Episode 89: 3 Reasons The Wealthy Avoid Paying Down Debt

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Are you using debt as a tool to build wealth, or is it holding you back from financial freedom?

In this episode of the Canadian Wealth Secrets Podcast, Jon Orr and Kyle Pearce dive into the complexities of personal debt and corporate debt and how it affects your financial freedom decisions. They tackle the critical distinction between ‘good debt‘ and ‘bad debt‘ and explore how each can either hinder or enhance your journey to wealth. With inflation and rising interest rates reshaping the financial landscape, understanding how to strategically manage debt is more important than ever.

Whether you’re a business owner juggling personal and corporate finances or simply someone looking to secure your financial future, this episode offers valuable insights into how debt, when managed correctly, can be leveraged to grow your wealth. Jon and Kyle’s discussion provides practical strategies that you can start applying today to navigate the challenges of debt and inflation, helping you move closer to your goal of financial freedom.

• Learn the difference between ‘good’ and ‘bad’ debt and how to manage each effectively.
• Discover how inflation and interest rates can impact your debt and wealth-building strategies.
• Gain insights into using debt as a tool for achieving long-term financial freedom.

Don’t miss out—tune in now to uncover how you can turn your debt into a powerful asset for building wealth.

Resources:

• Inflation rates in Canada
• A Federal Reserve Bank of St. Louis article states that “Inflation transfers wealth from creditors to borrowers for all sorts of nominal debt, not just government debt.”
• 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.

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting corporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

By hopping on a discovery call with Kyle, he will review your specific personal and corporate financial situation in order to determine if there are some quick wins available for you to minimize taxes personally or corporately, provide ideas for how you can increase your personal cash flow, and ensure that the net worth of your estate continues to grow in tandem.

In this episode, Jon and Kyle delve into advanced wealth management strategies, discussing how retained earnings and capital gains can be optimized using the Smith Maneuver and Infinite Banking. They highlight the importance of managing debt, particularly in the context of inflation and the complexities of corporate tax in Canada, to maximize financial growth and stability.

Watch Now!

Detailed Episode Summary 

Managing Personal Debt and Wealth Growth

Jon and Kyle discussed the complexities of personal debt and its impact on financial decision-making. They explored the concept of ‘good debt’ versus ‘bad debt’, and how to manage it, with a focus on tax implications and the potential for leveraging debt to grow wealth. They also addressed the challenges faced by individuals who use personal debt to fund their businesses, acknowledging the potential for significant tax issues and a loss of funds. The pair agreed to delve deeper into these issues in future discussions, with the aim of finding better strategies to manage debt and grow assets.

Managing Debt and Inflation for Financial Freedom

Jon and Kyle discussed the impact of inflation and interest rates on personal finance, emphasizing that debt, particularly “good” debt tied to assets, can be a tool for building wealth. They highlighted that while inflation reduces the purchasing power of money over time, it also decreases the real value of debt, making it more manageable in the long run. They also discussed the potential benefits of using debt to achieve financial freedom, but cautioned that it carries risks if not managed properly. They encouraged individuals to consider the long-term effects of inflation and interest rates and to seek out strategies that can help them navigate these challenges.

Quick Recap

Jon and Kyle discussed the complexities of personal debt, focusing on the difference between ‘good debt’ and ‘bad debt’, and how to manage it for financial growth. They also explored the impact of inflation and interest rates on personal finance, emphasizing the potential benefits of using debt to achieve financial freedom. The pair agreed to further investigate these issues to develop better strategies for managing debt and growing assets.

Transcript:

00:00:00:04 – 00:00:25:10
Jon Orr
Are you using death as a tool to build wealth or is it holding you back from your financial freedom? In this episode, we’re going to talk about three reasons the wealthy avoid paying down debt. Let’s go.

00:00:25:12 – 00:00:30:12
Kyle Pearce
Welcome to the Canadian Wealth Secrets podcast with Kyle Pearce and Jon Orr.

