“A Different Approach to Debt” with Mark Willis

Transcript of Podcast Episode 102

Announcer: Welcome to Security Mutual Life Insurance Company of New York’s SML Planning Minute, where we share concise financial ideas for individuals, families, and business owners, Security Mutual, The Company That Cares®.

William F. Rainaldi, CFP^®: Hello, this is Bill Rainaldi with another edition of Security Mutual’s SML Planning Minute. In today’s episode, A Different Approach To Debt with special guest Mark Willis. Mark Willis is a highly successful Certified Financial Planner™. He’s also a Security Mutual agent and the host of Not Your Average Financial Podcast, a weekly program available wherever you get your podcasts.

Hello, Mark, welcome to the program.

Mark Willis, CFP^®: Glad to be here, Bill. Thank you very much for having me.

William F. Rainaldi, CFP^®: Well, thanks, Mark. I am an avid listener of your podcast. I would highly recommend it to anybody listening to this show. But I thought you had an interesting show a couple of weeks ago talking about the whole concept of debt. And I contrast that with a friend of mine I spoke to recently. One of his objectives is to live debt-free. Now, I don’t know how you feel about that. I have a couple of issues with that, and I suspect from listening to your show that you might not agree that that’s always the best approach for people to have. What do you think?

Mark Willis, CFP^®: Yeah, that is a, it’s a funny thing. I would say for some people, as a CFP and a financial expert yourself, there’s really reasons for just about everything in the financial universe, but debt is not a poison, it shouldn’t be avoided like it’s the plague or something. If you know what you’re encountering and you know what the options are, you can really use debt to your advantage and even allow it to help propel you into a better financial place.

William F. Rainaldi, CFP^®: Sure. And I think what we’re talking about here is managing the amount of debt you have. I think you’d agree that we’re not talking about having a huge amount of credit card debt to finance your lifestyle or anything like that, but when it comes to, for example, a home mortgage, things might be a little bit different.

Mark Willis, CFP^®: That’s right, yeah. If you really stop and think about it, the home has traditionally been a place where people thought they have an asset. Many people think of their personal home as an asset, and they think that paying off their mortgage is going to solve all their problems. But let’s pull back for a minute. Mortgage payments, they don’t earn any interest, zero interest payment. Equity in my home is not liquid and I can’t get access to it unless I have a generous banker. Equity in my home is also not guaranteed. Just think back to 2008 for example. And of course there’s absolutely no tax benefit to paying down the mortgage. In fact we’re in some ways penalized as we pay down that interest on the mortgage. So, not to mention for most of us, unless we have a renter in our basement, we’re not being paid to live in that house.

Yeah, I guess another way of expressing that, Mark, would be that the value of your home is really independent of how you financed it, isn’t it? It doesn’t matter, home doesn’t know whether you have a mortgage on the home or not.

That’s right, yeah. It’s a really good point. So, how much of my home is earning and appreciating in the neighborhood? Is it only my equity or is it the entire home value? You’re right, Zillow and the appraiser, they don’t care whether I have a mortgage or not, all they look at is the value of that property. Really well said.

William F. Rainaldi, CFP^®: Oh, thanks. So, I’ve seen people recently in this environment of lower interest rates go to refinance some of their real estate. And I’ve spoken to one or two people who have thought of the idea that maybe what they can do is with a lower interest rate, they could take their existing 30-year mortgage and refinance it and get a 15-year mortgage with a similar or the same payment, thus build up equity a little bit more quickly. And I’m not sure that’s the best idea out there. It seems to me that maybe if you just refinance your 30-year mortgage, you’ll have a lower payment and you’ll be able to invest the difference. Maybe that’s the way to go? But I wanted to get your take on something like that?

Mark Willis, CFP^®: Well, yeah, exactly. We see clients all the time waking up to the fact that their home is not a piggy bank and it’s not a place to save money. As we mentioned earlier, there’s no guarantee in the equity value, there’s no tax benefit to paying down the mortgage, everything we just shared, there’s no tax advantage there to paying off the mortgage. So a lot of people are choosing in these very interesting rock-bottom interest rate times that we’re all living in to refinance, and many are even doing something called a cash-out refinance.

For our clients we talk about this in terms of equity harvesting. Let’s say over the last 10 years, you’ve been privileged enough to live in a home where your home has appreciated in the neighborhood. And let’s say for sake of example, you’ve built up some nice equity in the house. And for your scenario, your circumstances, you’ve decided that your home is not an asset, it’s more of a liability. That roof needs repair, you know that there’s going to be money that’s going to have to come out of your pocket to cover that house every year. So you decide to harvest out some equity, put it into a predictable vehicle that would grow guaranteed, such as Security Mutual’s whole life insurance. And part of that might be to dump some money in out of the cash-out refinance.

