How To Think With Dan Henry Why Rich People Never Pay Cash
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Most people think the best financial decision they can make is to pay off any major debt...
And that’s what we’re taught in school, right? Or that’s what most of us grew up learning from our parents or seeing at home. We were constantly told, “Hey little Johnny, don’t carry debt. Debt is bad! Bad, bad, BAD!!”
But is paying off all of your debt really the most financially sound decision?
NO! Not at all!
I’m going to tell you why it’s better to use someone else's money for your big purchases and explain how you can put your own money to use in a way that will give you a net gain instead of a net loss.
In this episode, I am going to cover:
- Why paying off major purchases can cause you to lose money
- How understanding interest rates on investments and debts can help you make smarter investment decisions
- Why it’s important to upgrade your social circle
If you got value from what you heard here, please be sure to subscribe and rate this podcast! Bonus points for you if you write a review! ;)
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— TRANSCRIPT —
Why do rich people never pay cash, and how can you use this fundamental money principle to get ahead in your life? That's what we talk about in today's episode,
This is a question that a lot of people ask when they see a rich person or, you know, rich is such a weird word to me, but you know, a person with means buy something expensive, like a house or, you know, a car or something. And they say, Oh, he probably paid cash for it. No, probably not. I'm gonna tell you why. I remember when I made my first million in my business and I started shopping for houses, cause my whole life, I lived in a very small town in SpringHill, Florida. The houses there are not the greatest real estate. 90% of the houses I lived in were kind of crummy. I lived in some decent houses, but nothing that was rather extravagant. So after I made my first million, I started looking at different houses to buy, and then I made a second million, and then I'm in my third million.
And I was like, alright, I gotta get a nice house. I'm making millions of dollars here and I'm living in this tiny house. The reason was that I had really bad credit, by the way, I never bothered to fix it for the longest time. I even had a Metro PCs, which is like the cheapest phone plan or phone type that you can get. I had it for two years after I made my first million. Cause I was just too busy to switch to something like T-Mobile or Verizon. Anyway, so I go get this house and of course, I finance it. I remember when I posted, everybody's like "You pay cash for that? You're a millionaire, why didn't you pay cash, man?"
When I bought my Tesla and I posed it and said "I got a new Tesla". More comments, "Oh, you bought it cash?" "Why didn't you buy it cash?" "If you're such a millionaire why didn't you buy it cash?" Then I just bought this $2 million yacht and again, I'm getting the same questions. I'm blown away by the lack of fundamental knowledge around how money works when people ask that because there is no reason to pay cash. Let me paint you a picture. Let's say, for instance, my house right now, I have about a 3% rate on this house. So my mortgage on this house, what I owe is 3% interest. Now, let's just say I owe a million dollars, we'll use that number.
Let's say a million dollars on my home. Now I could choose to take a million dollars, send a check to my mortgage company, and pay off my house. Right? I could do that and that would save me 3%. You might think, well, Dan, you have, if you have the money, why wouldn't you pay off your house? You're saving 3%. Well, I'll tell you why, because I could take that same million dollars, and I could put it into a hedge fund, a debt fund, a real estate fund, or almost any type of investment and get anywhere from 9% to 15, even 17% to 20% depending. So let's just say it's 10%. So I take a million dollars and instead of paying off my house, I put it into an investment that pays 10% per year. Well now, instead of me paying off my house and saving 3%, I'm making 10%.
And if you subtract three from ten, that is a net gain of 7%. That right there is why rich people do not pay cash because it doesn't make sense to pay cash. If somebody else is willing to loan me a million dollars for 3%, even if I have the million dollars, I can take that money and put it into something else that makes say 10%. So now if I pay off my house, I'm losing 7% on a million dollars. Why would I just hand over $70,000? Guys think about this, 1 million times 0.07 is 70 grand. So if I pay off my house, instead of putting it into a fund or an investment, I'm not actually saving 3%, I'm losing 7%. I'm losing $70,000 a year.