00:00:30:13 – 00:00:44:08
Jon Orr
We are recovering high school mathematics teachers and education consultants whose entrepreneurial spirit led us to begin multiple businesses in real estate investing, digital courses and coaching and consulting. After the bell rang at dismissal time.

00:00:44:12 – 00:01:02:24
Kyle Pearce
Fast forward a decade later where we’ve grown our portfolios and our time freedom to the point where we can now help entrepreneurs, business owners and investors to grow their wealth into a legacy that lasts generations through hidden investment and tax secrets. Your financial advisors won’t.

00:01:02:24 – 00:01:19:10
Jon Orr
Believe our true. Okay, now we’ve got to get to the bottom of this because I’m sure you go to your family gatherings, you go to Thanksgiving, you go to Christmas, you go to you know, you go to these places where other people and you start to, you know, money starts to come up as conversation and maybe there’s debt.

00:01:19:12 – 00:01:31:15
Jon Orr
Maybe there’s a talk of borrowing money. And then there’s there’s people that gasp, oh, if you were like, hey, like, how much debt? You know, I guess it’s not like it’s not like you’re walking around telling people, like, how much debt you have or how much that they have, But have.

00:01:31:15 – 00:01:36:02
Kyle Pearce
You ever seen me at a birthday party or a family gathering? John I’m always talking about it.

00:01:36:04 – 00:01:55:08
Jon Orr
You are. You are. But I think there’s like this maybe. Maybe that’s the reason is that people are afraid to say how much debt they have. And it brings up the debate that we kind of want to talk about here today. We almost want to make a case for you to say, especially if you’re thinking about trying to pay off some debt that you have.

00:01:55:08 – 00:02:16:09
Jon Orr
Maybe it’s in your business, maybe it’s in your personal life and you’ve used it to to say, buy an asset. And you’re like, I got to pay that down. We’re going to try to make an argument here to say maybe stop that, maybe don’t think about necessarily paying down that debt right now. So in this episode, we’re gonna talk about good debt versus bad debt and how to think about that.

00:02:16:09 – 00:02:35:05
Jon Orr
Kyle This came up from an email you received from a person that you had met to talk about their financial goals, that they’re thinking about their financial journey. You’re helping them kind of navigate that. And they were like, Oh, I got, I want to make sure I pay this debt off before I do anything else. And you’re like, Wait a minute, we got to talk about that.

00:02:35:05 – 00:02:37:07
Jon Orr
So give us the details on this person.

00:02:37:11 – 00:03:07:23
Kyle Pearce
I’m going to set the context a little bit here. So this is an incorporated business owner, has an operating company, runs a successful business. And I’m going to say like they’re after paying himself his income via salary, dividends, so on, has a retained earnings of typically between 100 and $200,000 per year in the company. And so far, this particular individual has been kind of, well, call it like shove.

00:03:07:23 – 00:03:28:12
Kyle Pearce
I like to say it is like taking the retained earnings and shoving it under the corporate mattress. It’s like hiding it, hiding it under the corporate mattress, keeping it as retained earnings, which were huge fans of, but not just throwing it into a savings account or in this particular case, this individual has put it into GICs. GSEs have high interest rates.

00:03:28:12 – 00:03:51:23
Kyle Pearce
At least going into this recording, they’re starting to come down. We had the first rate cut recently by the Bank of Canada. It looks like the Fed’s going to be following in the fall. But the reality is, even at those high interest rates, the part that this particular business owner didn’t recognize was these chicks are being taxed at the investment income rate of about 50%.

00:03:51:23 – 00:04:18:02
Kyle Pearce
That’s that passive income tax rate inside the corporation. So when I shared that, they’re like, Oh, that’s not as good as I thought it was going to be. Right. 5% becomes two and a half, 6% becomes three. Whatever the real issue was, what do we do instead? So we started talking about strategies. We started talking about how permanent life insurance inside of a corporate structure is massively helpful to take the tax target off of those retained earnings.

