Michael Port (00:05):
Hello, and welcome to Steal the Show, a podcast brought to you by Heroic Public Speaking. I’m your host, Michael Port. This season’s theme is Speakers with Money. I’m joined by my very good friend, Matt Rzepka, the Owner and Chief Wealth Strategist at Valley Oak, a specialized financial services firm. Together we’re exploring some of the most common and daunting challenges facing speakers, entrepreneurs, and small business owners when it comes to finance. Now to be crystal clear, I have no conflicts of interest here. My company is Heroic Public Speaking, which I co-founded with my wife, Amy Port. We are a public speaking institution based in Lambertville, New Jersey and we provide world-class training to aspiring and working professional speakers around the world. I don’t sell anything related to financial services. Matt, however, does and you are welcome to hire him. I, however, will not be compensated in any way if you do. I’m doing this purely because I love this topic and I think everyone in our industry can benefit from learning more about business and personal finance. That’s it. Okay. Today we’re discussing how you can turn your business into your own family bank. Let’s get right to it.
Michael Port (01:25):
So most people, when they start a business, they have a whole bunch of ideas in mind. I’m gonna get rich, I’m gonna build an empire or maybe something a little more modest like I’m gonna employ myself and be my own boss. Either way, nobody, nobody gets into business thinking, you know what I need, I need a personal bank for my family. Well, maybe the Rockefellers thought that, but most people don’t. It’s just not what people think of when they launch a business or start thinking about launching a business because it’s not something that comes to us naturally.
Michael Port (02:05):
So I wanna take a little time to just break down what we mean by turning your business into your family bank. Because although it’s not the most obvious way to think about your business, I really think it’s the right way to think about your business. Let’s start by addressing what we mean by personal family bank. And then we’ll get into why it’s helpful and important,who it’s for, and finally, how you do it. Matt, what do we mean by turning your business into your family bank?
Matt Rzepka (2:41):
The main thing is we have to have a system for our money and everybody can relate to a bank because that’s where most of your money is held. Or at least it’s held there at the beginning. When you’re in business, it’s held there. If you’re employed, everybody wants to make money like a bank. So if we can take the philosophies behind the banking system and implore them in our own process for how we handle our money, maybe there’s some value and wealth that we can exponentially build by, you know, building on some of these philosophies.
Michael Port (03:12):
Okay. So why is it best to think about our business in these terms?
Matt Rzepka (03:16):
Well, money has a cost, no matter what you do with it. If you are spending it, you’re losing the ability to ever make money on that money in the future. If you’re investing it, you’re trying to achieve some sort of rate of return. And then if you’re borrowing it, it has a cost on what the interest is. And then depending on if you’re borrowing it for personal use or borrowing it for business use, you have to look at what they call the arbitrage or the spread between what you hope to make. Let’s say hope to make 10% and you can borrow that money where you’re gonna make 10% at 5%, there’s a spread or a hopeful profit of a 5% rate of return that is to the good or to the positive if you’re engaging in a transaction like that.
Michael Port (04:01):
Okay. So I’m sure everybody understands this perfectly already.
Matt Rzepka (04:06):
Piece of cake.
Michael Port (04:06):
Yeah right. So before we get deeper into it and before we get into the, how you do this, because I think sometimes when you get into the, how you do this, you’ll start to actually see why it’s also helpful. But let’s talk about who should think about doing this.
Matt Rzepka (04:20):
I believe everyone should look at some sort of system or process for their money and really breaking it down into two categories: the money that we plan to spend and the money that we want or think is excess that we are gonna save or invest. And so you want to have a system for those dollars because what we’ve seen over the years is if your money just stays in a bank account and you don’t have a plan for, it gets into our whole budgeting conversation and what actually giving dollars a job, the money just seems to disappear if you don’t have a plan or a process for what’s happening with your money. So separating the two and having a spending strategy and an accumulation strategy is critical in my opinion.
Michael Port (05:02):
Okay. So we’ll get to how you do this in a moment, but first, how does someone know that it’s time for them to start to thinking this way?
Matt Rzepka (05:10):
Initially it is thinking about whether you know you have excess cash flow yet or not. So one of the key things here is if you’re struggling to handle your cash flow and pay your bills, this might not be the time to implement this strategy, but it could be the goal that you set for yourself to get to this point. So, that hey, alright. I think I have X amount of dollars per month that I don’t need to spend in my lifestyle. Let’s start setting aside those dollars in a systematic way and then come up with a strategy on how we continually add to how much we’re setting aside.
Michael Port (05:43):
Okay, good. So before we get deeper into how we do this, I wanna introduce three different terms that’ll help us draw some important distinctions here. Those terms are self-employed, business owner, and investor. Matt, are you familiar with these terms?
