RPF0617-Friday_QA
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00:00:22.080 | Today on Radical Personal Finance, it's live Q&A.
00:00:41.200 | Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge,
00:00:44.000 | skills, insight, and encouragement you need to live a rich and meaningful life now, while
00:00:47.520 | building a plan for financial freedom in 10 years or less.
00:00:50.960 | My name is Joshua, I am your host, and today on the show, we do live Q&A.
00:00:55.520 | You get to call me up, ask me any question, make any comment, we can talk about whatever
00:01:01.360 | you want to talk about.
00:01:03.480 | That's what a live Q&A show means.
00:01:08.560 | A couple of quick notes as we begin these shows, or as I begin today's show, these shows
00:01:17.460 | are entirely driven by you and what you would like to talk about, which means sometimes
00:01:21.400 | they work out really well, and sometimes they don't.
00:01:23.800 | I do my best to keep the content moving along, I do my best to deal with the calls, but I
00:01:27.880 | just simply take them in the order that they come in.
00:01:29.920 | I don't pick and choose, I don't sell some people they can't call in, I just take them
00:01:33.960 | in the order that they come in.
00:01:35.520 | A couple of notes, you will notice if you look in the notes on your podcast listening
00:01:40.160 | device, you will notice that I have put in to those notes the different questions and
00:01:45.080 | topics along with some time stamps.
00:01:46.920 | If there's a call that's just simply not interesting to you and you want to just skip forward,
00:01:51.320 | go ahead and feel free to do that.
00:01:52.320 | It won't offend me one bit, but I do my very best to keep things concise and focused on
00:01:57.360 | the specific questions.
00:01:58.360 | I hope you're enjoying the variety of these Q&A calls.
00:02:01.160 | We begin with Dan in Alberta, Canada.
00:02:02.960 | Dan, welcome to the show.
00:02:03.960 | How can I serve you today?
00:02:04.960 | First, I just wanted to say thank you for providing such a diverse and unique set of
00:02:14.000 | advice and just being yourself without conforming to the mainstream.
00:02:20.000 | I just really, really appreciate that.
00:02:21.920 | My pleasure.
00:02:22.920 | Thank you for the nice words.
00:02:25.760 | And I wanted to acknowledge that this summer I spent four months cycling across the US
00:02:33.080 | and Europe.
00:02:34.080 | As someone in my 20s, through the knowledge you've provided and understanding the value
00:02:43.240 | of money, I've been able to put away that time and money.
00:02:47.520 | I think that's really unique and I think something that a lot of people don't have the skills
00:02:53.600 | to realize what's possible.
00:02:55.480 | So I remember you mentioned traveling in one of your shows and how really what you want
00:02:59.800 | to do is travel.
00:03:00.800 | You can hop on your bike and ride and that's what I did and it was really an experience.
00:03:07.080 | What did you learn on your trip and how is it impacting your life now?
00:03:11.760 | Well, the first thing that jumps out is the value of companionship.
00:03:19.640 | When planning the trip, I was focused mostly on biking because I just really enjoy cycling
00:03:26.560 | and traveling.
00:03:27.560 | But yeah, about three weeks in, I kind of realized that I've been alone for three weeks
00:03:34.080 | on the road on my bike.
00:03:37.720 | And yeah, really started to appreciate people a bit more.
00:03:44.040 | Yeah, that has always been my experience traveling alone as well.
00:03:48.560 | There seem to be certain personality types that thrive on it, but anytime I've traveled
00:03:53.680 | alone I've never enjoyed it as much as when I have been with people that I enjoyed being
00:03:58.200 | with.
00:03:59.200 | So go ahead with your question for today, Dan.
00:04:00.200 | So to phrase it generally is how to give and share effectively.
00:04:09.080 | And a more specific example is when I do travel with friends, I work hard to save money to
00:04:18.840 | do this traveling and I can understand that my friends might not exactly be able to afford
00:04:27.720 | the same things or want to afford the same things that I can.
00:04:31.920 | So if I'm asking a friend to join me to do something and finance is a barrier to them,
00:04:40.480 | how can I approach paying for them?
00:04:45.960 | Because for me, it's definitely worth my money to share that experience with them.
00:04:51.880 | However, if they can't afford it, how can I share with them without having a power imbalance
00:04:58.440 | where they feel like they owe me something or just sharing effectively, if that makes
00:05:06.720 | sense.
00:05:07.720 | So your concern then is you're traveling with a friend and you want to have a peak experience,
00:05:15.160 | something that's going to cost money.
00:05:17.080 | And you feel, you know that you would love to have them go with you on this peak experience
00:05:21.720 | that's going to cost money, but you know it's not in their budget.
00:05:26.680 | And so you're trying to figure out how to magnanimously or magnanimously, anyway, with
00:05:33.320 | magnanimity you're trying to figure out how to simply say, "Listen, this is a treat on
00:05:37.940 | me in an appropriate way."
00:05:40.300 | Is that your question?
00:05:41.300 | Yes.
00:05:42.300 | Yes.
00:05:44.180 | Well, in my mind, I think first of all, you choose your friends carefully and you seek
00:05:50.020 | to choose people who are not seeking to take advantage of you.
00:05:55.100 | And if you are interacting with somebody who is taking advantage of you or who is trying
00:05:59.900 | to take advantage of you, then I think you simply speak directly to that and your actions
00:06:07.300 | should reflect that.
00:06:09.020 | Now if you're interacting with somebody who's a true friend in the situation that you're
00:06:12.900 | describing and you know that they're not simply a fair weather friend, somebody who's trying
00:06:17.420 | to take advantage of you just while things are good, then in my opinion, just make it
00:06:22.860 | clear to them and simply say, "This is a treat," and do it simply and easily.
00:06:28.260 | I think the best way to do it is to just simply speak clearly about the subject and to say,
00:06:33.820 | "I would like to do this and I'd like to take you with me.
00:06:36.220 | I'd like to buy this ticket for you.
00:06:37.740 | Are you willing to come with me?"
00:06:39.660 | And make it clear to them.
00:06:40.660 | There are no strings attached.
00:06:41.660 | I'm not trying to do anything.
00:06:42.940 | I just want to do this for you as an act of generosity so that we can enjoy this experience
00:06:49.540 | together.
00:06:50.700 | And if you just simply do that, then I think you will have... if you do it and you state
00:06:57.140 | it and you make it clear to them, you can avoid a lot of problems.
00:07:02.620 | The key thing is for you to clarify it up front.
00:07:05.020 | I have... there are people, for example, there are people that in my life, when they invite
00:07:08.860 | me to do something, I'm very cautious to understand the full situation.
00:07:13.860 | So they might say, for example, "We'll go here and I'll pay for this."
00:07:17.900 | Meanwhile, I know that there are other associated expenses.
00:07:20.940 | So I need to know, "Okay, if you're inviting me, are you inviting me and you're going to
00:07:24.060 | pay for the ticket, but then I'm going to pay for the meals, I'm going to pay for the
00:07:29.580 | lodging, et cetera."
00:07:31.020 | I need to know the full budget going in.
00:07:32.540 | So one thing you can do as the wealthier party is make it clear to them what they can expect
00:07:37.420 | to pay for.
00:07:38.700 | When I invite people to do things, I like to take people shooting, for example.
00:07:43.740 | It's fun.
00:07:44.740 | I like to take all my liberal friends that don't own guns and don't ever shoot guns,
00:07:48.340 | I like to take them shooting.
00:07:49.340 | It's super fun.
00:07:50.620 | And what I try to do is I try to make it clear to them what the expenses are going to be,
00:07:54.620 | because somebody who's never gone shooting doesn't know what the expenses are going to
00:07:58.500 | be.
00:07:59.500 | So if they're going to use my guns and I'm going to pay for the range fees, I do that,
00:08:03.260 | but then I give them a budget.
00:08:04.340 | If they're going to be paying for ammo and I'm going to do that and have them do it,
00:08:07.220 | I tell them, "Here's how much you can expect to pay for ammo or for targets," or if I'm
00:08:11.180 | going to provide those things, I make it clear.
00:08:13.620 | And so when you're inviting somebody to do something that they're not sure about whether
00:08:19.340 | or not they're going to be able to do, and if that person is in a financial situation
00:08:22.980 | where they need to know and to budget those expenses, then you can really do a good job
00:08:27.620 | by just simply being explicit with all of the costs and what they could expect to pay
00:08:32.900 | for and not pay for.
00:08:34.980 | That's on your end.
00:08:35.980 | So I think first, if you look for the friend and make sure that you're dealing with people
00:08:39.340 | who are – they would be your friends if you did nice things for them or not, and then
00:08:43.140 | number two, then you are clear with them, you can do a really good thing.
00:08:47.420 | And I've had so many people in my life who have been economically generous with me when
00:08:52.220 | I didn't have money, and I so appreciate what those people have done.