00:04:18:02 – 00:04:37:01
Kyle Pearce
Because no matter what you do with retained earnings inside an operating company, whether you send it up to your holding company, whether you whatever you want to do, you can reinvest it into investments. The problem is if it’s investment income, then you’re going to be taxed at the passive rate. That’s not fun or you will get a capital gain, right?

00:04:37:01 – 00:04:58:06
Kyle Pearce
So I can put it into a appreciating asset real estate, I can put it into stocks, I can do all kinds of things. And we will eventually realize a capital gain. There’s nothing you can do about a capital gain, whether you do it inside the company, whether you come outside the company, new rules make it maybe slightly better to do it personally, but not if you have to get taxed personally in order to get it out.

00:04:58:08 – 00:05:19:06
Kyle Pearce
So that part’s not an issue. But here’s the deal. If you take that money and then you reinvest it into something that is going to appreciate or grow, you’ll pay the capital gains tax. That’s fine. That’s fair, right? And it’s not bad. We talk on different episodes about capital gains taxes. It’s not as high as, say, your income tax you might be paying personally.

00:05:19:08 – 00:05:49:23
Kyle Pearce
But the reality is those retained earnings are still going to have to be taxed at the personal level by a shareholder, either this individual or a future shareholder once he moves on. So that’s where permanent life insurance comes in, because the tax benefits of it not only on its growth, because you’re not going to pay the passive income tax on the growth gassy like returns, but without the taxes, but then also the amount of flexibility they have.

00:05:49:23 – 00:06:18:20
Kyle Pearce
So we’re working on a strategy for a number of weeks, right? So we’ve been on many calls or working out different strategies. And then the big issue was that the whole idea of building a policy and building this sort of approach is going to rest on the idea of leveraging against the policy. And that leverage thing was becoming a really tough thing for this individual to sort of grapple with.

00:06:18:20 – 00:06:38:19
Kyle Pearce
So like pitcher, the old Kyle, I struggled with interest or interest with leverage when I first began, right? I was paying down my home and I was doing all of these things until I sort of had this epiphany through some of the research and reading I was doing about good debt and bad debt.

00:06:39:00 – 00:06:57:03
Jon Orr
What was it like the words tell me about the words this person was using? When you’re talking about leveraging the policy, what were they afraid of? Tell me the thoughts, because I’m sure you like you said, you’ve had these thoughts. I’m sure I’ve had these thoughts. The person listening right now had these thoughts. So tell me specifically what was coming up in those conversations.

00:06:57:03 – 00:06:58:11
Jon Orr
That was like the hold back.

00:06:58:11 – 00:07:12:11
Kyle Pearce
Yeah. This particular individual used words such as beliefs, morals, even mentioned came up like this idea of not I don’t think it was like morals, like you’re a bad person if you have debt. But it was like sort of, I believe.

00:07:12:11 – 00:07:16:23
Jon Orr
That like, exactly. That is just not something that I’m okay with.

00:07:16:23 – 00:07:36:13
Kyle Pearce
And you can tell, I think beliefs, pride, the better word of what like what he was trying to describe as like as a family. Right. So in the past, we’ve been taught that debt is bad and we try to pay off debt. So it’s very Dave Ramsey asks, Great. So Dave Ramsey would be a huge advocate for paying down all debt.

00:07:36:13 – 00:08:17:19
Kyle Pearce
So he doesn’t classify debt as good or bad or actually, I should say it’s all bad for him or bad. But the reality is that that is, again, you’re never going to hurt yourself by doing that. But it is definitely a much longer road to try to build any sort of wealth and any sort of investment in financial freedom when you’re doing it in that way, unless you have a substantial income that would allow you to be paying off debt while potentially doing some investment or to be able to pay off debt in a short enough period of time that you can then begin investing and sort of have a long enough runway in order

00:08:17:19 – 00:08:20:02
Kyle Pearce
for those investments to grow.

00:08:20:04 – 00:08:55:15
Jon Orr
Yeah. So the first let’s start making the case for helping this individual come around to say, like you, leveraging your policy is a better move here for you to take advantage because of the tax implications that are on his plate right now. So we’ve talked a lot in this podcast about leveraging our policy to go buy assets right sized, like let’s go buy an asset that has to be an almost like you can’t just go buy almost like any asset you have to realize that you are going to incur debt when you have that policy loan or any sort of debt.

