Episode 20: The Magical Money Machine That Turns $16k Into $21k Safely

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Imagine being able to build a wealth generating machine that allows you to basically print money. Imagine if you could start building this machine passively and within just a handful of years, the machine begins turning $16,000 into 17,000, then a few years later it begins turning $16,000 into $21,000. 

After 20 years, the machine has become so efficient that it will take $16,000 and turn it into $33,500 while only getting better and better with no market risk at all. 

What is this magical machine we are referring to?

Dig into this episode to find out!

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Kyle Pearce: But one thing I think it’s important for people to kind of take note of is that, as our home is an asset, it’s actually not an investment itself. So that’s one clear piece that sometimes I didn’t really differentiate for myself for a really long time. I looked at it as an investment. A lot of people call it an investment, but it actually doesn’t produce any income. It doesn’t produce cash flow for yourself. So it’s actually, there’s a lot of expenses that are associated with your home. And actually there are people out there that sort of show why, I think Ramit Sethi is one of them, I’ll Teach You to Be Rich, where he argues actually buying your own home is a poor choice. But I think that’s more of a personal decision. I own my home, I love my home, I want to own it. So I’m totally fine by that.
Welcome to the Canadian Wealth Secrets podcast with Kyle Pearce, Matt Biggley, and Jon Orr.

Jon Orr: Hey, get ready to be taught as we share our successes and failures encountered during our real life lessons, learning how to build generational wealth from the ground up.

Kyle Pearce: Welcome Invested students to another episode of The Canadian Wealth Secrets Podcast. My friends, we are Matt-less once again. It’s hurting our hearts. However, he was saying on the phone to me earlier this morning that maybe he’ll just have to be a regular guest on the podcast.

Jon Orr: He’s a special guest. He’s like our featured speaker every now and then.

Kyle Pearce: Absolutely. So while we miss his voice, his wonderful, wonderful face, and all of those things, for those who are watching on YouTube, we send Matt our best and actually we’re hoping that in today’s episode we actually give him an episode that he’ll learn something from as well because-

Jon Orr: I think so. He was talking about this.

Kyle Pearce: … earlier in the process here. Yeah. So before we get going here, Jon, let’s quickly recap. For those who did not hang out with us in the last episode, we were diving into some of those creative ideas, those creative strategies for wealth building, and all along your wealth building journey. As you’ll notice on this podcast, there is no one way to do this. There is no right way. There is no this has to happen first and then that. So that’s something you’re going to see throughout the theme of all our episodes. And ultimately for those who are thinking things are tight, that’s what the last two episodes were for. It was really for those people.
Now of course, if things are tight, we would first recommend that you look at your budget, and you start thinking about what really matters? Where’s my money going? For example, if you’re someone who loves a car, me personally, I’m not a huge car fan, actually it kind of hurts my soul a little bit when I put money into this vehicle because my kids destroy the interior. They leave garbage all over the place. And as soon as you care about the car, someone’s going to ding you in the parking lot. So for me, it’s just not my thing. So trying to manage your budget and trying to figure out what actually matters to you and what actually makes you happy for the long term is what you’re after. Of course, driving off the lot, you’re going to be happy, you’re going to feel great. But two weeks later, five weeks later, two years later, are you going to feel as happy?
However, if you’ve done all that work and things are still pretty tight, you start to look at the area around you, start looking at other people in your circle. And we use the example of family because of course there’s a strong bond there with your family. And oftentimes because parents want to ensure that their families are taken care of usually after they are gone.
So go back to that episode, we looked at some creative strategies on how both your family can benefit, receiving cash flow. And the example we used was cash flow through a rental property that you purchase yourself. You put it in your name, but they get all of the cash from it. So it’s almost like you’re a joint venture agreement in place where you’re going to hold the title and you are essentially going to benefit from the appreciation, while they benefit from all of the cash flow to help them sustain retirement or actually maybe give them more benefit well into retirement. So if you haven’t listened to that one, head back to that episode and be sure to dive in.
However, Jon, today we’ve got this other strategy because guess what? There’s been a lot of people that reach out to us. They first of all say, “How much money do I need in order to get into a deal?” Or they say things like, “I’ve got some money,” or that they’re continuing to save money, but it’s just going into a savings account. And it’s sort of just sitting there. And they’re like, “Ah, I feel like I’m not making any progress here.” We’ve got I think a tool that not only might help you in that scenario, but even if you’re not in that scenario, I think it’s a tool that you want to begin yesterday, right? It’s a tool that you want to begin as far back in the past as you could have possibly done. The next best time is now.