00:08:56.100 | Now to the topic of a power imbalance.
00:08:58.980 | There's always a power imbalance in life.
00:09:01.180 | One of the things that really bothers me about a lot of kind of modern philosophical reasonings
00:09:06.180 | is people think that somehow you can get rid of power imbalances, that somehow you can
00:09:12.780 | eliminate any difference between people that would lead to a power imbalance.
00:09:19.380 | And usually, unfortunately, the way that people try to eliminate a power imbalance is not
00:09:24.460 | usually by strengthening the person who is weaker, but often it's by tearing down the
00:09:29.220 | person who is stronger.
00:09:30.900 | I think power imbalances are entirely unavoidable.
00:09:34.400 | There will always be somebody who you have more money than, and there will always be
00:09:38.620 | somebody who has more money than you.
00:09:40.900 | There will always be somebody who is bigger than you, and there will always be somebody
00:09:44.140 | who's smaller than you.
00:09:45.600 | There will always be somebody who's smarter than you and somebody who's dumber than you.
00:09:49.500 | There will always be somebody who's more attractive than you are and somebody who's less attractive
00:09:53.060 | than you are.
00:09:54.100 | So we're all going to live in a life of imbalance.
00:09:57.460 | And so from that perspective, it's your job and your responsibility to cultivate the character
00:10:03.320 | and virtue not to impose coercion or manipulation on other people.
00:10:09.120 | So let me use a simple example.
00:10:11.420 | I am a physically large person.
00:10:14.620 | There are very few people who are physically larger than I am.
00:10:18.000 | So of course there's an obvious power imbalance of me compared to other people who are different,
00:10:24.060 | different in physical size.
00:10:25.860 | But does that make my size somehow wrong or a bad thing?
00:10:31.360 | Only if it's not guided in an appropriate way.
00:10:34.140 | So my size can be a very good thing if I use it for virtuous and upright and righteous
00:10:39.500 | ends.
00:10:40.500 | If I use my size to defend somebody who is smaller, to stand up to a bully, to stop some
00:10:46.340 | wrong that's happening, then that's a good thing.
00:10:48.900 | If I use my size for coercion against another person and I try to bully them or I try to
00:10:54.420 | physically force them or to intimidate them in some way, then now that's a bad thing because
00:10:59.700 | I'm expressing that coercion which individuals ought not to do.
00:11:04.300 | And so I would just say that's your job.
00:11:07.300 | Just because you're richer than your friends doesn't mean automatically that you're going
00:11:11.580 | to exert a wrong power over them.
00:11:15.200 | It just means you have a choice and you want to be careful that you're not manipulating
00:11:18.980 | them.
00:11:19.980 | And so you're getting a benefit out of it.
00:11:22.000 | You're getting your friends to accompany with you.
00:11:24.220 | Just make it clear to them, "I want to do this because I'm enjoying your company.
00:11:26.860 | I don't expect anything from you.
00:11:28.140 | This is a free and open-hearted gift."
00:11:30.420 | Those are my thoughts.
00:11:31.420 | >>Toby: Okay, excellent.
00:11:32.420 | Yeah, thank you.
00:11:33.420 | That does clear it up a lot.
00:11:34.420 | I'll just add a little note of sometimes as a response, people have valued their own kind
00:11:44.180 | of financial independence in terms of like they don't feel comfortable accepting gifts
00:11:52.620 | all the time.
00:11:53.620 | Is that their right to hold on to that value?
00:11:58.820 | Or do you think there might be some room for me to kind of explain how you explained it,
00:12:06.860 | to kind of see things more from my perspective, that there is this power imbalance but that's
00:12:12.580 | not a problem?
00:12:14.380 | >>Steven: I think it's their right.
00:12:16.860 | And so one of the things that I do think is good, especially if you're concerned about
00:12:22.060 | that, is it's very nice to allow somebody else to make a gesture indicating that they
00:12:30.380 | are not beholden to you, even if it's something of a token gesture.
00:12:34.740 | So let's say that you take somebody out for a nice dinner and it's a $100 dinner.
00:12:41.780 | Even in that circumstance, when somebody is taking, sorry, you're taking somebody else
00:12:45.940 | out for a $100 dinner, very fancy, you know they wouldn't be able to avoid it.
00:12:50.300 | Sorry, they wouldn't be able to afford it in their budget.
00:12:53.460 | It's nice if you let them pitch something in for the tip or if you give them an out
00:12:58.220 | that allows them to maintain their sense of dignity and say, "Well, I'll tell you what,
00:13:03.340 | let's go out for ice cream and you buy the ice cream after this expensive dinner."
00:13:07.540 | It usually will help somebody not to feel beholden to you in that way and I think that
00:13:12.580 | it's entirely fine to do.
00:13:13.940 | Now usually, in my opinion, the way to do it is to give them a chance.
00:13:18.820 | So let's use dinner as an example.
00:13:21.380 | You're feeling flush, there's a really nice restaurant that you really love going to and
00:13:26.380 | you want to invite a good friend of yours along for company and for just for companionship.
00:13:34.780 | And your friend is an honorable person who knows that you're being kind to them but they
00:13:38.100 | don't want to be beholden to you.
00:13:39.900 | So you invite them out for dinner and then they offer, naturally, to say, "Tell you what,
00:13:43.700 | let me leave the tip."
00:13:45.320 | And you say, "No, no, no, you don't need to do that."
00:13:47.100 | And they say, "Let me leave the tip."
00:13:48.860 | You should protest a couple of times because then they've at least made the gesture that,
00:13:53.500 | "Hey, let me leave the tip."
00:13:54.740 | They've satisfied that and if you overcome them by saying, "No, this is my treat," then
00:13:59.620 | they'll go ahead and just be quiet and appreciate the treat.
00:14:05.180 | Now on the other hand, if they really press it three times, "No, let me leave the tip,"
00:14:10.980 | then I think you should let them leave the tip because maybe they're solving that particular
00:14:14.740 | need.
00:14:16.740 | There are people in my life who have been deeply generous with me and I don't like feeling
00:14:21.900 | beholden to people financially.
00:14:23.860 | And I appreciate the generosity, extraordinary, I very much do.
00:14:27.900 | But then what I will try to do is at times go ahead and without permission, I'll try
00:14:33.180 | to make a token gesture to simply show, "Listen, I appreciate your generosity, but I'm not
00:14:38.060 | a freeloader.
00:14:39.060 | I'm not a charity case.
00:14:40.060 | I'm not asking for anything.
00:14:41.420 | And so I'll force the circumstances in some way that allow me to demonstrate that I'm
00:14:46.340 | not trying to take advantage of you."
00:14:48.480 | And so fighting over the tip, I think, is the normal thing.
00:14:51.020 | But trust yourself.
00:14:52.740 | The back and forth is a little silly sometimes, but if the person really insists, let them
00:14:57.020 | pay the tip or offer them, tell you what, you get the beers afterwards or you get the
00:15:00.660 | cigars or you get the ice cream or whatever the next thing is, give them a chance to show
00:15:04.940 | that they're not a freeloader.
00:15:06.420 | Okay.
00:15:07.420 | Thank you very much.
00:15:09.460 | I really appreciate that advice.
00:15:11.020 | My pleasure.
00:15:12.020 | And congratulations on what you experienced with your traveling.
00:15:15.380 | I'll repeat it for anyone who wants to know.
00:15:17.600 | Traveling doesn't have to cost money.
00:15:19.100 | If you want to travel, walk out your front door, turn right and start walking.
00:15:23.020 | You're traveling officially.
00:15:24.540 | You can walk across the country, you can bike across the country, you can walk around the
00:15:28.540 | world and you don't need a lot of money to do it.
00:15:31.620 | Now, of course, many people by traveling mean other things.
00:15:34.880 | So design what your ideal method of traveling is and go from there.
00:15:38.460 | We move to Mark in Texas.
00:15:39.460 | Mark, welcome to the show.
00:15:40.460 | How can I serve you today, sir?
00:15:42.980 | Thank you, Joshua.
00:15:43.980 | I really appreciate you taking my question.
00:15:46.180 | Also, I highly appreciate all the great content you put out.
00:15:50.980 | I've definitely benefited from it.
00:15:54.460 | My question is concerning a 401k.
00:15:59.020 | I am a VP of a small company and I recently was setting up our new 401k for all of our
00:16:11.340 | employees.
00:16:12.340 | And my question is regarding that.
00:16:16.560 | After setting it up, I had a good conversation with the owner of our company and he was okay
00:16:24.120 | with this idea.
00:16:25.780 | But I am more concerned about if there's any issues with it concerning the IRS or anything
00:16:32.980 | like that.
00:16:33.980 | It's my understanding that you can, a company can pay any employee that it wants to, no
00:16:43.220 | matter what type of work the employee is doing.
00:16:48.500 | It's all based upon the company's decision.
