Stop Chasing APR—What Really Drains Your Wealth (Ep. 245)

“We’re led to believe we have control. That’s a good point. We have control of that 401(k) and that IRA. We have control of X, Y, and Z. We have control of our banking account until we don’t. People’s bank accounts get frozen all the time. People’s IRAs, we don’t have control over because we can’t do all the things we think we can do with them. There’s all these government rules that we talked about. You think you have control of those things. These things you actually have control over. The only thing within the life insurance policy you’re not going to control is what the company is doing. And you can if you want, actually, because you have the ability to vote. It’s a mutual company. So they send you a letter. If you want to vote, you can vote. Ultimately, your one little voice probably isn’t going to be heard. But you have control of that cash value when it gets lent, when it gets paid back. There’s not government rules to them. But everything else we’re doing is a headwind. And it’s almost like we like the hard. Like the harder it is, the better we feel that we’ve accomplished something.”

Hello, hello, and welcome back to the podcast. Thank you for being here. Today, we are talking about the problem in Becoming Your Own Banker. So if you have your book, tune in. If you don’t, pause us, grab your book, and follow along. Page 17.

All right. I love this line because I think a lot of people when they hear this, they think they need to have just, like, gobs of money. So he says, “I build scenarios around the All-American family because I don’t want people to think you have to be rich to create a banking system that can handle all of your needs for finance.” Then he goes on to talk about this 29-year-old who makes $28,500 per year after taxes. And then he talks about how he’s allocating his money in each category. So he says, 20% is spent on transportation, 30% is spent on housing, 45% is spent on living. And then the problem is that many of these items are financed by charge cards or bank notes. The balance is financed by paying cash for them and thus giving up interest that could be earned otherwise. He is saving less than 5% of disposable income.

He says that it never seems to dawn that the volume of interest is the real issue, not the annual percentage rate. And then later in this page, he says, rate at which the medicine is injected into you. It’s not the rate at which medicine is injected into you. It’s the volume of medicine. And so I actually drew a line, like, where it says auto, housing, living. I then drew a line and separated savings. Because housing, living, and autos, we’re ignoring this. That flows through our hands. We’re just saying, “Hey, this is going to a bank, it’s going to a lender, whatever.” And then the savings of 10%, that’s what we’re focused on for a rate of return. So you were talking about this last night when we were visiting, that we have this volume here that’s going through our hands, but this is the tiny bit. And it’s not even 10%. Most people are not saving 10%. Let’s be real. So you have this shiny, minuscule amount of money that you’re trying to get this massive rate of return on so that you can have this amount at retirement. What?

Yeah. It’s silly because…

When you think about it.

Yeah. Well, and for anyone that’s looking at this page right now, he has it sectioned out into, like, the actual principal payment and the interest. And the housing one mixed with the auto and the living is insane. And this is money that we’re just happy to give up because that’s what we’ve been trained to do. But to your point, the ratio is so skewed. So it’s like, why are we trying to make this little tiny bit do the most amount of work when we can just become the banker and be on the receiving end? And now that money is flowing through our system, creating this rate of return and compound interest while we still go do all these other things that we were going to do anyway.

We were going to buy the house. We were going to buy the automobiles. We were going to have living expenses, braces, vacations, boats, campers, all of those things. We were going to do all of those things anyway. But instead, we pay cash to do those things. And then we have this little tiny bit of savings that we really try to get this big rate of return. And that’s where this conversation nonstop about rate of return comes from. Like, nonstop. “Well, that’s my rate of return. That’s my rate of return.” Liquidity, control, guarantees, uninterrupted compound interest. That’s what you gave up for rate of return. How much could that rate of return be if you just utilized money differently?

And then he says something in here. 95% of cars that are traded are not paid for. This means that at the end of 30 months, if the car is traded, 21% of every dollar is interest. And he was using the interest rate of whatever it was at that point. So 21%. When you don’t… Here’s another thing that in Life Without the Bank, I have compound interest and amortizing interest. And what’s the difference? I have it in both of my books. When you buy something from the bank, it’s amortizing interest. The majority of your first few payments is interest. And so you sell that vehicle and all you’ve really done is paid interest on it. Same thing with the house. You keep the house for seven years. You move. The majority of what you’ve paid is interest. The only reason you feel like you have more money in your house is because the value of homes went up. If everything stayed equal, you’d be like, “Well, what the heck? I’m not getting anywhere in this house.” But that’s not what happens. And so if that’s not happening, then we think, “Oh, we’re doing fantastic. We don’t need to pay attention to it.”

We’re paying attention to the autos and the housing and all of those things. We’re paying attention to those because we can’t… We’re having a hard time making those payments. The majority of people are having a hard time making those payments. So they’re saying, “Well, I can put 3% away.” The people that are putting 10% away are doing what? They’re putting it all into some sort of a savings vehicle, but they’re not overspending on a house and an auto because they’re super frugal individuals. They don’t have credit cards. They don’t have all of that stuff. Most of the time.