And to your point exactly, Bill, many times the monthly payment going from a higher interest 30-year to a lower interest 30-year can actually be less. You might actually get a couple hundred dollars off your monthly mortgage bill and then put that non-guaranteed home equity into a guaranteed cash value policy. And then you’ve got a very nice certainty, at least on those dollars you put into the policy, that you’re going to see that money someday in the future. You might even turn that into another liquidity bucket or emergency fund or opportunity fund for anything else you might need, including retirement needs, if need be.

William F. Rainaldi, CFP^®: Sure, and I think the basic concept you’re kind of hinting at here, Mark, it has to do with the whole idea of opportunity cost, which so many people seem to miss when they’re talking about their debt.

Mark Willis, CFP^®: Right, yeah, everything we do means we can’t do anything else. If I spend my afternoon at the office, I’m not spending it out on the lake with my family. It’s just an opportunity cost. I can only do so much. So for me and my money, I have to ask, “What is it I want my money to do for me more than anything else?” And you’re right, opportunity cost is the key question there.

William F. Rainaldi, CFP^®: Sure, and it’s not just on your home, but I think it’s on any major purchase. And I’m struck by the idea that some people don’t seem to understand that, and I want to get your thought on this, whether you agree that you finance everything you buy, and if you get a new car and you decide to pay cash for that car, then you are in fact financing it with your own assets.

Mark Willis, CFP^®: Mm-hmm (affirmative), yeah, I’ve really asked folks to push back on this. And over the years, we really have, all of us that I’ve had this conversation with, have come to a similar conclusion. Yes, you do. You finance everything you buy. Either you’re paying to a bank and financing it through a bank, auto loans, student loans, mortgages, or you build up money, you save up money and then you pay cash. And a lot of people think they’ve beat the financing racket by saving up and paying cash for things. They feel like they’re better off. They live debt-free and so forth, to your point of the guy that you were talking with. But you’re right, you finance even the things you pay cash for. Here’s why: when you pay cash you’ve lost the opportunity cost of what that dollar could have done. You’ve lost the growth and earnings and interest and dividend yield and anything else that that money might have grown to had you not spent the money and left it invested instead.

I hate saying this even as I sip on some coffee here, but this cup of coffee, it might’ve cost me $3. So, when I buy this cup of coffee for $3, $5, whatever it was, that means I don’t have my $3 anymore. Also, gone, however, is what $3 would have grown to over my lifetime. Maybe that was $12, $15 if I had left it invested instead. So the true cost of my cup of coffee is what that money would have grown to had I not bought the cup of coffee. Now, I hate saying that because I sure enjoy my daily cup of joe, but the truth is I’m financing it from myself, my future self. I’m saying to my future self, “I will take $15 out of your pocket to enjoy $3 today.” It’s the old quote from Popeye. What’s that guy from Popeye? He would always say, “I’ll gladly pay you Tuesday for a hamburger today.”

William F. Rainaldi, CFP^®: Oh, yeah.

Mark Willis, CFP^®: So, I’m pulling forward that $15. Do you remember the character who said that?

William F. Rainaldi, CFP^®: I think it was Wimpy. Does that sound right?

Mark Willis, CFP^®: Wimpy, yeah.

William F. Rainaldi, CFP^®: Okay.

Mark Willis, CFP^®: Yeah, it’s been years since I thought of that guy. But yeah, so I’m taking $15 out of my retired self’s pocket to give myself a cup of coffee today. That’s the way we finance everything we buy. Everything I spend is money I won’t ever see again, plus what it would have grown to. It has dramatic implications.

William F. Rainaldi, CFP^®: And then people fail to understand very often the real power of compounding over a significant period of time. $3 today is $3, but it could be $10 in the future. And if you do that over enough assets, all of a sudden you could have a significant amount of money later on.

Mark Willis, CFP^®: That’s right. So choose carefully, and you don’t have to get neurotic about this. Still enjoy your cup of coffee, but just realize that for the big stuff in life, we’re talking cars, how you pay off your house, how you send your kids to college, if you can find a way to continue to earn growth and capital on your cash, even as you make these important purchases throughout your life, then you’ve done something even better than pay cash, you’re better than debt-free. And that’s what we focus on, on our podcast.

Case in point, now let’s use the example of homes. For example, back to the idea of a home, many people wonder, “Well, how can you get growth on money even when you spend it? That sounds so anathema, it sounds so crazy, sounds counterintuitive.” Well, if anyone here listening has a mortgage or especially a HELOC, this makes perfect sense. Anytime I have a home, let’s say my home is worth $300,000. And let’s say I have a HELOC for $50,000 and I borrowed out $50,000 to do whatever, buy a car or more hopefully do something productive with it like upgrade my home or whatever. But let’s say I’ve got a $300,000 house and a $50,000 HELOC.