00:16:52.520 | So in a scenario like that for a 401k system, if I am working for a company as a VP and
00:17:01.060 | if I had the company going forward, any yearly bonus or really it's more any yearly, excuse
00:17:11.380 | me, any change in my salary, any increase in my salary going forward, if I was to have
00:17:21.100 | the company put that in my wife's name, not my name directly going forward for the cause
00:17:28.700 | of having a greater 401k limit so I could put more money in a 401k, I wanted to understand
00:17:38.100 | if there's any issues that the company would have in the future by doing that.
00:17:44.020 | My wife has done some work for the company.
00:17:46.980 | She is not a full-time employee for the company.
00:17:50.340 | So I wanted to know kind of your thoughts on that type of strategy.
00:17:56.220 | What kind of dollar amounts are we talking about here?
00:18:02.220 | So obviously my plan in the future would be able to fully maximize two 401k amounts.
00:18:14.180 | So I guess it's 18.5 right now.
00:18:17.020 | So going forward, that would be my plan or my desire to see that happening.
00:18:23.140 | So give me a ballpark.
00:18:27.860 | What is your current compensation, your total compensation from the company that you are
00:18:31.780 | a VP of?
00:18:32.780 | Okay.
00:18:33.780 | So it's a small company.
00:18:36.460 | My total compensation would be right around $100,000.
00:18:40.460 | And when your wife has done work for the company in the past without thinking about how her
00:18:45.320 | compensation would be structured, how much was she paid by the company?
00:18:52.820 | That was solely based on whatever project, it was per project that she was working on.
00:18:59.340 | So it could be anywhere around 500 to a thousand, just depending upon the contract per se.
00:19:07.500 | And how many projects did she do in the past per year?
00:19:11.220 | Very limited basis.
00:19:12.220 | So a few thousand dollars then?
00:19:15.220 | Yeah, very limited.
00:19:17.020 | Now, of course that could change going forward, but I'm more interested so that way it's a
00:19:25.180 | consistent thing.
00:19:26.580 | Any increase in my salary goes straight to her.
00:19:29.440 | And so that would help us to have the two 401k limits to utilize.
00:19:35.300 | Understood.
00:19:36.300 | Understood.
00:19:37.300 | Okay.
00:19:38.300 | So what I'm just trying to narrow focus in on is what things have been in the past, because
00:19:43.620 | there is, you have to fall in, in your work, you have to come in under virtually, basically
00:19:52.140 | reasonable compensation.
00:19:54.420 | Now that word reasonable will depend on what's actually happening and who and how things
00:20:02.420 | are working.
00:20:03.760 | So my first obvious answer should be, this would be a good question for an accountant
00:20:07.580 | who is familiar with the local laws of your state, who works on your company's books,
00:20:10.500 | et cetera.
00:20:11.500 | And I can help you think it through.
00:20:12.660 | And we have the benefit of my not being an accountant, not being supervised for that.
00:20:15.900 | So we can kind of say, is there a straightforward way to make this happen?
00:20:19.380 | So if you were to, if your wife were to work for the company more and be paid a higher
00:20:27.700 | salary, so the goal would be that she'd be able to earn at least $20,000.
00:20:31.940 | So she could make basically a full contribution to the 401k.
00:20:36.300 | Are there services that she can actually provide to the company?
00:20:39.180 | Is there work that she can actually do to the company?
00:20:42.180 | Or is she just never going to show up?
00:20:44.340 | Yes, there is different projects that she can potentially work on.
00:20:53.060 | And will your compensation go down?
00:20:56.100 | Is that the idea that your salary, your total compensation of $100,000 would go down because
00:21:01.740 | of trying to adjust some of the salary over to your wife?
00:21:06.540 | Or would hers be a different?
00:21:07.540 | No.
00:21:08.540 | No.
00:21:09.540 | No.
00:21:10.540 | My thought process was simply any increase, yearly increase would go over.
00:21:15.260 | So mine would stay level and any increase would go towards her.
00:21:21.140 | Right.
00:21:22.140 | So let's start with what the law would say as best I understand it.
00:21:27.380 | There is a doctrine, and I'm not a competent enough accountant to perfectly identify it
00:21:34.020 | or to identify the court case.
00:21:35.180 | But there was a court case at least probably a century ago in which a high income earning
00:21:42.300 | professional, a high income earning, I don't remember exactly what case he was and I could
00:21:48.500 | look it up for you, or you could look it up.
00:21:50.300 | But a high earning income professional was trying to get the money.
00:22:01.100 | He was basically saying, "Hey, all the income is coming in but giving it to his wife."
00:22:05.980 | I can't come up with the name of the court case, so I apologize.
00:22:09.420 | But in so doing, it went to the, I think it went to the US Supreme Court and it was ruled
00:22:13.740 | that no, the person who earns the income has to be the one who reports it and who pays
00:22:19.900 | the tax on it.
00:22:20.900 | So if the question is this, the question is I'm working earning $100,000 per year, can
00:22:28.180 | the company "hire" my wife and pay her $30,000 a year and she doesn't show up to work, she
00:22:39.060 | never comes into the office, she never does any projects, she never writes an email, she
00:22:44.900 | doesn't have a corporate email account, et cetera, can they hire my wife and then she
00:22:50.940 | can make a 401k contribution?
00:22:52.740 | The answer is no, they can't.
00:22:56.020 | And if you think about why, that's basically creating a non-defensible deduction for the
00:23:05.540 | company in terms of them deducting the employee wages.
00:23:09.020 | And if you could do that, if you could actually do that, it would be the basis of all kinds
00:23:13.900 | of tax fraud, at least under the way that the US tax code system works.
00:23:16.780 | Because under that same circumstance, I could hire my wife and I could hire all of my children
00:23:24.660 | and I could hire my brother and my sister and my parents, I could hire everyone in my
00:23:29.260 | family, pay them all a $30,000 per year salary, I would create virtually an unlimited business
00:23:37.460 | deductions, like I could hire as many people in my family as I need to, now the business
00:23:41.100 | can deduct those wages and then with those incomes coming to them, yes, they would pay
00:23:45.700 | personal income taxes but at those rates it wouldn't be much.
00:23:48.820 | So you can't do it if the "hire" has to be in air quotes.
00:23:53.780 | You can do it if they are legitimately hiring somebody.
00:23:58.620 | And so if your wife is actually going to work for the company and she's actually going to
00:24:03.340 | perform duties for the company and engage in products, then if she's actually going
00:24:09.300 | to work for the company, then what you say can work.
00:24:13.580 | And so the key needs to be being able to say, "Hey, is this person actually working for
00:24:18.140 | the company?"
00:24:19.140 | Now in that context, then I think there is substantial room for the business owners to
00:24:25.980 | choose how much they pay her, to choose how they structure her compensation, to make those
00:24:30.220 | choices.
00:24:31.460 | And so there's so much of a range of how much would be paid for different products and different
00:24:38.940 | services and the things that different people would do that the IRS doesn't have the ability
00:24:43.820 | to say, "One person has to - you have to pay this amount of money."
00:24:48.420 | So usually what you would do is for most - if you're hiring somebody who's a relative or
00:24:53.100 | a close friend, something like that, for most things it's good to get a market survey of
00:24:57.580 | what's happening in the local employment marketplace.
00:25:00.220 | If I were going to hire my children to work for me in my business, then I would call up
00:25:04.740 | a temp agency and I would say, "How much would you charge me to send over a temporary worker
00:25:11.560 | to help me with filing?"
00:25:13.020 | If that's the work that my children are going to charge me for - that's the work that my
00:25:18.380 | children are going to do.
00:25:19.380 | They're going to help me with filing my papers.
00:25:21.380 | And the temp agency would say, "We would charge you $15 an hour," or whatever the actual price
00:25:26.420 | is that they would say.
00:25:28.580 | Then I would take that estimate, I would get an estimate from them, and I would put that
00:25:31.660 | in my tax files and I would say, "This temp agency is giving me an estimate of charging
00:25:37.420 | me $15 per hour for them to send over an office worker to file my papers."
00:25:42.400 | So now I'm going to hire my child to work for me and they're going to file my papers
00:25:47.060 | and I'm going to pay them $15 an hour.
00:25:50.740 | But I'm substantiating it based upon what the market rate is.
00:25:55.300 | And this is basically how most things work, is you want to substantiate the pay that somebody
00:26:01.060 | is receiving based upon the market rate.
00:26:03.820 | Now obviously, different markets will have different rates, and some market rates are
00:26:09.740 | easier to establish than others.
00:26:11.740 | Let's say that your wife is hired to do public relations for the community, and one of her
00:26:16.900 | major jobs is to work as an Airsats lobbyist, where she goes around in the community and
00:26:22.620 | she goes to the morning breakfast meetings and markets your business.
00:26:25.660 | Well, how do you choose how much to pay somebody for that?
