RPF0370-Friday_QA
00:00:00.000 | Today on Radical Personal Finance, it's Friday.
00:00:04.160 | That means live Q&A.
00:00:22.600 | Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge,
00:00:26.160 | skills, insight, and encouragement you need to live a rich and meaningful life now while
00:00:30.720 | building a plan for financial freedom in 10 years or less.
00:00:33.320 | My name is Joshua Sheets and I'm your host.
00:00:35.080 | On Fridays, whenever I'm able to do it, we're a couple of weeks behind here, I do a live
00:00:39.200 | Q&A where I show up to a phone line and patrons of the show call in and ask their questions.
00:00:44.440 | I know the topics that are coming, but I don't know the specifics.
00:00:47.560 | So together, let's find out what they are and see if I can provide some useful ideas.
00:00:55.320 | If you'd like to do Q&A, I've always loved this format of radio.
00:01:00.120 | I always enjoy hearing individual people and the problems that they're facing and I figured
00:01:03.960 | out a way to do it and bring it to Radical Personal Finance without necessarily setting
00:01:08.840 | up a phone screener and all of that.
00:01:10.080 | We do it in the form of a conference call.
00:01:11.680 | So every week when I'm in town and I can sit down in front of my computer, we set up the
00:01:14.960 | conference line, I open it up, and these calls are open to patrons of the show at a certain
00:01:19.080 | patronage level.
00:01:20.080 | If you're not a patron of the show, you can become a patron at radicalpersonalfinance.com/patron.
00:01:24.840 | You'll find all the details there and then that will enable you to have access to this
00:01:29.040 | call in line where you can call in and ask a question.
00:01:31.920 | So thank you to all of you who do support the show as a patron.
00:01:35.320 | Again, details at radicalpersonalfinance.com/patron.
00:01:38.560 | Right now we've got three, oh, four, five.
00:01:40.280 | We've got five callers on the line.
00:01:41.280 | So we're going to start with the first few that I know and then we'll see where we go
00:01:43.760 | from there.
00:01:44.760 | We're going to kick it off with Chris in Minnesota.
00:01:46.760 | Go ahead, Chris, and let me know what your question is and let's see how I can serve
00:01:48.840 | you today.
00:01:49.840 | Hey, Josh.
00:01:50.840 | I really appreciate these.
00:01:51.840 | I think these are an awesome way.
00:01:52.840 | I agree with him.
00:01:53.840 | I think these are an awesome way.
00:01:54.840 | I agree with you that radios need more caller participation.
00:01:59.680 | So my question is around defined contribution benefit plans for pensions.
00:02:06.000 | I work for a state government, which I'm sure you're not a big fan of, but I like it.
00:02:14.320 | My question revolves around the, there are a lot of people who really don't like defined
00:02:21.280 | benefit pension plans because they lose a lot of their control over being able to decide
00:02:27.360 | how they invest their money, what they're going to get for payouts, those kinds of things.
00:02:32.360 | I was wondering whether you had any suggestions.
00:02:36.200 | There's been talk about maybe allowing people to pull out of the defined benefit plan and
00:02:43.960 | invest in my 457 instead of a defined benefit plan.
00:02:49.840 | I was just wondering what advice you could give me on that.
00:02:52.240 | Are you asking the question because you have a specific decision that you need to make
00:02:56.000 | or just kind of generalized what are your thoughts on the subject in general?
00:03:01.360 | I don't have a decision I need to make yet, but there has been talk in the Minnesota legislature
00:03:07.800 | of going ahead and removing the defined benefit plan and replacing it with a 401k style plan.
00:03:17.800 | It would allow us to either continue in our benefit plan as current, the people who are
00:03:24.120 | already in can be grandfathered and maintain it until its end, or I can roll over into
00:03:29.440 | a 457.
00:03:30.440 | Okay.
00:03:31.440 | All right.
00:03:32.440 | Let me give you just a little bit of background and explain this for the listeners and then
00:03:36.280 | we'll cover your particular situation.
00:03:39.160 | The difference of these terms where we talk about a defined contribution versus a defined
00:03:43.600 | benefit plan is important and it indicates a difference of how the money is set aside.
00:03:50.680 | So when we use the word pension, most people think of that word pension as meaning a steady
00:03:58.240 | stream of payments that's guaranteed by a government entity or by a large corporation.
00:04:03.480 | So the best example here would be payments that are similar to what we all understand
00:04:07.880 | social security payments to be.
00:04:10.180 | When you retire and when you file for social security, you're going to receive a steady
00:04:14.260 | stream of payments coming in no matter what happens behind the scenes.
00:04:18.500 | You're not concerned with the balances in the account.
00:04:21.320 | You're not concerned with whether there's money there or not.
00:04:23.260 | You're just going to get a check.
00:04:25.260 | Government employees are the most common ones who have these, whether it's someone like
00:04:28.160 | you who's an employee of a state government or whether it's someone like a firefighter
00:04:31.840 | or a police officer.
00:04:33.240 | We all know the benefits there.
00:04:36.180 | If you know a firefighter who retired at 55 years old and they got $5,500 a month coming
00:04:40.700 | in for the rest of their life, that's because they were enrolled in a pension plan.
00:04:45.280 | Now the term pension plan should be used, if used accurately, to be both a defined contribution
00:04:52.060 | and a defined benefit plan.
00:04:54.060 | But in normal kind of non-financial planner speak, most people use the term pension plan
00:04:59.180 | to refer to that type of plan.
00:05:01.300 | That type of plan is called a defined benefit plan.
00:05:04.620 | The reason is because what's defined is not how much money you put into it, but how much
00:05:09.420 | your benefit is, the defined benefit.
00:05:12.660 | That's why you can have a chart that says when you retire at the age of say 60 years
00:05:21.180 | old, you're going to receive 75% of your final year's salary.
00:05:27.380 | There are some variations to that formula.
00:05:29.580 | But all defined benefit plans are calculated based upon the actual benefit amount that
00:05:34.940 | you're going to receive.
00:05:37.100 | Then they're funded, ideally, enough to achieve that benefit amount.
00:05:42.840 | Now that's contrasted with a defined contribution plan.
00:05:47.060 | And this would be what we would usually understand as the standard structure of something like
00:05:50.860 | a 401k plan.
00:05:52.780 | There are many other types of plans, not just 401ks, but we're most familiar with this 401k
00:05:57.860 | type of plan.
00:05:59.060 | So under a defined contribution plan, you're not calculating how much the benefit is and
00:06:03.860 | the actual benefit is not being guaranteed.
00:06:06.580 | You're just simply have an amount that you can contribute.
00:06:10.340 | So we know, okay, you can put $16,000 into your 401k plan.
00:06:15.380 | And then we don't know how much it's going to be in the future, but we're just guaranteeing
00:06:20.260 | that this amount is going to be put in.
00:06:22.460 | We're defining the contribution.
00:06:24.540 | We don't know what the benefit amount is going to be.
00:06:27.580 | Now, historically, when companies provided pension plans for their employees, the majority
00:06:32.860 | of them used a defined benefit plan structure where they promised that when you retire,
00:06:39.220 | we'll pay you 60% of your final year's salary.
00:06:43.160 | And this worked out pretty well for the employees because most people are pretty bad investors
00:06:48.980 | and they're not going to receive much.
00:06:50.620 | They're not going to make good investment decisions.
00:06:53.700 | They're not knowledgeable.
00:06:54.880 | They're not emotionally stable enough to make good investment decisions.
00:06:58.260 | And so under this circumstance, they didn't have to worry about it.
00:07:00.480 | They just know they're going to get their check and their only job is to figure out
00:07:04.100 | how to depend on the check.
00:07:05.640 | This was also good because it kept professional investors in charge of the funds where the
00:07:10.540 | professional investment managers probably had enough expertise and knowledge to make
00:07:14.580 | good investment decisions and they were trained and there were mechanisms in force to help
00:07:19.340 | them to keep them from responding emotionally, not making bad decisions just simply because
00:07:25.040 | of a market up or down.
00:07:26.680 | So these plans worked out really well for the retirees and they worked out well for
00:07:32.820 | the investment managers.
00:07:34.500 | What didn't work out well was for the companies who were sponsoring them because when you
00:07:39.560 | promise to pay a certain amount of benefit in the future, you have to fund that plan
00:07:45.300 | and the company has to set aside out of its money a certain amount to fund that plan.
00:07:51.280 | And so the actuaries every year on these types of plans, the actuaries every year are sitting
00:07:55.860 | down and they're calculating how much money do we need in the pot in order to pay out
00:08:00.760 | these benefits to our retirees.
00:08:02.360 | So this put the companies on the hook.