Jon Orr: Yeah. And when you say that, I often think that I wish that I had started this and using this tool a number of years ago, as early as I could, right out of university, or right out of college. I wish that I had started this. And that’s a common thought I think most people have when they start to think about investments and planning for the future and thinking about assets. They always wish they started earlier. And this is another tool that I think wish I’d started earlier.
So here’s sometimes how I think about this tool, Kyle, and I think we’ve chatted about this, but also I think you might think differently about the tool than I do. So imagine that when you buy your home, when we buy our principal residence, I think the way I envisioned my principal residence was, and I think a lot of people envision it this way, as an investment. You’re buying this home, you’re living in it, but you know eventually this mortgage will be paid off and you’ll own this thing, and you could sell it and you could use the proceeds from that if you need to to downsize when you’re older. Or the way we’ve been talking about on the podcast as a tool, use your home equity line of credit. So think about using the equity you built up in the home over time as a tool to buy future investments, or to use to do what you need to do is thinking about because the future value of this home is here, I can borrow against it in a home equity line of credit.
Now imagine that you could have this asset like a home where it has a whole bunch of value attached to that and you could borrow against that value as an asset. But it’s not say a residence. It’s not another real estate deal. It’s not like this property over here. It’s not another home you’re buying. Imagine you could buy a home that’s not a home, and it has the exact same properties. And probably we’re going to argue here even better properties like tax savings, other situations that you’re going to get out of this.
But it’s really think of the same tool as you’ve got this other home equity line of credit sitting over here that you’ve built up over time. It doesn’t have the risk of a rental property, it doesn’t have the risk of another piece of property or home. It’s boom, it’s right there. You’ve built it up over time. You could borrow against it, and go, look, I could take this chunk of money like a home equity line of credit. I could buy a rental property with it. I could use it to buy a car that I need for myself. I don’t have to go to the bank to ask for them to lend me some money, guys. Could I do that? I could borrow against that asset without…
Here’s the thing, Kyle, think of your home equity line of credit. It’s growing because your value of your home is increasing. And then when you borrow or you take money out, your home still goes up in value. So it’s like you’re not changing the value of your home. It’s still going up, and this is the nice thing about your home equity line of credit. You can take it, you go buy an asset with it. You could buy your car with it. And then when you have extra money, you could put it back to pay that off, and your home just keeps going up in value.
This new tool that’s not a home does the exact same thing. It continually rises in value year to year to year to year, and you could borrow against it, think of it as a collateral, and go and use it to build your wealth. You could use it as like a bank. You could use it to buy a car. And it can keeps going up in value. Wouldn’t you want another asset like that? Here’s another great thing. It doesn’t have to be as expensive as a home. It could just be whatever you decide. You could say I’m going to put this away each year or each month, and it continually builds in value, and I can borrow against it. And it’s not a savings account, it’s not my tax-free savings account over there. It’s not the stocks. Because if I took that stuff out-

Kyle Pearce: It got-

Jon Orr: … that value goes down and the value doesn’t go up anymore. The value will always go up for this tool that we’re talking about.

Kyle Pearce: I love it. Jon, I am so intrigued. I want to buy this thing from you. Whatever it is you’re selling here, you’re doing a great job, but everything you’re saying is true. I want to backpedal just a moment here.

Jon Orr: Let’s backpedal and talk about all these things.

Kyle Pearce: And I want to go all the way back to your comment about the primary residence. And I loved it because you were talking about how, for a lot of people, one of the greatest assets that they own is their primary residence. And that’s true for a lot of people because homes typically appreciate. They keep up with inflation. When we say that homes rise in value, really what it kind of is saying or what it’s kind of doing is it’s sort of just saying, well, maybe money’s worth less, but you articulated a great benefit though. It’s that I could borrow against this asset that’s going to at least keep up with inflation over the long run, maybe do better, but ultimately it’s going to keep up. And the debt I owe actually doesn’t change, which is great, right? So when you do that, that’s awesome. So it’s like even though money is worth less, guess what? That means that this debt actually isn’t rising with inflation. So there’s a huge benefit.
But one thing I think it’s important for people to kind of take note of is that as our home is an asset, it’s actually not an investment itself. So that’s one clear piece that sometimes I didn’t really differentiate for myself for a really long time. I looked at it as an investment. A lot of people call it an investment, but it actually doesn’t produce any income. It doesn’t produce cash flow for yourself. So it’s actually there’s a lot of expenses that are associated with your home. And actually there are people out there that sort of show why, I think Ramit Sethi is one of them, I’ll Teach You to Be Rich, where he argues actually buying your own home is a poor choice. But I think that’s more of a personal decision. I own my home, I love my home, I want to own it. So I’m totally fine by that.
And this tool you’re talking about, the beauty is it’s like you’re buying another property, like you said, but it’s like all that risk, it can’t go down in value. The other piece is too is that it’s simple. So you don’t have to wait for the deal to come along. You don’t have to be like, hey, I really want to buy that investment property over here, but there’s nothing available right now, or I don’t have enough money for it. So there’s no minimum entry point either, which is great. Then you also articulated this idea that, while that asset is growing or trying to help keep up with inflation, we can actually take out a loan against it.
And you can do this also with your stocks, so keep this in mind. You might have a stock portfolio, you can go and take a loan out against it, but that to me feels riskier. I don’t know about you. And even in how much they’ll let you borrow will indicate that it’s riskier because typically they won’t let you borrow 80% of the value. They might let you borrow some lower percentage, whereas on your home you could borrow up to 80%. So that sort of suggests that asset is unlikely to fall value. It could for a time, but ultimately there’s safety there.
This one, Jon, I want to also mention, when you go to actually borrow against it, so let’s say this thing has a value, this tool has a value of, I’m going to use, $100,000. Just for easy numbers, $100,000. They’ll actually let you borrow 90%. So they’ll let you borrow 90,000 while that 100,000 continues to do its thing, no questions asked. And that is the other benefit as well.
So when you say no questions asked, what this means is actually you do not have to go to a bank and say, “I have this income, I have these-

Jon Orr: No qualifications.

Kyle Pearce: … expenses. I have this car payment, I have this mortgage payment.” There is no qualifying. You just say, “I want to borrow 90%,” or, “I want to borrow 10%,” or, “I want to borrow,” whatever that number is that you want to borrow, and it is granted to you while it continues doing its thing. So it’s this wonderful, wonderful piece of real estate, with a bit of a caveat. The caveat is that you’re not going to get the principle paydown. It’s missing one of those three silver bullets. There is no-

Jon Orr: We’ve got two bullets.