00:26:29.220 | A lobbyist can make millions of dollars or very little money.
00:26:32.180 | And so those kinds of things, there's a lot more flexibility.
00:26:35.780 | So in summary, I would say this, yes, I think that that arrangement can work, and I think
00:26:41.300 | that you could work it out with your employer for them to hire your wife and to pay her
00:26:47.420 | substantial compensation so that she can participate in the 401(k).
00:26:52.740 | And I think that can work out for you and for her and for your employer.
00:26:57.020 | What I would do is make sure that all of the dots are, I's are dotted and the T's are crossed,
00:27:06.100 | where you actually, she has an email address for the company, she works for the company,
00:27:10.940 | she shows up on certain days or she makes business correspondence, she files some form
00:27:16.460 | of report to the employer about what she's doing.
00:27:19.140 | If she's not, if her job and her function is not to come into the office, she needs
00:27:23.220 | to file activity reports, she needs to send in some form to actually substantiate that,
00:27:27.980 | yes, she is a legitimate, bona fide employee of the company.
00:27:31.380 | Now within that, I think you have enough creative license to make it work for you, for her,
00:27:36.660 | and for the company, but you can't just do it without those actual facts being there.
00:27:42.140 | Is that clear enough, Mark?
00:27:44.140 | Yes, that's perfect.
00:27:45.820 | I really appreciate that because that gives me some clarity on to make sure it's structured
00:27:49.860 | properly.
00:27:51.380 | And so that's really helpful, and I do fully understand.
00:27:54.740 | Good, good.
00:27:55.740 | So as long as you're following basically the spirit of the law, then I think you will be
00:28:01.900 | in good shape.
00:28:03.020 | And within that, I think you have enough license, just as any business has with their employees,
00:28:09.980 | to make things work for you.
00:28:11.540 | We go now to John in Pennsylvania.
00:28:12.980 | John, welcome to the show.
00:28:13.980 | How can I serve you today?
00:28:14.980 | John, are you there?
00:28:15.980 | Sorry about that.
00:28:16.980 | Yep, John, you're back.
00:28:17.980 | Okay, go ahead, John.
00:28:18.980 | Hi, Joshua.
00:28:19.980 | Thanks for taking the call.
00:28:20.980 | Yeah, I have two questions if you have time for them.
00:28:22.980 | First one is, after hearing the asset protection series you just went through, I kind of had
00:28:39.580 | some new concerns about some money that I had in various accounts.
00:28:44.300 | I had about $450,000, some of it, a good portion of that, about $300,000 in brokerage accounts
00:28:53.700 | and about $150,000 in other bank accounts.
00:28:58.340 | And I may soon be coming into another $100,000 that will probably go into one of those brokerage
00:29:04.380 | accounts or bank accounts.
00:29:06.060 | And I have this money just kind of not doing a whole lot.
00:29:08.460 | The brokerage accounts are, of course, invested, but the other ones are just, I guess, they're
00:29:13.940 | accessible.
00:29:14.940 | It's accessible money is the first reason I have it there.
00:29:17.660 | It's money I could live off of for a number of years if I lost my job or whatever or just
00:29:25.580 | chose to take off for a number of years.
00:29:27.980 | And especially the money in the non-invested accounts, they kind of give me like a mental
00:29:35.580 | hedge against being more aggressive in my other investments.
00:29:38.900 | So they serve some purposes, but now I'm looking at them in another light, which is they're
00:29:43.460 | very exposed as far as not being protected assets.
00:29:48.620 | And I was just wondering if you had some other ideas on if I have all my other things, the
00:29:54.100 | easy things like the IRAs and the 401(k)s correctly listed with their beneficiaries
00:30:01.380 | and all the other things you had described.
00:30:03.460 | For money that's not in protected accounts, what kind of things would you suggest?
00:30:09.500 | Or is asset protection kind of not something that's so far worth it that you want to kind
00:30:15.220 | of make the tail wag the dog?
00:30:17.900 | You know what I mean?
00:30:18.900 | All right.
00:30:19.900 | Well, you'll have to make that judgment.
00:30:21.820 | Certainly, asset protection strategies will cost you money, and that's the problem with
00:30:29.660 | the analysis.
00:30:30.660 | I don't know the answer in terms of when you're saying, "How do I judge my risk?"
00:30:38.980 | For somebody who's not in a high-profile occupation, for somebody who's not out and in the front-facing
00:30:49.180 | function of some kind, for somebody who's not a politician or a business owner or a
00:30:54.700 | doctor or some kind of thing where there's higher risks, for somebody who doesn't have
00:31:00.500 | a high-risk lifestyle, they don't own an aggressive, vicious dog, or they don't drive their car
00:31:06.740 | too fast, then is the actual risk all that high?
00:31:12.140 | Probably not, but how do you know?
00:31:14.500 | I've seen enough evidence that people are targeted for having deep pockets, and I've
00:31:21.140 | seen enough evidence of real cases that are brought against people that I'm not confident
00:31:28.340 | like I would like to be about that question.
00:31:30.500 | So I think it is worth considering.
00:31:33.500 | But how much is it worth considering?
00:31:35.380 | That's the question.
00:31:36.380 | How much money should you pay?
00:31:37.420 | If you have half a million dollars that's exposed, how much should you pay?
00:31:41.940 | Would you pay $5,000 to protect half a million dollars?
00:31:44.540 | I think most of us would.
00:31:46.380 | That seems really reasonable, because for somebody who has a half a million dollars,
00:31:49.820 | $5,000 is not all that much.
00:31:52.340 | Would you pay $50,000 to protect $500,000?
00:31:57.020 | That's hard to say.
00:31:58.540 | You would have to say, "Well, I've got some substantial risk that I'm concerned about."
00:32:03.900 | And where those numbers line up are very different for each person.
00:32:07.340 | So I don't know how to answer that question.
00:32:10.100 | What I do know is if you are aware of the strategies that exist for you, and if you
00:32:15.940 | are aware of the things that you can do, then you can think about it, and you can take the
00:32:19.980 | actions that will help you in that context.
00:32:25.260 | So let's talk just very briefly.
00:32:27.980 | I'll just give you a couple of ideas, because I will do more shows on asset protection and
00:32:31.500 | some of the more advanced strategies, but that starts to get where I get out of my area
00:32:34.860 | of expertise, and I don't want to make any terminal errors there in my advice.
00:32:40.620 | And so usually I'm going to refer you to somebody who is an attorney in your state.
00:32:44.340 | But I would say this.
00:32:46.480 | When you look at your money and you think about what do you actually want to do with
00:32:50.220 | the money, then you can think about how to protect it.
00:32:56.020 | So in many of the things that we have talked about, the entities and such, you can use
00:33:02.460 | those entities and they'll benefit you no matter what.
00:33:07.300 | The ones that I like to talk about are what we've talked about so far on the show.
00:33:11.420 | I haven't talked about college accounts, but in your state, college accounts may be protected.
00:33:15.900 | And so some parents can just move the money into a college account.
00:33:20.180 | I really like, for some of those safer dollars, I really think life insurance is a good, useful
00:33:25.900 | scenario.
00:33:26.980 | So you go through all of those different accounts and you kind of cover those.
00:33:33.020 | Now then you go back and say, "Well, I've still got the money."
00:33:34.980 | So what do you do now?
00:33:35.980 | Well, I think this is where you do definitely move into an entity, either a business entity,
00:33:41.620 | such as a limited liability company, or a family limited partnership, limited liability
00:33:48.220 | partnership, whatever you're going to establish, or you move into a trust.
00:33:54.380 | And I think that you can design those things in a way that is inexpensive enough to work
00:33:59.620 | for you.
00:34:00.620 | Example, let's say that you enjoy trading your money.
00:34:04.900 | Well, in that situation, you can establish an LLC.
00:34:09.220 | It's a flow-through entity, so we're not going to make any tax changes here, but you
00:34:13.460 | can establish an LLC that allows you to trade your money, but yet the assets become, you
00:34:19.700 | make a contribution to that LLC and the assets become the property of the LLC.
00:34:24.940 | And so now, instead of your brokerage account being held in your personal name, now it's
00:34:30.720 | a business that you are a director of, and you can easily set that up with substantial
00:34:35.540 | protection.
00:34:36.860 | I think at this stage of your wealth, you certainly should seriously consider a trust.
00:34:41.860 | The challenge here will be to figure out how to get a trust that is cost-effective.
00:34:45.820 | And so you basically have a couple ways that you can do this.
00:34:51.220 | Usually in the asset protection world, you'll hear people talk about a domestic asset protection
00:34:55.620 | trust and/or an offshore asset protection trust.
00:34:59.500 | And so when you look at these options, if you set up a domestic asset protection trust,
00:35:07.620 | there are, I think, something like 13 states that do have legislation that allows a self-settled
00:35:13.220 | trust to have asset protection.
