RPF0360-Friday

00:00:00.000 | It's Friday, that means live Q&A.

00:00:21.000 | Welcome to the Radical Personal Finance Podcast.

00:00:22.920 | This is the show dedicated to providing you with the knowledge, skills, insight, and encouragement

00:00:26.920 | you need to live a rich and meaningful life now while building a plan for financial freedom

00:00:31.000 | in ten years or less.

00:00:32.000 | My name is Joshua Sheets and I'm your host and on Fridays we do live Q&A.

00:00:35.160 | This is where the audience gets to call in, or certain members of the patrons of the audience

00:00:39.000 | get to call in and ask their questions and tell me their thoughts about anything they

00:00:44.320 | want to talk about.

00:00:52.840 | I love answering questions from all of you in the audience and those questions can happen

00:00:57.600 | in a number of different ways.

00:00:58.600 | I get lots of emails from you and I have too many emails, I'll never be able to answer

00:01:02.800 | all the emails.

00:01:03.800 | So I do have a list of them and I keep them there and from time to time I'll pull the

00:01:07.080 | emails into a show.

00:01:08.080 | But if you would like to get my opinion directly on a subject at the moment, these Friday Q&A

00:01:13.040 | calls are your best opportunity.

00:01:14.160 | So if you'd like to participate in them in the future, feel free to sign up to become

00:01:17.600 | a patron of the show.

00:01:18.760 | I think it's at seven bucks a month and you get access to these Q&A calls.

00:01:22.880 | So feel free to check that out.

00:01:24.400 | We've got, let's see, one, two, three, four, five people sitting on the line right now.

00:01:27.840 | So we're going to start.

00:01:30.440 | Let's go to Matt in North Carolina.

00:01:32.400 | I know you said you had to go.

00:01:33.400 | So let's go to you.

00:01:34.400 | Tell me what your question is and let's see how we can work together today.

00:01:37.400 | Thanks, Joshua.

00:01:38.400 | I sure appreciate it.

00:01:40.920 | I guess my question today relates to the need for bonds or not having bonds in a long-term

00:01:48.080 | retirement portfolio.

00:01:50.160 | Essentially with interest rates so low right now, I have concern about the capital value

00:01:56.920 | of the bonds in the event that rates go up.

00:01:59.360 | Also, stocks in general have better expected returns from a mutual fund standpoint.

00:02:04.360 | And so from an allocation standpoint, I'm pretty comfortable in long-term investments

00:02:09.000 | at like 90% stock funds and 10% cash.

00:02:13.960 | And then, you know, with an interest long-term and just having my home paid off and that

00:02:17.560 | kind of having a bond-like effect in my portfolio.

00:02:21.320 | And I know that that's pretty heterodox from an allocation standpoint.

00:02:25.400 | And I guess I have some understanding of the academic literature on that, but wondered,

00:02:30.120 | you know, do you see any – what are your thoughts on that kind of strategy?

00:02:35.160 | The big distinction here is with the academic literature, it's almost always primarily

00:02:39.680 | focused around a portfolio from a scientific basis, meaning we have this portfolio and

00:02:45.600 | this portfolio is trying to produce certain investment outcome returns for us.

00:02:49.320 | So what's the best way that we can manage just this portfolio in order for us to accomplish

00:02:54.760 | the investment outcome?

00:02:56.480 | So the way bonds work in a portfolio is as you put in more bonds, you smooth the volatility

00:03:02.660 | of the returns in general.

00:03:04.440 | To some degree, stocks and bonds are supposed to be non-correlating assets.

00:03:09.880 | They're not a perfect non-correlation, but they are supposed to be and generally are

00:03:14.240 | somewhat non-correlating.

00:03:16.120 | When stocks' values rise, in general bond values are not supposed to rise on the same

00:03:21.280 | exact trajectory.

00:03:22.920 | When bond values rise, in general stock values are not supposed to rise on the same trajectory.

00:03:27.080 | And so you can plot this out on what they call the efficient frontier and the curve

00:03:31.800 | of expected returns and expected risk.

00:03:36.320 | And the way it works is very interesting.

00:03:37.760 | If you plot a portfolio – and I don't have any numbers in front of me, so we're

00:03:40.960 | just going to keep this very big picture and listeners can go and dig into it more.

00:03:45.840 | But numbers big picture, your highest expected return will come from a portfolio that's

00:03:51.680 | 100% stocks.

00:03:53.960 | So if you're just going to go for highest expected return, 100% stock portfolio is the

00:03:59.160 | way to go.

00:04:00.800 | But if you start sprinkling a few bonds and you start plotting the curve, and let's

00:04:05.280 | say you come back to a 20% bonds and 80% stock portfolio, you get a little bit lower of

00:04:11.160 | an expected return, but you get a much lower variability of returns, much lower risk profile

00:04:17.520 | for that portfolio.

00:04:19.040 | So by bringing in a little bit of bonds into the portfolio, you get a much lower risk reduction.

00:04:27.760 | And that's where – and there's a kind of a sweet spot probably around that 80%

00:04:31.840 | stocks number where you've only given up a little return, but you've gotten a lot

00:04:36.560 | of stability.

00:04:40.000 | Now how do you bring that over and apply it to real world?

00:04:42.560 | Well if you are trying to run a scientifically managed portfolio and allocation such as we're

00:04:48.320 | sitting down and you say, "Joshua, Mr. Financial Planner, you've got a million dollars here.

00:04:52.240 | I need to make this million dollars last over the course of a retirement of this amount

00:04:56.160 | of time.

00:04:57.520 | Here's my personal risk profile and I can go ahead and I can manage this much risk and

00:05:03.440 | I can have this variability of returns," well, then the computer will spit out a model

00:05:07.240 | and you're always trying to decrease risk.

00:05:10.320 | Now that's just a little bit of the academic background to cut straight to your question

00:05:14.120 | now.

00:05:15.120 | If you can prove – and any risk profile questionnaire with any financial advisor,

00:05:21.880 | if you cheat the questionnaire by being very aggressive, it's going to spit out for you

00:05:26.560 | a portfolio that's basically 100% stocks on the back end.

00:05:30.640 | That's what's so interesting is that's the primary way that investment allocation

00:05:33.880 | is delivered is based upon your personal risk profile.

00:05:37.120 | It's not that the profiles, the recommended portfolios won't come out as 100% stock.

00:05:41.760 | It's just that most people can't handle the risk of 100% stocks.

00:05:47.920 | For me, I look at that and say, "Well, is there a way that I can learn as an investor

00:05:52.080 | to be comfortable with a very volatile portfolio?"

00:05:56.000 | That's what you've described there.

00:05:58.080 | If you can be comfortable as an investor with a very volatile portfolio, recognizing that

00:06:04.320 | the market value of your shares can wander around tremendously when you have an all-stock

00:06:08.240 | portfolio, then there's no reason necessarily why you can't go and establish a 100% stock

00:06:15.320 | portfolio.

00:06:16.800 | But most people aren't going to be able to build and maintain that level of comfort.

00:06:21.480 | I think that the things that you've said can offset it.

00:06:24.760 | If you establish a large amount of cash and you keep a large amount of cash, if you have

00:06:30.840 | a paid-off house, something like that which lowers your need for money, those things can

00:06:35.160 | offset it.

00:06:36.240 | When you're in an accumulation period, I think that's different than if you're in a distribution

00:06:40.160 | period.

00:06:42.800 | To give advice on asset allocation, Matt specifically would go past the bounds of what I can do

00:06:48.520 | without getting in trouble with the regulatory authorities here in the United States.

00:06:51.880 | I can just tell you that when I owned publicly traded companies, my allocation was 100% stock

00:06:58.640 | because I said I can handle the volatility of it by doing good financial planning.

00:07:06.120 | I don't buy the concept that the only way to invest successfully is to approach it from

00:07:13.200 | a pension fund perspective, which is the way that most of the research is done.

00:07:16.800 | How do we make this pension fund produce this outcome?

00:07:20.240 | I think it's every bit as acceptable.

00:07:22.280 | Don't tell me that I'm not in a safe position if I own 10 individual stocks from high-quality

00:07:27.720 | companies and I'm living on the dividends.

00:07:29.920 | Yes, my portfolio is 100% stock, but if I understand what I own, just because the portfolio

00:07:35.000 | values wander around doesn't mean that I necessarily have a problem.

00:07:38.080 | That's just normal investing.

00:07:40.400 | I wouldn't be scared of doing it if I understood all of the risks.

00:07:44.360 | The caveat is most people cannot handle what you're talking about, so you've got to be

00:07:48.360 | triple sure that you could actually handle it.

00:07:52.080 | What do you think about that answer, Matt?

00:07:53.080 | Do you want to ask a follow-up question?

00:07:54.080 | Is that helpful enough?

00:07:55.080 | No, I think that's right on point.

00:07:57.520 | I just was looking for your thoughts on that.

00:07:59.720 | I've been a stock investor forever.

00:08:01.760 | I've never sold out on a downturn.

00:08:05.760 | I think that that has served us well.

00:08:08.160 | I think also just the notion that the only way to control volatility is to reduce the

00:08:13.320 | volatility of your portfolio, but sometimes it's easier and more effective to reduce the

00:08:17.840 | volatility of your monthly outflows and maximize your potential for return in the portfolio.

00:08:25.040 | I guess I just appreciate your professional opinion on that approach.

00:08:30.680 | I agree with you.

00:08:31.680 | I do want to make one comment when you were talking about bond values and concern about

00:08:34.680 | bond values.

00:08:36.360 | I think and I'm convinced that good financial planning, which is the term I use it, meaning

00:08:42.120 | controlling the variability of your outflows, setting aside cash in a bank account, training

00:08:47.520 | yourself, that's what I call good financial planning.

00:08:49.800 | I think that's more powerful than just trying to do everything in the portfolio because

00:08:53.800 | if you were to go to a professional portfolio manager and you're going to say to him, "Hey,

00:08:59.640 | listen, I'm willing to accept a wide range of variability.

00:09:06.080 | I'm willing to accept a very high potential on the one side, but also I'm willing to accept

00:09:10.520 | some years where we can't pull income off of it."