Well, and I think too, I remember one time I thought about this problem visually, like this ratio issue. It’s like if you took a dollar and then you cut off 20% of it and then you cut off the percentages that he’s talking about for living, and then that’s the little piece that you have to do something with, versus just saying, “Hey, I’m going to have the discipline, and the money that I would have made a payment for for this vehicle, I’m going to put in my policy first so that I can build up the capital to then have it to go do the thing,” so that I can change this ratio issue so that I can put that 20% in my policy, or 5% to the life insurance company and, you know, 16% to additional premium.

And he says on the next page, he talks about the fact that we think we’re buying a house and we’re really just paying interest. But then he says, 34 and a half cents of every disposable dollar is paid to interest. This never changes. I think that people read that and say, “Well, today that’s not the case.”

Probably worse.

Yeah, it is. It is probably worse. Well, no, this was written, he wrote this in 2000, so interest rates were high. But 34 and a half percent of every dollar is paid to interest. “Well, I pay with cash.” Doesn’t matter. Then that 34 and a half percent is still debt. It’s still lost interest. You’re giving up earning power.

Yes.

And so you pay interest regardless. Whether you use cash or not.

If we think about that, just in even the terminology you were just talking about, cut off 34 and a half percent of that dollar bill and just hand it over to the bank. How many dollars could they make piecing that sucker back together? Right? Like, it’s pretty crazy.

When you have that much money going to interest, you have 34 and a half, this, I’ve thought about it this way too. You have 34 and a half percent of every dollar going to interest, but you’re only saving 10% or less than 10% for retirement. Why? Because our need for finance is greater today than our need for death benefit.

Yes.

And then he says, that means that we have a 3.45 to 1 ratio of interest paid out as compared to savings. And then I like this. “If you will get this young man together with his peers at a coffee break or some gathering and have one of them suggest that they discuss financial matters, I can predict that they will talk about getting a high rate of return on the portion they’re saving.” He’s not wrong, because that’s what everybody talks about when they start talking about financial matters.

And then he goes on to talk about flying. Again, I don’t know why planes matter, Nelson. I get it now. But at the time, I didn’t. And he is talking about headwinds and tailwinds. If you have a headwind, that plane just needs more energy to get where it needs to faster, can’t go as fast. If you’re on a plane and they’re like, “Oh, we have a tailwind today, we’re going to get in 15 minutes early,” or “We’re going to get in 20 minutes early,” they’re like, “Sweet, fantastic.” But what we’re doing is pushing against the forces for a rate of return. We have this headwind, nonstop headwind. We have the economy. We have inflation. We have kids. We have all these headwinds. And the one thing that can give us a tailwind is the policy, because it’s earning uninterrupted compound interest while we borrow the insurance company’s money. But we fight it because it’s not normal. “No, no. I’ll pass on the tailwind. Thanks, I’ll make life harder.”

Harder. Yeah, er. You know? Like, yeah.

Think about that. That’s crazy.

Well, it’s like we’re choosing to make things, we’re fighting against the fixed laws, like Nelson says. These are fixed things. This is a fixed ratio. Everyone is actively doing this. You either pay up or you give up interest you could have earned. And most people are spending 34.5% to banks perpetually for your entire life. And not just your life, your daughter’s life, your son’s life, your grandkids’ lives, your parents’ life. Think about how much money the banks get to make off of just your family. That is an insane amount of money.

Which is why they have a lot of branches. Because the more visible, the easier access you have to that bank, you’re going to bank there so that they can have more families. They can have more money going through that system.

Yeah.

He said, every, and I love this piece, “everything that you do in the financial world is compared with what everyone else is doing. 95% of American public is doing the equivalent of flying with a 345 mile per hour headwind.” And so, if you want to compete with the Joneses, I guess you could. But, everything that you do is compared to what? So, we have, we use the Truth Concepts calculators. And Todd is really good, the guy that developed the calculator, is really good about saying, “Compared to what?” And so, that’s a question that I forget a lot of times. But, “Oh, Tarisa, I, you know, I made a 25% rate of return.” Compared to what? “Tarisa, I got there in five hours.” Compared to what? Right?

So, we always have to look at, and we have this problem due to, basically, social media. We see all the good, that, oh, we see all the good side of people. We never really look at the bad of what’s happening on the other side. Okay, that happened compared to what? I can put my money in an IRA, or I can put it in a life insurance policy. So, if I put it in an IRA, I’m going to compare it to the life insurance policy. So, I like, I just like how he says that, because I think we need to remember that.

And then I have highlighted, “They would do well to spend their energy instead of controlling the environment in which they fly. You can’t do that in the airplane world, but you can in the financial world. You can do it by controlling the banking equation as it relates to you. That’s what the book is about, creating a perpetual tailwind to everything you do in the financial world. It never dawns on most financial gurus that you can control the financial environment in which you operate. Perhaps it is caused by a lack of imagination, but whatever the cause, learning to control it is the most profitable thing you can do over your lifetime.”

