Are emotions holding you back from growing your wealth? Are you making objective decisions regarding your wealth or is it possible that you’re like most business owners, entrepreneurs, and investors. Emotions creep into your decision making and are preventing you from achieving more?
In this episode of Canadian Wealth Secrets, Kyle Pearce and Jon Orr dive deep into a common struggle many Canadians face—how to utilize good debt while keeping emotions in check. It’s easy to feel conflicted about leveraging assets, especially when interest rates rise and financial advice warns us to pay off debt. However, avoiding strategic leverage could mean missing out on compounding wealth over time.
This episode is tailored for those trying to balance emotions with rational financial decisions, particularly in times of economic uncertainty. Whether you’re thinking about downsizing, borrowing against an asset, or wondering if higher interest rates are a reason to sell, this conversation sheds light on how long-term wealth is built, even when rates fluctuate.
- Learn why wealthy individuals thrive in times of inflation and how you can leverage this for your financial benefit.
- Discover how interest rates are tied to asset value, and why they shouldn’t deter you from utilizing your wealth.
- Understand the true cost of selling assets versus borrowing against them and how to strategically maximize your portfolio.
Don’t let emotions stop you from growing your wealth—tune in to this episode and start leveraging smarter today!
In this conversation, Kyle Pearce and Jon Orr discuss the concepts of good debt versus bad debt, the impact of interest rates on wealth accumulation, and the emotional barriers that prevent individuals from leveraging their assets effectively. They emphasize the importance of understanding how debt can be used strategically to build wealth, particularly in the context of rising interest rates and inflation. The discussion also highlights the common misconceptions surrounding debt and the need for a mindset shift to embrace leverage as a tool for financial growth.
Resources
- Dig into our Ultimate Investment Book List
- Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
- Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX.
- Looking for a new mortgage, renewal, refinance, or HELOC? Reach out to Jon to share some options.
Detailed Episode Summary
Quick recap
Kyle and Jon discussed the pros and cons of paying off a mortgage early versus paying it down on schedule, with Jon sharing his father’s experience of paying off his mortgage early but not knowing what to do with the extra money. They also explored the potential of using home equity for other investments, such as rental properties or the stock market, to increase overall wealth and cash flow. Lastly, they discussed the use of whole life insurance policies as a replacement for home equity lines of credit, highlighting the potential benefits and drawbacks of different financial strategies.
Next steps
- Kyle and Jon to create content explaining the pros and cons of paying off a mortgage early versus investing extra funds.
- Kyle and Jon to develop educational materials on using whole life insurance policies as an alternative to home equity lines of credit for accessing capital.
- Kyle and Jon to schedule discovery calls with interested listeners at canadianwellsecrets.com/discovery to discuss individual financial situations and strategies.
Summary
Mortgage Payoff Decisions and Financial Goals
Kyle and Jon discussed the emotional relief of paying off a mortgage and the subsequent question of what to do next. They considered the pros and cons of paying off a mortgage early versus paying it down on schedule. Jon shared his father’s experience of paying off his mortgage early, but not knowing what to do with the extra money, as it was spent on various things. They concluded that there’s no one-size-fits-all answer, and the decision depends on individual circumstances and financial goals.
Managing Extra Funds and Investment Opportunities
Jon and Kyle discussed the importance of having a plan for extra funds, such as those from a mortgage payment. Jon emphasized that if no plan is in place, these funds will be absorbed into the daily budget and may not be used effectively. Kyle agreed, suggesting that having a plan in place allows for better decision-making about how to allocate extra funds. They also discussed the potential of using home equity for other investments, such as rental properties or the stock market, to increase overall wealth and cash flow.
Discussing Home Equity Loans and Investment Strategies
Jon and Kyle discussed the use of home equity loans (HELOCs) to invest in assets and increase cash flow. Kyle suggested that instead of paying off the mortgage, Jon could make regular payments and use the extra payments for investments. He also highlighted the tax benefits of not selling the primary residence, as it appreciates in value and provides a capital gains exemption. Kyle emphasized the importance of considering the long-term implications of debt and the potential for growth in assets. They concluded that the current strategy of using HELOCs to invest in assets is effective, but they should continue to explore ways to optimize their financial situation.
Whole Life Insurance as HELOC Replacement
Jon and Kyle discussed the advantages of using a whole life insurance policy as a replacement for a home equity line of credit (HELOC). Jon emphasized that the cash value in a whole life policy can be borrowed against, similar to a HELOC, and this borrowing is not listed as a debt. He also highlighted that the insurance company does not care about the borrower’s ability to repay the loan, as they will be paid back from the policy’s cash value. Kyle agreed with Jon’s points and appreciated the unique perspective on the topic. They concluded that using a whole life insurance policy can provide flexibility and liquidity, similar to a HELOC, but with more control and without the need for permission to borrow.
