RPF0179-Friday_QA
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00:00:59.700 | Today we're going to do some Q&A and I've got four questions lined up.
00:01:04.800 | What and how and where should we keep our emergency funds?
00:01:12.500 | Would it make sense to take a bunch of money and put it down on a condo in Hollywood?
00:01:18.000 | Is a 529 a reasonable way of paying for my wife's education?
00:01:23.800 | And what would Joshua Sheets do if he were planning on moving abroad for two years?
00:01:46.000 | Welcome to the Radical Personal Finance podcast.
00:01:48.000 | My name is Joshua Sheets and I'm your host and today we do Q&A.
00:01:52.400 | It's actually not Friday as I record this and this is going out as Thursday's show.
00:01:56.400 | So we won't call it Friday Q&A, but who knows? Practically the same thing.
00:02:00.400 | All of our questions today come in from the Patreon page,
00:02:03.900 | individual patrons of the show that I pulled just this morning
00:02:06.900 | and they've all stepped forward and said, "Hey Joshua, answer my question."
00:02:17.900 | Been a busy day around the Sheets household and sitting down at 930 at night to record this show
00:02:22.900 | and just needed to – didn't have my outlines put together for any of the other topics that I'd like to bring you.
00:02:27.900 | So I'm doing the Q&A show and we'll see.
00:02:30.400 | I'm going to be out of the house all day tomorrow so there may not be a Friday show.
00:02:33.400 | So that's why we're doing Q&A today.
00:02:35.400 | So let's get into it and we're going to kick it off with Dustin's question.
00:02:39.400 | Again, this was this morning I put out for the patrons of the show and I said,
00:02:42.400 | "Hey, you guys are paying me money and I'm happy to answer any questions that you have.
00:02:47.400 | Go ahead and let me know."
00:02:48.900 | So here are four questions lined up that I'm going to answer and these all come in from the patrons of the show.
00:02:53.900 | By the way, if you are a patron of the show, thank you very much.
00:02:56.900 | And also by the way, if you've emailed me in the last three weeks,
00:02:59.900 | I'm sorry I haven't responded to emails in a few weeks. Soon I will.
00:03:03.900 | I just haven't been able to make the time to get that done.
00:03:05.900 | So let's get to it.
00:03:06.900 | Dustin asked me this question.
00:03:09.900 | He says, "Joshua, I'm currently in the financial stability stage of building wealth.
00:03:15.900 | Where do you recommend keeping an emergency fund and/or savings for large purchases?"
00:03:21.900 | So this one is fun and I have some thoughts on this that are probably a little bit unusual.
00:03:27.900 | But in my mind, cash should be strewn about in all kinds of places.
00:03:31.900 | That's basically how I think about it.
00:03:34.900 | So I recommend keeping an emergency fund in multiple places.
00:03:37.900 | And this is going to completely depend on the size of your emergency fund.
00:03:43.900 | A thousand dollars of an emergency fund is one thing.
00:03:47.900 | A hundred thousand dollars of an emergency fund is another thing.
00:03:50.900 | It's also going to depend on how likely you are to need it.
00:03:54.900 | So for example if – and you've really got to look at your own budget and think how is this going to happen.
00:04:00.900 | What am I actually likely to do?
00:04:02.900 | If you have a very stable job for example or maybe multiple jobs in the house,
00:04:07.900 | you're a couple and both spouses are working, that brings a level of stability.
00:04:12.900 | So you might be able to tuck your money aside in hopes of getting a little bit more interest
00:04:16.900 | where it's a little bit farther away.
00:04:19.900 | That might be very different than a business owner, somebody like me who I'm the sole breadwinner in my home.
00:04:25.900 | But I might have opportunities in which I might need larger amounts of cash.
00:04:30.900 | So as an example, I personally don't use any kind of strategy involving a laddered CD or a laddered bond type of strategy.
00:04:38.900 | Nothing wrong with that strategy but I don't use it because I need my cash to be more flexible and more available.
00:04:44.900 | As a business owner, that has a certain – there's a certain aspect to that.
00:04:50.900 | So I would say sit down and think about how big it is and think about what are the emergencies that you're likely to face.
00:04:57.900 | So in order how – I guess how I would approach this question, I would say start with cash on your –
00:05:04.900 | start by keeping your emergency fund with some cash on your person and close by like in your car depending on your vehicle situation.
00:05:13.900 | Keeping some available cash is something that is very – it's just not done very much in our modern world.
00:05:20.900 | Many people, especially those of us who are younger and we're more custom just – we basically always use a card for everything.
00:05:27.900 | We don't really keep cash but I think it's a very intelligent idea to always keep whatever is an appropriate amount of money on your person.
00:05:36.900 | I don't have any interest in talking about what I do or the cash I keep and where I keep it.
00:05:43.900 | But for you, you might consider keeping a few hundred bucks in your wallet.
00:05:47.900 | You might consider keeping a thousand bucks on you, whatever your comfort level is, at least 20 bucks.
00:05:53.900 | Now, there's little – keep a spare hundred here or there. Tuck it away.
00:05:58.900 | I don't want to be flippant with numbers but if you're in a financial stability stage,
00:06:02.900 | then you probably have – you're going to have at least a few thousand dollars tucked aside.
00:06:07.900 | So I would – there are all kinds of interesting ways that you can do this.
00:06:11.900 | You can get some little things I've seen online.
00:06:14.900 | You can buy something like a pill bottle and they have these little keychain attachments that are made for pills.
00:06:20.900 | And they're very, very small and they go on your key ring and you can fold up a hundred-dollar bill and stick a hundred-dollar bill in there.
00:06:27.900 | That way, you've got a hundred bucks accessible.
00:06:29.900 | That way, if – what was it a few years ago? There was a blackout in New York City.
00:06:33.900 | I remember hearing and watching on the news.
00:06:36.900 | Well, if you had some cash and you could go ahead and in that kind of situation, the cards aren't working.
00:06:42.900 | And so you need some cash to be able to get yourself in and out of that – in and out of the city or get yourself home, pay for a taxi ride unexpectedly.
00:06:48.900 | You're out – think about this from a financial planning standpoint.
00:06:51.900 | You're out late at night. You've had a few too many drinks.
00:06:54.900 | It's not safe to drive. You need to take a taxi but you don't have the cash or you don't have the ability to pay somebody to give you a ride.
