RPF0449-Friday_QA
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00:00:15.000 | It's Friday. That means it's time for Q&A.
00:00:19.000 | [Music]
00:00:35.000 | Welcome to Radical Personal Finance,
00:00:37.000 | the show dedicated to providing you with the knowledge, skills, insight, and encouragement
00:00:41.000 | you need to live a rich and meaningful life now
00:00:44.000 | while building a plan for financial freedom in ten years or less.
00:00:46.000 | My name is Joshua Sheets and I am your host.
00:00:49.000 | On Fridays we do live Q&A.
00:00:51.000 | That's where you get to call in, ask me whatever question you want.
00:00:54.000 | I don't screen the calls. I don't cherry pick.
00:00:57.000 | It's an open line and you get to ask me anything you want.
00:01:00.000 | [Music]
00:01:07.000 | I really do enjoy doing these calls.
00:01:09.000 | I never thought I was going to be in a radio program,
00:01:12.000 | but this allows me to do the equivalent of it.
00:01:15.000 | I think they're really fun.
00:01:16.000 | They keep me on my toes to see if I'm ready to go
00:01:18.000 | and often just have some really interesting questions,
00:01:21.000 | which sometimes later I expand on.
00:01:23.000 | These calls are open to listeners in a couple of ways.
00:01:26.000 | Today's call is an exclusive patron-only call.
00:01:29.000 | And so what that means is that only people who support the show directly through my Patreon program
00:01:35.000 | at radicalpersonalfinance.com/patron received an invitation to today's call.
00:01:39.000 | That means at the moment, because I have about, what, 270, 265 patrons right now,
00:01:46.000 | and many of them have had their questions answered,
00:01:48.000 | that means at the moment we have one caller on the line.
00:01:51.000 | So we're going to have a back-and-forth directly with Matt in Tennessee here in just a moment.
00:01:56.000 | If you would like to have access to a call like this,
00:01:58.000 | the very best way to guarantee that is to become a supporting patron of the show.
00:02:02.000 | The way that program works, it's a voluntary program.
00:02:05.000 | I distribute the podcast to you here each and every day for free,
00:02:08.000 | sitting here right here for you.
00:02:10.000 | If you find that it is valuable for you, then we have an opportunity to –
00:02:15.000 | you have an opportunity to support it and to send me money through the Patreon program.
00:02:18.000 | You can do that at radicalpersonalfinance.com/patron.
00:02:21.000 | And we just had another caller jump on, so there will be plenty of time.
00:02:23.000 | But we are going to start with Matt in Tennessee.
00:02:26.000 | Matt, welcome to the Friday Q&A show.
00:02:29.000 | Go ahead, please, and let me know what your question is, and let's see how I can serve you today, please.
00:02:33.000 | Joshua, thank you so very much for taking my question today.
00:02:38.000 | So we're answering a couple of my questions today.
00:02:41.000 | And my first one is say that I am a coaching client of yours, and I'm in my mid-20s to late-20s.
00:02:52.000 | I've went through the standard educational system of elementary school, middle school, high school.
00:02:59.000 | Then I went to college and got a degree in what my parents said would be a good paying job
00:03:07.000 | or what a close family friend or anything like that.
00:03:10.000 | And I've really never actually sat down and thought about my goals and objectives before.
00:03:15.000 | I've just kind of been like, okay, I went to college, and then I got a degree in engineering,
00:03:20.000 | and then because they said that would give me a good job.
00:03:24.000 | And you're sitting down and talking with me, and you're trying to really get to, I guess, the why behind a lot of what I do.
00:03:35.000 | But I've really actually never thought about it.
00:03:37.000 | What are some kind of sample questions that you would use in this situation to kind of pull out of me my goals and objectives?
00:03:45.000 | So it's a harder question than you may think.
00:03:49.000 | I'll give you a couple of questions in a moment, but I've been in that situation so many times.
00:03:56.000 | When I started in the financial planning business, I was 23 years old.
00:04:00.000 | And what you find when you work as a financial advisor is the majority of your client base will reflect your age plus or minus about five years.
00:04:08.000 | So in my case, I skewed because I started at 23.
00:04:13.000 | I skewed older rather than younger.
00:04:15.000 | I didn't have any 18-year-old clients, although it would have been nice.
00:04:19.000 | But I did have lots of clients in their 20s and early 30s.
00:04:22.000 | And one of the things that I learned was much of the training that I had been given was not particularly relevant to working with younger clients because often younger clients simply don't know what they want and they don't know how much it's going to cost.
00:04:40.000 | If I were sitting down with a 50-year-old man or woman or husband and wife doing a retirement planning, we would have a very good grasp of what they wanted.
00:04:51.000 | They would probably be living in the neighborhood that they wanted to live in or if they wanted to move, they would know exactly where they wanted to move and what that move was likely to entail.
00:05:01.000 | They would have an idea of the amount of money that they need to spend on their lifestyle.
00:05:06.000 | Are they spending $5,000 a month?
00:05:08.000 | Are they spending $10,000 a month?
00:05:09.000 | They would know that because they would be accustomed to that lifestyle.
00:05:12.000 | They would have a good budgeting history of what they've spent in the past, what they've gotten from it.
00:05:16.000 | They would have a good grasp on their children and their children's educations and what they expect and need.
00:05:22.000 | And so we could do really good financial planning in those circumstances.
00:05:27.000 | The quality of your financial planning is going to be determined by the quality of the data.
00:05:32.000 | And so an established 50-year-old couple has an established lifestyle in general and we can have good data to put into the financial plan.
00:05:44.000 | If you flip that around and talk with somebody like you are describing, in my experience, the average 25-year-old doesn't really have any idea of what they want.
00:05:57.000 | And they will vary in their goals depending on who's talking to them.