Matt Rzepka (06:01):
I’m a CPA, Michael.
Michael Port (06:03):
Okay. Well, alright then Mr. Smarty Pants, by all means enlighten us. What is self-employed? What does that mean?
Matt Rzepka (06:11):
That means that your business is effectively paying your lifestyle expenses. You’re working as an entrepreneur to provide for your own lifestyle.
Michael Port (06:20):
Okay. What does a business owner mean in this context?
Matt Rzepka (06:24):
A business owner is not only paying for those lifestyle expenses, but you’re also looking to make profits in excess of your lifestyle to accumulate cash, reinvest in other places, or just have true net income that you’re not spending to live.
Michael Port (06:40):
So real cash accumulation.
Matt Rzepka (06:42):
Yes, sir.
Michael Port (06:43):
Okay and number three in investor. In this context, what do we mean by investor?
Matt Rzepka (06:48):
Investor would mean that you’re utilizing money, that you’ve saved in some capacity to invest in another venture or another business. And you’re not needing that income to pay for your lifestyle. You’re just looking for rates of return and growth and wealth building characteristics.
Michael Port (07:06):
So would you say that the capital gains that you are trying to achieve would be produced passively in this context?
Matt Rzepka (07:12):
Yes. Most likely. There’s some specific rules on passive versus non-passive. One of the great resources of anything that we’re ever talking about is actually the IRS website. You can go to IRS.gov and you can and search passive income and it will give you all kinds of information about how that works and what it means to be passive versus active. Just a quick reference.
Michael Port (07:34):
Great. Yeah. When you hear people in this, a info product selling world say you’re gonna make passive income. It’s not technically the definition of passive income. Generally. It’s more of a marketing term that they’re using. So the three terms that we’ve outlined self-employed means your business is paying for your lifestyle expenses. A business owner means that the business is not only paying for your lifestyle expenses, but you are also making a cash profit in excess of those expenses so you have real cash accumulation. And then the investor means that you utilize money that you’ve made to produce passive capital gains or cash flow above and beyond lifestyle needs.
Matt Rzepka (08:15):
Yes.
Michael Port (08:15):
Fair.
Matt Rzepka (08:15):
Absolutely.
Michael Port (08:16):
Okay, good. So why should speakers or anyone in business for themselves think in these terms? What do these terms tell us?
Matt Rzepka (08:25):
These terms are a great benchmark to say, okay, what money system or what money process should I consider having? You know, if I’m self-employed and I took the leap to provide for myself and have more freedom and do some of the things that you do when you first start a business, you might not yet be in a position where you’re gonna have tons of excess cash flow. You’re just trying to get from the corporate world to the self-employed world and survive and get your bills paid and live the way you wanna live. So trying to jump into, you know, investing or other, maybe higher risk things might put you at a disadvantage. So you want to kind of identify where you’re at in those three terms. And if you’re at self-employed, it’s not bad, but you wanna move from self-employed to business owner. Once you start seeing some profits, then you can kind of pat yourself on the back. Alright, I’m from stage one to stage two here. Now I’m a business owner. Now I have to start thinking about this profit that we’re making. What do we want to do with it?
Michael Port (09:20):
Mm, great.
Matt Rzepka (09:21):
And then that also leads directly into the investor to say, okay, well we have excess profits. Not only am I functioning now as a business owner, but I may want to invest. And where and how can I invest and have a system for making those decisions?
Michael Port (09:34):
Okay. So now, now that we’ve got our terms set, I think it is time to talk about how to actually do this. How to actually turn your business into your family bank. Now to do this, you need to develop a consistent reliable system. So Matt, can you walk us through how to create this system to turn your business into your family bank?
Matt Rzepka (9:56):
Absolutely. The best place to start, and this gets into, again, you’ll notice a lot of what we talk about relates to each other, or so the, the budgeting process and having an idea of what you’re spending as a household is a critical first step. I sometimes refer to this as reverse budgeting. So again, if you’re not budgeting or doing anything with your money around what you’re spending, you can start and just say, alright, I think I’m spending X amount of dollars per month. So step one is to take what you think you’re spending each month, isolate it in its own bank account, and then spend your money from that bank account. And if you don’t run outta money, then you know, you have a handle on what you’re spending. If what you transfer to that bank account, doesn’t cover your monthly bills, well, you gotta reexamine.
Matt Rzepka (10:40):
You gotta identify. Alright, I thought I was spending $7,000 a month and I’m outta money and I still have two weeks left in the month. We got a problem. So that first step is to identify those household expenses, those core expenses that we are spending and then isolate funds so the exact amount of money with some extra is going into that account. So the extra is your cushion. Life is not simple. Month to month cash flow is not simple. You’re gonna have ups and downs in your cash flow. So you’re gonna have to figure out some of those things and figure out what cushion you want in your household account.
