RPF0703-Friday_QA
00:00:00.000 | Your tough Tacoma is here.
00:00:03.000 | Your powerful 4Runner.
00:00:05.000 | Your stylish Camry.
00:00:08.000 | Your versatile RAV4.
00:00:10.000 | Even your fully electric VZ4X.
00:00:14.000 | Your new Toyota car, truck or SUV is available now.
00:00:20.000 | So see your Toyota dealer today.
00:00:23.000 | We make it easy.
00:00:26.000 | Toyota. Let's go places.
00:00:30.000 | Today on Radical Personal Finance it's live Q&A.
00:00:33.000 | Welcome to Radical Personal Finance.
00:00:51.000 | A show dedicated to providing you with the knowledge, skills, insight and encouragement you need to live a rich and meaningful life now.
00:00:56.000 | While building a plan for financial freedom in 10 years or less.
00:00:59.000 | My name is Joshua. I am your host.
00:01:01.000 | And today on the show we've got live Q&A.
00:01:03.000 | I've got a full phone line.
00:01:05.000 | Over a dozen callers lined up here.
00:01:07.000 | So this promises to be an interesting show.
00:01:09.000 | Lots of things going on in the markets.
00:01:11.000 | Lots of things going on in the world.
00:01:13.000 | I think we're going to have fun today.
00:01:15.000 | Well, I don't know if fun is exactly the right word.
00:01:24.000 | With all of the goings on this week.
00:01:26.000 | Obviously it's been quite the momentous week.
00:01:28.000 | I need to pull out and check out the internet and see what the market's doing today.
00:01:32.000 | But it's been quite the interesting week in the markets.
00:01:34.000 | I'd imagine we'll talk a little bit about some market related topics.
00:01:37.000 | It's been quite an interesting week in the coronavirus world.
00:01:40.000 | As we start to see coronavirus spread across the world.
00:01:43.000 | Kind of as expected.
00:01:45.000 | So we'll see what happens.
00:01:47.000 | These live Q&A shows I record them every Friday when I can reach a live internet connection.
00:01:52.000 | I record a live Q&A show.
00:01:54.000 | Most of the time these shows are exclusively open to patrons of the show.
00:01:58.000 | You can become a patron of the show at patreon.com/radicalpersonalfinance.
00:02:02.000 | That means you simply support the show financially at the amount of your choosing.
00:02:06.000 | That's really helpful.
00:02:07.000 | Allows me to spend less time going after advertisers and things like that.
00:02:10.000 | And more time just simply creating more interesting and useful content for you.
00:02:14.000 | But today's show however I put out a general announcement on Twitter and to the email list.
00:02:20.000 | Which by the way you can sign up for the email list at radicalbooklist.com.
00:02:24.000 | That's what puts you on the email list so that I can reach out to you.
00:02:27.000 | All right we're going to begin today with Daniel in Virginia.
00:02:29.000 | Daniel welcome to the call.
00:02:30.000 | How can I serve you today sir?
00:02:32.000 | Hey Josh.
00:02:34.000 | Thanks so much for talking to me.
00:02:36.000 | I'm pretty new to Radical Personal Finance.
00:02:38.000 | But I thought I had a question that I've kind of been searching through the back catalog for.
00:02:45.000 | And it just kind of concerns a master's degrees.
00:02:50.000 | And basically the situation is my girlfriend is looking at doing a master's this fall.
00:02:57.000 | And she's kind of applied to two programs and gone in.
00:03:01.000 | And basically I just wanted to get your thoughts on how should I think about paying and kind of helping her out.
00:03:11.000 | And basically the cost of her programs are significantly different.
00:03:20.000 | One is $20,000 and the other is basically $80,000.
00:03:26.000 | And she makes about $40,000 right now and could make maybe $50,000, $60,000 when she finishes in two to three years.
00:03:36.000 | And I make about $75,000 a year and I'd really like to help her out in some way.
00:03:47.000 | But I just want to know how you would think about kind of comparing those two programs.
00:03:53.000 | They obviously have kind of different reputations but they have vastly different costs.
00:03:59.000 | And just any advice would be really appreciated.
00:04:04.000 | What would the master's degree be in? What areas of study?
00:04:08.000 | It is in international development.
00:04:11.000 | And they're slightly different focuses on the programs but that's basically it.
00:04:17.000 | When you say that her income would go potentially from $40,000 to $50,000 or $60,000, is that a guaranteed pay increase?
00:04:26.000 | For example, her current job where she's happily employed says if you have a master's degree we'll pay you an extra $10,000 or $20,000 per year.
00:04:32.000 | Or is that a guess as to what she would now be qualified to go out in the marketplace and look for?
00:04:37.000 | Yeah, that's definitely a guess, Josh. Not guaranteed.
00:04:42.000 | How much money does she have currently saved to pay for a master's degree?
00:04:46.000 | She has $20,000 in cash and about $10,000 in investments.
00:04:54.000 | Does she have any other debt currently?
00:04:58.000 | No debt. Neither of us have debt.
00:05:01.000 | And the difference between the $20,000 school and $80,000 school, I would imagine one is much more prestigious.
00:05:08.000 | But is there any sense that you can be confident that there would be a major difference in her job prospects if she had the name brand school?
00:05:19.000 | So I do think her job prospects would be better with the name brand school.
00:05:26.000 | It's hard to really quantify how much better the prospects would be.
00:05:32.000 | It's a bigger alumni network and a more recognized program.
00:05:37.000 | The $20,000 program, it's only about 5 to 10 years old kind of thing.
00:05:43.000 | Well, here's how I'd approach it. Just kind of a few things.
