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Episode 87: Where to Invest Excess Money
172 Plays4 years ago
Is your individual or business money sitting in a bank with low interest rates? Why is this an issue when it has historically worked for others? Join Phillip and Bryan as they tackle this topic that they have worked through with several clients of theirs. Creating a plan to “move off zero” is essential to the future of your savings. Instead of sitting on money in the bank that will lose its value in the long run, make investments now that align with your risk tolerance and core values. What you’ll learn: why bank interest rates should remain low or may even become negative, and solutions for where to put your excess money (uncommon banking, tax protection, cryptocurrency, and others).
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Transcript
Introduction and Podcast Goals
00:00:00
Speaker
Are you finding you just can't get enough of the Uncommon Life Project? We've got just the solution for you. Go to our website uncommonwealth.com and you can click on resources and get your own book for you to explore all of the ways that you can start going down your uncommon path. We hope it really helps. Let's get back to the show.
00:00:21
Speaker
Everyone dreams about living an uncommon life, but how we define that dream is very different for each of us. And for most, it's a lifelong pursuit. Welcome to the Uncommon Life Project podcast. We're going to introduce you to people who are living that life or enjoying the journey to get there. We're going to also give you some tools, tricks, and tips for starting or accelerating your own efforts to live an uncommon life.
00:00:46
Speaker
A life worth celebrating and savoring. Please welcome your hosts, Brian Dewhurst and Philip Ramsey.
Episode Topic: Financial Strategies for Business Owners
00:01:04
Speaker
Hello and welcome everybody to another episode of the Uncommon Life Project where I am your host, Philip Ramsey.
00:01:10
Speaker
And I am Brian Dewhurst. Thanks for tuning in. We have a really good show today for you and it's just Brian and I. So this is what you got.
00:01:20
Speaker
I don't know if that's exciting to you or not, but it is for me because this is a question that we get asked and it's coming up more and more because with low interest rates, there is a ripple effect. One of the things that we've been running into is business owners, once upon a time, never had this problem. In a far off, distant land.
00:01:43
Speaker
Right, I feel like that. When our parents were paying 18% for their mortgage rate, the rates at the bank for their savings account weren't next to nothing. And so now they are. So business owners are now at the helm on trying to figure out all these different pieces they have. They're trying to organize their cash and they're looking at all their cash in their bank and it's earning zero dollars. So that's a huge problem.
00:02:12
Speaker
And so we've been getting more and more clients who are blessed enough to have this problem, but now are figuring out like, I have
Challenges of Low-Interest Cash Management
00:02:20
Speaker
to solve it. And we've never had to solve this in the history because they've always had interest rates at like, let's say 5% of the bank. Could you imagine? Uh, but that in and of itself helps. Okay. Well, I can just set it at the bank and I'm earning interest on my money. Well, now they don't have that. Do you think I set that up? Okay. Yeah.
00:02:41
Speaker
Okay. So today we're going to try to help walk through some maybe solutions to that specific problem for business owners. And Brian and I get to talk to a lot of people. We're super blessed that way. And we get to see people who have multiple different strategies today. We're going to try to talk about those strategies and give you some ideas to maybe if you're in that place, uh, think about to get you through this, I have zero interest rate at the bank. What do I do?
00:03:10
Speaker
So where do we start? Be dog. Where do we start? Well, we don't feel like this problem is going to go away. I think that's the first place to start and, you know, really post 2000.
00:03:24
Speaker
interest rates have been significantly low now for multiple decades. We're really seeing, as you alluded to, just lots of people are sitting on excess amounts of cash. What strategies do you utilize to get rid of that cash?
00:03:46
Speaker
I think the combination of those two things is the other side of that equation is I think for the first time, people are really starting to realize as inflation kicks in and everything is costing more money.
00:04:01
Speaker
I can't just let this sit in cash or it's going to lose its value. I've never seen this many people be so aware of that reality as we are in this moment. The proverbial ice cube on the countertop. Right. Truthfully, I think for the first time too, people are abandoning the solutions at the bank.