Exploring Financial Strategies and Mortgage Options
Kyle and Jon discussed the benefits and drawbacks of different financial strategies, particularly in relation to mortgages and home equity lines of credit. Kyle emphasized the potential for saving interest by extending the mortgage term, and the possibility of using the saved funds for investments. He also highlighted the importance of considering the long-term implications of these decisions. Jon agreed, suggesting that the wealthy often prioritize financial stability over eliminating debt entirely. They concluded by encouraging listeners to consult with them for personalized advice and to share the podcast with others.
Read the full transcript
Kyle Pearce: All right, John, I am ready for a quick hit episode here with you because this is something that I am dealing with with so many clients and it really comes down to, we talk about it all the time, the idea of like, yeah, the rant is coming. No, but really, I’m really hoping that people can.
better understand what’s going on so that at least they can get their emotions more in check. Here’s the hardest part. We talk about rational side of our brain. We talk about the emotional side and emotions typically win. And the big one here is like, first off, one of our most listened to episodes as of recently is the episode on debt and what the wealthy do.
Jon Orr: Mm-hmm, the elephant.
Kyle Pearce: that’s different than what most others do. really comes down to we’re talking about this idea of good debt. And having good debt is actually a good thing. Now, the only way to have good debt is against assets, right? Like that’s what good debt is, right? You’re going to buy an asset or you have an asset and you actually leverage against that asset. The asset will continue to grow and of
And if you continue to pay interest, that is going to grow as well. But the part that people get stuck on is this idea. They would rather sell things and pay tax so they get less than what they had the day before they sold. They sell it. They pay capital gains, or they pay income taxes, depending on what it is that, where this money is coming from, from these investments.
Ultimately that money will just slowly dwindle away through inflation and through spending there is no growth there of course we’re not paying interest to spend our dollars the big argument is I don’t want to pay money in order to use my own money that’s like what people say but that’s actually an illogical move and I think today we’ve got a highlight
some of what actually impacts things like interest rates so that people can actually understand at a high level, like almost like a macro economic perspective as to how this all works so that they could recognize that, guess what? It doesn’t actually matter what the interest rate is five, 10, 15 years from now because it’s all gonna be okay.
Jon Orr: Hmm, yeah, I think many people are saying like, okay, I have this asset and I don’t wanna lock up my money. I don’t wanna like, it’s gonna get in there and I’m not gonna be able to touch it and if I do, I have to borrow against it and therefore like, what happens if interest rates are higher? It’s like, now I have to borrow at a higher rate than if I just sold it. I didn’t lock it in in the first place, it’s more liquid and then I can spend it. But the problem, right, is that,
you spend it like you said, it just goes away, it dwindles down. Whereas if I’m going to borrow against it, I’m so concerned about this interest rate that I now have to pay and that’s more money out of my pocket. And I think that’s the hard part for people to wrap their head around is that, okay, I have this money, it’s sitting there, but now I have to pay even more money to just access it. And I think this comes back to something that we’ve said a few times,
on different episodes about that. You have to think about that the rate, like the interest rate, let’s say, or inflation, there’s value here attached to rates. Like you have an asset, which is the amazing part. And if you have an asset, then you have this like chunk of like, let’s call it money. It’s sitting there. No matter what that asset is, it’s like it has an associated.
interest rate attached to it. I like to think of it that way because either you have to borrow to access the asset without selling it, right? So if you sell it, boom, it’s in your cash, it’s in your pocket. Great. If you don’t sell it, you have access to it, but yeah, you have to say pay the interest rate or think of it like this. Your asset is value. It’s a pot of money sitting there. And if you don’t spend it, you could make money you know, on interest by lending it out. Like there is, there is an interest rate attached to that money, either you’re earning interest or you’re spending the interest. It’s one way or the other, right? It’s like you’re, and if you do nothing, you’re losing the actual interest that you could be using or earning if you don’t say, if you, if you don’t say borrow against it or you use that asset. Like basically there’s an interest rate there somewhere. And if the interest rate is high, you earn the high rate.
If the interest rate is high, then you have to pay the high rate. But it’s like, that’s why it doesn’t matter. I think the way you’re saying it is like your assets value is increased. Therefore the interest rate is increased. Like it’s all coming out in the wash. It’s just like you said, it’s emotionally mindset about getting around this.
Kyle Pearce: Yeah, and I think you’re getting closer to this idea that we need to understand that interest rates aren’t random. They are connected. And of course, in short periods of time, they might not seem so. So for example, I’m going to use the housing market as an example. When interest rates spiked up very quickly here starting in 2022 and onwards, what happened is you had this quick change to interest rates. And therefore, that actually suppressed the housing market a little bit. It almost seemed like the opposite. You’re like, wait a second, interest rates went up. Now housing prices are going down. Well, actually what happened is, is interest rates took a longer time to catch up to what was happening to appreciation rates. So they had to quickly adjust them. So if everyone remembers from 2019 all the way to end of 2021, asset prices extremely jumped. Why is that? Because of this thing called inflation.
