If you are like most hard working people you have exciting plans for retirement. Maybe you have managed to save a few dollars, but you aren’t sure if you are on track. Maybe you have been living paycheck to paycheck and retirement seems impossible. Whatever your current money situation, learn to avoid the wealth traps your financial planner isn’t telling you about on the Epic Wealth podcast.
With this episode of the Epic Wealth podcast Matt shares even more wealth traps that are keeping you from financial freedom. Listen as he explains how to identify and avoid major weaknesses in your financial planning. It’s time to start thinking and strategizing like the wealthy!
What You’ll Learn:
- Why wealth isn’t achieved through savings and budgeting
- Why paying off your house is terrible financial advice
- How your primary residence is usually a poor investment
- Alternative investments you can bank on
- Why you should not expect to retire on paying off your mortgage
- Why you shouldn’t be afraid of debt
- Why all debts are not equal
- How to combat inflation and prosper
- Why wealthy people use other people’s money
- How your financial planner’s advice is hurting you
- Even more wealth traps to avoid in your pursuit of financial freedom
Read the Transcript:
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This is Theriault Media. It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. You don’t have a money problem, you have an idea problem. Welcome to the final frontier where the average person has a legitimate shot at creating epic wealth. Your host, Matt Theriault.
Matt Theriault: Yes. Hello, and welcome to the Creating Epic Wealth Show, the revolutionary new money show disguised as a real estate show, as real estate is the final frontier where the average person has a legitimate shot at creating epic wealth.
I mean you really just don’t have a chance at any sort of financial freedom unless you incorporate real estate into your financial plan. If you just don’t have the time to do it, nor the desire to really take on all of the heavy lifting, you don’t want to do the work, then this is just the show for you. Glad you found us.
Alrighty. Last week, we discussed specific traps that are preventing you from creating your wealth -- downright stopping you. Wealth Trap #1: Saving money. Wealth Trap#2: Budgeting. Wealth Trap#3: Maxing out your 401(k). All three of those are passed on to us as sound financial advice for as far back as we can probably remember as well. They maybe good advice for sustaining your current financial position, I mean making sure things don’t get any worse, but they are terrible wealth creating strategies.
Saving money to create wealth? It just moves too slow and is darn near impossible for the average person to maintain the discipline to carry that out. Then budgeting. Wealth is not created by saving a nickel but rather by generating a dollar. You need to focus on production rather than reduction. The 401(k) sounds good on the surface, right? It’s this tax deferred savings plan. First, it has savings in the description. Just as how you’re sold on the concept of compounding interest over time. The eighth wonder of the world, people call it. You’ve been sold that. That eighth wonder of the world compounding interest, it also works for the fees inside of the 401(k) as well. Robbing you of more than 60% of your potential in that vehicle over the long term placement of money in the 401(k). Additionally, by the time you’re able to withdraw the money from that account, you’ll be at a much higher tax back than you probably are right now of which the money will be taxed at a higher rate once you are able to actually access it.
Probably the biggest reason that’s a terrible wealth creating strategy is that you don’t get to pick your stocks or what you’re invested in. You have absolutely no control over the outcome. It’s a gamble at best. A very low paying one if you actually end up winning. So, how could that be? How could saving money, budgeting your expenses and maxing out your 401(k) be bad ideas? Well, I’ll clarify one more time. They might be okay strategies for preserving your wealth but they are terrible strategies for creating your wealth.
Are you ready for another wealth trap that’s about to blow your mind? All right. Try on Wealth Trap #4 for size. Paying off your home as fast as you can. You’ve heard that before. It’s a sensible prudent advice, right? Wrong! It could be quite possibly the worst financial advice ever given. Here’s why.
