How To Get One Dollar To Do Many Jobs
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. And in many products it can do 2 or 3 (products are things you buy). In many strategies it can do 5 or 6 additional (strategies are things you do.) So many people limit their prosperity potential by having their dollars do only one or two jobs. For example, dollars put away only to educate kids or only for retirement are doing only one job each. Each of these 2 examples does also provide some tax benefits, but mostly in the form of 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 as we know from Prosperity Principle #6 is as vital as keeping your body moving. Money multiplies (does many jobs) when it’s moving. When it’s sitting still, it can only do one or two jobs. One example of products that work and the strategies that make 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 are also benefited by inflation in that your payment can stay level while inflation causes the impact of that payment to be less and less. The property itself is on part of the asset and it can be left as is or improved. It can also provide for the other jobs listed here whereas many other assets give you only the asset and hence only 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 (as in a Charitable Remainder Trust) real estate 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: 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. Now back to educating those kids: 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 now causes 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. By borrowing against real estate that $100,000 can be accessed by borrowing against the property (meaning 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. Then as the loan is repaid (again, by the tenants) the borrowing strategy can be used again for the next child. Or maybe now its time to focus on increasing cash flow and reducing time spent on managing the real estate so you let the increased cash flow provide for more financial freedom income. Notice it was the product (real estate) plus the strategies (leveraging) that enabled the dollar to educate kids AND provide financial freedom. Leveraging is not always required to get multiple uses of dollars, but it can be one of the ways. 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 capability. Premium: same as a mortgage payment, by getting money to move from cash in the bank to a payment at a life insurance company, you’re immediately taking your dollar from doing one job to 3 or 4 and on up to 7 over time. 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 and literally forms the foundation of any strong asset base and enables an endless supply of other jobs since it is totally liquid and useable. ONE NOTE ABOUT THE DIFFERENCE BETWEEN PROPERTY AND CASH VALUE IS THAT CASH VALUE WILL ALWAYS GO UP, WHILE PROPERTY VALUE GOES UP AND DOWN. 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 guarantying 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 maximize 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. 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. Here the cost of borrowing (interest plus principal) will need to be paid back by either you or your child. However, borrowing costs only go on for a period of time (say 4 years of college plus 10 years of payback), where as opportunity costs go on for your life time. We used age 80 in the example but opportunity costs really don’t stop until you die. Keeping your money moving so it will keep multiplying (doing multiple jobs) 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 and “how many jobs your dollar is doing” should be your measuring stick – not what rate of return your money is earning.