00:35:16.740 | So a self-settled trust is a trust that you contribute assets to and you're a beneficiary
00:35:20.540 | of.
00:35:21.540 | So a self-settled trust is not a separate entity for tax purposes.
00:35:26.740 | The taxes all flow through, but usually that type of trust doesn't give you any kind of
00:35:31.780 | asset protection planning.
00:35:33.580 | And so in that case, you have to be in one of those states.
00:35:40.140 | And the downsides of domestic asset protection trust seems to be there's a minimum amount
00:35:44.660 | of settled law, of case law that's been established, and you have to be in one of the states that
00:35:50.180 | recognizes that a self-settled trust has asset protection features to it.
00:35:56.000 | You can go offshore, but the challenge with going offshore is frequently that you will
00:36:02.140 | pay substantially higher fees, and those may not be necessary to you, especially if you
00:36:06.660 | don't have a current threat that has materialized.
00:36:13.140 | An offshore trust, the biggest benefit of an offshore trust is you'd establish the persons
00:36:19.520 | in the trust to be in an entity that doesn't recognize US law.
00:36:23.860 | So the most famous jurisdiction here is a trust that's based in the Cook Islands.
00:36:28.500 | The Cook Islands is big in the trust business.
00:36:31.820 | And so if you hire a trustee for your trust that's based in the Cook Islands, if somebody
00:36:35.980 | wants to sue that trust, then they have to actually go to the Cook Islands, they have
00:36:40.820 | to hire a Cook Islands attorney, their lawsuit has to be admissible under the law of the
00:36:46.540 | Cook Islands, they have to reach a much higher level of proof in their case.
00:36:53.780 | So for example, in civil cases, one of the challenges for asset protection is in order
00:36:58.020 | to win a civil case, somebody just simply has to meet the preponderance of evidence
00:37:02.660 | standard, basically a 51% chance that the person is guilty, not the criminal standard
00:37:07.020 | in the United States of beyond a reasonable doubt.
00:37:10.020 | But you can move your trust assets into a jurisdiction that requires the proof of a
00:37:13.180 | case beyond a reasonable doubt.
00:37:14.700 | So you start to stack up all of these features of an offshore trust, and you have major protection,
00:37:20.260 | major legal protection for your trust.
00:37:25.900 | The downside is all that stuff costs money.
00:37:27.820 | So I think if you're going to have an offshore trust, what seems to make the most sense to
00:37:30.900 | me is establish a domestic trust that is portable.
00:37:34.780 | So you establish a domestic trust, and then you put into your trust documents a design
00:37:41.500 | that says if the beneficiary of the trust, which is you, if you are facing a significant
00:37:47.780 | legal threat, then this trust jurisdiction is going to be changed from the United States
00:37:53.260 | to an offshore jurisdiction.
00:37:55.680 | And so you can maintain a trust with lower costs inside the United States, and then when
00:38:03.640 | a legal threat materializes, at that point in time, your trust moves offshore, so you
00:38:08.620 | get the benefits of the offshore trust.
00:38:10.620 | And by doing it in that way and funding the trust in advance, you don't run afoul of the
00:38:22.860 | fraudulent transfers or fraudulent conversion legislation, so it keeps your assets safe,
00:38:27.020 | but it keeps your costs down.
00:38:34.100 | And that's the real challenge.
00:38:37.040 | And so when you start to put these benefits of an offshore trust together, in my opinion,
00:38:41.820 | that really is the best solution.
00:38:44.100 | There really is an ultimate solution that's really good for most people, but you've got
00:38:51.740 | to manage the cost.
00:38:53.260 | Now you'll have to look into it, and you have to assess your actual risk, you have to assess
00:39:00.220 | what you can do, and you'll need to get competent legal advice from an actual attorney who can
00:39:06.900 | set those things up for you.
00:39:09.380 | But that's my best answer for you.
00:39:11.420 | And by the way, there are other things that you can do in the United States.
00:39:16.220 | So for example, one of the concepts that intrigues me is if you're in a stable marriage relationship
00:39:21.580 | and you have a good relationship with your wife, and you're not concerned about the potential
00:39:26.340 | of divorce especially, there's a trust that you can set up called a Section 541 Special
00:39:31.580 | Power of Appointment Trust that basically is a domestic trust with low costs in it,
00:39:40.700 | and that can work really well inside the United States.
00:39:44.420 | So there are other options, but you've got to go and consult an attorney.
00:39:47.500 | Let me stop going on and just stop with that.
00:39:49.620 | Is that helpful at all?
00:39:51.700 | Yeah, that's very helpful.
00:39:53.380 | I appreciate it.
00:39:54.380 | I was kind of looking more towards things like trusts, or I don't think umbrella insurance
00:39:59.620 | is the same kind of asset protection that we talked about, but these trusts and the
00:40:05.980 | things you had mentioned about life insurance was what I was really curious about, but it's
00:40:10.220 | good to get the overview of what those things are.
00:40:12.460 | And I don't, at this point in my life, I don't engage in a whole lot of risky behavior, and
00:40:17.220 | the older I get, the more so that is.
00:40:23.580 | And I also keep a pretty low profile in a lot of regards, and I was more concerned about
00:40:29.540 | an unfortunate bad car accident or something that you just can't control that's out of
00:40:38.500 | the blue that puts a lot of stuff at risk.
00:40:40.620 | I think in a very backup situation where, obviously, if I hurt someone, I'd want to
00:40:45.220 | settle that and take care of that, but in a backup situation, you had also mentioned
00:40:49.340 | just going to buy property in Florida as a last minute thing, which is kind of just tumbling
00:40:55.060 | in the back of my head.
00:40:56.060 | But yeah, nothing on the horizon now.
00:40:58.500 | I'm just kind of a worrywart about this stuff.
00:41:01.060 | Right, right.
00:41:02.060 | Yeah.
00:41:03.060 | And it's hard to not ... I have no idea how to solve that.
00:41:04.620 | I'm an extremist by nature in almost everything in my life, and so I always go to the hardcore
00:41:10.300 | extreme.
00:41:12.060 | I want the ultimate protection, but I always do try to qualify that.
00:41:16.540 | The ultimate protection is usually inconvenient and expensive, and you have to say, "What's
00:41:21.100 | this worth at this phase of my life?"
00:41:22.740 | I want to make one comment on insurance.
00:41:25.740 | Don't think that you don't need insurance.
00:41:28.980 | An umbrella liability insurance policy is some of the absolute cheapest protection you
00:41:33.780 | can buy.
00:41:34.780 | So I haven't gotten to talking about insurance.
00:41:36.820 | I tried to just start with kind of low-hanging fruit of exemptions in the series, but definitely
00:41:41.060 | insurance has a place.
00:41:42.700 | And insurance is usually your very best first form of defense, making sure that you pay
00:41:47.900 | for proper insurance.
00:41:50.100 | Your cars, your liability coverage should be high.
00:41:52.540 | Your house, your liability coverage should be high.
00:41:55.200 | You should have an umbrella liability policy that coordinates with policy limits that are
00:41:59.260 | on your car insurance and your home insurance, and that umbrella liability insurance will
00:42:03.620 | be high, should be high.
00:42:06.060 | That is your absolute cheapest form of defense.
00:42:08.180 | It'll be much cheaper for you to do that than to go and establish various asset protection
00:42:13.780 | trusts.
00:42:14.780 | So if you haven't done those, do those, and I'll cover insurance in the future.
00:42:19.460 | But don't think that you don't need insurance, because that is a lot cheaper than setting
00:42:26.780 | up new trusts.
00:42:28.940 | One more comment.
00:42:29.940 | The basic function of trusts and other forms of entities is to do your best to unbundle
00:42:37.600 | the rights of property.
00:42:41.340 | So one of the things that lawyers deal with when they're in law school is they try to
00:42:44.620 | figure out what is property?
00:42:46.940 | How do you actually define property?
00:42:48.540 | And there are, of course, different definitions.
00:42:49.980 | But one of the definitions that I hear asset protection attorneys write about and talk
00:42:55.660 | about is that you can think of property as a bundle of rights.
00:43:00.700 | It's certain rights.
00:43:02.100 | And so what you can do, what you try to do, is to unbundle the rights.
00:43:07.220 | Typically we hold all the rights ourselves.
00:43:09.420 | But if you can unbundle the rights of property, you can keep the rights that give you the
00:43:18.700 | beneficial use and enjoyment of property while moving the ownership rights over into a protected
00:43:25.300 | entity.
00:43:26.300 | So simple example.
00:43:28.100 | Your car.
00:43:29.100 | What rights of property do you have in your car?
00:43:32.500 | Well, the two biggest, most important ones would be right of ownership, the right to
00:43:36.120 | sell it to somebody, to own it, and then the right to drive it.
00:43:40.900 | But you don't have to hold both of those things personally.