00:06:04.000 | If you – if they've recently attended something like a wealth seminar, maybe a real estate investing presentation, and I had a lot of this because when I started in 2008, a lot of people had been involved in kind of the real estate speculation area.
00:06:20.000 | Well, standard fare in that type of seminar is to show off all of the accoutrement of life, to show off the fancy car, to show off the – show off the fancy car, show off the nice RV, show off the fancy house, etc.
00:06:37.000 | And so by holding that in front of somebody, you can start to stoke their desire towards that goal.
00:06:45.000 | On the flip side, if somebody has been exposing themselves to something, say, minimalism and they've been reading a minimalist blog, then over time, that's going to have an impact on their desires as well.
00:06:59.000 | Their personal approach and their personal perspective and philosophy on life is going to make a huge difference on their goals.
00:07:07.000 | If you have somebody like me who encourages and values getting married, having children, then that person is going to be prioritizing, "How can I be prepared to attract a husband or wife that would be appropriate for me?
00:07:21.000 | How can I be prepared to establish my financial life?
00:07:24.000 | How can I be prepared to make sure that I have the money to pay for an engagement ring, to pay for a wedding, to pay for a house down payment," things like that.
00:07:33.000 | That will be influential in their lives.
00:07:36.000 | On the flip side, if somebody has been trained and encouraged not to worry about getting married or having children, then they're going to be very interested in saying, "What can I do to set myself up to travel the world and go backpacking across Europe for a year and go and live in Thailand on the beach with my buddies while we build an internet business?"
00:08:00.000 | So in many ways, a person in that situation is going to be a product of their influences.
00:08:06.000 | And if you can find out their influences, then you can start to sketch their goals out for them.
00:08:13.000 | What I learned while doing that was I needed to be careful because at the average – my opinion, these are fighting words – but the average 25-year-old today is on an emotional maturity level, on a life stability level, about as mature as perhaps an average 13-year-old would have been a century ago.
00:08:35.000 | In terms of a 25-year-old is taught that at this point in life, they should just be kind of figuring it out, trying to understand what they want.
00:08:42.000 | And so that's going to involve some significant changes, and their financial plan needs to reflect that in terms of they need to have a flexibility to try different things and they need to have a flexibility to work on different approaches.
00:09:00.000 | So given that background, the questions that I would ask would not be specifically financial to a young person.
00:09:11.000 | They would be more ideological.
00:09:14.000 | They would be more philosophical.
00:09:18.000 | What lens does that person bring to their life?
00:09:23.000 | Why do they think they're here?
00:09:25.000 | Are they here for self-pleasure, self-gratification, hedonistic enjoyment?
00:09:31.000 | Many people come with that approach and that philosophy.
00:09:34.000 | Are they here for something else?
00:09:37.000 | Are they here for service?
00:09:39.000 | Are they looking to cause a change in the world?
00:09:42.000 | And then by tuning into that, we can start to figure out what the best path is going to be for them.
00:09:50.000 | If I ask – the best question I've ever heard was Dan Sullivan's question, and it's called the Dan Sullivan question.
00:09:58.000 | After years of him using it, I heard it when I was listening to I think it was some MDRT tape or something like that.
00:10:06.000 | When I used to be in sales, I would spend all my time driving around listening to sales training tapes, and I heard some random person give the advice to start every interview with that question.
00:10:18.000 | I think it's applicable for younger people or for older people.
00:10:22.000 | But the question is this.
00:10:24.000 | If we were sitting down together three years from today, what has to have happened for you personally, professionally, and financially for you to really feel satisfied with your progress?
00:10:35.000 | That's the question.
00:10:37.000 | And most people, if you ask that question and you stop and you listen, they'll give you an idea of the direction to go in.
00:10:46.000 | And after you get that idea, then you can adjust and you can decide where to probe more.
00:10:53.000 | For a younger person, somebody like you described, the answers will generally be vague.
00:11:00.000 | And then my goal of trying to help is to try to give options and try to – in the same way that perhaps when you're sitting with an optometrist and they say, "What's better, A or B?"
00:11:13.000 | Try to think, "Well, do you want to live in the city or do you want to live in the country? Do you want to travel or do you want to stay at home? Do you want to build a business or get a job?"
00:11:20.000 | And then try to help them think about it because the sad truth is that very few people sit down and think regularly about their goals.
00:11:28.000 | So that would be where I would start. Is that helpful, Matt? Did I answer your question?
00:11:32.000 | Yes, absolutely. I just – and also I had been kind of studying the kinder questions of life planning as well and trying to see how to incorporate that in as well and helping others try to find exactly where they would like to position going forward.
00:11:52.000 | Do you remember any of his questions?
00:11:54.000 | Yeah, I guess like on the surface, the first one being if you had all – if you were financially independent, how would you structure your life? What would you change?
00:12:07.000 | The second question is say that you were diagnosed with a disease but it wouldn't hinder your ability to actually function and you would perish somewhere between five and seven years but you didn't know when. What would you do?
00:12:24.000 | And the third question is, OK, say that that got expedited very quickly and you had one week to live. What would you do and what would you regret?
00:12:34.000 | My beef with a lot of those kinds of questions – and I don't have any particular problem with them. I think they're useful.
00:12:43.000 | I want every – I love to have good questions. But my beef with a lot of the questions is I think they often will reflect – well, at least they often have for me.
00:12:56.000 | They often reflect this unrealistic perspective of life. For example, when I ask myself the questions of millions of dollars, then I quickly go to thinking about, well, here's the fancy kind of car that I want to have or here's the fancy kind of house that I want to live in.
00:13:17.000 | Or if you think about, hey, you only have 24 hours to live. Well, nobody is going to work for – if I've got 24 hours to live, the same thing that 99 percent of people would do is they would call all their family around them and they would organize some unique activity.
00:13:32.000 | They're in their local town that's going to end and involve food in some way or another and they're going to spend 24 hours with the people that you love and care about the most.
