The Difference Between Good Debt & Bad Debt with Logan DeGraeve
The Difference Between Good Debt & Bad Debt Show Notes
Most people think about debt as a bad thing. No matter what your financial background is, you’ve probably been told to avoid racking up debt, not to spend outside your means, and to pay off your debt whenever you can.
However, what this simplistic guidance fails to take into account is that there’s two kinds of debt: the debt you want to avoid and the debt you actually want to take on. So, what’s the difference?
Joining me to help answer this question is Logan DeGraeve, CFP® at Modern Wealth Management. We discuss the differences between good debt and bad debt, the discipline that is needed when using debt and leverage, and the right (and wrong) times in life to carry debt at every stage of life.
In this podcast interview, you’ll learn:
- When carrying debt is appropriate.
- Examples of when it’s a good idea to accrue debt instead of paying cash.
- Why student loans, credit cards, and overpriced homes that are likely to lose value are some of the worst kinds of debt you can accrue.
- The importance of having good credit in order to get access to good loans, free travel, and other benefits.
- Why the dollar amount on your 401(k) or IRA is not the same thing as how much money you have.
- How working with a CFP® professional can help you eliminate your taxable income.
- “When it comes to debt and leverage, there is a good, there is a bad. There is no book that can tell you what’s good debt for you, what’s bad debt for you, when you should use leverage, when you should not use leverage. It has to do with your own personal financial situation.” – Dean Barber
- “I honestly believe being a CERTIFIED FINANCIAL PLANNER™ professional and the environment that we have here and the tools with the subject matter experts, estate planning, insurance tax, it’s my job to play quarterback for my clients.” – Logan DeGraeve
- America’s Wealth Management Show
- Podcast: Episode 56 – The Basics of Bitcoin with Matt Kasper & Will Doty
- Southwest Airlines Visa Card
- Cabela’s CLUB Card
- Connect with Logan DeGraeve
[00:01:01] Dean Barber: Hello, everybody. I’m Dean Barber, Managing Director at Modern Wealth Management, your host of The Guided Retirement Show. Logan DeGraeve, CERTIFIED FINANCIAL PLANNER™ professional here at Modern Wealth Management, joins me today for a very interesting discussion on debt and leverage. What you’re going to discover through our conversation today is that there is good debt and there is bad debt. There’s debt that you want to avoid and there’s debt that you actually want to take on. Please enjoy my conversation with Logan DeGraeve, CERTIFIED FINANCIAL PLANNER™ of Modern Wealth Management.
[00:01:32] Dean Barber: Logan DeGraeve, CERTIFIED FINANCIAL PLANNER™ professional of Modern Wealth Management, welcome back to The Guided Retirement Show. Is this your first episode on The Guided Retirement Show?
[00:01:39] Logan DeGraeve: I think so. Just a radio appearance. I haven’t made the podcast yet.
[00:01:42] Dean Barber: Well, now you’re here. You’re here on The Guided Retirement Show. And by the way, what Logan is talking about for the radio appearance is we also have a radio program that you can actually pick up on your favorite podcast app. It’s a different cadence. It’s different topics and things like that but that show has been going on for almost 20 years.
Logan, today we want to talk about debt and leverage. There’s good debt and bad debt. It depends on the person’s stage of life in whether they are going to carry debt or not. I don’t necessarily subscribe to the Dave Ramsey theory that all debt is bad. What do you think as a CERTIFIED FINANCIAL PLANNER™? Are there appropriate times to carry debt?
[00:02:34] Logan DeGraeve: Absolutely. There’s an appropriate time to carry debt. Think about where interest rates are right now.
[00:02:38] Dean Barber: I call it free money right now.
[00:02:40] Logan DeGraeve: Pretty much, right? Not free, but close. It’s such a psychological thing. We can have the best idea in the world, but if our client is not comfortable with it, it’s a horrible idea. It’s our job to give them options. It is good debt and bad debt, but at the end of the day, are you really in debt if you can go to the bank, get a check, or take an IRA distribution and pay off your debt?