00:08:55:15 – 00:09:16:09
Jon Orr
Right? If I borrow this money from my family, I have to then maybe there’s an amount of interest that I have to pay. It’s like, okay, I borrowed it for a reason, maybe was to invest in my business. But the point there was to earn money on the amount that you were going to earn, the accumulation of this asset was going to get bigger in a quicker way than the interest you’re paying over here.

00:09:16:11 – 00:09:38:08
Jon Orr
So what this arbitrage that we all use to try to grow our wealth by saying I’m going to borrow money to make money and the difference there, I’m going to be okay with it because I’m going to go buy an asset that accumulates or appreciates or I’m going to earn interest on this investment over here, and that’s going to pay off the interest and put money in my pocket.

00:09:38:10 – 00:10:04:11
Jon Orr
That’s one of the ideas and I think that’s the I think when people think about, okay, like I have to I have to wrap my head around that because either I’m going to pay the interest or I’m going to lose out on the interest if I don’t bought like if I have no debt, then I’m like, okay, so I have no debt, but I also maybe have no asset, but I also have okay, I might have this pot of money sitting right here, but maybe I’m losing on the ability to gain on that asset or that interest.

00:10:04:11 – 00:10:26:19
Jon Orr
But there’s always and we said this before, there’s always interest somewhere, whether you’re paying the interest or whether you’re losing on the ability to earn interest or earn investment return. This is like almost like litmus test number one. It’s like if you can get by this idea that there’s this arbitrage between the two rates that you’re going to borrow and earn, for some people, that’s enough to move forward and a lot of people that’s enough to move forward.

00:10:26:19 – 00:10:34:04
Jon Orr
Like, okay, that makes sense. There’s risk on the table here because you have this debt and you’re trying to like, okay, this can be too risky. But then there’s one.

00:10:34:09 – 00:10:35:03
Kyle Pearce
Yeah, for.

00:10:35:03 – 00:10:52:10
Jon Orr
Sure. So it’s like when you have the right risk tolerance, then that makes sense. Then for a lot of people that’s the move. But some people are still not convinced on that. But then this is the argument that you’re trying to make to this individual is like, that’s not the only thing to consider here. And I think a lot of people think it is the only thing.

00:10:52:12 – 00:11:11:16
Kyle Pearce
Yeah. So the tough part is it’s even once you, you know, so I think on a rational front, there’s a lot more to consider here. And we’ve had this discussion, but still takes time. Even if you start to see all of the rational reasons, all of the logic as to why it makes sense, you still have to convince the elephant, as we’ve talked about, Right.

00:11:11:16 – 00:11:34:18
Kyle Pearce
So from the book switch, like you have got this emotional side of your brain that you have to control or you have to try to tame because belief really is tied to emotion, right? So it’s like, I don’t feel good when I kind of go against what I believe to be the way things should be. Even if I’ve been proven maybe time and time again as to what I should really be doing here.

00:11:34:18 – 00:11:57:12
Kyle Pearce
The tough part for this individual. First of all, they weren’t necessarily struggling with the leveraging against the policy because I think they saw, at least at this time, I’m guessing that that would become an issue later for them as they actually went to leverage. They would probably have a bit of an emotional challenge there. So that’s another hurdle that I think will come for them if they chose to go this path.

00:11:57:14 – 00:12:19:08
Kyle Pearce
But the reality was, is the bigger issue was they know they have some personal debt that they used in order to fund the business. Now that personal debt was at a I think it was like 4.5% interest in a high interest rate environment. Now, when they go to renew in a year or two, that rate may go up a little bit and that might be scary at its core.

00:12:19:08 – 00:12:42:07
Kyle Pearce
But here’s the challenge for this individual. They have just short of the amount they need to pay off that debt inside the company, it was about 600,000 or so. I think it’s actually more than that in the company that’s in GCS right now, being taxed half of their money going to tax. And then outside they had something like $800,000 on this debt.