00:13:40.000 | So these questions are all useful, but they all have exactly the same results.
00:13:47.000 | And in some ways, that's problematic because pretty much everybody wants about the same things.
00:13:55.000 | I used to listen to a lot of Zig Ziglar's tapes and he always – he had this one – excuse me.
00:14:00.000 | He had this one talk that he would give and he would just consistently talk about the fact that everybody in the world wants just about the same thing.
00:14:08.000 | Everybody wants to be happy.
00:14:10.000 | Everybody wants to be healthy.
00:14:13.000 | Everybody wants to be at least reasonably prosperous and to be secure.
00:14:19.000 | Everybody wants to have friends, peace of mind, good family relationships, and hope that tomorrow is going to be better than today.
00:14:30.000 | Hope that the future is going to be better than the past.
00:14:33.000 | And those were his eight things and I've never found anything better and maybe those are just so drilled in my head.
00:14:39.000 | Everybody wants to be happy, to be healthy, to be at least reasonably prosperous and to be secure, to have friends, peace of mind, good family relationships, and hope that the future is going to be better than today.
00:14:50.000 | So when you do that, you go through enough of these kind of goal-setting exercises and what you often find is that the answers are consistently predictable.
00:15:01.000 | So where am I going?
00:15:05.000 | I guess the point is that everybody wants about the same things.
00:15:08.000 | And so then the question is how can that be most effectively achieved?
00:15:14.000 | And I don't know the answer, but I guess I'm not saying that the questions aren't valuable.
00:15:20.000 | Just that what's funny is in my experience, everybody wants about the same thing.
00:15:26.000 | Matt, let me go to the next caller here.
00:15:31.000 | I've got a Chicago area number.
00:15:33.000 | I'll come back to you, Matt, in just a minute.
00:15:35.000 | Next caller from Chicago.
00:15:36.000 | Go ahead and let me know how I can serve you today, please.
00:15:41.000 | Hi, Joshua.
00:15:43.000 | Yep, go ahead.
00:15:44.000 | Yeah, sorry.
00:15:45.000 | I took to the note of just now.
00:15:47.000 | I didn't know I was going to talk online.
00:15:49.000 | But just a general summary for HSA health savings accounts, what are the deadlines, what are the limits.
00:15:57.000 | I understand what they are conceptually, but that might be worth a few words.
00:16:01.000 | And if you have time, kind of maybe a reminder for same thing for IRAs and Roth IRAs.
00:16:06.000 | Yeah, this is the time.
00:16:08.000 | This episode is for April 7, 2017.
00:16:13.000 | So this is the time to finish taxes.
00:16:15.000 | And this is the time where if you're going to make contributions to your accounts, to your IRAs and your Roth IRA accounts, this is the time to use it.
00:16:27.000 | The HSA account is also excellent.
00:16:30.000 | The HSA, of course, stands for health savings account.
00:16:36.000 | And it's an account that anybody who has a high-deductible health savings plan can contribute to.
00:16:44.000 | And an HSA is a really interesting and helpful account that I really love.
00:16:52.000 | The challenge is it's not hugely relevant because the contribution limits are not huge.
00:16:59.000 | And then also very few people have – fewer and fewer people have a high-deductible health plan.
00:17:09.000 | One of the best things about, of course, an HSA is just like your IRA and your Roth IRA, it's one of the very few account contributions that you can make after the close of the calendar year.
00:17:21.000 | Most financial decisions that you make for the purposes of tax deductions and tax credits, most of them have to be completed by December 31 of the tax year that you are working in.
00:17:33.000 | The only things that are allowable to be done afterward in essence are your contributions, whether or not to contribute to an IRA or to a Roth IRA and whether or not to contribute to an HSA.
00:17:48.000 | If you have a high-deductible health plan, which is defined as a deductible of at least $1,300 for an individual health insurance policy or at least $2,600 for a family health insurance policy, if you have a high-deductible health plan, then you can qualify for an HSA.
00:18:10.000 | That allows you to put in $3,350 of contributions for an individual and $6,750 of contributions for a family.
00:18:21.000 | Great thing about an HSA is that it comes right off the top.
00:18:25.000 | It's a deduction for AGI.
00:18:27.000 | It's a front-page deduction and those are pretty sweet.
00:18:30.000 | It's not a deduction from AGI.
00:18:34.000 | It's the best that you can have on the front.
00:18:38.000 | One of the useful things is if you – there is possible also – HSA contributions are not subject to employment taxes if your employer is withholding the money for you.
00:18:51.000 | So here we would have two conflicting scenarios.
00:18:54.000 | If your employer is not opening the account and deducting the money into the HSA, then the contributions that you put in, you're going to have paid your employment taxes, your Medicare and your social security taxes, which for employees will be 7.65 percent of your income.
00:19:09.000 | Because you're making – if you're making a contribution at the end of the calendar year such as now in April before you file your taxes, then you're not going to get this break.
00:19:20.000 | But if you are contributing to an HSA throughout the year through your employer, then your employer does not need to deduct your 7.65 percent employment taxes on your HSA contributions.
00:19:33.000 | So that can be an extra sweet deduction available to you.
00:19:37.000 | The money, if you use it for medical expenses, comes out completely tax-free.
00:19:41.000 | It can also be accumulated and it can come out for retirement for any purposes even if not for medical expenses.
00:19:48.000 | It can come out at retirement age tax-free.
00:19:51.000 | So if you are in a situation where you qualify, then definitely don't forget about making your HSA contributions and your IRA and your Roth IRA contributions before you file your taxes.
00:20:06.000 | If you've got the money, it can be very, very helpful.
00:20:09.000 | Does that cover what you were asking about or do you need any clarification or have any other – did I miss anything?
00:20:14.000 | No, I think that's most of it.