00:05:47.000 | It's got a lot of color so I'm going to give you a fairly brief answer and just hit some high points on it for you.
00:05:52.000 | So number one, it's dangerous for you to do financial planning together with a woman that you're not married to.
00:06:01.000 | If you want to give her money and just simply say, "Here's a gift of money," then of course that's always your right and I'm sure she will appreciate that.
00:06:09.000 | But given that you have no legal protections of marriage, you should not expect that there's any guarantee of your "investment" into her education.
00:06:22.000 | So in marriage, if you're married to somebody then you get divorced, well, then the judge sits down and you look at how much of each of us contributed, etc.,
00:06:30.000 | and who's earned money and how we supported one another.
00:06:33.000 | And things like supporting your spouse while your spouse is in school become a meaningful part of a divorce settlement.
00:06:39.000 | When you are unmarried, unless you have some kind of financial agreement between the two of you, which you can do as unmarried people,
00:06:47.000 | then you just simply need to think that any money that I give her is just simply a straight gift.
00:06:52.000 | And so from that regard, from a financial perspective, that's not necessarily a very safe thing for you because you're giving money to somebody with no guarantee of return.
00:07:01.000 | Now I doubt that that's a big concern for you, but as a financial planner, I need to start with that.
00:07:05.000 | Number two, with regard to a master's degree, I'm a fan of education and I think that generally more education does help.
00:07:13.000 | I question if credentialization is necessary in many careers, but there are some careers in which it really is helpful.
00:07:22.000 | I have a master's degree myself.
00:07:24.000 | Someday, my guess is someday I'll do a PhD.
00:07:27.000 | At the moment, it's not interesting to me, but someday because I'm the kind of person who likes to check off lists, I'll be like, "Okay, I'll get a PhD."
00:07:34.000 | But what I do think makes sense is to not overpay for it.
00:07:38.000 | And I would be shocked if the $80,000 degree turned into that much more of job options that couldn't be achieved with the $20,000 degree.
00:07:50.000 | Now, is it possible?
00:07:52.000 | Sure.
00:07:53.000 | Are there fields in which the right network makes all the difference?
00:07:56.000 | Certainly.
00:07:57.000 | You can make, I think, a strong business case at times for something like going into a name-brand education market, getting the Harvard MBA because of access to the alumni network, because of access to the job offers.
00:08:11.000 | Sometimes you can make a very strong argument for the name-brand law schools because of getting the plum internships, the really high-level internships with the high firms, and that pedigree can be very, very helpful for you.
00:08:25.000 | That said, it's a lot of money, and so I would not go into debt for a master's degree.
00:08:32.000 | And so what I would say is that if she wants to pursue the name-brand degree, I would either figure out a way to simply pay out of pocket for it, working her way through, maybe have to do it more slowly, or I would find a way to get it reimbursed as part of a job, so change to a job where there's going to be some kind of reimbursement system.
00:08:48.000 | Otherwise, I would go with the lower-cost degree.
00:08:51.000 | I think that if you go with a lower-cost degree, you can check the box for credentialization.
00:08:56.000 | Yes, I have a master's degree.
00:08:57.000 | And then on the side, you can access any social network yourself.
00:09:01.000 | You can access any – demonstrate any level of capability.
00:09:05.000 | You can study to whatever degree you want.
00:09:08.000 | I have never found, with the exception – I'll hold an exception for a technical study, like perhaps something like law school, engineering school, but in a field like international development, I cannot imagine that the actual course of study makes a difference in her knowledge.
00:09:24.000 | You can learn so much more as a self-taught student, and you can advertise yourself so much more without necessarily having to get the credential that to me it just seems like a waste of money.
00:09:35.000 | If I had the difference between $20,000 and $80,000 available as far as of money, what I would do is I would focus first on getting the $20,000 degree, and then I would take the time on the side to market myself effectively, build a career-oriented website, make sure that I'm systematically building my presence in the field.
00:09:58.000 | An international development podcast is going to be far more helpful for her than where she gets to meet everybody.
00:10:05.000 | That's going to be the most helpful and most impactful way for her to build her career versus getting an $80,000 degree.
00:10:12.000 | And so if I had the choice between spending $20,000 and $80,000, I would go with $20,000 because I have the money and can pay for it, and then I would invest the other money into developing my brand, reading the books, doing the projects, writing the papers, writing the essays, writing the blog posts, writing the books that are currently needed in my field of study, and relieve the financial stress.
00:10:35.000 | The only exception would be, in my opinion, if you found somebody who – some company that were willing to pay the full price of the degree.
00:10:42.000 | And then in that situation, things would be slightly different.
00:10:45.000 | Josh: Gotcha. Well, thanks, Josh. That's really, really helpful.
00:10:49.000 | Dave: My pleasure. All right. We got a lot of callers. We go now to – looks like Tennessee, Columbia, Tennessee. Welcome to the show. How can I serve you today?
00:10:57.000 | Zach: Hey, this is Zach. I prepared a little bit for you, so I'm just going to run through it. It might take me 15, 20 seconds.
00:11:03.000 | Josh: Let's do it.
00:11:05.000 | Zach: All right. Two full-time incomes. We're married about four years. Wife makes about $75K. I make about $55K.
00:11:13.000 | We have a little bit of debt, $6K, 9% interest, $30K at about 3% interest. That's student loans.
00:11:20.000 | We paid off about $50K in student loans. We're doing a little less than the last two years.
00:11:25.000 | We own our home for about the past eight months, low cost of living. Right now, we're paying off our highest interest debt, and then we're going to invest or meet our employer match at 6%.