Michael Port (11:14):
Okay. So you have, you know, variable expenses and you have fixed expenses. Then you have discretionary expenses. And what it sounds like you’re saying, tell me if this is correct, is the that you really wanna try to produce a budget that is as minimalistic as possible so that you have a clear picture of what your fixed expenses are, what your variable expenses are, and then what’s left over after that.
Matt Rzepka (11:40):
Correct.
Michael Port (11:41):
Alright, what’s next? What’s the next step after we do that?
Matt Rzepka (11:44):
So once we get an account set up for our household, we get the money transferring into that household account. Now we want to take what we believe is our extra, and we wanna start sending it to our family bank account. And there’s two ways that you can do that. There’s probably even more than two, but there’s two that I recommend. One is a very simplified, just separate bank account. I have these actually labeled in my own bank as the names. It’s a household bank account. I have my family bank. Mine is an actual LLC, but you can do it as just a regular bank account or as an actual LLC- either is fine. The LLC works more towards the business owner, entrepreneur that maybe is taking advantage of some tax planning. Like we talked about before hiring your kids in your business. If you have a family bank LLC, how you hire your kids becomes very efficient at that point. But you don’t have to take that step if you don’t want to. It’s simply isolating the excess. So if you have a household account for your expenses, what you believe is excess should be then going into a separate bank account and accumulating every month. So if it’s a thousand dollars a month, $2,000 a month, whatever the number is, you wanna make sure that a $1,000 goes in there the first month. It now has grown to $2,000 the second month, $3,000 the third month. And that you’re not having to dip into that bucket. That’s gonna identify what your excess cash flow is.
Michael Port (13:06):
What are the problems that people run into at this stage of the process?
Matt Rzepka (13:10):
Understanding how to automate this a little bit is probably the biggest problem. And that’s where your banking relationship or how many different banks you might be using. Before I was doing this, I had a few banking relationships and the automation of making this happen was a little bit difficult. So I consolidated all of my banking to one bank and then I could set up automatic transfers to make all this thoughtless. Once I set the transfer up, the money just moves how I wanted to move. And the less time consuming, this is the better. So you want to find a system that’s automated and systematic so that just happens once you’ve set it up. And then if you need to change it, you just simply go into that automated transfer and modify the amount until you get it really dialed in and, and it’s working fluidly.
Michael Port (13:59):
It sounds like it’s important that before people start moving money into what would be their family bank account to use for other types of investment purposes, that they make sure that they can afford to do it- that they have the cash flow for it. Do you often see people put the cart before the horse?
Matt Rzepka (14:2):
All the time. And we as a society have really programmed people that they need to invest from day one. And if you don’t have a stable foundation, like even in a house, if your foundation of your house is not good, your house is not gonna stay standing. Same thing is true in finance. You have to have a stable foundation. You want to know your numbers in when you’re investing in even two to separate something that I think has been meshed together in a really bad way. Most people, if you’re asked, well, what are you doing for retirement? Well, I’m saving for my retirement. Well, how am I doing that? I’m doing it in a 401K. Well, technically you’re investing for your retirement. Saving is often associated with safe, meaning I’m not gonna lose money or my account value’s not gonna go down. We have to distinctly separate saving money and investing money because savings should be safe.
Matt Rzepka (15:16):
Investing carries risk. And you want to understand both of those things. And if we’re going to the risk side of the equation too fast or too early, you might be forced to do something from an investor perspective that’s really bad, which is sell at the wrong time. And that’s what we saw a lot of in 2008, 2009, when we had the real estate crisis and the stock market crash. Everybody was over allocated to their risk tank, especially some of the things in the stock market, lost jobs or businesses went sideways and they needed money. And the only place to get the money was from the market or their retirement accounts, which now had lost a bunch of value, which is the worst. It’s a triple whammy. You’re paying a penalty, you’re paying taxes and you’re selling at the bottom. So you wanna avoid those things at all costs. And you want to have a system that lets you make good decisions when things aren’t going well.
Michael Port (16:05):
That’s why we focused on budgeting, right from the get go. Because if you know where every dollar that’s coming in is going, it’s a lot easier to make strategic decisions going forward. And until you’ve got that piece of the puzzle really mastered, I think it’s very easy to get sidetracked, especially when you hear about all the exciting things that some person that you don’t know on Facebook is doing with their money and how they got a 150% return on a meme stock. And you’re thinking, oh my God, if I could just do that, you know, that would solve all the problems. But of course, if you’re very strategic and thoughtful about the way that you approach this and you take a long term view, so you’re always playing the long game, you very rarely will get sidetracked. You very rarely get distracted. And in fact, I think the better understanding you have of just what’s coming in and where it’s going, the less stress you have because you don’t have to worry about it so much.