That's what you have to understand. Here's the other thing, the house retains its value. For instance, right now my house is worth about $700,000 more than I paid for it. I did some improvements. I bought it while the market was low. Now the market is hot, literally 700 grand more than I bought it for. So let's just say that I sell it tomorrow. I take a hit and I don't want to wait, I just want my money. Let's just say I get $500,000. So that is a net gain of $500,000. Again, you say, "You sold your house, you got 500 grand, why don't you just pay cash for the next house?" Well, if I do that yet again, I'm missing out on money because if I can buy another house for a three or even 4% interest rate, but then I take that extra money and I put it into something that pays 10, 12 or 15%. I still have a net gain, I still have an asset that I can write off. I can write off all kinds of stuff that comes with owning a home when you have a mortgage. I'm using somebody else's money instead of my money because my money can be used to produce a higher return elsewhere.
So when you start to have wealth, you learn these things because you know, you start getting better accountants, you start getting better advisors and they tell you these things, and then you start hanging out with other millionaires.This is one reason why, you know, it's very important that you hang out with people that are ahead of you. Another reason why I'm starting millionairecruise.com is that I believe that if you get a ticket and you come on a millionaire cruise where me and maybe some other high-level people are, you're going to learn a lot about what goes on, what it takes to be a millionaire for people who've already done it so you can get there faster. One of the things is how you manage money. Poor people are always told to pay things off, that's why they're poor.
If you listen to some of these podcasts and some of these radio personalities saying pay off your house, here's how you pay off your house. I often wonder if they're trying to keep people poor because it doesn't make sense to pay off your house. You can put that money into an investment and get a net gain.
It honestly doesn't make sense to pay off anything. This yacht that I bought, if I own this yacht and I have say a 4% interest rate, and then I put the extra money I would have paid cash for the yacht into something that produces say 12%. Well, now I'm ahead. Then when it comes time to sell the yacht, even if there is depreciation I'm still winding up ahead, because I sell it, I retain the value.
It just blows my mind how you go to school. You pack your kid's lunch and you put that lunch in their little backpack, and they take their little eggs and waddle out to the bus stop. They go out into the world and they go out into our education and our education system teaches them how to be poor. They do not teach them how to be wealthy because they want them to stay poor. Guys, poor people are a huge business. I mean, think about it. It's just like prisons is a huge business. They make like 40 grand a year per prisoner. So it makes sense to put people in prison. There's big business in poor people. There's big business in this. So why would we teach people to be rich? If we taught people to be rich and everybody would be rich and it wouldn't make sense. So I'm telling you that you don't have to listen to that. You don't have to listen to people that literally are not rich telling you how to manage your money, who have never built a million-dollar business, let alone a million-dollar portfolio telling you how to manage your money. Or you have these radio personalities that know their market. They know who they're speaking to, and they know that they can give bad advice. That's how they got famous and that's how they became a personality by giving bad advice. It just boggles my mind.
Listen, I'm not telling you what to do with your money. I'm not telling you how to invest. I'm telling you how I do it, and I'm telling you how almost every single wealthy person I know does it. Now, again, if you're a billionaire and you've got like a hundred billion dollars, then yes, buy a house, cash, buy a yacht cash because you're so rich at that point. It's not even worth it for you to do the mortgage paperwork and even bother with it. So you just buy it cash. So there obviously is that, I'm not that rich.
So I like to take my money and put it in investments that pay 10, 15% instead of saving 3%. So I hope that helps you kinda understand why rich people never pay cash. Why I don't pay cash for things, because again, I want a net. You make more money by not paying cash and taking whatever that cash is and investing it into something else. Like investment funds and things like that, or even just the S&P 500. I remember Warren Buffet said, "If you want to make money put your money in the S&P 500, it'll grow around 10% every year". I read some articles somewhere, he said that he was leaving his fortune to his family on the stipulation that they put a certain amount in the S and P 500. Sothink about that, just put that in your brain the next time you think about paying something off. Where would your money better be spent, and where would you get a better return?
So I hope that helps you guys, and I'll see you in the next episode!