00:11:37.000 | So my question is my wife's looking to transition from a full-time role as a physical therapist to PRN, and I was just looking for some feedback on –
00:11:48.000 | we're wanting to focus more on our physical and mental health and kind of start a family and doing some of those things.
00:11:53.000 | I was just looking for the best investment vehicles and questions for her to make that transition from probably working 75 hours down to 25 hours.
00:12:03.000 | She would go from about $75K down to about anywhere from $30K to $50K, depending on how many days she worked per week.
00:12:11.000 | But we're just looking for a lot more of that flexibility. Like I said, I'm just looking for the best investment vehicles and kind of how we should transition, and just any insights you have for me.
00:12:21.000 | Do either of you have any interest in entrepreneurship?
00:12:25.000 | Potentially, if that fits the flexibility of her needs for working and if she's interested in doing that.
00:12:33.000 | Okay. So when you're thinking forward to a decision and a specific decision like, "Well, should we – we want to change a job," then what I would say that's largely going to be primarily an ideological decision rather than starting with a financial decision.
00:12:54.000 | As I discussed in the show on the value of a stay-at-home wife, I'm convinced more and more that it's just simply an ideological decision that you say, "This is what we want for our family because this is what we believe is going to be best for our family," and then you make the money fit to that.
00:13:08.000 | And so I like to start with any money-related decision. I like to start with any other factor other than money because I think that money is such a misleading and relatively fickle way to make a decision.
00:13:22.000 | You can always make more money. There are so many ways to make more money. Money is the ultimate renewable resource, but there are other things that don't have the ability to change.
00:13:30.000 | So the phases – time, for example. Time is the ultimate non-renewable resource, and the phase that your family is in is the kind of thing that is a big deal.
00:13:41.000 | So I think you have to decide, "Here's the vision that we have for our family," and then make a financial plan that fits that vision. That's thing number one.
00:13:49.000 | Now, number two is if you're looking forward to a decision like this, then the first thing I would say is you begin by just making the change of accounts now.
00:14:03.000 | So if you think her income is going to be lowered from $75,000 to $30,000, then you need to set up an automatic transfer of that amount of money right out of the checking account into a savings account and practice living on a lower income now.
00:14:17.000 | When my wife and I were newly married, we had two incomes in our household, but we knew that that wasn't going to be a long-term part of our vision.
00:14:24.000 | And so from the beginning, we just always put her income into a separate account, and we never spent it.
00:14:28.000 | Now, in your situation, you might want to put it aside. In your situation, you might still want to use it to pay off debt rather than just simply save it, but I would just say put it into a separate account.
00:14:46.000 | With regard to investments, the right investment for your situation is going to depend on what you want to do.
00:14:52.000 | That's always the way that investing works.
00:14:54.000 | So you have to start by saying, "What do I want to do?" which is why I ask about something like entrepreneurship or if you need to make a job change.
00:15:02.000 | If you're satisfied with your job, you're satisfied with your careers, you say, "You know what? Probably what we'd just like to do is we'd like to work these jobs.
00:15:10.000 | We're well-suited for these jobs. They make us good money. They provide us with a good lifestyle, and so we're going to work in these jobs, and then in the future, we're going to look for a time when we can retire, but we don't want to do a lot of stuff on the side."
00:15:23.000 | Then you just put money in your 401(k).
00:15:25.000 | The 401(k) is a great thing. You have access to high-quality investments if you're willing to invest in mutual funds.
00:15:31.000 | You get good tax savings, and so you don't really need anything other than putting money in the 401(k).
00:15:35.000 | If you have another goal of what you'd like to do, I recommend to people that they invest in real estate.
00:15:40.000 | I think if every family that was invested in their 401(k) in addition owned a handful of rental houses, they would feel a lot more comfortable when the stock market dumps off 10% in a week.
00:15:50.000 | And so I've never wanted to be in a situation where all my money was invested in paper assets inside of a 401(k), and so I've always prioritized having other kinds of investments as well.
00:15:59.000 | So I'd encourage you, buy another house. Live in this house that you bought eight months ago for another few months, and then rent it out.
00:16:06.000 | Buy another one. Move into another one, and then just simply collect over the next few years a set of rental properties.
00:16:13.000 | I think that's one of the simplest ways to invest in real estate if the numbers work in your area.
00:16:17.000 | If you have a specific thing you'd like to invest in, then you start setting aside the money for that.
00:16:23.000 | And I think that you should consider investing in things other than mainstream investments.
00:16:27.000 | Maybe you have a real affinity for, I don't know, maybe you're a custom hot rod restoration specialist.
00:16:35.000 | Well, if you're very good at buying old cars and fixing them up and selling them for a profit, then you need money to do that, and so you just simply prioritize cash for that.
00:16:43.000 | Maybe you have an interest in working on machinery and woodworking, and if you just bought some woodworking equipment, some special machines,
00:16:53.000 | you could make very highly sought-after things in your backyard.
00:16:58.000 | Well, in that case, you need to buy the equipment.
00:17:00.000 | And so the investing question always needs to be driven by what do I want to accomplish with my investments, and then what do I want to do, and then the funding plan is obvious.
00:17:09.000 | So you can't go, it's not wrong to just put money in the 401(k), that's fine.
00:17:13.000 | I think it's the slow plan, but if you're living a good lifestyle and you're okay with the slow plan, then it provides what you're looking for.
00:17:20.000 | All right, next we go to, looks like the Florida Keys.
00:17:25.000 | Welcome to Radical Personal Finance.
00:17:27.000 | How can I serve you today?
00:17:29.000 | Hey, good morning, Joshua.
