RPF0625-Friday_QA
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00:00:29.920 | Today on Radical Personal Finance, it's live Q&A.
00:00:32.280 | Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge, skills, insight, and
00:00:53.200 | encouragement you need to live a rich and meaningful life now while building a plan for financial freedom in 10 years or less.
00:00:59.120 | Today on the show, it's live Q&A. Open phone lines for any member of the audience to call in. Ask me any question, make any
00:01:05.720 | comment, discuss anything you want. That's what we do here on live Q&A shows.
00:01:09.880 | We go to an open phone line here today.
00:01:22.480 | I've got three callers waiting on the line, and we will go and see what we have going on. First up today,
00:01:27.480 | we've got Daniel in Texas. Daniel,
00:01:30.160 | welcome to Radical Personal Finance. How can I serve you today, sir?
00:01:33.200 | I am about to leave my current job, and I'm fully vested in my 401k.
00:01:43.240 | I've got about $20,000 in it at this point.
00:01:47.640 | It's currently
00:01:52.480 | in about, I think it's like a 55-year retirement plan. Standard, I'll be
00:01:57.560 | 30 here in a couple years. So,
00:02:00.200 | kind of standard plan on that. I am curious if you have any thoughts on
00:02:04.760 | what I should maybe transition that to, if I should just kind of leave it there and not mess with it, or if there's
00:02:12.520 | some other way I should
00:02:14.720 | transition that as I leave this current job. Are you going to another job?
00:02:20.680 | Yes, I'm going to another job. Does the other job have a 401k?
00:02:27.720 | They do have a 401k. There is no matching with it at this point. They are a younger company.
00:02:35.920 | They're about 10 years old, so they offer a 401k,
00:02:38.160 | but there's no matching. My plan is that I'll be taking a pay cut for the first year, and then hopefully
00:02:43.400 | make more money in my second year.
00:02:46.600 | But unless they institute that matching, my thought would be more than likely. Anyway,
00:02:51.000 | anything I do put into some sort of retirement fund, I'll probably put into a Roth
00:02:56.160 | IRA so that I do have access to those original funds if I need them for some reason.
00:03:02.640 | And is the plan at this existing job a good one? Is there low fees, good investment options, etc.?
00:03:08.120 | Sorry, say that again? The funds that are currently held at your existing job,
00:03:15.160 | are they held in a plan that is a strong and good plan? Does the plan have good investment options?
00:03:20.640 | Does it have low fees? What's the quality of the 401k plan where you are right now?
00:03:25.960 | It seems decent. From what I can tell, it's got relatively low fees.
00:03:32.400 | I don't remember that. I looked about a year ago, and I don't remember. From what I could tell, it had fairly low fees.
00:03:41.320 | Investment options were decent. It does have a money market option. It does have a few different options in there.
00:03:48.000 | So, I don't really mess with it a ton, and I haven't because it's not something I've put a ton of thought into.
00:03:56.000 | So I've been happy with it. I haven't had any issues with it so far, at least.
00:03:59.640 | And are you a resident and citizen of the state of Texas?
00:04:03.600 | Yes. Okay. Well,
00:04:07.920 | in general, the way that you look at it is, are there benefits to staying put
00:04:12.840 | when you have investment dollars? You say, are there benefits to keeping those investment dollars where they are?
00:04:17.800 | And are there benefits to rolling those investment dollars out to another location?
00:04:22.600 | Usually, you'll have a better option of
00:04:26.880 | investments, fees, etc. in the open market when you're not just doing business with your company's 401k plan provider.
00:04:36.360 | So usually, it's better to roll the money out.
00:04:38.880 | Because with your 401k plan provider,
00:04:42.160 | your employer has contracted with a third-party administrator to manage that plan.
00:04:48.120 | They've selected a menu of investment options.
00:04:51.280 | And the key to that menu of investment options is to offer a broad enough array of investments
00:04:56.800 | so that the plan fiduciaries won't be suable in court for not providing good investments.
00:05:01.800 | But to offer, keep those plan options boring enough that the fiduciaries won't be sued in court for providing
00:05:08.120 | risky and bad investment options. And so most 401k's, you're going to have access to just the general vanilla
00:05:15.000 | mutual fund options. And they'll develop a menu of 20, 30, 40, 50, whatever is available in your plan.
00:05:21.320 | Now those can work fine. And some companies have great plans, low fees, low expenses, etc.
00:05:27.960 | But many times, if you take it out to the open market, you can have access to a much broader array of
00:05:32.840 | investments and a much broader array of
00:05:35.400 | options. Usually in the open market, if you just custodian an IRA with a low-cost provider,
00:05:41.160 | especially if you're holding mutual funds, you may be able to have it
00:05:44.400 | just simply less expensive, cheaper in terms of the overall fees.
00:05:48.080 | You can also do many more interesting things with it.
00:05:51.040 | You can do interesting things from a financial planning perspective, like you're talking about, where you
00:05:56.560 | roll the money over into a Roth IRA or pursue something else.
00:05:59.560 | You can also do interesting things with regard to the investment choices.
00:06:02.720 | You can invest IRA assets in all kinds of interesting things if you're into that.
00:06:07.240 | So usually it's best to roll it out. Now the only, the strongest reasons to not roll it out
00:06:14.480 | involve asset protection. So both bankruptcy and
00:06:18.600 | somebody suing you. And
00:06:21.400 | the reason is your 401k is extremely safe. The money in a 401k is protected from the claims of creditors.
00:06:27.440 | It's exempt under the federal bankruptcy regulations. My understanding in the state of Texas,
00:06:32.520 | IRAs and Roth IRAs are also protected, but not being an expert on Texas law,
00:06:38.720 | I don't know if that protection is codified.
00:06:41.480 | I don't know to what extent that protection is applied to IRAs and Roth IRAs.
00:06:46.560 | If you were facing some kind of legal problem or you are aware of something, I would move very carefully and I wouldn't take that risk.
00:06:53.120 | But in absence of any circumstances that you're aware of why you would have some unique risk,
00:06:58.040 | yeah, I think I would roll it out and try to save money and get better investments. I don't see any reason not to.
00:07:02.760 | Okay, thank you. Yeah, as from when your show when you're talking about IRAs, I went look,
00:07:10.520 | far as I can tell, obviously I would need to talk to a lawyer to know for sure, but deeper,
00:07:15.920 | but it looked like there is
00:07:17.760 | code that says IRAs are both Roth and regular are fully protected from the claims of creditors.
00:07:24.640 | Which do you think it would be? I'm in a, I mean,
00:07:28.640 | because I have my children and I have three kids, so with the child tax credit and where I fall,
00:07:35.040 | especially this coming year since I'll be making less money than I even think now,
00:07:38.920 | doing it would potentially be worthwhile to, if it's possible, to roll out my 401k into a Roth IRA so I have
00:07:46.440 | those funds and pay the penalties or would I just have to do the math on it?
00:07:51.040 | Well, I would try to pay the penalties from, I would try to pay any necessary penalties from my other savings and not use IRA dollars
00:08:00.240 | first, if at all possible. And the reason is since you only have a limited,
00:08:05.560 | since you have a limitation on how much money you can actually get into an account,
00:08:09.680 | you want to keep as much money in there as possible.
00:08:11.680 | And since you have the choice of paying taxes elsewhere,
00:08:14.600 | use the money in your savings or your checking account or whatever in your other financial
00:08:19.000 | resources to pay the taxes so that you can keep the maximum amount of money working in that growth deferred
00:08:25.360 | account. It would be foolish to try to roll it over to a Roth IRA and
00:08:31.240 | use the investment dollars in the IRA to pay the taxes unless you were absolutely certain that
00:08:36.840 | tax brackets or your tax rates are going up and you're gonna go up into a higher bracket.
00:08:42.120 | So use money that's in your account to do that.
00:08:44.120 | Yes, if your income is down,
00:08:45.640 | you should go ahead and do the IRA if you have the money from other
00:08:49.240 | resources to go ahead and pay the tax. And that is a good plan and I do think it is, it's a good move.