00:20:18.000 | I guess I just got to take a couple – I got to figure out what my deductible is.
00:20:23.000 | I didn't – I've got to plan it for the future because you don't know what's going to happen with healthcare.
00:20:26.000 | But I didn't – I don't know what our deductible is right now to even qualify for this, but I'll find out and go forward.
00:20:33.000 | So thank you.
00:20:34.000 | Yeah, you can check the rules.
00:20:35.000 | And like with many things, I don't know how vigorously these things are checked up on.
00:20:43.000 | It's probably just simply a statement to say, "Yes, I have a high-deductible health plan, and I don't know what the actual verification mechanism is."
00:20:55.000 | So – but you should check.
00:20:56.000 | It's pretty simple.
00:20:57.000 | And I love high-deductible health plans.
00:20:59.000 | If I – they work out really well.
00:21:01.000 | As long as you don't have a ton of expenses every year, a high-deductible health plan is the way to go.
00:21:06.000 | All right, back to Matt in Tennessee.
00:21:07.000 | Matt, I got a little bit longer left.
00:21:09.000 | Go ahead with your second question please.
00:21:12.000 | Okay, Joshua, there is an extremely obvious thing around behavioral finance because when people tend to "retire" or reach an older age, the value of that is going to be higher.
00:21:30.000 | The vast majority of those people, the highest assets they accumulated are either some type of 401(k) or IRA and/or their house, which there's a huge behavioral aspect around that because you technically can't – I mean you can touch the money all along the way, but you can't really get to it very easily.
00:21:55.000 | So my question is, is there – there's a curriculum around investment management with the CFA.
00:22:01.000 | There's a curriculum around technical financial planning with the CFP.
00:22:06.000 | But now that behavioral finance is starting to come on the scene, do you know of any books or a curriculum that is focused specifically on the aspects of kind of behavioral finance?
00:22:19.000 | Well, I had the good fortune when you said you were going to ask the question.
00:22:24.000 | I did a quick DuckDuckGo search before I started my – before we started the call.
00:22:28.000 | When you said you were going to ask me about behavioral finance and if there was going to be something about it, I found two articles here that I was – I wasn't sure who was offering it, but I knew somebody was probably offering something.
00:22:41.000 | It looks like Kaplan.
00:22:43.000 | Kaplan is offering something related to this behavioral finance program, how extensive it is and what the courses are.
00:22:52.000 | It looks like they just simply have two basic areas, behavioral financial advice and you, stress management, the mind and the brain, the alignment model, the four R's, and then behavioral financial advice and your clients.
00:23:03.000 | Using the alignment model, teaching the smart money philosophy, applying to your practice.
00:23:07.000 | And so they do have a program. It's eligible for up to 20 CE credits towards CFP, CHFC, other American college designations as well as SEMA and some of the other IMCA stuff.
00:23:25.000 | IMCA is also – evidently has a behavioral finance program as well.
00:23:30.000 | So, of course, IMCA, the Investment Management Consultants Association, a well-renowned option, well-renowned training company also has a program as well.
00:23:45.000 | So those would be two areas to start with.
00:23:47.000 | I don't know how useful a lot of that stuff is.
00:23:50.000 | The point when you're for financial advisors, you've got to get your CE done. And so you can – I don't know.
00:24:00.000 | It gives you more letters to put on your card, which is helpful.
00:24:04.000 | The problem is a lot of this stuff is so overpriced.
00:24:06.000 | If your firm is paying for it, then great. Soak them for all you can get and go and get it from them.
00:24:14.000 | If I were paying for it out of my pocket and I had my CE taken care of, I didn't need it for CE, I'd probably just read some of the books.
00:24:22.000 | I find that a lot of times textbooks, they have their place, but I would read some of the books.
00:24:29.000 | Ultimately though, I don't know how much of a – I don't know how much of an impact an advisor is going to make in some of these areas on an individual one-to-one scenario.
00:24:40.000 | The whole financial advice industry as far as just the average retail advisor is set towards working with people who have already done a good job of accumulating their money.
00:24:53.000 | And in terms of the actual impact that you can make on somebody and the actual change that you can make in their life, there are a few little tricks that you can do.
00:25:04.000 | But – and you can encourage them.
00:25:07.000 | But they may or may not take your advice.
00:25:09.000 | The people that I see the biggest influence on are the people who are trying to work at the policy level, at the firm level.
00:25:14.000 | For example, trying to get things to change where people are automatically enrolled in their retirement – company's retirement plans instead of doing it themselves.
00:25:24.000 | I think that's helpful to some degree and also people who are preaching it publicly such as hopefully me, somebody who's talking about things in the public space.
00:25:37.000 | I feel like that's the more effective frontier at the moment.
00:25:40.000 | But those would be two courses for advisors.
00:25:43.000 | Anything to add to that, Matt?
00:25:45.000 | No, that's exactly what I was kind of looking at.
00:25:49.000 | But thank you so very much for answering that.
00:25:51.000 | Yeah, I do think that behavioral finance is going to be the biggest thing that people should be paying attention to and it is an area that advisors should be paying attention to.
00:26:03.000 | I think the model of the old days of we're just around to manage money, that model is changing, and people are expecting more and more of this.
00:26:15.000 | I think the companies who are leveraging the platforms, the companies like Betterment, like Personal Capital, etc., the companies that have access to everybody's data.
00:26:30.000 | I think they're going to be able to integrate some of those things.
00:26:33.000 | I just read an interesting article.
00:26:35.000 | I forget the citation.
00:26:38.000 | I think it may have been Wall Street Journal.
00:26:40.000 | But I read an article on Uber and all of the behavioral tricks that Uber has brought in.
00:26:46.000 | I think New York Times.
00:26:48.000 | Forgive me.
00:26:49.000 | I think it was New York Times.
