the left or right side of the WealthQ, and if appropriate what needs to be done to move to the right side. This will help you internalize the information.
Examples of Portfolios
Scenario 1:
Kyrbi has $20,000 in her savings. She purchased a rental property with fixed-interest
rate, 80% debt, with the lowest loan constant. She made sure that her risk metrics were
in the ranges she set for herself. She raised equity-financing from her friend John. John
invested the 20% down payment, and they agreed they would split all profits 50/50. She
kept her $20,000 in her savings for liquidity and emergency. Here is how that one
transaction moved Kyrbi on the Wealth Equation:
Analysis:
· The well-structured debt moved her to the receiving side of inflation.
· The renter paying rent in that rental property moves her to the “passing it” side of
interest.
· Not using her money and structuring the deal to be safer moves her to the receiving
side of opportunity cost. Having reserves is one of the keys to The WealthQ Method.
· Keeping her $20,000 in her savings account will help cover any emergencies, but
also kept her liquid, which would help in purchasing another rental property in the
future.
· Running this by her tax attorney and accountant made sure she is aware of tax
implications of this transaction.
· By using debt correctly, she is on the receiving end of inflation as well.
Scenario 2:
Tobe has great credit. She wants to maintain it. So she purchased a car for $30,000
with her savings. She then used her remaining $10,000 in her savings to buy her living
room furniture. She is very proud. She doesn’t like debt.
Analysis:
By Tobe spending her last $40,000 on a car and furniture, let’s calculate her lost
opportunity cost. Consider what would happen if she purchased her car and furniture with
low-cost debt, kept $10,000 in a liquid account to keep her ability to obtain more loans,
and used her remaining $30,000 to invest in an asset that paid 12% for the next 20
years. (Perhaps private lending—refer to my previous book The Banker’s Code). The
“Future Value” of that $30,000 would be $289,388.79 not counting taxes. The car in 20
years would be worth $0!
The debt on the car and furniture would not move her to the “Receiving” side since the
assets (car and furniture) are not the right assets. However, that debt allowed Tobe to free up her savings to invest into the right assets to move her to the “Receiving” side. Her
liquid account will allow her to handle any emergencies in the loan payments and
maintain her ability to obtain more debt for moving her to the right side of the WealthQ.
The ability to look at various portfolios and analyze what can be done to move to the
other side is great practice. I recommend talking to people about their portfolios and
without giving advice (you are not licensed to do so), but just for the fun and practice,
review and discuss their portfolios. Have them read this book, and this will make it easier
to discuss. I make sure I do that with my students. Lots of “a-ha” moments are gained
from these discussions.
And finally, read this book again. If you need further help, make sure to contact us.
Our contact information is in the back of this book.
* * *
I was staring at my mentor as he completed his review of everything we talked about
over lunch.
“George, snap out of it! Hello, anyone there?” he chuckled.
“You know what” I said slowly, “It’s amazing how hard people work out there. They
CHOOSE to be poor. They CHOOSE to suffer in their jobs. They CHOOSE to let life pass
them by. They CHOOSE the pain of life, sitting behind a desk in a cubicle and bouncing all
through life.”
“What I have learned from you and Emile can change many lives, but so many people
are just not willing to learn it or even open to learning it” I uttered.
I am a skeptical person, but I am very open to listening to new concepts. I just have to
be able to prove the information right (or wrong) to myself as the case may be. I believe
skeptics make better investors if they use their skepticism as an advantage instead of a
disadvantage.
I knew I was tired of working against the system. I knew I wanted more out of life. I
knew I would have good days and bad days doing anything new, and in fact more bad
days than new in the beginning, but at least I knew what was possible. I knew I was
moving in the right direction. I knew what lifestyle I wanted. I knew that nothing would
stop me from achieving my goals.
I knew that I needed to step into my fear, because on the other side of my fear was
my greatness.
So I took the step...
Little did I know that it would change my life in more ways than I thought!
Chapter Summary
· Move to the right side of the Wealth Equation
· The four forces we discussed in the book are Inflation, Interest, Taxes and Opportunity Cost. Make them work for you.
· Become educated on how to use debt correctly. Become a “Debt Millionaire.”
Epilogue
As I stood up to leave my mentor’s office, he hesitantly said “George… ummm… don’t
forget what this is really all about.”
He turned towards his computer monitor to start typing.
I waited for him to continue.