00:09:12.880 | If you take the shackles of having to deliver a consistent income on a consistent time off

00:09:19.280 | of a portfolio manager, their total return, I think, is going to be much bigger over time

00:09:26.360 | because if they can dry down the outflows a little bit during rough times, they can

00:09:31.520 | sit through the difficult times.

00:09:34.240 | The higher you put, and I can prove this with software.

00:09:37.800 | If I had financial planning software at my fingertips, the higher you put the must, the

00:09:42.560 | mandated flows off a portfolio in retirement planning software, then the less risk you

00:09:48.800 | can take because you've got to meet that need.

00:09:54.440 | There's a good financial answer to you.

00:09:56.240 | One thing on bonds though, when interest rates rise, bond values will fall.

00:10:01.680 | However, it's not a catastrophic fall.

00:10:05.800 | Many people, it's difficult to calculate for yourself the impact of what would a rise of

00:10:11.760 | interest rates of say 40 basis points due to my bond portfolio.

00:10:16.040 | It's difficult for the average layperson to calculate that.

00:10:18.320 | You can go and calculate that from an expected return perspective.

00:10:23.520 | It does make a difference, but it's not a catastrophic, necessarily a catastrophic impact.

00:10:29.200 | It's not as though your bond portfolio is going to plummet from a value of $100,000

00:10:33.360 | to $20,000 overnight just simply because the interest rates increased by a few basis points.

00:10:40.320 | I don't necessarily accept the narrative also on the other side to say, "Well, interest

00:10:44.080 | rates are at an all-time low, so when interest rates rise, the value of my bonds will plummet."

00:10:47.720 | That's not factually true, and you should do an actual calculation on your portfolio.

00:10:52.520 | All right, next caller.

00:10:54.000 | Let's go to Haleshia in Denver, Colorado.

00:10:57.720 | Welcome to the call.

00:10:58.720 | Let me know how I can serve you today, please.

00:10:59.720 | I have a question about if a person has a 401(k), is there really that much value in

00:11:06.840 | also having a Roth IRA, or do you just put all the extra savings into funding the 401(k)?

00:11:16.480 | Is there really a difference in having both?

00:11:19.080 | Is this scenario that ... First, let's ask financially qualified.

00:11:23.480 | Are you financially qualified to contribute to a Roth IRA, and do you have access to a

00:11:30.400 | 401(k) at your work?

00:11:32.440 | Mm-hmm.

00:11:33.440 | Okay.

00:11:34.440 | Second, do you have an employer match on your 401(k)?

00:11:36.800 | Yeah, and I've already met that.

00:11:39.840 | Great.

00:11:40.840 | Now you've got some additional room in the 401(k), and you're considering, "Should I

00:11:43.840 | put more money in the 401(k) or into the Roth?"

00:11:47.200 | I haven't opened a Roth IRA yet, so I was thinking if I should open one.

00:11:52.440 | I don't know.

00:11:53.440 | Okay.

00:11:54.440 | So, Matt, there's a couple answers.

00:11:56.720 | Mathematically, yes, if you can use these retirement accounts and your goals for your

00:12:02.400 | investment are going to fit within the construct of those accounts, you should come out substantially

00:12:07.920 | ahead by using those accounts.

00:12:09.960 | The most important one in the 401(k) is to first take advantage of an employer match,

00:12:14.680 | and then you can ask the question of, "Should I take the tax deduction now, or should I

00:12:19.040 | take the tax deduction in the future?"

00:12:21.420 | If you can max out both of them, you're going to come out ahead using a maxed out 401(k)

00:12:27.000 | and a Roth IRA versus a taxable investment account.

00:12:31.720 | You're going to come out ahead of both of them.

00:12:33.680 | So do you have enough money that you could max out both of them?

00:12:36.840 | So the 401(k) maxed out is like $18,000 a year, right?

00:12:42.080 | Right.

00:12:43.080 | Yeah, no.

00:12:44.080 | Okay.

00:12:45.080 | Not.

00:12:46.080 | So then you're trying to decide...

00:12:47.640 | So then your basic question is you're trying to decide, "I want to invest a little bit

00:12:51.140 | more money, and should I put it into a 401(k) or into a Roth IRA?"

00:12:54.320 | Is that accurate?

00:12:55.880 | Yes.

00:12:56.880 | Okay.

00:12:57.880 | If you invest the money, what type of things would you invest it in?

00:13:01.200 | Mainstream mutual funds, or would you want to do something else with it?

00:13:05.080 | Probably mainstream mutual funds.

00:13:06.600 | And if you were going to use the money, when would you use the money, and what would you

00:13:09.720 | use it for?

00:13:12.520 | Probably retirement, so like 40 years from now.

00:13:15.500 | Do you expect...

00:13:17.080 | What's your household income right now?

00:13:19.220 | It's around...

00:13:20.220 | I think it'll be like 90 this year.

00:13:22.740 | Do you expect your income to increase substantially in the future?

00:13:26.740 | Yeah.

00:13:27.740 | Okay.

00:13:28.740 | That complicates my answer.

00:13:34.420 | So the accounts are different.

00:13:37.680 | One of the great benefits of the Roth, one of the things that I love about the Roth is

00:13:40.900 | that you can put in the money, and you can take out the contributions without any tax

00:13:49.260 | penalties.

00:13:50.260 | And so I really like that from the perspective of access to money.

00:13:56.180 | My fear with many people when they're contributing to a 401(k) is they put all the money in the

00:14:00.220 | 401(k), and there are a couple of wrinkles with 401(k) plans.

00:14:04.140 | Number one, you need to be sure of the quality of the investments that you have.

00:14:08.680 | Some 401(k) plans offer excellent investments, very low cost, well managed.

00:14:13.400 | Some 401(k) plans don't offer very good investments, very expensive, very poorly managed.

00:14:18.980 | So if you said, "I have a 401(k) that's very poorly managed," well, then I would tend towards

00:14:23.820 | go ahead and do the Roth IRA because you can choose any company out there, you can choose

00:14:27.980 | a low-cost investment provider, and you'll be better off.

00:14:31.320 | So you've got to consider that.

00:14:32.820 | Number two is you've got to consider who has control over the money.

00:14:36.500 | In a 401(k), you do not have control over the money.

00:14:39.540 | And this is because the way that a 401(k) plan works is it's technically considered

00:14:46.660 | to be a profit-sharing plan.

00:14:49.220 | It's provided to you out of the goodwill and the good grace of your company and your employer.

00:14:54.380 | It is a profit-sharing plan that has 401(k) provisions on it.

00:15:00.460 | Now this is different than the way that most people think of their accounts.

00:15:03.260 | Most people think of the 401(k) as my money.

00:15:05.020 | I have the right to it.

00:15:06.260 | Well, if you think that to be the case, go to your 401(k) provider with the job that

00:15:10.260 | you're currently at and ask for a $100,000 distribution.

00:15:14.500 | You can't get it.

00:15:15.720 | And the reason you can't get it is because it's not considered to be your money.

00:15:19.360 | It's considered to be a profit-sharing plan that the company is allowing you to make a

00:15:24.660 | contribution into.

00:15:26.520 | So this is a big difference, and it's a big frustration for many people when they look

00:15:29.540 | at their 401(k) and say, "How do I get my 401(k) out of a plan that has bad investment

00:15:34.900 | options and get it into something else?"

00:15:36.380 | Well, you can't because it's not your money.

00:15:38.620 | It's your employer's money.

00:15:39.900 | Now when you leave employment with that employer, then you can have access to the money.

00:15:45.500 | And if you're at the employer, there might be some options where your plan might allow

00:15:49.500 | some kind of in-service distribution.

00:15:51.620 | Your plan might allow you to take a loan against the account.

00:15:55.180 | There are some options that your plan provider can do, but it is important to recognize that

00:15:59.460 | it's not your money.

00:16:00.620 | So if people are putting all of their baskets in the 401(k) and you don't have other savings,

00:16:06.220 | you don't have other investment accounts, I get nervous about that.

00:16:09.060 | I'd like you to have access to more money.

00:16:12.740 | And that's one of the benefits of the Roth.

00:16:14.340 | If you put, say, $5,000 this year, $5,000 the next year into the Roth, and then all

00:16:19.220 | of a sudden you have a need for money and you need $10,000, you can go ahead and take

00:16:23.980 | that $10,000 back out of the account and you could take the money back out of the account

00:16:30.500 | and use it.

00:16:31.500 | So it gives you a little bit more flexibility.

00:16:33.380 | If you instead put that $5,000 into the 401(k) and you needed money two years from now, well,

00:16:40.000 | you're going to be putting the money on a credit card or rating some other kind of asset.

00:16:43.500 | So you need to consider that within the context of your planning.

00:16:46.740 | In general, I think at this point and with one of the other callers, I'm actually going

00:16:50.700 | to go to Rick next, we're going to talk about the question of what comes out ahead.

00:16:55.780 | I'm convinced that I probably think there's more value in using the 401(k) and paying

00:17:02.180 | the income taxes in the future than going ahead and opt and using Roth IRAs first from

00:17:07.960 | a tax perspective.

00:17:08.960 | Now, this is a hotly debated subject.

00:17:10.980 | Many people disagree with me and I understand the arguments, but I'm convinced that, number

00:17:19.300 | one, I don't expect tax rates to change all that much in general because I don't think

00:17:23.980 | the population politically is going to accept them.

00:17:26.980 | I think that when you look at retirement and you look at taking funds out of a 401(k),

00:17:32.140 | it's really tough for you to be at the highest marginal tax bracket that you're going to

00:17:36.860 | be at during your working years.

00:17:38.820 | So I would say my answer to you, Haleshia, would be, number one, if you don't have other

00:17:45.500 | money available to you, consider prioritizing the Roth for the sake of the flexibility.

00:17:51.360 | If you do have other money to you, consider prioritizing the 401(k) and accumulating the

00:17:56.060 | assets there along the way, and you can do some of each.

00:17:59.260 | Is that helpful or too confusing?

00:18:01.060 | No, that's helpful.

00:18:02.060 | Okay, you had a second part of your question.

00:18:04.420 | Go ahead with the second part of your question, please.

00:18:06.260 | I do.

00:18:07.260 | So I'm thinking about quitting my job in about 2018 to go do some long-term travel.

00:18:15.100 | And I was wondering about how I should plan out ahead so that I don't completely come

00:18:22.340 | back to the US and then have nothing.