[00:03:10] Dean Barber: Right. What you’re talking about is looking at your total net worth—assets minus liabilities. Your net worth won’t change if you take an asset and pay off a liability. You’re still going to have the exact same net worth. So, yes, you’re in debt, but it’s not really affecting your net worth.
[00:03:32] Logan DeGraeve: Yeah. Let’s talk about a time when debt may be good. You and I deal with it on a daily basis and have for a long time. We work with a lot of retirees and deal with a lot of second homes. They want to get their second home in Florida, Arizona, wherever it may be. It’s whatever is important to them. They say, “Well, Dean, Logan, I need $300,000.”
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[00:03:52] Dean Barber: I’m going to pay cash for that.
[00:03:53] Logan DeGraeve: I want to pay cash and we say, “Well, you need a lot more than $300,000.” Why is that, Dean?
[00:03:59] Dean Barber: Most of the time people’s assets are in qualified plans or IRAs or 401(k)s. They need to take enough out to pay the tax on that to net down to the $300,000.
[00:04:12] Logan DeGraeve: By the way, depending on their age, their Medicare premiums are going to go up as well.
[00:04:17] Dean Barber: I’m anxious to get your take on this as well, but here’s the way I look at a second home. I’ll give you an example of a client that I worked with. He’s been a client of mine for a number of years and loves going up to Wisconsin for the summer. He and his wife will go up and they’ll rent a place for two to three months. They’ve got a lot of family up there.
So, he’s like, “I think I really want to buy a place up there, but don’t want a mortgage.” I tell him, “No, just hold on a second.” This is a guy who has most of his money in traditional IRA. He’s got a good amount in some Roth IRA, so we could pull the money out of the Roth IRA. No tax is due and he could pay it off.
I said, “You’re 67 years old. How much longer do you believe that you and your wife will really want to go and spend three months in Wisconsin over the summer? How much longer do you think that you’re going to have the physical and mental ability to do it? Is it 10 years? Is it 15 years or 30 years?” He goes, “Well, certainly not 30 years. Maybe 15. That takes me up to 82. And, yeah, by that point in time, you’re right. I probably won’t want to be driving back and forth.”
And I said, “So, let’s take a look at the scenario.” We looked at a 20% down payment to avoid PMI. We looked at what his mortgage payment be. How much would we need to take out of his investments on an annual basis to make the mortgage payment so it becomes a net zero as far as cash flow goes? What is still owed on a house in 15 years? And I’m like, “Look, you’re going to sell this place in 15 years anyway.”
[00:06:13] Dean Barber: If there’s a little bit of debt on it, we figured out that his investments could actually earn enough. We needed to earn about 5% per year on his investments over that 15-year period for him to make the mortgage payment and have a net cost of zero as far as his cash flow goes. At the end of the day, he still got his investment and he’s got whatever equity the house may have built.
[00:06:38] Logan DeGraeve: Absolutely.
[00:06:39] Dean Barber: So, that’s good debt.
[00:06:39] Logan DeGraeve: Let’s talk about when that may be bad debt, though, at the same time. You knew all that because you knew your client really well. You knew how he was thinking and feeling about money in those decisions. That’s why we spent the time we do getting to know our clients. I have a client that had enough cash, but what’s cash paying right now? Zero.
[00:07:04] Dean Barber: 0.0.
[00:07:07] Logan DeGraeve: 0.01, right?
[00:07:08] Dean Barber: Yeah.
[00:07:09] Logan DeGraeve: They said, “Well, we like having this cash in the bank. We might invest it.” And I said, “Well, look at the opportunity costs. If you want to go get a mortgage for 3%, do it. If not, you’re going to have to invest this money because you’re still losing money if you keep it in the bank and you take out a 3% mortgage.” They said, “Well, I guess we never really thought about that.” It’s a trade-off. They are opportunity costs. In your case with a 15-year time frame, we feel pretty comfortable about getting a 5% return.
[00:07:42] Dean Barber: We can build bond ladders that are going to deliver that where we know it’s predictable. We can say this is what’s going to happen.
