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What's the best way to eliminate debt? Most Americans are misled about this, using a "good" method, but there's a far better, "best" way. It requires understanding how money works—something many Americans never learn. Banks and credit unions pay interest because it's profitable; they make more than they pay out. If they stopped, they'd fail. You'll learn why a bank's greatest asset is its liabilities.
I'm Doug Andrew, a financial strategist and retirement planning specialist for over five decades. I've helped thousands optimize assets, minimize taxes, and build what I call "authentic wealth." Many people initially dismiss my methods, but the math is undeniable. Choosing the "good" way costs hundreds of thousands of dollars.
Defining "out of debt" is crucial. Most say it means owing no one. My definition, shared by savvy business owners and multi-millionaires, is having enough liquid assets to pay off all debts instantly. This explains why wealthy people often maintain significant mortgages: it's strategically using leverage.
Years ago, an employee, a former relationship manager at a major bank for high-net-worth individuals, was perplexed. Her clients repeatedly refinanced their homes to the maximum, even though they could pay them off. They understood money differently; they knew when paying interest was advantageous. She was taught to simply eliminate debt, not how to use it strategically.
I'll show you smarter, quicker ways to eliminate debt. The smartest and quickest way is *not* aggressively paying down mortgages. Let's use a business analogy.
Imagine an employee costing $118,000 but generating $535,000 in profit ($416,000 net). Would you fire them? No. Now, imagine another employee costing $127,000 but generating $735,000 ($600,000 net). A third employee costs $43,000 and generates $1,242,000 ($839,000 net). Which is best? Keeping the high-earning employee, even with higher costs, is far more profitable. This illustrates why I'm not in a hurry to pay off a mortgage – it's like firing a profitable employee.
Let's clarify preferred versus non-preferred interest expense. This relates to tax deductibility, not the strategy itself. I help clients deduct mortgage interest, even if they take the standard deduction. I often shift interest to business expenses. For years, I've deducted mortgage interest on my business tax returns; the IRS doesn't care if you use your house as collateral. Many clients itemize because of charitable contributions, making it advantageous. The law of tithing often results in more money despite giving 10% away.
Leverage is a key element in wealth accumulation. The first miracle is compound interest, the second is tax-free compounding, and the third is safe, positive leverage. Leverage means owning assets with minimal or no money at risk. The key is liquidity—access to your money when needed. Leveraging without liquidity is risky; tying up all your cash in down payments is a mistake. I've never used my own money for down payments, maintaining full liquidity.
Years ago, a software program for $800 showed people how to pay off credit cards in order of interest rate and then aggressively pay down the mortgage. Their example showed paying off a $210,000 mortgage in 12.5 years, then investing the extra money in a tax-deferred 401(k) for $987,000 after 30 years (approximately $650,000 after taxes). This is "good".
My "better" approach maintains liquidity. I don't send extra principal payments; I keep the mortgage and invest elsewhere. Borrowing at 6% (tax-deductible, a net cost of 4%), if I'm earning 8%, I'm still ahead. In 10.2 years, I have enough liquid assets to pay off the mortgage, 2.3 years sooner than the first example. Then the difference is invested tax-free for $1,245,000 net.
The "best" way: In 10.2 years, I have enough liquid assets to pay off my mortgage. I'm out of debt in my mind. Why fire a highly profitable employee (the mortgage)? I don't, and I end up with $1,844,000 tax-free. I refinance every few years, leveraging the equity for higher returns.
Let's look at taxes (assuming tax deductibility). Paying extra principal payments results in unnecessary tax. My method, "the best way", results in zero unnecessary tax. The "good" method yields $416,000; the "better" way yields $600,000; and the "best" way yields $839,000 or more.
My 2005 book, *Misfortune 101*, sparked a Federal Reserve Bank of Chicago white paper. Their conclusion: Americans are making a mistake paying down mortgages aggressively. They stated that redirecting those funds to tax-advantaged accounts would result in substantial gains. They deemed my approach conservative.
There are four things you can do with money: spend, lend, own, or give it away. I double-dip, owning and lending with the same asset. Banks thrive on interest; they make far more than they pay. In 2008, banks borrowed at less than 1% and earned 4-5%, a huge profit margin. I did the same, borrowing at 3.75% (net 2.5% after taxes) and earning 10%.
In 2007, I refinanced my $1.5 million home at 4.5% (net 3%) and took out a second mortgage. Earning 8% on the million and a half was far more than my interest payments. My home's value dropped to $1.1 million in 2008, but I didn't care; I had the liquidity and was making a huge profit. Those with their equity trapped in their homes faced foreclosure.
For quickest debt elimination, avoid extra principal payments. You'll get out of debt faster, but by maintaining liquidity and earning higher returns, you'll gain hundreds of thousands more. My book, *The Laser Fund*, explains how to become your own banker. It's available for free; cover shipping and handling at laserfund.com and I’ll send you a copy. You can also register for a free webinar or schedule a consultation. Learn how money works! [Music]