One of the most common pitfalls of “typical” financial advice is to section your dollars into different buckets. When done in that way, your dollars are only doing one job. While this is okay, it’s inefficent, and ultimately leads to lost opportunity costs and waste. So what if your dollars could do multiple jobs at once?
First let’s define what a job is. Any time a dollar buys an asset, pays an insurance premium, reduces tax, increases cash flow, leverages itself, improves protection, recaptures opportunity cost, improves liquidity, recovers control, enables tax benefits, builds confidence, gains movement or lowers restrictions, that dollar is doing one job.
In many products, your dollars can do 2 or 3 jobs at a time. Products are things you buy.
In many strategies your dollars can do 5 or 6 jobs. Strategies are things that you do.
How To Put Your Money to Work
So many people limit their prosperity potential by having their dollars do only one or two jobs by segmenting their dollars across many products. For example, when you put some dollars in a retirement account and some dollars in an education fund for your children, each account is only doing one job. They’re also diluted because funds are split between these accounts. While each of these accounts also provide some tax benefits, it’s in the form of a tax deferral. Deferring tax is like sticking your head in the sand, hoping the problem goes away but actually making it worse by ignoring it.
So how do you get your dollars to educate your kids AND provide for your financial freedom? You keep them moving and you watch out for lost opportunity costs. Keeping money moving is as vital as keeping your body moving. Money multiplies when it’s hard at work and moving. When it’s sitting still, it stagnates and can be very limiting when you want to use your dollars.
How Real Estate Makes Money Move
One example of a product/strategy combo that makes your money move and do many jobs is investment real estate. If you buy real estate as an investment you immediately get each of your dollars potentially doing 7 jobs: Mortgage payments, the property itself, depreciation, appreciation, leverage, disposition, and cash flow.
Mortgage Payment
Getting your money to move from one place (cash in the bank) to another (the mortgage company) is an important first step as money that sits around is lazy while money that is moving is productive.
Mortgage payments also benefit from inflation in that your payment can stay level while inflation causes the impact of that payment to be less and less.
The Property
The property itself is part of the asset and it can be left as is or improved. Unlike other assets, the physical property enables the other jobs, while other assets often do not and hence only do one job.
Depreciation
While only available on investment real estate and somewhat limited by tax law, depreciation enables you to offset some of the income coming from the property.
Understanding this takes the work of a good tax strategist (CPA or otherwise) and can be furthered by qualifying as a real estate professional.
Appreciation
Real estate generally increases in value over time though it may do so in a roller coaster manner. Unless the property is at risk of falling into the ocean, its value can not fall to zero.
Leverage
This job provides unlimited potential and is literally defined as one dollar doing two jobs.
Borrowing against real estate is one of the most efficient strategies available. You can use $10,000 to buy $100,000 worth of value (add zeros to both if you like) and there is no other asset available for purchase that way.
Furthermore, with payments and/or appreciation, that ability (to borrow against it) comes available again.
Disposition
Selling or giving away real estate (as in a Charitable Remainder Trust) enables dollars to be freed up and used for something else.
Choosing not to sell enables continued increases and cash flow in a tax favored way.
Cash Flow
Cash flow, of course, is our favorite because you can increase rents or lease payments over time while the net impact of your mortgage payment decreases. You can also improve the cash flow by improving the property over time.
Cash flow enables you to pay down loans, reinvest in additional cash flowing properties, or just create an income stream.
How One Asset Can Enable New Strategies
Let’s get back to that education fund. If you build up assets in a 529 plan, when you send the kid and the money off to school, they’re gone. That money is a lost opportunity cost for your retirement or financial freedom.
For example, if you send $100,000 off to the school (maybe they had a prepayment discount) at your age 50, this equals $324,340 lost from your asset base by the time you are 80, assuming a net 4% rate of opportunity cost.
If you have investments performing at net 12%, that lost opportunity cost is $2,995,992. Yes, almost 3 million dollars you could have had at age 80.
Instead, what if you could borrow that $100,000 from your real estate property? With this strategy, the underlying asset keeps growing. The cost of borrowing (interest plus principal pay back) can be carried by the tenants. It can also improve your tax position. You can do this again and again for multiple children. When everyone is through school (or whatever they choose), you can then enjoy the cash flow as additional income.
Notice it was the product (real estate) plus the strategies (leveraging) that enabled the dollar to educate kids AND provide financial freedom. This is the power of having dollars that can do more than one job alone.
How Whole Life Insurance Can Do Multiple Jobs
A second example that operates very similarly is whole life insurance and its 7 jobs: premium, cash value, waiver of premium, death benefit, leverage, increased death benefit, and paid up additions (PUAs).
Premium
Same as a mortgage payment, by moving money from the bank to the life insurance company, you’re immediately putting your dollars to work at many jobs.
Premiums also stay the same while inflation causes the net effect of them to go down.
Cash Value
Similar to property value, this asset can be left as is or improved. Your cash value literally forms the foundation of any strong asset base and enables an endless supply of other jobs since it is totally liquid and useable.
(Note: Cash value will always go up, while property value can go up and down, making cash value the more certain of the two.)
Waiver of Premium
Only the life insurance industry offers this benefit. If you become disabled, the insurance company will pay your premium for you, thereby guaranteeing you will have a steadily rising liquid cash value account.
Death Benefit
Since death is a guaranteed event (unlike all the other perils various insurances protect against) knowing this benefit will pay some day in the future can help us today.
Plus, on the small chance you die early, your kids are still educated.
Leverage
Just like real estate, you can borrow against cash value while the asset still keeps on growing, unaffected by the loan. Yes you might want to read that again.
Increasing Death Benefit
A growing face value is necessary to keep up with inflation, and is also helpful to enable you to optimize the use of all your other assets.
Paid Up Additions
This is the ability to add additional dollars to an existing policy to increase all the other benefits it provides.
Making Your Life Insurance Work
So how could life insurance help educate your kids AND provide for your own financial freedom? Similar to real estate, you can borrow against (notice I didn’t say “take out”) cash value of life insurance to pay for school while the underlying asset keeps right on growing.
With this asset, the cost of borrowing (interest plus principal) will be paid back by either you or your child. However, borrowing costs only go on for a time (say 4 years of college plus 10 years of payback), whereas opportunity costs go on for your lifetime. We used age 80 in the example above, yet opportunity costs really don’t stop until you die.
Keeping your money moving so it will keep multiplying is as vital to your personal economy as the movement of money is vital to our world-wide economy. Getting your hard-earned dollars to do as many jobs as possible is more important than chasing a higher rate of return. Efficiency and effectiveness is what we all want our money to be about. So if you’re looking for a measuring stick with which to measure your growth, “how many jobs your dollar is doing” should be a higher priority than what rate of return your money is earning.
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