[00:07:49] Logan DeGraeve: That guy may have saved a good amount. You compound 2%, right? You’re making 5. Your interest rate is 3, compound 2% over 15 years. It’s a lot of money.
[00:07:59] Dean Barber: You’re going to actually wind up with your investments being worth more at the end of that period than they were today. Otherwise, here’s what happens. This scenario is crazy because the house that he would purchase in Wisconsin—or with your example, Arizona or Florida, wherever—is going to be worth exactly the same whether there’s debt on it or not 15 years from now.
[00:08:25] Logan DeGraeve: Absolutely.
[00:08:25] Dean Barber: The question is, what do you still have in your account? When you start looking at the effect of the net worth over that period of time by not paying cash and by using that debt, it’s tremendous. The numbers are crazy.
[00:08:43] Logan DeGraeve: You said he was 67?
[00:08:45] Dean Barber: Yeah.
[00:08:46] Logan DeGraeve: You and I spent a lot of time talking about behavioral finance and a lot of different things. Our average client is 60, 62 years old.
[00:08:54] Dean Barber: Yeah.
[00:08:55] Logan DeGraeve: We have these conversations about them not wanting to take a mortgage. When they were in their family formation years, maybe their early 20s, they were taking out mortgages and rates were substantially higher. I’ve had these conversations with folks and they say, “Logan, I remember my first mortgage was 12%. I never want to be in that situation again.”
A counterargument to that, which in my opinion is a horrible counterargument, is that it’s all relative because cash and CDs were paying 7% or 8% at the time. I’m making up these numbers, but they didn’t have any money to invest. Now, it’s on that flip side of, “Wow, I wish when my mortgage was 12% and CDs were paying 8%, and I have this money now.” That’s why it’s so hard for them from a psychological standpoint.
Think about someone that’s 25, 30 years old now. They’re used to debt from student loans and interest rates are as high as they’ve ever been. They’re going to continue to be as high as they’ve ever been.
[00:09:59] Dean Barber: That’s bad debt.
[00:10:01] Logan DeGraeve: That’s bad debt.
[00:10:01] Dean Barber: We’ve got to get that thing paid off.
[00:10:03] Logan DeGraeve: But to them, they say, “Heck yeah I want a mortgage.” They couldn’t do it without it. But at the same time, too, going back to that 67-year-old, whether they went to college or not, maybe they never had student loans. It’s just different. It’s such a psychological thing for people to wrap their head around. That’s really where you have to understand how to approach things with certain clients because everyone thinks and feels differently about money.
[00:10:32] Dean Barber: I totally agree with that. Real estate is the typical area where we will go in debt. Let’s bring it back to using real estate as an investment and not just as a place to live or a vacation home. Let’s talk about debt there versus debt on a property that you’re going to use.
What happened in the Great Recession was a tragedy for many people. It was a tragedy for homeowners, real estate investors, and real estate developers. The biggest reason that it was a tragedy for all those people is because they misused the debt.
We live in Kansas City. I remember walking out to pick up the Kansas City Star on a snowy morning in December 2007. I was sitting in front of a fireplace with my cup of coffee and opened up the business section. There was this full-page ad from Pulte Homes. The ad was you get a free BMW with the purchase of a Pulte home. I told my wife, I said, “The madness has gotten to a point where it’s…”
[00:12:25] Logan DeGraeve: But you went and bought it? Did you go buy a home, though?
[00:12:28] Dean Barber: No. I’m like, “This is the craziest thing I’ve ever seen.” In the years leading up to that, on television or radio or wherever you’d see and hear ads, “Hey, if you’ve got a home, we’ll loan you up to 120% of the value of your home. You can use that money to take a vacation, to pay off a vehicle, to do whatever” What in the world? That was just absolutely insane.
They had these loans that were five-year balloons at a low-interest rate. People were speculating, “Oh, might as well take this five-year balloon loan out. I can pay interest only on that loan for five years. Just think about how fast real estate’s appreciating in value? I can pay that. I can refinance and be in great shape.”
