Latest / On Course: Navigating Wealth On Your Terms / Ep.2 Where Should Your Next Dollar Go?

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Ep.2 Where Should Your Next Dollar Go? · On Course: Navigating Wealth On Your Terms

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Andrew Tenenbaum: If someone has five opportunities competing for
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their capital and all of them are worthwhile, which one comes first?
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Welcome to On Course Navigating Wealth on Your Terms.
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I'm Andy Tenenbaum, and we're exploring the conversations and decisions that
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shape how we build and use wealth.
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Andrew Tenenbaum: So I have a client that has a great problem.
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He has a lot of opportunities, and he's trying to figure out
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where his next dollar should go.
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So we had a really good discussion.
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We went back and forth for a little while, figuring out what he's currently
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doing, where infinite banking could fit in, and ultimately, what his goals
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are, what is he trying to accomplish.
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So let's jump into it, look at some of the questions, and hopefully
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you can gain something from this.
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So the first thing he was looking at is where his money should go.
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And his question was, and it started off with a statement, is, "I've got five
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things competing for available dollars. How do I figure out the priority order
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for where my next dollar should go?"
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And what you're really looking at here is opportunity cost.
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You're trying to figure out what the best option is for your dollar, because
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once you deploy it somewhere, you may not be able to deploy it somewhere else.
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And the criteria I usually like to look at here are growth,
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income, liquidity, and protection.
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And I'll look at where that dollar is going and how it fits
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into those four characteristics.
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And if you have a dollar, it doesn't just have to do one of them, but
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it might do something better there than it could somewhere else.
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So understanding what you're trying to accomplish is really important.
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The other thing you wanna look at is time, your timeline.
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So I'll bring this back to infinite banking because that's kind of the
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lens here and the way we look at stuff.
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If you have a longer horizon, infinite banking could be very good.
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You're looking ten, twenty years, maybe even generationally.
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However, if you have a very short-term mindset or a short-term goal that
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you're trying to accomplish for that specific dollar, infinite
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banking may not be your best bet.
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So it's really important to understand what you're giving up, what you're
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accomplishing, and what that dollar is gonna do for you when you deploy it.
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So as the conversation continued, we started looking at trade-offs,
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and the next thing that he brought up is, what am I giving up?
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And the exact question was, given that I already have rental equity
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and other places to deploy capital, why should my next savings dollar go
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into this policy instead of staying liquid or going somewhere else?
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And that's a great point, and it's when people are first getting
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into infinite banking, a lot of times they're looking at this and
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they're thinking it's an either/or.
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They have to choose infinite banking or whatever else they're doing.
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It's really important.
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With infinite banking, this is an and asset.
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You're doing whatever else you're doing and this.
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The key is your sequencing of capital
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So the way that I would solve this, if infinite banking were coming
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into the mix, is my first place that the dollar would go to is premium.
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Then after I've built up enough cash value, I would access that
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cash value through a policy loan and then deploy it to continue
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whatever it is I've been doing.
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Understanding where that first dollar goes and how subsequently you can actually
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access it to continue doing whatever it is you're doing is really important.
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And I break this down a lot more on my channel if you want to get into it.
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But realize when you do this, this money, this capital is not free.
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You're gonna pull it out with a policy loan, but your cash value
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is gonna continue to grow in the background because you're not
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actually interrupting that growth.
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What's going on is you're leveraging it.
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You're just using your cash value as collateral, and that's
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why this is so effective.
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If you understand leverage and how this works, then you start understanding
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infinite banking and why it is such a powerful tool when deployed properly
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So once we got to the point of understanding the benefits of building
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up your cash value, it led to the next question, which was, what kind
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of timeline am I looking at before the policy catches up with the money I put in?
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And this is a very common way for people to look at the cash value in their policy.
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They wanna know when they put in X amount of premium, how many years down
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the road do they have that same X amount of cash value available to leverage.
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And while that's interesting to a point, I really like looking at this differently.
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What are you actually trying to accomplish?
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How much cash value do you actually need to finance whatever
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it is you're trying to finance?
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That's when the policy really starts becoming effective, and that's why
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it's so important to capitalize.
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So for him, the way we looked at this is we started looking at how much
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can he actually pay in premium, what is that gonna do over the years, and
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how many years down the road is he gonna have enough cash value where
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he could start financing some of these rental properties that he's
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involved with and use that for a down payment or maybe even the whole thing.
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It's just gonna be how much time he has, how the policy is designed,
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how he goes through underwriting, and then ultimately, what that's
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gonna look like on the back end.
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So after we got through that question, we started kinda really get
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into it, and he wanted to know how this would work in the real world.
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So we started looking at how he could position capital to
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support future opportunities.
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And the exact question was, or kinda what he wanted me to do at this
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point, was walk him through a real policy loan as if he were using it
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for a future rental down payment.
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And this was a great exercise.
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So we needed to look at typically what the down payments were gonna be
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based on the value of the property that he was gonna look to purchase
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to set up as a rental property.
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And then from there it was, all right, how much cash flow do you have coming in?