00:12:42:09 – 00:13:05:13
Kyle Pearce
And that is a scary number, right? So that debt is against this business, Right. But he’s personally holding it. The challenges is in his mind is like, I want to get the money from in the company out of the company so I can pay off that debt. Now, if that money was in his bank account, I could see how people would be like, Listen, I’m just going to pay this thing off or at least pay three quarters of it off in one chunk.

00:13:05:13 – 00:13:31:04
Kyle Pearce
Great. I feel better. Whatever. But here’s the challenge it takes. At 600 out of the corporation, he’s going to be gifting 40 to 54%, depending how he does it. Right. If he does a dividend or whether he does a salary is going to do a dividend. Of course, if he took it out in one chunk and he’s going to take that money out, lose all of that money to tax in order to pay off debt, that’s at 4.5%.

00:13:31:04 – 00:13:48:24
Kyle Pearce
And a I’m going to say I don’t care what CPI is right now. The actual inflation rate is definitely around that number four and a half, maybe even more, because we know that the government likes to be very selective. Right. In terms of the numbers or the products they put in that basket of goods that they’re using to measure inflation.

00:13:48:24 – 00:14:11:07
Kyle Pearce
They keep changing it over time. So the reality is she’s in this big pickle because he’s like in order to get over this belief, he wants to gift basically half of the money that’s in there in order to get it out to pay off less than half of this debt, just because, again, it’s what we should or what my belief sort of tells me I should be doing so right there.

00:14:11:07 – 00:14:50:08
Kyle Pearce
Fundamentally, that’s a real challenge. Now, the other part, though, is that there’s some other things going on in the background here that we have to recognize. It’s one thing to, let’s say, do arbitrage on a rate of return for an asset, like you said, But there’s actually some other things going on. Imagine instead of inside that corporation, let’s say, who gets that policy funded over the next few years, he’s still got retained earnings that every year is going to contribute to the amount of money that has to be taxed on the way out unless it hits a permanent policy so that it can come out through the CDA later.

00:14:50:10 – 00:15:21:02
Kyle Pearce
And there’s leverage ability so that he could then build more assets inside the corporation. So that’s a really good thing here. And that’s kind of the strategy we are working on. But there’s more to it because of course we want the assets to grow greater than the amount that you’re borrowing on this policy loan. But the reality is, is that there is an opportunity here for us to get a great rate of return by reinvesting those dollars.

00:15:21:08 – 00:15:48:19
Kyle Pearce
But then there’s also this idea of the deductibility on the interest that is borrowing. So on a personal side, he is actually able to deduct the 4.5% interest, just like the Smith maneuver. Right. Just like that, that same idea, we can deduct that because that loan that he has personally is in order to earn money, in order to earn a return on this business.

00:15:48:19 – 00:16:15:17
Kyle Pearce
So that 4.5%, depending on the tax bracket, that’s 30 or 35% in whatever the tax bracket is that he’s pulling out right now. He’s actually getting like a 32, 35 or 50% discount on the 4.5%. That is substantial, right? He might be paying less than 3% in after tax dollars if we think about the return or the deductibility of that interest.

00:16:15:19 – 00:16:33:16
Kyle Pearce
And basically, again, he’s got to take money out, pay tax in order to pay off this really low, really great interest rate instead of reinvesting into other assets inside the corporation to grow his net worth.

00:16:33:18 – 00:16:52:23
Jon Orr
I just imagine it’s like, okay, so I’m going to take money out of my business. I’m going to get taxed at that, which is going to drop its value, and then I’m going to take that and I’m going to pay off this debt, which actually will give me more taxable income to pay the government when it’s time to lay claim my tax.

00:16:52:23 – 00:16:53:16
Jon Orr
Your contents.

00:16:53:16 – 00:16:55:23
Kyle Pearce
On your tax issue basically is what it is.