00:07:02.900 | Well, if you make the foolish decision to drive inebriated, that's going to cost you a lot more.
00:07:09.900 | It's an emergency. You need some cash is my point.
00:07:12.900 | So keep some – keep a few hundred bucks. Keep a thousand bucks on you.
00:07:15.900 | It's not that hard to secret some money around your person in an easy way that you'll always have it depending on what your lifestyle is like.
00:07:23.900 | You might tuck some in your briefcase, something like that.
00:07:25.900 | Obviously, you need to be careful of theft.
00:07:28.900 | If you're in a situation where it's – there's a high likelihood that you might be robbed or you might be pickpocketed, plan accordingly and take different precautions.
00:07:38.900 | Next, I would say keep some cash in your house or very close by.
00:07:42.900 | Keep some cash – and I'm talking actual cash.
00:07:46.900 | You can't beat having your hands able to get on – being able to get your hands on actual physical $20 bills in a very quick circumstance.
00:07:56.900 | And as you mentioned in your question, both you said emergency fund and/or savings for large purchases.
00:08:01.900 | So the ability to say, hey, it's Saturday afternoon.
00:08:05.900 | The banks are closed.
00:08:07.900 | But here's a really great deal on a car that my neighbor is selling.
00:08:11.900 | And the neighbor just needs to come up with money all of a sudden to be able to walk to your house or go to some secure place that you have and keep – be able to get your hands on $6,000 or $8,000 might be really useful to you.
00:08:28.900 | So look through – look at your situation and consider, do I have the ability and do I have a way to carefully store some cash?
00:08:37.900 | Put the money in your gun safe if you need to hide it.
00:08:40.900 | Again, be careful of your circumstances.
00:08:43.900 | Don't advertise the fact that it's there, but keep it on hand.
00:08:49.900 | This used to be a harder – this used to be a harder decision when you would actually get paid some interest at the bank.
00:08:56.900 | But I see almost no reason to have major amounts of savings in a bank account at this point with these low interest.
00:09:03.900 | The only reason is from a sheer practicality standpoint, me, I wouldn't – I'm not sure that I'd be comfortable with $50,000 and $100 bills in my house.
00:09:12.900 | That would be too much of a risk.
00:09:13.900 | I'd rather have – as far as risk of fire, risk of theft, that type of thing.
00:09:17.900 | So that would push me over the risk meter.
00:09:20.900 | But a few thousand bucks, to me, that would be an intelligent way of planning.
00:09:26.900 | And if you have the means and if you have the ability to protect it properly, again, a good, strong safe, something like that, you never know when you might need to get your hands on the money and get yourself a deal.
00:09:40.900 | I have a friend who routinely is buying and selling vehicles and boats, and he keeps tens of thousands of dollars just sitting in a safe in his house so that he says, hey, there's a ski boat over there that the guy is selling.
00:09:53.900 | Listen, you're going to find a better deal if you wait, but if you want money right now, I'll give it to you.
00:09:59.900 | And he'll buy something.
00:10:01.900 | He'll use it for a while.
00:10:03.900 | Then he'll turn around and sell it because he got it at such a deal.
00:10:05.900 | Then he winds up with a zero cost of ownership, sells it for more than he bought it for.
00:10:11.900 | That can be a very useful approach.
00:10:14.900 | Next I would say keep cash that you need – keep some amount of cash very liquid.
00:10:21.900 | So in a savings account or money market account, my preference here – this is something I make use of – is money that can be quickly and hopefully instantaneously moved into your checking account right from your phone, right through the app with your bank.
00:10:37.900 | So for example, I have – in my personal cash management strategy, I have prepared that all of – that my accounts are linked right on my phone.
00:10:47.900 | And I have prepared in advance with my bank – it just takes a phone call.
00:10:51.900 | You can probably do it with yours – that I have a very high withdrawal limit on my ATM fees.
00:10:59.900 | So most ATMs will shut you down and if you have – and your bank most of the time will shut you down.
00:11:04.900 | They'll limit you to being able to withdraw $500 from your checking account on a daily basis, something like that.
00:11:11.900 | Well, if you call your bank, you may be able to get that a little bit higher.
00:11:14.900 | You may be able to withdraw $6,000, so I could withdraw $6,000 from the ATMs without being shut down by my bank.
00:11:20.900 | That's very, very useful.
00:11:21.900 | Now, I still have to deal with the ATM withdrawal strategies, but I used this the other day when I had a – it was a few months ago.
00:11:34.900 | I had about a $2,500 repair on my car and I asked the mechanic.
00:11:39.900 | "Listen, can I get a discount if I pay you with cash?"
00:11:42.900 | He gave me a nice discount for paying with cash.
00:11:45.900 | So I went to a couple of ATMs and instead of what usually happens where you stick your ATM card in and you need to pull out the money and it goes ahead and locks it up.
00:11:55.900 | Then I just went ahead and was able to run the transaction multiple times on the same ATM and get the money out of the bank.
00:12:01.900 | So I don't keep much money in my checking account, but I keep the money in an account that's linked and so I can immediately transfer it in.
00:12:08.900 | Then with the high amount on my withdrawal limit that I'm quickly able to withdraw money from the ATM.
00:12:15.900 | So consider that.
00:12:17.900 | Now, you have to think through how much is going to be reasonable in your situation.
00:12:24.900 | You got to think through how much money do I actually need in savings and what is the type of emergencies that I'm actually concerned about.
00:12:32.900 | So in general, I can't see much of a reason unless you're saying – and maybe for you, "OK.
00:12:39.900 | I'm going to keep 10 grand in my gun safe.
00:12:41.900 | I'm going to keep 10 grand in a savings account."
00:12:44.900 | That's probably for most people more than – that's probably about all the money they're going to need for an emergency or for an opportunity unless you're dealing in much bigger numbers.
00:12:52.900 | From there, I think of emergency funds as either big opportunities and I'm going to have a few days or I'm going to do – I'm going to be prepared for a plan of, "OK.
00:13:07.900 | I lost my job and now I'm eight months into not having a job."
00:13:10.900 | For me, where I like to keep my larger emergency fund is within my whole life insurance policies.
00:13:19.900 | For me, this is the best of both worlds because I have the money tucked aside.
00:13:24.900 | It's – there's – it's guaranteed – the way whole life insurance policies work, minor traditional whole life insurance policies, the money is guaranteed to go up.