00:08:55.320 | What you'll do is you'll roll the money out of the 401k into a traditional IRA with your custodian of choice and
00:09:02.560 | then with that custodian you'll go ahead and make the conversion there.
00:09:06.200 | So that way the 401k provider doesn't withhold any taxes from you
00:09:10.680 | and so you can actually just put it directly into a traditional IRA and then do the conversion. On the asset protection
00:09:16.920 | standpoint, good for you for researching the state of Texas.
00:09:21.160 | In general, unless you can, and again, I would defer here to an attorney,
00:09:26.640 | but here's my non-attorney understanding of the law, unless you can prove that the state of
00:09:33.960 | the state that's the jurisdiction that you're dealing with the law in is
00:09:39.080 | absolutely makes IRAs and Roth IRAs sacrosanct and unless you were confident that you weren't actually going to be moving states,
00:09:47.920 | you would still rather, if you were facing a creditor situation or
00:09:52.760 | potential legal risk of some kind, you would still rather have it in a 401k. And let me explain why.
00:09:57.640 | The reason why a 401k is protected from the claims of creditors is
00:10:02.000 | because all of the money is mingled and it's
00:10:06.480 | designed to be for the protection of the person. So a 401k account is protected from the claims of the company's creditors.
00:10:13.840 | It's held in a separate trust for the claim and so it's insulated from the claims of a company's creditors, your employer's creditors, and
00:10:20.320 | then because it's a fairly normal pension account that's covered by the ERISA law,
00:10:24.180 | then it has the most ironclad protection. The challenge with
00:10:27.960 | an IRA is it's a much easier legal argument to make to somebody to say, "Hey, listen,
00:10:33.760 | we're gonna invade this account and it's only gonna hurt this person."
00:10:36.480 | And then you run the risk of what if you move from the state of Texas to the state of, you know,
00:10:42.640 | whatever, that doesn't have that same protection. So I agree with you. I don't think it's
00:10:46.840 | necessary to be that paranoid if you are happy being a Texas resident,
00:10:51.400 | but I just want to point out that if you thought something were going to change, then the 401k is superior.
00:10:56.880 | Any follow-up questions, Daniel, or should I go on to the next caller? Is that enough for now?
00:11:09.920 | Choose based upon your investment strategy.
00:11:12.920 | So if you are going to invest in index funds,
00:11:17.120 | well, pick whoever offers the cheapest index funds because you're dealing with an index fund. If you want to invest in
00:11:23.320 | you know,
00:11:25.560 | tax tax liens, then you're gonna need a checkbook LLC by somebody who does that. If you want to buy gold coins,
00:11:31.160 | then you'll need somebody who will help you to arrange that. If you're gonna do offshore real estate, if you're gonna trade stocks,
00:11:37.280 | you know, if you're gonna trade individual stocks, then you should custodian your account with somebody who is providing the
00:11:44.000 | platform on which you can make your trades. So think through your investment plans and then based upon your investment plans, choose your custodian.
00:11:51.520 | Okay, thank you very much. I appreciate it. My pleasure. We go now to the state of Minnesota. Welcome to the call. Tell me your name, please.
00:11:59.720 | Corey. Corey, welcome to the show. How can I serve you today, Corey?
00:12:06.800 | Yeah, hi, yeah, I wanted to thank you for all your great content.
00:12:11.640 | I'm helping my parents in kind of the initial stages of their
00:12:15.560 | estate planning and I went back and listened to your shows like 260, I think about
00:12:22.640 | trust and
00:12:25.480 | some of the documents that are helpful and
00:12:29.280 | just trying to get kind of a sense of their plan to meet with the
00:12:34.880 | estate planner in the coming
00:12:36.880 | weeks or months here and they wanted me to try and do some research and trying to get a better understanding of what are the
00:12:42.200 | different options out there.
00:12:44.160 | Just from a little bit of financial background, my
00:12:47.420 | parents, I think their assets, you know,
00:12:51.420 | combination of real assets and equities and things, probably around two or three million and
00:13:00.360 | my grandfather, who was also successful in business, set up some form of trust in the state that
00:13:07.240 | my parents have described to me that sort of
00:13:10.360 | passes the income to the grandchildren, but gives the income to the parents to use during their lifetime.
00:13:17.000 | So there's some of those assets out there as well.
00:13:19.320 | We're just trying to hear any thoughts or recommendations on how to kind of approach the
00:13:24.040 | overall estate planning process, things to maybe think about to ask at the
00:13:30.120 | visit with an estate planner or any other recommendations you might have.
00:13:33.560 | What type of assets do they primarily hold? Mutual funds, IRAs, real estate, etc.?
00:13:39.640 | Yeah, probably primarily real estate and
00:13:44.200 | mutual funds and maybe individual equities as well.
00:13:48.300 | So with estate planning, obviously it's an extremely broad question.
00:13:53.720 | So let me give you just a couple of specific
00:13:55.480 | suggestions, which are about all I can do in this context, and then a couple of broader comments that might help you.
00:14:01.000 | The best thing that you can do for them to have a productive meeting with their estate planner,
00:14:07.240 | are they going to an estate planning attorney? Is that who their meeting is with?
00:14:10.520 | I'm not entirely sure. It's an estate planning attorney or
00:14:15.840 | it's probably part of a larger firm that has those services. They're the same firm that kind of worked with
00:14:22.040 | my father, my grandfather. Okay, so it's likely a law firm and they're meeting with an estate planning attorney.
00:14:27.640 | The most useful thing in preparing for the meeting with the attorney is to have a complete balance sheet prepared
00:14:34.480 | that has the information on each particular asset class.
00:14:38.800 | So they'll get the best bang for their legal buck if they don't have to waste a lot of the attorney's time coming up with
00:14:44.280 | the details. So if they are owning, let's say real estate,
00:14:48.360 | they should come in with a balance sheet, a net worth statement, that says a list of the properties.
00:14:54.200 | So if they're individual properties, I would have on that list of paper,
00:14:58.080 | I would say one, two, three, Maple Street. On that you need to have the value of the property.
00:15:03.600 | This one is worth two hundred thousand dollars.
00:15:05.600 | Put the tax basis or an estimate of the tax basis. The tax basis in this property is
00:15:10.960 | $100,000 and then make sure any ownership information is listed on that property.
00:15:16.640 | So if it's individually owned, if it's held in an LLC,
00:15:19.680 | whatever the ownership information is listed. And then any of course indebtedness as well should be associated with that.
00:15:26.320 | So if they can come in with a complete list of all assets owned, all
00:15:30.800 | investment accounts, any investment account that is a retirement account,
00:15:36.200 | it should be listed there. That investment account listed beneficiaries, contingent beneficiaries, a list of any
00:15:43.080 | same thing with stocks, if they own stocks or mutual funds that are outside of retirement accounts,
00:15:47.200 | they should list those accounts and make sure to list their estimate of the tax basis in those stocks.
00:15:52.120 | And they should make a complete list of all of their property. If they have physical property that's significant, personal property,
00:15:58.280 | they should make something of a list of that and
00:16:00.760 | just come in with a complete balance sheet. If you come in with a complete balance sheet, that will help the estate planning attorney
00:16:07.200 | to have the data that they need to talk through any recommended strategies.
00:16:11.880 | Additionally, they should think and talk about what they would like to have happen. What's important to them?
00:16:16.720 | Is it important to them to provide money to their children and to their grandchildren? Is it important to them to provide
00:16:23.960 | education accounts? Is it important to them to fund a certain charity?
00:16:28.600 | What's in etc. And then if they have information from their financial advisor and/or if they can prepare themselves,
00:16:35.120 | they should come in with some kind of an estimate of what their assets,
00:16:38.800 | what's expected to happen with their assets during their retirement years. If they are, how old are your parents?