Let’s imagine you follow this advice. You worked hard to pay off your house as fast as possible. You paid down your mortgage, maybe even shortening the term by paying some additional on the principle every month, or by paying bi-monthly. Now what? Well, a large bulk of your money now, it’s in your house, isn’t it? If you are like most retiring Americans, you are going to need that money at some point. Sure, there is no mortgage payment at this point but you still have expenses. Your bills are less. The cost of living are going up, they are always going up. You are going to need money. No one ever retired just by eliminating their house payment. You still need money to live. You’re living in a pile of cash, so to speak. Now, selling the house that’s an option but then you got to find another place to live, right. It’s all probably going to be -- it will be a step down or two from your accustomed lifestyle. You could hit the road and head south in an RV with all the cash in the cooler, you could do that. That might be fun. But your basic problem still really remains. There is no financial security.
What if an emergency comes up, heaven forbid emergency comes up. You could borrow against the equity, but if that is the plan, then why did you work so hard to pay it off in the first place? You paid off your mortgage just to create a new one? Does that make sense? What problems have actually been solved here? What financial advantage has been created by paying off your house as fast as you can? I have nothing against you paying off your mortgage, I’m just saying that you can’t count on that as a strategy to secure your financial future, let alone build wealth. It makes a lousy primary investment strategy. It’s not even a good secondary or tertiary strategy. In fact, your primary residence is simply a terrible investment. Your residence may have been a good and worthy purchase but your own house is almost never a good investment.
Consider this scenario: You just wrote the last check to your mortgage company. It feels good, right. It feels good. It looks even better when you consider that the home you paid a $100,000 for 30 years ago is now worth 300,000. You tripled your money, right. You might be wondering how could that possibly be a bad investment.
Well, what most people fail to consider is that over 30 years, the total combined principal and interest payments will amount to approximately double, if not more than the original purchase price of the home. Then you need to account for the 30 years of property tax, insurance and maintenance cost. When all's said and done, after you’ve paid for that house, you are going to see that you pretty much paid $300,000 for your $300,000 home. Now, as you are working all those years and paying the house down, you probably were thinking that you were investing in your future, but all you really did was deposit your money into a zero interest bearing savings account. You deposited your $300,000 and now you have a home worth $300,000 insurance free and clear, but it’s a wash.
Now, I’m not discounting the feeling of owning your own house. You can get a great deal of value out of that. You probably put in time and effort at that home, memories have been made there. You had it just like you wanted and now, it’s truly yours. Well, except for property tax. Try not paying those and you’ll see how long the house is yours. You still got to pay that.
The reality is that your money could’ve done so much better over those 30 years without really any extraordinary effort either, without even an elevated financial IQ because the money in your house was doing absolutely nothing for 30 years. Certainly you could’ve found something that did better than nothing.
Now, there are exceptions. I can hear you right now. There are exceptions. If you are fortunate enough to be approved for say a low single digit interest loan, and you purchased your home in a higher appreciating area, and you timed the market just right, you could experience an acceptable rate of return on your investment perhaps but you can’t bank your future on exceptions. That’s exactly what that would be. Those are just the exceptions. I mean do you want to gamble your future on being an exception? You have to look at the vast majority of cases. You know gambling on being the exception is not a sound investment strategy.
This wealth trap had snared so many people because it seems to make sense. On the surface you are tripling your investment. You don’t have to dig too deep before you begin to see that this investment is simply just a bad deal. It’s just a math equation. Unfortunately, it gets worst. You think you at least saved the $300,000 right. You are forced to save basically because you had to pay your mortgage, so you’re forced to. You didn’t lose money, or did you? Because you can’t ignore inflation.
Over the last 40 years, the average published inflation rate average is somewhere around 3-4%. That means that your money has lost 3-4% each year, 3-4% of its buying power. In order to make your financial situation actually improved, your returns must outpace inflation. If you are making a 3% gain per year but money is worth 3% less that year, then it’s a wash. You may have more money than you did 30 years ago when you bought your $100,000 home but that money has less value. There is some relation now between your home’s appreciation and inflation. Inflation affects appreciation but the relationship is not straightforward. I mean considering everything, the absolutely best case scenario is that you didn’t lose any money. But you most likely suffered a slight decrease. You lost money on a deal.