00:43:44.500 | You can move your car, can be owned by a business that you own, and then you can just simply
00:43:51.180 | have the right to drive it.
00:43:52.500 | It doesn't change anything about your personal rights in the property because a business
00:43:56.660 | owns it.
00:43:57.660 | So a lot of asset protection planning strategies, that's the basis of what you're doing.
00:44:01.780 | In my example about trading, let's say that you're actively involved in stock trading.
00:44:05.180 | Well, you can establish a trading company that allows you to continue having ownership
00:44:11.660 | of those assets, sorry, control over those assets.
00:44:14.820 | You can choose the investment decisions that are made in that trading entity.
00:44:19.140 | But now the ownership of those assets has been moved to a company.
00:44:22.260 | And so a claim against you will also then have to go to the assets of that LLC.
00:44:28.540 | And in the assets of that LLC, if you set things up properly, you don't have to make
00:44:31.980 | distributions.
00:44:32.980 | You can hold the distributions inside the entity.
00:44:34.520 | So if you think about what you're trying to protect, you can work it out, but you need
00:44:41.380 | to get legal counsel on that, competent legal counsel.
00:44:44.300 | John, you said you had two questions.
00:44:46.220 | Go quickly to the second one, please.
00:44:47.700 | Yeah, no, I appreciate that.
00:44:50.340 | I'm looking forward to talking about insurance for the asset protection because that actually
00:44:55.660 | does dovetail into my next question, which is you say that insurance is some of the cheapest
00:45:00.780 | protection you can get, which is both on insurance I was thinking about and also something I've
00:45:06.540 | been sleeping on for years and I really ought to do it.
00:45:09.900 | And I was just kind of hoping to get reconvinced that a simple term life insurance is very
00:45:15.860 | cheap protection because even though it's very cheap, I don't see a whole lot of need
00:45:20.220 | for it considering my wife and I, if something was to happen to one or the other of us, we
00:45:26.380 | could still make do, although it would be more stressful.
00:45:30.960 | We just haven't seen the value in paying $1,000 or $2,000 a year for term life insurance,
00:45:35.580 | even though I'm told by everybody and I think even by you in the past that it really is
00:45:40.900 | cheap insurance and I haven't been able to convince myself to pull the trigger on it.
00:45:44.620 | Well, I may not be able to convince you either.
00:45:46.820 | I'm sure that I'm biased just because of my personal experience as an insurance agent.
00:45:52.260 | And one of the things I've observed is people who have a certain experience, it changes
00:45:58.220 | their perspective and it's hard to, you know, physicians sometimes start to manifest all
00:46:03.260 | the symptoms of illness that their patients have, but it's not because they actually had
00:46:08.180 | the illness, it's because they're around all the time and they thought they had the illness.
00:46:11.460 | So life insurance agents I'm sure have a predilection to say, "Well, you're going to die so you
00:46:17.220 | should have life insurance," because we file death claims where many people don't do that.
00:46:22.040 | Let me just give you one simple point on something like life insurance and how it can bring in
00:46:28.540 | to the world of asset protection, even just term insurance where you're not building up
00:46:33.020 | cash values, you're not trying to protect money that you have inside of a policy for
00:46:37.520 | your benefit, just term insurance.
00:46:40.620 | You may not need it.
00:46:41.620 | All right, there's a good chance that you might not need it.
00:46:44.620 | If you have enough assets that you're financially independent, then you are effectively self-insured.
00:46:50.500 | But what you should consider is you should ask yourself the question, "Are there risks
00:46:54.860 | that I might face that could wipe out my assets before I die?"
00:47:00.100 | And I would say two big risks here are unpaid for health costs, actually three big risks.
00:47:11.460 | Number one is unpaid healthcare costs.
00:47:15.140 | Number two is unpaid long-term care costs.
00:47:18.900 | And number three would be unpaid personal living expenses during extensive disability
00:47:29.340 | due to sickness.
00:47:31.620 | And when I look at something like term life insurance, I always think about how well that
00:47:35.660 | can protect my family against risks like those.
00:47:39.620 | Now, if you have the world's best health insurance that's not connected to your job or that would
00:47:47.620 | be portable in the case of your job, and if you have enough money to be able to pay for
00:47:51.460 | that health insurance under the continuing coverage provisions of the policy if you were
00:47:55.740 | separated from your employment, then maybe all of your health insurance, your healthcare
00:48:00.340 | costs would be paid for.
00:48:02.260 | But most of us don't have a Cadillac policy like that, or most of us don't have enough
00:48:06.100 | money that we could actually pick up those premiums if we were separated from employment
00:48:09.300 | due to extended illness.
00:48:10.980 | And so I think it's at least reasonable to say it's possible that we might have significant
00:48:16.580 | healthcare costs from an extended illness that are not paid for by health insurance.
00:48:22.380 | Number two, long-term care.
00:48:24.180 | Most people don't have long-term care insurance and/or they don't have unlimited long-term
00:48:28.540 | care insurance policies.
00:48:30.740 | And so if something happened where somebody had early onset Alzheimer's, early onset dementia,
00:48:35.940 | some kind of ongoing chronic illness that led to their having substantial health costs,
00:48:43.020 | then in that situation they would have additional expenses that would drain the family assets.
00:48:49.580 | And then the third thing would be living expenses.
00:48:51.720 | If you add those first two together and then somebody faces something like an extended
00:48:55.580 | illness, it's not unreasonable to think that they would go through money pretty quickly,
00:48:59.900 | paying for living expenses and healthcare costs due to hospital care or long-term care.
00:49:06.820 | Now is that a catastrophic situation?
00:49:09.660 | Guaranteed.
00:49:10.660 | No, it's not.
00:49:11.860 | It's absolutely not a catastrophic situation, guaranteed.
00:49:15.480 | Somebody who's a sound and wise financial manager would find ways in that situation
00:49:21.180 | to do their very best.
00:49:22.740 | And they would probably be able to leave their spouse with assets still that their spouse
00:49:26.860 | would be okay in the case of their death.
00:49:29.420 | But if I were in that situation, would I feel really good about having $5 million of term
00:49:35.340 | life insurance in force?
00:49:37.260 | That I knew that even if we spent every dollar on my care, every dollar on my hospital expenses,
00:49:44.520 | and if we took money from savings and we traveled the world to kick all our buckets off our
00:49:48.340 | bucket list before I kicked the bucket, would I feel really good knowing that my wife would
00:49:54.540 | be entitled to receive that $5 million of life insurance payout upon my death, which
00:50:00.460 | would completely replenish my estate?
00:50:03.060 | And would I feel really good about knowing that that life insurance payout would be not
00:50:08.220 | subject to the attachment of my estate's creditors?
00:50:12.360 | So that even if I racked up a million dollars of healthcare, of hospital bills, even if
00:50:18.540 | we racked up all kinds of credit card debt and we fell behind on our mortgage, et cetera,
00:50:22.900 | that $5 million would be there to completely reset my wife's financial situation.
00:50:28.060 | And I could establish that $5 million and keep it completely free of claims of any creditors.
00:50:33.420 | And I could do that for a measly couple thousand bucks a year if I need $5 million of coverage.
00:50:38.400 | In my mind, that's the kind of risk reward payoff where you look at something like term
00:50:42.140 | life insurance and say, "Man, that's a powerful tool."
00:50:45.540 | Now do you need it?
00:50:46.540 | I don't know.
00:50:47.540 | But I got to say, that's a powerful tool and it's a lot cheaper than maintaining a trust
00:50:54.260 | in the Cook Islands.
00:50:55.260 | Yeah, no, that's kind of exactly the kind of thing I was hoping to get a perspective
00:51:00.980 | on.
00:51:01.980 | I really appreciate it.
00:51:02.980 | It's a good defense of it and good pitch for it.
00:51:05.660 | So thank you.
00:51:06.660 | I appreciate it.
00:51:07.660 | My pleasure.
00:51:08.660 | All right, got two more callers on the line.
00:51:09.660 | We go now to back to Texas.
00:51:10.660 | Texas, welcome to the call.
00:51:11.660 | How can I serve you today?
00:51:12.660 | Hi, Joshua.
00:51:13.660 | Good morning, Joshua.
00:51:14.660 | Hi, Joshua.
00:51:17.660 | Good morning.
00:51:18.660 | Go ahead.
00:51:19.660 | Hi, yes.
00:51:20.660 | I'm just listening to your recent call in about Roth IRAs.
00:51:25.100 | I have a question.
00:51:26.100 | My wife and I have been working to get out of debt, kind of following the Ramsey plan.
00:51:32.780 | And we'll be receiving a large sum of money, not large, but a lot of money in the next
00:51:40.140 | month to pay off our debt.
00:51:42.700 | And so my next step is to build an emergency fund.
00:51:47.300 | Kind of my target goal was $10,000, $12,000, three to four months of expenses.