Kyle Pearce: … principle paydown. Because you don’t have a mortgage in order to buy this thing. You just start with whatever you have. So picture it as your down payment, this amount. And you can continue contributing to this particular tool and allow it to do its thing. And then when the time is right, if and when the time is right, you could then go, you know what, it’s worth $10,000, and I need 9,000 for this. Or it’s worth $30,000, and I need 20,000 for a car. Or I need the down payment for my next investment property. The beauty is is you could borrow that down payment against this asset. It will not show up on your credit report. They will not ask you any questions of what you’re going to do with the money.
And when you go to the bank that’s lending against the investment property that you want to buy, if you say and you show that it came from this tool, they don’t care. They don’t care. Whereas if you borrowed it on your home equity line of credit, or if you borrowed it in any other manner, the bank is going to go, “Ooh, hang on. Now we got to recalculate all these numbers.” Because one of the beauties about this particular tool over here that we’re talking about is that this tool, you can pay it all off tomorrow if you borrow against it or you can never pay it off if you choose. There is no actual requirement for you to do.
Of course we’re going to say right now your goal should be that all your extra capital goes to pay that off, just like any other debt. But ultimately at the end of the day, it almost becomes in our mind the way we treat it, you and I, Jon, and the way that Matt is going to be treating it as he’s about to open his first of this tool, is dumping ground for your money. You make a hole to go buy an asset, and then any cash flow from that asset just goes back to this hole to fill that bucket back up. And remember that bucket is the debt against the tool that’s continuing to grow just like any other property would.

Jon Orr: Compound interest is working its magic. Compound interest is still rising and helping it grow day to day to day.

Kyle Pearce: Very conservatively, very conservatively.

Jon Orr: That’s the trade off.

Kyle Pearce: Very safely.

Jon Orr: Right. With any investment you have a risk reward trade off. So when we said it’s less risky than buying a rental property with this exact money that you’ve say built up over time. If I put it in a savings account and save it for this many years, and then use that pot to go buy a rental property, the thing about saving a whole whack of money is that I’ve missed out on say using that to keep that growth going. It’s kind of like that went over here and now it’s in this rental property. What we’re saying is use this tool to go whatever I was going to put in my savings account to grow, I’m going to put over here. It’s going to grow, and then that keeps growing and I can borrow that to buy my asset, and then they both grow at the same time. So now I’m using two uses for the same dollar. And so I wanted to touch on-

Kyle Pearce: It’s like double compounding, Jon.

Jon Orr: It’s double compounding, but people going to get hung up, and be like, “Well if I borrow against this asset, I have to pay interest. I have to pay the interest on the amount I borrow.” Now this is why we would recommend using this asset. You buy another asset that is an income producing asset so that it’s part of, hey, the interest is getting paid by the cash flow from this other asset you’re buying. And that’s the key to use this to help build your wealth.
As long as you can keep dumping money, like you said Kyle, you keep dumping money back to the debt on that first asset, then that keeps growing unaffected, continually grows day to day to day. And this asset over here is going to do the same thing, and all the cash flow is paying that, and all of a sudden you’ve got two assets growing for really the same dollar you put in to the first asset, which is pretty cool. That’s the same idea as a home equity line of credit because your home, your principle is trying to grow, like you said, it’s catching inflation, it’s going to go that way. And then if you’re using your home equity line of credit to buy an asset, it’s the same idea, but I didn’t have to buy a home to do this.

Kyle Pearce: Right. And just to rubber stamp this idea about the borrowing piece because one thing you will get from someone who is not involved in investing, so I’m going to say probably people who aren’t listening to this podcast or maybe new listeners who are just getting started on this journey, that borrowing, they’re like, wait a second, so you’re telling me I got to borrow my own stuff? And the reality is again, if you think about it’s like, yeah, just like the money that you’re putting into your primary residence, if you want to access that money, that dead equity, you have to borrow it unless you want to sell the actual asset.
If you want to sell the house, it’s all yours, and the same’s true over here. You can sell this tool, this asset. Again, we’re not going to call it an investment, we’re going to call it an asset that is a tool, and you can sell it at any point. But if you do sell it, then you’re losing this opportunity for the growth. So instead you want to actually borrow against this particular asset, just like you would borrow against any of your other rental properties in order to start growing your portfolio in other areas.

Jon Orr: And some pushback we get on this tool as an asset is some people’s strategy is that they are dumping their money in their tax-free savings account year to year. Let’s say you’re maxing out your tax-free savings account every year. And you’re using that to say grow so in your retirement, that money grew tax free. Awesome. And so you contributed say part of your budget to contributing to that account, and that’s going to grow year to year to year. And let’s say he’s like, you know what, if I wanted to use that money, it’s there and I could pull it. And hey, I don’t have to borrow any money against it. I don’t have to pay any interest, Kyle. That’s my money. It’s sitting there.
So people think why would I? This is an objection to this asset that we’re describing is why would I want to go down that road with that asset so that when I need the capital, or when I need access to that money, I have to actually borrow against it when now I have to pay interest on that money. Whereas if I went down my tax-free savings account route, or maybe I’m putting in stocks, or maybe I’m putting in just a regular savings account on saving up for a home or saving up for my retirement down the line, if I need it, it’s there and I can use it. Now I don’t have to pay interest. It’s my money. Why would I have to pay interest on my own money to borrow? Kyle, I know the answer to this, but I want to hear your answer because you articulate things very well. So think of the two options now. It’s like why would I want to go this route when if I need my money I don’t have to pay interest on it?