00:13:33.900 | It doesn't ever decline in value.
00:13:35.900 | I need the insurance anyway and I value having the insurance and I get a much higher rate of return on the money than I get with any kind of bank arrangement, especially in today's low interest rates.
00:13:50.900 | So I get a much higher interest rate.
00:13:52.900 | I am using it as the context of I need the life insurance anyway.
00:13:56.900 | Then I can go ahead and with one phone call to the insurance company – it has to be business hours, so I've got limitations.
00:14:02.900 | So I wouldn't – I don't – this is not the kind of everyday funds.
00:14:05.900 | But for major funds, I can just go ahead and make a phone call and in 24 hours, I can have the money wired into my account or I can have a FedEx – a check FedExed and do a policy loan and have access to the money.
00:14:17.900 | And I have enough in the values to where I can keep the policy sustained.
00:14:22.900 | If I ever have to cash the policy out and stop the payments, I could do that as well.
00:14:27.900 | So this makes a lot more sense to me as a place to keep my kind of liquid cash that I'm not willing to subject it to the potential of the stock market where there might be a 30 percent decline over a period of a week or something.
00:14:41.900 | I'm not prepared to subject it to the vagaries of the bond market.
00:14:44.900 | And so for me, my life insurance policy is a good place for it.
00:14:48.900 | I also like the fact that this moves – gives me an additional layer of asset protection where instead of keeping a lot of money in – let's say that – pretend that I'm – I'm saying, okay, I want to keep $50,000 or $100,000 of cash on hand all the time.
00:15:05.900 | Well, if I keep $50,000 or $100,000 in a checking account or a savings account or a money market account, I don't have any kind of asset protection plan on that.
00:15:15.900 | But if I keep that money and this is just purely emergency fund, this is not for a planned purchase, but if I – and so I keep that money in the context of a life insurance policy.
00:15:23.900 | Well, now I'm in a situation where I'm protected from – the money is protected from the claims of creditors.
00:15:29.900 | So that's a very useful aspect of planning.
00:15:32.900 | Notice that I'm doing this so that I can keep other money invested in the market.
00:15:40.900 | But for me, that's a large amount – that's where I would keep a large amount of money that is specifically intended for savings, specifically intended for rainy day, that type of approach.
00:15:53.900 | So I can't give any sound numbers but that would be how I would approach it, keep proximity.
00:15:59.900 | The idea is if you – the best and most – the best place to keep money is very close to you.
00:16:05.900 | But then you also get the lowest interest rate and it's also subjected to other risks.
00:16:10.900 | The worst place to keep money is far away from you but you're more likely to get higher interest rates and you're protected from some other risks.
00:16:18.900 | If you keep 500 bucks on your person, it's very possible you might just lose your wallet.
00:16:22.900 | So I wouldn't want to keep too much but it's useful to have 500 bucks on your person.
00:16:27.900 | So start with figuring out how much money do I want to – how much cash do I want to keep on me or in some nearby location.
00:16:35.900 | How much cash do I want to keep in my house and how do I make sure that I protect that?
00:16:39.900 | How much cash do I want to keep in savings accounts and money markets that are immediately linked to my checking account?
00:16:45.900 | What would make sense in my context depending on how much money I want to keep just liquid and then where would make sense for my other aspects?
00:16:54.900 | If you're trying to keep hundreds of thousands of dollars, you're going to open up an account with treasury.gov.
00:17:00.900 | You're just going to open up and buy T-bills.
00:17:02.900 | Depending on the scale, you give me a million bucks.
00:17:08.900 | It's not treasury.gov.
00:17:10.900 | Treasurydirect.gov.
00:17:11.900 | I tried down to treasurydirect.gov and buy T-bills.
00:17:14.900 | That's where you're going to keep that amount of money.
00:17:17.900 | I guess the only other thing I didn't talk about would be if you're trying to do some kind of international currency thing.
00:17:24.900 | If you're trying to figure out, well, where do I keep my emergency fund in case of a collapse of the US dollar and we get into a situation of hyperinflation, how do I make sure – what do I do there?
00:17:37.900 | Well, in that situation, now you got to think about I'm going to open up a safety deposit box in another country.
00:17:41.900 | Maybe I'm going to do that in Canada and then I'm going to put various foreign currencies in there.
00:17:46.900 | It all depends on what you're planning for.
00:17:48.900 | So that's – the first part of that is my just kind of normal, everyday US-American approach, not trying to figure out how to set up a secret bank account in the Cayman Islands.
00:17:58.900 | That's a different show.
00:18:00.900 | So hopefully that helps, Dustin.
00:18:02.900 | But good for you, man, for being in that financial stability stage.
00:18:05.900 | That's exciting.
00:18:07.900 | Just looked at my time stamp here.
00:18:09.900 | I'm the only financial broadcaster who can take 15 minutes to answer a question on where do I keep my emergency fund.
00:18:16.900 | Jacob asked this question.
00:18:17.900 | "Joshua, my only major financial goal is to buy a small condo in Hollywood in about six to seven years.
00:18:23.900 | I am 33 years old, single, and I don't plan on starting a family.
00:18:27.900 | I have about $170,000 in investments and retirement savings and I'm on track to have an additional $80,000 or $90,000 saved for the condo in about six years.
00:18:35.900 | I want to make a 50% down payment on a $200,000 condo," so basically a $100,000 down payment.
00:18:41.900 | "My dream is to have a super low monthly mortgage payment, around $500 to $600 per month.
00:18:46.900 | That would be very freeing for me.
00:18:48.900 | I want the flexibility in life and career that low monthly expenses would give me.
00:18:53.900 | Am I crazy to make such a big down payment?
00:18:56.900 | I know it's almost half of my net worth, but it feels right for my lifestyle choices.
00:19:00.900 | I'm tired of being stuck in the super high, trendy city apartment renting hamster wheel.
00:19:04.900 | Thanks."
00:19:05.900 | Jacob, it's a good question.
00:19:07.900 | So a couple of ways I would answer it, as usual.
00:19:13.900 | Here's how I would think through the question though.
00:19:15.900 | I don't much see the point of the plan that you are presenting.
00:19:19.900 | You're going to buy a $200,000 condo and you're going to put a 50% down payment on it.
00:19:23.900 | I could understand putting a 20% down payment to avoid private mortgage insurance.
00:19:29.900 | That would be the kind of thing where there's a cost savings component to that.