00:51:54.020 | My question is, though, I don't currently contribute to a Roth IRA.
00:51:57.540 | So my question is, can I wait until the April filing deadline to establish a Roth IRA for
00:52:05.940 | 2018 and should I do that considering a limited amount of savings at this time?
00:52:15.140 | Yes.
00:52:17.220 | So if you're going to continue, which I'm not trying to dissuade you from, but if you're
00:52:21.260 | going to stay focused on paying off your debt, stay focused on your debt snowball, keep that
00:52:26.940 | same focus there for yourself of getting out of debt.
00:52:33.740 | So get out of debt.
00:52:35.020 | Now with additional money, if your major focus is, or your major goal and hope is to have
00:52:41.500 | that money available as an emergency fund, I think making a Roth IRA contribution is
00:52:46.780 | a great place for that money.
00:52:48.900 | But what I would do is, to be clear, I would open a Roth IRA account.
00:52:54.100 | You can choose whatever custodian you want, but of course, choose a low cost and convenient
00:52:57.940 | custodian that you want to work with.
00:53:00.260 | Make the contribution to the Roth IRA, but don't invest the money.
00:53:05.620 | Keep it in a cash account, a money market account, some kind of cash or cash equivalent
00:53:11.060 | account so that it is not subject to market risk.
00:53:15.420 | And you're living in Texas, right?
00:53:17.860 | Yes, sir.
00:53:19.060 | Okay.
00:53:20.060 | So in Texas, you get the benefits of state protection for Roth IRA assets, also IRA assets
00:53:26.140 | from an asset protection standpoint.
00:53:28.900 | And yes, you can make your 2018 Roth IRA contributions anytime up until the tax filing deadline for
00:53:38.300 | your 2018 taxes, which is April 15th or thereabouts.
00:53:42.640 | So yes, what I would do is I would open a Roth IRA account for one for you and one for
00:53:48.740 | your wife if you don't have one open currently.
00:53:50.940 | I would make the contribution to that account and then earmark the contribution as being
00:53:56.200 | for your 2018 contribution in hopes that you can, by the end of the calendar year 2019
00:54:03.900 | or by the end of when you file your 2019 taxes, you can save additional money for your 2019
00:54:09.740 | contributions and just keep the money in cash as your emergency fund.
00:54:13.220 | And then if you need the money out, you just simply take a distribution back out.
00:54:17.780 | There's no tax consequences, but work really hard, of course, not to do that.
00:54:21.580 | Work really hard, just keep it there as an emergency fund.
00:54:24.480 | Okay.
00:54:25.480 | And then once I get into a better cash position, I can move that money in the Roth IRA from
00:54:33.120 | a money market account to equities that I want to invest in after I have a better cash
00:54:39.440 | position?
00:54:40.520 | That's right.
00:54:41.520 | So whenever you reach the point at which you have enough cash to feel like you have a fully
00:54:47.000 | funded emergency fund.
00:54:48.480 | So let's say you reach six months of expenses.
00:54:51.640 | Once you have six months of expenses in cash, and that cash could be in your Roth IRA, or
00:54:57.200 | it could be in a savings account, or it could be in physical currency that you keep under
00:55:01.000 | your pillow, or it could be in some other place.
00:55:04.680 | Once you reach the point that you have your six months of expenses, then go ahead and
00:55:08.280 | start earmarking your investments and investing your money, investing the money that's beyond
00:55:15.000 | that, move it from the cash account over into an investment account.
00:55:19.000 | And you can do that within your Roth IRA.
00:55:21.080 | Okay, great.
00:55:23.480 | Right.
00:55:24.880 | And so in your calculations, you're obviously focusing primarily on having stability of
00:55:32.240 | the money, and you're thinking a little bit about the asset protection.
00:55:35.560 | But if you do start to develop cash in other sources, then you do want to make sure, since
00:55:40.600 | cash is lightly taxed, you only pay tax on whatever interest you're receiving, then you
00:55:46.040 | do want to make sure that you do your investing, your highest growth investing in the most
00:55:52.640 | tax favorable account, which will be most likely your Roth IRA.
00:55:56.780 | So don't go and open a brokerage account, keep all your cash in the Roth IRA.
00:56:01.720 | You want to make sure your highest growth investments are in your best tax advantaged
00:56:06.520 | account.
00:56:07.520 | But on the way there, I see no reason for you not to use the Roth IRA, because if you
00:56:10.480 | don't use it by the tax filing deadline, you'll never be able to get those 2018 contributions
00:56:15.120 | back.
00:56:16.120 | Go now to, let's see, what is it?
00:56:17.400 | The Evergreen State, State of Washington.
00:56:19.240 | That's your state motto, right?
00:56:22.400 | That is correct.
00:56:23.400 | How are you, Joshua?
00:56:24.400 | This is Ben.
00:56:25.400 | Welcome, Ben.
00:56:26.400 | Welcome to the show.
00:56:27.400 | How can I serve you today, sir?
00:56:28.400 | Thank you.
00:56:29.400 | Hey, I've been doing pretty well with my finances this year.
00:56:32.960 | I've got my 401k maxed out, and I have a little bit of cash left over.
00:56:39.200 | Think about buying myself a nice vehicle.
00:56:43.560 | I had budgeted between $30,000 and $35,000, but a couple of days ago, you mentioned that
00:56:50.520 | instead of someone buying a new vehicle, why don't they put that towards some sort of investment
00:56:56.720 | and then have that monthly profit go toward paying for something else instead of buying
00:57:03.640 | a new vehicle outright with no debt.
00:57:06.240 | So what I was wondering, I need to get my creative juices flowing, and what type of
00:57:12.200 | investment could that money go into?
00:57:15.760 | Any type of investment that would provide you...
00:57:18.320 | So would you, if you had an investment of $35,000 value that was paying you out money,
00:57:25.880 | would you be comfortable with taking out a car loan or some version of that and making
00:57:31.400 | a monthly payment on it?
00:57:33.440 | No.
00:57:34.440 | Okay.
00:57:35.440 | So that's the only way that the idea that I said really works, because otherwise, you'll
00:57:43.320 | need to generate enough investments that you have enough money that you could just save
00:57:51.880 | for two or three months and then go back and buy the car that you're trying to buy.
00:57:55.280 | In my little example, let's pretend this.
00:58:00.480 | In your local real estate market, are there condos or something like that that you could
00:58:05.200 | buy in the vicinity of $35,000 or mobile homes or something like that?
00:58:12.840 | Mobile homes, yes.
00:58:13.840 | Condos, that'd be a decent down payment, but I would still have to get a mortgage after
00:58:18.560 | that.
00:58:19.560 | Right.
00:58:20.560 | So let's use real estate.
00:58:21.560 | I like to use real estate because it's more intuitive for people than dealing with dividends
00:58:25.840 | on stocks or capital gains on stocks, just because real estate is straightforward.
00:58:30.880 | We understand it more than we do stocks.
00:58:33.400 | But if you could go and you could buy a couple of mobile homes for $35,000, and if those
00:58:39.400 | mobile homes were rented out, you paid cash for them, you would look at your cashflow
00:58:44.600 | from those mobile homes, your rents, and of course, you need to look at your net rents
00:58:49.320 | after you pay your lot fees and whatever you're paying for your expenses.
00:58:54.000 | But you would look at those net rents from your mobile homes and you would say, "Oh,
00:58:58.240 | look, I have here, I don't know what number to use, but I have $350 a month of net rents
00:59:05.480 | from my mobile homes that I own."
00:59:07.120 | Let's say I could buy two mobile homes, rent them out for 500 bucks a month, $1,000 of
00:59:10.880 | gross rents coming in, and then by the time I pay my lot fees, rent service, any debt,
00:59:16.640 | if you did this with a condo and you had a mortgage, by the time you service any debt,
00:59:19.920 | the goal is say, "Can I create profit of $300 or $350 a month?"
00:59:24.800 | Then with that $350 a month profit, you go buy a car, you finance all of the $35,000
00:59:32.040 | of the car, and your monthly payment on that car is $350 per month.
00:59:38.120 | So fast forward, let's say it's a 60-month loan on the car.
00:59:43.000 | You use a long-term loan because you're lining it up with your cashflow, so you finance it
00:59:47.840 | on a 60-month loan.
00:59:48.840 | Well, at the end of the 60-month loan now, if all goes according to plan, then you now
00:59:54.240 | have a paid-for car and you have mobile homes that are still paying you $350 a month net
01:00:02.080 | profit or whatever your real estate investment is.
01:00:04.840 | That's the concept.
01:00:06.320 | And so in an economy like the United States of America, where there is abundant access
01:00:10.800 | to debt capital, which is very different than many places in the world, where you can find
01:00:15.580 | all kinds of people just falling all over themselves to try to lend you money, you can
01:00:19.520 | set up something like that situation.