Impact of National Debt on Interest Rates
00:04:25
Speaker
you don't want a money market, even high-interest savings accounts, people are just like, if inflation is 5% last month, which I think it was, earning 2% in high-interest savings and have to jump through 10 hoops to get it, it's not worth it anymore. I'd rather just take my chances and invest in something else
00:04:46
Speaker
Um, then deal with that and it's kind of like putting that, that ice cube in the refrigerator. It's still going to melt as fast. Yeah. And, um,
00:04:59
Speaker
So yeah, we have multiple strategies with this. And I think the other thing that I've heard a few other people, you know, thought leaders that I follow say that I'm really, at first I heard that and I was like, I don't know if I agree with that. And now I'm like, yeah, they're right. I agree. And that saying is that basically there's really no incentive to save anymore. There's no incentive to, you know, put 50K in the bank and just let it sit there. I mean, you're really,
00:05:25
Speaker
you're really running the risk that it's, it's not going to keep up with inflation for sure. Um, and so that, yeah, we're just in a new paradigm. So I think our solutions go ahead. Before we go into solutions, I want to talk about, you touched on it briefly, but we don't believe interest rates are going up. And I love, you always say this and I always like, dude, this is great. It's like if you had $33 trillion on a credit card and you call the credit card company and you're like, Hey,
00:05:54
Speaker
First, you have no way of paying off that 33 trillion, by the way. But then you call your company up and say, hey, will you raise my interest rates? Like, you just don't do that. So that's almost the way that, why do we think the interest rates are not going up? Because they really can't. So do you want to speak into that quick of kind of that thought process? So I think we've all seen the national debt calculator that never stops running.
00:06:22
Speaker
never stops going up. And due to COVID, our national debt has gone from north of 20 trillion to almost 30 trillion in about 18 months. And I mean, we were already over 20 trillion, but the gap from 20 trillion to 30 trillion has been closed pretty quickly. And when you look at the budget proposed by Biden,
00:06:49
Speaker
of $6 trillion next year, it will definitely put us over $30 trillion in national debt. So let's just use super round numbers, $30 trillion, which is not an easy number to start with. But let's just say the interest rate was 5% on that debt.
00:07:07
Speaker
So 10% of 30 trillion is 3 trillion until you cut that in half. So it's about 1.5 trillion a year in interest expense if the interest rate on that 30 trillion, you know, is 5%. The interest rate really is probably almost sub two or sub 1% because the government is using short-term treasuries, so notes less than seven years.
00:07:35
Speaker
to roll over or finance that debt. The debt, let's just say they use a two-year treasury or a one-year treasury, that debt rolls over in a year from now. If you refinance a debt with more debt, you've got more debt.
00:07:51
Speaker
And so, as this is like a snowball, it's really going to start getting, you know, we'll be at 40 trillion in national debt before we blink, you know, really, because it just keeps morphing, you know, the bigger and bigger it gets. So, there's no feasible way for the government to raise interest rates voluntarily. And then if you go back to the 70s when interest rates skyrocketed,
00:08:15
Speaker
And some of our parents, I know my parents talk about the mortgage at 13% or 18%, whatever it was, interest rates got up to 21%. And so the interesting part about that was a lot of that debt was like 30-year notes. So a lot of the banks and insurance companies bought that, and it turned into an asset for those financial companies because rates were never that high again, and they lasted for decades.
00:08:41
Speaker
So back then, you had super high interest rates, long-term debt. Now, we have super low interest rates, short-term debt, so the debt's rolling over super fast. But what people don't realize about the 70s, the reason the interest rates went sky high is because people questioned the money. It wasn't a function of the economy or any of those things, as maybe we've been led to believe, but what preceded the rise in interest rates? Well,
00:09:09
Speaker
we went off the gold standard. For the first time since the founding of our country, the currency was fully decoupled from the gold backing. There are several reasons for that. I don't want to get into that here, but because of that coming off the gold standard, there was a loss in confidence in the dollar. Interest rates had to rise to compensate people for that loss of confidence.
00:09:34
Speaker
And so that's why interest rates went up was to restore the confidence in the value of the dollar being decoupled from gold. Conversely, if interest rates go up here, it's because the market is demanding higher interest rates for the credit risk it's taking on the United States. What's happening right now is the Federal Reserve is purchasing Treasuries at about $120 billion a month.
00:10:01
Speaker
If you extrapolate that, that's about 1.45 trillion a year. The Federal Reserve, if they weren't purchasing those Treasuries, the interest rates would be higher.