00:16:56:04 – 00:17:11:01
Jon Orr
Totally. And it was like almost is like, okay, I’m going to put this down here, but all you did was just raise this taxable income on your side. So you have to figure out, okay, like you don’t have to figure out. You just have to know it’s going to like increase how much tax I pay personally by doing this.

00:17:11:01 – 00:17:27:20
Jon Orr
So I’m going to lose half there and increase my personal tax by just paying this debt off because I don’t like the idea that right, if money is an issue, then this isn’t really the episode you want to listen to. It’s like if you need cash and you need to like get rid of this debt, that’s a different thing.

00:17:27:20 – 00:17:52:21
Jon Orr
But we’re trying to make the argument that you should keep it around because you’re actually better off, probably even if you do need cash to think about some of these moves that when you make that move, there’s implications. And you brought up this great point about tax deductible interest on your personal side. Now, there’s another thing that I want to kind of bring up here as a piece around paying your debt off that I think a lot of people miss out on or forget about.

00:17:52:23 – 00:18:13:15
Jon Orr
And if you think about it, let’s talk inflation, because I think you brought it up before. She was like, let’s talk inflation for a sec. So let’s say you have a dollar your pocket right now. You pull out that loonie and it’s like, okay, next year, that loonie, right? That loonie, it can buy less because of inflation. But let’s say compared to the year before, that loonie is now like a dollar and $0.03 or something.

00:18:13:19 – 00:18:31:06
Jon Orr
It’s gone up by inflation or whatever. That inflation rate is 3%, 2%. It’s now it’s like compared to the year before, you need more of those to buy this next one. But here’s the thing. All the goods and services, like all of the goods and services, rise by inflation. This is like how they track it, right? This is where the CPI really comes from.

00:18:31:06 – 00:18:50:14
Jon Orr
It’s like that basket of goods you talked about. Every year this basket is increasing and we’re like, Oh, we have to adjust our purchasing power. Do you know what doesn’t rise every year? Your debt, your debt, the amount on the books doesn’t rise if you’re paying off your interest in let’s just say I’m not paying down the debt at all.

00:18:50:16 – 00:19:11:20
Jon Orr
It’s just staying there. And let’s say I put my money towards the interest every year and it’s like $1,000 or it’s it’s a $10,000. It’s like next year it’s still $10,000 next year. After that, it’s still $10,000. 25 years later, it’s still $10,000. If I just paid the interest over that time. But my dollar every year has gone.

00:19:11:22 – 00:19:15:23
Jon Orr
In essence, the purchasing power has like degree feels like it’s got decreased.

00:19:15:23 – 00:19:21:17
Kyle Pearce
Like the loonie shrinking. If you imagine it’s like clipping off like three or 4% of shrinking.

00:19:21:23 – 00:19:44:00
Jon Orr
But the debt is staying the same. And therefore, when you think back to the debt later in your life and you look at that number compared to your current value of that dollar in that time frame, you’re like, that doesn’t seem like a lot of money anymore. It’s kind of like when you hear about your parents going to the movies and or maybe it’s like, maybe you went to the movies.

00:19:44:00 – 00:19:46:10
Jon Orr
It was $0.25. I’m like, That’s ridiculous.

00:19:46:10 – 00:19:51:05
Kyle Pearce
He’s like, out of the movies for $0.25, $0.25 to take your mother to that movie.

00:19:51:10 – 00:20:10:03
Jon Orr
My father purchased his home, the home that we grew up in. He still owns this home for $40,000 in the eighties. When you think about that, it’s like, okay, the debt he brought on was $40,000 in the eighties to him back then. That’s a lot because it was compared to your purchasing power at the time, which is always what the case is.

00:20:10:05 – 00:20:17:02
Jon Orr
But in a long enough time horizon, the debt feels less and less every year, just because inflation is going up every.

00:20:17:02 – 00:20:24:24
Kyle Pearce
And I love like I want people to pause for a second. You were talking about, okay, there is a cost. The interest is a cost and you can almost look at interest is being like.

00:20:25:02 – 00:20:27:00
Jon Orr
What is part of why interest is in there?

