A hearty welcome to “Grandma’s Wealth Wisdom” with your neighborly hosts, Brandon and Amanda Neely. This is the only podcast that helps you take charge of your cash flow and leverage your assets, simply and sustainably, the way Grandma used to.
Brandon: Hey, I’m Brandon, and welcome to our Grandma's Wealth Wisdom, where we help you break through to a smart, stable financial future, with the tried and true wisdom that Grandma used.
Amanda: Hey, I’m Amanda. This is Episode 80, titled, “When it's smart to pay interest.” You might notice we didn't title this episode “Is it smart to pay interest?” or “How to never pay interest.” There are actually possibly a few times when pain interest might even be the smart thing to do. [00:55.0]
Brandon: Now, don't jump off the podcast just because we said that. Keep listening. I mean, we know it's scandalous to suggest there is, in fact, a time to pay interest, but humor us for the next 15 to 20 minutes and see if we say something that makes sense to you, and put all those judgments aside and go into it with an open mind.
Amanda: Yeah, we actually have come up with three ways or three times when it might be smart to pay interest, not one, not two, but three. See if you agree with us on any of these. One, maybe you agree with one, maybe agree with two, maybe even all three. We want to get into these without further ado. We've got stories and numbers to back up each one. Brandon, why don't you kick us off with number one?
Brandon: This is an obvious one. At least I think it is. In order to buy a home, I mean, purchase a home, you might need to take out a mortgage, which requires interest. Number one is if you want to purchase a home. I mean, I don't know anyone who would have been able to buy their first home without a mortgage. [02:14.3]
Amanda: Yeah, and even I’ve started going through the curriculum for the certified financial planner certification, hoping to have that certification completed within the next couple of years or so, but even the very first textbook that I’m reading mentions the proper use of a mortgage as a way to build wealth.
Of course, it goes through there are wrong ways to use a mortgage and right ways, depending on each person that's thinking about taking a mortgage depending on their unique situation. For example, if you're only going to live in a place for a year, it's likely smarter to rent. But all the costs associated with buying a home and starting a mortgage are likely not worth it if you're only going to live there for a year, right? But if you're going to live there, say, for 30 years, it might be more worth it to use a mortgage and pay those costs as opposed to the cost of renting. [03:06.3]
Brandon: Yeah, plus, a lot of people purchasing a home and paying a mortgage, it's their first experience of building equity or wealth, so they need to.
Amanda: Yeah, and for a lot of people, that's their primary way that they're building wealth. I know for my parents, besides a pension, their only wealth was in their home. They didn't even really keep a savings account, but my dad put his labor into the house that my parents bought when I was four years old. He closed in our carport. He finished the basement. He'd had lots of other things, mostly with his own two hands because he was skilled in that way.
Brandon: Not me.
Amanda: By the time they sold that house that they bought when I was four, they sold it after I went to college because they didn't need as big of a house anymore. My dad had increased the value to double what they had purchased it for and that was part of their retirement plan, part of what allowed them to have at least some money to go buy their next house and to live a good life. [04:10.2]
Brandon: Not everyone can do that. I mean, obviously I couldn't do it from the labor side, right? I mean, it's a difficult thing, but possibly I could still double our home's value before a lot--
Amanda: It all depends on the market, too, right?
Brandon: Possibly, yeah.
Amanda: Yeah.
Brandon: But for a lot of people living in the same place for 15 or even 30 years and then cashing out the equity when they're empty nesters is a big part of their retirement savings plan.
Amanda: Yeah, and for most of them, if not almost all of them, that would not be possible without a mortgage and without paying interest.
Brandon: Yeah.
Amanda: Yeah, so just to recap, that's one time when it might make sense or it might be smart to pay interest to buy a home that you're going to live in for a long time and build equity within that home. [05:02.2]
Brandon: And number two I would say is really, as a business owner, something I like to think a lot about, and it's to create a ROI, a return on investments. Businesses or real estate are obvious when we talked about that in our last episode. When you have a predictable return with managed risks that requires additional funds than you have, this might be a time when it's smart to pay interest.