00:26:50.000 | The behavioral tricks that Uber has brought in to affect the driver's earnings.
00:26:58.000 | Uber has kind of captured all of and gamified the system for drivers.
00:27:04.000 | Little things, the only one that comes to mind right off the bat, little things like when somebody is about to sign out of the app, if they've earned $270 on the app, before they – when they go to sign out, the app will pop up a little message saying, "Are you sure that you want to sign out?
00:27:21.000 | You're just $30 away from hitting $300."
00:27:24.000 | And so they'll put in opportunities for benchmarks, things like that.
00:27:30.000 | And I think they're big opportunities for the companies that are using all of the client's data such as Mint, such as Personal Capital, such as – there are more coming all the time.
00:27:40.000 | These big guns, they have an opportunity to put in some of those game strategies to really help people to see, and I think that will be coming in the future.
00:27:49.000 | All right, let's go to – I've got a Missouri caller here.
00:27:52.000 | 573 Area Code, how can I serve you today, please?
00:27:55.000 | Hi, Joshua.
00:27:57.000 | Can you hear me, Joshua?
00:27:59.000 | I can. Sounds good. Go ahead, please.
00:28:01.000 | I'm curious to get your take on rental properties and how much is too much to borrow.
00:28:08.000 | My wife and I are just starting out in the rental real estate business, and we've borrowed some money to get started, and we don't know if we should continue to borrow as much as we can or if we should just kind of hold back and take it a little slower.
00:28:23.000 | Define "borrow as much as we can." What does that mean to you?
00:28:28.000 | Well, currently, we have our primary residence completely borrowed against up to like 80% equity, but the three properties that we have are free and clear, so we could borrow against those additionally.
00:28:46.000 | Okay. How much experience do you have in managing rental real estate?
00:28:52.000 | About three years.
00:28:55.000 | So you haven't been through a recession yet?
00:28:58.000 | No, I have not.
00:29:01.000 | Here's the philosophy that I personally think makes sense when approaching that question.
00:29:09.000 | The question is not how much to borrow so much as it's where to borrow and how to borrow.
00:29:19.000 | How do I put this clearly? If I'm just starting off as a real estate investor, I've never – it sounds like you.
00:29:29.000 | We're purchasing some properties. It sounds like you've – you started with some capital.
00:29:34.000 | If you own three rental properties free and clear, even if your primary house is mortgaged, you're not up to your neck in problems.
00:29:43.000 | If I'm just starting off, I want to be very careful about being too aggressive because the leverage of debt – if I make mistakes, the leverage of debt cuts both ways and it can destroy me.
00:29:57.000 | It can help amplify my return significantly and it can help destroy me in a downturn.
00:30:03.000 | So if somebody approaches me and says, "I have a mortgage on my house and I have the maximum mortgage on my house and I have three rental properties that I've bought and I have maximum mortgages on each of those three and I'm just getting started," I'm going to be concerned about that situation because, overall, in the context of the portfolio, overall, that's a very aggressive approach.
00:30:31.000 | And I think a recession comes and if a recession comes and you have no money and you have a lot of debt, a recession comes, you have one problem on a roof, you have one tenant that can't pay, you go through foreclosure, property sits, you have to lower prices.
00:30:47.000 | That can spell disaster very quickly.
00:30:50.000 | That's different than looking at a property and trying to figure out how you're going to borrow on it.
00:30:58.000 | So I don't have a problem if somebody is going to utilize leverage in their real estate investing portfolio.
00:31:04.000 | I don't have a problem borrowing a maximum amount.
00:31:07.000 | I think it makes a lot of sense.
00:31:09.000 | If I had a portfolio of five properties and – with a total portfolio value of $500,000 and I was going to have $300,000 of debt, I would try to have the $300,000 of debt on three of the properties and two of the properties owned free and clear rather than borrowing a little bit across the board, rather than borrowing 60% on each – $60,000 on each of the properties.
00:31:37.000 | Because in many ways, back to the thing that I consistently talk about, you want to either have maximum leverage or no leverage because the in-between ground isn't particularly helpful.
00:31:48.000 | If you have a $90,000 – $100,000 mortgage on a house that's worth just over $100,000 and you go into a recession and all of a sudden you wind up with a problem, you have a problem but your lender has a much bigger problem because there's a note of $100,000 on a $100,000 property.
00:32:12.000 | And possibly if the property is declining in value, there's a note of $100,000 on an $80,000 property.
00:32:16.000 | So your lender has a big problem in that situation.
00:32:19.000 | That puts you in a good negotiating perspective to work out a deal, to change the terms of the loan, et cetera.
00:32:24.000 | That puts you in a position of safety.
00:32:26.000 | If you have a $60,000 mortgage on a $100,000 property and your portfolio goes down by 20% so that your property is now worth $80,000, the lender still doesn't have a problem.
00:32:41.000 | But you've got a big problem.
00:32:42.000 | You've lost 50% of your equity in the property whereas the lender still has adequate consideration to cover their loan.
00:32:51.000 | So I don't know what's the appropriate amount to borrow versus not.
00:32:58.000 | I think that will come down to risk tolerance.
00:33:00.000 | On the whole, I think most of us are going to be well-served by being very, very conservative overall because if you can just not lose money, you can become very, very rich over a long period of time, over the course of your lifetime.
00:33:19.000 | It doesn't take all that much if you just don't lose money.
00:33:22.000 | But if you lose money, losing money can set you back a decade, two decades, et cetera to dig out.
00:33:28.000 | I had a lot of friends who got destroyed in real estate in 2007, and a decade is basically – it's taken them a decade to dig out.
00:33:37.000 | All of the highest returns of their activities were wiped out in a loss.
00:33:42.000 | So on the whole, I think we should give a lot of value to being conservative.
00:33:47.000 | With regard to a specific property, if you're going to employ leverage, I think you should borrow the max.