Michael Port (17:12):
And then that makes your decisions much easier when you are ready to start doing more investing for the long term. I mean, most of us don’t need to do investing for the short term. We are not day traders. We’re not moving in and out of the crypto market on an hour by hour basis. You know, most people who are listening to this show are not focused on that. We’re focused on building a solid financial foundation, employ long term growth strategies, so that either when there’s a dip in opportunity, meaning the gigs aren’t there or something happens in the business, the money’s still there. We still have a really solid cushion.
Michael Port (17:54):
And then when it’s time to start winding down and we don’t wanna work that much anymore, you know, we have money that will take care of us for the rest of our life. That’s what we’re trying to do in our focus on this season of the show is to make sure that we’re covering all of the really boring stuff so that you can get the exciting stuff without being over-stimulated by it.
Matt Rzepka (18:18):
Yeah.
Michael Port (18:19):
We’re not here to pitch the latest craze. We’re really trying to make sure that all of the people we support have both solid, personal and business financials to make better decisions going forward. And if you do, then the decision making process is much easier. If I had somebody come to me for my team, Matt, as you know, I do regular personal finance days where we’ll talk about different things that they’ve got issues with or things they want to know. And sometimes you’ll come in and help with that in the tax area of course. I don’t address that.
Michael Port (18:54):
But somebody else came to me recently because they wanted to buy a house, because typically people think of a house as a very good investment. And when we started looking at their foundation, they realized, oh wow, the last thing I should be buying right now is a house because I’ve gotta get my quote unquote house in order before I can buy a house. Because buying a residential property is generally not a good financial investment. You know, you hear these stories like my grandmother bought her house for $14,000 in 1906 and then she sold it for $1.2 million. Yeah, of course she lived there for, you know, 97 years. But you know, inflation probably eats up most of that gain anyway.
Matt Rzepka (19:38):
Yes.
Michael Port (19:58):
And then the amount of money that went into it all those years to fix it up, new roof, new boiler, etc. So you buy a house often because you don’t want to create something in your own image. That means something to you that you can have for a long time for your family, always has a place to come back. But generally, a house is not a brilliant financial investment. So when I started walking her through just the numbers on it versus renting and what she could do if she rented, but then save money to put it into the market for the very, very long term, she saw, wow, this is like an obvious choice. Yeah. But sometimes the obvious choice is not so obvious because the way the industry or society has set up expectations may actually be misleading.
Matt Rzepka (20:24):
Yes, very much. And the long game is how you should play. But the thing about the long game that usually distracts people early on, is early on it’s not very sexy because the numbers are small. You’re not really seeing anything major because you’re just starting out the savings process. You’re just starting out the investment process. The compounded growth that everyone can show you on paper, what it looks like 40 years later, you have 40 years later it’s great. But you gotta stay the course. And that’s where a lot of people get off track. And with the family bank, it really is critical. I know exactly how much money I’m saving every month. Every month I update my family bank report once a month. I know exactly how much money I have available for a new investment. If one happens to come across my plate and that clarity, just again, lets you make good decisions.
Matt Rzepka (21:16):
And then my personal approach on how I handle the safe funds. So the safe funds in my family bank LLC are the money that’s not going backwards. I never allocate more than 50% of my safe money. And the reason for that is the safe money is there to protect you. It’s there to help you when things go wrong, because if something goes wrong, like a hurricane or a pandemic, or all the things some of us have been dealing with the last 18 to 24 months, usually money helps you solve that problem and come out on the other side just as good or better. And you don’t wanna over leverage that. Or if something goes wrong at the wrong time, you could be in a really bad spot.
Michael Port (21:58):
Yeah. So talk to me a little bit more about how you deploy this concept of a family bank. So like just at a basic level, let’s say if they don’t set up a separate LLC, you know, like I have that because you worked on that with me, the Port Family Bank, but you might just have a bank account that is your family bank and you keep putting money into there trying to stockpile money. And so first you wanna make sure you have enough money in there to cover any emergencies. So you have your emergency supplies. And so that may be six months to a year of living expenses, correct?
Matt Rzepka (22:34):
Correct.
Michael Port (22:35):
Okay. So now you’ve got that in there and then you’ve exceeded that. Now you’re gonna start to decide, well, where do you want to deploy that capital to start to produce investment returns that are more passive. They won’t necessarily be risk free, but there’s a lot of different options. And in later episodes, we’re gonna go deep in into what options are available to people and break them down specifically. But could you talk a little bit more about some of the things that one might do with their family bank, how they may deploy some of those assets?