00:18:24.380 | So I was looking at what that should look like.

00:18:29.420 | Okay, perfect.

00:18:30.460 | So given that detail, you should definitely consider doing the 401(k), and then you should

00:18:37.320 | do what is called a Roth conversion during the time that you're traveling.

00:18:42.580 | And so what that means is you contribute to the 401(k), and then when your income is low

00:18:47.540 | because right now you're going to be at your higher marginal tax rate, when your income

00:18:53.140 | is low, convert some of the 401(k) to the Roth, pick up that income on that year's tax

00:18:58.660 | return, pay the tax at the low rate, and then you can go ahead and have the money accumulated

00:19:03.500 | in a Roth.

00:19:04.500 | So with that additional detail, that makes my advice with regard to 401(k) or Roth relatively

00:19:10.300 | straightforward.

00:19:11.300 | That's what I would do if I were in your shoes.

00:19:12.580 | Now is your concern running out of money while you're traveling and not having any money

00:19:16.900 | to come back home?

00:19:18.300 | What's your specific concern?

00:19:19.980 | No, I'm pretty sure I planned well enough to have money abroad.

00:19:25.540 | It's just more so I was wondering if there were any things I was overlooking when you

00:19:31.140 | go through a period of maybe a year without any income as to what to consider other than

00:19:37.220 | having cash on hand.

00:19:39.380 | So you're going to pay for your travel with savings that you've accumulated?

00:19:44.700 | Mm-hmm.

00:19:45.700 | Okay.

00:19:46.700 | I would just do a couple of things.

00:19:47.860 | So doing something like that is an opportunity.

00:19:50.920 | Do you plan to continue in the same career when you get back from your trip?

00:19:55.260 | I think so.

00:19:58.420 | Doing something like a year traveling can be very, very simple.

00:20:01.220 | If you're going to just go and be in the same career when you come back, all you need to

00:20:04.740 | do is make sure that you have savings to pay for the trip and then make sure that you reserve

00:20:09.740 | enough money to get established when you get home.

00:20:14.060 | You don't want to come home to an empty bank account and not have anything to pay first,

00:20:18.620 | last, and security in a new apartment or not have anything to buy, an improved suit to

00:20:23.420 | go to your job interview.

00:20:24.940 | If you can line up your employment and have something set up in advance, that makes it

00:20:28.780 | even simpler to transition whether that's with the same company or with a different

00:20:32.180 | company, then those are good opportunities.

00:20:36.780 | When you cut your income, it opens up an opportunity for you to use some of the strategies we talk

00:20:42.020 | about here to use some of the strategies for tax planning.

00:20:47.700 | Specifically, the biggest one for you is going to be to do that Roth conversion, but it also

00:20:51.480 | opens up the opportunity for you if there's any programs or things that you need to have

00:20:55.500 | a low income for to take advantage of, do it in that year.

00:20:58.820 | So if you had kids and you were trying to send your kids to college, well, line up the

00:21:06.180 | travel in the year that that lower income can be reported on the FAFSA.

00:21:11.180 | If you need to do anything with income-based applications for any aid or anything like

00:21:16.140 | that, line that up so that you are doing that in the year that you're reporting the travel

00:21:21.080 | where you basically don't have any income.

00:21:24.180 | So I mean, those are your biggest opportunities.

00:21:28.340 | And my recommendation would also be keep some kind of nice record of the trip so that with

00:21:35.460 | the job hunt process, it's nice if you can just point somebody towards your blog or your

00:21:41.740 | Instagram profile or something where they can kind of see what you've been doing.

00:21:45.220 | A lot of people have the fear that if they're out of the workforce for a year or two that

00:21:50.460 | they're going to fall behind.

00:21:53.340 | And then take advantage of the time that you're gone and don't lose contact with your industry.

00:21:57.320 | That would be if you want to do something while you're on the road, that would be a

00:22:00.900 | good time to make some moves in your industry.

00:22:03.260 | Set up an industry-focused website, post some articles, things like that.

00:22:07.340 | Use that downtime if you want to do any work.

00:22:10.820 | People don't want to do any work, but use that downtime to really adjust yourself and

00:22:14.480 | establish yourself from a career perspective.

00:22:16.780 | Those would be just some generalized thoughts.

00:22:18.580 | Any of that spark a train?

00:22:20.380 | Anyone ask any follow-up questions?

00:22:21.380 | - No, that was, you gave me a couple of things to think about.

00:22:25.860 | - Yeah, it's a real opportunity.

00:22:28.380 | If you have had any thoughts of changing careers, I don't know if you've already had your trip

00:22:32.660 | totally planned out, you're a few years out from it, but doing a trip can be a tremendous

00:22:39.880 | way to also change careers.

00:22:42.420 | If you put a theme around your trip, so for example, you're changing from industry A to

00:22:45.860 | industry B, and you use, while traveling, you use your travel experiences to investigate

00:22:52.260 | the industry B that you want to get into.

00:22:54.620 | If you want to become a farrier, shooing horses, and you travel all around the world and you

00:22:59.500 | document farriers, how they shoo horses in every country and in every culture, and you

00:23:05.500 | use this to establish a presence online, this can catapult you into a new career.

00:23:11.300 | You can use this time to reeducate yourself and to establish a new presence.

00:23:15.420 | It's a really great transition that you can participate in.

00:23:19.740 | Think about how you can use the fun of the travel and integrate it with any other life

00:23:24.500 | goals that you have.

00:23:26.060 | It can be a really great way.

00:23:27.840 | We don't often get a lot of opportunities to do those long-term projects, and so taking

00:23:31.960 | a gap year can be a really cool way to do it.

00:23:34.300 | All right, Rick, I know you said you had a meeting, but I want you to weigh in on this

00:23:39.020 | question that we're talking about of which account to go with.

00:23:44.660 | Quick background, Rick, on a show where I talked about Roth IRA versus traditional IRA,

00:23:52.060 | and I said if anybody wants to do the calculations, I can't do the exact calculations, but I think

00:23:58.060 | the benefit of the Roth is generally oversold for retirees.

00:24:01.740 | Rick went through the work of doing some of those calculations.

00:24:04.940 | Fill us in on what you learned, please, Rick.

00:24:07.260 | Yeah, actually the tax side of it is the challenge is solving for that.

00:24:13.580 | What I did was want to solve for what the retirement income would be on an after-tax

00:24:20.780 | basis at retirement age.

00:24:22.980 | Some of the assumptions that you gave us was that this is someone that would contribute

00:24:27.540 | $15,000 a year, 7% a year growth.

00:24:33.100 | I can't remember if that was your assumption or mine on those contributions.

00:24:38.260 | And then also with that, I went ahead and added in some assumed Social Security income

00:24:45.540 | as well.

00:24:46.540 | Essentially, the bottom line on this is that at retirement, which we said was going to

00:24:52.460 | be age five, the Roth account produced an after-tax income of $59,893.

00:25:02.100 | And again, why this is important as an after-tax income, obviously the Roth is already after-tax.

00:25:08.140 | However, Social Security is not.

00:25:10.220 | So doing that total evaluation on the taxation, Social Security taxed totally different than

00:25:17.380 | other income.

00:25:18.620 | So they had a total take-home income of $59,893, whereas the person that contributed to the

00:25:26.020 | deductible IRA or 401(k) had an after-tax income of $60,031.

00:25:32.820 | So basically it's a wash.

00:25:34.980 | What is it, a little actually like $60 difference between the two.

00:25:41.900 | So it really didn't matter.

00:25:44.340 | Another assumption that I made is that this splash deductible scenario was able to save

00:25:52.060 | an additional $3,750 a year because they received tax savings through their traditional splash

00:26:01.500 | deductible contributions.

00:26:03.900 | And I did that in order to equalize the net spendable income during the accumulation years.

00:26:09.580 | In other words, it wouldn't be fair to say, in other words, I tried to smooth out the

00:26:19.420 | income in both scenarios for those years in order to make it fair.

00:26:25.180 | Otherwise, one guy would be living on more money during accumulation than the other guy.

00:26:30.500 | Right.

00:26:31.500 | Yeah, so basically it came out, let me give a little quick more background and then we'll

00:26:36.300 | talk about what you think is the best move then, Rick.

00:26:40.860 | So real quick on a little bit of additional background if people weren't able to follow

00:26:44.540 | that.

00:26:45.780 | One thing that's important to recognize and very big picture is that if you pay taxes

00:26:51.580 | up front at the same tax rate as you pay taxes on the back end, the amount of money that

00:26:58.080 | you get to spend is identical.

00:27:00.980 | So if you pay taxes at 15% on a Roth IRA up front and then you pay taxes at 15% on a 401k

00:27:10.900 | at the back end, the actual amount of spendable money is the same whether you pay them up

00:27:14.500 | front or down the road.

00:27:16.460 | So many people don't realize that and they think that they're getting a better deal by

00:27:20.860 | contributing to a Roth IRA.

00:27:23.340 | Now there are other factors that need to be counted in, which we're not going to go into

00:27:26.800 | in detail here, factors such as what Rick said, he said he needed to equalize the spending.

00:27:31.540 | Well if you don't have to pay taxes up front, you can contribute more to a traditional IRA

00:27:37.860 | or traditional 401k than you can if you have to pay taxes up front in a Roth scenario.

00:27:44.340 | So it can be easier to get more money into a 401k because you're not having to pay the

00:27:49.180 | taxes up front.

00:27:50.660 | But if you could pay the taxes up front and get more money into a Roth, then you can come

00:27:54.200 | out ahead because you're actually saving more money.

00:27:56.260 | But it's not because of the tax savings of the Roth, it's because you're saving more

00:27:59.660 | money.

00:28:00.660 | Now the big picture thing that I look at is when are you having the highest income.

00:28:06.100 | Recognizing that you're going to be paying taxes and we always calculate tax deductions

00:28:10.780 | and at the highest marginal rate, I look at it and say it's very simple that most people

00:28:17.420 | are going to have more income during their working years than during their retirement

00:28:21.660 | years.

00:28:22.660 | It would be an unusual circumstance to be in where you're earning substantially more

00:28:27.300 | in retirement than you are during your working years.

00:28:30.860 | So it's probably going to be better to take the deductions during your highest earning

00:28:36.860 | years which are going to be your working years than in your retirement years which is during

00:28:43.220 | your non-working years.