Kyle Pearce: Yeah, totally. And honestly this is one of the main differentiators between people who are able to actually grow wealth and eventually grow sort of a legacy in terms of being able to provide for their family and for future generations is the decision, this particular decision, of whether you want to fire sale stuff for money or whether you want to put all your money into things that grow and ideally cash flow, right? Cash flow is obviously helpful, but think about certain stocks, for example, that don’t have a dividend. They don’t have cash flow. Some of them you buy them and you are investing because that company over time is going to grow, or at least you feel strongly about it. You might buy an index fund to do the same thing.
The whole goal there is that, as soon as I sell that thing, that asset, be it my home, be it a rental property, or that asset, if it’s not a tax sheltered account of some sort, so your home, your primary residence, you can sell and that would be tax free. But now you have nowhere to live, right? If you sell a rental property, you now have to pay the capital gain on that particular asset and it stops compounding.
So it doesn’t matter what the asset is, if it is truly an asset, that means that it’s going to hold value, and ideally it’s going to continue to keep up with inflation. So it’s going to grow in value. The ultimate goal is that you want to hang on to as many assets as long as possible without putting yourself in a situation where you cannot maintain the debt of course. So that is key.
So the other piece I wanted to sort of articulate is that so I can go this way, and I can actually sell or liquidate an asset. I lose all that upside potential. In many cases, I have to pay tax on that. When I borrow against that asset, that asset continues to grow just, like your house example. So your house continues to rise in value, your debt does not, right? So your debt actually goes down. And the beauty of debt is the debt doesn’t inflate on its own, right? So I mean you have to pay an interest of course, but ultimately the goal there would be that debt over time, the longer you can stretch that debt out, the less your money is worth.
So imagine this. Imagine you owe $100,000 on a home. And imagine if somehow you could still owe that $100,000 20 years from now, $100,000 is not going to be the same $100,000 as it is today. So that debt is peanuts by 20 years from now. Your hard part is how much did it cost you in interest to get there.

Jon Orr: inaudible.

Kyle Pearce: And could you somehow do an arbitrage there where you’re earning more on the asset, be it through appreciation, cash flow, or principle paydown in the case of real estate, versus the amount that you had to pay. So the thing is here, it’s just a net positive game. As long as your net positive, you are on the upper hand. And that’s really what we’re trying to do here. And I want to also talk about this particular tool that you’ve already articulated and I’ve articulated you can borrow against this tool.
So you mentioned tax-free savings accounts. The beauty is that there’s actually a way where you can do both. Because if, let’s say, for those who are in the US, your IRAs, any of your tax sheltered accounts, we have a tax-free savings account they call it, which is really just a tax-free shield that you can put in, this year, you can put $6,500 into a tax-free account. So that’s 6,500. If you’re going, well listen, I only have $6,500. I could put it in my tax free account or I could put it in this tool. Well, I would argue, why not do both? Why not put that 6,500 into this tool, and then borrow? You can only borrow 90% of its value right now, and take that value and put it over here. If you believe that you can safely, key is safely, safely get a better return in this account over here, then you’re winning in two areas.
So you’re winning in two areas. This one’s tax-free over here, the tax-free savings account. And the beauty is guess what, Jon, this tool over here, you can keep this tool for your entire life, but there will be a time in life way down the road where you’re going to have to liquidate it. This tool, it’s going to force you to. Now with many accounts like a registered savings account or a registered retirement savings account or a 401(k), or any of these retirement accounts that are out there in the US and Canada, they force you to take it and then they tax you. But with this tool over here, the beauty is when you’re forced to liquidate the money or the value of this particular account, there is no tax implication, which is so amazing.
So imagine, and I told you, you don’t have to liquidate this thing until way down the road. We’re going to talk about when the exact moment is that this is forced to be liquidated. We’ll talk about that as we dig in here and as we reveal the name of this particular tool. Jon, do you think we’re ready to reveal-

Jon Orr: I think you have to now.

Kyle Pearce: … the tool? Holy smokes, you’re going to be shocked. Many people are going to be shocked. If you’re not shocked, that means you already know something about this tool.

Jon Orr: They already guessed. They guessed.

Kyle Pearce: Well, they’ve already got it.

Jon Orr: Put your hand up if you already guessed after you said you’re forced to liquidate it.

Kyle Pearce: And I’m going to tell you exactly when. Here’s your last chance. You are forced to liquidate it. And actually it’s you aren’t forced. It just liquidates as soon as you pass away. And that is a particular type of insurance. This is participating whole life insurance. And some of you may be immediately shocked because Suze Orman, Dave Ramsey, a lot of these gurus out there, financial gurus, actually hate this particular tool.
However, the caveat is that I’ve done the rabbit hole research on this because when I went and first began exploring this tool, I wanted to know exactly why they hated it. And for all the reasons why they hate this tool is all the reasons or all the ways in which you would not design this tool to be set up. So there is a massive, massive difference between how the tool is set up and used in their mind and in their world. And I’m going to argue, if you have one of these, if you have a whole life policy, you’re probably there going like I’m out. Don’t hit stop yet. Your policy, I almost promise you, if you’re unaware of this tool and how we’ve described it here, then your policy was not set up in a way to allow you to benefit in the ways we’re suggesting or at least to maximize the benefit in the ways in which we have suggested.
Because so many agents out there actually don’t understand it themselves. They just hit the enter button and out comes what you get. And I’ll be honest, when they’re not set up optimally, they’re going to lose commission. They’re not going to get as high of a commission. And whether they’re aware of it or not, I don’t want to throw anybody under the bus here. I think it’s more of a lack of awareness, more of an ignorance piece. I don’t think it’s an intentional piece. And if you find the right people, and we’ve got some to suggest for you later, you can use this tool, and you can benefit and just set yourself up with such an amazing long-term strategy. And I’m sure in future episodes too, we’ll talk about how you can go beyond yourself and maybe a partner or a spouse in terms of how you can really amp this thing up and use it to your benefit.