Matt Rzepka (23:08):
Yes. And one thing I do, I do a little bit of real estate investing and so it’s a cash flow engine first. And then when I do real estate investing, the bank helps fund the deal. So if I have a new deal, I’m gonna use the actual bank lending institution to fund usually around 75% of the purchase. And then I’m gonna use my family bank to fund the other 25% of the purchase. And the goal with that real estate investment is that it produces positive cash flow after it receives the rent, pays the expenses, pays the mortgage to the bank, pays the mortgage to the family bank. There should be some money left over in the whole thought process is that I’m saving into the family bank every month from my business, but I wanna also produce more cash from other investments that adds and compounds the cash flow itself so that that cash flow keeps growing every month, every quarter, every year.
Matt Rzepka (24:04):
So if I’m putting $5,000 a month in the family bank now, I want to do everything that I can to make that $5,000 turn into $6,000, turn into $7,000, turn into $10,000. And you would be shocked as you automate and create a process for your money, how efficiently and quickly you’ll start to accumulate cash because you have a system. It’s like a money machine is the way that I talk about it. Your money just keeps growing each month and you get to decide, alright, what do I to do with it? And real estate is just one of many options. You can do stock market, you can do retirement accounts, you can do all kinds of stuff from the family bank account.
Michael Port (24:40):
So the gains that you are making on your real estate property is going back into the family bank.
Matt Rzepka (24:46):
Yes.
Michael Port (24:46):
It’s interesting. There are a number of different ways to do the family bank. You know, you hear people talk about and it’s become a kind of, I think marketing term, whole life or permanent life insurance policies are often being referred to as a family bank because you put premiums, large premiums into those policies. Those policies then have this cash value component to it. Supposedly making a little bit of interest each year. And then there might be a death benefit associated with it. And then people can borrow from the permanent life insurance policy and use that money for whatever they want and then either return it to the policy or don’t return it to the policy, but then the death benefit makes up for, you know, that pays the loan off essentially when you die. Now, when I’ve heard it marketed like that, it sounds pretty sexy, but there’s some risks associated with that type of family bank. Can you address that, Matt?
Matt Rzepka (25:44):
Absolutely. And I’m very familiar with permanent life insurance products. I have some on myself and own some, but the difference between what we’re about here and some of the marketing strategies that you hear about other family banks, there’s no one asset that’s the holy grail. This is a cash flow system first. So if you follow the process of what permanent life insurance looks like and how it works and want to do that, you would have the choice to do that inside of your family bank. If you don’t, you don’t have to do that. One thing I want to clarify, and this is again, there’s even a book written about whole life that’s not correct, so it’s called “Bank on Yourself,” and it talks about borrowing your own money. And you don’t actually borrow your own money if you own a permanent life insurance policy. What’s going on is you’ve accumulated cash value inside of an account and the insurance company is willing to loan you their money and use your cash as collateral. So that’s the only way that that really works, otherwise the whole system around what that looks like and how the math works, wouldn’t work at all. So you’re borrowing in the insurance company’s money and using your own cash value as collateral.
Matt Rzepka (26:51):
So again, a big topic there, my advice to anybody who is either doing or thinking about permanent life insurance is work with somebody who’s not in a hurry. Because if you’re thinking about that and they’re trying to rush you through a scenario, they’re likely just trying to make a sale, not necessarily design a policy, that’s gonna work for what you’re accomplishing. We all the time, run into people who have policies that aren’t funded properly or that aren’t doing what they’re supposed to be doing. So you want to unpack that first and then figure out if it’s a good fit for you.
Michael Port (27:23):
Yeah. I had purchased a policy in 2000 and I’d like to say 6, that I had for many, many years and it was a dog. It was an absolute dog. But as I got more experienced and as I learned more about personal finance, I was able to dig a little deeper into that particular policy and I realized that I had been losing money every year that I was investing money into it because the expenses were so high. It was such a badly written policy. Not for the salesman. It was very well written for him. And it was very well written for the insurance company, but not for me. So I ended up closing it. It’s just really, really important that we don’t assume somebody knows what they’re doing, just because they’re in the business of doing it.
Matt Rzepka (28:14):
Yeah. The insurance companies, especially, I tell the story all the time, the insurance companies work in what I call the world of large numbers or the rule of large numbers. That’s how insurance works in general. If you have homeowner’s insurance, they know they’re gonna sell a thousand and policies and hopefully only 50 people have a claim. Well, when it comes to their sales force, unfortunately they take the same approach. They hire a thousand agents all well knowing 900 to 950 of them aren’t gonna make it because they aren’t good sales people or can’t get people to buy product, which means they’re just out selling stuff they don’t understand and the client buys it and it doesn’t fit. And it just creates all kinds of issues and animosity around the product. And then the 50 that are doing well are ones that took the time to educate themselves and learn how this stuff works. So speed is a factor in the insurance world. If you’re dealing with life insurance and somebody’s in a hurry, that should be red flag number one.