00:19:33.900 | I could also understand putting a 20% down payment down to if you need that to get good financing terms.
00:19:39.900 | That would make sense.
00:19:41.900 | I could also understand making a 100% down payment as in paying for it debt-free.
00:19:46.900 | So if you said, "I've got $100,000 and I want to go ahead and buy a $100,000 condo," that would make sense to me.
00:19:53.900 | But I don't see the point of making a 50% down payment and here's why.
00:19:57.900 | What benefit do you get from that?
00:20:02.900 | What benefit do you get from giving up control of all of your money and going from having all kinds of money that's liquid and that's available to you that you can do things with and then having that all locked up in real estate?
00:20:16.900 | Here's the key, and I know it doesn't sound to me like you're thinking of your condo as an investment.
00:20:23.900 | But there are a couple of things that most people don't often think about with regard to real estate.
00:20:27.900 | The size of your mortgage payment has no bearing whatsoever on the value of your property.
00:20:36.900 | So just because you have $100,000 down and you owe a $100,000 mortgage, that's not going to change the value of your property.
00:20:45.900 | So you could have a $200,000 mortgage and if your condo appreciates in value, then you could – your condo appreciates in value, then you could be in a situation where you're going to get much more money available to you.
00:20:58.900 | So there's no connection there between investment and the amount of your mortgage.
00:21:02.900 | The second thing I would point out is you're taking a large amount of money that could be invested for income and you're spending it on a luxury lifestyle choice.
00:21:18.900 | Now, obviously, you can spend it on a luxury lifestyle choice, but you should be getting something for it.
00:21:25.900 | So consider that very seriously. If you had – you can do this in two ways.
00:21:32.900 | You can either go ahead and buy the condo and put your $100,000 down on it or you can buy a $100,000 condo that you rent to somebody else, then take the rental payments from that and buy your $200,000 condo and have half of your rental payments – your mortgage payments covered by the rental payments from somebody else.
00:21:51.900 | So think like an investor first. I would rather – before I would put all that money down, think – go back and listen to the episode that I did with Jon Schaub.
00:21:59.900 | That was episode 119 and you'll hear him say that he was taking time in his early career.
00:22:06.900 | He rented a house for years while he was building up his investment portfolio.
00:22:12.900 | So establish your investment portfolio first, however you plan to do that, and then establish and go ahead and secure your housing.
00:22:20.900 | If you are single, you're not in a situation where you have any – you're not in a situation like I am for example where there's a lifestyle choice for my wife and for my family that I choose to prioritize over what might be perhaps the optimal financial choice.
00:22:39.900 | So consider that you're taking money that could be invested and you're spending it instead of investing it.
00:22:48.900 | Now, you might get a little bit of return back from it someday, but you're still spending it instead of investing it.
00:22:55.900 | The other thing that I just want to point out is with regard to flexibility.
00:23:00.900 | You can have flexibility either way.
00:23:02.900 | So you specifically said, "I want the flexibility in life and career that low monthly expenses would give me. Am I crazy to make such a big down payment?"
00:23:10.900 | So if I were going to pursue your strategy, I wouldn't put the $100,000 down.
00:23:15.900 | I'd keep the $100,000 in a bank, and we'll get to the cost of interest on a mortgage in just a moment.
00:23:20.900 | But here specifically is what I mean.
00:23:22.900 | Let's say that you've got $100,000.
00:23:24.900 | Well, if we were to run the financing – let's run a quick amortization schedule here.
00:23:29.900 | So $100,000, put that in as our present value, turn it negative, 30, change the function, N.
00:23:35.900 | So we have a period of 360.
00:23:37.900 | Let's just say you could get a mortgage at 5%.
00:23:40.900 | So let's see what the 5% paid monthly.
00:23:44.900 | Let's put in – okay.
00:23:46.900 | So our payment for a 30-year fixed-rate mortgage would be $534 at 5% for $100,000 of financing.
00:23:53.900 | So if you financed $100,000 at 5%, you're going to have a $534 mortgage payment.
00:24:01.900 | Now let's say you keep $100 in the bank – excuse me, $100,000 in the bank.
00:24:06.900 | I'm getting my tongue mixed up here.
00:24:08.900 | So let's divide $100,000 by 534.
00:24:12.900 | Let's see how many months of savings and mortgage payments that would be.
00:24:17.900 | That's 187 months of mortgage payment divided by 12 to get years.
00:24:22.900 | You're at 15.61 years.
00:24:25.900 | So if you keep the money in the bank, if you keep $100,000 in the bank, you have 15 years of flexibility,
00:24:35.900 | even if you have a higher mortgage payment.
00:24:39.900 | So in my mind, cash and money gives you flexibility.
00:24:44.900 | If you're not comfortable investing that money, that's fine.
00:24:47.900 | You could just simply put it into a bank.
00:24:50.900 | But cash and money gives you flexibility.
00:24:53.900 | Now you have to look at the actual numbers involved in your situation.
00:24:57.900 | I think you said Hollywood, California.
00:25:00.900 | Okay, it's by a small condo in Hollywood.
00:25:02.900 | So Hollywood, California, not Hollywood, Florida.
00:25:05.900 | Who knows?
00:25:06.900 | There's Hollywood, Florida near me in down in Fort Lauderdale.
00:25:08.900 | So you need to clearly understand why you're trying to do a deal.
00:25:15.900 | Are you trying to do a deal because you're tired of renting and you want to move into a place where you own?
00:25:22.900 | That's a perfectly valid approach.
00:25:24.900 | Well, in that case, you can do it.
00:25:26.900 | You don't have to wait for the $100,000.
00:25:28.900 | Whatever the down payment is in your situation.
00:25:32.900 | What are the actual cost of renting versus the cost of owning?
00:25:35.900 | Soon I'll do an entire show on that.
00:25:37.900 | I won't go into it now.
00:25:38.900 | But sit down and understand what are my actual costs of renting and what are my actual costs of owning.
00:25:42.900 | One of the biggest things that people often fail to realize is that mortgage component is only one component of actually owning a property.
00:25:50.900 | And so run the actual numbers and figure out all of the components of owning the property.
00:25:56.900 | Next, look at what the actual financing terms are.
00:25:59.900 | In the United States, we have such – the National Association of Realtors has done a tremendous job and will do a tremendous job.