00:28:44.700 | Now there are so many ways that this can be changed.

00:28:48.340 | You can't answer it on a general basis.

00:28:50.820 | But the reason why it's so difficult of a nut financially to calculate is because you

00:28:55.300 | have to calculate, okay, what are the credits, what are the social security income.

00:28:59.540 | You have to project all these things out and then figure out which come out.

00:29:03.220 | So that's what Rick did and basically the results of the calculation and I'll link to

00:29:07.700 | it.

00:29:08.700 | It's in episode 332 was his comment, radicalpersonalfinance.com/332 if you want to see all the numbers and he came

00:29:15.020 | out and said the difference is relatively inconsequential.

00:29:17.620 | So Rick, I know you're a financial planner.

00:29:19.100 | Did this surprise you doing the math or was this about what you expected?

00:29:27.300 | It's pretty much what I expected just because the math, well in some ways it surprised me,

00:29:32.060 | in some ways it's what I expected.

00:29:33.660 | So it's what I expected because I totally agree with your first comment that the Roth

00:29:41.540 | contribution versus traditional is not a question of increasing your wealth.

00:29:48.500 | It's just this whole idea of pay the tax on the seed versus the harvest is just kind of

00:29:55.060 | a case that doesn't really accurately portray the situation of what's going on.

00:30:01.660 | So I always have viewed it as kind of a wash.

00:30:04.700 | However, with that said, in retirement there are more nuances, particularly the taxation

00:30:09.260 | of social security and then also RMDs as well.

00:30:14.380 | And so it's really, as anything in personal finance, a case-by-case situation because

00:30:21.420 | if you have a traditional account, presumably you're going to have a higher balance and

00:30:25.420 | therefore a higher RMD.

00:30:27.540 | And if you don't want or need that high of a withdrawal rate, then you could be bumping

00:30:32.140 | your bracket by having that higher RMD and also bumping the taxation of your social security

00:30:38.420 | and potentially bumping the cost of your Medicare.

00:30:41.700 | So all of that is to say that I think there can be a compelling story for Roth in the

00:30:49.300 | future.

00:30:50.300 | However, for most people, I totally agree with you that for most people, go ahead, take

00:30:56.180 | the tax deduction today and then you have some flexibility in retirement and before

00:31:03.340 | retirement to do some conversions if it makes sense.

00:31:08.660 | The only other way I would say go Roth as far as a clear answer is someone says, "Hey,

00:31:14.100 | I want to contribute $5,000.

00:31:16.020 | I'm going to do it.

00:31:17.020 | I've got $5,000 tax refund or inheritance or extra money, whatever.

00:31:22.260 | Should I do Roth or traditional?"

00:31:23.460 | Well, if they do Roth, obviously it's the equivalent of just adding more money at that

00:31:27.540 | point.

00:31:28.540 | So in that case, it's more of a behavioral finance rather than a numbers question.

00:31:35.060 | I think there's a lot of value of having – when you get to retirement, there's a lot of

00:31:39.700 | value of having multiple accounts so that you can manipulate a little bit where the

00:31:43.580 | funds come from and you can manipulate a little bit, "Okay, the Medicare cost, let's see.

00:31:47.500 | Can we fit it under a bracket and figure out how this goes?"

00:31:51.020 | The only kind of clear takeaway I would take from this is I don't think – a lot of people

00:31:56.700 | get – because they mistake that – you phrased it very well.

00:32:01.220 | Should I tax the seed or tax the harvest?

00:32:03.740 | That's one of those things that seems intuitively better to tax the seed, but the math demonstrates

00:32:09.180 | that it doesn't matter.

00:32:10.700 | The tax is the tax.

00:32:12.340 | So I would discourage people from jumping to the Roth 401(k) for the bulk of their investing.

00:32:21.260 | That's the thing that I see that I'm concerned about.

00:32:23.620 | Many people now are having the option to participate in a traditional 401(k) or a Roth 401(k),

00:32:29.460 | and they say, "Well, I know that Roth is better.

00:32:30.940 | I know I'm going to have less money in the end, so I'm going to go to a Roth 401(k).

00:32:34.620 | I think that's a bad move."

00:32:36.140 | But if you can – go ahead.

00:32:37.500 | Now, I'll push back with you a little bit on that, just to add a little more nuance.

00:32:41.980 | I have some 401(k) plans that I manage, and some of the employees – actually, a lot

00:32:46.300 | of them are in non-profit education at the lower income level, basically preschool, day

00:32:51.860 | school kind of thing.

00:32:53.580 | And anyways, a lot of them, I counsel, "Hey, go ahead and go for the Roth.

00:32:58.580 | You're probably paying little, if any, tax right now on your tax bracket.

00:33:03.380 | Go for the Roth.

00:33:04.380 | And oh, by the way, you're automatically diversifying your taxes because the employer contribution

00:33:09.880 | is traditional.

00:33:10.960 | They never put employer into the Roth, so you'll automatically end up with both accounts

00:33:16.020 | in that scenario."

00:33:17.020 | So I think there is sort of a missed opportunity where some people, and quite a few people

00:33:22.660 | who aren't high-income earners, whether it be just a lower-income area or a second wage

00:33:27.620 | or whatever, second earner, whatever the case may be, they're taking a deduction automatically

00:33:33.900 | in their traditional 401(k), and they haven't really looked at the tax and seeing, "Oh,

00:33:38.020 | wait, I'm a net recipient due to the earned income tax credit and everything else that's

00:33:43.340 | going on, so therefore I'm basically wasting a tax-free scenario here."

00:33:50.620 | Yeah, that's a great point.

00:33:52.820 | 100% agree with you.

00:33:54.700 | If you're at a low tax bracket, if you can look forward and imagine your life and see

00:34:00.260 | that in the future you reasonably expect to be earning substantially higher, then use

00:34:05.900 | the Roth now, especially if you're at those bottom brackets.

00:34:09.820 | Use the Roth to get the money out of the taxation world and wait on the 401(k) or traditional

00:34:16.580 | structure until you're in a higher earning.

00:34:19.100 | I think just some of the other factors that you've got to look at, I love the flexibility

00:34:23.260 | of the Roth for what we went over earlier in the call, to take the contributions out

00:34:27.700 | if you need them.

00:34:28.700 | I like the ability to choose investments.

00:34:30.420 | I think ultimately most people are going to wind up having both, and both being the plan,

00:34:36.620 | but use some of this data to calculate.

00:34:38.340 | So Rick, I appreciate you doing those calculations.

00:34:41.300 | Thank you very much.

00:34:42.300 | My pleasure.

00:34:43.300 | Thanks, Joshua.

00:34:44.300 | For sure.

00:34:45.300 | I've got two more callers online.

00:34:46.300 | I've got Sean and Jay.

00:34:47.300 | Sean, let's go to you.

00:34:48.300 | Sean in Chicago.

00:34:49.300 | What's your question?

00:34:50.300 | How can I serve you today?

00:34:51.300 | Thank you, Joshua.

00:34:52.860 | My wife has recently been able to be hired to work for a nonprofit, which she founded

00:34:58.260 | and loves dearly.

00:34:59.260 | Currently, she's the only employee and likely will be for the next few years.

00:35:04.420 | They're considering setting up benefit plans and are in the process of setting up a retirement

00:35:08.340 | plan.

00:35:10.140 | She wants to present a plan that's both as appealing to our circumstances as possible,

00:35:15.220 | but also to the nonprofit since she'd never sacrificed its good given that she's found

00:35:19.860 | it and it's her life's work.

00:35:22.380 | So currently, we max out 403B, mine's 403B, her simple IRA, backdoor Roth, and have some

00:35:29.060 | in taxable investments.

00:35:32.140 | If she were to max out a 403B, we'd still have some for the taxable investments.

00:35:37.460 | That's important to us because we both kind of think we may start our own business in

00:35:40.860 | the future.

00:35:41.860 | So my question to you is, are there any considerations for setting up a retirement plan for a small

00:35:48.860 | business or nonprofit like this that you think people may often overlook when they're concerned

00:35:54.700 | not just about the employee side, but also the employer side, that it's a mutually beneficial

00:36:00.460 | setup?

00:36:01.460 | I don't know if it matters, but we do file our taxes, merit filing, separately since

00:36:08.140 | she qualifies for public service loan forgiveness given her salary.

00:36:12.540 | Okay, that does matter, but let's come back to that in a moment.

00:36:17.220 | Is the nonprofit well capitalized?

00:36:21.460 | They're pretty well.

00:36:23.580 | They're on a good trajectory and in a strong but small position.

00:36:31.900 | It's an interesting question and I'm not sure that I can remember my details clear enough

00:36:38.380 | to answer it as well as I would like.

00:36:42.220 | I'm making a note of it and if I can dig into it a little bit more, I'll need to check a

00:36:45.540 | couple of books.

00:36:46.940 | So just recognize that it's such a nuanced question that I wish I could give a better

00:36:55.820 | answer off the top of my head.

00:36:56.820 | I'm not that good.

00:36:58.540 | So the reason I say merit filing separately does matter is because merit filing separately

00:37:04.260 | hurts you with a couple of, I think is it IRA contributions?

00:37:09.620 | Or is it?

00:37:10.620 | Yeah, it's IRA contributions.

00:37:13.180 | That if you're using an IRA, the limit for a deductible IRA is like, I need a tax table

00:37:21.580 | at my hands.

00:37:22.580 | It's like 5,000 bucks, something like that is your income if you're married filing separately.

00:37:27.180 | It doesn't sound like that's appropriate to you, but there are a couple places where the

00:37:31.100 | IRS really doesn't like people who are married filing separately, especially when it comes

00:37:35.300 | to retirement accounts.

00:37:39.500 | But if you're using the public loan forgiveness program, then that's probably compelling enough

00:37:43.820 | that I wouldn't necessarily just say you need to change it.

00:37:51.940 | With regard to the reason I asked if they were capitalized, she's expecting more employees

00:37:57.380 | in the future and things like that.

00:38:00.500 | So you're probably not going to want to try, you're not trying to structure this in just

00:38:05.700 | a way that's just going to benefit her.

00:38:07.140 | You need a plan that's going to be consistent across all of the employees in the future.