William F. Rainaldi, CFP^®: By the way, Mark, just so the listeners know, a HELOC stands for home equity line of credit.

Mark Willis, CFP^®: Mm-hmm (affirmative), yeah. Well, Bill, is my home only growing on $250,000, my remaining amount there? Or am I still getting full growth on the $300,000? No, of course, I’m getting the entire growth on all $300,000, even the amount I had borrowed against. So, I’m spending my money, the HELOC, but it’s still earning and growing as if I hadn’t touched the money. That’s the power of letting my money do two things at once and overcoming opportunity costs.

William F. Rainaldi, CFP^®: Sure.

Mark Willis, CFP^®: Make sense so far?

William F. Rainaldi, CFP^®: Yeah, absolutely, it’s the power of leverage.

Go ahead.

Mark Willis, CFP^®: Leverage, there you go. So, there’s debt to our advantage. Not all debt is poison. Back to your original point, now I do think that there’s some risk with HELOCs. You and I can talk about it, right? We’re still back in the bankers pocket, they require interest payments every month on a HELOC, they can change that rate if it’s a variable rate, and of course I’ve got to continually be in the good graces of a banker to keep access to that HELOC. They can call that HELOC, of course, and there’s nothing guaranteed about my home value.

Now, contrast that with one of Security Mutual’s whole life policies. Now we’ve got a policy where I can borrow against it, so there’s our debt, but the policy’s underlying asset is still growing on a guaranteed basis and there’s an annual cash value increase on my cash every single year. So my asset is growing guaranteed, but my ability to leverage that asset to do things I need, whether it’s sending my kid to college or investing in real estate or investing in my business, all of those options are available to me. And the kindness of Security Mutual is partly the reason, but also the contract forces Security Mutual to give policyowners the right and access to the policy loan feature, which lets me borrow against the cash, and I can use that for any reason, but the policy, that asset continues to grow as if I had not touched a dime of the money, just like a HELOC, but without all the risks and non-guarantees that real estate and HELOCs afford.

So, I’ve truly been just floored with Security Mutual’s ability and strategy and contracts available to the public that allow us all to do these things.

William F. Rainaldi, CFP^®: Right, in other words, the dividend on the company policy is based upon the full value, regardless of how much you’ve borrowed against it.

Mark Willis, CFP^®: Correct.

William F. Rainaldi, CFP^®: We’re getting too technical here, but-

Mark Willis, CFP^®: Yeah, you get that dividend. Yeah, that’s right, so you get the guaranteed cash value increase and also the non-guaranteed dividend paid on the entire cash value as if there is no loan. Did I say that correctly?

William F. Rainaldi, CFP^®: Yes, that’s correct. Well said. So not many people get into that kind of detail and not many people talk about life insurance as a way to accumulate assets. It’s a different approach, but I think it does have its advantages.

Mark Willis, CFP^®: Well, think about it. I mean, if that’s true, if all that we’ve just said is true, doesn’t that change everything, especially about how we make major purchases in our life? And, Bill, I’ve not met anybody who won’t go through their lifetime without making major purchases, whether it’s a down payment or your child’s college or your own education, or in fact, most importantly, your retirement. I mean, think about the volume of money that will pass through your hands over your lifetime. If you simply spend and pay cash for all of these big purchases, imagine we’ve talked about cups of coffee, but imagine how many millions of dollars that might be if you simply paid cash, blindly paid cash for things for the big purchases of life, just your cars would be several hundred thousand dollars over your lifetime in just raw dollars, but then what would it have grown to over your lifetime had you kept that money invested or used it through a policy like we’ve been describing?

So, it truly changes everything about how we view our finances. I have sometimes referred to banking as the hinge in your financial life, the small hinge that swings the big door. I still believe in the power of a diversified portfolio, and I still have brokerage accounts, Roth IRAs in the market and so forth. They’ll have real estate and other assets, but I got to tell you, I’m convinced that the more money I can use through a true policy as we’ve described here today for my major purchases, it makes the rest of my financial life just so much simpler and so much saner. While I might sound weird saying that especially as a CFP, not too many CFPs are going to be waving this flag as a rallying cry, I do believe that it’s a part of a well-diversified plan when you have liquid cash that can continue to grow for you even on the capital you borrow as if you never touched a dime of it.

William F. Rainaldi, CFP^®: Wow, that’s fantastic, Mark. Well, I think we can end our conversation on that. I think this has really been great, and I appreciate very much the time you’ve taken to spend with us today.

Mark Willis, CFP^®: Thank you.

William F. Rainaldi, CFP^®: Thank you, take care.

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