Jon Orr: Yeah. And I think you’ve kind of articulated that it’s a special type of whole life insurance, and you do need a person who knows exactly how to set this up for you. This is not how we set up ours. It’s not like we just called the local insurance, your existing say life insurance provider.

Kyle Pearce: Oh I did, Jon. I called a lot of them before we landed on one. But that’s not what we want you to do at home for sure.

Jon Orr: You don’t want to do that, right? You don’t want to just call them up and say, “I want whole life insurance because I’m going to use it the same way that these guys are describing.” And it’s a very special type and you have to find a particular insurance broker who can do this for you. So you’re looking for an infinite banking practitioner. So a person who can kind of design this special whole life policy for you so that you can maximize its use the way we’re describing.
When people think of a life insurance, they say I want the most death benefit for the least amount of money. So if it’s like it’s life insurance. So when I die, I want to leave a whack of money so that my family doesn’t have to worry about money for a set time, or not at all. Or I want to make sure I’m covering the basis so that if I die early then they’re covered.
So their mindset when they’re buying insurance is I want to maximize death benefit, but I don’t want to pay a lot. I just want it. People resort to term insurance because of that. It’s like if I die early, I’m going to get a whack of money because I’m going to get a lot of death benefit here. It doesn’t cost me a lot to do that. Whereas whole life, people think it’s whole life insurance, it’s like you got to put a lot of money in there and you don’t get a ton of death benefit. So this particular type of participating whole life insurance policy is not necessarily maximizing death benefit. It’s kind of like it’s maximizing cash value of the policy today.
We want to use the asset to do a whack of stuff to grow our wealth, to buy assets that are income producing assets, cash flow producing assets. We want to use it like our home equity line of credit. So it’s got to be carefully designed to maximize your cash value of the policy. And the cherry on top is that when you die, the death benefit is higher or will reach the same as its cash value. It’s carefully designed that when you hit age 100, the cash value will match the death benefit. And before that, the death benefit’s going to cover everything of the cash value.
So this is the nice thing about using it to buy an asset in that leaves that hole. Well, depending on timing, when you die, that hole’s covered automatically because the death benefit pays it all out. So when you die, any loan against the value of the cash value is first and foremost paid off by the death benefit, and the rest goes to your family. So it’s kind of like a cherry on top that’s going to cover everything in there, and then all the other extra money will go to the family.

Kyle Pearce: And tax free.

Jon Orr: And tax free. If you’ve used this account well to buy assets, you are almost using tax-free money to do that. That’s another benefit that we’re using to grow our wealth.

Kyle Pearce: Absolutely. And I look at this as a tool, and you had said it as well there, Jon, you were like, “I wish that I started this a long time ago.” And then you’re like, “Right out of school.” And then you’re like, “Wait a second, even earlier.” Because the earlier you can begin this process, the better suited you will be because these things, I will say, and we’re going to cite that R. Nelson Nash in his book Becoming Your Own Banker is a amazing, amazing tool. He is sort of the godfather of this strategy. People call it the infinite banking concept. I’m going to argue though that the way in which even the book, you need to read the book and you probably need to read it a number of times. So we’ve both read it. I know you and I have both read this thing a number of times.
We’re both math teachers, we have math degrees, and it’s more of a philosophical mind shift. And you really have to look at it. And me being very analytical, it took me since, when I came across this concept, it was back in 2016. I mean it was earlier, but I didn’t look into it enough to really say I came across it. I heard of it, but I didn’t understand it and I just sort of left it. Then I started going down the rabbit hole in 2016, ’17. I got on calls with some people, some good people, but I’m going to also argue there are people out there that are, I would say they call it licensed practitioners from the Nelson Nash Foundation. So this is the godfather. These people know how to set up these policies the correct way.
One other aspect though that I look for in the person that we landed with, so far, it doesn’t mean we’re necessarily going to always be with this particular individual, but one other aspect that I think is really important is they need to understand it so well that they can communicate it to the person on the other end. Because if you can’t do that, then it’s almost like you get stuck in this place where there’s uncertainty, and then that’s what happened to me along this process. These other people knew how to set up these policies, but they could not help me to understand. And I mean part of it’s maybe I was close-minded at the time. I’ll argue I was. But I think the average person’s going to be close-minded to something that is so different from what they’ve grown up and what they’ve experienced that the person needs to be able to help you have the epiphany in order to make the move. And if they can’t do that, then they’re not the right person, in my opinion anyway.

Jon Orr: Another asset to selecting this person is you want to pick one person who ultimately is using it the way you want to use it. So you can find an insurance broker who can do this, what Kyle has given you some suggestions on kind of where to look. But I mean not only should that person be able to explain it and clear up any issues that you have with it, but it would be great. And this is the person that we went with. They’re using it in the same way we wanted to use it to buy assets, to build your wealth. They’re the ones, they’re going to act as a coach for you along this journey as well. You want to pick someone who is ultimately using this tool the way it should be used.