One more problem, your house is now 30 years older than when you purchased it. Perhaps it’s a little outdated. How’s the roof holding up? What about the pipes? What about the wiring? I mean without a doubt you are going to need to invest in home maintenance. The older the home gets, the more maintenance required, right. You may even need some major repairs on the property which can be very costly. Sorry to break that to you. A primary residence just does not add up as a retirement strategy, or at least not for the primary strategy. Yet so many people are convinced that this strategy will grant them peace of mind and ease in retirement but it will not.
You must understand that no one has ever retired simply by paying off their primary residence. Yes, you should buy real estate. You should buy income producing real estate. The reason you want real estate is for the income it produces, the appreciation it experiences, the hedge against inflation that it provides, the tax deductions that it allows, the fact that it will never be worth zero, the fact that it’s tangible, the fact that humans need shelter there will always be demand for it, the supply is limited we’re not making any more land. I mean I could go on. You absolutely want real estate for those reasons, for all of those benefits but you don’t have to live in the real estate you do own to experience those benefits. Got it? We’ll be back right after this.
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And now, back to creating your epic wealth.
Matt: Alrighty, so paying down your house, paying it down as fast as you can -- bad advice, really terrible advice. I’m really sorry to break that to you because I know before you heard this you were probably -- that might be your plan, that might be in the plan you’re immersed in right now. It might be the one that you have almost fulfilled but it’s not -- it’s a bad move.
Primary residence just does not add up as a retirement strategy. Like I said, at least not for the primary strategy, I wouldn’t even say the secondary or the third strategy. Yet so many people are convinced that this strategy is going to grant them that peace of mind in their golden years that they’ve been looking for. It’s going to make their retirement a lot easier. It simply just a terrible investment. It’s just one way of piling up cash. Perhaps the worst way. Just understand that no one has retired simply by paying off their primary residence ever. Again, I’m not saying don’t pay it down or don’t pay off. It’s okay if it’s part of your plan. I’m just asking your to consider where it actually is in your plan. I’m asking you to consider the order of what you do pay it down. Where is it in the list of priorities in creating your wealth? You need to bring it down a few little notches. If you think you already got it lower on the list of priorities, consider moving it down a couple more.
Look at it this way, you get up each and every day to go to work, right. If you put every extra cent you have into paying down your house as fast as possible, you’re essentially retiring your money before you retire yourself. I mean you’re still getting up and going to work every day sweating it out. You are still running that rat race while your money is over there on the sidelines kicking it, sipping a fruity drink by the beach while you’re still working. Your money is watching you. It’s relaxing. It’s watching you work.
Sure, you can retire your money at some point in the interest of preserving your wealth, I’m actually all for that, but focus on retiring you first. What about the debt right? What about the debt? You may not be able to get past the idea of debt because debt is bad. How can you just ignore that giant mountain of debt sitting on top of your home, right? At least I got rid of the debt. I got rid of the worry.
Well, that would bring us to the fifth wealth trap, the advice of never going to debt. The idea that all debt is bad. Payoff your mortgages fast as possible, pay cash for your car, and leave those credit cards in the wallet. Avoid debt by any means necessary. That’s a really common advice from the gurus on TV. The ones with the national audiences. The ones with the biggest platforms. That’s really sad that that is the message that prevails. It’s the message that prevails and it’s the message that sticks. That’s sad because if you follow that advice, you have fallen into a trap. You have fallen into a wealth trap. It’s keeping you from your wealth. It’s preventing you from getting there.
Now, irresponsible consumer debt should be definitely avoided. However, the financially educated understand debt’s place in the financial world. Debt is for good or evil, an intrinsic part of our national economy. Debt will also be essential in your personal economy. It will be essential in creating your wealth.