00:20:27:00 – 00:20:49:20
Kyle Pearce
Yeah, like the cost of money, right? So it’s like there’s two things happening. It’s like it costs you money because of inflation. That’s why when high inflation environments happen, interest rates go up, right? So they try to make it harder to borrow money. And that would allow people to stop buying. And then inflation will eventually come down. Like that’s exactly what’s happening right now.

00:20:50:00 – 00:21:14:22
Kyle Pearce
But the average person, we don’t understand that. Plus, it’s very emotionally hard to wrap your head around, even if you rationally understand. I rationally understand how this works. And I still have my own emotional challenges, right? When I get more debt, I still have this feel because that’s what we’ve been sort of raised to believe. But I really want to take this idea of inflation for a second.

00:21:14:22 – 00:21:42:13
Kyle Pearce
I want to like think about this for a second and talk about what’s really happening. So on average, again, averages kind of mean nothing in the short term, but they mean everything in the long term because right now, inflation, even though CPI is saying we’re in the 3% range, most people would agree we’re probably still higher because things seem to continue to rise at a higher rate than 3% on average over the last 62 years.

00:21:42:15 – 00:22:11:14
Kyle Pearce
This is from we’ll post the link in the show notes. But it says that in Canada, the average rate of inflation was about 3.8%. And that means that $100 in 1960 was the same as $986 or almost $2,000 in the beginning of 2023. So when you think about that for a second, that is like the value of a dollar basically tenths.

00:22:11:16 – 00:22:29:05
Kyle Pearce
So it’s like a loonie back then is like a dime now. Right? When we think about this and you go like this is hard to really think about, it’s like having a time machine and it’s really hard to kind of like think of it. It’s hard to even think six months from now, let alone like over a long period of time.

00:22:29:07 – 00:22:57:08
Kyle Pearce
But here’s an interesting quote. The Federal Reserve Bank of St Louis, there’s an article we’ll post it in the show notes and they state, I quote, Inflation transfers wealth from creditors to borrowers for all sorts of nominal debt, not just government debt. To me it says two things. I mean, the obvious thing here is that when you borrow, you are getting wealthier.

00:22:57:10 – 00:23:26:06
Kyle Pearce
Assuming when they say for all sorts of nominal debt, we’re talking about good debt, we’re talking about assets. When you don’t borrowing to go on vacation and you’re not borrowing to buy a car at a really high interest rate like these depreciating items, expenses, essentially we’re talking about assets here. So when you think of all of the wealthy people in the world and you think about so often, people say, well, how come so-and-so Trump doesn’t pay tax?

00:23:26:06 – 00:23:47:16
Kyle Pearce
How come Elon Musk doesn’t pay tax? How come all of these billionaires don’t pay tax? Well, it’s because they use debt and they continue to get richer and richer. Now, they’re not just using debt just for lifestyle. They are doing that too, but their lifestyle expenses are such a nominal, such a minimal amount compared to their overall asset purchases.

00:23:47:16 – 00:24:12:22
Kyle Pearce
Right. So Elon Musk borrowed against his Tesla stock in order to buy what’s it called now? I don’t even know Twitter, which is now X, Right. So this is how people do it. Now you have to have a head on your shoulders to know you need cash flow in order to maintain those debts. So we’re not saying everybody go get indebted because you will lose assets if you can’t maintain payments.

00:24:12:24 – 00:24:35:07
Kyle Pearce
But you need to be looking at these things and starting to figure out like, what is the arbitrage that I can do here in a way that I can emotionally handle. Right? And this is going to be different for everyone. There’s no perfect formula here that you’re going to have to figure out. But at least overcoming this idea of debt being always bad to wait a second, imagine a world.

00:24:35:07 – 00:24:58:11
Kyle Pearce
So like John, you and I, when we buy a property, we just bought a property in Arizona. We buy that property and we put down in this property, we put up very little too down. We’ll talk about it on another episode. But when you put a small amount, even if it’s 20% or 30% down and you take on the rest as debt, when you think about that debt, that debt continues to grind away from inflation.