00:08:04.440 | Well, once the cat got out of the bag with companies realizing that they could start
00:08:09.260 | to use the defined contribution plan, most popularly the 401k profit sharing plan which
00:08:17.360 | technically is a profit sharing plan where individuals can make their contributions to
00:08:22.760 | it, make your 401k contributions to it, then they realize the benefit.
00:08:27.780 | The benefit is that the company is not on the hook to guarantee your retirement check.
00:08:33.240 | All they have to do is just write a check up front for the amount of their match and
00:08:36.480 | you're on the hook for it.
00:08:38.120 | Now people who are participating in the 401k plans often like these types of plans especially
00:08:42.880 | if you're a savvy investor.
00:08:44.640 | It's possible that you could invest more aggressively.
00:08:47.120 | It's possible that you could invest more wisely and that you could come out on the other side
00:08:51.800 | with far more money.
00:08:53.840 | And they like the fact that they would have access to the money in the term of a lump
00:08:57.200 | sum instead of just you're going to get $6,000 a month.
00:09:00.920 | I might have a million or $2 million in this account in theory.
00:09:04.200 | So it's very much a matter of competing priorities and it's a real question as far as what's
00:09:11.760 | better for me and how am I actually going to navigate it.
00:09:16.400 | Which brings us to today.
00:09:17.880 | One of the pressures that's on most large companies have done away with a defined benefit
00:09:23.360 | plan and they've transitioned over to a defined contribution plan.
00:09:27.480 | You will sometimes see defined benefit plans.
00:09:30.720 | People more often see them as a form of executive compensation rather than for rank and file
00:09:35.680 | employees.
00:09:37.000 | The 401k type of plan has really swept across the marketplace and the companies really like
00:09:43.440 | it.
00:09:44.440 | If I were a business owner, I really would like having the 401k plan because I am not
00:09:49.080 | on the hook for future contributions.
00:09:52.040 | But many governments have still been holding out and have still provided these defined
00:09:57.300 | benefit plans.
00:09:58.300 | And there are a couple of reasons for it.
00:09:59.920 | You could say, well, maybe they're more conservative.
00:10:02.500 | Maybe they feel this serves the interests of their participants.
00:10:08.060 | Maybe so.
00:10:09.060 | I don't know.
00:10:10.060 | Personally, I think that one major factor of this is that it's easier for politicians
00:10:16.600 | who have to face election to promise very strong retirement benefits and those retirement
00:10:22.840 | benefits to be in the future.
00:10:24.440 | And depending on how the large investment markets are functioning at a certain time,
00:10:28.500 | they can get away with this or they cannot get away with this.
00:10:30.640 | And the idea here is that if I'm an elected politician and Chris is a state government
00:10:35.960 | employee, I know I've got to keep my state government employees happy.
00:10:38.960 | I've got a limited amount of tax revenue and I've got to figure out how do I keep my employees
00:10:46.240 | happy, keep my union representatives happy without going over my budget.
00:10:50.960 | Well, if I promise a bigger retirement plan in the future, then I don't have to pay for
00:10:57.000 | that today and some future politician's got to deal with it.
00:11:00.360 | No, by the way, we're in a strong period of strong market performance and so we can figure
00:11:06.000 | that our investment plans will probably get about 10 or 11 percent.
00:11:08.960 | We've got plenty of money.
00:11:09.960 | Our actuarial calculations are doing fine.
00:11:12.360 | And this is what has happened to a lot of governments where they – both local, municipal,
00:11:18.280 | state – I can't confidently say federal because I haven't researched that, but it
00:11:24.320 | very much impacts local, municipal and state governments where they've promised very large
00:11:29.560 | retirement packages.
00:11:31.080 | And if you speak with many local and municipal and state government employees, you'll find
00:11:36.240 | that they're primarily interested in their retirement package.
00:11:39.160 | The pay today is not great but they really love the retirement package and one benefit
00:11:43.160 | that they love is this guaranteed payout.
00:11:45.960 | So the challenge, Chris – let's come back to your situation.
00:11:48.560 | The challenge that anybody who is making this decision has to face is they have to look
00:11:52.840 | at their state's budget.
00:11:54.720 | Some states are financed well and these funds are capitalized well and there hasn't been
00:11:59.800 | all kinds of skullduggery behind the scenes where the promises have been too high.
00:12:04.840 | Rather, the funds are well capitalized.
00:12:06.640 | They're in a good position and they're strong.
00:12:08.940 | Some states, it's exactly the opposite.
00:12:11.040 | Some cities, it's exactly the opposite.
00:12:13.040 | And your guarantee of a retirement program – of a retirement benefit is only as strong
00:12:18.560 | as the government entity and their taxing authorities' ability to deliver it.
00:12:24.160 | And so it's a major challenge to sort through because it's so broken up and each city is
00:12:30.100 | different than another and each county is different than another and each state is different
00:12:33.040 | than another.
00:12:34.040 | So you've got to look at the specifics of your situation.
00:12:37.480 | So that's the background, Chris.
00:12:38.820 | Are you leaning towards one or another?
00:12:41.400 | Well, I guess my grandfather was always telling me about how wonderful a pension is because
00:12:49.600 | it's defined how much you're going to get and always get that and everybody who doesn't
00:12:54.280 | do that is dumb.
00:12:56.040 | But he was not always the poster child for financial responsibility.
00:13:02.520 | So I guess all I really know is that the defined benefit sounds great, but because I'm so young,
00:13:10.080 | I'm 24, I could afford to take a few more risks.
00:13:13.360 | I could potentially earn more by being a little bit more risky now and have time to recoup
00:13:21.240 | if it doesn't go well.
00:13:23.760 | It might make sense for me to pull out of the pension and go for the defined contribution
00:13:29.640 | if it becomes an option.
00:13:33.200 | I guess I'm not sure which way to lean.
00:13:35.360 | I would lean more towards the pension if I were a bit older, but because I'm not, I'm
00:13:39.680 | not sure whether I should look at the...
00:13:43.040 | You took the next question was going to be how close you are to retirement.
00:13:45.560 | If you're 24, you're quite a ways from retirement, especially within the context of the pension
00:13:49.240 | plan.
00:13:50.240 | So a couple of things that I think would be your major factors that you would need to
00:13:54.520 | weigh in making this decision.
00:13:56.280 | Number one, do you know anything about the health of your state's pension fund and how
00:14:01.680 | well funded it is?
00:14:03.160 | Yes, it is currently funded at 88% and they have a whole bunch of weird rules that indicate
00:14:13.280 | as soon as it gets up to, or as soon as it gets down to 85%, then the employer share
00:14:19.720 | goes up from the currently the employee and the employer both chip in 5.5%.
00:14:25.720 | If it comes down to 85% funded, then the employer share goes up to 6.8%.
00:14:31.360 | And then if it drops all the way down to 75% funded, then the employee share comes up to
00:14:38.480 | 6.8% as well.
00:14:42.280 | The challenge with the funding things, and this is where you've got to look deeply at
00:14:46.240 | it, and I would search carefully to see if there's somebody who's carefully analyzing
00:14:51.040 | your pension program.
00:14:52.840 | But I don't know all of the rules on how they report those ratings of how well funded it
00:14:59.240 | is.
00:15:00.240 | So does that mean when they say this is well funded, does that mean that they have this
00:15:05.080 | amount of money sitting in reserve assets, which are currently capable of doing that?
00:15:10.280 | Or are they counting on future contributions?
00:15:13.200 | My guess would be that would be the first one, but I have very little confidence in
00:15:18.360 | people's willingness to disclose difficult facts.
00:15:22.280 | And the challenge for states and local municipal governments with regard to funding their pension
00:15:29.360 | obligations, the challenge they have that the federal government doesn't have, is that
00:15:33.600 | people find it very easy to move out of one tax jurisdiction into another.
00:15:38.920 | So if things start to become a problem, then the situation starts to get bad, people will
00:15:45.520 | quickly move from one county to the next, one municipality to the next, one state to
00:15:49.120 | the next even.
00:15:50.280 | And so a lot of times, the assumption of revenue, the assumption of the tax base, the assumption
00:15:55.080 | of those things that's being calculated, starts to break down when you encounter population
00:15:59.520 | shifts.
00:16:02.120 | I don't know how to give you advice on that without reviewing in detail your plan, and
00:16:06.800 | I think that would put me beyond where either I have the interest or the legal ability to
00:16:11.920 | do without going in a rough direction.
00:16:14.720 | But I would encourage you to dig deeply into your state and see.
00:16:18.780 | At this point in time, I have, in the coming decades, especially given your age, in the
00:16:25.560 | coming decades, I think that the trend will be that many local municipalities and state
00:16:33.600 | governments will start to face more and more significant financial headwinds.