00:17:30.000 | This is John.
00:17:31.000 | I'm a Miami number, but I'm actually out in California.
00:17:34.000 | Got it.
00:17:36.000 | Question for you regarding whole life insurance.
00:17:40.000 | When my daughter was born, we purchased a whole life policy on her.
00:17:44.000 | It was roughly a $100,000 policy.
00:17:46.000 | It's only about $50 a month.
00:17:50.000 | And I'm just curious, is it worth keeping this policy?
00:17:54.000 | I listen to Dave Ramsey a lot, and he hates these things, but I swear in the past I've heard you mention that you have a whole life policy on your children, or at least I think I heard that.
00:18:03.000 | So, is this thing worth keeping around for the long run, or should I just cash it out and put the money towards some other investment asset for her?
00:18:17.000 | How long have you had the policy?
00:18:19.000 | Almost three years now.
00:18:21.000 | And how old is your daughter?
00:18:23.000 | She's three.
00:18:25.000 | Okay.
00:18:26.000 | And you're putting $600 a year of premiums into $100,000 of insurance.
00:18:31.000 | Okay.
00:18:33.000 | So, what would you do with the money if you weren't putting it into the whole life insurance policy?
00:18:37.000 | I currently have a brokerage account that I invest in a couple ETFs for her, and I would just boost up those investments.
00:18:49.000 | If you cancel the whole life policy, would you still have life insurance on her life?
00:18:55.000 | I do. I'm active duty military, and so there's a rider on my life insurance to the military for her.
00:19:04.000 | It's $10,000 of coverage.
00:19:06.000 | Okay.
00:19:07.000 | So, the life insurance question for children is a little bit difficult because it combines the unique attributes of life insurance on a child's life with the unique kind of consideration and planning that needs to be done with whole life insurance in general.
00:19:25.000 | I own whole life insurance on my life.
00:19:27.000 | My wife has whole life insurance on her life.
00:19:29.000 | We have whole life insurance on all our children.
00:19:31.000 | I like whole life insurance.
00:19:33.000 | I intend in the future to buy more whole life insurance, and I'm very pleased with the whole life insurance policies that I own.
00:19:40.000 | That said, they are not the only thing, and where people mostly go wrong on this stuff is where they try to make one investment be their everything, and you can't do that.
00:19:55.000 | There are many benefits of different kinds of investments, and you need to look at each investment for its specific attributes.
00:20:02.000 | And there are times in your life where you'll choose one attribute versus another attribute.
00:20:07.000 | So, to begin with, when you have life insurance on a child's life, the first decision that you have to make is about actually having insurance there, and I personally think it's a very good idea.
00:20:18.000 | If you want to buy substantial amounts of life insurance on your child's life, you can almost never do that with term life insurance until your child is an adult, legally an adult at the age of 18.
00:20:30.000 | So, the only way that I have ever found to buy life insurance on the life of your child is as a rider on an existing policy elsewhere, and usually those are maxed out at about $10,000, like yours is.
00:20:45.000 | Maybe you can get a little bit more.
00:20:46.000 | Maybe you can get up to $20,000 or $25,000.
00:20:48.000 | That's possible, but usually those are maxed out at about $10,000.
00:20:53.000 | So, for most people, that would be enough money to pay for a funeral, et cetera, but there's a reason why you purchased more life insurance than that, and I think having more than that is a good idea if you can afford the money.
00:21:05.000 | And so, if you want the insurance and you want significant amounts of insurance, you can't do it with anything other than whole life insurance.
00:21:11.000 | That's the first thing to think in mind.
00:21:13.000 | Number two, when you own whole life insurance on a child's life, there's a real balance between the current insurance and the future benefits of that policy.
00:21:23.000 | So, for example, with my children, I have riders on all my children's life insurance policies that are additional purchase benefits and waivers of premium.
00:21:34.000 | And so, what those additional purchase benefits do is they allow the child in the future or me as the policy owner.
00:21:40.000 | They allow us in the future to buy additional amounts of insurance without medical or lifestyle underwriting.
00:21:47.000 | So, if you buy a $50,000 policy, for example, depending on the company, every company that sells it will have a different amount of insurance that's available at certain ages.
00:21:56.000 | But when my child turns 18 years old or when my child turns 20, I have the opportunity to buy more life insurance on their life without having to go through underwriting.
00:22:06.000 | And that number varies, but it's probably something like $250,000.
00:22:09.000 | And so, something like a $50,000 life insurance policy could be viewed effectively as a form of call option.
00:22:18.000 | It could be viewed as the ability that in the future, no matter what happens with my child's health, no matter what happens with my child's hobbies, their avocations, any lifestyle choices they make,
00:22:30.000 | as long as we follow the terms of the policy, we'll have in the future opportunities to buy additional amounts of insurance.
00:22:36.000 | So, my children's policies, they're all with Northwestern Mutual because that's where I used to be based, and I think they're a great fit for whole life insurance.
00:22:44.000 | They start at age 20.
00:22:47.000 | From age 20 to 40, there are a total of seven different opportunities to increase the amount of insurance.
00:22:51.000 | And it's in excess of – I forget the exact number.
00:22:53.000 | I have to go look at the policy.
00:22:54.000 | But it's in excess of another million dollars of insurance that I could buy or they could buy without any underwriting.
00:22:59.000 | Now, is that going to be strictly necessary?
00:23:02.000 | Probably not.
00:23:03.000 | There's a good chance that that's not necessary.
00:23:05.000 | Many people, when they grow up, are perfectly healthy, just like they're healthy when they're children.
00:23:10.000 | But there are people who are not healthy when they grow up, and they can't get more life insurance.