00:24:58:13 – 00:25:32:07
Kyle Pearce
And assuming it’s an asset that does provide appreciation and or cash flow, you have somebody or somebody else paying down that debt on your behalf. So you have actually a double compound machine in the positive sense on this debt. The debt is worth less, meaning it’s easier to pay off later and you also have the asset itself generating some sort of income, cash or whatever, so that you can use it to actually start stomping out the actual debt.

00:25:32:08 – 00:25:57:01
Kyle Pearce
Now, I’m going to encourage you to reinvest some of the equity that you get out of there, but you don’t have to reinvest every dollar. The key is we need to be able to overcome. We have to understand first how good debt works and how we can use it to our benefit. You can also really hurt yourself with debt, as I’m sure many people know if you overdo things.

00:25:57:03 – 00:26:20:00
Kyle Pearce
So I’m thinking the big takeaway for me on this episode, I’m hoping people can at least begin the journey to think about debt differently. Don’t do anything dramatic. Don’t just like flip a switch and go, I’m all in on debt. But thinking about how can you use debt as a tool to help you get to your financial freedom goals?

00:26:20:02 – 00:26:38:06
Kyle Pearce
And how can you maybe overdo it and hurt yourself with it and then decide where do you fit, at least in a short term? And maybe that might change over a longer term, right? So just getting yourself open to it can really impact and change your trajectory.

00:26:38:08 – 00:27:00:06
Jon Orr
Yeah, my big takeaway on that last one for sure is like tomorrow’s dollar actually pays off more of your debt next year than what it would pay off today because of inflation. Right. So it’s like that. That’s an important idea that we never consider. Like there are three points that we brought up here that kind of help you wrap your mind around why answering that question, Kyle just prompted about where you stand on debt.

00:27:00:08 – 00:27:19:15
Jon Orr
That first one was thinking about the asset accumulation, thinking about how do we leverage this value so that we can make money on, say, the arbitrage between the amount that we’re paying in interest and the amount that we have potential return on investment. The second piece was thinking about your tax deductions that you may be getting because of the debt.

00:27:19:17 – 00:27:43:15
Jon Orr
You have to want to factor that in when you’re considering borrowing to invest or buy that asset. It does play a role in possibly the amount of return you’re calculating because you’re saving on, say, the tax amount that you are going to have to pay to the government. The third one here was inflation. Over time, that debt will the dollar amount doesn’t change.

00:27:43:18 – 00:28:03:20
Jon Orr
But the since inflation is going up, the amount that debt feels to you because of the dollars you have in your pocket, say 25 years later, that debt is going to feel much different to you 25 years from now than it does today. And that’s a that’s a strong consideration when you’re thinking about that debt over time. I think we often forget about that, folks.

00:28:03:22 – 00:28:24:09
Jon Orr
This was another episode of the Canadian Wealth Secrets podcast, and this is the first time you listen to an episode. We encourage you to hit the follow the subscribe button. We put these episodes out every Wednesday. We also put out secret sauce episodes, shorter ones every Friday. Hit that subscribe or follow button, so you get notified of those episodes as they come out.

00:28:24:11 – 00:28:45:01
Jon Orr
Also, if you have listened before, then we encourage you to hit that rating review button. Let us know your thoughts. What was your big takeaway? Hit that button. Write a quick rating. Review It helped other people build and figure out what their financial journey is going to look like and they’re going to learn secret sources along the way.

00:28:45:03 – 00:29:16:05
Jon Orr
All right, folks, that’s it for us. And we’ll see you next time. Just as a reminder of the content you heard here today is for informational purposes only, you should not construe any such information or other material you heard here today as legal, tax, investment, financial or other advice. John is a mortgage agent with Brick’s mortgage license number.

00:29:16:05 – 00:29:28:15
Jon Orr
m23006803. Kyle Pierce is a licensed life and accident and sickness insurance agent and a corporate wealth management with pain court team, including corporate advisors and pan financial.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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