00:26:07.900 | I see zero chance at the moment politically of them not sticking to their guns and buying off the politicians to keep the mortgage deal.
00:26:15.900 | It's basically the sweetest deal that exists.
00:26:18.900 | And so especially the mortgage on a primary residence, especially if you are steadily and gainfully employed.
00:26:24.900 | I mean you can finance – you can go out and finance money and get money for a house at a few percent interest rate, at three or four or five percent interest rate.
00:26:34.900 | That is astounding.
00:26:35.900 | If we were in a different country or at a different period in the business cycle where you're looking at a 15 percent interest rate, now you've got a very different analysis.
00:26:45.900 | But in today's world, mortgage money is the cheapest money that's out there.
00:26:50.900 | So you might be able to take advantage of that and it might work really, really well when you put that into a comparison.
00:26:59.900 | Again, if it were me and I were in your shoes, I would probably use the money and I'd keep it liquid.
00:27:07.900 | If I were going to do this – and so just so you know, in case you haven't heard my story, I did – I didn't put 50 percent down.
00:27:16.900 | I put 20 percent down on a house and the house that I live in now, which was a very large – it was about a $50,000 down payment.
00:27:24.900 | And when I put a $50,000 down payment down on this house, one of the things that – I did it under a certain set of circumstances.
00:27:33.900 | Thinking that I was going to be very stable, that I knew exactly what was going to happen, I had – the house that I own is four-tenths of a mile from my financial planning practice.
00:27:43.900 | I was walking to work every day.
00:27:45.900 | It was a house – it is a house that I could see my family happy in for the next 50 years.
00:27:51.900 | There's – I don't really see any reason why we would necessarily want to move.
00:27:55.900 | But the mistake that I made was that I wiped out most of my liquid savings and then less than a year later, all of a sudden, I decided to start radical personal finance.
00:28:06.900 | Trust me. I work very hard now with way too much money tied up in house equity that it would have felt a lot better to have the money sitting in a savings account.
00:28:18.900 | Once your money is locked up in house equity, it's very difficult to get out because you either have to sell the house or you have to finance it out with a home equity line of credit.
00:28:27.900 | And that's a valid strategy, but it is difficult.
00:28:31.900 | If I were going to do what you're doing, I wouldn't put it as a down payment.
00:28:34.900 | I would go ahead and finance the property because I don't see the point of getting to $100,000 mortgage.
00:28:38.900 | I'd rather keep the money in the bank.
00:28:40.900 | That would keep my flexibility.
00:28:42.900 | I would do 20 percent down and I'm using that as a proxy for whatever numbers you need to put down to get good financing terms.
00:28:48.900 | I would finance 80 percent of it.
00:28:50.900 | I'd keep all the money in the bank.
00:28:52.900 | And then once I got to the point where I could just write a check and clear off 100 percent of it as in have a payment of zero, that's when I would make the difference and I would go ahead and go to 100 percent.
00:29:03.900 | If you want flexibility, there are two ways to keep your flexibility.
00:29:06.900 | Either have a lot of money in the bank or have a mortgage balance of zero.
00:29:12.900 | But just having a mortgage payment that's $534 less, assuming you can comfortably afford that under normal circumstances, you're working, you're employed, et cetera, I don't see the benefit of it.
00:29:24.900 | To me, I'd rather have a $1,000 mortgage payment.
00:29:27.900 | I'd rather have a $1,068 a month mortgage payment and $60,000 sitting in the bank or have a $0 mortgage payment and less money sitting in the bank.
00:29:42.900 | Those are my thoughts.
00:29:44.900 | I hope that was clear.
00:29:46.900 | I guess I've just come to value flexibility and life choice more than just about anything.
00:29:50.900 | I don't much see the point in having just that massive amount of your net worth tied up.
00:30:00.900 | I'd be scared silly to have that much of my net worth tied up in a piece of real estate in a volatile real estate market that's highly priced.
00:30:09.900 | I wouldn't want – it's not good asset allocation.
00:30:12.900 | It's not good asset allocation to have a $200,000 condo when you've only got – well, you have $170,000 in retirement and investments.
00:30:21.900 | Still a lot of money.
00:30:24.900 | Choice I would make, I would finance the property, loan the most, keep my money invested elsewhere until I could just pay off the property.
00:30:33.900 | By the way, if you're tired of being stuck in a super high-trendy city apartment running hamster wheel, just move.
00:30:39.900 | Anyway, I hope that helps.
00:30:40.900 | If anybody sees a flaw in my logic, let me know.
00:30:44.900 | I repeated myself a little bit too much on that.
00:30:46.900 | Let's go on to a question from Bradley.
00:30:50.900 | Question, "Joshua, I have a 529 for my oldest son.
00:30:53.900 | I'm planning on transferring that to my wife as she will be going back to school in August of 2016.
00:31:00.900 | She's a teacher.
00:31:02.900 | Once she graduates with a specialist degree, she will receive an automatic $5,000 annual pay raise.
00:31:08.900 | We estimate the program will cost $15,000 and can be completed in 18 to 24 months.
00:31:15.900 | The 529 plan is currently invested very aggressively based on our oldest son's age of 6.
00:31:21.900 | I am planning on immediately changing the investment to the guaranteed option of 1 to 1.25%.
00:31:27.900 | Am I missing any other investment options?
00:31:29.900 | We use George's 529 plan, which is a Tia Cref based.
00:31:32.900 | It seems an easy choice to me.
00:31:34.900 | What else am I missing?
00:31:35.900 | Any other thoughts?
00:31:36.900 | The current value is $12,700 and we contribute $600 per year.
00:31:40.900 | If we're short during the last semester or two, we plan on paying with excess cash flow we hope to save up by then.
00:31:46.900 | Thanks, Brad."
00:31:47.900 | So, Brad, the question is a good one.
00:31:50.900 | It's going to depend on how much money you have and where it is.
00:31:54.900 | For the sake of my answer, I'm going to assume that the primary funds that you have available for her education,
00:32:00.900 | for this return of investment basically, is in the 529 plan.
00:32:06.900 | Because my hint on that is that you said if we're short during the last semester or two,
00:32:11.900 | we plan on paying with excess cash flow that we hope to save up by then.
00:32:15.900 | So you've been diligent saving for your son, but now you see a better use of the money as far as this investment consideration.
00:32:23.900 | That, okay, if I pay $15,000 and she gets an automatic $5,000 annual pay raise, that's a pretty quick return on investment.