Kyle Pearce: And this goes to say this is a very, very complex shift in mindset of course. So I think this might be even more dramatically so. But the same is also true in a joint venture because, I’ll be honest, when I was trying to find joint venture partners initially, it was hard because it was like I didn’t maybe understand the process as well as I needed to in order to explain it to someone else. I knew I had it ready to go and we were good to go. But the same’s probably true for some of you listening. If you’ve ever had the opportunity to engage in a joint venture, if there’s this hesitation there, then something isn’t clear for you.
So I mean the better the joint venture colleague, or I don’t want to say partner because it’s a venture, you’re both there. You’re both collaborating on this thing jointly. The better they are at articulating exactly how you win and exactly how they win, the better the relationship becomes and the easier it becomes. So this is very true in this particular case. So for me, took me a very long time to get started. I really do wish I started a long time ago. And I would even say, well, if you’re thinking about this thing and you’re going, this sounds really interesting to me, definitely reach out to us. We can pass you along to our wonderful, wonderful, selected practitioner. We don’t actually receive anything for doing so. I’ll be honest and say I want to get my license just because I’m so passionate about this work and I know policies inside and out. I love just knowing how they work and why they work and where do they break, and all of those things.
But this piece is, for me, something that is a tool that could be so helpful and transformative for any person, but also any family. And this goes on multiple generations. So if you imagine this idea that, hey, if I could be building and using this tool over here, and I can still access capital, I’m going to say within the week, right? Basically just have to tell them I want this much money. And they say, “Where do you want it? I’ll cut you a check or we deposit it straight to your account.” And that’s it. That’s all there is to it. There is some management on your side because, again, we wouldn’t recommend that your goal here is to open a policy and use it as a tool just to pull the money out for nothing, just to live. That, I feel like you’ll probably get yourself caught up into some challenges there.
But if let’s say you’re like, well, I normally put $100 into this unregistered account or even tax three savings account every month, you could essentially set up a policy. Any amount will work as long as it’s set up correctly. You could send the $100 over there, get a policy started, and let that policy roll. And if you wanted to, you could immediately borrow some of that cash value early on. The cash value is low. And this is one of those things that is a hold up for people, and it was a hold up for me because I’m like, wait a second, I don’t have access. So I’m going to give you, let’s call it $100, but it’s only worth to me $70 out of the bag.
And the reality is it’s almost like a startup. So there’s a commission in there. Let’s be honest. The agent’s got to make a commission. I am not licensed, so I have no benefit at this point, but ultimately they’ve got to make money. The insurance company has to actually get you committed, and say, “Are you in or are you out?” So that’s one of the ways. But over time, if this is a long play, if you do this work over time, this thing will pay itself off. And I just want to show an example. Jon, you think it’s worth showing an example for our YouTubers here?

Jon Orr: Sure.

Kyle Pearce: And we’ll try to talk through it. I have gone down, and I think this is the best representation that if it was shared with me early on, I may have maybe pulled the trigger earlier in my journey. But I only pulled the trigger about a year ago, and I wish again it was 10, 20, 30 years ago. And you’ll see why in a second.
But I’m going to use an example. This one’s on a $15,000 policy for you to look at. So this one is based on an illustration that was shared with us. There you’ll see the annual premium is about 15,000. Now again, there’s no minimum here. I mean obviously I’m sure there is one, maybe it’s, I don’t know, 50 bucks a month or something small, but this one’s 15,000, so it’s like more than $1,000 a month. So keep that in mind. So it doesn’t have to be this way. I’m just using this one as an example. And ultimately what happens is in year one, I put 15,000 or almost 16,000 into this policy, and immediately it has a cash value of $13,000. Right there, that’s where people usually are lost, Jon. They’re like, well, wait a second, so you’re telling me it’s actually worth less? And I’m like, yes. Year one is worth less. However-

Jon Orr: Sometimes it’s helpful for people to think like, well, of course, it’s insurance. If I cashed out, I wouldn’t get all my money back.