[00:13:15] Logan DeGraeve: It’s the same thing today, though. You and I spend a ton of time with a lot of clients’ kids. They’re asking how much home they can afford. You can look online and the banker is going to tell you can afford whatever based off their formula. And as a CERTIFIED FINANCIAL PLANNER™ professional, there are certain thresholds that we look at. But really, it’s what are you comfortable with? I remember when I got pre-qualified for my home.
It’s, “Hey, you can spend X, Y, and Z in this.” I’m never going to buy a house that’s that expensive. But if you don’t have an education in finance and you haven’t done the research and thought about it, it would be easy to fall in that trap.
[00:13:58] Dean Barber: It is easy to fall in that trap. That’s where I was going with that story. Let’s just say that you were out and saying, “Okay. This is a good deal. I’m going to go out and buy some rental properties and do this investment property. I’m going to put zero down and do an interest-only loan. This thing is going to positive cash flow day one because the interest-only loans are so cheap. Then, in five years, look, think about what this real estate is going to be worth.”
So, here’s the problem. Let’s just use an example of somebody putting 10% down on an investment property. If you have a $1 million property, you put $100,000 down. That property increases in value by 10% and is now worth $1.1 million. What’s the return on the $100,000 investment? It’s double, right? You just made 100% because now you have $200,000 in equity if you sold that home and all you put in was $100,000.
There’s a greed factor in people as they start looking at that. It’s like, “Oh my God, this is what leverage can do for me. This is what debt can do for me.” But the flip side of that is also true. What happens if that piece of real estate that you paid $1 million for and put $100,000 down decreases in value by 10%? How much of your $100,000 did you lose? One hundred percent.
So, now a 10% drop in that real estate value wipes out 100% of your equity. During the Great Recession, people were levering themselves up so much that 10% or that 15% drop in value wiped out 100% or more of their equity. Then, when they go to try to refinance after the Great Recession, what did they say? “You know what you got to do? You got to put some more money down, brother.”
[00:15:57] Logan DeGraeve: Let’s think about this, though. A parallel to that may not be a popular opinion, but do you remember three or four years ago when there was the first big bitcoin bomb? It went from a couple of thousand to $20,000 overnight. I remember reading CNBC headlines of people are doing cash-out refinances on their homes.
[00:16:25] Dean Barber: And buying bitcoin.
[00:16:25] Logan DeGraeve: And then what happened to bitcoin shortly after that?
[00:16:29] Dean Barber: It crashed.
[00:16:30] Logan DeGraeve: And now it’s back up.
[00:16:30] Dean Barber: And it went back up. But yeah.
[00:16:32] Logan DeGraeve: Could you have withstood the crash? Most of the people that are taking out cash-out refinances to do that probably couldn’t. So, it’s the same kind of dynamic. It’s the same thing with margin on investment accounts.
[00:16:46] Dean Barber: Speaking of margin on investment accounts, there are good and bad times to use a margin. Let’s look way back to the Great Depression. People were saying that they literally lost the shirt off their back. At that point in time, you could margin almost anything to invest in the stock market.
You could margin your house, car, or any asset that you had that you would pledge to the brokerage firm. You could margin it. When the markets dropped, you get a margin call and they come and collect on everything. That’s a horrible idea. They’ve since put rules in place where there’s only a certain percentage that you can margin in your brokerage account. But let’s take another example of when a margin might have been a good idea.
Now, this is an aggressive move. This is an aggressive move and not something that I recommend for most people, but let’s say that we went back to February and March of 2020. COVID hits and what happened to energy stocks? They were cut in half or more in a matter of two or three weeks. So, now you might step back and ask yourself a question: Are we going to stop using oil? Are these energy companies going to remain at this level for a prolonged period?
Is COVID going to go away? At some point, we’ll get back to kind of normal things. So, at that point in time, you might have looked and said, “I got some money in my brokerage account. Maybe I should borrow a little bit and buy some of these really, really cheap energy stocks because it was evident at that time.” BP was a perfect example. It got down to $15 a share. It was $60 a share before COVID hit. Now, it’s back up to $25 and some change.