00:10:12
Speaker
because the market is demanding higher interest rates for the credit risk of the United States. If you don't trust someone you're borrowing money from, what do you do? You increase the rate at which you're charging them because you don't trust them, they're going to be able to pay you back. That's what the market demands right now because we're creating so much money out of thin air and the Fed is stepping in and purchasing treasuries
00:10:36
Speaker
below the market value to keep interest rates down, to try to spur on the economy, and in real legitimacy, is to decrease the interest expense of the existing federal debt. That's where we're at now, and that's why interest rates can't go up. If you look at Europe, who's ahead of us, a few laps on this track, so to speak, they're at 0 percent interest rates and or negative interest rates.
00:11:04
Speaker
so they're actually charging you to leave money in the bank. My favorite CEO, Elon Musk, was just talking about this on a webinar thing. He was just saying, Tesla Europe gets charged by their bank in Europe to just keep money in cash to facilitate their business. It's crazy to see your bank balance go down
00:11:27
Speaker
because your bank is charging you money. It should be obviously the opposite. If that's foreshadowing for what's to come, that's the importance of this podcast episode is you have to start doing something right now. You have to move off zero because the currency globally is getting basically incinerated through inflation.
00:11:49
Speaker
And that's why when you first said they're forcing you to get it out of the banks and invest it, that's why. Because you could almost have a negative interest rate. So what would you
Exploring Financial Tools: Life Insurance and Investments
00:11:59
Speaker
do? You'd yank it out of the banks and what would you do with it? Invest it somewhere else. So that's why. Right. Okay. So what's our solutions to help business owners out there? Yeah. So the solutions that we've always used is our own common banking strategy, cash value life insurance.
00:12:14
Speaker
We're utilizing whole life and we're utilizing index universal life. It kind of depends. Each person's a little different. If you want more of a guarantee or you're more conservative, obviously whole life is for you. If you like the idea of being indexed to the stock market and having more of an investment engine, you might want to look at index universal life. I think the key is with that,
00:12:38
Speaker
you know, for the way we utilize it is not only there, but also then helping people and teach people how to borrow against it so that it still earns interest or dividends. And then, you know, purchasing other assets that produce cash flow with that money. So, you know, borrowing against that policy or cash value to invest in a company
00:12:56
Speaker
or purchase a rental property. That's how you get multiple uses on your money. The other thing that is created from the life insurance contract itself is tax protection. You can grow your money, access the growth of that money without paying tax through policy loans or surrender to cost basis, getting your basis back, so to speak. It's a very flexible instrument when it's designed and built for cash on cash growth, which is what our
00:13:22
Speaker
You know, goal is, so to speak, and then teaching you how to either purchase your own debt or buy assets that produce cash flow.
00:13:30
Speaker
Right. And so that's kind of a hard concept for people to understand, but there's also a death benefit attached to that. And so we always try to get multiple uses for our money. This is a strategy to do that. And depending on your risk tolerance is maybe the idea of how we would structure that policy. But a lot of people just get freaked out about life insurance and all of that. What I think is interesting is everybody has been conditioned to give the least amount of money
00:13:59
Speaker
to get the biggest amount of death benefit. When we structure these policies, it's actually opposite. We try to put the most money in to get the highest cash value that you can borrow out to get the least amount of death benefit, which creates that environment that you're talking about that's actually productive and helpful. Now, it has to be with a strategy and
00:14:19
Speaker
chances are we're going to probably be borrowing this money out to go do something, but it's creating this environment and such that for business owners, you're going to need it anyway. So, uh, in a well-designed plan and somebody to help you kind of understand the ins and outs, it can be a very powerful tool. So multiple use on your money. Next thing that we could talk about.
00:14:41
Speaker
Yeah, so the next one is a brokerage account or investing in the market, stocks, bonds, ETFs, mutual funds, that type of thing. So we run models just conservative, moderate, and aggressive based on the risk tolerance, based on how much cash you have, based on your cash flow. There's no guarantees. You can't use that word. You definitely can lose money. So I'm going to be super clear and compliant about that upfront.