00:16:45.160 | Mid-60s. Okay, so if they're in their mid-60s and they're planning to retire and they're going in to sit with the estate planning attorney and
00:16:54.160 | their financial projections for retirement show that they've got two or three million bucks,
00:16:58.560 | but this is probably going to be drained down to nothing by the time they die at 95 years old,
00:17:02.360 | then that's one direction of the planning to go.
00:17:05.360 | If on the other hand they're living on the income from their parents trust and they've got two or three million dollars set aside here
00:17:11.800 | and that two or three million dollars is just going to be invested purely for the long-term benefit of the children,
00:17:16.480 | that's a very different scenario because if they aren't spending
00:17:19.720 | two million dollars, they're just starting with two million dollars.
00:17:23.360 | If they've got a 30-year investment time horizon and let's say they could earn 8% on their money,
00:17:28.040 | then very conceivably that investment could, that two million dollars over the next 30 years could grow into 20 million dollars.
00:17:34.080 | And so the numbers in estate planning can get very big very quickly.
00:17:38.160 | So they need to have an estimate of where things, sorry, a balance sheet, an estimate or some kind of projection
00:17:44.480 | from their financial plan in terms of their retirement distribution plans and an idea of what they would like to happen with the money.
00:17:51.440 | Then in the conversation with the estate planning attorney, they'll walk through
00:17:55.560 | those things and then they'll recommend
00:17:58.960 | appropriate strategies based upon what your parents are trying to do.
00:18:03.600 | So that's probably just a simple answer that of what you can do and what they can do to prepare for the meeting.
00:18:09.280 | Is that good enough?
00:18:11.280 | That's great, thank you very much. My pleasure. We go on now to Daniel in Florida. Daniel, welcome to Radical Personal Finance.
00:18:18.000 | How can I serve you today, sir?
00:18:20.000 | Hey, Joshua, thank you for taking my call. My pleasure.
00:18:22.680 | I've got a question for you with no answer, which is a tricky one.
00:18:28.000 | What I'm looking for
00:18:30.880 | is I'm trying to get an idea of what your particular paradigm might be for
00:18:35.360 | luxury purchases as opposed to investing.
00:18:39.360 | So I'm getting a little bit of a late start and recently re-listened to your episode on catch-up investing.
00:18:47.040 | It was the
00:18:50.000 | doubling penny episode.
00:18:52.840 | And I'm trying to figure out how I structure my
00:18:57.920 | investment plan going forward with luxury purchases in the
00:19:02.200 | current day.
00:19:05.280 | So what's a useful paradigm to think about?
00:19:08.000 | You know, should I buy this new car or should I route this money into retirement and
00:19:12.880 | you know, make do with my current car for another five years, that sort of thing.
00:19:16.440 | So I know that the answer to that is, well, you know, it depends on
00:19:20.120 | you as a specific individual, but do you have a particular paradigm that you would be comfortable sharing?
00:19:26.240 | Sure. How you think about that? Sure. The first thing I think it's important to look at is the actual situation and circumstances
00:19:34.280 | of your life.
00:19:36.880 | For example,
00:19:38.840 | let's talk about a luxury like a house, right? A house can be a luxury expense.
00:19:43.240 | But it's also there's a measure of that house that is just necessary. You need to live in a certain place.
00:19:49.120 | But it's, in my opinion, undeniable that there's a component of a house that is a luxury
00:19:55.600 | expense. Usually when most of us go and start looking at real estate, we start looking around and we like the places that are nicer.
00:20:02.120 | In my opinion,
00:20:04.800 | it's not wrong to buy something that's luxury if it's not going to cause many other
00:20:10.640 | harm, many other problems or harms to your, you know, something important and/or it's going to make a major benefit. So
00:20:18.680 | in my situation,
00:20:21.120 | my wife is
00:20:22.720 | just caring for all our children, right? She's at home all day every day.
00:20:26.000 | I think it's entirely appropriate for us to have a more luxurious place for her to be
00:20:33.400 | with the children so that she has adequate space, so that she has adequate amenities,
00:20:38.160 | things like that that are going to be helpful for her because that'll make a dramatic difference in her
00:20:43.240 | experience of life.
00:20:46.280 | And so I think it's important to prioritize that because it helps something that's very important to us,
00:20:51.800 | the integrity of our family.
00:20:54.000 | I would view that very differently if it were just me and I'm talking about, you know,
00:20:58.360 | is it wise for me to buy a luxury house that's just going to sit empty while I'm away every day?
00:21:02.440 | And the reason what I'm driving at here is who's going to benefit?
00:21:06.440 | It's very nice for me to have as a single man,
00:21:10.320 | it's very nice for me to have a hot tub, a big pool right on the intercoastal, a nice boat to park behind that.
00:21:16.340 | But I think it's really foolish because if I'm working,
00:21:18.560 | I'm going to spend most of my time working and it just doesn't seem smart to me to do that when I can just rent
00:21:24.040 | a five-star hotel on Miami Beach whenever I want to go and do that and I can rent a boat whenever I need to do
00:21:28.880 | that and I'll rent the captain with it.
00:21:30.200 | So the luxury of a larger house is at this stage of my life a more helpful thing because it's fitting something
00:21:37.360 | that's actually really important. And yes, I could, you know, we could stay living in a tiny little travel trailer.
00:21:44.800 | We could do it if we had to but I'm not willing to do that.
00:21:48.000 | I have enough money that I can afford the luxury. So practically speaking, I would say what benefit am I going to get from this?
00:21:53.760 | So now to your car example.
00:21:55.360 | Let's say I have a perfectly adequate intelligent car.
00:21:58.800 | It's a perfectly reasonable car and I've decided that I'm going to,
00:22:04.000 | I'm thinking about upgrading it. Well, I would say why am I thinking about upgrading it?
00:22:09.080 | What benefit am I going to get for having a newer car? If the older car is pretty safe and pretty reliable and pretty functional,
00:22:16.480 | but I just want a newer one because I'm tired of this one, to me that doesn't seem particularly useful.
00:22:21.680 | But if there's some other benefit of the car, perhaps it's going to be,
00:22:25.640 | it's going to be better for our children. We're going to have space. Perhaps it's going to be safer.
00:22:31.640 | Perhaps there's a safety feature on the car and I have the money. I think that's appropriate.
00:22:35.760 | I had a family member recently who just bought a new car.
00:22:39.160 | They bought a new Prius and one of the reasons they bought it was, of course, Prius is the second,
00:22:43.160 | the smartest choice for anybody that can't get away with a minivan.
00:22:46.240 | A vehicle. But one of the reasons they bought it was because of the upgraded and improved safety features, the anti-collision features and things like that.
00:22:53.360 | And because his family member was getting older, they thought that that was a useful thing.
00:22:57.360 | They had the money. Is it kind of a luxury purchase? Kind of. But there's a benefit there.
00:23:01.280 | That's a really legitimate benefit in terms of those advanced safety features, the anti-collision features.
00:23:06.840 | That's very helpful to an older person. So I look at it and say, is there actually a benefit? Now, it's your money.
00:23:14.040 | So if there's, you weigh the benefits based on their own basis, because in life, maximization of net worth is not the ultimate goal.
00:23:20.720 | The winner is not the one who dies with the biggest trust.
00:23:23.520 | There's other components to life. And so even if you just say, I want to get another luxury expense because I just want it,
00:23:30.080 | I'm okay with that, as long as you can afford it and you're thinking about it.
00:23:34.160 | And there my tool is to say, what does this mean for me in the future in terms of the alternative use of the dollar?
00:23:41.440 | Let's say today I go and make a $50,000 expenditure. Well, if I don't make that $50,000 expenditure,
00:23:47.680 | what else would I do with the money? Would I invest it?
00:23:50.480 | And if so, how much would that $50,000 be worth to me in the future?
00:23:54.640 | And here, I think, is how we bring things into a matter of timing. When you're 20 years old
00:23:59.760 | and you're thinking about going and buying a luxury sports car, let me just do some quick math here.