[00:18:55] Logan DeGraeve: The beautiful thing about that is that you said brokerage account. At the same time, I don’t care what you held. It was down. So, why would you take margin? You don’t want to sell things at losses. What if you had Southwest Airlines. That wasn’t recovering any time soon,
[00:19:11] Dean Barber: But it did. Think about Las Vegas Sands or MGM Grand.
[00:19:16] Logan DeGraeve: But you would never have sold that to get the funds needed to buy, in your example, the energy stocks.
[00:19:21] Dean Barber: So, let’s go borrow some money against the equity that we have in the position because we know that things are depressed for a temporary time. I think one of the things that happens there is that a lot of times people don’t understand the depth of which a stock can fall. People think, “Oh my gosh, this thing’s going to go to zero. I’m going to lose it all.” You and I, as financial professionals can look at it and say, “Okay. Here are the real dynamics behind this. This is the financials that the company has. Here is what their longer-term outlook is. This is a bargain.”
[00:19:55] Logan DeGraeve: Their financials didn’t get 35% worse because overnight. It was COVID and fear. Let’s talk about something else and this is when a lot of people are thinking about debt and it’s not good debt. It’s credit card debt.
[00:20:14] Dean Barber: We never do that one.
[00:20:15] Logan DeGraeve: That’s the worst one you can do. All the time, people say, “Well, I just want to make my minimum payments.” That’s not what we want to do. If you’re someone that may be in credit card debt, it happens. Okay?
[00:20:29] Dean Barber: You need to get that paid off.
[00:20:30] Logan DeGraeve: You need to get that paid off fast. Okay? Look at which rates are the highest and pay those first. Credit card companies aren’t stupid. What do they do? Let’s say they gave you no APR for 12 months.
[00:20:49] Dean Barber: Take it.
[00:20:49] Logan DeGraeve: 15 months, take it. But you better make sure that you have that thing paid off in time because a client of mine’s son came in and he goes, “I got into trouble.” I went, “What kind of trouble?” He’s like, “Well, I have a no APR card and I maxed it out.” I said, “What’s the timeframe? Let’s figure out a payment plan to get it done.” He goes, “That ended last month, and now it’s at 21%.”
It’s not just credit cards. There are a lot of things out there with no interest. Guys like you and I look at that and lick our chops. We want no interest. It’s great. I’ll use free money all day long.
[00:21:34] Dean Barber: You go to Nebraska Furniture Mart.
[00:21:36] Logan DeGraeve: That’s a great example.
[00:21:36] Dean Barber: Or go to a car dealership. I will tell you a story. I bought a new vehicle a couple of years ago and they had a 0% APR so no interest. And then I said, “But what’s the price of the car if I pay cash?” They gave me a different price if I paid cash and I’m like, “Well, do you have other financing options that I could get the same price for cash?” And they said, “Yeah, 2.9%.” And I said, “How long do I have to carry that loan for this reduced price at a 2.9% APR?”
They said, “You have an early payment penalty if you pay it off within three months.” So, I took the loan for three months. I saved like $5,000 on the vehicle at 2.9% for three months and then I paid the loan off. It’s a no-brainer.
[00:22:42] Logan DeGraeve: But one reason you could do that, though, is because you have good credit. That’s a whole part of this whole conversation we’re having, too, is how important it is to have good credit. For instance, you made an example about Nebraska Furniture Mart. Three or four years ago when I furnished my new home, I went 0% on everything—TVs, bedding, all that. Why wouldn’t I do that? Now, they have a certain credit threshold.
[00:23:08] Dean Barber: You wouldn’t do it unless you knew you could pay it off in the period because you got to pay that thing off within like 12 to 15 months. You need to make sure that you have the cash to do that.
[00:23:18] Logan DeGraeve: Then, it all goes back to discipline. It’s the whole thing with debt and leverage. I think if there’s one word that describes if you’re going to use it or not is, are you disciplined? Can you put yourself a budget together to get this done? It doesn’t matter what it is. But my example with that was you had to have above a certain credit score to do it. That’s what people don’t understand about how important credit is.