00:15:06
Speaker
But over time, you can also achieve a potentially positive return north of zero because we're competing at the bank. And so over time, if you can start with a balance and then add to a balance, you can invest. And over time, we should be able to average a higher rate of return than zero.
00:15:26
Speaker
Again, this is money that you don't think you're going to use for the next three to five years, so this is a little bit longer time horizon. We have people ask us all the time, like, well, I think I might need this money in nine to 12 months. It's like, no, I would just leave it. I wouldn't take the risk. We don't want it. This is money that's three to five years out. It's excess and you want to start building a potential other asset in terms of an investment portfolio.
00:15:54
Speaker
Good. And you have to remember that like, yeah, there is some risks to that, but in a plan, hopefully your business is generating more.
00:16:04
Speaker
cashflow or more money every month that you can put more into this every month, which would be dollar cost averaging. And now we're going into like the basis of investing. So there are risks, but when you think about putting that into a bank that used to be the safest thing, and now it starts going negative, it's something to think about. And I'm glad that we have this on the list.
00:16:25
Speaker
Yep. Good job. Yeah. And then the last one in terms of like asset side or of the balance sheet for a business or an individual.
Cryptocurrency as a Financial Strategy
00:16:33
Speaker
I mean, all of these can work for an individual too. An individual or couple that's sitting on excess amounts of cash. This all works for you too. In our opinion as Bitcoin and cryptocurrency,
00:16:44
Speaker
Again, as part of an overall plan, we're not saying put all your money in there, but I've been learning and talking a lot lately about what I would call asymmetric, I don't like the word bets, but basically asymmetric situations. And what that means is, let's just look at Bitcoin.
00:17:02
Speaker
And I think the best way to look at Bitcoin is the first commercial transaction. So this was the first transaction where Bitcoin was used to purchase a product from a business. There's a national Bitcoin pizza day. I've actually celebrated this with my kids. We've gone out and got pizza. We didn't use Bitcoin to buy that pizza, but we had pizza and we talked about it. So the first commercial transaction of Bitcoin, I think was in 2010 or 11, I always kind of forget.
00:17:31
Speaker
Anyways, a guy spent 10,000 Bitcoin to buy two pizzas like a Papa John's. Now, I want you to picture yourself as the Papa John's franchise owner. And this transaction, I think, was about 28 bucks at the time.
00:17:48
Speaker
And so if you're the owner of a Papa John's and you're selling pizzas all year, could you afford, hopefully, to pocket the total revenue from two pizzas? I think the logical answer is yes. It's $28. If he would have just sat on those Bitcoin,
00:18:09
Speaker
and just went about business for the rest of this decade. So that was about 10 years ago. And let's just say Bitcoin's at roughly about 30,000, 32,000 today. So 10,000 times 32,000, I'm going to do my calculator because I just turned 40 and it's just not as fluid as it used to be. So 10,000 times 32,000 is $320 million.
00:18:34
Speaker
So that franchise, which I don't even know what they produce, but let's just say it's a million dollars a year, one franchise generates in revenue. That guy who owned that Papa John's, if he would have just kept those Bitcoin be worth over $320 million today. And so that's my point to business owners is like, how can you not take one or two transactions of what you do a year? So if you're a dentist,
00:18:59
Speaker
take a couple fillings or crowns or braces and get some exposure to Bitcoin or cryptocurrency and diversify. It's like an asymmetric bet. If that $28 in Bitcoin never would have survived, the guy lost 28 bucks. If he would have held it, $300 million. Again, I think
00:19:23
Speaker
introducing yourself and your understanding to Bitcoin and cryptocurrency, because when you look at the financial institutions and what's happening in the world, and I'm talking about like Visa, MasterCard, JP Morgan, massive financial institutions, they're all purchasing crypto assets, they're investing in blockchain, they're partnering with existing Bitcoin and cryptocurrency related projects. And for someone that's in this business, I think it's the future of all financial transactions.
00:19:52
Speaker
It's going to take, you know, five to 20 years, just like the internet has. Right. But now can you picture yourself without the internet? So I feel like it's about 2000. Let me do five levels advocate here. Cause I'm the guy. I'm that guy. Um, it's interesting to me. Cause even if somebody's like, eh, that ain't happening, it ain't happening. There's a lot of times that how you kind of approach it, I think is wise. Hey, you do pro bono for your work. What if you did instead of pro bono, you just said, Hey, I'll charge me in crypto or whatever, whatever.