00:32:31.900 | I'm also going to answer the question from a primarily financial perspective.
00:32:36.900 | As far as the quality of the interest of the education and all that, that's up to you guys.
00:32:42.900 | So a couple points I would make is first, make sure that you've done your research as far as the educational options
00:32:50.900 | and make sure that you have fully investigated all of the different places and ways – places she could go for school
00:32:58.900 | and ways that she could earn this degree in order to satisfy the requirements just simply needed to get the raise.
00:33:08.900 | Research your school's requirements very carefully.
00:33:12.900 | Is it just that she needs a – does she need a specialist degree of a certain accreditation?
00:33:18.900 | Is there a long-distance degree that will offer that differently?
00:33:23.900 | Does it need to be in a specific field to get the highest return?
00:33:28.900 | Is there an option where she's – if she gets a specialist degree in this certain specialty,
00:33:34.900 | that there's a potential for a higher rate of pay increase than another?
00:33:38.900 | Just do all your homework because what would be even better than spending $15,000 to get the $5,000 annual raise
00:33:45.900 | would be to spend $5,000 and get a $5,000 annual raise.
00:33:50.900 | Very few people fully investigate all of their options.
00:33:54.900 | Just one example – just as an example, the best deal that I know of for a master's degree from an accredited university
00:34:04.900 | is a school called New Charter University.
00:34:08.900 | So I'll put a link in the show notes, but it's NEW.edu is their website.
00:34:14.900 | They only offer business classes, but they're an accredited university and they offer a master's degree –
00:34:19.900 | they offer master's degree programs in business.
00:34:21.900 | So if I click here and I say I want to pursue – let's say that your wife wants to pursue an MBA in management.
00:34:29.900 | She's not transferring in any courses, which that will save money if possible,
00:34:33.900 | and she's going to complete it in three courses per 16-week term.
00:34:37.900 | So it's going to take 12 courses to complete.
00:34:39.900 | It's going to take her a total of 16 months.
00:34:41.900 | It's all distance study.
00:34:43.900 | The total cost is going to be $5,264.
00:34:47.900 | So if her requirement is simply for a master's degree, then she could take this master's degree for $5,264
00:34:57.900 | and get the $5,000 per year increase and you guys could save the $10,000.
00:35:04.900 | Now, she might hate studying business.
00:35:07.900 | So if she hates studying business – I have a sister who has a master's degree and she's a teacher.
00:35:12.900 | And she has a master's degree in I think teaching reading or something like that.
00:35:18.900 | So obviously if your wife is a teacher, she's going to much more enjoy studying something that's related to her field of expertise.
00:35:28.900 | But is she going to enjoy it $10,000 more?
00:35:31.900 | That's a question you can answer.
00:35:33.900 | So understand that.
00:35:36.900 | My thought on college, unless they're paying you to go to school there, you're probably not there for the education.
00:35:41.900 | You're there to get the degree.
00:35:43.900 | You do your educating – the best education is going to be a self-education, just simply becoming an expert in your field and that's mandatory.
00:35:51.900 | But just get whatever degrees you need as quickly as possible to make more money.
00:35:57.900 | Next thing to consider is make sure she fully investigates all of the options for scholarships, grants, things like that.
00:36:05.900 | Research deeply and find are there teaching grants that people can get
00:36:10.900 | or is there various scholarship options that few people are applying for.
00:36:14.900 | Getting scholarships just simply takes focus at the undergraduate level.
00:36:19.900 | I don't know what the graduate level is, but it just takes some focus of sitting down and actually filling out applications.
00:36:26.900 | You fill out enough of them and you can make a lot of money on scholarships.
00:36:29.900 | Regarding the 529 portfolio reallocation, yes.
00:36:33.900 | If there's any chance that she's going to use the money, then you should immediately reallocate the portfolio.
00:36:40.900 | The market right now is certainly healthy at a healthy level.
00:36:44.900 | Who knows if it goes higher or lower, but for your purposes, as soon as you know there's a potential expense,
00:36:50.900 | then you definitely need to change your allocation even if you wind up using other funds or doing something different with the money.
00:36:58.900 | The only thought I have as far as using the 529 money, run the numbers on it as far as what you're saving.
00:37:05.900 | Look at your basis in the account and see if you have major tax savings there.
00:37:10.900 | For example, if you have $13,000 in the account and you contributed $12,500,
00:37:21.900 | just recognize maybe it didn't really save you that much in tax.
00:37:24.900 | You can look at your state deduction and figure out in Georgia you have a $2,000 deduction per beneficiary.
00:37:31.900 | So figure out if you're using that amount and you might be just funneling the money through there.
00:37:38.900 | The only other just idea that occurred to me in thinking about answering the question is your wife should be eligible for the job-related education credit.
00:37:50.900 | Now, this is a credit where if you are going back to school and paying for education that's related to your current line of work,
00:37:59.900 | then you may be able to deduct your expenses, the expenses that are associated with it.
00:38:04.900 | Now, this is an itemized deduction and it is limited to – you can only take it if it exceeds 2% of your adjusted gross income.
00:38:13.900 | So that's why this is not really useful because often people simply don't have that much – they simply don't have it where –
00:38:21.900 | they don't have enough expenses to exceed the 2% limitation.
00:38:28.900 | But in her case, because this is specifically education that is intended to advance her career and this would be –
00:38:39.900 | if you decide to go with the teaching thing, I'd have to do a little research and thinking if you get a master's degree in finance.
00:38:45.900 | It's not related to teaching, but who knows? Maybe you can justify it.
00:38:48.900 | Then what you could do is you could deduct all of the expenses. That would include the tuition.
00:38:52.900 | It would also include books and supplies. It would also include her local transportation expenses.
00:39:00.900 | So for example, she should track her mileage going to class if she's taking classes locally and she can deduct her mileage at – what is it?
00:39:09.900 | It's 56 cents a mile in 2014. I don't know what the 2015 number is.
00:39:13.900 | She can deduct any parking fees, any tolls.
00:39:16.900 | She can also deduct any kind of lodging or meals or transportation that is required for her for any away-from-home expenses.
00:39:27.900 | The meals deduction of course is limited to the 50% of the cost as it always is.
00:39:33.900 | But this might help and if you are able to do this, one of the things you would want to consider to do is try to put as much of your expenses into a single tax year as you can.
