is turned up to 100%? That means that you’ve had very little success in saving money for the future. In the past, maybe you have a little money in your 401k at work, and maybe you have a bare minimum of an emergency fund. What happens when you’re in this position is that you have no access to capital. What happens is, you’re forced to borrow money and take on liabilities.
Maybe you have a little bit of credit card debt. Maybe you have a car loan. Maybe there’s some student loans that you haven’t had the chance to pay off yet. Notice that all of these debts have no collateral. The money spent on the credit cards, that’s gone. The car is a depreciating asset that the bank really doesn’t want.The car and the education, they can’t take your education back. So you have no collateral. But the fact of the matter is you do have collateral.
You are obligating your future income to pay those debts. And by obligating your future income, that reduces your future lifestyle and further compromises your ability to save for your future lifestyle. Consequently, that really puts in jeopardy your ability to get to position A. As you can see, we use this personal economic model to show people how money enters their system. More importantly, the consequences of all the choices that they can make with their money. Are you living within your means? If you’re not sure, we recommend you start with a budget. Take inventory of what you have coming in every month and what your monthly expenses are and what you could reasonably afford to save every month.
“Our mission as a company is to show people how to regain control of their money.”
The problem with getting in the debt cycle is that once you take on that first debt, it becomes difficult to save your income. In the case of an emergency, you’re forced to take on more debt and tie up even more of your income and make it even harder to save. In his bestselling book “Rich dad, poor dad,” Robert Kiyosaki’s foundational principle is to pay yourself first. But if you’re working that hard to pay off your debt, how in the world are you going to be able to pay yourself first?
So here are some of the problems with consumer debt. First, it places an obligation on your future earnings. You lose the capital to purchases and the financing costs forever. As in, you’re giving up opportunity costs. When you make these purchases, you become a debtor to the creditor. Most importantly, you’re losing control.
Our mission as a company is to show people how to regain control of their money. With this simple concept, showing them how to regain control of the financing function in their lives. We could make significant progress in showing you how to regain control of not only your money, but your financial future.
If there’s only one thing you take out of this video, please let it be that “ It’s not what you buy, It’s how you pay for it that really matters.”Because let’s face it,every purchase we make is financed. You could either be a debtor, a saver, or wealth creator. Let’s go over the differences.
This is what a debtor looks like. They have no money. So when they have to buy something, they have to finance it. They have no choice. They dig a hole and then they fill it up and then they dig another hole and they fill that up too. But notice, they never get above the financial line of zero.So what a lot of people do, is they save money in order to spend. They save, save, save, and then when it’s time to buy something, wipe out their savings in order to make the purchase. They keep doing this again and again. Over time they don’t stay above the financial line of zero.
Then there’s the wealth creator. This is what we help our clients to become. They save as a matter of course. Then, when it’s time to make a purchase, they borrow against their money. They use other people’s money to make their money more efficient, but notice they never interrupt the compounding of interest on their money. Their money is always working for them and they are no longer working for money. That’s the power of becoming a wealth creator and that’s the power of controlling the finance function in your life.