00:38:14.300 | And so that's going to send you in the direction of just some of the normal plans.

00:38:19.140 | The first thought I had was, and I'm not sure that you can do it, but I need to research

00:38:25.020 | it.

00:38:26.020 | But the first thought I had was, could you set up a 457 plan?

00:38:29.620 | I think, I wish I had read my book recently.

00:38:34.420 | If you could set up a 457 plan at a nonprofit, then that could give you some flexibility

00:38:46.100 | with your other accounts.

00:38:48.020 | Because you already have the Simple IRA, you already have the 403(b), you have your Roths

00:38:52.620 | and you have your taxable.

00:38:54.160 | If you could set up a 457 plan, then that would give you some options where you can

00:39:02.360 | contribute money, have the tax deferred, but not have to pay the tax right now.

00:39:09.400 | And it's a little bit of an arcane area.

00:39:11.120 | I just found an article on it here.

00:39:14.740 | And it's one of those things I'd have to check into and get back to you.

00:39:19.160 | So I'll just leave it at that for a moment.

00:39:21.920 | Otherwise, just the normal options would apply.

00:39:27.760 | I can't pull the answer out of my head right at the moment, so we'll leave it at that.

00:39:32.040 | I apologize.

00:39:33.040 | I'll make a note and we'll see if I can get back and answer the question for you properly.

00:39:37.000 | So I'm kind of failing you on this one.

00:39:40.080 | Any follow-up clarification or things that I might be able to help with?

00:39:43.880 | No, I mean, I think that's it.

00:39:48.880 | Any thoughts you find or if anything comes along, that'd be great.

00:39:53.120 | But thanks for mentioning that 457 plan.

00:39:55.560 | We'll look into that a little further.

00:39:58.080 | Yeah.

00:39:59.080 | Okay.

00:40:00.080 | So just one article here as I was desperately trying to pull through my notes and through

00:40:05.840 | the internet.

00:40:06.840 | "Non-governmental plans can be established by qualified 501(c)(3) organizations that

00:40:11.220 | also offer 403(b) plans, but they can only be offered to highly compensated workers,

00:40:17.240 | although the exact level of income for qualifying employees is not stated precisely.

00:40:21.200 | However, it must meet some sort of ascertainable standard set by the employer.

00:40:25.400 | These plans have therefore been given the nickname of 'top hat plans.'"

00:40:29.160 | So with a 501(c)(3) organization, if the board were to set up a 403(b) and then were to offer

00:40:37.040 | a 457 plan, if they could jump through the hoops and you need to work with a consultant,

00:40:42.400 | with a qualified plan consultant on this to get it right, you might be able to set something

00:40:47.920 | like that up.

00:40:51.480 | And yeah, you might be able to set something like that up.

00:40:56.080 | That's the best idea I've got for you right now.

00:40:58.480 | If I can find a couple of these articles that are helpful, I'll also link them in the show

00:41:01.780 | notes for today's show.

00:41:03.800 | All right.

00:41:05.160 | Next I've got Jay, New York City.

00:41:07.480 | Jay, go ahead with your question.

00:41:08.480 | I don't know how I can serve you today.

00:41:12.480 | Hello?

00:41:13.480 | Yep.

00:41:14.480 | Go ahead.

00:41:15.480 | I can hear you.

00:41:16.480 | Hey, Josh.

00:41:17.480 | Oh, great.

00:41:18.480 | Hey, Josh.

00:41:19.480 | First thing, great show.

00:41:20.480 | I've been listening to you for a long time.

00:41:21.480 | Pretty honored to just be able to talk to you now.

00:41:23.720 | So regarding my question, 2008 impacted a lot of people, including myself and my family.

00:41:29.480 | We ended up, story short, I ended up filing Chapter 13.

00:41:34.680 | We're in the process right now that we're actually exiting Chapter 13.

00:41:38.000 | Great.

00:41:39.000 | And I would like to be able to kind of move forward in a better path in terms of my financial

00:41:44.600 | lifestyle or my financial life and how do you see or what suggestions you may have in

00:41:49.120 | terms of kind of reengaging the financial system now that we've spent so many years

00:41:54.240 | on our own, living off the dollar that we make and nothing else, which I'm happy to

00:41:59.920 | continue to do so.

00:42:00.920 | And we're fine with it and we're pretty stable.

00:42:03.520 | But we do want to be able to in the future recreate or reestablish credit and be able

00:42:09.800 | to move forward in different avenues.

00:42:12.560 | So just wanted to get your opinion on how is best to kind of exit this type of situation.

00:42:19.600 | Describe the circumstances that led to the Chapter 13.

00:42:23.200 | What was it that put you in the hole so bad?

00:42:26.520 | Sure.

00:42:28.040 | I was, it was 2007, 2008.

00:42:31.880 | So when the market crashed, I was in the middle of a construction program for my home.

00:42:37.640 | So my primary home, we were building a second story home.

00:42:40.480 | We had a construction loan, an equity loan on the house.

00:42:45.240 | And I had probably in personal savings of about 50 grand that I was also going to use

00:42:51.040 | in the home.

00:42:52.040 | Unfortunately, because of what was happening with the market after demolition, so I already

00:42:56.160 | had no roof over us and we were already in the process of construction, the loans that

00:43:02.880 | had committed for the construction, the HELOC, as well as construction loan, I had two different

00:43:09.440 | loans, were frozen, which led me to pretty much fund the entire $100,000 to build construction.

00:43:16.080 | A lot of which I trimmed down by doing a lot of the work myself with my family, but also

00:43:22.800 | fund the entire cost pretty much out of my pocket and through credit cards, which was

00:43:30.080 | not what I wanted to do.

00:43:31.760 | Those ended up being frozen too, so my credit just went to crap.

00:43:38.440 | And we were kind of in the spiral of the market, where we ourselves put ourselves in, but unbeknownst

00:43:44.320 | to what was going to happen.

00:43:46.560 | So unfortunately, we had to proceed with the construction, which was already demoed.

00:43:50.920 | Trimmed down a lot, but we still had to proceed and then kind of had to deal with the impact

00:43:55.760 | afterwards.

00:43:56.760 | Sure.

00:43:57.760 | So basically, it was one big house deal that went bad, and then all of the associated construction

00:44:04.600 | costs that got put on credit cards, that was what put you under ultimately?

00:44:08.520 | Did you have a lot of other credit card debt or a lot of other car payments, a lot of other

00:44:12.160 | debt outside of the construction debt before that that also hurt you, or was it just construction

00:44:17.080 | debt?

00:44:18.080 | No, it was pretty much all associated with this.

00:44:21.520 | I was probably utilizing credit cards at 20% or less of availability, but I did have a

00:44:28.920 | lot of credit cards available to me at the time, because they were coming in pretty easily.

00:44:36.720 | So I had a certain amount of costs that I couldn't put into the credit card, which I

00:44:40.640 | ended up doing.

00:44:41.960 | And as cards and banks started freezing accounts or cutting accounts, that was kind of just

00:44:49.480 | turning in and reducing my availability of funding, which kind of destroyed my credit.

00:44:54.160 | And then I tried to re-engage the system and negotiate some things.

00:44:59.120 | I couldn't do it.

00:45:00.800 | Suggestions came into trying to do the HAMP program, which kind of just destroyed me even

00:45:05.440 | more.

00:45:06.440 | I ended up not doing that and choosing not to do that.

00:45:07.960 | But after that, by the time I decided, I already had months that I was not paying on my home

00:45:13.240 | because of the suggestions to get in order to get into the HAMP program, I had to not

00:45:16.840 | pay my bills, even though I was paying my bills.

00:45:19.640 | So it definitely was a year plus journey that put me in that position.

00:45:25.300 | But it all started on the fact that I was on the construction when the market crashed

00:45:29.680 | and all my loans I had for the construction were taken out.

00:45:34.920 | Right, right.

00:45:35.920 | So a couple of thoughts for you.

00:45:38.720 | First, I would recommend that you, if you haven't done it already, I'm sure you've learned

00:45:44.040 | a lot of lessons.

00:45:45.040 | I would recommend that you sit down and write some of them down.

00:45:48.560 | Just kind of make a list of the things that you've learned from this nightmare.

00:45:53.200 | Because we all go through difficult circumstances and the biggest waste is to go through a disaster

00:45:59.400 | and not learn anything from it.

00:46:00.880 | If you go through a disaster and you learn something from it, then at least you could

00:46:04.240 | gain some value out of it.

00:46:05.520 | If you don't learn anything from it, then it can have some major problems.

00:46:12.600 | And I appreciate it.

00:46:13.600 | I heard in your statement, I heard you correct yourself and take responsibility for the things

00:46:18.920 | that you could take responsibility for.

00:46:21.480 | And you corrected a couple of times when you were talking, you corrected and used responsible

00:46:25.480 | language.

00:46:26.480 | I chose this.

00:46:27.480 | I made these choices.

00:46:28.480 | To me, I commend you for that because that's a very important starting point.

00:46:32.520 | A lot of people say, "Well, the market crashed and I couldn't do anything about it."

00:46:37.280 | Well, no, you can't do anything about a market crash, but you can foresee and consider that

00:46:43.720 | things might happen.

00:46:44.720 | Now, if you were considering, say, a 30 or 40% decrease in value or decrease of credit

00:46:50.600 | lines or things like that and they cut it by 75%, sure, that's a little harder to perceive.

00:46:56.240 | But you're a little wiser now and you can plan and count on those things.

00:47:00.320 | And I think it's an instructive story for all of us who are listening to it that sometimes

00:47:05.240 | things that seem so great, "I've got these lines of credit, everything's going to be

00:47:08.840 | good to go," sometimes things change.

00:47:11.880 | And that's where you need to understand the terms of your agreements.

00:47:16.660 | You need to read the terms of your loan agreements.

00:47:19.520 | If you're going to take out a construction loan, a home equity loan, etc., do they have

00:47:23.280 | the right to reduce those things?

00:47:25.400 | Many people had this happen.

00:47:26.520 | Many people had their lines of credit decreased and they didn't realize that that was possible.

00:47:32.520 | So I commend you for that and I encourage you to just learn from it.

00:47:37.920 | So you're already doing that, but just for the sake of the audience.

00:47:41.320 | At this point in time, do you live in the house?