00:39:47.900 | So here's what I mean.
00:39:49.900 | If your – let's say your household adjusted gross income is $50,000.
00:39:54.900 | Well, 2% of $50,000 is $1,000.
00:39:58.900 | So you lose the first $1,000 worth of deductions every single tax year because this is an itemized deduction subject to the 2% of AGI limit.
00:40:09.900 | If you stretch this out over three years, then you lose $3,000 worth of potential deductions.
00:40:20.900 | If you can bring it together and compress it into – if you could compress it into a year, then you only lose $1,000 deductions and you have an additional $2,000 that you can deduct.
00:40:32.900 | Now, frankly again, this is simply an itemized deduction.
00:40:35.900 | And so is it actually going to be useful for you?
00:40:38.900 | Maybe it's still – you don't have enough other itemized deductions where it's going to exceed the standard deduction.
00:40:43.900 | But it's a point of teaching for the audience.
00:40:47.900 | Think about it.
00:40:48.900 | This will qualify as job-related expenses.
00:40:51.900 | And also just think about whenever you have that compressing those deductions into one year.
00:40:56.900 | So make one tuition payment late and another tuition payment early and kind of into the same tax year if you can.
00:41:04.900 | Hope that helps.
00:41:05.900 | All right.
00:41:06.900 | Last question comes from Jim.
00:41:07.900 | He says, "If you were at a financial stability stage, 3.5, in the United States, debt is eliminated and about 50 percent of basic items are addressed, and you were planning on moving overseas for two years and you're leaving in two years, what steps would you take to secure your financial future?"
00:41:27.900 | I love this question because who knows?
00:41:30.900 | I might move overseas in two years.
00:41:32.900 | You never know.
00:41:33.900 | So, Jim, first thing that comes to mind is I would try when I'm gone to be completely unencumbered from the US in order to maximize my experience.
00:41:46.900 | Depending on your family situation and your personal situation, if it were me, though, I would try to sell everything I owned, get rid of just about every physical, tangible object that I owned with the exception of very important personal mementos, digitize as many pictures as I could, though, and use it as an excuse to pare down and start over.
00:42:08.900 | And my purpose here would be so that I could fully enjoy and embrace my two years away because who knows what happens.
00:42:15.900 | I might be away for two years and I might love it.
00:42:17.900 | I might want to stay for more.
00:42:18.900 | But I'd hate to own a house in the US and all kinds of stuff in the US that I'm worried about and I've got to deal with renters from abroad and things like that.
00:42:27.900 | So, if it made financial sense for me, if the market – the housing market is strong, if I didn't need – depending on what all of your goals are – and again, you didn't give me all the details.
00:42:39.900 | But just for me, I would try to be completely unencumbered.
00:42:42.900 | I would try to not have any physical presency in the United States as much as possible because that, I think, would allow me to fully embrace and enjoy my trip and my time abroad.
00:42:53.900 | And I think that anytime there's a point of transition, anytime you change jobs or you get fired or you move, that should be a point of reassessing and kind of optimizing, re-optimizing everything.
00:43:10.900 | Now, you might have a lot of sunk costs and so maybe you might not want to re-optimize everything.
00:43:16.900 | But for me, it's like are we really living where we want to live?
00:43:19.900 | Is this the house that we want to own?
00:43:21.900 | Even if it's the right town, is this a town?
00:43:22.900 | Is this a state?
00:43:23.900 | Is this the country?
00:43:24.900 | And so having an opportunity to be away and travel for a couple years and come back and start afresh can be just an incredible – almost a rebirth time in your life.
00:43:34.900 | But some specific financial thoughts.
00:43:37.900 | I would – so one that most people don't think about is I would focus today on getting all of my insurance squared away, especially my life insurance and disability insurance.
00:43:51.900 | And the big one that most people don't think about is disability insurance.
00:43:54.900 | Let me explain what I mean.
00:43:56.900 | This is probably unique to my background that I look for these little things.
00:44:01.900 | When you go to apply for life insurance and disability insurance and you make an application, you need to be able to answer a number of questions.
00:44:09.900 | And some of these questions – well, on both of them for all companies is do you have plans to travel or move abroad within a certain period of time?
00:44:22.900 | Usually, it's two years.
00:44:23.900 | It depends on the company and it depends on what their actual application asks.
00:44:27.900 | Now, there's a little bit of an ethical question here where you say, "Well, what do you mean plans?"
00:44:34.900 | Because, for example, if I answer that right now, I don't have any plans to travel abroad in the next two years.
00:44:40.900 | But that's not to say that six months from now I might not decide to get on a cruise ship and go abroad.
00:44:50.900 | I might not decide to go ahead and book a trip.
00:44:52.900 | So I can answer that question truthfully no, and then there's nothing that's flagged.
00:44:56.900 | Now, the key here is with disability insurance.
00:45:00.900 | If you own personal disability income insurance, depending on where you're moving – if this is just we're going to go travel Europe for two years, it may not be a big deal.
00:45:08.900 | But the story from my life is – or from my past is I had a client that I had written a disability insurance policy for them.
00:45:17.900 | And this client was in the medical field.
00:45:19.900 | And they knew that they might want to go abroad at some point in the future and work as a missionary in Africa.
00:45:26.900 | Well, because I was able to get their insurance squared away for them before they had any inkling of going abroad on the trip – this is for one of the members of the couple that was moving abroad – then when they went to Africa, all their insurance is still in force.
00:45:41.900 | And their disability insurance, when you have an individual disability insurance policy, it covers them no matter what, no matter where they are.
00:45:48.900 | So even if they are in Africa and they're in quite dangerous circumstances, if they were disabled as a result of those dangerous circumstances, they are still covered under the contract that I wrote for them.
00:45:59.900 | Now, that was for one of the members of the couple.
00:46:03.900 | The other member of the couple wasn't – didn't choose to purchase the disability insurance policy that I recommended.
00:46:10.900 | And then prior to leaving for Africa, once – it was a year later and they'd actually – or a year and a half, they actually decided to go for sure.
00:46:18.900 | They'd actually gone ahead and started making provision.
00:46:21.900 | I said, "Well, I'd like to get some disability insurance."
00:46:24.900 | I got one quote from Lloyds of London.
00:46:26.900 | That was the only company that would write the policy.
00:46:28.900 | And Lloyds said – I mean the premium was laughable.