Michael Port (29:09):
Yeah. There are a number of different ways to utilize this concept. One of the things that I do is most of my investment accounts are with Vanguard. I think Vanguard is the greatest institution on the planet for the individual investor in large part, because it was founded by John Bogle who is considered the godfather of the index fund. Now he actually, wasn’t the very first person to think about the index fund or to even write about the concept, but he’s really the one that popularized it. And Vanguard is a not for profit. So when you invest through Vanguard, you’re technically an owner of the company, like all the other clients. But I have a fair amount of investments in brokerage accounts. So a brokerage account is a taxable account, not a retirement account. So any gains that you make in a brokerage account are subject to capital gains taxes- and we’ve spoken about those on a previous episode. And capital gains taxes for me would be 20%, but I’m still looking at it as a long term investment account. I don’t pull from it. I’ve never pulled from it, sold any of the assets in it.
Michael Port (30:17):
But the reason I moved a fair amount of money out of Vanguard into another brokerage account called Interactive Brokers is because they offered a margin loan at a 1.5% interest rate, which is incredibly low. It’s really the lowest in the industry. Yep. Vanguard will do the same, but I think their interest rate for margin loans is about 7%. Now I don’t buy stocks on margin. If you don’t know what margin loan is, it’s essentially the brokerage account is lending you money to buy more assets.
Matt Rzepka (30:50):
Yeah.
Michael Port (30:50):
And they’re using your investments, your capital as collateral. And they can call in that margin when they want. If the market goes down and they’re concerned that you’re not gonna have the capital left in your account, then they’ll call in that margin. So, but what I do is something a little bit different. I set this account up to be another type of family bank because the interest rate is so low at 1.5%, I can borrow on margin, but take out cash. Instead of buying more stocks, I can take out cash. So for example, let’s say you wanted to buy a house. You know, you could get a mortgage rate for I don’t know what it is now. 3.5%, 3.9%…
Matt Rzepka (31:30):
3%. 3.5%. Somewhere in there still.
Michael Port (31:32):
And it’s going to start to go up as interest rates continue to go up, but still by historical figures, it’s very, very low. But maybe I don’t wanna pay that much. Or maybe I don’t wanna have a mortgage on my credit account. Maybe I just don’t wanna have it on the books anywhere, but I still want it to buy property. Maybe I wanted to buy an investment property. And investment properties the banks are gonna charge you higher interest rates because you’re not living there. So maybe they’ll charge you an extra point or a point and a half because it’s an investment property. But if I wanna borrow money on margin from the Interactive Brokers against the assets that I have in the account, so against my capital, I can do that at such a low interest rate that it’s almost like free money that I’m borrowing for myself. Now the key is you have to be very, very careful because you can’t overextend yourself. If I borrowed 75% on margin of the money that’s in there and I don’t even know if they would let me…
Matt Rzepka (32:32):
They wouldn’t.
Michael Port (32:32):
…but let’s just say I did.
Matt Rzepka (32:33):
Yeah.
Michael Port (32:33):
Hypothetically, and the market dropped by 35%. Boom, all that money’s gonna get wiped out. It’s gonna be a really big problem. I think they let you borrow up to 50% if I recall correctly.
Matt Rzepka (32:46):
Typically, yep.
Michael Port (32:47):
But I have a principle where I won’t borrow on margin from that account more than 20% just to be really conservative and on the safe side. And here’s an example of how I used it in a way that might be surprising. Amy and I had a boat that we decided to put on the market a couple years ago and it was taking a while to sell in part because the manufacturer of the boat introduced another model that was almost the exact same size, but much cheaper. And as a result, it hurt the resale value of my model boat. I wasn’t really happy about that, but that’s what happens.
Michael Port (33:26):
And I had also, when I bought it, only put 15% down rather than 20% down. I had a good relationship with the bank. So they said, yeah, we’ll take only 15%. That’s fine. Instead of 20%. So this way I could keep my money working for me rather than give that money to the bank. But when it came time to sell it, I was underwater on the boat. So I had to put money into the sale to close out the sale. But I didn’t wanna take cash out of my emergency fund. I didn’t wanna sell any of my stocks or bonds. And so what I did was borrow from my brokerage account on margin, the amount that I needed to cover that short fall. But what that allowed me to do was to keep the capital in the margin account, working for me. And fortunately the market has been going up.
Michael Port (34:14):
It just got lucky. And within six months the earnings on that account eclipsed what I had borrowed from it. So I was able to pay it back and ultimately the earnings paid off the boat, none of my principle. So that’s a type of banking on yourself, borrowing from yourself, family bank type of strategy. It’s a sort of a next level or a next step from what we’re talking about here with, you know, keeping a bank account where you’re funneling money in and then deciding where you’re gonna deploy it. But yeah, that worked really, really well for us. You just have to be very careful so you don’t get over extended.