00:16:38.680 | When you look at some of the early warning signs of some of the different municipalities
00:16:43.820 | that have declared bankruptcy over the last couple of years, and you watch and you see
00:16:47.520 | what's gone on, you see the trend.
00:16:50.740 | Now the problem with it is that I don't see any immediate fear.
00:16:57.280 | For example, people are often talking about, "Well, everything's going to collapse this
00:17:00.040 | year."
00:17:01.040 | No, that's not what happens.
00:17:02.380 | It happens over a period of time.
00:17:03.760 | It happens over decades and decades.
00:17:05.720 | But I don't see how, with the structure that many governments have brought onto themselves,
00:17:11.680 | I don't see how they can maintain it over time.
00:17:16.800 | And so what will happen is, politically, the pensioners will get stiffed.
00:17:21.200 | And that's happened many, many times with all the municipalities.
00:17:24.760 | Many, many, it would be too strong of a statement.
00:17:27.180 | That's happened many times with the municipalities which have gone bankrupt over the last couple
00:17:32.480 | of years.
00:17:33.740 | So I would consider that and research it carefully.
00:17:37.960 | And I would generally trend towards not trusting at first, but I would allow myself to be open
00:17:44.700 | if I could trust it.
00:17:45.780 | For example, when I was with Northwestern Mutual, I had a pension plan, a traditional
00:17:50.160 | defined benefit plan, and I dug into it.
00:17:53.400 | The company was very financially strong.
00:17:55.760 | There was a long track record, and I really liked having that traditional defined benefit
00:17:58.960 | plan because I was confident in its funding and its performance.
00:18:03.840 | So I like the structure of a defined benefit plan if it's well-funded.
00:18:08.540 | But the question is, is it well-funded?
00:18:10.440 | The second thing that I would consider if I were you would be how long you intend to
00:18:14.840 | be at this employer.
00:18:16.520 | A defined benefit plan usually has a relatively long vesting schedule.
00:18:21.140 | And in order for you to benefit from it, you're going to want to be there for a long time.
00:18:25.360 | And that's sometimes hard to predict.
00:18:28.860 | How confident are you that you've been at this employer for a long time and you're going
00:18:32.740 | to be there for a long time?
00:18:34.080 | Pretty confident or less confident?
00:18:37.200 | Reasonably confident.
00:18:38.720 | My employer has a different style of vesting structure where after five years, you are
00:18:44.280 | eligible to receive your full benefit, but then they prorate the benefit based off of
00:18:48.440 | your years of service as opposed to a 25%, 50% sort of thing.
00:18:55.000 | It's a 1.7% for every year of service.
00:18:59.880 | And so after five years, I'm eligible for the full benefit I can achieve, but it is
00:19:08.160 | variant based off of how long I stay here.
00:19:10.800 | But I also really like what I'm doing.
00:19:12.520 | I'm trying to reduce regulation and improve our government's ability to actually function
00:19:20.360 | without being strapped for money and all the rest.
00:19:25.960 | I increase efficiency.
00:19:27.880 | I think it's a good mission.
00:19:29.880 | And so I like being here.
00:19:32.400 | I think I might be here for a good while longer.
00:19:34.480 | Well, if you can survive, I hope you can and I hope you can do the work.
00:19:38.880 | If you're going to be there for a long time and if your plan is well-funded, I think they're
00:19:43.000 | really, really strong.
00:19:44.720 | I love doing retirement planning for a couple where they have a defined benefit plan of
00:19:52.120 | some kind to rely on because it solves that major problem of having a floor under your
00:19:58.840 | income and it helps you to be more aggressive in other areas of investing.
00:20:03.200 | When I used to work with clients, I would always use this example when it came to retirement
00:20:07.320 | planning.
00:20:08.320 | Remember 2008?
00:20:09.320 | And I said, "Remember that and think of your friends."
00:20:13.320 | Everyone has a friend where one of the person where the husband is a retired firefighter
00:20:18.000 | and the wife is a retired teacher and they're living just on their pension income, their
00:20:21.920 | defined benefit income.
00:20:23.800 | How nervous or uncomfortable were they in 2008?
00:20:27.640 | Not very.
00:20:28.760 | Way less nervous and uncomfortable than the retired executive where all of his money was
00:20:32.520 | sitting in a 401k and he's sitting there looking at his stock values and saying, "What am I
00:20:36.560 | going to do?"
00:20:37.940 | So that confidence that you can have when you have a guaranteed number is really powerful
00:20:42.860 | in planning and I think it should be given some priority.
00:20:46.120 | That doesn't mean that you can't additionally invest to get what you're hoping for to be
00:20:50.960 | higher returns from another place.
00:20:53.240 | So given the facts that you have described to me, I would investigate the health of it
00:20:58.160 | and I would probably lean toward pursuing it myself and I would lean away from investing
00:21:05.840 | in the 401k at least if my choice was either/or.
00:21:11.200 | I think you're a good candidate for the defined benefit plan if you can verify and keep your
00:21:17.020 | eyes on those factors.
00:21:18.720 | All right, next let's go to Rocky.
00:21:23.440 | How can I serve you today?
00:21:24.440 | Hey, Joshua.
00:21:25.440 | Thanks for taking my question.
00:21:29.100 | Today my question is more of a behavior question versus tactical.
00:21:32.480 | As I talk to people who achieve financial success and that just means that they've been
00:21:39.160 | able to build up a decent retirement account and I read books, it seems to come down to
00:21:45.600 | two simple principles.
00:21:47.800 | One is spend less than you earn and the second principle is take that amount that you've
00:21:54.240 | saved and invest it, save it, do something to make it grow.
00:22:00.280 | Every time I sit down and I talk to these guys, they all say the same thing.
00:22:03.920 | It's these two simple things and then we scratch our heads and we have this one big
00:22:08.200 | question I have never been able to find the answer to.
00:22:11.920 | Why don't more people just do those two simple steps?
00:22:16.680 | So that's my question for you.
00:22:20.800 | What do you think?
00:22:21.800 | What's your opinion on the subject?
00:22:25.800 | You know, I think it's probably two things.
00:22:30.520 | One, I don't know that everyone is taught that and two, there's no money in delivering
00:22:37.640 | that message.
00:22:39.180 | So you know, the auto dealer is not going to deliver it.
00:22:43.080 | The guy, you know, selling stuff at Walmart is not going to deliver it.
00:22:46.520 | Your boss doesn't want you to retire.
00:22:47.960 | He wants you to keep working for him.
00:22:50.560 | So I think people in general are probably or people just want more and then they have
00:22:57.120 | to balance.
00:22:58.120 | So there's no money in selling that message to people for the most part except maybe for
00:23:03.480 | the financial planner.
00:23:08.040 | If I could answer that question, I could probably get rich off of answering that question.
00:23:11.640 | So because you're right, it is the fundamental.
00:23:14.040 | I'm looking for your answer.
00:23:15.240 | There we go.
00:23:16.240 | All right.
00:23:17.240 | Well, I'll give you some ideas and these are probably more speculative.
00:23:22.880 | I haven't done a PhD dissertation on it.
00:23:24.920 | But when you look at people in my informal survey of stories that I've read and people
00:23:32.920 | that I've talked to, I think one of the strongest influences behind whether or not somebody will
00:23:38.560 | put into practice those simple routines is their example, either the positive example
00:23:45.280 | or the negative example.
00:23:47.180 | So we know for whatever reason that in general society's wealth, wealth distribution, income
00:23:54.600 | distribution is going to be generally governed by the Pareto principle.
00:23:59.000 | 20% of the population is going to own 80% of the wealth.
00:24:02.480 | 20% of the population is going to earn 80% of the income.
00:24:05.600 | 80% of the population is going to earn 20% of the wealth.
00:24:08.480 | I don't know why that is.
00:24:09.560 | I've never read a satisfactory explanation of why the Pareto principle seems to hold
00:24:13.760 | so consistent, but it seems to be consistent in just about anywhere under just about any
00:24:18.840 | system.
00:24:19.840 | So if you recognize that, that means that 80% of the population is only holding 20%
00:24:26.000 | of the wealth and is only holding 20% of the income.
00:24:28.800 | That means that 80% of the population is seeing a negative example.
00:24:33.880 | Only about 20% of the population is seeing a positive example.
00:24:37.320 | And then the higher you go in the numbers, the Pareto holds true at every distribution
00:24:42.960 | of income and wealth.
00:24:44.360 | The top 20% of the top 20%, so that would be the top 4%, own 80% of the top 80% of income.
00:24:52.480 | So that's where you get into that 64%.
00:24:55.580 | And you can follow these distributions along.
00:24:58.000 | So what that means is that very few people are going to have a positive example.
00:25:02.400 | And many times when you talk to people who are wealthy, they'll trace back to a positive
00:25:06.240 | example in their life.