I love this section because it makes me think about so many different things. Like, how many people, if you’re making a financial decision, would you want to control every aspect of the environment that would impact how well it did for you?

Everything. Every single time.

Yeah. Everything. Because it would go in your favor. And that’s what Nelson is saying is, like, everything has to go through an environment, but you can control this environment. Right? Whereas, like, even real estate, it’s like, okay, well, that’s impacted by interest rates and that’s impacted by, you know, what someone’s willing to pay for your house and what the appraiser says and yada yada. It’s like, there are so many things that impact how well this can do for you in the future that you don’t have control over as an individual. There are very few things where we have control over them as individuals, and this allows you to have the ultimate control of your financial environment.

Most things we think we have control over.

Yeah.

Because we’re led to believe we have control.

That’s a good point.

We have control of that 401(k) and that IRA. We have control of X, Y, and Z. We have control of our banking account. And we don’t.

Until we…

Until we don’t. Until we don’t.

Mm-hmm.

I mean, people’s bank accounts get frozen all the time. People’s IRAs we don’t have control over because we can’t do all the things we think we can do with them. There’s all these government rules that we talked about. And so you can’t… You think you have control of those things. These things you actually have control over. The only thing within the life insurance policy you’re not going to control is what the company is doing. And you can if you want, actually, because you have the ability to vote, because you’re a mutual… It’s a mutual company. So they send you a letter. If you want to vote, you can vote on who the board members are. Ultimately, your one little voice probably isn’t going to be heard. But you have control of that cash value when it gets lent, when it gets paid back. There’s not government rules to that. But everything else we’re doing is a headwind. And it’s almost like we like the hard. Like the harder it is, the better we feel that we’ve accomplished something.

You know? I remember someone, how I wish I could remember where I heard this, but this guy asked this gentleman this question, like, “Hey, would you rather have $50 million or would you rather have the ability to earn, like, $2 million?” And he’s like, “The ability to earn $2 million.” And he’s like, “Well, that’s dumb. You know, like, why wouldn’t you just think the $15 million?”

Yeah.

But it’s like, it’s almost… Because short-term thinking is “I want $15 million.” Long-term thinking is $2 million times X amount of years of my life. That’s way more than $15 million.

Yeah.

So it’s like, we make things harder on ourselves because we’re not willing to rethink our thinking. That is, like, having an open mind is honestly the best return on investment that you’ll get ever. So, like, rethink your thinking. Ask yourself, like, critical questions, and people that are smarter than you. Be around people that are smarter than you so that you can start changing how you think about things. Like, we don’t need to reinvent the wheel. We don’t need to make things difficult. We don’t need to go through so much pushback inside of our financial environment.

Yeah. I had a guy a few years ago, like, a lot of years ago. Probably seven or eight years ago. And he said, “Mary Jo, I want to sell my mineral rights. And I would rather buy a life insurance policy with it.” Well, that guy’s an idiot. Nobody sells mineral rights. Right? And he lived in oil country. And he said, “The amount of money that I pay in taxes on this oil that comes in is insane.” He’s like, “It’s like 50% tax.” So, he’s like, “The majority of my money is when they hit a well. And so, they’ve already hit the well. I’ve already made the majority of my money.” He said, “If I take and sell my mineral rights and put it into a life insurance policy, the death benefit to my kids will be much greater than the amount of oil money I’ve ever gotten.” And I thought, hmm, that’s interesting. Okay, whatever, do. And I ran the numbers. I’m like, he’s not wrong.

Wow.

So, he sells his mineral rights. He leaves the death benefit to his kids income tax-free. Okay, all that mineral money is taxable. Leaves the death benefit income tax-free. If those kids took the policy and bought more death benefit, his grandkids would have way more income tax-free money than they would ever see in their lifetime from oil. We can sit in that thinking of our peers and what everybody else is doing, like he’s talking about in this chapter, or we can use our imagination and really look at it. Like, when I saw those numbers, I actually called Nelson because he was so alive, and I’m like, “Nelson, guess what this guy is wanting to do?” And Nelson’s like, “Yep, makes sense to me.” Of course it does. But even my thinking was limited, right? Nelson’s like, “Well, of course that makes sense.” And I’m thinking, how did you know that? Imagination, reason, logic.

Okay, I’ll leave you with that. If you come in, if you have that opportunity, if you do have oil, but oil income is so up and down. I have a lot of clients that have oil or minerals of some kind, and that’s great, but it could be, it’s boom or bust, man. So, if we’ve exercised everything for minerals, we still have the land, we still have the surface damage that we could get paid for. Is that an avenue? What are we looking at long term? This guy was thinking very long term. So, something to think about. Another strategy.

That’s awesome.

Yeah. Okay. That’s all we got on that chapter. Let us know. maryjo@withoutthebank.com, tarisa@withoutthebank.com. Schedule your appointment, grab your book, and we’ll see you with the next chapter. Have a good one.