00:33:54.000 | John Schaub teaches that you should never put in more than 10 percent of your own money into any individual property.
00:34:01.000 | But he's also encouraging that you work towards having a very low debt ratio on your overall portfolio.
00:34:10.000 | So there's going to be an in-between ground, but in general, if I were starting off, if I had $100,000 – I don't know.
00:34:17.000 | Say I have $100,000 in the bank and I'm going to become a real estate investor, and I think you need money to be a real estate investor.
00:34:22.000 | It's a rich boy's game.
00:34:25.000 | You shouldn't play in the sandbox if you can't have a little bit of cushion and margin behind you.
00:34:29.000 | But if I had $100,000, I'm going to try to buy properties and keep all of my $100,000 in the bank for a cushion, and I'm going to try to borrow the max on the properties.
00:34:38.000 | But over time, once I am able to actually follow through and finalize the property portfolio that I want to have – let's say it's five properties – then I'm going to go ahead and work towards paying those things off as quickly as I'm able.
00:34:54.000 | Does that help? Any other further clarifications? Is that a good answer to your question?
00:34:58.000 | It makes a lot of sense. I appreciate the insight.
00:35:01.000 | Great. Awesome.
00:35:02.000 | I'm always confused with – some people say pay cash only and other people say borrow as much as you can.
00:35:09.000 | And like you, I think there's a middle ground somewhere that everybody has to find.
00:35:16.000 | It's very hard to argue intellectually mathematically. It's very hard to argue that paying cash is going to come out better under normal mathematical assumptions.
00:35:35.000 | Real estate is very, very simple.
00:35:39.000 | The simplest way to get rich in real estate – who was it? Jimmy Napier used to say. I'm not sure.
00:35:45.000 | Borrow a million dollars and let your tenants pay it off for you.
00:35:48.000 | That's the basic approach. Borrow a million dollars and let your tenants pay it off for you.
00:35:53.000 | It's very hard to argue against that mathematically.
00:35:57.000 | If you have growth in your real estate and if you have rents that come in, et cetera, the leverage there is powerful.
00:36:06.000 | And real estate leverage is unique.
00:36:08.000 | It's unique because it's such a stable – relatively stable asset.
00:36:12.000 | You can get good loans at good terms and people are happy to lend you money in real estate because their investment is secured by property.
00:36:22.000 | And there are a lot of unique ways to structure it.
00:36:25.000 | And so it's very hard for me – I can't argue the case that going along and paying cash in real estate is probably going to come out financially ahead.
00:36:37.000 | I can't find a way to make that argument.
00:36:39.000 | However, it might be very stressful if things go bad and if you make mistakes.
00:36:47.000 | And if you make mistakes, you can get wiped out.
00:36:51.000 | So when I look at that, I look at it and say we got to take a little nuance here and recognize the realities and ask ourselves, "Are we going in 100 percent?
00:37:03.000 | Are we being young and aggressive and not taking any care of risk management, prudent management?
00:37:09.000 | Do we have any experience or are we trying to get in too fast?"
00:37:13.000 | If we are, I'm going to caution someone and say be more conservative.
00:37:16.000 | But if someone is being conservative, they have assets, they have money in the bank that will protect them in case of problems.
00:37:23.000 | In that situation, I think leverage has a powerful mathematical model to it.
00:37:27.000 | So it's a circular – an endless circular argument, and I find both positions compelling.
00:37:34.000 | And the only way I know how to answer that is to look and try to see, well, in a specific situation, what's better for this individual person?
00:37:43.000 | All right, one last call here today.
00:37:46.000 | Let's go to Alabama.
00:37:48.000 | How can I serve you today, please?
00:37:49.000 | Hi.
00:37:51.000 | Thanks for taking my call.
00:37:53.000 | Okay, so my brother-in-law is planning on proposing to his girlfriend soon, and I'm really excited for them, and they're a really great match.
00:38:05.000 | The only problem is neither one of them is very good with money.
00:38:08.000 | And I really just wanted to hear, you know, if you had a, you know, beloved sibling that was about to marry someone,
00:38:16.000 | and you were, you know, wanting to give them some advice or, you know – and if you didn't have the background that you have, you know.
00:38:25.000 | So I'm not, you know, a financial person.
00:38:27.000 | Like I'm not trained in a way that makes me, you know, authoritative to be able to talk to them about, you know, not buying new cars and stuff like that.
00:38:35.000 | But what's the best way that I could give them, you know, some gentle guidance that doesn't make me sound, you know, like a know-it-all?
00:38:45.000 | That is such a difficult question to answer.
00:38:49.000 | It really is incredibly difficult because you are working in an area that is fraught with danger.
00:38:59.000 | You're dealing with family, family relationships, and money, which is incredibly sensitive.
00:39:05.000 | So let's start with the first most important question.
00:39:08.000 | Has your brother-in-law asked you for advice about money?
00:39:14.000 | He actually has.
00:39:16.000 | He has said that he's interested in, you know, just getting kind of a general rundown of the way that my husband and I handle our finances.
00:39:24.000 | And why did he ask you for advice?
00:39:26.000 | What caused him to come to you and ask for advice?
00:39:31.000 | Well, it came up in conversation when we were discussing how my father-in-law will be retiring soon.
00:39:40.000 | And so as a family, we were all sitting around, you know, discussing kind of his assets, you know, esoterically and into a lot of details.
00:39:51.000 | You know, my husband and I were kind of providing feedback on, you know, our planning to retire early and sort of where we're putting some of our money and our methodology behind that.
00:40:04.000 | And at that point, that's when my brother-in-law said, you know, he'd be interested in hearing more, but there hasn't really been an opportunity yet.
00:40:12.000 | Okay.
00:40:13.000 | So rule number one is that I have learned, don't ever give advice to people who aren't asking for it.