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What is your note gonna be with the bank?
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What are your monthly payments gonna be on that?
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And then on top of it, once you could satisfy that, are you gonna
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be able to pay back the policy loan at a reasonable rate so that this
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thing isn't snowballing on you?
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And I also wanted to not make this or have this done in a perfect scenario.
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I wanna look at real world stuff, 'cause if you've ever been involved in
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the real estate business, you know it never goes one hundred percent smooth.
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You're gonna have situations that are gonna pop up, and you're gonna need
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capital in order to take care of them.
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So with that in mind, it was, okay, where's that capital gonna come from?
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Is that gonna come from a policy, or are you keeping that capital somewhere else?
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And then on top of it, once you do take care of that problem, are you
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still gonna have enough liquidity or savings or money, income coming in
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to not only satisfy the primary loan that you have with the bank in order
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to pay or keep this rental afloat?
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And then on top of that, are you still making your premium payments, and do
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you still have extra capital or money coming in at this point to pay back that
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policy in a reasonable amount of time?
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And we can get into what a reasonable amount of time is and
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how much you should be paying.
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If you look at Nelson Nash, he always wants to pay it back with the-- whatever
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you'd be paying back to the bank, and I think that's a great thing to strive for.
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But at a minimum, I always recommend making at least the interest payments on
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the loan so that doesn't snowball on you.
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But you do wanna have a long-term plan, typically, especially in a situation
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like this, to go ahead and pay it back
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So the conversation really started progressing from here, and I could
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see that he was getting it, and it led to a really interesting question,
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a good point to bring up for people.
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And the question was: If I'm already leveraging one property to buy another,
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why wouldn't I leverage another property to pay the policy premium?
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So a little bit of context here.
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So what he's looking at doing is he has one rental property, and he has a
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lot of equity built up on it-- in it.
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What he wants to do potentially is use that really as his bank.
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So you can bank with a lot of different things.
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With infinite banking, we want a properly structured,
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dividend-paying whole life policy.
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But you could absolutely bank through a HELOC or something
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like that and use a property.
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There's pros and cons to both.
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That's probably something I wanna cover in an-another episode.
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I don't wanna get into that right now.
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But the interesting point here is he was looking at leveraging the
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one property to then buy another.
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Now he was looking at leveraging the property to then pay premium for a
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whole life policy, then borrowing the cash value to buy another property.
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And at that point I was like, "No, this is not what you wanna do." I'm fairly
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conservative when it comes to this.
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There are other people that may go for that option.
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I don't like leveraging something and taking on more
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debt in order to pay premium.
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I want people to have financial margin.
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I want the premium payments coming in from other sources that I know
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are free and clear, building up the cash value and then leveraging that.
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And if everything goes swimmingly and things are perfect, you
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could do what he's talking about.
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But a lot of the times when I stress test these and I look at worst case scenarios,
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what happens if we have a downturn?
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Now all of a sudden he has two properties that are highly leveraged.
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He has a premium payment, and chances are he also has a, uh, a loan out
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at this point, and he's probably maximizing the loans on this policy
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if this is the way he's setting it up.
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And it really can get you into a, a debt spiral, and you can get in a lot
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of trouble where you don't have enough capital to satisfy all these needs
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and something is gonna have to give.
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So with infinite banking, the point is not to get to the point where you're
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over-leveraged, it's just to do everything you've been doing, but just to sequence
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the capital through your policies first.
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If you're getting to a point where you're taking on leverage that you
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wouldn't typically take on with a bank, then we're doing it wrong.
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And the way he was doing this, I don't think I would or at least, yeah, me, I
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would not set it up where I'm leveraging something in order to fund these policies.
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I think you're really missing the point of what we're trying to accomplish.
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So this is really good 'cause at this point, we started diving into, well,
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if that's the case and he can't fund the policy that way, he wanted to know
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how it would work given his situation.
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So he goes, "What would make you tell me not to fund the policy in a particular
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year?" And I really like this because now he's trying to figure out what
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can work and what cannot work, and we started getting into the policy design.
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So the way this will work is you will fill out a form, we'll get a really
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good look at your assets, your financial health, and it will be a back-and-forth
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conversation figuring out, knowing, like, what are you saving right now?
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What can you actually dedicate towards premium?
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And then we'll look at that in the ideal situation you're in right
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now, potential stuff coming down the road, maybe you think you're
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gonna be doing a little bit better.
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And then on top of that, what happens if things don't work out like
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you plan, and all of a sudden you don't have that income coming in?
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What is kind of that floor?
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What's that bottom?
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And how are you going to be able to, to survive if you're
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not in the best position?
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So we started really working through all this stuff and The big thing
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here, and I come back to this, I mentioned earlier, was we were
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looking at his financial margin.
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Once you have the rental property taken over, how much do you have left over
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where you can dedicate capital towards premium to set yourself up so you can
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actually practice infinite banking?
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And him, he still has a decision at this point.
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He's trying to figure out, does he wanna dedicate more premium towards
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a policy right now, or does he really wanna jump in, leverage the one property
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and go for the other and minimize the amount of premium that he's actually
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gonna be putting into this policy?