00:23:15.000 | In addition, sometimes people start doing things that make it hard for them to get more life insurance.
00:23:19.000 | They decide at the age of 18 that they're going to go into the military and they're fighting an active war.
00:23:25.000 | Or they decide that they're going to get a pilot's license and they're going through private pilot's training.
00:23:29.000 | Or they're doing something that's perceived to be risky.
00:23:32.000 | They're scuba diving or they're an offshore oil rig worker, et cetera, et cetera, et cetera.
00:23:36.000 | And so once you pursue those kinds of things, race car driving, riding motorcycles in professional racing,
00:23:42.000 | once you move into those activities, you can't generally buy larger amounts of life insurance.
00:23:47.000 | And so a part of the premium in a life insurance policy is really this call option, this additional purchase benefit.
00:23:55.000 | And that's not an inexpensive benefit.
00:23:57.000 | It actually costs quite a bit when you actually sit down and look at the premiums.
00:24:01.000 | Now, I think it's a significant benefit.
00:24:03.000 | It's worth having.
00:24:04.000 | That's why I have it.
00:24:05.000 | But it is a straight cost.
00:24:07.000 | The other cost is something like a waiver of premium, which is an option where once you have it on the insurance policy,
00:24:13.000 | if the child becomes sick or hurt and disabled, then the insurance company pays the premiums.
00:24:19.000 | Now, with my policies, if the policy has a premium being waived, then they'll actually purchase the additional amounts for you and waive those premiums.
00:24:30.000 | And so it's possible that if a child had some kind of serious disease, serious disability, suffered the loss of their legs or loss of eyesight, et cetera,
00:24:40.000 | it was possible that with the way the benefits work with the right companies and the right structure,
00:24:45.000 | you could go from $20 a month or $40 a month, whatever your premium is, to $1,500 or $2,000 a month,
00:24:53.000 | and the insurance company would still be paying those benefits.
00:24:56.000 | And the reason I go into that is I consider those to be useful, valuable benefits.
00:25:00.000 | And I like having them there as an option for either me or for my children.
00:25:05.000 | Can I prove that they're needed?
00:25:06.000 | No.
00:25:07.000 | Just like I can't prove that even insurance in and of itself is needed.
00:25:10.000 | The majority of children are going to live to a ripe old age.
00:25:12.000 | So you can't prove it.
00:25:14.000 | You can look at the numbers.
00:25:15.000 | But at the end of the day, it's just kind of a gut check of what do I want, what do I value here in this particular plan.
00:25:24.000 | So now, when we go now back to the numbers now,
00:25:27.000 | you're going to assess the value of the whole life insurance policy based on the death benefit and based on the cash value.
00:25:34.000 | The reason I started with waivers of premium, additional purchase benefits, is because those things have a direct cost.
00:25:41.000 | They're pure insurance.
00:25:42.000 | And so the money never goes to the cash values.
00:25:46.000 | With whole life insurance for children,
00:25:49.000 | whole life insurance often is very expensive in the beginning.
00:25:55.000 | And the numbers don't work out quite so well in the beginning years as they do for adult policies.
00:26:00.000 | It takes longer for them to break even.
00:26:02.000 | It takes longer for them to start accumulating significant amounts of cash values.
00:26:06.000 | And the rate of return is lower in the early years.
00:26:09.000 | So a lot of that, though, is driven based upon how much of the benefit is going to these other waivers of premium and how much is going into it.
00:26:17.000 | You can design a policy that's very cash heavy, that has a high percentage of the money going directly into cash value.
00:26:23.000 | But when you start adding those other benefits to it that I talked about, if you have them, they lower the rate of return.
00:26:28.000 | And so life insurance for children often underperforms life insurance for adults in the early years for some of these reasons,
00:26:35.000 | when you sit down and look at them side by side.
00:26:37.000 | I still think they're a good idea.
00:26:39.000 | But I'm focusing not just on the cash value.
00:26:43.000 | I'm focusing on the value of the insurance.
00:26:46.000 | So how do you make a decision?
00:26:48.000 | First, you don't listen to Dave Ramsey, you don't listen to me and just say, "I'm going to do something else."
00:26:53.000 | The way that you analyze a whole life insurance policy is you order from the insurance company what's called an in-force illustration.
00:26:59.000 | And so you can get this from your insurance agent or the insurance company itself.
00:27:02.000 | You order an in-force illustration.
00:27:04.000 | And then you sit down with an insurance agent who can explain the in-force illustration to you and explain to you what's actually happening in the policy.
00:27:11.000 | This is the only way that you have of being able to understand what's happening in it.
00:27:16.000 | Then once you have those numbers, you can look at the policy and you can see what happens with the amount of money that I put into it.
00:27:23.000 | Now, three years into the policy is still fairly young, where you're just starting to get to the different phase.
00:27:29.000 | And the problem with whole life insurance is that all the expenses come out up front.
00:27:33.000 | The agent gets their commission, most of it, in the first year.
00:27:37.000 | The insurance company charges large expenses to the policy for the cost of underwriting, et cetera.
00:27:41.000 | And so whole life insurance in the first year, in the first couple of years, is very, very expensive.
00:27:47.000 | But after a few years, what happens is that because those expenses are already gone, the profitability of a policy changes significantly.
00:27:55.000 | Now, I can't tell you without actually looking at the in-force illustration when, for example, the break-even point is,
00:28:00.000 | when you have as much money in cash value as you have as you put in in premiums.
00:28:06.000 | Most of the time, I don't need to get into your company here, but if it's a high-quality company,
00:28:10.000 | that's probably somewhere between six, seven, eight, nine, ten years, depending on the policy design, et cetera.
