Don't drive down the highway with one foot on the gas pedal and the other foot
on the brake. In this episode, we are going to address the question of "How is
the best way to save money and get out of debt?" Are you ready?
So, I'm Doug Andrew and I've been a consultant for 45 years helping
people to optimize their financial assets, accumulate money safely,
predictably on a tax-favored basis so they don't outlive their money in
retirement. But also at the same time I've counseled a lot of people on how to
get out of debt. Now, a lot of times people think, "Well, I need to hurry and
pay off all this debt first and then I'll start saving money." No. It's actually
extremely important to be accumulating some money, establishing some liquidity
an emergency fund where you can access money in the event of an emergency, a
setback, being laid off getting sick disabled, whatever it is rather than
hurrying and paying off all your debts. Because I have seen numerous people who
paid off their debts and then they got into trouble or they got in an accident
or they had an illness or they had to have a surgery. And now, they
couldn't borrow back because they weren't working.
They couldn't qualify and they just had killed all their access to money because
they just plowed it all against the debt. And now they don't have any income. So,
you need to be balanced and start accumulating money. But there is a much
faster way to get out of debt than sending extra principal payments against
the mortgage, to the lender. And I'm going to prove why in this episode. So, let me
tell you a story. Years ago, I met with three finance professor
at a major university. And they started out by saying "Mr. Andrew, we teach all
of our finance students up here in the upper level classes why when they go out
in the world and they buy their first house, if they can afford it, they should
take out a 15-year amortized mortgage instead of a 30-year amortized mortgage."
And I went, "Hmm." I said, "Gentlemen, why do you do that?" They looked at me like, "Well,
duh!" They knew I was a financial guy. Now, maybe they meant "Doug". I don't know. But
they go, "Duh, if you just bite the bullet and pay a higher principal and interest
payment on your mortgage, you'll save a grundle of interest." I
guess grundle is up maybe a Utah term, where I'm from. "You'll save a whole bunch
of interest and you'll be able to pay off your mortgage in 15 years. And
then you can begin to sock away what you used to pay in mortgage payments into a
savings account like an IRA or 401K." I said, "Gentlemen, you're finance professors.
Haven't you ever taken the differential between a 15-year amortized mortgage
payment let's say of this and we actually used a mortgage of
150 thousand, 300 hundred thousand. Several examples. A 15-year advertised
mortgage payment is higher than a 30-year amortized mortgage payment.
Haven't you ever taken that differential between the 15-year and the 30-
year and the tax savings? Plus the tax savings. You will achieve during the
first 15 years of the 30-year mortgage, okay?
Don't spend it. use a system and suck away that difference over here." And I
would point to my right hand pocket. Well, where's here? "Over here accumulating
money tax-free." And they would go, "What's tax free?" it didn't surprise me. So,
I would take a few minutes and explain my favorite vehicle which I call the
Laser Fund. And I would say, "Okay. Gentlemen, in sections 72(E) 7702
and 101 a of the Internal Revenue Code, you probably don't know what those are
but I'm a specialist in those. That allows you to accumulate access and
transfer your money totally income tax-free.
I have averaged 10.07% tax-free rates of return for the last 25
years using Laser Funds." And just trust me. I will give you a book titled the
Laser Fund to prove this. Because now I've written a book for that but back then, I
gave them my Missed Fortune book and they were blown away. Because I titled the
very first chapter in my very first book the $25,000 mistake being made by
millions of Americans. What was it about? People who were sending extra principle
payments to the mortgage company. They were doing the bi-weekly plan. "Oh, isn't
that magic?" Instead of paying 24 ½ payments a year, they're paying 26 ½
payments because most people are paid bi-weekly. And and so, it was all these
little magic ways that you could pay off your house in 22 years or 20
years or the 15 year method that they were talking about. And so, I said, "Haven't
you ever taken that differential and set it aside
with with a very disciplined system over here in a tax-free vehicle?" "No, we've
never done that equation", they said. "So, you understand compound interest". They
you go, "Yes." I'd give him a sheet of paper 8 ½ by 11 sheet of copy
paper, I'd fold it in half. Fold it in half again. Now, imagine if you could fold
out over that sheet of paper 48 more times a total of 50 times, how thick do
you think that would be? And they would say, "Oh, 3 centimeters or 5 inches?"