00:46:31.900 | And I looked at him and I said, "I'd never buy this policy in my life.
00:46:33.900 | It's just – it's a waste of money."
00:46:35.900 | So unfortunately, they hadn't done the planning a couple years earlier to have the insurance in place.
00:46:41.900 | When you can get your insurance squared away today at a young age and under very safe, normal circumstances and you get those policies in force, then once they're in force, then the future can change as it wants to.
00:46:55.900 | So think carefully through what you're going to want to have in place.
00:47:00.900 | I know for me, if I'm working as a missionary in Africa, I'd like to have my life insurance squared away.
00:47:06.900 | I'd like to own it in the US under cheap rates and I'd like to have my disability insurance squared away.
00:47:10.900 | I'd like to own that in the US under cheap rates and be completely covered.
00:47:14.900 | So get that stuff squared away now.
00:47:16.900 | As far as your investments, I would be thinking about what's my investment plan.
00:47:20.900 | Do I want to have my money invested while I'm gone?
00:47:22.900 | If so, get it set up in a way especially where your accounts are going to be rebalanced automatically so you don't have to be spending all your time.
00:47:29.900 | It could be simple if you're going to a country where there's lots of internet and you can just do it yourself online.
00:47:36.900 | It could be very simple or it could be very complex.
00:47:38.900 | Me, I don't want to be rattling around in Uganda and trying to get online and fix my investment portfolio.
00:47:46.900 | So make sure things are set up in advance.
00:47:49.900 | Focus on getting your cash management set up properly.
00:47:52.900 | So what's your plan as far as which credit cards?
00:47:55.900 | Research the credit cards that don't have any foreign transaction fees.
00:48:00.900 | Research the debit cards that you'll be able to use with the lowest transaction fees.
00:48:05.900 | Figure out what bank is going to be most appropriate for your time abroad.
00:48:09.900 | Get that stuff set up for yourself.
00:48:12.900 | Then the only other one which is kind of for fun, I would say make sure that you're planning for fun in this sense.
00:48:21.900 | Plan to travel from wherever you are and set aside the funds that you need.
00:48:26.900 | Maybe you're going on a two-year foreign work contract.
00:48:29.900 | Well, if you're going to be abroad for two years and you're going to be working, then take advantage of the fact that you're going to be in a completely different region of the world and you might have all of these fun experiences that are super easy to get to.
00:48:40.900 | If you are living and working in Hong Kong for two years, take the time and travel all throughout Southeast Asia and just get on the cheap flights and go to Japan and go to Singapore and go all throughout mainland China and go on weekend trips.
00:48:56.900 | Just hop on a plane and set aside the budget for that so that you can fully take advantage of your time abroad.
00:49:02.900 | I've known various people and maybe they just don't like to travel but they set these things up and they're abroad and they don't take advantage of the fact that they're abroad.
00:49:11.900 | So that's my only other thought that occurs to me.
00:49:16.900 | That's it. Those are the four questions.
00:49:19.900 | So thank you to the patrons of the show who submitted those questions.
00:49:24.900 | I hope you guys like my answers.
00:49:26.900 | I apologize. I think it's late at night now and I probably rambled a little bit more than I should have.
00:49:32.900 | But I plan to do this more and more to try to keep rewarding those of you who are supporting the show.
00:49:37.900 | I'm trying to do it more and more and this is just an indication of the type of things that I can do more frequently.
00:49:44.900 | So if you are not a patron of the show, consider going to RadicalPersonalFinance.com/patron and becoming a patron.
00:49:50.900 | Even if you're not, I'd be happy to have your question.
00:49:52.900 | I've got quite a list but I'd be happy to have your question answered in a future show.
00:49:55.900 | Who knows? You send me a fun question and it might get moved to the front of the queue.
00:49:59.900 | I like to have very interesting questions.
00:50:03.900 | They give me an opportunity to talk about different things.
00:50:06.900 | And hopefully take the ideas that I've talked about here and consider them in your own situation.
00:50:11.900 | That's one of the things I like to do about these questions.
00:50:14.900 | Sometimes it's a lot easier for us if we just listen to somebody else's situation to see the parallels to our own.
00:50:21.900 | Sometimes when we're looking at our own life, it's hard to see what we should do.
00:50:26.900 | But when you hear someone else, you hear the guy ask a question, Brad asks a question about his wife being a teacher,
00:50:32.900 | then it might hopefully inspire you to say, "Well, maybe I should go and research and see is there an automatic raise for me in my field?"
00:50:40.900 | And maybe I should go to a cheap school.
00:50:44.900 | Maybe I should go to New Charter University where I can sign up and get a $5,000 master's degree
00:50:50.900 | which will allow me to be paid at this higher rank.
00:50:53.900 | Sometimes maybe if you're a police officer or just these types of government bureaucratic scenarios where there's this automatic pay scale
00:51:02.900 | that's based upon advanced degrees, punch that ticket.
00:51:06.900 | Check that box and get the money.
00:51:08.900 | And maybe that will help you do it.
00:51:09.900 | It's a lot more easily doable to do it with $5,000 than to think about going and spending $45,000 on a master's from a fancy brand-name school.
00:51:18.900 | A lot of times those things don't – they don't ask you where's the school.
00:51:22.900 | It just needs to be an accredited university and, hey, this one is.
00:51:27.900 | That's it. I'm out.
00:51:29.900 | Talk with you all soon.
00:51:31.900 | [Music]
00:51:41.900 | Thank you for listening to today's show.
00:51:43.900 | If you'd like to contact me personally, my email address is joshua@radicalpersonalfinance.com.
00:51:50.900 | You can also connect with the show on Twitter @radicalpf and at facebook.com/radicalpersonalfinance.
00:51:57.900 | This show is intended to provide entertainment, education, and financial enlightenment.
00:52:04.900 | But your situation is unique and I cannot deliver any actionable advice without knowing anything about you.
00:52:12.900 | Please, develop a team of professional advisors who you find to be caring, competent, and trustworthy, and consult them because they are the ones who can understand your specific needs, your specific goals, and provide specific answers to your questions.
00:52:33.900 | I've done my absolute best to be clear and accurate in today's show, but I'm one person and I make mistakes.
00:52:40.900 | If you spot a mistake in something I've said, please help me by coming to the show page and commenting so we can all learn together.
00:52:47.900 | Until tomorrow, thanks for being here.
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