You and I talk with our clients all the time about putting their kids on their credit cards. Start building credit for them early on. Don’t let them have a credit card until they’re making good financial decisions. Once it’s not good credit and you’ve had some issues, it’s very, very hard to come back from it. Then, you’re not having the same type of luxuries that you’re describing with the cars and those type of things.
[00:24:10] Dean Barber: And on the flip side of that, think about what some of the credit card companies do. They will give you cash back and give you points toward certain things.
[00:24:20] Logan DeGraeve: There are people that make careers writing about, “Hey, you can get this credit card this month if you have good credit and then you cancel it.” Now, that’s a lot of work. I’m not going to go do that. You’re probably not going to go do that, but it’s powerful.
[00:24:33] Dean Barber: But I will tell you this. I have not paid for an airline ticket in probably 10 years.
[00:24:43] Logan DeGraeve: That means you spend too much money.
[00:24:44] Dean Barber: No, I don’t pay for airline tickets. I fly my wife and kids where I want to go. Because what I did was I went out and got a Southwest Visa. I got a high enough credit limit and put every single thing that I can on that card. Why do I do that? Because I like to travel. I like to do things and bring my kids along. I pay that thing off in full every single month and have never been charged one penny of interest on this credit card. By using that credit card, I am now flying all the time with no cost. I’m flying my kids with no cost.
[00:25:32] Logan DeGraeve: And your costs would be huge if you were flying the kids and significant others.
[00:25:37] Dean Barber: I don’t consider that debt. I consider it a different way to pay for things.
[00:25:44] Logan DeGraeve: Good point. I tell everyone often that I don’t care how old you are. If you have a job, put things on a credit card for the perks and points. But more importantly, and I see this with clients all the time that may have like $15,000 or a small inheritance and it’s just sitting in their checking account. Move that from your checking account now.
That’s your money. What if someone hacks your debit card through an online scams. It’s prevalent every day now. With a credit card, that’s the credit card company’s money. So, why would you ever leave your money at risk like that? It just doesn’t make sense to me. Now, if you have the inability to control spending…
[00:26:30] Dean Barber: Maybe no discipline.
[00:26:32] Logan DeGraeve: No discipline, right. Going back to that word, it makes sense to use a debit card. But as long as you have discipline, it’s not that hard now. You can set it all on auto-pay. As long as the money is in there, you don’t have to worry about it. That’s something that I do see, though, with some of our older clients. They just don’t think about it because they don’t like credit cards. Why?
[00:26:53] Dean Barber: And I have another credit card that I use an awful lot and that’s my Cabela’s Card. I love to hunt. I love to shoot. That’s been an avid hobby of mine. Ever since I can remember, my grandfather taught me to start shooting at 9 years old. That’s something I do, so I use my Cabela’s credit card from time to time. I get points at Cabela’s or Bass Pro.
So, when I want to go in and buy some ammo or something for my fishing boat, or whatever, the money is there. It’s already in the points within the system. And again, I pay it off at the end of every month. I don’t have to worry about ever paying any interest on it.
[00:27:37] Logan DeGraeve: Let’s talk about something we’ve kind of talked about, but maybe glossed over. You and I have been doing a ton of cash-out refinances on houses the last couple of years. So, let’s use the example again of someone wanting to buy a second home. A client told me that they were going to need to take about $100,000 out for a down payment. But they didn’t have that. It was going to need to come out of their investments. And, by the way, they weren’t 59.5 and we couldn’t touch their 401(k) or IRA money.
[00:28:16] Dean Barber: So, take a second mortgage on your home.
[00:28:18] Logan DeGraeve: And at the time they said, “What? I’ve just spent my whole life paying this down, and now I’m going to add $100,000.” Their rate was like 5%. I think we got him a 3 on a 30. So, it was a no-brainer to begin with because they’re going to stay in the home. Secondly, they could not accomplish that retirement goal without talking…
[00:28:40] Dean Barber: By pulling money on paying cash and then paying the 10% penalty.