Kyle Pearce: Exactly. So this is what cash value is. And really the cash value is how much it’s worth today in order to reach that death benefit at age 100. So the way these are designed, so I’m 40, so this one’s based on age 41, and that is the whole goal here. By age 100, this thing should be worth the death benefit at age 100, which you’ll see in just a second. But we’re using this as a tool. The goal here for us is not death benefit, but I’ll show you how that applies in just a moment. Right away, year one, you’re going, this sucks, I’m out.
I’m going to argue that, you know what, with anything, so for example, you want to buy an investment property. For those who are listening, guess what? You got taxes, right? You’ve got land transfer taxes, you’ve got closing costs, you’ve got all kinds of things out of the bag. So I guess you’re not into real estate, right? No, that’s not how we treat this. This is like you’re opening the policy. Year one’s going to suck, and I’m going to even argue that year two, three, and four aren’t amazing either. So the goal here would be picking a number, picking an amount, and using cash that maybe you’re putting into a savings account or whatever it might be.
Or if let’s say I wanted to max out my RRSPs this year, I might go, oh, well, I still could borrow against this 13,000 to maximize on my RRSP. I get tax rebate from the government, and then I take the rebate or the refund, and then I put it back on my policy loan, and then I carry on my way. Now I’ve got two assets rolling. And hopefully the one in the RSP is going to be rolling at an even higher rate.
So if you look at this year one, Jon, you are losing 17.5% if you bail. But you’re not going to bail because you won’t open the policy if you think that that’s not going to be something you want to do beyond year one. If you’re that person, then obviously you made a mistake when you decided this. But I want to show you when you get to year five, look at that. The rate of return on average per year, not so hot, not so great. Again, you could be borrowing this cash value. It’s up to about $80,000. I’ve been putting in 15, almost 16,000 a year, and I still can borrow 90% of this 80,000 because in the long run I know that this is going to provide me with a lot of safety and benefit.
One other benefit is that this thing will not go down. So your tax free account, or your RSP, or even your real estate technically could go down in value any year. Hell, in year one here it says 17.5%. Guess what? Most people in their stock accounts, their portfolios went down by more than 17% over this last year, and that wasn’t in year one. That was just randomly. So that’s a massive hit. That will never happen after you get your policy going here. Now as you go, you can see this growth, and you can see the average rate of return. This is a compounding average rate of return. It’s not simple interest we’re talking about here.
So by year 10, not only do we have more cash value than the amount of money we put in, the average rate of return is now 3.2%. Not amazing because remember, it’s not an investment, it’s a tool. But here’s what I want you to realize is that 17.5% loss in year one doesn’t exist in year 10, year one. Okay? So I’m going to say this again. I’m going to say this again. By year 10, on average, the rate of return has risen to 3.2%. The actual rate of return from year nine to year 10 is actually much greater than 3.2%. This machine, the compound rate per year, gets bigger and bigger and bigger as you go. So what I’ve done is I’ve averaged it out. It’s like every year you go, you start to erase the negativity of year one.
And then all of a sudden you hit this point by year five where all of the negativity of year one is completely erased, right? I could go back to year four and three, I think you’d still be. So we’re at 0.45% by year five on average, which means the 17.5% year one doesn’t exist anymore. It only existed if you cashed out in year one. By year five, you have now averaged a positive return. By year six, it jumps to 1.55, by year 10, 3.2%, and by year 15, 3.8% on average. And by year 20, 4.05% on average. Those numbers can obviously change. We don’t have the future exactly predicted, but this is based on historical dividend rates that the company has had.
And ultimately, I want to just share one thing. That first year, your negative 17.5%. Again, if you’re going to cash out year one, that’s silly on you. I can’t help you there. One thing I can tell you though, when we look to the death benefits side, Jon, if you die in year one, your return is 2,750% because you’re going to get 434,000 tax free for your family. So the other side shows that if you’re using this as a tool, you’re getting some protection. By year five, your return drops. If you die in the first five years, your return drops to only 117% per year compounded if you die within the first 10 years.
So this is where our term insurance people come in. Term insurance, 99% of term policies do not pay out because you end up living longer than the term. So you’ve spent that money and you don’t get any of it back. That’s why it’s so cheap because it just goes right into their pocket. Over here, if you die within the first 10 years, you get a 35.35% return on average. And ultimately as you go, we told you this tool, it’s going to pay you out over time on this policy. If I die in the first 20 years, I’m going to get 13.4% on average. Okay?
So forget about the cash value because remember the cash value doesn’t matter anymore if I die in year 20. In year 20, I get 1.3 million in change, and the cash value means nothing now because I’m not living to 100. My family gets that tax free. Look it, if I make it to 45 years down the road, which puts me at, look at this, if I make it to age 85, which I hope to make it longer, but you never know, by age 85, my average rate of return would be 5% on the death benefit on average. So if you think about this as a long-term play, instead of a short one to three or four year play, you will win with this strategy. And I dare anyone to argue me on that, especially if you’re going to benefit by using the cash value to borrow and put into other assets which generate cash flow.

Jon Orr: Exactly. So think about if you, and age 85, the death benefit is 2.5 million, Kyle. In age 85, what’s the cash value of that one?

Kyle Pearce: Age 85, the cash value-

Jon Orr: It’s close.

Kyle Pearce: … is two-

Jon Orr: Two million.

Kyle Pearce: Yeah. Just over two million.

Jon Orr: If you made it to 85, you’ve had access to up to $2 million to use and build other assets. And then you know if you died, all of that debt is gone, right? All of that cash value debt, that if you borrowed up to $2 million to buy other assets, when you die, all of that is forgiven. So think of people who have mortgage insurance. I have mortgage insurance so that when I die, my mortgage is wiped off. But you have that built in here because if you’ve used your $2 million to buy this property, this investment property, this investment property, and this investment property, and all of those are cash flowing and are paying the interest of all that money you borrowed, when you die and leave this legacy to your family, all that debt is gone, and then anything left goes to the family itself.
But think of it, that you’ve just given this family these tax-free assets that they are now part of your family. So this is called the infinite banking concept, using this tool to accumulate your wealth. And if you ask all wealthy people, the top 1% of wealthy people are using this strategy to help build their wealth. It’s one of the tools that they’re building. So essentially what we’re talking about is, this is why the book is called Becoming Your Own Banker from R. Nelson Nash, is because what you’re doing here is you’re setting up a system that acts like a bank.
And you can borrow against the bank and you’re going to pay the bank back, but it’s all you. You’re the bank. And so there’s a lot of ways that you can build your wealth using this tool. And we’re just kind of touching on some of the ways here, Kyle. And I know you can hear the passion in Kyle’s voice, but we’re definitely going to, we have other episodes that go into very specific scenarios of how to use this tool for your family, for your business, for your corporations, if you have a corporation. So there’s a lot of ways you can use this tool to build and accumulate wealth.

Kyle Pearce: I want to give one last thought for everyone because-

Jon Orr: Listen, he’s still-

Kyle Pearce: … this held me up.

Jon Orr: … so excited. He’s still.