00:40:18.000 | If they don't ask you for advice, they don't want your advice.
00:40:22.000 | So just don't give advice to people who aren't asking for it.
00:40:25.000 | Now, obviously, we can't do that all the time.
00:40:30.000 | Obviously, there are times when you really are concerned or you care about somebody, and so you push past that out of risk of just fear for them.
00:40:39.000 | If somebody is a drunk and they're drinking themselves to death, you don't wait around for them to ask you how to stop drinking.
00:40:46.000 | You push past, but you recognize that you're probably not going to be successful because until they want to stop being a drunk, then they're going to – they're not going to listen to you.
00:40:55.000 | So that is one of my rules, that they're not going to give you advice – sorry.
00:40:59.000 | They're not going to – don't give advice until they ask for it.
00:41:04.000 | Number two is don't give advice until they pay for it.
00:41:08.000 | And in this context, I'm not saying that he needs to pay you money.
00:41:12.000 | I am saying that in my case, as a financial advisor, I would hold that.
00:41:19.000 | I don't give advice for free because people don't do anything with advice that's free.
00:41:23.000 | You can give advice for free all day long.
00:41:25.000 | People think it's worthless because they didn't pay for it, and I tried that for a decade, and I realized that that plan doesn't work.
00:41:32.000 | And so I don't give free financial advice anymore.
00:41:34.000 | Listeners of this show have – and that's one of the nice things about having a podcast.
00:41:39.000 | Anybody who's interested in "free financial advice" can listen to my show, and I just tell people, "Listen to my show if you want to hear me talk about money."
00:41:49.000 | And people pay for that in regards to their time and also their effort.
00:41:53.000 | So you're not here by accident.
00:41:55.000 | You're here because you had to search out a podcast.
00:41:59.000 | You didn't stumble into it.
00:42:02.000 | You had to actively go and click on a website or subscribe on your phone, and you're paying with your time.
00:42:08.000 | You're listening to the content.
00:42:10.000 | How I would apply that to you as a normal person, non-financial advisor, is I would give homework.
00:42:17.000 | I would give – I would try to think of an approach that's been helpful to you, and then I would pass that along and give that to them as homework.
00:42:28.000 | Don't give them all the advice.
00:42:30.000 | Give them a little bit of advice and give them a homework assignment and see if they do the homework.
00:42:35.000 | And if they don't do the homework, then you know don't waste your time any farther, and there's no point in going on anymore.
00:42:42.000 | And if they do the homework, then you can go ahead and do more as well.
00:42:46.000 | Now, lest I sound heartless and cruel, I'm not seeking to be heartless and cruel.
00:42:51.000 | I've just observed that people don't do anything unless they actually have to do a little bit of work.
00:42:55.000 | Nobody values anything they get for free.
00:42:58.000 | And so we want to make sure that we care for somebody, but we want to make sure that they're going to get value out of it.
00:43:04.000 | How old is your brother-in-law?
00:43:06.000 | 26.
00:43:09.000 | So do you know anything about the details of his situation as far as is he in debt?
00:43:15.000 | Does he just not – he just doesn't know where his money goes?
00:43:19.000 | I think he does have some student loans, and lately he's been working to pay them off aggressively.
00:43:29.000 | He seems like he's in a better place right now, but I also know him that he sometimes goes through little peaks and valleys in money management.
00:43:38.000 | I think we all do. At least I do.
00:43:40.000 | I'm the king of peaks and valleys.
00:43:43.000 | At this point, I've learned to deal with it, but I'm the king of peaks and valleys.
00:43:47.000 | We all do that.
00:43:50.000 | What financial voices have been the most influential in your and your husband's lives?
00:43:58.000 | That's a good question.
00:44:02.000 | Mostly – so we've both gotten kind of a lot of influence from our parents for sure.
00:44:09.000 | But a lot of the financial gurus of today that publish books, I think I've read a lot of them and shared those with my husband.
00:44:17.000 | So I feel like we mostly go off of radio and podcast voices.
00:44:23.000 | So I would encourage you to start with whoever has been most influential and helpful for you.
00:44:28.000 | If it's radical personal finance, just introduce him to that. Send him your favorite episode.
00:44:33.000 | If it's Dave Ramsey, give him a copy of Dave Ramsey's book.
00:44:37.000 | Maybe consider sending him through Financial Peace University, Dave Ramsey's kind of flagship program for financial management.
00:44:44.000 | If it's something else, go ahead and just share with him the resources that have been helpful for you,
00:44:50.000 | because that's where there's going to be power and authority in that.
00:44:55.000 | As far as what he should actually do, which is kind of the tone of your question that I've skipped up till now, I would try to keep it very simple.
00:45:04.000 | And if you're looking for a specific program to recommend him to, I don't think you could go wrong with Dave Ramsey's program, Financial Peace University,
00:45:14.000 | until I create my own, which will be better than his.
00:45:19.000 | At this point in time, I think that's the best option. And here's the reality.
00:45:23.000 | It is – I don't see any possible way that you can go wrong following Dave's advice.
00:45:32.000 | If you pay off your debt and you don't borrow money and you save money and you invest using mainstream investments and you buy term life insurance, disability insurance, etc.,
00:45:46.000 | I don't see how you can go wrong.
00:45:49.000 | It's a really safe plan that's going to work for the vast majority of people, and it teaches the important fundamentals, the important fundamentals of budgeting, the important fundamentals of planning, etc.
00:46:00.000 | Now, there's a point in time at which it stops, but I've never seen somebody who is better at motivating action than Dave is.
00:46:09.000 | He is world-class. As long as he doesn't annoy the person with his personality, kind of the southern personality, the Tennessee boy type of thing, he is world-class at inspiring and motivating behavior.
00:46:23.000 | And so that would probably be the resource that I would point him towards.
00:46:28.000 | Specifically, I would try to get him to think very carefully about how much money he spends on a ring. I would send him to – has he talked about that with you?