Matt Rzepka (34:49):
Yeah.
Michael Port (34:50):
Unnecessarily or inadvertently.
Matt Rzepka (34:52):
We’re talking about leverage. So you always have to make sure you understand the leverage formula. And really the family bank concept comes down to the principle of access to capital. If I need money or I need capital, where can I get it most efficiently? In your example, that most efficient access to that capital was a 1.5% loan from the brokerage company. No question. Yeah, because if you had to sell any of those investments, do the same thing, not only would’ve you missed out on the market growth, you would’ve had to pay taxes. So all of a sudden your cost to use that money when instead you borrowed against it and saved on all, you had opportunity gains because you left the money invested and you avoided those taxes by just using it as collateral. When you’re borrowing against investment accounts like that, the 20% rule that you have Michael’s great because any fluctuation down the opposite could also happen. And that if you’re gonna do something like this, you want to make sure you understand this.
Matt Rzepka (35:48):
If the market goes down, when you have a loan borrowed against your brokerage account, they may do a margin call. Because 50%, so let’s use a real easy example…if you’ve got $500,000 in your brokerage account, they’re gonna let you borrow up to $250,000. Let’s say you borrowed the full $250,000 for an emergency. And you happened to borrow it when the market was going down and the market went down to $400,000 from $500,000. Well now your 50% formula is out of balance. Your $50,000 overdrawn on the allowable loan. So the brokerage company is gonna tell you, you have two options, deposit $50,000 in five days, or we’re gonna sell securities to pay down your loan. So that’s what would happen if you got out formula on a brokerage loan. Not a bad thing, you just have to be aware if you’re fully drawn on that leverage, that’s how that’s gonna work. So risk assets, you can borrow against those. That’s your access to capital. Safe assets you can borrow against those. That’s your access to capital. Or real estate. Real estate’s the other way you can have access to capital. You can borrow against to help solve whatever problem you have or make an investment in whatever opportunity you have.
Michael Port (36:53):
If you have equity in that real estate.
Matt Rzepka (36:55):
Yes, equity is required.
Michael Port (36:57):
If it’s already leveraged, then there’s nothing you can do about it, right? You can’t leverage it twice.
Matt Rzepka (37:01):
Correct. Your standard formula at the bank. If you’re buying a home is usually 80/20, 80% of the bank’s money, 20% of your money. You could likely re-leverage it up to 90% with a home equity loan. Sometimes that’s gotten a lot tighter in the last 10 to 15 years. So I would say 80% of your home’s value is usually what you can leverage in terms of access to capital.
Michael Port (37:23):
Yeah. One of the things that, you know, people might be thinking and is something Amy asked me when we were talking about this strategy in terms of how to make up the shortfall on the boat. She said, yeah, but what if the market goes down? What if we don’t get the gains? Not that it goes down so much that it would force a margin call because again, I’m only staying below 20% and for the market to go down, as far as it would need to for the call to come in, it would be very unlikely. By the way, I don’t think Interactive Brokers actually does margin calls. They just take the money.
Matt Rzepka (37:52):
Okay.
Michael Port (37:52):
They don’t actually do the call. They just take the money. But what she said is what if we don’t make money? Let’s just say the market stays flat and we have this loan. And my feeling was, and she agreed, was that it’s worth the risk because it’s only 1.5% interest rate. It was such a tiny interest rate. And this is, you know, Interactive Brokers gets a lot of business because people want this really low interest rate. And for me, that was a risk worth taking rather than actually depleting either those accounts or depleting any of our cash savings, which is for emergencies, was a much safer bet to me to take the risk of the account not going up and paying it off for us. But just having to hold that loan longer at 1.5%.
Matt Rzepka (38:36):
Short game versus long game. Because even in a short game where the market’s flat or even goes down, 1.5% cost compared to 40% tax is still a better efficiency. You lose forever 40% if you liquidate the account to solve that same problem that the government now has. And you never have the ability to earn on it.
Michael Port (38:56):
Yeah.
Matt Rzepka (38:57):
So, you know, you’re in that account for the long term if it happened to go down with bad timing, when you happen to take the loan, that’s okay. You’re still in the long game, you work the rest of your finances and all of your flows to make that still balance out over the long term. And that’s just huge.
Michael Port (39:12):
Well, this is another thing you actually taught me when we first met, which was surprising to me and kind of obvious once you pointed it out, was the issue with 529s. Matt, can you define a 529 plan?