00:25:08.000 | Usually, hopefully a parent, because mom and dad are the parents who have the most
00:25:13.200 | influence in their children's life.
00:25:15.640 | But sometimes it's also an uncle or it's a grandfather or it's a business person in the
00:25:20.160 | community or somebody else that they looked up to and somebody who took a mentor role.
00:25:24.840 | If somebody is given a positive example, I think that can make a big difference.
00:25:29.380 | You also see the strong negative example, where many times you're speaking with somebody
00:25:34.160 | and they had just this strong negative example from their family.
00:25:38.280 | We were so broke, we couldn't afford any food.
00:25:40.200 | And I said, "That's it.
00:25:41.200 | We're not going to do this again.
00:25:42.240 | I'm going to learn what I need to learn."
00:25:44.160 | But most people aren't in those extremes.
00:25:45.800 | They don't have that strong positive example and they don't have that strong negative example,
00:25:49.240 | or at least they're not able to respond to the negative example by completely changing
00:25:53.560 | something.
00:25:54.560 | So most people just kind of are lackadaisical.
00:25:56.800 | They continue on the way that they've mostly continued on.
00:26:00.120 | And when you recognize that the majority of people are going to continue on in kind of
00:26:03.560 | a mediocre way, it means that the majority of the population continues on in a mediocre
00:26:08.320 | way.
00:26:09.320 | It's not that the majority of the population is completely poor, at least not in the United
00:26:12.440 | States, and it's not that they're completely rich.
00:26:13.920 | They're just kind of average.
00:26:15.680 | And that's what you see with many people is when they've got to come up with some money
00:26:18.640 | to pay a bill, they come up with the money to pay the bill.
00:26:20.640 | When they've got to get something done, they get something done.
00:26:22.960 | But they're not proactive about changing that.
00:26:26.560 | So the first thing I think is the power of example, which is why it's so important for
00:26:30.920 | us to be a clear example and to be vocal about our example for our children, for our community,
00:26:39.120 | for the people that are around us.
00:26:41.120 | Number two is training.
00:26:42.260 | So when you get to the topic of proactive training, there's strong evidence to say that
00:26:47.040 | if you can train somebody diligently, you can help to change their behavior over time.
00:26:52.560 | But that requires something that's even additional to example, and it requires training.
00:26:57.920 | So when I work with a family, I'm working with a family right now that's in a crisis,
00:27:02.400 | just a local family here in my community, and they're in a financial crisis, training
00:27:07.480 | is tough.
00:27:08.880 | And walking them through all the basics, step by step by step by step, it requires hours
00:27:13.640 | of my time and a tremendous amount of emotional energy.
00:27:17.000 | So few people are going to provide that training, but that training is what is needed.
00:27:21.600 | I think one of the challenges is that we constantly face the opposite training, and there are
00:27:25.840 | some social influences that are constantly working on us.
00:27:29.920 | So advertising would be an excellent one.
00:27:32.320 | I've dug into a little bit of the subject.
00:27:34.520 | There's some good books written on the amount of advertising that our children see from
00:27:38.620 | a young age.
00:27:40.080 | It's relentless.
00:27:41.120 | And the advertisers are very intelligent about it to specifically target our children from
00:27:46.360 | a very young age with specific brands, with specific messages, with advertising content
00:27:52.200 | that's specifically tailored to them.
00:27:54.360 | Now if you factor in, let's talk about the amount of television advertising, you factor
00:27:58.200 | in the way that the average family functions, that you kind of just, and I'll build a little
00:28:03.360 | bit of an archetype here, but calculate the amount of time that the average child spends
00:28:08.040 | sitting in front of the television, calculate the total ad impressions that that child faces
00:28:15.520 | through that TV channel and through other channels as well.
00:28:17.920 | I don't have the data in my fingertips to cite, but just go with the concept.
00:28:23.320 | Calculate the number of hours that are faced there and then calculate how much time the
00:28:29.640 | average parent actually spends with their young child.
00:28:33.640 | That number is extremely low.
00:28:35.400 | And then calculate the amount of time that the average parent actually spends with their
00:28:38.620 | child in a period of focused example and in a period of focused training.
00:28:44.600 | It's not very much.
00:28:45.840 | And so you've got this massive dominance of advertising messages that are carefully designed
00:28:52.020 | and tailored to appeal to the child's desires.
00:28:57.800 | Child psychology and all of those things are well understood, so let's build this advertising
00:29:01.840 | machine.
00:29:02.840 | And then on the flip side, there's not a lot of proactive training, and so most people
00:29:06.260 | have very little self-defense against advertising.
00:29:09.040 | So I think that makes a big difference.
00:29:10.720 | You can look at how conformity is taught throughout culture.
00:29:15.760 | One of the most powerful lessons that we learn from the government school system is the power
00:29:19.320 | and the importance of conformity.
00:29:21.600 | You know that if you don't fit in, life is going to be unpleasant with you.
00:29:26.000 | And so I've seen good arguments.
00:29:27.880 | I wouldn't necessarily stand up and preach them myself, but I've seen persuasive arguments
00:29:32.500 | that one of the major functions that comes out of the system of formal, universal, standardized
00:29:39.200 | government schooling is that you create a population that is easily controlled and easily
00:29:44.200 | sold to.
00:29:45.800 | You can know if you go into just about any group of young people or just about any peer
00:29:51.120 | group, you can probably find the hot buttons that you can push and that you can sell to.
00:29:55.800 | And that's what advertisers know.
00:29:57.040 | I used to work in the business very briefly as a junior-level analyst, and we would analyze
00:30:02.920 | different population groups, and we would analyze them for their triggers.
00:30:06.480 | And so I spent a lot of time working in different areas, but the best example would be something
00:30:11.800 | like fast food or we did some consumer packaged goods surveys.
00:30:17.520 | And when you get into the world of advertising, it's very, very carefully constructed.
00:30:22.840 | And so you find a peer group of people that are similar, and you find out what their buttons
00:30:28.080 | are, and you figure out how do I associate a message that's going to be impactful for
00:30:34.080 | this type of person.
00:30:35.080 | I'll give you one simple example.
00:30:37.520 | When I was working with the company that I worked with, we were doing a large research
00:30:41.800 | study for a specific type of new light beer that was going to be introduced.
00:30:47.720 | And this light beer was being presented by a large well-known brand.
00:30:51.600 | And they were trying to figure out what was the, in the advertising speak, what's the
00:30:55.560 | white space opportunity?
00:30:56.960 | What's the market segment that we can identify that we can exploit with our advertising message?
00:31:05.280 | So they had a beer that had all of the basic flavor and taste, et cetera, but it was a
00:31:09.560 | light beer and it was a luxury beer.
00:31:11.840 | And what they realized is that the marketing segment that they needed to fit was they needed
00:31:16.520 | to fit somebody who liked to drink lots of beer, so they were looking for a light beer,
00:31:21.120 | and they didn't want to be weighed down when they were in a social situation, but they
00:31:24.800 | didn't want to appear as basic or they didn't want to look like a redneck.
00:31:29.360 | They didn't want to hold a Bud Light in their hand because they looked like a redneck.
00:31:32.440 | They wanted to look sophisticated.
00:31:35.440 | And so all of the advertising message was around what that bottle looked like in their
00:31:40.600 | hands, that they looked like somebody that was sophisticated.
00:31:43.080 | They looked like somebody that was an elitist in terms of their social standing, but yet
00:31:49.040 | they could still drink and drink without getting filled up over time.
00:31:52.440 | So the point is there's a lot of conformity in different people groups, and I think that
00:31:55.880 | has a tremendous influence on people.
00:31:58.600 | Very few people would go out and make the purchasing decisions that they did if they
00:32:02.640 | weren't influenced to some extent by their peer group.
00:32:06.360 | And the final idea I have is just simply if you look at the amount of the thinking time
00:32:11.840 | span that most people tend to have, for you to defer gratification and to delay gratification
00:32:18.240 | to the future, you have to have an ability to think and to plan on a longer time span.
00:32:24.440 | And there have been a number of research reports that have done it.
00:32:28.600 | I mean, the famous one would be the Stanford Marshmallow Experiment that I believe I've
00:32:32.160 | seen that verified, and you have to be careful with studies because sometimes you hear something
00:32:35.800 | and it's not true.
00:32:37.080 | But I've verified that one a couple of times, and I'm confident that that one is accurate.
00:32:40.400 | And the idea here was they followed some students.
00:32:42.560 | They put students in a room and they said, "You have a choice.
00:32:45.440 | If you can have one marshmallow now or if you can wait five minutes, you can have two
00:32:51.160 | marshmallows."