00:28:14.000 | But look at your in-force illustration.
00:28:17.000 | But once you get a few years into a whole life insurance policy, it's very hard to ever want to see you surrender that.
00:28:23.000 | And you just have to look at it and see, for example, check the math and say,
00:28:28.000 | "Next year, I'm going to put in a $600 premium payment. How much does my cash value increase?"
00:28:36.000 | At this point in time, all of the costs of the past are a sunk cost.
00:28:40.000 | And so you're not doing the analysis of, "Would I buy this over again?"
00:28:44.000 | You're doing the analysis of, "Should I keep this now that I have it?"
00:28:47.000 | And so you have to look at the in-force illustration.
00:28:49.000 | You have to ignore the sunk costs of the past.
00:28:52.000 | And then you have to look at the alternative use of the dollar.
00:28:54.000 | What else are you investing in?
00:28:56.000 | And the final thing I have to say, I've done extensive shows on whole life insurance.
00:28:59.000 | You can find them in the archives.
00:29:01.000 | But the final thing I would say is one of the best benefits of life insurance is that it provides a useful pot of money
00:29:10.000 | that has different characteristics than almost any other pot of money.
00:29:14.000 | It is not perfect. It just has different characteristics.
00:29:17.000 | I think whole life insurance is often oversold.
00:29:20.000 | And that bothers me because when you oversell something,
00:29:22.000 | you run a risk of having somebody who's much less satisfied with it than if you just sell it properly.
00:29:29.000 | But what I like about life insurance is you have an asset value that generally performs better
00:29:35.000 | than many other very stable things you can do with money.
00:29:39.000 | I get a lot higher rate of return in my life insurance policies than I do with money that's in a savings account, for example.
00:29:47.000 | It's probably not going to perform as well in the long term as something like a stock account.
00:29:53.000 | A stock account had better perform in the long term a lot better than a whole life insurance policy.
00:29:59.000 | Otherwise, we've got major problems.
00:30:01.000 | And the reason for the difference in performance has to do with what the insurance company is actually investing the money in.
00:30:06.000 | Because an insurance company portfolio manager has to meet a predicted cash outflows
00:30:12.000 | and has to keep a margin of safety so that the insurance company can pay death benefits.
00:30:17.000 | They have to invest more for income than for growth.
00:30:20.000 | And so the vast majority of the general accounts of an insurance company are invested into fixed income investments.
00:30:27.000 | Bond investments primarily, lots of treasuries, lots of stable bond investments,
00:30:32.000 | lots of some real estate depending on the company.
00:30:36.000 | They do large commercial real estate, fund a shopping mall at $400 million, that kind of thing.
00:30:41.000 | Some investment, they do a lot of private placement equities.
00:30:44.000 | They do some public traded equities, but usually the public traded equities are a relatively small percentage of the portfolio.
00:30:50.000 | Now, in general, you're always going to get higher returns in equities than you are with bonds
00:30:56.000 | because you're taking more volatility risk with equities than you are with bonds.
00:31:01.000 | And so in order for somebody to get you to bite on the volatility risk, they're going to have to provide a higher rate of return.
00:31:07.000 | That's just a guaranteed rule.
00:31:08.000 | You would never go and invest in equities with the volatility that you see this week if you didn't expect a larger rate of return.
00:31:15.000 | And so that's the reason why generally when people talk about, "Well, buy term insurance, invest the difference,"
00:31:20.000 | that's the reason why often that is going to work and why it's going to be a better idea.
00:31:24.000 | The reason is you're putting your money into something that has more volatility but has a higher long-term rate of return.
00:31:30.000 | So don't expect your life insurance to get a bigger rate of return than stocks.
00:31:35.000 | I don't think it will.
00:31:36.000 | Or at least it shouldn't.
00:31:38.000 | If it does, we got major problems.
00:31:40.000 | But what a life insurance policy does give you is it gives you stability and it gives you higher growth than some other ways of having stable money.
00:31:47.000 | And it gives you certain benefits such as the tax-free growth of the inside buildup of the cash value.
00:31:53.000 | In addition, the life insurance is very flexible.
00:31:55.000 | You can access it in a tax-advantaged way by taking policy loans against it.
00:32:00.000 | So you can take the money out.
00:32:01.000 | You can put the money back.
00:32:03.000 | My basic emergency fund, I keep cash on the side.
00:32:07.000 | I keep a large credit card portfolio of credit cards where I have access to 0% financing.
00:32:12.000 | And then I have large amounts of money in life insurance policies that back up the credit cards.
00:32:17.000 | And so if I went through my base, I like to have a lot of safe money.
00:32:20.000 | I like to have a lot of emergency funds.
00:32:22.000 | But if I went through the cash that I have in bank accounts and the physical cash that I have and I needed more money, I would go to 0% credit cards.
00:32:31.000 | And then if I had a problem, let's say that I couldn't pay them or I started to have high interest rates, then I would start pulling money out of life insurance policies to pay those credit cards.
00:32:39.000 | I can be confident in doing that.
00:32:41.000 | Thank you.
00:32:43.000 | Because I can be confident in doing that because I have the ability to have a stable asset that's guaranteed to go up in value.
00:32:53.000 | And I have the ability to get at the money right away.
00:32:56.000 | And so I view life insurance as a short-term to medium-term funding mechanism with a very safe, stable risk profile where I'm not likely to all of a sudden run out of money in that policy.
00:33:09.000 | So I can't tell you exactly what you should do.
00:33:11.000 | I can't go through all the details.