You see, your savings account at the bank, it’s an asset to you but it’s a liability to the bank. They have to pay you interest. To offset that liability, the banks lend your money at a higher interest rate rather than -- yeah, above what they pay you. The world banking system operates on the fractional reserve system. For every one dollar you save, the bank can lend out ten dollars. The bank loves borrowers because they make a lot of money this way. When they lend out the ten dollars based on your one dollar savings, the money supply has increased, more money is printed, and the economy is stoked. If they lower the fractional reserve, interest rates will go up and the economy will slow down. The system is crazy, but it’s the one that we have.
Because the government has the ability to dictate the amount of money that can be printed, every dollar you save becomes subject to government control. As more money is printed, the dollar decreases in purchasing power and the money you have in the bank becomes effectively worthless. Your savings account becomes a really poor asset because the dollar is basically being gutted by the system.
For you this has a few important implications. One, where you can stop the devaluing of your assets is to purchase commodity such as gold and silver to hedge against the inflation. You also incentivized to use debt to acquire assets. Generally, it’s more lucrative to play the debt game. The system is based on debt. If you use debt as well, you can prosper in that system. If you play by the rules, you can go along for the ride and win in the way that they are winning.
For this to work for you, you need to be crystal clear on the difference between an asset and a liability. The simple distinction is that if it pays you, then it is an asset. If you pay it, it’s a liability. The government and the financial system reward you for good debt. Good debt is used to purchase assets. That’s how you classify whether your debt is good enough. Did you use it to purchase an asset? Something that pays you. If you use debt to purchase liabilities such as furniture, vacations, or cars as most people do, you’re going to run your financial ship right into the ground.
Debt used for assets, that’s going to enable you to increase your wealth many times more quickly because of the advantages of leverage. We will certainly talk about that in the future. You see, the wealthiest people in the world uses little of their own capital as possible when acquiring an asset. Then, they make it a priority to quickly get back whatever amount of their own capital that they did invest.
Now, why would the people who have the most money choose to use someone else’s? There’s a big clue right there. If you want to be wealthy, first, stop doing what poor people do. Second, start doing what wealthy people do. Wealthy people use debt to keep their wealth growing. You see, you can get rich using your money, certainly. But you get wealthy using other people’s money.
So I’ll leave you with this, when it comes to creating epic wealth, when it comes to creating your epic wealth, I want you to access as much debt as you can for the purpose of buying assets. Then once you’re satisfied with your wealth, eliminate the debt to preserve it. You got it? You want to take on as much debt as you can to acquire assets. Once you’ve got your wealth to where you want it to be, once you’ve got your cash flow to where you want it, now eliminate that debt to preserve it. Now, that’s solid advice. That’s advice you won’t get from your stockbroker. You won’t hear that from Dave Ramsey. You won’t hear that from Suze Orman. You’re not going to hear it from Jim Cramer. You’re not going to hear it from the Motley Fool's or any number of the popular money gurus that are dominating mainstream media.
You know, it makes you wonder a little bit, doesn’t it? It makes you wonder if the advice of saving money, if the advice of budgeting money, if the advice of maxing out your 401(k), if the advice of paying off your house as fast you can, if the advice of avoiding debt at any cost, if that’s all sound financial advice, the advice that the masses adhere to, then why are 95% of all Americans by the time that they reach the age of 65 -- 95%, they are either dead or they’re dead broke. There’s only 1% of the population that reaches the age of 65 wealthy, just 1%. What’s the big difference?
To get wealthy, you observe what the poors are doing and do the opposite. The poor they save money. The wealthy creates streams of money. Do you think Dave or Suze made their wealth saving money? No, they did not. They created streams of money through selling to the masses the advice to save money. The advice of saving money will not make you wealthy but boy, selling that advice sure will. We’ll be back right after this.
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That’s it for today. We’ll pick up from where we left off right here next week. See you then.
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