00:32:52.160 | And then the researcher would leave the room with one marshmallow sitting on the table
00:32:54.920 | in front of them.
00:32:56.520 | And they came back after a few minutes, and some percentage of the students, of the little
00:33:00.520 | children, went ahead and just ate the one marshmallow.
00:33:03.000 | Some percentage were able to defer their gratification and wait for the two for a few minutes later.
00:33:07.480 | And they followed those people throughout their life, and they found that of those who
00:33:10.240 | were able to delay gratification, they were able to amass more wealth, gain a higher level
00:33:16.600 | of income.
00:33:17.600 | Well, look around and ask yourself, is there somebody or something or some influence in
00:33:22.480 | society at large that's teaching children to delay gratification?
00:33:27.840 | In general, my observation is no.
00:33:29.780 | We don't teach delayed gratification.
00:33:32.000 | Some people seem to have it naturally.
00:33:33.640 | I don't know what influences that, but we don't teach it.
00:33:37.960 | And so if we're not going to teach that, when you start adding these things together,
00:33:42.760 | the fact that most people don't have any desire or experience or practice delaying gratification,
00:33:48.560 | they don't have a strong example of how they can build wealth.
00:33:53.040 | They think that they need to play the lottery to build wealth.
00:33:55.780 | They don't have a lot of proactive training because that's very time-consuming for a parent
00:34:01.440 | to do.
00:34:02.440 | And you flip it and you add all the negative examples, the fact that they're marketed to
00:34:05.280 | constantly without having any positive instruction or training that's anywhere near the amount
00:34:10.720 | of time that the advertisers have with our children.
00:34:14.520 | You look at the way that society is structured and has a lot of conformity and conformity
00:34:19.000 | is encouraged.
00:34:20.560 | You start to add these things together, and to me, it's not a surprise that people are
00:34:25.520 | not wealthy.
00:34:26.520 | It's a bigger surprise to me that more people are not poor, and that's the magic of the
00:34:30.400 | free enterprise system where there's still an opportunity for people to break it out.
00:34:34.200 | So those are some of my ideas.
00:34:35.200 | Rocky, what say you?
00:34:38.840 | I think I agree with everything you've said, and I guess the question is, can we do something
00:34:46.040 | about it?
00:34:47.040 | But I think at the end of the day, there's just going to be 20% of us who have it and
00:34:52.600 | 80% who don't, and that's just going to be life.
00:34:58.640 | It's funny because when I look at how I'm raising my kids, we don't follow any of those
00:35:04.720 | things that you've talked about.
00:35:06.100 | So there's no TV advertising, for the most part, or if we see ads, we talk about the
00:35:12.720 | ads and how they're looking for things.
00:35:15.840 | We don't teach conformity.
00:35:17.360 | We kind of make our own path.
00:35:19.120 | And so my kids are growing up financially strong.
00:35:21.840 | I think we just did that.
00:35:25.160 | You're helping to put in words why those things are occurring and why it is.
00:35:30.440 | So yeah, I think I agree with you.
00:35:35.880 | And until people want to change, I guess they won't.
00:35:38.840 | Right.
00:35:39.840 | It's the same from my experience.
00:35:40.840 | So here's some things that we can do.
00:35:42.840 | And just to corroborate what you're saying, my experience is the same, that my parents
00:35:47.400 | had very little advertising in the house.
00:35:49.560 | We never had a TV growing up.
00:35:51.080 | I spent most of my time reading books, only a few magazines.
00:35:55.120 | I was outside of many of the mainstream kind of socially conforming pressures for the formative
00:36:02.800 | years.
00:36:03.800 | I only went to a private school starting in about seventh grade, with the exception of
00:36:07.800 | one year that I was in a government school in third grade.
00:36:10.040 | I was educated at home for the first six years, and those are the most formative years.
00:36:14.200 | And I actually vividly remember how I had no concept of peer pressure going into seventh
00:36:20.880 | grade.
00:36:21.880 | I had no concept of, for example, fitting in and the cool kids and the uncool kids.
00:36:28.720 | Because I was surrounded in the home education environment, I was surrounded by people who
00:36:32.280 | took me and accepted me as I was, without any pressure to conform, without any stylistic
00:36:37.680 | cues.
00:36:38.680 | I didn't know you had to wear a certain kind of shoe, wear a certain kind of shirt, comb
00:36:42.960 | your hair in such a way.
00:36:44.520 | I had no concept of those things.
00:36:46.160 | It actually took me about a year of being in a private school where I learned about
00:36:50.640 | cliques and I learned about peer groups and I learned about peer pressure.
00:36:54.920 | And most of the things that I regret from high school, the times that I was rude and
00:36:59.120 | ugly to people and the things that I did that were just foolish, were after it took me about
00:37:03.040 | a year after I learned that, "Wait a second, I'm supposed to fit in and how do I do that?"
00:37:08.320 | But that stood me well and it prepared me to be able to stand alone.
00:37:11.880 | I have no problem standing alone in an unpopular opinion or holding something that's a bit
00:37:16.320 | countercultural myself.
00:37:18.860 | And so that's been a major help to me when it comes to building wealth, to have that
00:37:24.540 | trained.
00:37:26.060 | And I also had some of the positive examples, positive training and I had a lot of negative
00:37:30.740 | examples, things I learned the hard way where I said, "I'm not going to do that again."
00:37:34.460 | And so you can do that.
00:37:35.600 | You can break out.
00:37:36.600 | I think the biggest thing that we can do is number one, work with our kids, work diligently
00:37:42.440 | and proactively, restrict the influences that are going to be negative and are going to
00:37:47.960 | have a desultory influence in their life.
00:37:50.520 | Pull those things out.
00:37:52.320 | Work to establish them as an individual first before exposing them to the onslaught of advertising.
00:37:58.320 | Training them.
00:37:59.320 | Anytime I take my children with me to a store or something like that, I get so, those are
00:38:05.400 | the best training opportunities.
00:38:06.520 | I get a little bit sad when I see parents who, the first thing they do, go to Costco
00:38:10.920 | and here's a digital game or here's a cell phone and you should be spending your time
00:38:14.560 | on the cell phone.
00:38:15.560 | Well, you're missing out on the training opportunity.
00:38:17.720 | Let's talk about value comparison.
00:38:19.520 | Let's talk about why we're shopping at one store versus another.
00:38:22.400 | Let's talk about all of these different influences and use those as proactive training.
00:38:27.440 | The proactive training that we can do where we can help put in place systems, training
00:38:34.600 | in budgeting, training in savings, put situations in place where we're teaching them the value
00:38:39.720 | of delayed gratification.
00:38:40.840 | I'm convinced these are skills that can be taught and can be acquired.
00:38:44.320 | They're not just some kind of genetic lottery that we win and we either have them or we
00:38:48.760 | don't.
00:38:49.760 | Certainly, there may be a natural predisposition in one direction or another, but it's a skill
00:38:54.120 | that can be learned.
00:38:55.360 | And then that can extend out.
00:38:56.840 | We have the most influence over our children.
00:38:59.320 | Next we can go out into our social groups, into our more extended families and one by
00:39:04.160 | one you can impact people by and large.
00:39:08.440 | I don't know if it's possible to change the 80%.
00:39:13.120 | I don't know.
00:39:15.280 | I've never fully understood why that principle seems to hold constant in seemingly every
00:39:23.200 | society and seemingly every aspect of life.
00:39:26.200 | So I don't know why that's the case.
00:39:27.760 | I just know that it is the case.
00:39:30.120 | But what I do think you can do is you can, whether or not we can move more wealth down
00:39:36.520 | so that more people in the lower ages are able to have wealth, I don't know.
00:39:40.440 | But I do know we can move people up.
00:39:42.560 | And you can move somebody from the bottom 80% to the top 20%.
00:39:46.560 | And you can then move somebody from the bottom 80% of the top 20% into the top 20% of the
00:39:51.480 | top 20%.
00:39:52.480 | Now, can you go farther without natural inclination?
00:39:55.360 | I don't know.
00:39:56.460 | But I know we can make an impact one by one.
00:39:58.780 | And as the old story goes about the person walking down the beach throwing sand dollars
00:40:06.440 | back into the ocean, no, you can't throw all the sand dollars back into the ocean.
00:40:10.780 | But it can make a difference to the one that you throw.
00:40:16.720 | Anything to add, Grocky?
00:40:17.720 | Nope.
00:40:18.720 | I think we've done a great job of covering it.
00:40:22.200 | Cool.
00:40:23.200 | Let's go on now to, let's see, Daria.
00:40:25.760 | Go ahead and let me know what's going on with you.
00:40:27.280 | I want to see how I can serve you today, please.
00:40:29.280 | Thank you, Joshua.
