“When you have capital, opportunity will find you.” -Nelson Nash
This month I’d like to highlight a short case study of one of my clients. We will call him “Dan.” In short, Dan started thinking and behaving like a banker and was able to spot an opportunity that equated to a 33% rate of return on his money! And not only that, the return was 100% tax-free and risk-free.
Hang with me here…
Danstarted his dividend-paying whole life insurance policy last Fall after several months of discussions and careful research on his part. If I’ve ever worked with anyone who likes to play “devil’s advocate,” it’s Dan.
In February of this year, Dan sent me a very excited text message (see below). He was presented with an opportunity and, because he had access to capital, was able to seize it with amazing results! Dan was moving his kids into a new private school and had some options on how to pay the tuition. Here’s how it went down:
Dan’s private school tuition for his 4 kids: $28,114
Dan’s discounted price if he pays the tuition up front for the year: $21,334
Dan’s savings: $6,780, or 24%
24% savings is pretty cool! But it gets even better:
Dan was still viewing this from the lens of a “consumer” and not a “banker.” As consumers we are taught to look only at how much we are “saving” when getting a discount.
A banker will look at how much he is “making.”
In Dan’s case, he effectively turned $21,000 into $28,000 of purchasing power. If you were able to invest $21,000 somewhere and a year later it is now $28,000, what would be your “rate of return” (RoR)?
$28,000 / $21,000 = 1.33333 = 33% RoR
But Dan didn’t have to invest the money. Which means there was NO RISK. Which also means there is NO TAXABLE GAIN.
Dan played defense with his money and earned a 33% RoR!
You see, mainstream financial advice only teaches us to play offense with our money by searching for that ever-elusive highest rate of return we can find. So we focus on getting the biggest RoR on the 10-15% of the money we put aside for investing.
But what about the other 85-90% of our money that is used for financing our everyday life? Where are we losing that money? And where can we leverage that money to play defense for us by saving and earning?
Back to Dan…
So Dan has paid his children’s tuition for the year. And I know what you are thinking: “but now he has a $21,000 loan he has to repay…how will he do that?”
Great question, I’m glad you asked. Let’s dive into that
Before Dan signed his kids up for private school, obviously he looked at his budget and decided that he could afford the monthly tuition payments without going into debt. And those monthly tuition payments amounted to $2,342, which he had earmarked to set aside for tuition each month for the next year.
But now he doesn’t have to make those monthly payments to the school does he? Instead, he can make those same monthly payments back towards his outstanding policy loan and have the entire loan repaid in about 9 months!
Or, as Dan pointed out in his text message, he can now make loan repayments to himself each month for $1,778 ($21,334/12) and have the loan repaid in one year. By doing this, Dan has freed up $564 of cash flow each month that he can use for whatever he wants!
The point here is that Dan has choices. There is no required loan repayment schedule, so if he wants to pay back $3,000/month or nothing at all, he is free to do that. But Dan isn’t just some ordinary consumer; he is a banker. So he is going to play “honest banker” with himself and make sure that loan gets repaid.
And as you probably already know, every time he makes a payment back against his loan, that payment is available for him to borrow again if and when he wants it.
I encourage you to start thinking like a banker just like Dan did. You will begin to see opportunities you never noticed before. And focus on playing defense with your money just like you focus on playing offense, because as they say:
Offense wins games, but defense wins championships!
To hear this case study in more detail, tune into episode 23 of the Wealth Warehouse podcast dropping on Monday July 18th.
If you ever want to discuss these concepts, feel welcome to schedule some time to talk with me.
Cheers,
David Befort