00:47:44.440 | Do you love it?

00:47:45.440 | Have you sold it and moved on?

00:47:46.440 | What are you doing with the house?

00:47:48.560 | It's still ours.

00:47:51.920 | We love the neighborhood.

00:47:52.920 | We love the town.

00:47:53.920 | And the house is exactly what we need in terms of what we ended up doing with it.

00:47:59.320 | I ended up part of the situation.

00:48:00.840 | I ended up needing to house the two-family home, but I ended up also needing to house

00:48:05.680 | my in-laws full-time at my expense.

00:48:09.000 | So that's kind of also hampered my ability to move forward with some of the financial

00:48:14.320 | constraints due to financial constraints.

00:48:17.360 | But yeah, we're happy with our current situation.

00:48:20.880 | I wouldn't change anything because you learn more from your hardships than you do from

00:48:24.960 | your wins many times.

00:48:27.040 | And we have a happy family.

00:48:29.560 | We're doing well.

00:48:30.560 | We are...

00:48:31.560 | I could potentially, part of my progress moving forward, I could potentially...

00:48:35.640 | I'm probably still owed about $350 plus on the home.

00:48:40.720 | It's pretty high rent or cost of living in this area.

00:48:45.400 | But I could potentially put a plan together that I see myself within 10 years paying that

00:48:50.280 | off completely.

00:48:52.960 | So we are financially stable now and in a better position where it's more about what

00:48:58.080 | do we tackle.

00:48:59.080 | Now, I never wanted to get into some type of bankruptcy, but now that I'm out of it,

00:49:04.520 | I'm glad that I was able to keep my home, keep the roof over my head to my family and

00:49:10.280 | my in-laws and still be able to kind of figure out ways to feed us.

00:49:16.440 | We're doing fine now.

00:49:17.440 | It's just how do we move forward?

00:49:19.320 | And I should financially be able within 10 years to pay off the entire house if I move

00:49:24.440 | forward that way or look at other ways.

00:49:26.640 | But I just kind of just want to pick your brain as well, how would you envision best

00:49:32.720 | way to kind of emerge out of this type of situation.

00:49:36.320 | So two lines of thought that we should go down.

00:49:38.880 | One is how to move forward and build wealth.

00:49:41.240 | And the second is how to improve your credit.

00:49:44.480 | Those are two separate things because your credit is not necessarily indicative of your

00:49:50.520 | wealth.

00:49:51.660 | They don't necessarily correspond.

00:49:53.920 | So between the two, if you have to choose between building wealth and having a great

00:49:58.000 | credit score, obviously you're going to choose building wealth.

00:50:01.360 | That's what actually matters.

00:50:03.240 | But the credit score is important.

00:50:05.600 | It's going to make a difference in your life, a dramatic difference.

00:50:08.780 | It's going to make a difference in the terms at which you have many things from your car

00:50:13.400 | insurance to some of your banking opportunities.

00:50:16.120 | It will make a difference.

00:50:17.120 | So you do want to deal with the credit score.

00:50:19.480 | So first, building wealth.

00:50:21.680 | The great thing is in Chapter 13 when you come out of it on the back end here, you will

00:50:26.200 | have paid and satisfied your debts.

00:50:28.280 | You'll have satisfied all your creditors and you'll be coming out with basically a clean

00:50:32.160 | slate.

00:50:33.400 | You don't have anything else that you owe and you're coming out with a clean slate.

00:50:36.800 | You're coming out with years of building some new habits of living just on the income and

00:50:40.800 | making that big Harry Chapter 13 payment.

00:50:43.920 | And so when that thing is gone, you're going to feel like you're rolling in money.

00:50:48.160 | The difference of building wealth is no different than it was before.

00:50:50.920 | It's a matter of saying there's no difference for somebody who's coming out of bankruptcy

00:50:54.240 | than it is for someone who's not coming out of bankruptcy.

00:50:56.440 | I need to save money.

00:50:58.000 | I need to establish my financial goals, figure out what's the clear path towards those goals.

00:51:03.440 | So how does paying off this house help me get those goals?

00:51:07.020 | Can we pay it off in 10 years?

00:51:08.320 | What are the numbers going to be to get there?

00:51:11.160 | What's going to be the primary financial engine of our plan?

00:51:15.160 | How's my income doing?

00:51:16.160 | Do I need to, now that I'm getting rid of this big Harry payment, do I need to invest

00:51:20.320 | in something that's going to help me earn more money?

00:51:22.240 | Is there something that's associated with your business?

00:51:24.640 | So you start to build an investment plan and you build a financial plan that's going to

00:51:28.520 | have your income coming in, keep your expenses under control.

00:51:32.440 | You're going to have those debts cleared and then you're going to focus on what's the investment

00:51:35.560 | plan and you're going to start working towards that investment plan.

00:51:39.520 | And so all of the investment plans, any investment plan is open to you coming out of Chapter

00:51:45.760 | 13 as is open to anybody else.

00:51:48.260 | So if you are going to invest using stocks within a 401(k) at your job, that doesn't

00:51:54.180 | matter whether you've come in or out of bankruptcy.

00:51:56.320 | If you're going to invest in real estate, you can do that whether or not you've been

00:51:59.680 | out of bankruptcy.

00:52:00.680 | I have a couple of guys here locally who 2007, 2008 put them into bankruptcy and they just

00:52:07.240 | kept right on going right through it and worked their way through and came out the other end

00:52:11.160 | millionaires.

00:52:13.840 | And they never gave up their real estate plans.

00:52:15.680 | Being in business isn't going to be affected by bankruptcy.

00:52:18.520 | So your wealth plan is not affected by your bankruptcy.

00:52:23.320 | When you have this thing paid off, you'll have satisfied all your creditors, you've

00:52:26.160 | done the honorable thing, you've paid your debts and you'll be starting with a clear

00:52:30.080 | slate.

00:52:31.080 | So your wealth plan is everything is not connected to the bankruptcy.

00:52:36.080 | You're just simply working your way through exactly like we talk about every other day,

00:52:40.920 | increasing your income, decreasing your expenses, investing wisely, avoiding catastrophe, optimizing

00:52:47.560 | your lifestyle.

00:52:49.040 | Now given what you've learned, the only thing that's going to be impacted on your wealth

00:52:53.120 | plan by your bankruptcy is that some lines of credit that other people might count on

00:52:57.800 | are not available to you.

00:52:59.600 | So you can't have a small emergency fund and a credit card as your emergency plan.

00:53:06.680 | You've got to have a big emergency fund.

00:53:08.800 | You can't plan on a home equity line of credit being your backup.

00:53:12.840 | You've got to have a bunch of savings.

00:53:14.280 | And so you've got to be more conservative than other people, recognizing that you can't

00:53:18.240 | necessarily rely on the things that other people rely on for some of their plans.

00:53:22.980 | But that's okay.

00:53:23.980 | You've learned a lesson.

00:53:25.640 | And just because it takes you a little bit longer and you've got to save $50,000 instead

00:53:29.640 | of $15,000, that's okay.

00:53:31.600 | You'll feel better with the $50,000 in the bank.

00:53:34.760 | Now with regard to the credit score, that process is relatively simple.

00:53:39.480 | Go and get a good book from the bookstore on building a credit score.

00:53:44.080 | And there are a couple of things that are associated with it.

00:53:46.800 | Number one, the biggest thing that's going to drive your credit score is paying your

00:53:49.760 | bills on time and paying the debts on time.

00:53:52.680 | So after this is discharged, yes, the bankruptcy is there, but you'll still be able to work

00:53:57.520 | your way through and pay your bills on time and that will start to build a stronger credit

00:54:02.000 | history.

00:54:03.000 | And then that bankruptcy will fall off.

00:54:04.480 | Was it 10 years for bankruptcy to fall off the credit report?

00:54:06.600 | Is that right?

00:54:07.600 | I believe that's what I was told.

00:54:09.680 | Yeah, that's what I think it is.

00:54:12.040 | So you don't have to wait 10 years to have access to credit after a bankruptcy.

00:54:18.980 | But you're not going to have access to credit immediately after bankruptcy.

00:54:23.440 | Do you foresee at this point in time that you need credit for something in your financial

00:54:27.860 | life in the coming years?

00:54:30.060 | Not directly.

00:54:34.380 | I'm building my emergency fund, so that's fine.

00:54:39.120 | My kids will be heading off to college starting in two years.

00:54:45.300 | So that's probably going to be more of a constraint.

00:54:47.020 | But they already know that they have skin in the game.

00:54:49.220 | I'm going to provide for half and they got to provide for the other.

00:54:52.300 | And I have avenues to provide for my part, so I don't think that's going to be too

00:54:56.620 | insane for me, for us personally.

00:54:59.700 | So I mean, everything else we've been for six years, we've been off our own dollar.

00:55:03.380 | We're fine with that.

00:55:05.380 | We'll probably need a car here and there to replace the existing old cars that we've

00:55:10.220 | been running down for a while.

00:55:12.220 | Sure.

00:55:13.220 | But I could probably fund those directly.

00:55:16.060 | Yeah.

00:55:17.060 | I don't see really any use for credit except for houses.

00:55:22.380 | Houses and maybe businesses.

00:55:24.220 | Other than that, I don't see the point of borrowing money.

00:55:27.460 | So the credit score game is just simply a game because so many things are based upon

00:55:31.860 | the credit score.

00:55:32.860 | It's useful to build a high credit score.

00:55:35.780 | And if you have a high credit score, it can be useful for some of the games, the travel

00:55:39.300 | hacking and the mileage games and all that, to travel for free.

00:55:42.760 | You can do that.

00:55:43.760 | I've seen people that do that very successfully.

00:55:46.240 | But in terms of building wealth, the only time that you need credit is basically for

00:55:50.480 | mortgages and possibly for businesses.

00:55:55.340 | I don't think there's any reason to ever borrow on anything except one of those things that's

00:55:59.480 | going to go up in value.

00:56:01.080 | So the path to improving the credit score is pay the mortgage payment after you come

00:56:06.640 | out of the Chapter 13 and you'll have paid the Chapter 13 payments.

00:56:09.660 | Pay the mortgage payment on time and make sure that that's set up and it's always paid

00:56:15.020 | on time.