Amanda: Yeah, just like we talked about most people can never buy their first home if they couldn't, if they didn't pay interest, if they didn't take out a mortgage, I think also most businesses would never start or grow by avoiding debt all together, particularly if they're brick and mortar or they use some kind of inventory that they have to purchase in advance before they sell it. We're all for bootstrapping as much as possible. When we started our first business, we bootstrapped out the wazoo. We bootstrapped a lot and we reduced our need to go into debt to start that business by 80%, but we still had that 20% that we-- [06:16.2]
Brandon: Which is still a lot of money.
Amanda: Yeah, and we did need to borrow it, but it made a lot of sense. We were just months, two or three months from being able to open the business, and we just needed that last little bit of funds to get us across the finish line, so that we could open that initial inventory, the finalizing of the build-out, those kinds of things. At that point, that was really our only option. We did it smartly. We got 0% interest on credit cards for a year, things like that, but we would have never been able to open without that last 20% that we’d use debt in order to open.
Brandon: And just like a lot of businesses, we started in the negative. We knew the ROI of getting started would be worth it, though, and we put in our time and effort to see that take place. [07:08.5]
This is what people sometimes think when they start a business, maybe they think there’s going to be an ROI right away, but in most businesses, it takes a good a couple of years to get it turned and flipped, and knowing and doing the effort, it’s going to pay off in the end.
Amanda: I think you've got another example besides business.
Brandon: Yeah, and this can also work with real estate. If you're going to buy income properties to rent, it's highly unlikely you're going to be able to save up enough cash to purchase properties outright, and even if you can, the speed and number of properties you can purchase would be considerably reduced if you did it that way.
Amanda: Yeah, buying all your properties in cash and trying to save up for that, that doesn't sound like a very good business plan to me.
Brandon: Yeah, me neither. It's very, very slow. [08:01.6]
Amanda: But I feel like we should say one word of warning here when you're looking for an ROI and you think you can get a better return on investment than interests that you would pay. There are some people out there who would tell you it's smart to pay interest to invest in things like stocks, options, cryptocurrency, and so forth. Be very careful if you choose to do this. Remember that too many people borrowing too much money to invest in risky investments like the stock market was a very big contributing factor to the Great Depression, and we don't want to go there again.
Brandon: Yeah, and so I think it's important to know what you're doing, really know that whole, whatever the business model is, really know it. It's way too easy to get over-leveraged when the investment doesn't do what you thought it would do. If your investments go in the wrong direction, you still have the debt to pay, so make sure you are thinking about that. [09:02.8]
Amanda: Yeah, think about it this way. When you're using debt to start a business, you purchase inventory, you buy equipment. Even if the business doesn't work out, you still have something you can sell to help you pay off your debt and hopefully sell it at a fair market value to maybe another business or something like that.
When you use debt in real estate acquisitions, there's a property that backs it up, and even if the market, the real estate market, goes down a little bit, you still have a home. You could sell it, pay most of your debt back. Your assets that you're using as collateral, when they're much riskier, they're stocks or options, or cryptocurrency, depending, there's a lot more risk that you could sell it for or you need to to pay your loan back otherwise, right?
When we had started with this ROI thing, we talked about, it's about managed risk. You know what kind of risk you're taking. Hopefully, if you're thinking about starting a business, you're smart enough to know you don't put all of your money into your business, right? [10:06.5]
Let's say you're 60 years old and you're retiring. You don't use all your retirement funds to go start a business. You only use a portion of them, right? Or if you're taking out a loan, you don't take the maximum that you could take out. Maybe you take out a smaller amount, so that you can pay it back or you've tested and proven.
With stocks, it's a totally different arena. It's a hundred percent out of your control. You don't really know what's going to happen in other kinds of riskier things. You’ve just got to be really, really careful there. Maybe even avoid it altogether.
Brandon: Yeah.