Kyle Pearce: One more. And then we’re going to do some takeaways and we’re going to give you some next steps. Because you just said, Jon, if what you’re hearing here, hopefully you’ve gone through and you’re like, whoa, this sounds really good. And you’re still like, wow, this makes a ton of sense. That’s awesome. That makes me feel good because it’s a very complex scenario. So if you’re still there, you’re going, okay, but there’s a lot of work to still be done. There’s lots of questions that will come up along the way. And that’s good, that’s healthy. If you don’t have questions, then you may be just kind of blindly following. We don’t want that.
But before we do, keep in mind that the scenario we just shared, those who are on YouTube, definitely check it out so you can see it up on the screen. It’s a big table, and I’ve done all of the math here. So it’s compounded average rates of return per year. Okay? So there’s no funky business going on here. Now, a big question that I had, and this was a concern of mine, is that you’re actually paying this, what they call it, a premium every single year. So that’s almost 16,000 is going in every year. Now some people are like, holy smokes, how am I going to do that for the rest of my life? Well, you can design policies where you stop paying after a certain amount of time, but I would say you don’t do that out the gate. You do it, make it manageable for, I would say, over your next 10 year window or horizon.
And then after the 10 year mark, what you can do is you can actually say to the insurance company, “I just want it to run out on its own.” I wouldn’t do it personally. I’m only going to do it as if I had to. But ultimately, at the end of the day, from year nine to 10, you see on the screen, in year nine, the cash value is 161 and change thousand. And then in year 10, and this is again, these are projected values based on the prior years dividend rates. And of course these numbers can change slightly, but the one thing they can’t do is they can’t go down. After it happens, it does not go down. It can only go up from that amount. So there’s protection there, there’s safety there.
When I subtract those two numbers from year nine to year 10, I’ve put 16,000 in. It was worth 161,000 and change, and now I put 16,000 in. And suddenly at the end of the next year, it’s worth 182,000. That is $21,000. The cash value is increased by $21,000. So my question to everyone is, if I can put 16,000 in, and then it is now worth 21,000, does that seem like a good deal to you to find a way to put 16,000 in? And I’m going to argue that by year 10 that you should be able to do this because you’ve been using this cash value to buy assets that have cash flow. So you should be paying down anything that you borrowed.
But also, I could literally borrow against my cash value to pay next year’s premium, and it immediately is worth 21,000 in the next year instead of 16. I’m going to find a way to do that no matter what. And the same would be true. You imagined it being $160. Taking $160, and now it’s worth $200. Or taking $16, and now it’s worth $20. Because the compounding in the future years gets better and better and better, and it’s erasing all the negative initial years.
That’s where this average rate comes from. So think on that, but don’t put yourself in a position where tight in the first few years. You want to make sure that you can handle it. You can always open another policy in the future, as long as you remain healthy enough to do so, right? So starting early is a benefit, but don’t necessarily worry about it being the best policy in the entire universe or the biggest one you can possibly handle. You can always get another one and start again. All right. So I would say starting is better than not starting. That’s my takeaway. Jon, what’s your big takeaway for today?

Jon Orr: Well, I think I said about thinking about being your own bank. I mean, that’s what’s your creating here. And the other big idea is this idea that you’re also setting up a legacy for your family. So you’re hitting a lot of areas by using this tool, by thinking about setting up a legacy for your family that’s tax free, using the cash value to buy other assets that automatically give you money in your pocket. There’s a lot of uses here, and I think the versatility of this tool is a big takeaway for me.
So we got a few next steps. We recommend you have to learn a little more. You have to keep learning. It’s a lifestyle. It’s a mindset change that you have to kind of wrap your mind around so that you can kind of change the way you view the money that you use. And once you do that, then this becomes very, very powerful. So couple things. One thing, I think the number one is to read Becoming Your Own Banker, R. Nelson Nash. You can find it on Audible, you can find it on Amazon. Read that book. That is kind of the original book. And then we got a bunch of other books that we’ve read over-

Kyle Pearce: Eight additional books that we’ve read multiple times-

Jon Orr: You’ve got lots of reading.

Kyle Pearce: … on this concept.

Jon Orr: You got lots of reading there. So you can head on over to investedteacher.com/books. We’ve got our book list there on all of our investment books, but we’ve got a section there just on the infinite banking concept. So please head there. You’ll also find a link to Becoming Your Own Banker from R. Nelson Nash over there as well. So that’s kind of your next step is head to the books website, investedteacher.com/books. Kyle, any other next step for folks?

Kyle Pearce: No, I think that’s awesome. One thing you can do is, if you’re still with us, we just talked about life insurance. So if you’re still with us, then that means you’re getting some value here because otherwise you would’ve clicked next a long time ago. So all I can say is that if you’re finding value, there are other people in your lives that could find value here as well. So return the favor, pay it forward to them. They are probably not out there Googling for podcasts that can help them get their finances, their wealth building strategies going to learn passively, but to have a big payoff in the end.
So I’m going to just ask that, however you found us, I’m going to ask that you share it in the same way. So if you found us on social media, go ahead and share us on social media. If you found us through ratings and reviews on just searching your podcast app, go and leave us a rating and review. Honestly, I’m going to say it’s the least that you can do in order to pay it forward to someone else so that hopefully they’ll pay it forward to you, and you’ll be able to find some other great assets out there or great podcasts out there just like this one. So thank you for that. You don’t know how much it means to us. We are reaching a bigger audience. So thanks to those who have done this work. But if you haven’t yet, it would mean the world to us if you took a moment to do so now.

Jon Orr: Show notes and links to resources from this episode can be found over at investedteacher.com/episode20. We’ll put a link to the books website over there as well. So head on over to investedteacher.com/episode20.

Kyle Pearce: Hey, Jon, today we have a call with a interested Canadian Wealth Secrets listener who wants to find out more about how JVs work and how they can get themselves started. Hey, you can too if you head over to investedteacher.com/jv. A couple quick questions, and we can hop on a call with you and get you started. Hey, maybe a JV works now. Maybe it’s not for well off into the future for you. But getting yourself started, getting acquainted, and you just never know when that right deal might be perfect for you. So Invested students at this time, class is dismissed.

Jon Orr: Just as a reminder, the content you heard here today is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice.

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