00:56:16.020 | Next, you'll go and establish a secured credit card with a local bank, credit union, et cetera.

00:56:23.180 | Secured credit card is where you give them $1,000 and they give you a credit card with

00:56:26.460 | a $1,000 limit and it's backed by the money in the account.

00:56:29.980 | You take that, use that for just your normal expenses, paying it on time, consistently

00:56:34.540 | over time and you work your way forward with that for a while.

00:56:42.180 | Then after a while, you go ahead and you apply for another credit card and you pay that one

00:56:47.980 | on time.

00:56:49.220 | You can borrow money for a car but really I don't see the point of it.

00:56:53.420 | If you want to get a small car loan to establish another car loan and a credit history, you

00:56:59.860 | can do that.

00:57:00.860 | But I don't see the point of it because when you borrow on things that go down in value,

00:57:08.700 | that's a recipe for poverty and you don't want to do that.

00:57:12.360 | So yes, getting a secured credit card to start to have just that plus your mortgage, that

00:57:15.860 | should be enough with a history of payments.

00:57:18.580 | When you're getting the credit cards, the keys to the score is one of the four parts,

00:57:22.700 | the utilization of credit, your payment history, the type and nature of accounts that are open

00:57:27.940 | to you, et cetera.

00:57:29.620 | I would do is I would keep it simple.

00:57:31.020 | I would just simply pay cash for everything except the mortgage, pay the mortgage consistently

00:57:35.860 | over time and I would get one secured credit card and then after I've had the secured credit

00:57:42.220 | card for a while, I'd probably get one or two more.

00:57:44.540 | Keep the balances on them, pay it off, pay them on time every time.

00:57:48.060 | You need to use them and so from time to time, you should carry a balance through to the

00:57:53.460 | end of the statement date.

00:57:55.860 | You need to have that there as demonstrated that these are being used.

00:57:59.700 | Don't just pay them immediately.

00:58:01.140 | Let them go through to their statement date and that over time will raise the credit score,

00:58:07.500 | just that consistent period of payment.

00:58:09.820 | From talking with people who come out of bankruptcy, if you needed to borrow money and buy a house

00:58:13.740 | a few years after bankruptcy, you could do that again if you needed to switch.

00:58:19.820 | So all those options are there for you.

00:58:21.580 | The big thing is to pay a little bit of attention to the credit score, get a book, do that,

00:58:26.020 | but focus primarily on the wealth plan and recognize that it's not connected to your

00:58:30.340 | credit score.

00:58:31.340 | It's a separate deal.

00:58:32.340 | That's great.

00:58:33.340 | Thank you.

00:58:34.340 | You're welcome.

00:58:35.340 | I'm glad you're coming out of it, man, and I'm glad you've learned some lessons.

00:58:40.860 | Analyze what puts you there and then resolve in the future, as I'm sure you have.

00:58:46.180 | I tell you, I have made some huge business decisions, business mistakes in the past that

00:58:50.620 | have cost me a lot of money, and I am very sensitive to making those mistakes again.

00:58:54.740 | So it's a good teacher to learn the hard way.

00:58:58.100 | Yes, sir.

00:58:59.420 | All right.

00:59:00.420 | I think that's it for callers.

00:59:01.420 | I've got one more email here that I'm going to take before we wrap up, and this was from

00:59:05.540 | Megan.

00:59:06.540 | She wrote me this and said to Joshua, "I was going to call in on the Q&A today, but I'll

00:59:09.540 | be at work, so hopefully this reaches you in time because I can't call in.

00:59:12.940 | I'm in my last year of grad school and I saved up just about enough money to pay for it out

00:59:16.860 | of pocket and still have a four to six month emergency fund left over.

00:59:21.540 | But beyond that, it will wipe me out.

00:59:23.580 | I was approved for loans covering over 100% of my tuition cost based on need, and I already

00:59:29.180 | have about $35,000 in student loan debt.

00:59:32.180 | My question, should I use the loans for school and increase my debt so I can open an investment

00:59:37.720 | account with the money I have saved up so I have it as capital for a future business

00:59:41.780 | or real estate endeavor?

00:59:43.220 | I'm employed full time, but I plan to start a side business.

00:59:46.780 | When I finish my degree next year as an integral part of my plan for financial independence.

00:59:51.180 | I'm typically very debt averse.

00:59:54.260 | I live mortgage and car payment free.

00:59:56.500 | I pay off my credit card every month, and I've only accrued $30,000 in loans in a degree

01:00:00.980 | program where many of my peers came out six figures underwater.

01:00:05.280 | So my initial plan was to use my savings and not increase my loans at all.

01:00:09.540 | Since listening to your show and further research of my own about financial independence and

01:00:13.580 | how debt leverage can be a powerful tool when used properly, I started to wonder if taking

01:00:17.980 | the loans so my capital could be put to use doing something else is a better option.

01:00:22.420 | My conclusion so far is that if I can earn equal to or more than my interest rate, I

01:00:27.660 | should take the loans.

01:00:29.020 | My current loans range from 3% to 7% interest, so I'm planning on the high end of a 7% interest

01:00:35.500 | rate.

01:00:36.500 | I don't have time to actively manage an investment account right now.

01:00:39.940 | So if I go this route, I plan to open a Vanguard account and invest in the Total Stock Market

01:00:44.140 | Index Fund (I'm also a Jim Collins fan) which tracks that market at approximately 8% to

01:00:50.500 | 12% average returns depending on the economy and just leave the money there until I need

01:00:54.500 | to invest in a business.

01:00:56.380 | At the low end of 8%, I'm still coming out slightly ahead of my loan interest accrual,

01:01:01.240 | so it seems like a good deal.

01:01:02.660 | I am aware, of course, that that is not a guaranteed return and the market could tank

01:01:06.180 | the day after I invest and lose everything, but since that money is not a part of my everyday

01:01:10.380 | survival, I could afford to lose a portion or all of it and ride out the stock market

01:01:14.580 | ups and downs as necessary.

01:01:15.980 | I'm curious about your opinion on this as well as if there are other factors I should

01:01:19.180 | consider apart from the interest rate vs. investment return disparity and legalities.

01:01:24.780 | Legalities as in you cannot use student loans to fund endeavors beside school so the loans

01:01:28.300 | will only go to school expenses.

01:01:31.620 | Even though I was approved for more than I need, I will only take what I calculated my

01:01:34.340 | school expenses to be this year and use those funds appropriately.

01:01:38.700 | So Megan, two aspects to the answer.

01:01:45.660 | I see two questions here.

01:01:47.140 | The first question is should I take out student loans and keep this extra money aside for

01:01:53.620 | a capital as investment capital or should and then the second question is if I'm going

01:02:01.280 | to keep the money aside as capital, should I invest the money in stocks or not?

01:02:11.300 | So there's two questions.

01:02:12.860 | Let's handle them separately.

01:02:15.300 | First you have enough money to pay out of pocket for that schooling and still have a

01:02:21.020 | four to six month emergency fund left over but beyond that it'll wipe me out.

01:02:25.980 | In general, how to answer this, in general I think minimizing student loans is the right

01:02:34.540 | idea.

01:02:35.880 | Minimizing student loans is the optimal path.

01:02:40.480 | I can't stand student loans and minimizing them I think is fantastic.

01:02:46.600 | Being completely debt free is ideal, is fantastic and I think that forcing yourself to pay the

01:02:53.740 | money and avoid those student loans has a lot of benefit to it.

01:02:59.800 | It'll make you feel proud of having the loans gone.

01:03:03.040 | It'll have a tremendous amount of benefit.

01:03:06.060 | So in general I love that plan.

01:03:08.560 | I especially love it when it forces you to adjust expenses.

01:03:14.040 | When I was in college, my first year of school I didn't borrow any money on student loans.

01:03:19.360 | I did four years of college.

01:03:20.800 | My first year I didn't borrow any money on student loans.

01:03:23.280 | I worked three jobs concurrently and I worked hard and I was able to come out the other

01:03:28.600 | side without any student loans.

01:03:31.420 | My second year of college I decided I had been working too hard and during that year

01:03:35.720 | that I was working too hard I decided to stop working at a job for income and I decided

01:03:40.680 | to start using student loans.

01:03:42.840 | So I used student loans to pay for my expenses and for my living expenses.

01:03:47.360 | So my class expenses and for my living expenses and I started accruing student loans.

01:03:52.220 | During that process, my second year I learned less and I got worse grades than I had my

01:03:57.200 | first year.

01:03:59.200 | My third year was a little bit unique because I studied abroad the first semester then I

01:04:02.280 | came back, dropped out of school and I went back in the summer.

01:04:05.920 | So set that aside for a moment.

01:04:07.600 | My senior year was when I decided to get out of debt and I wanted to get out of debt before

01:04:11.520 | I graduated.

01:04:12.760 | So I set my entire focus on paying off the student loans just as quickly as I could.

01:04:18.080 | During that process, I worked like crazy.

01:04:22.200 | I took 18 hours of class, worked 40 hours a week and it was the hardest year of my life.

01:04:28.400 | But the amazing thing was I came out the end and I had the student loans paid off completely

01:04:33.480 | and I had gotten straight A's.

01:04:36.160 | I got better grades that year that I was working 40 hours a week, taking 19 hours of class

01:04:42.560 | and saving like crazy.

01:04:43.560 | I got better grades and not only did I get better grades, but I learned more because

01:04:48.240 | I was intense about it, because I was focused.

01:04:50.920 | I was putting in much more effort into my studies and I was putting in much more effort

01:04:57.720 | into being prepared for class and all of a sudden, the same teachers who a few years

01:05:01.920 | previously I had been quite negative about saying, "I don't know what they're talking

01:05:06.600 | about."

01:05:07.600 | All of a sudden, the same teachers became much more knowledgeable.

01:05:09.560 | It wasn't that they changed, it was that I changed.

01:05:12.400 | So I learned that when you put the screws to yourself with a clear, focused goal, you

01:05:19.680 | can make some great stuff happen.

01:05:22.200 | I regret that decision I had made that second year where by starting to borrow money on

01:05:29.760 | student loans, I became lazy, I didn't work, I didn't do well in school, I didn't work

01:05:34.180 | very hard and I suffered for it.

01:05:36.000 | I started to spend more money.