00:46:39.000 | Not directly, but I do know that he's planning on going with a family heirloom, so I'm really proud of him for that.
00:46:46.000 | Perfect. Perfect. Okay. That's ideal. So I would try to get him to limit what he spends on the ring.
00:46:51.000 | I would try to – as they approach wedding planning, I would try to get them – do you know if there's going to be family help with wedding or would you expect family help with the wedding?
00:47:02.000 | Is his parents, her parents in position where they could help or would they be paying for it themselves?
00:47:07.000 | I think there will be a good bit of help. There might be some out-of-pocket expenses for them.
00:47:14.000 | And I think mostly they're planning on a big honeymoon trip. I think that's where they want to put the majority of their funds.
00:47:23.000 | Awesome. So the big key distinctions, if they can just not borrow money, if he's paying – he's been working on paying off his student loans, he might need to stop that repayment while they get work through the wedding.
00:47:37.000 | That's what I would do. I would not wait to get married until I got out of debt or something. I mean that's – whatever. It's going to be there.
00:47:45.000 | So maybe they need to stop extra payments until they get married, but just try to help them avoid borrowing money.
00:47:52.000 | Many times with people who are not financially skilled, they face such emotional pressure to spend too much money on a ring and to spend too much money on a wedding.
00:48:04.000 | I've been there, done that myself. So you have a temptation to spend too much because it's the most important thing going on in your life at that time.
00:48:16.000 | And not saying it's not important, but the level of importance and impact in your life does not need to be measured by how much money you spend.
00:48:24.000 | So just try to help them to avoid borrowing money. Don't let them take out credit cards to go and pay for their wedding.
00:48:32.000 | Many couples do that and it's a disaster. In addition, try to help them think through some very simple system of budgeting once they get married.
00:48:44.000 | In today's modern world, there's no better solution than YNAB. Try to help him to use that.
00:48:52.000 | If he just uses YNAB, that will coach him toward managing the money that they have.
00:49:01.000 | I would stick with those two things for a year or so. After they get married, I would continue to follow up with them and I would consider sending them through something like Dave Ramsey's Financial Peace University, possibly even during their engagement period, and then follow up with them.
00:49:17.000 | And those basics will see them well. After they've been married a year, something like that, they'll be at a position in their marriage relationship where they can start to think about future goals, future dreams.
00:49:28.000 | It will take them a year to get through the honeymoon phase where they can talk enough about figuring out, "Well, what do we want our shared life to look like?"
00:49:36.000 | And so at that point in time, you can start to chime in with some of what you've learned about early retirement.
00:49:41.000 | You can talk with them about some of the different lifestyle decisions, the impact of where they live, of the different ways that they approach things, and you can go from there.
00:49:49.000 | But I think those would be the basic outlines of my advice.
00:49:53.000 | That's a lot of really good advice. Thank you so much for your time.
00:49:57.000 | Awesome. Thank you for calling in and asking the question. It's always fun.
00:50:02.000 | Man, big variety here of the questions today.
00:50:07.000 | It is hard to know how to get young people and how to help young people work their way through some of these decisions.
00:50:15.000 | And more big financial decisions or financial mistakes are made in those early years than seemingly any other time.
00:50:23.000 | All right. That's it for today's show. A couple of resources as we go.
00:50:27.000 | I mentioned YNAB. You Need a Budget. That is the budgeting software that is just so good that I recommend to help people budget.
00:50:34.000 | If you'd like to sign up for that, you can get a free 34-day trial at RadicalPersonalFinance.com/YNAB.
00:50:40.000 | I use it every day. I think it works phenomenally well.
00:50:43.000 | And here's the trick. Sign up for a free trial. Again, RadicalPersonalFinance.com/YNAB.
00:50:49.000 | And take the YNAB classes. One thing that Jesse Mecham and his crew have done so well is they have built a series of structured,
00:50:57.000 | systematic classes for people to go through to learn how to use the software.
00:51:01.000 | And they coach people on all the basics that are necessary in order to learn how to use the software and to manage the money they have.
00:51:08.000 | And before you get to any aspect of investing, everything starts with money management. Everything is built upon that.
00:51:14.000 | In addition, in today's show, I mentioned Personal Capital. Personal Capital, I also have an affiliate link for them.
00:51:19.000 | You can use their service at RadicalPersonalFinance.com/PersonalCapital.
00:51:24.000 | RadicalPersonalFinance.com/PersonalCapital.
00:51:27.000 | And what Personal Capital does is they do provide a world-class dashboard for your money.
00:51:34.000 | You can link all of your various investment accounts and you can see how much money you have in your bank, in your investment accounts, etc.
00:51:41.000 | They do a good job of helping you to track your investing performance, to see your net worth, and also to look for things like fees.
00:51:48.000 | If you use that link, the software is completely free.
00:51:51.000 | The way their business model works is if you have an investment account, they will reach out to you and they will target you as a potential customer for their investment management platform.
00:52:04.000 | But if you use that link, I will get a commission for some of you who sign up for that.
00:52:08.000 | So you can do that completely for free. Totally free software package. RadicalPersonalFinance.com/PersonalCapital.
00:52:13.000 | Finally, as we go here, if you'd like to support my show directly and send me money, you can do that at RadicalPersonalFinance.com/Patron.
00:52:22.000 | And I will also get you access to these Friday Q&A calls in the future.
00:52:25.000 | And on these patron-only shows, we have plenty of time, plenty of time for good questions.
00:52:30.000 | RadicalPersonalFinance.com/Patron.
00:52:32.000 | Have a great weekend. Make sure you pay attention to the things that are important this weekend.
00:52:38.000 | This show is part of the Radical Life Media network of podcasts and resources.
00:52:44.000 | Find out more at RadicalLifeMedia.com.
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