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The Debt Millionaire

Page 14

by George Antone


  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

 

 

 


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