00:24:04.640 | Let's say you're saying, I have the money. I'm gonna buy a $100,000
00:24:08.320 | luxury sports car at 20 years old. So we'll start with that. And fast forward,
00:24:13.840 | you can imagine yourself being 65 years old. So you've got a 45-year investment time horizon.
00:24:19.560 | Let's say you're investing your money at 8%.
00:24:21.560 | Well, that $100,000, if you could invest the $100,000 today instead of buying the luxury sports car,
00:24:27.560 | that's $3,192,000 that you could expect to have at the age of 65.
00:24:32.880 | Now, in this situation, that's probably a really compelling
00:24:37.880 | feature. And it's really good for that 20-year-old to say, I'm gonna wait on this sports car until later,
00:24:43.920 | and I'm gonna build towards that $3.1 million. Now, fast forward to the same person at 60 years old.
00:24:50.400 | They have $3.1 million. Then that $3.1 million is gonna grow.
00:24:55.000 | They have a business that they're doing fine at. Now, they do exactly the same calculation and say, well,
00:25:01.200 | how much would this $100,000 be worth at retirement?
00:25:06.280 | Well, the answer now is that $100,000 would be worth $146,000.
00:25:10.360 | And now they look at it and say, would I rather have this $100,000 luxury car or $146,000 in five years?
00:25:17.040 | And there's a decent chance that they're gonna say, I'll go ahead and get the car.
00:25:19.760 | So you have to bring in the time value of money, and you have to bring in the opportunity cost.
00:25:24.840 | What are you giving up by having the opportunity cost, and what are you getting in the time value of money?
00:25:29.720 | You should think carefully about the opportunity cost and consider the costs for other people.
00:25:34.560 | For example, I've bought lots of nice things. I've bought lots of fancy things.
00:25:38.240 | What I have learned about myself is that my number one priority is financial freedom in terms of money.
00:25:44.800 | I don't ever want to be in a position where I have to make a decision I don't want to make because of money.
00:25:51.680 | So I don't want to live somewhere that I have to live because of money.
00:25:54.800 | I don't want to say something or not say something that I want to say because of money.
00:25:59.200 | I want to be in a situation where at any point in time I can do what I want to do.
00:26:04.080 | I can live how I want to live, and I can say what I want to say without worrying about money.
00:26:08.800 | And for me, the magic key to that is frugality.
00:26:12.080 | Back to a long time ago, I did a show where it was talking about lentils.
00:26:17.120 | And I can't, it was a short little one that I did.
00:26:19.040 | Basically, the parable where one philosopher said to another, you know, if you...
00:26:24.800 | I'm gonna mess it up.
00:26:26.080 | He said, you know, if you would say nicer things to the king, you wouldn't have to eat lentils.
00:26:32.480 | And then the other one replied, I eat lentils.
00:26:35.840 | So I can...
00:26:36.720 | The point is, by having frugal, by being able to eat lentils in that case of the silly story,
00:26:43.040 | the philosopher didn't have to suck up to the king.
00:26:45.600 | And so for me, I'm gonna weigh a luxury purchase and say,
00:26:48.640 | does this mean I'm gonna have to suck up to the king?
00:26:50.880 | Does this mean that I'm gonna have to pretend that I think something I don't think?
00:26:55.120 | And if so, I'm gonna walk away from it.
00:26:56.720 | Now, other people don't have that.
00:26:57.840 | So I think with that time value of money, are there actually benefits?
00:27:02.480 | And in terms of your own opportunity cost, what would you be giving up by making the luxury purchase?
00:27:08.720 | When you weigh it that way, then you can wind up at a fairly rational
00:27:12.800 | analysis to decide if that luxury purchase is right for you or not.
00:27:15.760 | Okay, that makes a great deal of sense.
00:27:21.120 | And I do have a quick follow-up question if you have a second.
00:27:23.440 | Go ahead.
00:27:23.680 | It may be a way of restating the previous question.
00:27:27.200 | But given the history of what you talked about on the show,
00:27:29.840 | I guess you probably wouldn't be offended by being described as an economic
00:27:33.360 | doom and gloomer in the long run.
00:27:36.080 | And I am 100% there with you.
00:27:39.200 | Does that inform your investment decisions with regard to current luxury purchases?
00:27:45.760 | My investment plans have always involved the presupposition of a 7% real return.
00:27:52.560 | And over the years, I've become very, very, very uncomfortable with that presupposition.
00:27:57.440 | And it would drastically change my investment life going forward if I were to adjust that to,
00:28:02.880 | you know, say a 3% or a 4%.
00:28:04.640 | At what point do you, whether in your personal life or whether, you know,
00:28:12.560 | giving me advice, at what point do you say, "Hey, enough is enough"?
00:28:15.680 | Where do you draw the line at, "Let's be reasonable"?
00:28:20.480 | I don't know if that's a question that makes any sense to you.
00:28:24.480 | It does.
00:28:24.880 | Or if that's just a restatement of the previous.
00:28:26.560 | So I'll answer it.
00:28:27.600 | Before that, while you were speaking, I looked up the lentils anecdote that I butchered,
00:28:32.160 | and here it is.
00:28:33.120 | The philosopher Diogenes was eating bread and lentils for supper.
00:28:37.040 | He was seen by the philosopher Aristippus, who lived comfortably by flattering the king.
00:28:41.680 | Said Aristippus, "If you would learn to be subservient to the king,
00:28:46.080 | you would not have to live on lentils."
00:28:48.320 | Said Diogenes, "Learn to live on lentils, and you will not have to be subservient to the king."
00:28:54.160 | And that particular version of the old parable is from The Song of the Bird by Anthony DeMello.
00:28:59.680 | Episode 525 was dedicated to that particular parable.
00:29:03.680 | And so that is what I was grasping for in my previous answer.
00:29:07.440 | So first, to correct the record, I don't see myself as a doom and gloomer.
00:29:10.640 | I'm not somebody who, in fact, I'm extremely optimistic.
00:29:14.960 | But what I try to do is I try to temper that kind of optimism with realism, so to speak.
00:29:22.240 | To me, it seems irrational to be pessimistic, to always see things as worse than they are.
00:29:29.520 | But it's also irrational to basically screw up your courage and say,
00:29:33.200 | "Well, it's always going to be great."
00:29:34.400 | Because the answer is no, it's not always great.
00:29:37.200 | This always bothered me when I was a professional financial advisor, when I managed money.
00:29:41.840 | Because there is a component of that business where you always have to say,
00:29:46.400 | "It's always going to be great."
00:29:48.320 | And you do that because you're trying to influence your customers in a certain direction.
00:29:54.240 | But you also do it sometimes because you're trying to influence
00:29:57.200 | them to purchase something that you have.
00:30:00.320 | And so you always say, "Oh, it's going to be great."
00:30:02.080 | And this always bothered me because I could defend that to some degree rationally.
00:30:07.440 | But I think there is a point in which you say, "No, it's a good chance things aren't
00:30:10.640 | going to be great or they're not going to be great for this particular time."
00:30:13.840 | So I am deeply optimistic about my life, etc.
00:30:17.680 | But I look around at circumstances and I say,
00:30:20.880 | "The things of the past are not always going to continue as they are."
00:30:24.720 | So the United States, for example, is not going to always be great just because it's
00:30:29.840 | the United States of America.
00:30:30.880 | This is a perspective that many US Americans hold.
00:30:33.680 | "We're the best."
00:30:34.320 | Well, first of all, you're not the best.
00:30:35.760 | You have to look and say, "Well, are we the best in anything?
00:30:38.880 | What is the basis?"
00:30:40.320 | Because there are lots of countries that are better than us on almost anything.
00:30:43.440 | And then you have to look and say, "Well, what caused somebody to be in that situation?
00:30:48.560 | And what was it that they did that led them there?"
00:30:51.600 | And that's to me what I say, especially when I look at the United States.
00:30:54.560 | I do have a whole lot of doom and gloom in the future of the United States because as
00:30:58.880 | far as I'm concerned, the things that caused the United States to be great in many areas
00:31:04.800 | are no longer the case.
