The LEAP System is a methodology, or thought process, that we use, which stems from a model. Robert Castle, the man who founded LEAP System about 30 years ago, created a financial model that integrates protection, savings, and growth into one financial model based around the concept of lost opportunity cost, or equalizing decisions based on present value in math. The system is phenomenal because it allows you to determine fact from fiction. There is a lot of opinion in finance that when you tie it back to math, you can determine the correct answer as long as you equalize the scenarios via lost opportunity cost.

One example is that of a home mortgage. Which is more expensive? The 15– or 30–year? You’ll often hear on the media that you should have a 15–year mortgage, or you should double pay your mortgage, because it will save you $180,000 in interest over that 15–30–year period. This is actually false. When we equalize the 30–year and the 15–year, we find that the 30–year mortgage is much less expensive than a 15–year mortgage at today’s interest rates. The assumption you have to make is what rate of return you will earn on your money; this is the piece that is unknown. If you typically earn high rates of return or you are a small business owner who has the opportunity to hire another employee, then for you, a 30–year mortgage is a much better option because you have a lower cash flow that will allow you to build up more liquidity, or invest more money in your business, which should produce a higher income down the road than if you put it all into your house. Some people want their house paid for, and that is a whole different reason to hurry that up, but from a pure cost standpoint, that 30–year mortgage is usually much less expensive than a 15–year mortgage.

Life insurance is one of those things that you really have to drag people into kicking and screaming, but down the road, the client will call and thank you. About 10 years ago, I had to find an insurance policy for a client who had just become a fighter pilot in the military. The premiums were higher for this type of policy, but when he was deployed to Afghanistan, I got a note from his wife thanking me for the peace that policy gave them as her husband was away at war. From a human life standpoint, if you don’t have worry in your life, confidence is single biggest factor in determining how successful someone is. So anything I can do to reduce worry or uncertainty and transfer that risk away allows me to focus on what I am best at, which will create more net worth than if I have that worry nagging at me, preventing me from living to my fullest potential.

The LEAP System has three major concepts:
One: Lost Opportunity Cost (Equalization)
To determine if something is a good or bad decision, you have to equalize the scenario. You treat it like a laboratory, so LEAP is all about creating a laboratory much like an engineer would use that bases everything on math. In finance, because people want your money, a lot of strategies are designed for the financial institution’s benefit. The financial institution makes money when given money and wants to keep the money as long as possible and give the money back to you as little as possible. Most of the strategies that are promoted (buy term, live off the interest, and do a 15-year mortgage) benefit the financial institution more than the consumer. Some of these strategies may fit the consumer needs, but it depends. So we build a laboratory, put in all the inputs, and have the ends and goals as the destination and then run through the scenarios to ensure that occurs.

Two: Velocity (Movement of Money)
One of the core messages in the LEAP system deals with the velocity, or movement, of money. Financial institutions that are trying to make money with their money want to constantly tie up or lock down that money so that it doesn’t move. They do this so they can then make a profit with their money. In the LEAP system, it is the movement of money that creates wealth. Just like when money moves through the system, and the velocity of that money is measured. A recession such as the one we are now in occurs because money is not moving. Banks are not lending, and as a result, there is no velocity and everything recedes, or backs up. In our own personal economies, if we lock our money down, we make less money than if we keep it in motion. We use the model to demonstrate to our customers the best strategy for getting their money in motion. Often, the strategy can create more money than just the products that are used. Two safe products might have a better return than one or two risky products.

Three: Risk Transfer
The final premise of the LEAP system ties back into our wreck and that is transfer risk, whether investment risk, life insurance risk, disability risk, or risk of lawsuit or taxes. The key is to transfer risk as much as possible. Anything that is a drag on my total return must be minimized, not necessarily deferred. One of the concepts you see preached by a lot of people is defer, defer, defer. If I am deferring at a 15% tax bracket and eventually spending it when capitol gains tax rates go up at 28%, it probably wasn’t a good decision. The key is to look at the environment and minimize tax, just as you would minimize risk. The LEAP System has been a great tool to help us teach people these concepts via a financial simulator used on software or just from a pictorial standpoint on the model we use.

With the LEAP System, we are able to design strategies that transcend just products. The strategy, I think, is what really creates the ultimate wealth—sometimes more than the product. Dow Barr is a company that does studies on investments and investors. Investor performance is significantly below investment performance. Over most decades, investment performance has been 12–15%, and in that environment, investor performance has been between 2–4%, not even one-third of what the investments did. In our opinion, it is important that you have a strategy you can stick with to make sure you maximize the accumulation of wealth for your family so you can accomplish dreams and goals, educate kids, and retire and live on a beach if that is what you want to do. The LEAP System is one of the things from a conceptual standpoint that governs all the decisions we make at Dokus Financial Partners.