I said, "Gentlemen, I thought you understood compound interest."
What is the sheet of paper doing every time you fold it in half? It's doubling.
That is five one thousandths of an inch thick. But if you doubled it 20 times, it
would be 1 million 48 thousand
times thicker than five one thousandth of an inch thick. If you
doubled it 20 times, it would be a mile high. If you doubled it 42 times, it
would be from here to the moon. If you folded it over 50 times, it would be here
from here to the Sun. If you fold it over one more time, 51 times, it would be from
here to the Sun and back. And they would go, "Wow." What does that mean? If I take the
money that I would be giving the mortgage company, it would be like saying,
"Here Mr. banker, here's an extra hundred bucks this month.
Don't pay me any interest on that. If I need it back I'll borrow it back on your
terms and prove there's a need why I should have it." Sound sort of stupid,
doesn't that? But that's what's happening every time you send extra principal
payments to the mortgage company. I said, "Gentlemen, take the differential put it
over here compounding tax-free. And have you ever done the math?" No, I took out my
little HP 12c calculator at the time. And I did the math. They were flabbergasted. I
said, "Look. There was enough money in this right hand pocket to totally pay off the
mortgage liability. This pocket (let's say) in 12 ½." With the same
money they were teaching their students to pay off and mortgage in 15 years.
Same money. But I got out of debt in 12 ½ years. 2 ½
years faster. And then instead of sucking away the money into a tax-deferred IRA
or 401K, I kept it over here. Now, I actually don't
physically take the money out of this pocket and pay it off. I can. But by
keeping it over here, I'm earning higher interest than I'm paying over here. If
I'm borrowing on a mortgage at 4½ tax deductible interest,
that's a net cost of 3. If I am earning 9, how much more is 9 than
3? Don't say 6. It's 300%
more. On a million dollar mortgage, I'm making 90,000 over here compounding. It's
going to be more than 90 the next year because it's compounding. I'm paying
30,000 simple interest. Compound, simple interest. There's enough money
over here to pay off the mortgage 2 ½ year
faster but by not paying it off. Guess what I'll have? I'll end up with... And I
show them the math. I'd end up with several million dollars over here
instead of if I'm lucky 900,000 in a tax deferred IRA or 401K
after paying off the mortgage. And after tax, the 900,000 is only
worth 600,000. What would you rather have? 2, 3, 4 million
tax-free or a paid off house and only 600,000 after tax and IRAs
and 401Ks. Are you getting it? I can show you how to get out of debt. But the
quickest smartest way is not any way shape or form sending extra principal
payments to the mortgage company. You put it over here where it's liquid safe and
and earning predictable rates of return. You can access the money here because
it's yours. You don't have to borrow it back. You're in control.
So, this sounds a little counter-intuitive to what you've always been taught or
thought. I understand that. And that's why I wrote my first book, was called
Missed Fortune. And that's why it was the very first chapter. And so, I taught
people in the first section of the book the first eleven chapters about how
money really works and how you can become your own banker. And then I talk
about why IRAs and 401Ks are not the best way to save for retirement.
I would rather accumulate my money tax-free, access it tax-free, when I die
at blossoms and transfers tax-free. That knocks the socks off of an IRA or 401K.
So, why would you want to go down the highway with one foot on the gas in a
tax deferred IRA, 401K account and put the other foot on the brake by getting
rid of all your tax deductions paying off your house the wrong way. Keep the
tax deductions high continue to use money like the smart banks and credit
unions do where they borrow OPM, other people's money. By doing that, you'll have
a tremendous amount of wealth. And the best place to accumulate
that is in a tax-free Laser Fund. And so in all the books that I've written, one
of my favorite is The Laser Fund. And if you click on this episode here, you'll
understand how you can get a free copy. I'll pay for the book. It's 300 pages.
Half of the book is is the charts and graphs and explanations. The other half
at are 62 actual clients stories of how you can use the Laser Fund for
retirement, for real estate management, business capital, college funding. And
I'll send it out to you. I'll pay for the book. You pay the shipping and handling
$5.95. Is that fair enough? And then you can become empowered on these
kinds of strategies so that you are smarter about your money and you end up
with far more than even these finance professors were telling their students
because they didn't know what they didn't.