00:40:30.960 | Well, first of all, thank you for all the work that you do.
00:40:34.160 | I refresh my iTunes feed every day several times with something from you.
00:40:39.360 | And then I also wholeheartedly agree with what you said in the previous question.
00:40:43.960 | I think it's a painful question for me.
00:40:47.280 | But I agree with all what you said.
00:40:51.280 | And I grew up without ads because I grew up in a USSR that no longer exists, where ads
00:40:56.840 | didn't exist.
00:40:57.840 | So I know how it feels with and without.
00:41:00.520 | But to my question is, I see an opportunity in the next several months to be independent
00:41:09.320 | in terms of work for myself.
00:41:12.120 | And the work would be consulting type of work for BISEC.
00:41:18.560 | So I was wondering what kind of things I should think about setting up this.
00:41:24.400 | For example, I understand that maybe LLC is the better way to go, that some other options,
00:41:30.800 | there are probably some tax implications that I should start thinking about.
00:41:34.440 | If you could give me your ideas about where to start trying to make sure that at the end
00:41:40.280 | of the year of my self-employment, I'm not finding myself doing something illegal or
00:41:45.920 | not filing enough taxes or just tripping up.
00:41:49.360 | Okay.
00:41:50.360 | That's a good question.
00:41:51.440 | Are you already doing the consulting work and being paid for it?
00:41:55.840 | No, because I am employed by a company.
00:42:00.360 | But my idea is to stop the employment at a certain point in time.
00:42:08.240 | And then I have enough money saved to sustain the transition.
00:42:13.340 | And I have enough connection made and I see the market opportunity where I can sit in
00:42:18.880 | to start it.
00:42:21.120 | So this is the idea.
00:42:23.880 | Do you have the legal ability, for example, hopefully you don't have a non-compete or
00:42:30.360 | something like that.
00:42:31.360 | Do you have the legal ability to start taking on a couple of consulting clients while you
00:42:35.440 | continue to be employed at your current job?
00:42:37.560 | This is a good question, which I am trying to figure out with our legal team and see
00:42:45.280 | what my contract says.
00:42:46.960 | But let's assume that I don't while I'm employed and let's assume that once I am not employed
00:42:55.440 | I can start right away without waiting for any certain period of time.
00:43:01.720 | So when you're starting something like a consulting business, let's first talk about the business
00:43:05.160 | aspect and then we'll go to the nuts and bolts of accounts and taxes, etc.
00:43:11.240 | The big thing with any new business is to make sure that you actually have a market.
00:43:16.960 | And I don't need to know all that much about your business history.
00:43:19.800 | I'm going to speak generally and you can pull from it what's applicable to you, Daria.
00:43:23.640 | But generally people who are excited about going off and starting a business, if you
00:43:27.880 | haven't done it before, you might get excited about the wrong things.
00:43:31.760 | And the thing that matters when going and starting a new business is can I get customers
00:43:35.880 | and can I make sales?
00:43:37.740 | And so you should practice that as much as possible in the lowest possible risk way.
00:43:44.040 | So if there's any way that you can go off and start the practice of getting customers
00:43:48.160 | and proving your systems and making sure that you can actually convert somebody from an
00:43:52.640 | interested prospect into a paying client, if you can do that now, go do it now.
00:43:58.800 | I advise don't worry about any of the technicalities until you've gone and gotten a customer, until
00:44:04.680 | you've gone and proved it.
00:44:07.360 | So many times I see people that are wanting to start new businesses and I always just
00:44:11.720 | pick on someone like a photographer.
00:44:14.460 | You don't need a business card, you don't need a website, you don't need an LLC, you
00:44:20.920 | don't need a business bank account, you don't need to file a business tax return.
00:44:24.220 | You need to go get a paying customer.
00:44:25.580 | So if you've got a camera, go take pictures of somebody and get somebody to pay you money.
00:44:29.760 | And you can deal with all the technical stuff after the fact.
00:44:32.860 | Same thing with consulting.
00:44:34.120 | You need to go and get somebody to pay you money so you can prove there is actually money
00:44:39.680 | here.
00:44:40.680 | Now, of course, there are going to be many areas where the path of a consultant is well-proven
00:44:46.000 | and you can walk in the footsteps of somebody who's already done it and you can do it yourself.
00:44:52.080 | There are many industries that you can do it.
00:44:53.400 | So if you have a legally binding contract, if you want to do consulting in an industry
00:44:57.760 | that you're in and you can't go and do it on the side, then that's fine.
00:45:03.200 | What I would be doing in those circumstances is I would be working hard to build and establish
00:45:09.260 | my brand and becoming a known quantity in my field even if I'm not providing actual
00:45:15.720 | consulting services.
00:45:17.320 | And it would be a rare contract.
00:45:18.720 | It would only be something like where I came from in financial services.
00:45:21.440 | It would be a rare business where you can't do that while you have your job.
00:45:25.880 | And so you should be working as hard as you can on your marketing and on building and
00:45:29.200 | establishing your reputation before you go ahead and make that jump.
00:45:32.520 | Now when you go and make the jump, what do you need to do?
00:45:35.120 | In the beginning, it's relatively simple.
00:45:37.400 | The first most important thing you can do is to establish a separate bank account for
00:45:42.280 | your business.
00:45:43.800 | This can be a business account and you should in your mind call it a business account.
00:45:48.780 | Whether it is an actual business account or whether it's just a personal checking account
00:45:52.800 | that you're using as a business account doesn't really matter that much.
00:45:57.880 | But you need to establish a separate bank account.
00:46:00.720 | And then anything that you do that's associated with your business, you pay out of that bank
00:46:05.480 | account.
00:46:06.480 | And any money that comes into your business, you put into that bank account.
00:46:11.440 | And it doesn't matter if it goes into the bank account and then you do an electronic
00:46:15.160 | transfer from your bank the very next day to your personal account.
00:46:19.400 | That's fine.
00:46:20.400 | The key is it's got to be run through that bank account because that will help you with
00:46:24.120 | the very simplest of records.
00:46:26.100 | And with something like a consulting business where it's just you, you're not going to
00:46:29.760 | have employees in the short term, it's going to be very, very simple.
00:46:32.960 | Simple is fine.
00:46:34.240 | And by just establishing and keeping a separate bank account with separate records on that
00:46:38.080 | bank account, you'll have the equivalent of a profit and loss statement which you need
00:46:42.200 | every month at the end of the month.
00:46:43.520 | You look in that check register and you say, "Is there money here?"
00:46:46.360 | If there's money there, that means you're making money.
00:46:48.280 | If there's not money there, that means you're not.
00:46:50.600 | And so it's pretty simple to sit down and figure out if you're making money.
00:46:53.920 | So you do need to establish a separate business bank account.
00:46:58.960 | Now depending on the type of consulting, you may or may not want an entity.
00:47:02.920 | Business entities, my opinion, are overrated.
00:47:06.020 | People get bogged down in the details and then they don't go and do anything.
00:47:09.360 | A business entity will protect you from some liability.
00:47:14.120 | But in something like a consulting business, you've got to look carefully and understand
00:47:18.920 | what is my actual liability.
00:47:21.920 | For example, when I was a financial planner, my primary liability that I faced was not
00:47:28.560 | a professional liability.
00:47:29.560 | The primary liability was professional liability that I would give bad advice.
00:47:33.240 | And so having a financial planning business owned in a separate entity like an LLC wouldn't
00:47:39.080 | make any difference to the quality of my advice.
00:47:41.640 | That was where I protected against that liability with something like errors and omissions insurance.
00:47:46.620 | So it was a different liability.
00:47:48.760 | The business of a consultant has very different liabilities than the business of a local concrete
00:47:54.040 | manufacturer.
00:47:55.120 | If you're running a concrete plant and you've got a bunch of guys that are driving concrete
00:47:58.500 | trucks all over town, you've got a different kind of liability.
00:48:01.760 | You've got employees now who might hit some little girl crossing the road and now you've
00:48:05.460 | got a lawsuit on your hands.
00:48:06.560 | Well, in that situation, an LLC and a business type of entity will protect you from that.
00:48:11.600 | But it doesn't protect you from giving bad advice.
00:48:14.200 | A doctor doesn't need an LLC to protect him from bad medical advice.
00:48:20.640 | A doctor needs malpractice insurance.
00:48:22.820 | So look at your liability and understand what the advantages and disadvantages are.
00:48:28.560 | If I were just getting started as a consultant, would I start an LLC?
00:48:32.560 | Maybe.
00:48:33.560 | It's really, really simple to go on to your state's website and file just a standard boilerplate
00:48:38.880 | LLC.
00:48:39.880 | It'll cost you 50 bucks.
00:48:40.880 | You do a report once a year.
00:48:41.880 | It's a pretty simple thing to do.