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And there's no right or wrong answer.
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It really just depends on what you're trying to accomplish.
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It comes back to the beginning.
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What are you trying to do with that dollar?
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Now, I will tell you, over the long term, there's a lot of
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factors that can go into it.
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If he could have enough financial margin to build up and save and
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then take a loan eventually and get that second property, that will
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be a very nice way to set that up.
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But who knows what the market's gonna do down the road?
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Maybe he has more of a short-term play.
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Maybe he has an inside track, and if he gives up on this property, he's really
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gonna be missing out So every situation is going to be different, and there's no hard
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and fast rule that you have to do this now or you have to put X amount of premium.
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It's going to depend on your financial situation, your health, and ultimately
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what you're trying to accomplish
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So as we were continuing the conversation, it started evolving to him really
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looking at his specific situation.
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And the question he asked was, "If you're designing this specifically for
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me, what are you trying to optimize, and what would you actually build?" And
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this is great because this is exactly what happens with infinite banking.
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There is no cookie cutter.
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You need to look at your exact liquidity needs, what you're trying to
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accomplish, your death benefit needs, who is relying on you, ultimately,
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what your objectives and goals are, and then from there, we can figure out.
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I usually have a place that I'll start based on your age, what you do
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when you go through underwriting and what you're trying to accomplish.
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But that doesn't mean that we're gonna stay there, where you can kind
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of flex left and right a little bit depending on what you're trying to do.
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So in his particular case, he's in his mid-fifties.
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He-- I was trying to optimize for the most amount of cash value at age seventy.
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And with that in mind, also take into account that he has a big need
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for liquidity in the short term.
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And so maybe we would put another type of rider on there called
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an SPUA to really maximize that.
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But ultimately, it depends.
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And this kind of comes back to the beginning.
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I wasn't looking at when his premium was gonna equal his cash value.
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I was looking at when is he gonna have enough cash value that he'll actually
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be able to put down payments on rental properties going forward so that he
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has that liquidity that he needs.
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And then finally, his last question was, how much should I
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commit without compromising the other opportunities I'm pursuing?
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And so there's two things that I always come back to here,
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meaningful and manageable.
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Is it gonna be meaningful, meaning is the premium gonna be meaningful enough
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that it's gonna lead to enough cash value down the road that you can accomplish
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what you're trying to accomplish?
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And is it gonna be manageable?
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And this kinda comes back to that double leverage when he was looking
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at leveraging the one property to then fund premium and then, you
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know, have leverage on the other.
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That also is not manageable.
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So really, what is your financial margin?
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How much capital, how much money do you have coming in that you can
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actually dedicate towards premium?
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And the other big thing here is remember, you don't have to hit
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a grand slam on the first one.
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You just have to hit a single, get on base.
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If you look at Nelson and his book, Becoming Your Own Banker,
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it is a series of policies.
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You're not trying to accomplish everything with your first policy.
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It takes time, and I think when people catch this, they get really excited, and
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they want it to all work right away, but it's a very slow, methodical process.
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It's kinda the tortoise and the hare.
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We are the tortoise in this case.
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We're gonna win over the long term.
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But in the short term, it's gonna take a little bit of time to get that
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momentum, build up, get that cash value, and actually have enough to accomplish
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what you're trying to accomplish.
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So what's the big lesson here when we look at all this?
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Well, if you remember, when we go back to the beginning of the podcast, I had a
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client here who had a lot of options when it came to every dollar coming in, and
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he was trying to figure out how infinite banking really fit into all of it.
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And so the big things to look at here are, number one, sequencing capital.
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Remember, you don't have to choose between infinite banking
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and whatever you're doing.
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This is an and asset.
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It's a matter of getting capital through premium into your policy
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and then leveraging it to accomplish whatever it is you're gonna do.
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Just realize in the short term, you are gonna give up some liquidity
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to get that done, but over the long term, this is gonna be extremely
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powerful for you and your beneficiaries and whoever else generationally
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you're trying to take care of.
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So when you look at those dollars coming in, I bring it back to the
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characteristics that I talked about.
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Are you trying to solve for income?
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Are you trying to solve for protection?
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Are you looking for liquidity?
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Are you looking for growth?
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And realize your dollar may be accomplishing all four of those
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things even, but maybe it's doing one a little bit better than another.
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So it's important to look at what you're doing, what your goals are,
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what your horizon is, and then from there, you can really put together a
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solid financial plan and bring infinite banking in to complement, not replace,
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whatever else it is that you're doing.
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All right.
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I hope you enjoyed it, and I hope to see you again on the next one.
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Thank you for joining me on On Course.
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My goal of this podcast is to share real conversations, explore
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different perspectives, and help you think more intentionally about
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the financial decisions you make.
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If you found this conversation valuable, consider subscribing and leaving a review.
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And if you'd like to learn more about infinite banking and how it might
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fit in your own financial picture, head over to blueskiesic.com and
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check out my Start Here series.
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Thanks for listening.