00:20:22
Speaker
Here's what I'd say though, look around and do research of the big players and finances and see what they're doing because they're getting into the cryptocurrency space at an alarming pace. Maybe not what they're saying, but what are they doing? I think that would then convince a lot of people of like, I might need to understand a little bit more of this.
00:20:45
Speaker
I'm grateful I'm Brian, so I don't really do that. That's not really my passion, but Brian is and I'm grateful for it. And I think a lot of the business owners who really take a step and start looking at what they are doing.
00:20:58
Speaker
are like a little bit more convinced, like maybe there is some validity here. Cause it used to be, oh, that'll never do anything. And then you kind of got to these big companies saying, oh, it'll never amount to anything. But then you saw them working on the back of these cryptocurrencies. So now they're like stepping into this space. So anyway, that's what I would say to just kind of like, maybe, maybe think about this.
00:21:23
Speaker
And how do we provide that as a solution? So we are currently not custody direct like Bitcoin and cryptocurrency, but we're using financial instruments to give you exposure to Bitcoin and cryptocurrency through this brokerage account. So we're bringing it as a bundled solution. We were one of the first registered investment advisors. That's kind of a legal entity.
00:21:47
Speaker
or kind of the overarching structure that our business is. We were one of the first RIAs in the Midwest to offer exposure to these types of assets to our clients. And it's kind of fairly well. Again, past performance is not indicative of future results. So I'll throw a little disclosure in there, disclaimer. But I think getting a small portion or exposure to these types of assets and then starting to understand how they could potentially impact your overall business
00:22:16
Speaker
I think it's super important and actually that's part of what we're talking to a lot of our business owner clients about is, you know, should I start accepting Bitcoin? How do you even do that? Are other companies doing that? Are there other applications within blockchain or cryptocurrency?
00:22:32
Speaker
that we should be looking at or made aware of. We're getting those types of questions right now from business owners all over the country. Those are conversations that are happening now, and I think crypto and Bitcoin adoption is going to continue. Obviously, going to have its swings. Obviously, the government's going to want to have a say in this. It's not going to be a totally smooth ride, but
00:22:57
Speaker
Over time, Bitcoin right now has actually grown at almost a 200% average annual growth rate. Pretty phenomenal. Again, starting to initiate exposure to those types of assets. When you look at the melting ice cube of sitting in cash, it starts to make sense.
00:23:18
Speaker
Well, I appreciate that. And I hope our business owners out there at least get a glimpse of, hey, there are some options out there for you. Obviously there are, but just to be mindful of creating a plan, executing the plan and making sure that it aligns with your core values and where you're going as a business. But I do think there's a lot of business owners out there currently who are just like, this is a different environment than anybody's ever been. And what do we do? So hopefully that's helpful. Final thoughts, Brian.
00:23:48
Speaker
You got to get off zero. You have to start doing something and whether one of these solutions works for you or all of them. It's typically a combination. They're all liquid. We're not trying to take your money away from you as a company.
00:24:05
Speaker
typically link these instruments to your corporate bank account, especially the brokerage account. If you need money back, it's like an ACH transaction. All these things are done in your corporate name so you can move money around as a corporation. It's very fluid and we can help you manage that. You don't have to hire anybody. You don't have to have a CFO to do this stuff.
Conclusion and Contact Information
00:24:27
Speaker
We're doing these things actively for several business owners.
00:24:31
Speaker
and gaining them all the time. So it's a very fluid and simple thing to implement and to move off zero.
00:24:39
Speaker
Good. Well, if you want any more information about our company, it is www.uncommonwealth.com. We would love to have a conversation if we could answer any questions from you. Again, you've been listening to the Uncommon Life Project. I've been your host, Phillip Ramsey. And I am Brian Dewhurst. Until next time, go and be uncommon and impact lives. Thanks, everybody. Goodbye.
00:25:02
Speaker
That's all for this episode of The Uncommon Life Project, brought to you by Uncommon Wealth Partners. Be sure to visit uncommonwealth.com to learn more about our services. Don't miss an episode as we introduce you to inspiring people who are actively pursuing an uncommon life.