Matt Rzepka (39:25):
Yes. A 529 account is a special account that you can put money into that will go towards a child’s college or anyone’s college. And you get special tax treatment on the gains, only the gains, so you put after tax money into the account. Any growth that you get in that account can be used tax free for qualified college expenses.
Michael Port (39:46):
So when Jake was little, I set up a 529 and just was putting money in there and, you know, built up a good size account for him. Just don’t tell him. He doesn’t listen to the show anyway, so it’s fine. But you know, the problem is, is that now that there money’s in that 529, when Jake goes to college and we take the money out to pay for college, all that principle that had been working all these years is now gone.
Matt Rzepka (40:11):
Yeah. The opportunity is gone.
Michael Port (40:13):
Yeah.
Matt Rzepka (40:13):
It’s the pure opposite of how compound interest works long term. The faster and higher you can stack your money and get it growing and compounding, the more the compounding works for your benefit.
Michael Port (40:23):
Correct.
Matt Rzepka (40:24):
So you never want to drain the account or as I say, drain the tank because you’re starting the compounding process back over at zero. So again, the family bank. Banks understand long term compounding. They understand other people’s money. They want the pot to be as big as possible and compounding and growing cuz that’s how they make money, so that’s why you want to act like the bank.
Michael Port (40:44):
Yeah. So that adjusted our strategies for how we saved for college. And we started using Roth accounts because you can use them for qualified education. You don’t have to. We could save them and keep them for other purposes. But also we would just take that money and put it into brokerage accounts. Because if the brokerage accounts are large enough at the time that you need them, you can then borrow just like I was saying against those accounts at very low interest rates and pay for the college that way, if you want, and then see if you can use earnings to then pay yourself back through the earnings. Or you’d pay it back in other ways.
Matt Rzepka (41:22):
Yeah.
Michael Port (41:23):
But you’re not eating into that capital and all the compounding value that you’d produced over time.
Matt Rzepka (41:30):
Yeah. You become the bank for student loans, you manage your resources to grow and compound as big and as fast as possible and the other thing, this is a concept that I think it’s overlooked, you can finance someone’s college education, but you can’t finance your own retirement. So if you don’t put yourself first, yes, it’s great that you want to help your kids and want to help them pay for college and get to college, but be in control of that situation so that you don’t jeopardize your own retirement in lieu of getting them to college. So that’s something I see a lot and we have a lot of discussions about, and it’s a big thing to grasp.
Michael Port (42:05):
Yeah, because thinking that you’re gonna send them to MIT so they can make a fortune and then cover your retirement is a really high risk strategy.
Matt Rzepka (42:14):
Yes, it is.
Michael Port (42:15):
There’s no guarantees on that one. That is for sure. Oh my goodness.
Michael Port (42:20):
Alright, so what do you want folks to take away from this episode? I mean, we covered a lot in this episode, but what do you want people to take away from it?
Matt Rzepka (42:29):
The big takeaway here is systems or process for your money. If you don’t make a plan for where your money’s going and why it’s going there, it’s just gonna disappear because lifestyle will creep if you don’t make a plan. So figure out what you’re spending again, budgeting and all the great things we’ve talked about in previous episodes. If you don’t want to get into the detail, then just pick that reverse budgeting number. Alright, X amount of dollars per month and let’s test ourselves. Are we living on that money? I talk about this with retirees or people that are approaching retirement a lot. Hey, what’s your budget? Oh yeah. We’ve got that dialed in. So what I tell ’em is all right, go for three months and live on that amount of money and come back to me and tell me how it went. And you’d be surprised like, wow, we’re actually spending more than we thought.
Michael Port (43:15):
Yeah.
Matt Rzepka (43:15):
But if you don’t dial that in, it can really throw outta whack your retirement plan and long range planning. So just understanding what you’re spending first and then start sending excess to a separate account. And it’s really rewarding when you actually start seeing those dollars accumulate every single month. And then you get really motivated. Well, I want more money in that account and it just makes the money machine roll. It just gets really exciting at that point
Michael Port (43:40):
Right on. So what’s the next step for you? All of our listeners are in different places, but you, just you, what’s your next step? Is it setting up another bank account so that you can automatically funnel any of your savings into that account and setting a goal for how much you wanna put into that account by a certain date? What is your next step? Because if you just choose one next step after each of these episodes, by the end of the season, you’re gonna be in an entirely different place. You’ll get compound returns from the steps that you take as we move forward. And then in the meantime, go ahead, write a review and share what you are taking away. What did you learn? What did you discover? What was helpful to you? What did you find valuable? Put it into the reviews so that other people can see and also get value from it. And Matt, what are we covering next week? Next week we’re talking about what to do with your additional savings. Alright. That’s it for us today. Thank you for listening. I’ve been Michael Port with Matt Rzepka and we’ll see you next week.
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