Grandma always said, “Eat your vegetables. Look both ways before crossing the road. And never risk your financial future on elements of the market you can’t control.” That Grandma, always good for some tried-and-true advice. And although some of her wisdom seems to have skipped a generation, you don't have to be left behind.
Download “Grandma's Top Tips for an Independent Financial Future” absolutely free, when you visit Grandma’sWealthWisdom.com. Don't wait. Get Grandma's best tips today.
Brandon: And that leads us into number three of when it's smart to pay interest. It's also possible to have your safe accessible money growing for you while you're borrowing against it. Right? If your money is growing more than the interest you pay and you lose the interest if you spend the money, then that might be a good reason to pay interest, and this is something we think a lot about, leveraging your assets.
Amanda: Yeah, and part of why we put this third is that if you can start thinking it makes sense to pay with a mortgage, it makes sense to pay interest to get an ROI within a business or real estate, then maybe it makes sense to pay interest in certain areas of our personal lives, too. [12:04.0]
For a lot of people, though, paying cash for everything, it's the solution to saving money, growing wealth, been smart with your finances. There's a big problem with paying cash though. Opportunity costs.
Brandon: That's a big one.
Amanda: Yeah. Opportunity cost is the loss of potential gain on your money when you spend it. Every dollar you spend could have been put to work to grow into more dollars over time, just like we're talking about the ROI in the last example, but when you spend it, there's always an opportunity cost of what else it could have done.
Brandon: And opportunity cost is what gurus are talking about when they rail against buying lattes. Do you remember? You've heard that before. That $4 could have grown into $12 for your retirement, but instead you bought a latte today, so there goes your retirement, and I hate that one.
Amanda: Yeah, especially as coffee shop owners and I’m drinking a latte as we record this episode. [13:03.8]
But the way around opportunity cost is really to put your money somewhere where you can use that solid cash as collateral for a loan to go, make a major purchase, like a car or groceries in retirement, whatever it might be. But this only works if the cash is growing by more than the interest on the loan.
Brandon: Amanda, can you do an example here.
Amanda: For sure. Let's do some round numbers. Let's say, you've got $10,000 and it's growing at 5.5% annually and you've got 20 years until when you want to retire. That $10,000 is set to grow to $29,000 and some change, almost tripling at the end of 20 years. If you spend that $10,000 today, it's almost like losing the $29,000 in future value.
Brandon: And when we think in terms of opportunity cost, everything gets more expensive. Everything. [14:05.2]
Amanda: Yeah, when you're thinking this $10,000 is really $30,000 or $29,000, all of a sudden, that purchase is now $30,000 instead of $10,000. You just tripled the price of the thing that you're thinking about buying.
Brandon: Yeah.
Amanda: Now, let's say, you could take a 5% simple interest loan of $10,000 and still buy the thing, but keep your $10,000 growing at 5.5% annually. Let's say then that you also repay that loan at $200 per month. You'd end up paying $1,150 in interest over four and a half years. Why would you do that? Why?
Brandon: Yeah, I mean, that's paying interest on your own money. That's ridiculous.
Amanda: Right, because, I mean, you could have just taken that $10,000 out and just bought something and you didn't have to pay interest, but even though you paid that $11,050 in interest, your $10,000 is still growing and you're still going to have that $29,000 and some change for retirement and that thing that you bought with that $10,000. [15:08.7]
On the other hand, right? That's kind of Option 1. You can pay the 1,100 bucks in interest and still triple your money, or on the other hand, you could just spend that $10,000 cash, save up that $200 per month, because you're going to want that money for retirement again, until you get back to $10,000, so that you're not paying interest, you're just paying cash and then saving back up, so that you've got that $10,000 again.
It takes about four years, but as you're piling it up, you're still getting the 5.5% growth. But you end up at the end of 20 years with only $25,000. Remember you were going to have 29,000 if you never spent it, but because you spent it and put it back in, you end up with $25,000. That's $4,000 less than if you’d just kept your money growing. [16:01.6]
Brandon: What you're saying is would you rather pay cash and lose $4,000 of growth that you could've gotten or use a loan and pay $1,150 in interest?