There was an uncomfortable silence.
“Enjoy life. Enjoy the people around you. Enjoy your vacations. You cannot take money
with you when you die, enjoy life. You have just one life to live. Live it” he said as he
focused on his monitor.
“What we discussed is a game, just a game. We help one another win the financial
game, but it’s a game. Living your life with passion and making a difference in other
people’s lives is what this is about.”
“We love to hack the financial system to support or improve our lifestyle and just for
the challenge of doing it. It’s a game George. Hacking the financial system means
understanding the system that was setup by the bankers of the world, finding shortcuts
and using them. Make sure they are legal and ethical. That’s the fun part of the game.
But as I said, it’s just a game.”
“The wealthiest people still struggle with happiness. They still struggle with health.
They still have challenges. You know how to enjoy life, don’t change. You do not need
money to start living life.”
“In fact, George, here’s a big secret that most rich people will never tell you. They
admire the people that live life now and take care of themselves. That’s worth all the
money in the world to them.”
As I listened to him, I noticed a sign next to the door that said “When writing the story
of your life, don’t let anyone else hold the pen.”
“When writing the story of your life, don’t let anyone else hold the pen.”
He continued “When you release money from being the measure of your success, and
start living life, that’s the most admirable quality. People will be drawn to you. They won’t know what it is about you that is so magnetic, but it’s the fact that money doesn’t drive
you anymore.”
Don’t make money the measure of your success.
“Use
your family bank for what it’s meant to be, not for the money side. Now, go on
get out of here and go have some fun” he said as he smiled.
He was still focused on his monitor.
“…and keep throwing popcorn at your loved one in the movie theater.”
He must have seen me at the movies!
Appendix
A Few Debt Metrics
In this chapter, we will briefly discuss a few metrics related to debt. These metrics will
allow you to start to learn how to measure debt. Before learning to control and make
debt work for you, you need to understand and measure it.
Interest Rate
According to InvestorWords.com:
“A rate which is charged or paid for the use of money. An interest rate is often
expressed as an annual percentage of the principal. It is calculated by dividing the
amount of interest by the amount of principal.”
When buying for appreciation, consider keeping the interest rate on the debt lower
than the projected appreciation rate on the asset. This is not required, but it is
recommended.
Cost of Debt
According to Investopedia.com:
“The typical metric to measure “cost of debt” is the interest on the debt. For example,
a 5% interest loan means the cost of the debt is 5%. However, one should also consider
any tax implications.
To obtain the after-tax rate, you simply multiply the before-tax rate by one minus the
marginal tax rate (before-tax rate x (1-marginal tax)).”
Loan Constant:
According to Investopedia.com:
“An interest factor used to calculate the debt service of a loan. The loan constant,
when multiplied by the original loan principal, gives the dollar amount of the periodic
payment.”
The annual loan constant is used when using debt to buy income-producing assets.
The income coming in from the asset (measured as the capitalization rate) is compared
with the loan constant and the difference is what generates “passive income.”
Also, the loan constant is a measure of risk. A lower loan constant represents a lower
risk since it offers more flexibility. A higher loan constant is an indication of higher
obligation for the investor, which results in a higher risk loan.
Loan Term:
This is the time period over which a loan agreement is in force. Before or at the end of
the period the loan should either be repaid or renegotiated for another term.
You should match your loan terms to your exit strategy. For example, if you want to
buy an asset, hold it for ten years and sell at the end, then your loan term should be ten
years or longer.
Amortized Loan:
A loan with scheduled periodic payments that include both principal and interest. For
amortized loans, in general, you want to have them amortized for as long as possible. A
30-year amortized loan is much better than a 15-year amortized loan in many ways.
Interest-Only Loan:
A type of loan in which the borrower is only required to pay off the interest that arises
from the principal that is borrowed. Because only the interest is being paid off, the
interest payments remain fairly constant throughout the term of the loan. However,
interest-only loans do not last indefinitely, meaning that the borrower will have to pay off
the principal of the loan eventually. Interest-only loans typically have the lowest loan
constants.
Points:
Points mainly come in two varieties: origination points and discount points. In both
cases, a point is equal to 1% of the total amount mortgaged. For example, on a $100,000
loan, one point is equal to $1,000. Origination points are used to compensate loan
officers. Discount points are similar, but are there to compensate the lender as prepaid
interest.