00:33:13.000 | It's obviously difficult to analyze it.
00:33:16.000 | But sit down with an in-force illustration.
00:33:18.000 | And as long as you've got a good company and a good policy, then chances are you probably should keep it.
00:33:25.000 | And the last thing that I do need to say, I consider it malpractice, financial malpractice to say to somebody that you should simply cash out a life insurance policy.
00:33:36.000 | Because what happens is people think that that's the only way to end a life insurance policy.
00:33:40.000 | First, you have to do the actual analysis of the life insurance policy.
00:33:44.000 | And then once you do the actual analysis of it, you'll get the answer of what your best options are.
00:33:51.000 | But then you need to look at all of the non-forfeiture options.
00:33:54.000 | So for example, in your whole life insurance policy, you have a non-forfeiture option called extended term insurance.
00:33:59.000 | Where if you didn't want to have it anymore and you said, "Well, I've put $1,800 into this policy and I don't want to have this anymore."
00:34:07.000 | Let's say that you have $800 in your cash values and you put $1,800 in it.
00:34:10.000 | One of your non-forfeiture options in a whole life insurance policy is to take an extended term policy.
00:34:15.000 | And so the insurance company will calculate how many years of term life insurance you can have based upon using your $800 of cash value to pay premiums for you for the coming years.
00:34:27.000 | And so let's say that the premium for a term life insurance policy of $100,000 on a three-year-old child is $100 a year.
00:34:35.000 | Well, in that situation, they would give you eight years of term insurance at $100,000 of coverage based upon your $800 of cash value.
00:34:44.000 | And so when you're sitting down and saying, "Well, I'd like to have insurance on my child."
00:34:48.000 | That could be a far superior option for – but I don't want to have this whole life policy anymore.
00:34:52.000 | That could be a far superior option for you versus dropping it, cashing the money out, and then taking the money and going and putting it in your brokerage account.
00:35:04.000 | And then paying more money for term insurance as a writer, which you can't even get $100,000.
00:35:08.000 | Or an option like taking a policy paid up.
00:35:11.000 | You might look and model at something and say, "Well, I don't want to make this policy forever, but what does it look like if I make 10 years of premium payments on this policy?"
00:35:19.000 | And then we take the insurance as a reduced paid up.
00:35:22.000 | And so instead of having $100,000 of insurance, 10 years in – let's just – by example, 10 years in, you've put a total of $8,000 of premiums into it.
00:35:32.000 | Let's say that your cash values are something like $7,000.
00:35:35.000 | And you say, "I don't really have something else that I really want to do with this money.
00:35:38.000 | But what I would like to do is have some kind of insurance on my child forever."
00:35:42.000 | Well, you could take the policy as a reduced paid up, and maybe they'll say, "We'll give you $30,000 of insurance that's in force forever, and you never have to pay another premium."
00:35:52.000 | That's another option that you can calculate.
00:35:54.000 | And so there are lots of options that you can have under your non-forfeiture benefits of a life insurance policy, which you need to consider.
00:36:00.000 | So that's my best guess – or that's my best charge in 10 to 15 minutes of just giving you an overview of it.
00:36:07.000 | But the answer is sit down with an insurance agent, run an in-force illustration, think about the alternative use of the dollar, and understand all of your options.
00:36:15.000 | But at the end of the day, I am very happy with owning small whole life insurance policies on my children.
00:36:21.000 | I buy them when they're two weeks old, and I am very happy with them and happy with all the whole life insurance that I have.
00:36:28.000 | I'm not saying that whole life insurance should be where all your money is. It's not.
00:36:34.000 | I think it's not the most profitable place to invest your money. It's going to be in your own business.
00:36:39.000 | One of these days, buy term and invest the difference bothers me so much because the people who often tout it don't understand what the actual investments are when they're comparing it to whole life insurance.
00:36:53.000 | The general portfolio of the insurance company is fixed income.
00:36:56.000 | So if you're going to talk about buy term and invest the difference, to make that analysis fair, you need to buy term and invest the difference in fixed income.
00:37:02.000 | Or you need to compare it to a variable whole life policy or a variable universal life policy that's invested purely into mutual funds.
00:37:11.000 | You cannot compare a traditional whole life insurance policy to buy term and invest the difference and say I'm going to invest the difference into the stock market and have that be an accurate, realistic comparison.
00:37:21.000 | It is simply not unless again, as I said, you're saying I'm going to buy term and invest the difference in treasuries or I'm going to buy term and invest the difference or I'm going to compare the stock account to a variable universal life or a variable whole life policy with stocks in it.
00:37:35.000 | Then you can make an accurate comparison.
00:37:37.000 | So I don't love it for everything.
00:37:39.000 | And one of these days, I'm going to do a show saying don't buy – I got to come up with some cheeky catchphrase.
00:37:45.000 | Don't invest the money in stocks. Invest the money in your own business.
00:37:48.000 | Because the exact same analysis always comes down to well, should I buy money in stocks?
00:37:52.000 | You're an idiot to put money into the stock market where you think you can get 8 to 10 percent if you have the opportunity to invest the money into your own business or to other forms of investing where you can get 300 percent or 3,000 percent.
00:38:02.000 | Nobody gets rich quick based upon investing in stocks.
00:38:06.000 | The key is investing into your own business.
00:38:09.000 | And so if you're going to say buy term and invest the difference is the extent of the argument with whole life insurance, well, then let's just say why would you ever be a fool and invest in the stock market when you could invest into leveraged real estate or you could invest into your own business and make a higher rate of return.
00:38:23.000 | Now, I believe there's perfectly fine to invest in the stock market.