00:31:06.320 | So just a slight correction.
00:31:10.960 | Now, to your point about interest rates and rates of return.
00:31:14.560 | First, it is impossible that on the whole of everything, real interest rates on investment
00:31:22.800 | classes could be 7% or 8% forever.
00:31:26.080 | It's not possible.
00:31:27.600 | And the reason is because if you look at the time value of money and the compounding of
00:31:31.200 | money, once that interest starts going forever, once that snowball just keeps picking up and
00:31:39.520 | picking up, eventually it consumes the whole world.
00:31:41.280 | Compound interest calculations become absurd because if they're at a high rate, you basically
00:31:49.440 | consume all the resources of the world.
00:31:51.440 | You can do an example and you can say, "Let's start with a molecule of air."
00:31:55.200 | And you start doubling that molecule of air or giving it a 7% return or whatever.
00:31:59.520 | And very quickly, you get to the point where every molecule of air in the entire universe
00:32:03.520 | is consumed.
00:32:04.560 | And so the same thing can happen with investment predictions.
00:32:08.320 | So can you have an invest at real rates of return across the entire economy at 7% into
00:32:16.080 | perpetuity?
00:32:17.040 | My answer is no, you can't because of the compounding of that.
00:32:22.800 | So it just can't work.
00:32:25.280 | And it hasn't worked throughout all of human history.
00:32:27.520 | But does that mean that you can't get 7%?
00:32:29.600 | I'm more skeptical there because in every market, there are going to be winners, there
00:32:34.160 | are going to be losers, there are going to be different markets.
00:32:36.320 | And I think you as an individual could manage your money in such a way that you would be
00:32:41.040 | able to find yourself that real rate of return that you need.
00:32:45.040 | And so the key is not to look at markets in general, but to say, "How can I do it?"
00:32:49.040 | There is a paradox in investing.
00:32:51.200 | Your highest rate of return of your personal activities can come at your earliest, smallest
00:32:58.400 | stages of wealth.
00:32:59.680 | It's very easy for a poor person or someone with low income to invest at a much higher
00:33:05.760 | rate of return than 7%.
00:33:07.600 | Very, very easy.
00:33:09.680 | And so if you are at that stage of wealth, you can invest at 7%.
00:33:13.440 | We can bring anybody up and just through simple frugality, I'll give you an example.
00:33:17.840 | One of the things I noticed a lot, and I'll include this when I do more shows on what
00:33:22.640 | I learned RVing, but I was bemused to see how much money I could save on fuel by planning
00:33:29.360 | ahead with my fuel purchases.
00:33:31.120 | What I do is when traveling, I use GasBuddy to find out where the cheapest fuel is.
00:33:37.120 | And I would try, when I knew where I was going, I would try to time out my fuel stops with
00:33:41.360 | the range of my truck in order to save money on fuel.
00:33:44.480 | Because I could save very frequently through using GasBuddy.
00:33:48.160 | I could very frequently save in excess of 50 cents a gallon.
00:33:51.440 | Now, 50 cents a gallon savings doesn't sound like much until you put it out over a 37-gallon
00:33:57.520 | fuel tank and over 10 miles per gallon, and all of a sudden, 50 cents a gallon can add
00:34:02.640 | up quickly.
00:34:03.600 | So just simple frugality of knowing what station in your town has the cheapest fuel can be
00:34:10.640 | very powerful.
00:34:11.360 | I'm amazed when I see people sitting at the expensive gas stations that aren't particularly
00:34:15.920 | convenient filling up their vehicles.
00:34:17.440 | I think, don't you know that two miles over and one mile to the side, you can save 50
00:34:22.400 | cents a gallon if you just use GasBuddy and get there.
00:34:25.120 | A poor person who's living week to week and just has just enough money, that $15 savings
00:34:31.200 | can be a big, big deal and gives them a massive rate of return.
00:34:34.720 | But to a rich person, that 50 cents per gallon issue is meaningless.
00:34:39.680 | So what I say is, go for the highest rate of return you can, recognize that at the beginning
00:34:45.200 | of life, you can get a much higher rate of return by redirecting your energy and attention,
00:34:51.280 | and then keep yourself nimble.
00:34:52.800 | And so this is one of the reasons why I've basically walked away from large publicly
00:34:56.000 | traded securities markets.
00:34:57.440 | I don't see any reason why I should put my lot in with everybody else when I can go and
00:35:02.480 | invest at higher rates of return on my own.
00:35:05.200 | They exist, the markets exist, I can find the inefficiencies, I've worked hard at it,
00:35:09.440 | I'm going to continue to work hard at it, but I can do a whole lot better than 3%, I
00:35:13.520 | can do a whole lot better than 7% if I put in the work.
00:35:16.720 | Now if I'm a multi-billionaire, it'll be tough for me to be involved in those markets, but
00:35:20.480 | I'm not a multi-billionaire, so I can get a higher return.
00:35:23.840 | So not doom and gloomer, I just say, focus on what does work and invest where you can
00:35:28.240 | make the higher rate of return.
00:35:29.800 | And unless you're super rich and managing a really large portfolio, which is tough,
00:35:33.600 | I think you can, for yourself, make those higher returns.
00:35:36.960 | And in the aggregate, in the macro economy, in time things will shake out.
00:35:40.640 | There's always going to be an interesting corner that you can go and pursue if you keep
00:35:43.920 | yourself nimble in your investment approach.
00:35:45.840 | Awesome, that makes a great deal of sense.
00:35:50.240 | Thank you.
00:35:51.760 | Play where you can, don't compete with people you can't compete with, compete where you
00:35:55.960 | can compete well.
00:35:57.680 | If you're big, don't go be a jockey.
00:35:59.520 | If you're little, don't go play football.
00:36:01.040 | All right, we go now to the state of Oregon.
00:36:02.880 | Welcome to the show.
00:36:03.880 | Tell me your name and how I can serve you today, please.
00:36:11.040 | Go ahead.
00:36:12.040 | Oh, hello, this is Grant.
00:36:13.040 | Grant, welcome.
00:36:14.040 | How can I serve you, Grant?
00:36:15.040 | Yeah, I just had a question about, so my wife and I have recently been married.
00:36:20.200 | We are just married a little bit.
00:36:24.120 | We're also married in like seven, eight months.
00:36:27.520 | And I was just wondering, our age gap, though, is pretty big.
00:36:30.920 | Like there's about an eight-year gap between us.
00:36:33.280 | And I was just wondering what you had on advice for maybe like rental properties or maybe
00:36:41.160 | what type of insurance products you would recommend in case I die before planned, so
00:36:45.560 | to speak.
00:36:46.560 | How old are you and how old is she?
00:36:49.160 | I'm 31 and she is 23.
00:36:52.480 | Well, at that age, there's not going to be a lot in this way.
00:36:59.880 | So there are two major issues, I think, that come into play when doing financial planning
00:37:06.000 | for a married couple.
00:37:08.520 | The first issue is going to be more philosophical with regard to having children.
00:37:14.040 | So given that she is younger, if you guys desire to have children, that will be a better
00:37:19.360 | solution because a 23-year-old is far more able to have children easily, safely, comfortably,
00:37:27.560 | et cetera, than is a 43-year-old.
00:37:30.420 | And so in your financial planning, if you desire to have children, she has a good number
00:37:35.400 | of years where she can still have children.
00:37:37.440 | And so in that case, things are really good.
00:37:40.120 | And even financially, anything that's of interest regarding to children is going to be cheaper
00:37:45.960 | at this point in time.
00:37:46.960 | They actually use a term in motherhood, they call it geriatric.
00:37:51.160 | They used to do this.
00:37:52.160 | I don't think they came up with a euphemism for it, but they would call it a geriatric
00:37:55.040 | pregnancy if a woman, I think, is in her middle to late 30s.
00:37:58.880 | So one component would be think about the phase when, if you guys desire to have children,
00:38:04.120 | when you desire to have children, et cetera, and recognize that earlier is better.