01:05:37.920 | When you have a clear goal of, "Hey, I'm getting out of grad school," and you're paying out

01:05:43.320 | of cash, cash out of pocket, you're going to spend less money.

01:05:47.100 | When you're paying cash for things, you have less of an incentive to spend money and that's

01:05:51.460 | one of the reasons why you want to avoid debt like crazy, because when you're using debt,

01:05:55.860 | it's so easy to just go ahead and buy the thing.

01:05:59.340 | It's so easy to say, "Well, this is my last year of grad school, so I'm going to go ahead

01:06:02.280 | and spend all this extra money on A, B, C, D."

01:06:05.880 | It doesn't matter what it is.

01:06:07.560 | So that'd be one of my big concerns, that if you don't pay cash, you'll wind up spending

01:06:12.480 | more money.

01:06:13.480 | Now, is it possible that you're a robot and these emotions don't affect you and that you

01:06:18.200 | can just spend exactly the same amount?

01:06:20.400 | I guess it's possible.

01:06:21.720 | I mean, I don't think you're a robot, but perhaps you have that financial outlook.

01:06:25.600 | I think there are people that can do that.

01:06:28.640 | I would tend towards saying, "Pay cash for that year of school."

01:06:34.000 | Now what's the argument on the other side?

01:06:36.400 | If you have a clear goal for that future business and real estate endeavor and you want to have

01:06:43.400 | that capital, and if that were going to start right after grad school, then I couldn't argue

01:06:52.240 | that you would need to have that capital available to you.

01:06:55.200 | If you were in grad school and coming out the backside, you had to say, "I have this

01:06:58.800 | business.

01:06:59.800 | I need $15,000 of startup capital available for that," and by keeping this money aside,

01:07:05.400 | you're going to have that available to you and that's a clear plan, not just a vague,

01:07:09.880 | fuzzy wish, but that's a clear plan.

01:07:13.840 | Given that wrinkle, I think I would do what you're saying.

01:07:15.880 | I would take the money on the student loans and I would keep the capital aside, but you've

01:07:19.400 | got to figure out a way to cover yourself, to keep yourself focused on not spending the

01:07:26.480 | money and not wasting it.

01:07:28.880 | Given if you had a clear goal and a clear action plan, clear business, clear real estate,

01:07:33.960 | etc., I would do that because I think that if you were to invest the money in something

01:07:38.200 | like that and if it were to work, you could come out substantially ahead.

01:07:43.800 | Think of it like this.

01:07:44.960 | You mentioned real estate here, so let's say you could perform one successful real estate

01:07:50.600 | transaction that had a very high profit or a decent profit out of it.

01:07:55.600 | It's possible that by having the capital to put down on the property, bring it in, fix

01:08:01.500 | it up, flip it, and secure profit, you could with a deal or a couple of deals, you could

01:08:06.200 | make enough money to pay off these student loans completely.

01:08:10.120 | Capital is so valuable that if you've accrued it and you have a clear plan, I would probably

01:08:16.440 | do that.

01:08:17.440 | I would probably keep it aside, but only you know how clear that goal is.

01:08:21.720 | Now, you're almost done with grad school.

01:08:24.000 | What I question, and this is where it's hard to answer from an email, I wanted to get to

01:08:27.320 | it because you said you were going to call in, but my question is, why are you going

01:08:30.480 | to grad school if you're trying to pursue this business or real estate?

01:08:35.400 | Grad school is usually related to a job.

01:08:38.680 | If you're planning to go into a job and out of grad school you're going to keep working

01:08:42.720 | this job and let's say you're hoping to make more and it's going to be a few years.

01:08:46.600 | Well, if it's going to be a few years and you're going to be working the job and this

01:08:50.480 | business or real estate idea is not clear, it's not something you're going to be focusing

01:08:53.920 | on, then I would say pay off the debt and make it a focus of first clearing the debt

01:09:00.120 | so you can build from that simple perspective.

01:09:05.000 | Hope that's a useful answer to question one.

01:09:07.120 | It's hard for me to know which one of those is correct.

01:09:10.520 | So there's both sides and you'll have to choose.

01:09:12.200 | Your money, you're responsible for it.

01:09:13.800 | Now, question two, would I invest the money?

01:09:16.480 | Let's say I chose, if I were in your shoes and I chose to have the money and I were going

01:09:20.120 | to take out student loans to cover my tuition for that final year and we're going to keep

01:09:24.040 | that money in cash, would I put the money into stocks?

01:09:28.120 | Absolutely not.

01:09:29.120 | I would not do that.

01:09:30.720 | I would not do that for a couple of reasons.

01:09:33.080 | Number one, if you're saying I'm going to put the money in stocks until someday I might

01:09:38.160 | do something with it, then that would prove that my answer to question one is that you

01:09:44.160 | should just simply pay the money down in student loans.

01:09:46.840 | You don't have a clear plan.

01:09:48.280 | You don't have a clear goal that I'm going to open six months from when I graduate, I'm

01:09:51.920 | going to open this retail store for this product that's very needed.

01:09:55.280 | You're just kind of generally starting to think about that.

01:09:57.800 | Well, in that case, paying off debt is the right solution because paying off debt will

01:10:01.480 | free you up, it'll minimize risk, and it'll save you money on these interest rates.

01:10:05.320 | That's the first reason.

01:10:06.400 | The second reason, student loan interest rate at 7% and stock returns at 8% average returns

01:10:13.240 | are not the same thing at all.

01:10:15.720 | If you adjust for the volatility of the stock market and you adjust for the risk factor,

01:10:21.120 | there's a substantial difference there.

01:10:23.160 | I would not borrow money at 7% to invest it for 8%.

01:10:27.200 | Now, I know that you were saying 3% to 7%, 8% to 12%.

01:10:30.680 | I wouldn't borrow money at 3% to invest at 10%.

01:10:34.640 | When you adjust for the risk of the volatility of returns of a stock portfolio and you adjust

01:10:39.720 | for the risk of the student loans, which is a consistent interest, those numbers are far

01:10:44.880 | closer than it might appear.

01:10:46.920 | I haven't done the mathematical formula, but those numbers are closer, and especially the

01:10:52.540 | risk in your own life because what happens is you're not counting on things happening

01:10:57.240 | in your own life, and those student loan payments are going to be there every single month.

01:11:01.640 | Now, you're not planning to spend the money in the stocks, but in that situation, I would

01:11:06.280 | still keep the capital aside, and I would just keep it in cash, in a savings account,

01:11:11.880 | in a CD, something short term.

01:11:14.280 | The other big thing to recognize is that when you're in this short range, you didn't give

01:11:18.960 | me a time of range.

01:11:20.420 | If you said, "I have student loans that are 20% 20 years long, and I've got this investment

01:11:24.620 | account over here, and I'm not going to touch it for maybe 30 years," well, now we're out

01:11:27.760 | to a time range that maybe we could start to figure out.

01:11:32.320 | But I'm seeing in your question here just a range of a few years, and the standard rule

01:11:37.520 | with stock investing is when you get under five years of time horizon, you want to make

01:11:41.760 | sure that you're adjusting your asset allocation and selling your investments.

01:11:45.360 | If I've got a financial goal that I'm going to be using to fund with stocks, and it's

01:11:49.000 | coming up in about five years, I'm going to be looking very closely at my portfolio and

01:11:55.960 | probably starting to transition out of stocks into cash, if not completely, partially, during

01:12:04.440 | times that the market is high, during opportune times, because you've got to be prepared in

01:12:11.160 | stocks that in any random year, your portfolio debt will be down 14%.

01:12:16.880 | One out of three years, your portfolio will be down by a third, and it's very possible

01:12:20.940 | and likely that a couple or a few times in your investment lifespan, your portfolio will

01:12:26.120 | be down by 50%.

01:12:28.580 | So you've got to hedge that when you've got a clear need for the money, then you've got

01:12:33.360 | to hedge that.

01:12:34.480 | So when I put these two answers together, my answer to you is given the fact that the

01:12:39.040 | second part of your discussion shows that you don't have a clear, specific goal, because

01:12:44.440 | if you did, you wouldn't be putting it into stocks.

01:12:46.600 | You'd just be keeping it in cash and saying, "I'm going to open this store six months from

01:12:49.920 | when I graduate," or "I'm going to do this real estate deal over here, and I've already

01:12:53.560 | found the property, and I'm just waiting to make it happen."

01:12:56.420 | Because you're thinking about, "Oh, I'll just put the money in the stock market and it'll

01:12:59.160 | return," then my answer is a very clear, "Pay off the student loans, pay cash for your senior

01:13:04.960 | year of college, and make it a goal that one year out of college, you've got the rest of

01:13:09.960 | them gone.

01:13:11.140 | Then save up the money and put it into something else."

01:13:15.720 | Hope that's useful.

01:13:16.720 | Hope that's helpful.

01:13:17.720 | It's always hard to ask these questions or answer these questions, but hopefully that

01:13:21.200 | at least gives you a couple of ways to think about it.

01:13:25.180 | Thank you to all of the callers who called in for today's show.

01:13:27.920 | Thank you to Megan for writing in your question.

01:13:30.440 | I don't intend to take written questions on these shows.

01:13:32.880 | I just wanted to do it for her today, because she emailed me at 12.03 PM, right before the

01:13:37.080 | call started.

01:13:38.080 | So thank you for the questions.

01:13:40.020 | If you would like me to answer your questions on a show like this, I would love to do that.

01:13:43.760 | I do my best.

01:13:44.760 | Some of them, like the one on the retirement plan for a non-profit, I'm not good enough

01:13:48.960 | to pull that stuff off the top of my head, but I do my best.

01:13:53.760 | I'll at least try to point you in the right direction.

01:13:56.520 | To do that, become a patron of the show at radicalpersonalfinance.com/patron.

01:14:00.380 | Thank you to those of you who do that.

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01:14:23.080 | In the past, the blog posts were being delayed from the website by a few days.

01:14:27.640 | I did that for a few reasons, because it really helped me with my production workflow.

01:14:32.120 | But at this point in time, we've tried to speed that up, because one of the things that

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01:14:49.320 | Well, I don't need it by email.

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01:15:10.480 | So thank you all for listening.

01:15:11.480 | Have a great weekend, and I will be back with you next week.

01:15:22.680 | (upbeat music)

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