00:48:44.240 | But you don't have to.
00:48:45.240 | You can just file what's called a Schedule C and just operate the business as a sole
00:48:49.620 | proprietorship.
00:48:51.100 | So the key is go out and get the business profitable.
00:48:54.160 | As you get the business profitable, at that point in time, you can go ahead and start
00:48:58.460 | to hire the advice that you need.
00:49:00.820 | You can go ahead and start to hire the advice of how to structure things.
00:49:04.480 | You can go ahead and afford to pay for good bookkeeping.
00:49:07.280 | You can go ahead and afford to pay for good financial advice.
00:49:10.540 | All of those things will come with time.
00:49:12.140 | But the key is to get the business off the ground.
00:49:14.380 | The couple things that you do want to do.
00:49:15.860 | As you're earning money with regard to your taxes, you want to pay quarterly taxes.
00:49:20.540 | Basically take about 20% of what you're making-ish of your profit and send that to the IRS in
00:49:26.300 | the form of your quarterly taxes.
00:49:28.220 | You want to make sure that you're doing that so that you're keeping pace on the amount
00:49:30.980 | of quarterly taxes that you're paying.
00:49:33.240 | Your accountant will be the one who will work through that with you.
00:49:37.540 | They'll give you the forms and the little slips that you send in to the treasury when
00:49:41.860 | you're paying your taxes.
00:49:43.300 | Or if you're using your own tax preparation program, they'll print those out for you as
00:49:47.620 | well.
00:49:48.620 | But beyond that, it's pretty simple.
00:49:49.900 | When most of the work is on the side of the business, not so much on the side of the technical
00:49:54.380 | planning.
00:49:55.580 | Once you get down the road, once you're making a good amount of money, then you can come
00:49:59.580 | back and reassess your planning and make sure that you've got all those things buttoned
00:50:02.580 | up.
00:50:03.580 | Perfect.
00:50:04.580 | Well, thanks so much.
00:50:05.580 | These are all great points.
00:50:06.580 | Now I know what to do, at least the first steps.
00:50:07.580 | And just to give you some good context about the great thing that you said, I think it's
00:50:08.580 | important to know that you're not just doing this for the money.
00:50:09.580 | You're doing it for the business.
00:50:10.580 | You're doing it for the people.
00:50:11.580 | You're doing it for the people.
00:50:12.580 | You're doing it for the people.
00:50:13.580 | You're doing it for the people.
00:50:14.580 | You're doing it for the people.
00:50:15.580 | You're doing it for the people.
00:50:16.580 | And just to give you some good context about the great thing that you said about the fact
00:50:20.740 | that people jump to a business without understanding their market.
00:50:23.860 | So I'm in a situation where my husband moves to a different state and I have to quit the
00:50:28.140 | job.
00:50:29.140 | But what I told my employer is that I actually do not want to quit fully.
00:50:35.540 | I want to continue to provide my work, but if we can do it on a contract basis or whatever,
00:50:40.420 | a consulting basis, that would be great.
00:50:42.780 | Of course, it may or may not happen, but for me, it's a great opportunity instead of
00:50:46.620 | going right away and trying to find a job in a different state.
00:50:50.100 | I want to explore and see how it works, especially given that I can be on social benefits, on
00:50:56.460 | all kinds of benefits on my husband's new job.
00:51:00.500 | And yeah, but I heard what you said and I think these are great points and I'm also
00:51:07.020 | going to speak with some of my friends who have done this to see what other things they
00:51:13.900 | encountered as independent consultants and what worked and what didn't for them.
00:51:20.100 | The situation that you're describing is really ideal for the purposes of setting up a consulting
00:51:24.900 | business.
00:51:25.940 | If you can use your husband's group benefits to provide for your needs for things like
00:51:30.640 | health insurance, etc., and if you can use your employer as your first major contract,
00:51:38.780 | that can set you up to launch the new business and that can give you the stability to go
00:51:45.020 | ahead and bring on new clients.
00:51:46.340 | That sounds like a perfect fit to me.
00:51:48.340 | The couple of things that you just want to do is let me not skip past, make sure that
00:51:53.540 | you're using that or that you've established that business bank account today and then
00:51:59.020 | use that bank account at all stages.
00:52:02.180 | So for example, if you're going and taking your employer to lunch to talk to them about
00:52:07.160 | your possibly working with them on a contract basis instead of a wage-based, that lunch
00:52:16.140 | appointment qualifies you as a meals and entertainment expense.
00:52:20.420 | So 50% of that will be a deductible expense to your profits and you need to get in the
00:52:25.380 | habit of tracking those things from the beginning.
00:52:28.840 | So make sure you don't short-circuit that and then if you're moving or things like that,
00:52:33.480 | make sure that you're counting and carefully tracking the miles that you're putting on
00:52:37.300 | your vehicle.
00:52:38.460 | That'll be a substantial savings for most people to be able to deduct your mileage expense,
00:52:42.700 | especially if there's travel involved.
00:52:45.080 | If you're traveling on an airplane, make sure that you're tracking those details and that
00:52:48.780 | you're making note of what you're doing.
00:52:51.540 | If you're traveling into town and you're flying back and forth, make sure that you're keeping
00:52:55.260 | those records, paying for those expenses out of your business bank account and then what
00:52:59.180 | you want to do is keep a diary of your actual activities.
00:53:02.960 | Without going into all the details of deducting business travel today, just keep a diary,
00:53:07.780 | make notes of where you're meeting, who you're meeting with, how long your trips are, etc.
00:53:12.000 | so that you have that information so you can get the proper deductions that you're owed
00:53:15.280 | for those expenses.
00:53:17.000 | But it sounds exciting to me.
00:53:18.380 | Deducting can be a great way to earn an income using a skill that you really have while giving
00:53:28.200 | you a good deal of flexibility.
00:53:29.920 | Any other questions, Daria, before I go on to our last caller?
00:53:32.200 | No, I just want to thank you wholeheartedly for what you do and thank you for the advice.
00:53:38.200 | I'm so glad that it's been helpful to you and I'm so glad that you're here in the United
00:53:42.520 | States where you have more economic opportunity instead of in the USSR where you grew up.
00:53:47.920 | So I'm really thrilled for you.
00:53:49.720 | All right, I've got one last caller here with a Pittsburgh area code.
00:53:53.380 | Go ahead, please.
00:53:54.380 | I was calling just to listen mostly, actually.
00:53:58.480 | I've talked to you before, Josh.
00:53:59.920 | You know my story.
00:54:00.920 | I work with family business and just kind of learning from everyone, listening.
00:54:07.440 | One thing out of curiosity, I'll just throw it out there as a conversation piece and see
00:54:11.560 | what your thoughts are.
00:54:13.080 | I had a friend who is doing some flipping of real estate and kind of a similar situation
00:54:19.960 | to me, young family guy, couple kids, you know, money isn't flowing abundantly as always,
00:54:26.280 | but he ended up taking out a home equity line of credit to do his first flip and did very
00:54:33.240 | well on it and is now kind of taking what he made and continuing on, moving on to some
00:54:38.160 | bigger project than the original.
00:54:41.440 | I wanted to see what your thoughts are on that as a strategy to kind of get into some
00:54:45.600 | real estate flipping and those sort of avenues of investing.
00:54:50.280 | Sure.
00:54:51.280 | And just a comment for you and then any other patrons, there's no need, if you just want
00:54:54.680 | to listen in, don't ask a question.
00:54:56.840 | There's no need for you to call into the conference call.
00:54:59.200 | Just listen on the show.
00:55:00.200 | I don't edit the shows.
00:55:01.200 | I just put them out as they are.
00:55:02.580 | So you'll get the same thing on the show as you get on the live call and it helps me to
00:55:06.280 | make sure that I only have callers on the line.
00:55:08.320 | Also in the future, just go ahead and listen in the podcast feed if you don't have a question
00:55:11.560 | for you and other members of the audience.
00:55:13.240 | Also on your question, nothing wrong with it.
00:55:15.000 | It can work.
00:55:16.000 | Basically, you're just trying to say, "I need capital," and if the capital is locked up
00:55:20.840 | in your house, you got to figure out some way to access the capital.
00:55:23.840 | So sometimes that means you sell the house and you use that capital to go ahead and do
00:55:28.240 | your deal.
00:55:29.240 | Sometimes that means you borrow against it and you mortgage the property through a home
00:55:32.640 | equity line of credit.
00:55:34.320 | So you need capital to do a business like flipping real estate.
00:55:39.140 | Even if you're financing it, you're still going to need some capital to get good terms
00:55:42.720 | on your financing or to fund the project.
00:55:45.480 | And so if the capital is locked up in your house, you can't access it.