00:38:08.960 | From her perspective, she is in the time of her life now where it will be the easiest
00:38:13.960 | in her life physically to have children and the energy, et cetera, to have children.
00:38:18.820 | Now the conflict there is with society because in general, the US American society doesn't
00:38:23.640 | look kindly on young people having children.
00:38:26.120 | And so there's an argument there with biology versus society that you and she would be well
00:38:30.560 | suited to discuss.
00:38:32.000 | But it's in her, your best interest as a couple if you want to have children to have children
00:38:36.360 | now at a young age versus waiting till later.
00:38:40.600 | That may mean that you may need to reorient your finances around that.
00:38:44.160 | So if you need to adjust your living circumstances so that you can afford to live on your income
00:38:51.440 | while you have young children, that would be important, but that should fit into your
00:38:55.160 | financial plan.
00:38:56.160 | The good news is with your being older, in many ways, it is an ideal situation where
00:39:01.080 | at this point, you probably are more established in your career.
00:39:04.400 | You're in a place of being more established in your personal maturity.
00:39:08.160 | And so you have enough income, enough maturity where you can support the household and have
00:39:13.320 | children at a young age.
00:39:14.580 | That's different than many people who are younger and get married younger and they're
00:39:18.920 | scrapping around at low wages and not being established in their career.
00:39:22.960 | So that's one thing to talk through and to consider.
00:39:25.760 | The second thing then involves the end of life planning.
00:39:29.040 | So statistically, you will die before she does just simply because you are a male and
00:39:33.440 | she is a female.
00:39:34.880 | So that's always important to plan for.
00:39:36.620 | And because she is nine years your junior, eight years your junior, then there's a good
00:39:42.400 | chance that that will play out even longer.
00:39:45.960 | So there's a good chance that she will be a widow for a longer period of time.
00:39:49.320 | Now, of course, you could die middle age, she could remarry, but if you live and grow
00:39:53.960 | old together and then you die at an expected time for a male and she dies at an expected
00:39:59.580 | time for a female, there's a very good chance that she will be a widow for an extended period
00:40:04.360 | of time.
00:40:05.400 | And so you want to make sure that you plan ahead for that and make sure that she is prepared
00:40:09.140 | for that.
00:40:10.140 | So making sure that you have plenty of assets, making sure that you have plenty of life insurance
00:40:14.200 | money at this stage.
00:40:15.640 | As your assets grow, you have to plan for her to have a long life as a widow and then
00:40:20.080 | make sure that she develops the financial skills and has enough good financial advisors
00:40:25.940 | around her where if she is left as a widow for an extended period of time that she knows
00:40:30.220 | how to handle the money.
00:40:31.760 | One of the major challenges in many relationships is most often the husband is drawn to managing
00:40:36.620 | the money and if the husband dies and leaves behind his wife a widow, but she's not prepared
00:40:42.140 | to handle money, to understand what the family's investment plans are, to understand all of
00:40:46.460 | those details, then that can be very difficult where she's caught unprepared.
00:40:50.540 | And so make sure that she's prepared for that circumstance.
00:40:52.740 | Is that helpful at all?
00:40:58.220 | Any other follow up questions?
00:40:59.220 | Is that kind of what you're thinking?
00:41:01.220 | Yeah.
00:41:02.220 | You know, I mean right now we, my wife is pregnant and so yeah.
00:41:06.060 | Congratulations.
00:41:07.060 | That's good.
00:41:08.060 | Congratulations.
00:41:09.060 | Yeah.
00:41:10.060 | You know, so we are definitely talking about that and you know, I just didn't know if you
00:41:14.540 | recommended say like whole life insurance, you know, as a result of our age gap.
00:41:18.980 | Right now I have a 20 year policy with, for a million dollars, but I just thought because
00:41:23.820 | of our age gap, like you said, she could be widowed for a significant period of time.
00:41:27.500 | Does it make sense for that?
00:41:29.060 | Maybe I mean part of my financial plan is to kind of pursue rental real estate as you
00:41:33.500 | know, a way to kind of help carry her over for that period of the time that she could
00:41:36.980 | be, you know, widowed for a long period.
00:41:40.500 | I just didn't know if there was one that you said, Oh, that, that seems like a better fit
00:41:43.620 | maybe.
00:41:44.620 | Not necessarily at this point.
00:41:46.420 | And let me ask you, tell me about just very briefly about your career, how much money
00:41:49.740 | you have and how much money you're earning.
00:41:53.580 | So I am an accountant and I have our, we are currently debt free and we have probably I
00:42:02.420 | think $27,000 in net assets and I make $78,000 a year.
00:42:08.180 | Great.
00:42:09.180 | So to answer your question about insurance, the only change that I would suggest that
00:42:12.580 | you consider is in addition to your 20 year level term insurance, I'd love to see you
00:42:19.020 | with some annual renewable term insurance.
00:42:21.100 | And the reason I say that if your wife is 23, then if her body functions according to
00:42:28.540 | the normal pattern, it's conceivable that you guys could have children anywhere along
00:42:33.020 | the lines over the next 17 years.
00:42:36.100 | And so up until about age 40 would be the normal age at which you would, you would stop
00:42:41.340 | conceiving children naturally.
00:42:44.380 | So that would be the normal process in terms of biology.
00:42:50.100 | Fast forward and also in terms of you would have to consider, you know, do you want children,
00:42:54.460 | how many children, et cetera, all those things.
00:42:56.100 | But if you fast forward 10 years down the road, if your wife is now 33, you'd be perfectly
00:43:04.060 | reasonable for you to have more children in her early to mid 30s.
00:43:09.060 | There would not be any kind of, you know, difficult thing medically.
00:43:12.140 | If you're in good health, she's in good health, that could be very normal.
00:43:14.620 | Now in your 20 year life insurance policy, that means that 10 years from now, you would
00:43:19.540 | only have 10 years left on that policy.
00:43:22.320 | And if 10 years from now you have another child or 15 years from now you have another
00:43:25.700 | child, then now you only have five or 10 years left on your 20 year term policy, which means
00:43:31.220 | that unless you are financially independent and able to self-insure because of your assets,
00:43:36.740 | now you're going to be, you might have a problem.
00:43:40.940 | Now most likely everything would be fine.
00:43:42.960 | You would just go ahead and apply for another 20 year term policy.
00:43:45.740 | You're healthy, nothing's happened.
00:43:46.980 | You could just get it.
00:43:47.980 | That's what happens for most people.
00:43:49.400 | But I don't like those risks.
00:43:50.900 | So what I'd rather you do is have an annual renewable term policy that you can keep for
00:43:55.220 | a very long time.
00:43:56.220 | There are companies in the market that sell it.
00:43:57.820 | You can keep it as term life insurance up until you're 60, 70, 80, depending on the
00:44:02.140 | company, and the premiums are adjusted to your age and they just go up a little bit
00:44:06.740 | each year.
00:44:08.100 | All of the term life insurance that I own for myself being in a similar situation as
00:44:12.340 | you is all term life insurance.
00:44:14.820 | Sorry, annual renewable term life insurance.
00:44:17.220 | I don't anticipate keeping those policies as annual renewable term life insurance until
00:44:24.540 | my policies can be enforced until the age of 80.
00:44:28.460 | Technically, the premiums are miserable when you start to get into your 60s and 70s, but
00:44:33.580 | technically I could keep them until I was 80.
00:44:35.460 | I don't intend to keep them that long.
00:44:37.380 | But what I will do is I will have them until our situation starts to be more apparent,
00:44:42.900 | our financial situation 10 years, 15 years, 20 years from now, and the progress of our
00:44:47.500 | family and our children.
00:44:49.360 | So if things have happened that my wife and I have had children, we're not going to have
00:44:53.300 | any more children, our youngest is three or four years old, at that point in time I'd
00:44:58.060 | be happy to go ahead and drop my annual renewable term after having replaced it with a level
00:45:03.900 | term.