[00:28:44] Logan DeGraeve: Taxes and 10% penalty. When you’re still on that accumulation phase of life, compound interest is your friend. The hardest part is getting enough money in there to start compounding.
[00:28:57] Dean Barber: I think it’s interesting because a lot of people confuse the dollar amount on their IRA statement and the dollar amount on their 401(k) statement with how much money they have. I promise you that the values on those statements is not how much money you have. I want to illustrate that to you by trying to cash that out and spending that amount of money. Let’s say you’ve got $1 million in your 401(k). That’s beautiful. Congratulations. But if you really think you have a $1 million in there that you can spend, try to take $1 million out and go spend it. You can’t do it.
[00:29:29] Logan DeGraeve: I probably sit down with 100, 120 new people a year. In the last eight to 10 years, I’ve seen it once. A gentleman came in and said he had about $700,000 in his 401(k).
However, the statement said $1 million, though. He goes, “Yeah, but all that money is not mine.” And I just shook his hand on the spot. I go, “You get it.” But where I wanted to go with that cash-out refinance story was talk to a financial planner and figure out if you have a goal or dream of what you want to do. There are a lot of different ways to do it, but you don’t know what you don’t know.
[00:30:15] Dean Barber: There are a lot of different ways. Sometimes people can’t see what’s right there in front of them. And that’s why it’s really good to reflect with a good CERTIFIED FINANCIAL PLANNER™ professional, like yourself, where you can step back and say, “Tell me about everything.” It’s almost like they’re going to a therapist and they’re kind of laying out, “Here’s what I really want, and here’s what I’ve got.” Well, here’s the best way to do it.
[00:30:38] Logan DeGraeve: Once you understand how they think and feel about money, you can begin to kind of frame those conversations. Because I can’t talk to a client about a cash-out refinance from one client A to B to Z. They’re all going to take it differently and need to ask different questions. So, that’s why we do a really, really good job of getting to know our clients.
[00:31:00] Dean Barber: That’s important. If we don’t know them, then there’s no way that we can do the right thing.
[00:31:04] Logan DeGraeve: It’s impossible.
[00:31:05] Dean Barber: I think that the bottom line here when it comes to debt and leverage is there is good and bad. There is no book that can tell you what’s good or bad debt for you and when you should and shouldn’t use leverage. It has to do with your own personal financial situation. And one of the things that I think that we’re doing here at Modern Wealth Management that’s different than the majority of the industry is that I think a lot of people think, “Well, if I go talk to somebody in the financial world, they’re going to try to sell me something.”
So, you as a CERTIFIED FINANCIAL PLANNER™ professional aren’t selling anybody anything. You’re saying, what do you have going on? Let’s see if we can give you the great advice. So, in the eyes of the public, they need to look at you in the same lens as they would look at a CPA. I need somebody who has some expertise in this area.
Now, do you do it for free? Absolutely not. Because nobody in this country works for free. If you’re going to sit down and do an analysis, you’re going to say, “Here’s what you can do.” Most of the time, you’re going to gather enough information to say, “You know what, it doesn’t make any sense for you to pay me. Or you know what, I know enough in a very brief conversation 15 to 30 minutes that it’s going to be worth it for you to pay my fee.”
[00:32:29] Logan DeGraeve: And what we’re doing too that’s different than a lot of folks is we’re sitting down with our CPAs in-house and we’re looking at these decisions together.
[00:32:38] Dean Barber: Powerful stuff.
[00:32:40] Logan DeGraeve: It really is. And I don’t think you can do it on your own.
[00:32:43] Dean Barber: Some people can, but I think that the issue is that…
[00:32:49] Logan DeGraeve: Because the pitcher is too close.
[00:32:51] Dean Barber: It is.
[00:32:51] Logan DeGraeve: You need to have someone that kind of pulls it back for you.
[00:32:53] Dean Barber: I’m going to give a perfect example and it’s a that I don’t think I’ve ever told you. We had been on America’s Wealth Management Show and were talking about tax planning and how we can help people reduce their long-term tax liability. So, I had a gentleman come in to me back in 2009 or 2010 after listening to that show and hearing how we offer a complimentary consultation.