Amanda: Exactly.
Brandon: Yeah, by doing that, it sounds like a positive. I mean, it's not a whole lot of money, but $3,000 is maybe a month or two of income.
Amanda: Right, and, of course, if you're doing this with even a bigger purchase or you're doing this multiple times throughout the next 20 years, the difference is just going to get bigger and bigger and change.
Brandon: Yeah, that just adds up.
Amanda: Yeah, you think about things like paying for kids' college or helping them with a down payment for their first home, or helping them start a business or starting a business yourself, or buying a car or doing a repair to your home or remodel to your home, or -
Brandon: Roofing, who knows? [16:57.8]
Amanda: - a big 20-year anniversary trip that costs $10,000. There are all kinds of things that are major purchases within our lifetime and we just did one example. You're probably going to have 10 or more of these examples and each time you've got the choice, whether to keep your cash growing and pay a little bit of interest or lose the growth, and each time you’ve got to think through what you're going to do there. Does that make sense?
Brandon: Yeah. I don't know if that was a hint since our anniversary is coming up and it's 15 years, not 20 years.
Amanda: We're not going to spend $10,000 on our 15-year anniversary. But let me ask you, Brandon, which would you rather do? Would you rather pay the interest or lose the growth?
Brandon: I think I would want to make more money from it, so whatever the math says for me is what I would, right? That's the way I kind of think about it. Every purchase may be different and maybe a difference in each situation, but, in reality, I want to win over losing. [18:00.0]
Amanda: I can just hear some people saying, But how do you get your cash growing by 5.5%? Where does that happen without taking risk? And then where can you get a loan for 5% simple interest? And I only know one place that you can do that and that's by starting a properly designed, high-cash value, dividend-paying whole life insurance policy. For short, it's often referred to as the bank on yourself concept.
Brandon: I mean, it doesn't make sense in all situations, but we think it's worth at least giving it a look. If you want to learn more, again, this is what we do and what we specialize in. Go to Grandma'sWealthWisdom.com/call and schedule a call with us or you can go to three links that we are going to have below or in the podcast somewhere, I don't know.
Amanda: In the show notes.
Brandon: Yeah, in the show notes somewhere. We have a YouTube video series of FAQ's that is banking yourself questions, so download those and listen and see if it makes sense. We have a video about how we decided whether to take a loan or not. Again, we said it depends. Sometimes we go to taking a loan, sometimes we don't. [19:18.8]
Of course, again, a link to schedule an intro call and get your questions answered from us, and we'll run the numbers and see what makes the most sense for you. Not just for us or for somebody else, but for you.
Amanda: Yeah. But before you go check out those links, we want to ask you a couple of questions by way of recap. Are you convinced yet that there could be a time when it makes sense to pay interest, whether it’s to purchase a home or to get a predictable ROI, or to keep your money growing, even while you make major purchases? Could there even be a time when you might use the banks in your favor?
Brandon: I mean, they try and use us in their favor. We should do the same. Yes, we know we're thinking a little differently than you might hear most people talk about money. Paying interest, though, is not evil in and of itself. Just like most things in life, it's a little more complicated than a clever soundbite. [20:19.3]
When you're ready to work with a financial professional that helps you think outside the box about your money, we're ready to do that as well with you. Go visit Grandma’sWealthWisdom.com/intro and let's get stuck.
Amanda: And then, of course, be sure to hit that subscribe button for the podcast and join us next time for a special episode, where we'll discuss how to create a business that lasts and impacts generations. Now, we know not every business is a 100-plus-year-old business, but even if the business is gone, its impact can remain. Join us for our current thoughts on how to make your business last and make the impact you desire to see. [21:01.2]
Brandon: Yeah, both of them. Until next time, keep building your wealth, simply and sustainably, so you can break through to a smart, stable financial future.
The topics presented in this podcast are for general information only and not for the purposes of providing legal, accounting or investment advice. On such matters, please consult a professional who knows your specific situation.
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