00:55:49.720 | The challenge is just simply to go slow and learn it.
00:55:52.680 | The big mistake that we all make is trying to get too big for our britches too fast,
00:55:56.760 | where we have a little bit of success in one area and then all of a sudden you switch from
00:56:00.720 | a $100,000 project to a million dollar project.
00:56:03.520 | But on your second project, you didn't figure out how to keep a contractor from doing something
00:56:08.840 | that caused you significant financial problem and now you're in a much deeper hole.
00:56:13.160 | So it's a balance to say, "How aggressive do I be versus how careful do I be?"
00:56:19.680 | But many people have followed the path that your friend is following because when you
00:56:25.480 | decide to build a business, a lot of times it seems like the only money you have available
00:56:30.040 | is either in a 401(k) plan or in your house.
00:56:32.780 | Those are the two places where most US Americans tend to accumulate their money.
00:56:36.560 | So sometimes you cash out the 401(k) plan and sometimes you cash out the house and go
00:56:41.720 | from there.
00:56:42.720 | Right.
00:56:43.720 | And the 401(k), if you were to access that, obviously you just take a huge tax hit.
00:56:47.400 | Is that kind of what happens?
00:56:48.840 | I know you can pull out Roth contributions without penalty as far as the amount you've
00:56:53.800 | put in, not the gains.
00:56:55.360 | But is that true?
00:56:56.360 | Is that how people would do that?
00:56:58.080 | Is just take a huge tax hit on whatever they have in there?
00:57:01.960 | Yeah.
00:57:02.960 | For an operation like you're describing where somebody's investing in a real estate and
00:57:06.920 | they're not under any of the exceptions, for example, there are exceptions to 401(k)
00:57:12.520 | whether it's educational exception, first-time home buyer, significant medical expenses,
00:57:17.480 | et cetera.
00:57:18.480 | And if they don't have an exception where they can do it after 59 and a half, then yes,
00:57:22.600 | they're just going to pay taxes.
00:57:23.600 | It's not necessarily a huge tax hit.
00:57:26.200 | The way it works is you will pay a 10% penalty tax plus you will pay income taxes on the
00:57:34.880 | money.
00:57:35.880 | And the reason that can be expensive is because the distribution that you're making from the
00:57:40.320 | 401(k) comes generally all at one time.
00:57:45.560 | And so when you get it, it might take you up into a higher marginal tax bracket.
00:57:51.120 | And remember that all tax planning is done at the margin.
00:57:53.680 | So if you are earning say $75,000 a year and you take out say $75,000 from your 401(k),
00:58:01.600 | now in this year instead of having a $75,000 income, you have $150,000 income and that
00:58:05.960 | can impact your bracket.
00:58:07.580 | So you're often paying taxes at a higher bracket.
00:58:10.560 | But there are also ways of adjusting that.
00:58:13.800 | For example, if you are working and earning but you're planning to take money out of the
00:58:17.680 | 401(k) and flip a house, then just take it out in the following tax year and adjust it
00:58:22.640 | so that you're doing it in a year where you're not working or where your income is down.
00:58:26.640 | The end of the day, I encourage people don't get scared of penalties.
00:58:31.800 | Just simply calculate them because it's possible, for example, in the scenario I just described,
00:58:36.880 | it's possible that I might be paying taxes at an effective tax rate of 20% right now.
00:58:44.240 | But next year, I'm going to take money out of my 401(k) and I'm going to be flipping
00:58:47.520 | this house and my income tax rate is actually going to go down so low, let's just say I
00:58:51.920 | go down to 0% for the sake of my example, that paying a 10% penalty tax on the money
00:58:58.600 | is cheaper than it would be if I just left it there and pulled it out when I was retiring.
00:59:04.040 | So you just look at the numbers.
00:59:05.620 | You look at the rate of return that you're going to make with the prospective investment.
00:59:08.900 | You calculate the cost of the capital.
00:59:11.160 | And if you're going to take money out of a 401(k), you just got to sit down and calculate
00:59:14.440 | what is this costing me and make sure that there's enough margin and wiggle room in your
00:59:20.400 | decisions that you know you're going to be making money and with a comfortable margin
00:59:25.800 | of safety.
00:59:26.920 | If it's compelling and it's financially compelling, personally I have no problem with
00:59:30.560 | pulling money out of retirement accounts in that situation if it's financially compelling.
00:59:35.240 | If it's on the edge, then I would wait or I would look for another source of capital.
00:59:38.880 | Right.
00:59:39.880 | Great.
00:59:40.880 | That helps a lot.
00:59:42.520 | Thank you.
00:59:43.520 | Awesome.
00:59:44.520 | Well, thank you everybody for calling in to the show today.
00:59:46.640 | I really appreciate it.
00:59:48.360 | I enjoy doing these conference calls and I hope that you enjoy them as well.
00:59:52.560 | If you listen to enough of them, you start to hear that there are some consistent themes.
00:59:55.960 | I think it's so helpful to be able to learn from other people's stories and other people's
01:00:00.640 | actual challenges that they are facing.
01:00:04.580 | From today's show, what I want you to take away from it.
01:00:07.800 | Today's show, take away just the idea of training, setting a good example and giving positive,
01:00:12.720 | proactive training to your children and to other people for how they can make progress.
01:00:17.920 | As Rocky said, building wealth is pretty simple.
01:00:20.960 | Spend less than you earn and invest the difference.
01:00:23.960 | Increase income when possible.
01:00:25.420 | These are simple skills that people can learn.
01:00:27.600 | They can learn at a very young age.
01:00:28.960 | They can practice.
01:00:29.960 | They can build.
01:00:30.960 | They can develop these skills and abilities.
01:00:32.580 | You and I can make a big difference in their lives by taking the time to sit down and teach
01:00:36.960 | them.
01:00:37.960 | Sometimes you can teach them in public.
01:00:39.200 | That's what I'm working on doing, obviously, is seeking to equip you with anything that
01:00:42.640 | I've learned and anything I can draw out of my guests.
01:00:45.440 | You know what?
01:00:47.080 | I reach a lot more people, but a much lower percentage of people take action versus perhaps
01:00:53.200 | you might not be able to reach so many people, but a much higher percentage of the people
01:00:56.760 | that you reach might actually take action.
01:00:58.680 | At the end of the day, knowledge that is not applied doesn't do anything.
01:01:03.360 | Doesn't matter how much you know that I should make more, I should spend less, and I should
01:01:06.840 | invest the difference wisely.
01:01:10.040 | Just knowing it doesn't make it happen.
01:01:13.400 | Reach out today and help somebody.
01:01:14.920 | Help somebody with some crisis budget counseling.
01:01:17.120 | Help somebody with help a young person.
01:01:19.760 | Give them a job.
01:01:20.760 | Give them an opportunity.
01:01:21.760 | Spend the time.
01:01:22.760 | Train them how to budget.
01:01:23.760 | Train them about investing.
01:01:24.960 | Look for ways where you can help and impact another person.
01:01:27.680 | Let's get more people out of the bottom 80% and up into the top 20%.
01:01:31.520 | Along the way, what'll happen is what happens in free market and has been happening for
01:01:34.920 | a couple hundred years, which is incredible, is the entire, I don't know how to get people,
01:01:40.240 | how to change the 20/80 ratio, but we can get the entire thing to move up.
01:01:44.840 | So even if the people in the bottom 80% are living far better than people in the top 20%
01:01:49.280 | were living in the past, because that's the circumstance that we're in today.
01:01:52.980 | If you would like to join for a call like this in the future, all the details at radicalpersonalfinance.com/patron.
01:01:58.180 | If you've enjoyed and benefited the way that I've worked with these individual callers,
01:02:00.840 | but you'd like to retain me to work with you on an individual question that you don't
01:02:04.680 | want aired or you'd like to get into more detail, you can book a phone call with me,
01:02:08.840 | a consulting call at radicalpersonalfinance.com/phonecall.
01:02:10.840 | Again, radicalpersonalfinance.com/phonecall.
01:02:11.840 | Hey, Cricut customers, Max with Ads is included with your Cricut $60 unlimited plan at no
01:02:21.120 | additional cost.
01:02:22.120 | Max is the streaming platform where you can watch Scoob, Meg 2 The Trench, The Nightmare
01:02:27.120 | on Elm Street Collection, and so much more.
01:02:30.560 | Just log in with your Cricut username and password to experience Max on all your favorite
01:02:34.300 | devices.
01:02:35.300 | We've never seen this before.
01:02:36.300 | Max, the one to watch for a good scream with Cricut.
01:02:39.800 | Phone plans, streams, and standard definition, programming subject to change, fees, terms,
01:02:43.840 | and restrictions apply.
01:02:44.840 | See Cricutwireless.com for details.