Inflation was very, very high relative to what it had been doing in the years prior. And therefore, interest rates had to spike up to try to kind of mitigate that. Like we’re increasing interest rates to bring the inflation rate down. When things inflate, while we hate it going to the grocery store, while we hate it when we go out to a restaurant, while we hate inflation for so many things, who loves inflation is the wealthy.
The wealthy love inflation because their assets are increasing in value while they sleep. And this is the part that I think is so critical for us to understand when we’re utilizing this idea of leverage strategies, be it to purchase assets or to leverage in order to generate tax-free income for ourselves. I’m going to use a house as an example. What the typical retiree does here in Canada, which is problematic, is
They sell their primary residence because there’s no capital gains and they downsize. This idea of downsizing is a big deal, right? I get it, downsizing makes sense if you’re like, the house is just too big and I don’t want too big of a house. But what many people do is they go, no, we’re actually gonna free up equity from our house and we’re gonna live off of that equity because we’re now retired and we need money in retirement. So they take a…
million dollar home just making up numbers and then now they buy a $500,000 home. Now it’s usually where the conversation starts. By the way, they usually go million. They want to buy 500 and then they buy 750 because they want a really nice version of the $500,000 house. And then they’ve kind of like have been like, we’re not quite there. But here’s the real important part is that that let’s say they went from a million dollar home to a $500,000 home.
They’ve released $500,000 of equity and in this case because it’s a primary residence, they’ve done it tax free. So that part’s good. The problem is, is that in each and every year ongoing, the million dollar house is going to appreciate by at least whatever the rate of inflation is probably more though, right? As we’ve seen because of the Canadian housing market being so tight. So let’s pretend for a second it’s 4%. So that million dollar home is gonna appreciate by 40,000.
the $500,000 house is gonna appreciate by half that amount. It’s gonna appreciate by 20,000. Now here’s where the problem gets worse, is that if we keep going, you’re compounding on a bigger amount each and every year on the million dollar home that keeps growing at the same rate. The smaller home is growing at the same rate, but it’s not going to ever of course catch up to that million dollar home. And here’s the crux of it all.
When that money that we freed up by cashing in the 500,000, mind you, we didn’t pay realtor fees in this world. We didn’t pay land transfer tax. We didn’t pay legals. didn’t do all of those things that you did. and all the money you put into the property before you sold it, because you were trying to elevate the purchase price. All of those things, we’re not even factoring in here. We’re gifting those to us for this discussion. That 500,000 is gonna eventually run out.
And then now they have to look back to that asset again and go, what’s our move? And you know what that move for many Canadians is, is downsize further or sell completely and then move into some sort of rental situation. And guess what? They eventually get to a place where they take zero, benefit zero sort of, of, advantage of this thing known as inflation, because we were taught when we were very young and
all throughout our working years, that we should pay off debt and that we shouldn’t hold debt because debt is bad and interest rates can increase. When in reality, if we use logic, you recognize that, a second, my property value is going to be increasing in the years where interest is at a higher level and therefore I can leverage and be at a net better spot despite interest rates being higher because
my assets are also appreciating. So this is a big, big idea that we need all of our Canadian wealth secret seekers to start accepting or at least thinking about in their minds that we’re not here to over leverage. We’re not here. We want to use conservative leverage and we want to keep assets for as long as we possibly can to kick the can on capital gains taxes and
to create tax-free income because here’s the problem. If we look to the taxable buckets, the result is even worse because now we’re gifting much of the upside that we’re trying to release through taxation and we lose the opportunity for that asset to continue growing in the later years as interest rates increase.
Jon Orr: Yeah, and I think you’re right. The big idea here is wrapping our minds around here about how do we get over the emotional side of using leverage to grow your wealth? Because as soon as you get past that part, that’s when the real, Kyle used the word compound, the real compounding will start to take effect because you’re past the emotional side of overcoming your fear of using the good debt to grow that wealth. you know, if you’ve still got like hangups on that right now, like you’ve listened to this episode, you’ve listened to our previous episodes about how do you manage your debt and think about debt, then reach out to us. Like, you know, get on over to our CanadianWealthSecrets.com, join our email list, email us. Like we want to hear what are some of the holdbacks, the barriers that you’re experiencing right now that makes it feel harder for you to use leverage?
and the debt that you have, you know, have access to your assets to grow your wealth. Because I want to hear about them because then, well, let’s talk about how you can use that or get beyond that because that’s how you’re going to actually grow your wealth the most.
Kyle Pearce: I think that’s a huge secret sauce, my friend. So head on over to Canadianwealthsecrets.com. Hey, listen, if you’re an incorporated business owner and you have retained earnings and you’re trying to remove the tax target off those retained earnings, reach out to us at Canadianwealthsecrets.com forward slash discovery, and we’ll teach you some leverage strategies that will help you become financially free sooner and ensure that you’re maximizing and optimizing your situation while utilizing conservative leverage.
Jon Orr: All right, Canadian Wall Secret Seekers, we’ll see you next time.