00:45:04.900 | But at this stage of life where you're not quite sure about any of those details, I'd
00:45:07.180 | much rather you have annual renewable term insurance.
00:45:10.640 | That also gives you possibilities if over the long term you want to be in a situation
00:45:15.580 | where you might want whole life insurance.
00:45:17.580 | So all of my term life insurance policies can be converted to whole life insurance until
00:45:23.060 | the age of 60.
00:45:24.460 | Now I'm not planning to convert the majority of my policies to whole life insurance policies.
00:45:29.700 | That would be too much if I converted all my term.
00:45:32.380 | That would be too much whole life insurance for me to have in terms of the usefulness
00:45:36.460 | of whole life insurance.
00:45:38.100 | But I like having it available as an option so that if I get sick, get hurt, get fat,
00:45:42.900 | you know, start racing cars, flying airplanes, scuba diving every other weekend, and jumping
00:45:46.900 | out of planes too so I can't get insurance anymore, I like having all that stuff locked
00:45:50.980 | up.
00:45:51.980 | So if we are extremely financially successful, I'll just go ahead and I'll move my term life
00:45:56.380 | insurance policy into a life insurance trust.
00:45:58.740 | I'll have the trust convert the policy to a whole life policy, and then we'll keep the
00:46:02.500 | policies there.
00:46:03.700 | And so the annual renewable term is a far superior planning mechanism to give you all
00:46:07.420 | of those options.
00:46:08.420 | To answer your question though, I don't think any significant amount of whole life insurance
00:46:13.380 | at this point in time would be appropriate.
00:46:15.700 | Be fine to get a little bit if you want some because you're younger, but at this point
00:46:19.220 | you need to build wealth.
00:46:21.180 | And whole life insurance is not a good primary plan for building wealth.
00:46:25.260 | It's better for you to invest into something that's going to have a higher rate of return,
00:46:29.820 | and then just use whole life insurance as a place for some of your longer term safer
00:46:33.900 | dollars that you're not going to invest into more aggressive pursuits.
00:46:38.860 | And I think it would be inappropriate at this point in time for you to pursue much of anything.
00:46:43.140 | Fine if you want to have some $25,000 policies, $50,000 policies, put a couple percent of
00:46:47.140 | your income into that, but I'd much rather have you get higher rates of return by investing
00:46:51.820 | aggressively if you want to do real estate or investing in your business, buying multiple
00:46:55.260 | practices, building up your tax business, selling more products, etc.
00:46:59.020 | Getting your income from $78,000 a year to $178,000 to $278,000 to $578,000 to $1,000,000.
00:47:04.700 | That's what I would like to see you do.
00:47:06.380 | And then as your income rises, then feel free to revisit the whole life policy discussion
00:47:11.700 | down the road.
00:47:13.700 | However, your job is to leave assets behind for her.
00:47:17.780 | You can do that.
00:47:18.780 | She can spend the money perfectly well if it comes in as a life insurance settlement
00:47:22.060 | or if it comes in as a giant real estate portfolio that she just steps in and takes over the
00:47:27.060 | trusteeship of.
00:47:28.740 | That's no problem.
00:47:29.740 | And I think it's premature for you to worry about that at this stage.
00:47:34.780 | That's perfect.
00:47:35.780 | I really appreciate the advice.
00:47:36.780 | Congratulations on the baby.
00:47:37.780 | I hope that you enjoy the process and don't forget that it's a very special time.
00:47:45.900 | My encouragement to you, Grant, is this your first baby?
00:47:48.700 | Is that right?
00:47:49.700 | Yes, it is.
00:47:50.700 | Okay.
00:47:51.700 | Yes.
00:47:52.700 | So spend the money and enjoy however many months remain until the birth of the baby.
00:47:58.920 | Spend the money and enjoy some of the special things together as a couple that are hard
00:48:05.380 | to do when you have young children.
00:48:08.380 | Young children are great.
00:48:11.220 | They also are going to dramatically change your lifestyle.
00:48:14.220 | So if there's anything on your list, on her list, if you want to go snow skiing or if
00:48:19.060 | you want to do anything that is crazy, go ahead and do those things now and spend the
00:48:23.100 | money now.
00:48:24.340 | You can always make up that money later, but I think you and she both will appreciate that
00:48:29.460 | going down the road.
00:48:30.460 | We go now to Texas.
00:48:31.460 | Austin, Texas, welcome to the show.
00:48:33.220 | Tell me your name and how I can serve you today, please.
00:48:36.020 | Hey, Joshua.
00:48:37.420 | My name is Coulter and I am looking to sell my business in a couple of years and looking
00:48:44.060 | for your perspectives on whether it would be more financially wise to try to lean out
00:48:50.940 | expenses over the course of the next two years to show a higher net income, which is ultimately
00:48:56.260 | a function of what the business is going to be worth, or if I should focus on driving
00:49:03.700 | sales higher, which hopefully would lead to a higher profit margin.
00:49:09.860 | Is there a reason why you wouldn't do both of those simultaneously?
00:49:13.660 | Did I lose you?
00:49:17.500 | I'm still here.
00:49:21.140 | Sorry about that, Coulter.
00:49:22.140 | Yeah, sorry about that, Coulter.
00:49:23.140 | I muted one of my mics.
00:49:24.140 | I need a cough switch on my recording setup.
00:49:27.420 | Is there a reason why you wouldn't do both of those things simultaneously?
00:49:36.500 | Not necessarily.
00:49:38.780 | They don't have to be mutually exclusive.
00:49:44.500 | I just thought a little bit more detail.
00:49:46.380 | It's a roll-off dumpster business, so it's going to be a pretty asset-heavy business.
00:49:51.780 | We're currently doing about, I don't know, $700,000 in sales.
00:49:58.980 | Net income last year was about $180,000.
00:50:02.180 | So obviously, the more dumpsters that I purchase, provided that I can get them rented out, it's
00:50:09.860 | going to drive sales higher.
00:50:13.940 | I've been a little debt-heavy.
00:50:16.940 | I've got about a $300,000 business loan over the course of the next couple of years.
00:50:23.180 | I anticipate getting that down probably to $150,000, $200,000.
00:50:27.540 | Just curious if you had any thoughts in regard to this whole situation.
00:50:35.860 | I do.
00:50:36.980 | It's an interesting area of consultancy, and I'm not qualified to give you a proper answer
00:50:42.060 | to the question.
00:50:43.060 | But I had a friend of mine who I used to refer clients to, and I'd be happy to refer you
00:50:51.700 | to him separately for a conversation.
00:50:54.100 | I haven't spoken to him in a couple of years.
00:50:55.460 | I think he's still in the business.
00:50:57.180 | But I have a friend of mine who exclusively did this consulting.
00:51:00.180 | He exclusively would consult with people who were thinking about selling their businesses
00:51:06.500 | in order to enhance them, in order to enhance the value.
00:51:11.420 | It always interested me to study.
00:51:13.020 | I have a couple of books saved in my library that I haven't read yet on the subject.
00:51:16.940 | I've always thought this would be something that I would really enjoy practicing in.
00:51:19.780 | It's one of my backup consultancy business types of things that would appeal to me in
00:51:25.300 | terms of a niche to operate in.
00:51:27.860 | There is a huge cornucopia of options available to you to enhance that business.
00:51:33.580 | As you are rightly identifying, it's a big, big deal.
00:51:36.380 | It's a big deal how you ... Whatever you do here is a big deal.
00:51:40.540 | It can make a big difference in terms of your savings.
00:51:45.860 | I don't know what the specifics are for your business.
00:51:49.300 | Here's how I would approach solving the problem.
00:51:52.180 | First, I would look for any books that are on the subject.
00:51:56.060 | I can't remember off the top of my head what those books are that are in my library.
00:52:00.620 | I will try to look for them.
00:52:02.860 | I would go online and search for ... Start at Amazon, of course, and search for business
00:52:10.700 | valuation, search for selling my business.