Fixed-Interest Rate:
An interest rate on a loan, that remains fixed either for the entire term of the loan or
for part of this term. Fixed-interest rate are usually better than adjustable rates due to
the uncertainty with adjustable rates. Furthermore, fixed-interest rates are a better
hedge for inflation as mentioned in this book.
Adjustable Rate Mortgage (ARM):
A type of loan in which the interest rate paid on the outstanding balance varies
according to a specific benchmark. The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month. The interest rate paid by the
borrower will be based on a benchmark plus an additional spread, called an ARM margin.
An adjustable rate mortgage is also known as a “variable-rate mortgage” or a “floating-
rate mortgage”.
The Wave Machine: Debt magnifies returns and risk
Figure 39: The Wave Machine
(Debt Magnifies Income Volatility and Risk)
The diagram above illustrates some important concepts mentioned in this book and my
previous books. On the left side of the diagram, the asset generates an income (the
squiggly line to the right of the asset). That squiggly line or wave shows fluctuating
income being generated from the asset in dollars. Let’s call that the “income wave.”
The “income wave” then hits the “Wave Machine.” You are the operator of that
machine. As you turn the lever on top (the circle with a handle), the Wave Machine
magnifies the wave on the other side. It the lever is turned to “off” (or zero), the wave
doesn’t change and keeps moving across the Wave Machine.
The Wave Machine is nothing more than the amount of debt. As debt is increased
(lever is turned to the right towards maximum), the “machine” takes in fluctuation in the
income wave and magnifies it further. This new wave that is generated to the right of the
Wave Machine is your return (in percentage). As your return fluctuates more (known as
volatility), that in turn increases your upside and your downside (risk) as is observed with
the highly volatile wave.
So in essence, the income coming in from the asset, no matter how stable or volatile it
is, is converted into “returns” and further magnified with debt. If the income is stable (as
from an apartment building for example), you can afford to have more debt because
although the additional debt will magnify the volatility (and therefore the risk) it will be
magnifying the volatility of a stable income stream (“wave”). If you have a highly volatile
income stream from the asset, then you cannot afford to have more debt because you
are magnifying an already risky (highly volatile) income stream, which already carries
increased risk.
This is important to understand how debt plays an important role here.
The “Splash Wall” on the right side represents the risk metrics you need to absorb the
wave. So the higher the wave, the higher and thicker the wall needs to be to absorb that
wave. That’s why we have to consider the risk metrics whenever we adjust the debt
amount. This is covered in The Wealthy Code.
Chapter Summary
· In this chapter, we introduced a few terms related to debt. It’s important you
understand these terms and how they work together.
Resources
The Debt Millionaire Basic Spreadsheet
You can download this complementary spreadsheet that contains various calculators
di
scussed in this book at:
www.TheDebtMillionaireBook.com
Complimentary Special Report on Family Bank
You can download a special report on the Family Bank at:
www.TheDebtMillionaireBook.com
Upcoming Workshops
To receive up-to date information about upcoming workshops, please visit:
www.TheDebtMillionaireBook.com
“Family Bank Game” Events
To find out about upcoming “Family Bank Game” events happening around the country,
visit:
www.TheFamilyBankGame.com
Interview: John C. Bogle
http://www.pbs.org/wgbh/pages/frontline/retirement/interviews/bogle.html
Contact Information
Company: MPactWealth LLC
Toll Free Phone: (888) 888-3612
Web: www.MPactWealth.com
Document Outline
Acknowledgments
Tools and Resources
The Inspiration of This Book
CHAPTER ONE: Introduction
CHAPTER TWO: The Wealth Equation
CHAPTER THREE: The Traditional Method of Investing Doesn’t Work!
CHAPTER FOUR: Hacking the System
CHAPTER FIVE: Moving to the Receiving Side of Interest
CHAPTER SIX: Moving to the Receiving Side of Opportunity Cost!
CHAPTER SEVEN: Moving to the Receiving Side of Inflation
CHAPTER EIGHT: Lowering Your Taxes
CHAPTER NINE: Debt Revisited
CHAPTER TEN: The Third Secret Side—The Key to Wealth
CHAPTER ELEVEN: The Last & Most Important Leverage
CHAPTER TWELVE: The Family Bank
CHAPTER THIRTEEN: Putting it All Together
Epilogue
Appendix: A Few Debt Metrics
Resources
The Debt Millionaire Page 14