01:00:23.040 | And if all goes according to plan, it should work out really well because you buy an investment
01:00:28.280 | asset that gives you cashflow, and then instead of just putting that cashflow in the bank,
01:00:34.140 | you can then use that cashflow to buy the consumption item.
01:00:39.960 | Does that make sense as far as the concept?
01:00:42.080 | Yep, yeah, as far as the concept, that makes sense and gives me a little bit more of an
01:00:48.220 | idea of how creatively to go about this.
01:00:51.040 | I enjoy right now having my car paid off, no car loan, but that wouldn't really matter
01:00:56.520 | if I have that money coming in to pay off that long-term loan like you described.
01:01:02.560 | Right.
01:01:03.560 | So I wanted you to just recognize the key words I said were, "If all goes according
01:01:09.600 | to plan."
01:01:10.600 | And the reality is many times, the best laid plans of mice and men, blah, blah, blah.
01:01:17.080 | So things can go not according to plan.
01:01:19.280 | And so here's where you should look at your affairs and try to make sure that you're being
01:01:23.960 | careful, prudent, conservative, doing your very best to make sure that you'll be in good
01:01:30.880 | shape to not, so that your plans don't all go crazy.
01:01:35.940 | So first thing is you should have money, you should have additional savings on hand.
01:01:41.480 | Do you currently have more than $35,000 of saved money?
01:01:46.760 | Yes.
01:01:48.160 | Good.
01:01:49.200 | So if you additionally have an emergency fund or additional savings, then it's not imprudent
01:01:55.960 | for you to either spend the $35,000 on a car, nor is it imprudent for you to go and buy
01:02:00.740 | a $35,000 investment asset.
01:02:03.320 | Because if you over here in your savings account have another $20,000, then if your tenants
01:02:08.440 | don't pay or they burn the mobile home down, or you have to evict them, or tax rates are
01:02:13.880 | raised, whatever, all the stuff goes wrong with your investment plan, then you still
01:02:18.500 | have enough money where you should have enough time to make your payments on the car without
01:02:23.200 | things going wrong, and you should still be able to do that.
01:02:27.680 | Then of course, you would look at your financing and you say, "How can I finance this car in
01:02:31.440 | the lowest cost, lowest risk way?"
01:02:33.840 | So that might be going down to Toyota Financing Corporation, or it might be buying the car
01:02:38.600 | with a cash advance on a credit card.
01:02:40.560 | You look at that and you calculate the options, and the goal is to say, "How can I have the
01:02:45.280 | lowest cost, lowest risk loan?"
01:02:47.360 | And then you have to figure out, "What can I actually invest in?
01:02:49.880 | What would I actually buy?"
01:02:51.440 | And so I don't know if mobile homes in your area are a good investment or not, but you
01:02:56.040 | might be better served by buying a $100,000 condo, putting down a $35,000 down payment
01:03:01.360 | on that $100,000 condo, and you might still, if all goes according to plan, net enough
01:03:07.160 | from that condo to pay your car payment.
01:03:09.600 | But the basic goal is to say, "How can I get my investments to pay for my consumption items
01:03:15.200 | rather than just spending all my money on my consumption items?"
01:03:19.240 | Okay.
01:03:20.840 | That put it very clearly.
01:03:23.760 | Thank you.
01:03:24.760 | Thanks for explaining that.
01:03:25.760 | If you will think like that, then as time goes on, your wealth can continue to grow
01:03:30.480 | and your consumption can continue to grow.
01:03:33.280 | Now you may or may not finance things.
01:03:38.160 | You may or may not use debt.
01:03:40.040 | You may or may not do that.
01:03:41.500 | That's up to you.
01:03:42.500 | But if you will think that way and always try to find your investments before your consumption
01:03:47.240 | items and then make your investments pay for your consumption items, then you have a lifetime
01:03:52.600 | of consumption items available to you.
01:03:55.200 | Because once you own that asset, pretend you can buy a condo, and that condo will pay you,
01:04:00.920 | let me wrap up the numbers.
01:04:03.960 | Let's say once you own a $75,000 paid-for condo, that condo should pay you enough to
01:04:09.380 | pay a car payment every single month for the rest of your life.
01:04:13.640 | And so you could lease a car every month for the rest of your life, always be driving a
01:04:18.120 | brand new car, trading it in every two or three years for a new lease payment.
01:04:23.000 | And basically, your cars are virtually free in a sense because they're being paid for
01:04:28.560 | by your investment assets.
01:04:30.880 | That's the basic process of wealth building.
01:04:33.700 | That's what we do.
01:04:34.700 | And so you have to analyze your situation, look at your income opportunities, look at
01:04:37.760 | your investment opportunities, look at your business opportunities.
01:04:40.360 | But before you go and buy a toy, look to see, is there some way that I can use that toy
01:04:47.360 | to get the best deal?
01:04:48.360 | And then, of course, finally, I'll say this.
01:04:50.960 | Anytime you buy a toy or buy a consumption item, look, of course, to buy it in the most
01:04:56.960 | efficient way possible, get the best deal, get the lowest price, get the best financing
01:05:02.560 | terms, whatever you're going to do.
01:05:04.580 | But then also look to say, can I make this thing make more money for me?
01:05:08.640 | Can I make this thing do more for me?
01:05:11.640 | So maybe that means with your new car, you say, well, I don't have enough money.
01:05:17.440 | For some people, I don't have enough money to buy a condo, but I'm going to buy a new
01:05:22.500 | car or another car.
01:05:24.360 | But let me make sure I'm going to go and drive this car two weekends a month for a ride share
01:05:29.000 | service and make enough to pay my car payment.
01:05:33.040 | Many people could do that.
01:05:34.040 | And it's probably the best use of those kinds of companies, like driving for Uber, Lyft,
01:05:38.440 | et cetera.
01:05:39.440 | They don't work well as full-time occupations.
01:05:40.840 | The pay is too low.
01:05:41.840 | But for somebody who wants to just simply make a car payment, they can do that.
01:05:45.760 | Or look at it and say, if I'm going to buy this car, how can I buy this car in a business
01:05:51.200 | that I've created that would allow me to depreciate it or to expense my miles in a bigger way?
01:05:57.560 | So to look at every way that you can to try to maximize the value of it, and when you
01:06:01.920 | start putting all those things together, then again, you can have a lifetime of increasing
01:06:06.600 | wealth and decreasing and in good solid consumption over time.
01:06:11.040 | That's it for today's show.
01:06:12.040 | If you would like to join for another Q&A show, keep an eye on the schedule that I have
01:06:15.720 | been publishing.
01:06:16.720 | I hope you'll join me in the future.
01:06:19.160 | And in closing, I would say, let me again, mark it to you my credit card course, radicalpersonalfinance.com/creditcardcourse.
01:06:27.880 | One of the things that the way that this applies to the call that we've just heard is how do
01:06:32.800 | you finance the car?
01:06:34.240 | And one of the benefits of a credit card is you have a fairly low payment in terms as
01:06:41.880 | compared to the actual value of the debt.
01:06:46.100 | And so your monthly payment on a credit card balance is 1% of, usually it's 1% of the total
01:06:54.560 | value of the loan plus the previous month's interest payment.
01:06:58.720 | And so sometimes you can use a credit card payment and get lower payments on debt, which
01:07:05.000 | can help you if you are in a situation where everything's not going well.
01:07:10.200 | So there are numbers that would be too big.
01:07:12.920 | I don't know what Ben's income is.
01:07:15.360 | I don't know what those scenarios are, but I wouldn't be scared to buy a car using credit
01:07:21.520 | cards because it gives me more wiggle room sometimes than a car payment does.
01:07:27.520 | It'll be easier for me to adjust, pay less on my credit card payment sometimes than it
01:07:32.240 | would be on a car payment.
01:07:33.960 | So that's the kind of application that you could use with the concepts that I've talked
01:07:37.440 | about in the credit card course.
01:07:40.800 | Or additionally, you could use credit cards as a form of backup financing so you have
01:07:44.920 | more wiggle room if your tenant did move out and if they burned down your mobile home in
01:07:49.120 | those situations.
01:07:51.220 | If you ever take out financing, you always want to think about how to make sure that
01:07:55.480 | if everything goes wrong, the loss is not catastrophic.
01:07:59.160 | If everything goes wrong with your investment, if everything goes wrong with your car, how
01:08:03.040 | do I make sure that I have plenty of wiggle room so I can solve those problems and have
01:08:06.760 | room to work my way back?
01:08:08.440 | And part of that involves making sure that if you borrow money, you borrow it in the
01:08:12.200 | most intelligent way.
01:08:13.560 | So understand how credit cards work.
01:08:14.840 | If you'd like to sign up for my course, go to radicalpersonalfinance.com/creditcardcourse,
01:08:20.440 | radicalpersonalfinance.com/creditcardcourse and sign up there.
01:08:24.080 | Thank you for listening.
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