00:52:14.460 | I would look for any search terms related to that.
00:52:17.540 | As you go through the process of searching those search terms, see what books come up,
00:52:21.340 | read the reviews and the categories and try to figure out what the process is as far as
00:52:26.460 | what terms are going to be used.
00:52:29.020 | Amazon's recommendation engine is so good that that'll be your best place.
00:52:32.180 | They'll provide a couple of books for you, but go ahead and order a couple of books on
00:52:35.900 | it.
00:52:36.900 | Also, then go to the business press, companies like Nolo, see if they have anything.
00:52:41.540 | You should be able to find their titles in the Amazon search, but go to Nolo.com and
00:52:46.940 | search for business valuation there and see what they offer in terms of selling a business.
00:52:54.580 | Start by ordering half a dozen or a dozen books on the subject and then work your way
00:52:58.540 | through them, the way that I handle things like that.
00:53:02.540 | Buy the books.
00:53:03.540 | It'll be less than a dozen.
00:53:05.620 | I don't know if it's a dozen, but it'll be less than a dozen that will have good ratings,
00:53:09.140 | be current, et cetera.
00:53:10.660 | Order those half a dozen books and just go through them.
00:53:13.540 | At least get an idea of what the issues are.
00:53:15.860 | Read the relevant sections.
00:53:16.860 | You don't need to read them all cover to cover, but read the relevant sections so that you
00:53:20.100 | understand what those books talk about.
00:53:23.120 | Then I would use those books as a way of referring myself to the people who are writing them
00:53:27.420 | because those experts who've written the books are probably decent people for you to reach
00:53:31.980 | out to for a consultation and get their specific advice.
00:53:36.500 | Also importantly, I want to say more importantly, but I don't know if it's more or just simply
00:53:40.180 | also importantly, you want to do some research in your personal industry.
00:53:45.340 | If you know anybody who has sold the business or if you know anybody in your industry or
00:53:50.180 | anybody who's bought a business, call them up and ask them for any information on that
00:53:55.620 | process.
00:53:57.280 | If you know somebody that sold a business, I would go and see them.
00:54:02.900 | It's probably your best bet.
00:54:04.720 | You can call them and talk to them on the phone, but probably what I would do is I would
00:54:08.140 | go see them.
00:54:09.140 | Just book a plane ticket and go sit down and buy them lunch or if they'll give you the
00:54:13.700 | time and go see them and ask them questions about what worked well for them and get their
00:54:19.640 | information of what worked well, who did they sell to, how did that process go, were there
00:54:25.700 | brokers involved, what did they wish that they knew and interview them for the specifics
00:54:31.440 | of your business.
00:54:33.200 | If they refer you to a business broker, somebody who is selling businesses that are in your
00:54:37.700 | industry, I would go see that business broker or have them come see you or at least talk
00:54:41.700 | to them and develop a relationship and get their input and information on how to actually
00:54:47.820 | position your business.
00:54:48.820 | So they'll be the ones who can answer the specific question of should you invest in
00:54:52.980 | what's going to make the biggest difference in the negotiations.
00:54:55.780 | Would it be helpful to you to have more dumpsters out and more contracts or will it be helpful
00:54:59.980 | for you to have a higher net profit because your financing is eliminated, etc.
00:55:06.660 | Those are the people who will answer that question for you and then follow their advice
00:55:10.980 | and then my only other comment is work to see if you can groom your own buyer.
00:55:16.500 | One of the mistakes that people make is they just take whatever buyer comes along and usually
00:55:22.740 | if you can groom your own buyer, you'll be in a better situation.
00:55:26.580 | So if you think the ideal buyer is a big corporation, start making the contacts at that corporation.
00:55:32.820 | Start connecting with them, start meeting the people, do your research before your industry
00:55:36.020 | conference, whatever industry conference you go to, research who are the representatives
00:55:40.060 | of that industry who are going to be there, make personal friends with them, get the inside
00:55:43.620 | track so that those corporations, the large people that you've got the connections there.
00:55:49.980 | If you think the best buyer for your business is a small local buyer, start looking around
00:55:53.940 | and seeing can you groom somebody, can you groom a team, can you groom an employee, etc.
00:55:58.260 | Because if you'll groom your own buyer, then you'll be able to profit from it in the, you're
00:56:04.420 | going to get the highest valuation that way.
00:56:07.140 | And then finally I would say analyze the structure of the business to see if you can separate
00:56:12.500 | the component parts in some way that will help you in your overall long term financial
00:56:17.420 | plans.
00:56:18.420 | For example, if your business owns, and I don't know how this applies to yours, I just
00:56:22.420 | want to use it as an example.
00:56:24.660 | Let's say that I am a physician and I own an office building that I do my practice in
00:56:30.020 | or any business really.
00:56:33.220 | The real estate is going to be separately valued from the business.
00:56:37.380 | And so of course you would own the real estate and the business separately because you would
00:56:40.100 | do good planning there.
00:56:41.420 | But the point is for you as an individual, you're going to sell the actual business based
00:56:46.060 | upon the business valuation and you'll sell the real estate based upon the real estate
00:56:49.860 | valuation.
00:56:51.100 | But in your own planning, if you can separate the component parts, try to make it easy for
00:56:55.300 | yourself to sell the business but not the real estate.
00:56:58.360 | And so in your personal business, if you haven't already separated the component parts, separate
00:57:02.880 | the component parts so that the business can be valued, so that the assets can be valued,
00:57:07.420 | and then you might want to hold the assets and lease them out or you might sell them,
00:57:12.180 | it's up to you.
00:57:13.180 | But think about how you can structure all the components of everything you own so that
00:57:16.980 | it works best in terms of your long-term financial plan.
00:57:20.180 | Because if you can keep the assets and lease them back to the company, whether it's a real
00:57:23.620 | estate asset or the physical assets, maybe you own all the dumpsters outside of the operating
00:57:29.380 | entity and you say, "Well, I'm going to keep the dumpsters and I'll just lease them," or
00:57:33.100 | whatever it is, however you structure it, then if you can profit on each of the components
00:57:38.420 | the best, I think that's also something worth considering.
00:57:40.940 | So that's the best advice I got for you.
00:57:42.620 | I don't know a specific question, but that's how I would go about researching it.
00:57:45.540 | And that's how you find the people who will answer those questions appropriately for you.
00:57:49.180 | Perfect.
00:57:50.180 | No, that's great.
00:57:52.020 | I really like the idea about grooming the buyer.
00:57:54.260 | That's very sage advice.
00:57:55.900 | If you can do that, it's going to be your best win.
00:57:59.860 | Now, businesses, the individual business might be outside of one individual's ability to
00:58:04.620 | buy, but if you can bring in the buyer that you've developed, you might hold a note for
00:58:10.460 | that buyer or something like that, that'll be your best because you'll have a confidence
00:58:13.700 | in their ability to run the business, you can help somebody else and still profit really
00:58:18.460 | well from it.
00:58:19.460 | So those are my recommendations.
00:58:22.660 | That's it for today's show.
00:58:23.660 | I hope you enjoyed the Q&A show and I will be back with you very soon.
00:58:27.220 | Stay tuned and thank you for subscribing.
00:58:28.940 | I guess the last thing I'll pitch here at the end, I'd love more reviews.
00:58:31.900 | Last time I checked, we were at 985 reviews for the show on iTunes.
00:58:35.580 | I would be thrilled to get that number over 1,000.
00:58:38.940 | So if you'd do me a favor, if you've enjoyed today's show, grab whatever you're listening
00:58:42.260 | to me on, tune in, Spotify, iTunes, Google Podcasts, whatever you're listening to me
00:58:47.380 | on, grab your phone if that's where you're listening to me, click review, rate, and leave
00:58:52.420 | a comment.
00:58:53.420 | 10 words, one sentence, two sentences, perfect.
00:58:56.500 | And that would be super, super helpful to me.
00:58:58.220 | So thank you for doing that today.
00:58:59.580 | Be back with you soon.
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