“If the majority were right, the majority would be rich.” Having now invested more than 100,000 hours into my career, I am having fun proving again the power of Money in Motion Solutions. We’ve used this slogan for years to get people to think about their money being used in multiple ways rather than the old “bucket” or “envelope” method of allocating their funds. I don’t know about you, but my mother had a separate envelope for grocery money, gas money, etc. and my parents had separate savings accounts for Christmas funds and vacations.
For years, I have practiced what I preach – systematically allocating a certain percentage of our income to stodgily perceived cash value life insurance. Some people call this permanent life insurance. Balancing these more secure dollars with additional allocation toward “risk” dollars in the stock market has been the remainder of our strategy.
The majority of folks believe the heaviest allocation to risk dollars can give you “better returns.” On paper, that might be the case. In my lifetime, I have experienced multiple dips in the value of my invested dollars. That means the values in our statements were less than the last monthly or quarterly reference point.
At this writing, the most recent example is 4th Quarter 2018. 1000 points a day drops in the market became a new reality. (Want more details? Read the recent post “Stocks – Rocky Path” on my blog.)
A couple of years ago, we had an attractive opportunity to buy some property in the Heights that would help out my daughter, Emily. Traditionally, I would have had to put up cash to make this happen. Instead, I arranged a loan for the property purchase and a line of credit with the bank and pledged (assigned) the cash values of my life insurance policy as collateral in an amount sufficient to cover not only the acquisition, but also the necessary renovations. This is the same strategy that Walt Disney followed when he developed Disney Land in California.
To the property seller I was a cash buyer. What I was attempting to achieve was what I call “construct to perm” financing. We needed to buy the property as well as have the funds to do the construction. Paying cash would have meant self-financing out of savings. As a business owner, I like to guard my liquidity for unexpected cash flow challenges.
As in any renovation project, things did not work out perfectly. We had to invest many more hours and dollars than originally estimated to update a building over 100 years old.
What was the outcome of the final project? We added six figures to the asset side of our balance sheet. We still had a liability in the form of longer term financing (still at historically lower interest rates) – and my daughter had a much nicer place to expand her catering and “grab and go” gourmet food business. (www.oak-heights.com)
The banker was happy. She had a new, solid loan, backed by more than sufficient assets. The city and state will benefit from the property and sales taxes. More people are being employed.
We got a tax write-off for the interest on the construction loan. After that tax credit, we looked at the change in the cash values inside the life insurance policy, less premiums paid, and found the internal growth was higher than our after-tax cost of the loan. The IRS doesn’t see that increase which goes on the asset side of our balance sheet.
Remember my comments about the how the majority would have committed cash? We put up only $1000 in good faith for the original offer. Also, if my pledge to the bank had been equities, the drop in the market in the 4th quarter would have triggered a “margin call” – which would have meant coming up with more cash, or selling equities at depressed prices. Because of our minority approach to financing, none of this happened to us.
Do you have a story to share? We’d love to hear it. Are you following majority thinking that helps the bank or IRS?
Call Thomas about scheduling a time to think about becoming a minority thinker with your finances – or like the title of my older book said, “Beyond Majority Thinking.”
Ron Schutz, author
Securities and investment advisory services offered through World Equity Group, Inc. Member FINRA and SIPC, a Registered Investment Adviser.
SMART Group Houston is not owned or controlled by World Equity Group, Inc. Neither SMART Group Houston nor World Equity Group, Inc. provide tax or legal advice.