This guy comes in and he brings two years’ worth of tax returns and he lays it in front of me. And he says, “I want to know how you can do better than this.” Well, his tax liability for the prior two years was zero.
[00:33:51] Logan DeGraeve: May not be a good thing.
[00:33:51] Dean Barber: It was zero. So, I said congratulations on paying no taxes, but can I ask how you’re living? Are you paying your bills? And he said, “I’ve got a bunch of money set aside in the bank and I’m spending that right now before I start claiming my Social Security in a couple of years.” That makes total sense, but I said, “But do you not have any money in IRAs?” And he goes, “Oh yeah, I got a couple of million dollars in IRAs.”
[00:34:21] Logan DeGraeve: How old was he?
[00:34:23] Dean Barber: He was 60 at the time. I said, “So, when you talk to your CPA and they told you based on what I see on your tax return, that you could have taken almost $30,000 out of that IRA with zero taxes due, was there a reason you didn’t do it?” He just looked at me and he said, “Well, we never had that conversation.”
I said, “So, when your CPA explained to you that you could have taken $95,000 out of that IRA and you could have converted it to a Roth IRA for a total tax of $11,000, is there a reason why you didn’t do that?” And he goes, “Well, we didn’t have that conversation,” and I said, “Why not?” He said, “Because my CPA doesn’t know I have $2 million in my IRA.”
[00:35:11] Logan DeGraeve: That’s common.
[00:35:12] Dean Barber: So, what was happening was he was taking a standard deductions and personal exemptions. And he had a negative taxable income. If he had done a couple of these really simple things that you and I would see in an instant, he could have gotten money out of those IRA accounts. It was like almost $200,000 at about a 12% tax rate. So, put it in a tax-free environment where it could be tax-free forever. It’s crazy.
[00:35:38] Logan DeGraeve: But it’s more common than you think.
[00:35:39] Dean Barber: And the reason that happened is because his taxpayer or tax preparer at the time may never ask any questions.
[00:35:51] Logan DeGraeve: It was tax compliance.
[00:35:52] Dean Barber: That’s all it is. I was preparing the tax return based on what the guy gave me.
[00:35:54] Logan DeGraeve: Being a CERTIFIED FINANCIAL PLANNER™ professional and utilizing the environment that we have here with the tools and the subject matter experts in estate planning, insurance tax, it’s my job to play quarterback for my clients.
[00:36:08] Dean Barber: One hundred percent.
[00:36:09] Logan DeGraeve: And it’s my job to coordinate with all these people like Joann Huber and our estate planning attorneys. If you forget one piece, you can blow up the whole financial plan. As little as it is, your property and casualty insurance, if it’s not done right and something happens…
[00:36:26] Dean Barber: You could blow it up.
[00:36:27] Logan DeGraeve: Absolutely.
[00:36:28] Dean Barber: So, we’ve got a little bit off the subject of debt and leverage. But you know what? The whole deal revolves around your overall financial plan. And that’s why we use our Guided Retirement System and have The Guided Retirement Show™. Logan, thanks so much for taking time out of your busy schedule to join me here on The Guided Retirement Show™. It was pleasure to have you and I’m sure we’ll have you back many more times in the future.
[00:36:46] Logan DeGraeve: I appreciate it and had a good time.
[00:36:48] Dean Barber: Thanks so much for joining me with my discussion with Logan DeGraeve, CERTIFIED FINANCIAL PLANNER™ professional. As a quick reminder, if you’re listening on your favorite podcast app, make sure and subscribe. If you’re on a podcast app that allows you to give us a rating, please give us a five-star rating. Share this with your friends. And if you’re so inclined, there is a link in the show notes that will allow you to request a complimentary consultation with Logan DeGraeve. He can visit with you by phone, in-person, or virtually. Thanks so much for joining us.
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Investment advisory services offered through Modern Wealth Management, Inc., an SEC Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.