Hey life architects, today’s solocast on the Build A Bigger Life Podcast is a deep dive into a comment made by my most recent interviewee Bill Westrom of Truth In Equity.com. As I mentioned on that podcast, Bill thinks outside the box when it comes to structuring your life, your debt, AND your income to create the highest level of, as he calls it, INCOME EFFICIENCY. Bill described that as the percentage of your income that is actually being used to pay down debt.
The comment he made, and the focus of today’s solocast is the idea that when this is working most efficiently, you are Lean, Liquid, and Independent. I’ll dive into those ideas a bit on the show, but first want to share with you from a high level how the theory of equity optimization and income efficiency work —
Every month, most people are paying a mortgage payment and or a student loan payment. Since those are the two greatest debts that most people have in their life, we’ll focus on those two. Keep in mind this system works with credit cards, car loans, department store cards, etc. ANY debt you may have can be eradicated with this system.
When the payment is made on a mortgage or student loan, the first “chunk” to come out goes to interest that has accrued on your balance for the month. So for simplicity’s sake, if you owed $200,000 on a mortgage at 5% interest, You’d owe 10,000 a year in interest or $833.33 per month on that balance. If your payment is $1,300 per month, that would mean 833.33 goes to interest, let’s suppose $350 goes to escrow for taxes and insurance, leaving a whopping $117 that goes towards principal. At $117 a month, it will take a LONG time to pay off that mortgage.
However, if you were to use your income differently… not just dropping it in checking, then paying all the minimum monthly payments out of it, then attempting to save the rest (at a measly interest rate). Instead you put all of your income into a line of credit, and used that line of credit as a means to blast away extra principal every month from your student loans or mortgages. What happens when you do this effectively is you shred your debt. When chunks of principal are paid, MAJOR amounts of interest are immediately reduced from your debt. Do this over 2-5 years and you’re debt free, lean, liquid and independent.
What tends to be the biggest challenge for most people is doing for two years what most people won’t do. That’s not to suggest that this process is difficult. It’s super simple, just complicated to understand because you have to unlearn what you know, relearn a different way, then live that way for a few years. The end result is more freedom, flexibility, and ease of life. No more chasing payments… you’ve figured out the banking game and are now playing the game in your own favor.
If you’re currently living paycheck to paycheck, something’s gotta give. For this process to work, it’s crucial that you have extra discretionary income that you can apply towards your debt. If saving money has never been something you’re good at, consider grabbing a copy of my book 30 Days To $1K on Amazon. It’s a chapter a day book for 30 days that will have you shedding expenses, decreasing debt, and mastering your money. It’s the first step in making this process a habit.
So on Bill’s interview, he mentioned the three words Lean, Liquid and Independent. I think breaking them all down might make sense so you understand where he was coming from.
Lean relates to your expenses… it’s not critical for you to live like a pauper for this to work and most people I describe this lifestyle to at first believe they won’t have any money for “fun stuff”. Not so. My wife and I tried the NFD (the No Fun Diet) for a while and it doesn’t last because you begin to wonder why you’re working so hard for no fun.
To Lean your finances, the best way is to make your required payments as small as possible. If you could get a 50 year mortgage, it would be advisable. The reason is when the amortization schedule is kicked out that far, the required payment is super small. This creates more discretionary income that can ultimately be used to optimize your payoff process. The optimization that I’m talking about is you begin to optimize your cash flow towards debt reduction.
In the BABL Blueprint, I talk about maximizing your L factor. Your L factor is your life factor. It’s the amount of money you have left over if you took your income and subtracted your expenses. The leaner you are, the higher your L factor every month. One of the key lessons I learned and teach young people today when it comes to money is it’s not how much you make, it’s how much of what you make you keep at the end of the month. The ‘keep’ in this sense means how much are you not spending towards frivolous things and instead blasting away the things that prevent you from Building a bigger life (like oppressive debt).
Now before I launch into some of the things that make you NOT lean, let me first offer this — I think having stuff is awesome. I’m not opposed to that in the slightest. I also think if you want more from life, figure out ways to make more money. I don’t believe that anyone is stuck in the position they are — if they want to live in a bigger home, drive nicer cars, etc more power to them. But to do this I believe you must figure out a way to earn more whether that’s through asking for raises, doing a side hustle project, or creating a product that people can buy. Maybe it’s investing in real estate or gumball machines… whatever you want it’s in your reach.
Back to the Lean discussion. These are some of the things that will make you the opposite of lean:
- huge car payments
- 10-15 year mortgages
- Eating out a lot
- Expensive habits, clubs and memberships
- Recurring expenses that could be eliminated
Remember, the goal is to budget well, live on less, and make your required monthly payments as lean as possible. Anything extra from an income perspective or your L factor, is now optimized to blast away debt.
The second term Bill mentioned on the interview was Liquid. And before I dive into what that might mean, I’m going to share with you some information I gleaned from a newsletter that I subscribe to from Bill Bonner. Bonner is the CEO of Agora Financial, a financial research firm that publishes a number of newsletters about the market.
Bonner, in a recent newsletter, suggested that on any given day there is about $1.5T circling the globe in tangible US currency. There’s another 3-5T floating around on any given day but it’s all zeros and ones, all digital. Of the $1.5T in circulation, Bonner suggested that probably only 25% of that is actually in the US. The rest is held in safety deposit boxes in foreign countries, or might be being used in other countries as currency exchange. So assuming that there is only 25% of the 1.5T in the US, that means that there is approximately $375B in currency (actual cash) in the United States. If we assume that there are 300million Americans and we divide the amount of currency by the population, the number we come up with is there is about $1,250 in cash for every man, woman and child in the country.
In other words, as a country, the US is not very liquid. If all of us attempted to go after that money at the same time, we’d have what is considered a run on the banks. Banks would literally close their doors and lock them because they wouldn’t have enough liquidity to supply all of the people wanting their money out. The money, after all, is used by the banks to loan back out again. They, by law, don’t have to have a dollar for dollar amount in their vault equal to the amount of deposits.
The reason I tell you this is I think it’s critical that everyone have some amount of money available in cash. Not that I’m a prepper or think doomsday is coming, but there is enough craziness in the world that someone knows how to shut down our credit system, and if credit and debit cards are unusable, and you don’t have access to cash, you’ve got problems.
So Liquid, in Bill Westrom’s own words is money that is:
Accessible, Available, not locked away for decades with no access.
401k’s and ROTH IRA’s therefore, aren’t liquid. CD’s aren’t liquid. Anything tied to a “Qualified Retirement Plan” through the IRS would be illiquid.
So liquid is available and accessible. How you manage that is up to you, but is important for this system to work.
The last descriptor used for this system is Independent. The main thing to remember when it comes to independence is there is no approval necessary, meaning you don’t have to go to the bank and fill out an application every time you want to access it.
By no means is me describing this on a podcast enough information for you to run out and do this… my goal today is to open your eyes to a new way of optimizing your income and your equity to minimize your interest expense on debt. These principles are taught in MBA classes all over the world, and most companies are using some form of it in their day to day bookkeeping, but for the average consumer, we’re raised to believe that saving a little every month, dollar cost average investing, making that one extra payment a year on the mortgage is enough to put us on the retirement track.
Perhaps it is… I just want to retire a whole lot sooner than that.
For more information about this process, the theory behind it, and how to implement it in your own life, check out Bill Westrom’s site TruthInEquity.com or the software I’ve been using for 3 years to blast away all of my debt ShredMyMortgage.com.
And in the pursuit of building a bigger life, remember to be lean liquid and independent. Make it a great day…