00:38:26.000 | That hopefully shows and demonstrates the fallacy of just starting with buy term and invest the difference.
00:38:33.000 | Take a little bit more of a nuanced look.
00:38:35.000 | Gather some more information and then you'll know.
00:38:38.000 | I think I lost that call.
00:38:39.000 | Are you still on the line with that, John?
00:38:41.000 | Yeah, I'm still here.
00:38:43.000 | Very thorough and I appreciate it.
00:38:45.000 | Good.
00:38:46.000 | My pleasure.
00:38:47.000 | All right.
00:38:48.000 | Very good.
00:38:49.000 | We go on now to looks like New Jersey.
00:38:50.000 | Welcome to the call.
00:38:51.000 | How can I serve you today?
00:38:52.000 | Hold on.
00:38:53.000 | There you go.
00:38:54.000 | Go ahead.
00:38:55.000 | Tell me your name, please.
00:38:56.000 | Hello.
00:38:57.000 | Can you hear me?
00:38:58.000 | I can hear you great.
00:38:59.000 | Go ahead.
00:39:00.000 | Go ahead, please.
00:39:01.000 | Can you hear me?
00:39:02.000 | Yes.
00:39:03.000 | Sounds good.
00:39:04.000 | Okay.
00:39:05.000 | I'm with some sort of a teleconference machine speaking in the background.
00:39:06.000 | Josh, I'm so glad I got to you.
00:39:07.000 | I could spend a whole hour just thanking you for all the hours I've listened to you.
00:39:08.000 | It's been excellent and I've learned a lot from you.
00:39:09.000 | Thank you very much.
00:39:10.000 | My pleasure.
00:39:11.000 | Thank you for being here.
00:39:12.000 | Okay.
00:39:13.000 | My question is, I think it's very simple for you, Cockney, that you're a good investor.
00:39:14.000 | I'm not sure if you're a good investor.
00:39:15.000 | I'm not sure if you're a good investor.
00:39:16.000 | I'm not sure if you're a good investor.
00:39:17.000 | I'm not sure if you're a good investor.
00:39:18.000 | I'm not sure if you're a good investor.
00:39:19.000 | I'm not sure if you're a good investor.
00:39:20.000 | I'm not sure if you're a good investor.
00:39:44.000 | My question is, if I save up enough where I can pay half of what me and my wife pay
00:39:53.800 | for a long-term period, like 20 years, basically until 165 or something, then I can retire.
00:40:03.560 | That seems simple enough, right?
00:40:07.240 | So since half of what me and my wife pay is our mortgage, that means that I would have
00:40:14.880 | to save enough to pay my mortgage, theoretically, right, until for 20 years.
00:40:21.800 | To pay my mortgage for 20 years.
00:40:24.000 | Not 30 years, but 20 years.
00:40:26.480 | Now being that my home is worth, let's say, $500,000, okay, somehow I'm getting lost with
00:40:34.400 | how come I can't just save $500,000 and say, "Okay, I can retire on this."
00:40:43.920 | It seems like such a smooth sum because I know that there's other things involved, like
00:40:49.920 | the benefits of homeownership that you've talked about, the tax deductions.
00:40:59.880 | I've been muted.
00:41:00.880 | Can you still hear me?
00:41:01.880 | I can hear you fine.
00:41:02.880 | Keep going.
00:41:03.880 | I don't know why the machine's off.
00:41:06.880 | So anyway, my thinking is with all the deductions and everything else you have in homeownership,
00:41:14.000 | if I take my $500,000 and I just invest in the stock market fairly conservatively and
00:41:19.800 | make 5% on my investment, my $500,000, then I could pay from that account my mortgage
00:41:28.480 | for at least 20 years.
00:41:30.360 | Does that make any sense?
00:41:31.360 | Yeah, it does.
00:41:32.360 | It does.
00:41:33.360 | Hello?
00:41:34.360 | Yes.
00:41:35.360 | Yes.
00:41:36.360 | The answer is yes.
00:41:37.360 | It does make sense.
00:41:38.360 | And yes, if you can earn 5% in the stock market and pay your mortgage at 3%, and if you can
00:41:47.640 | do that every single year, then yes, it will work.
00:41:53.200 | Now it just seems like I would run out of money, but being that, and you would agree
00:42:00.360 | I think that 5% is a conservative return on $500,000, but that would last 20 years mathematically
00:42:07.520 | speaking?
00:42:08.640 | The basic problem, so from the interest rates, okay, so the math is simple and obvious.
00:42:14.080 | Let's say you have a $500,000 mortgage that you are paying at a 3% interest rate on your
00:42:18.720 | mortgage and you have $500,000 in an account and you're earning 5% on the account.
00:42:25.560 | Well if you are going to pay 3% on your mortgage and you're going to earn 5% on your account,
00:42:30.200 | then yes, every single year you can take the amount of money needed to pay your mortgage
00:42:34.680 | out of your investment account and pay it and mathematically it will work.
00:42:38.480 | Now notice there's a big if, can I earn 5% on my money there?
00:42:43.680 | And so where that goes wrong is with the volatility of stocks and stocks generally of most mainstream
00:42:50.960 | paper assets generally provide significant rates of return.
00:42:54.920 | The long-term average of the stock market over the course of many decades is something
00:43:00.380 | approaching 9%, 10%.
00:43:03.300 | The problem is how do you guarantee that going forward in the future?
00:43:07.260 | And in the middle of getting that high overall rate of return there are a lot of periods
00:43:11.080 | of time where things are really, really bad.
00:43:14.000 | We're in a week where the market has dumped off 10% in the last week.
00:43:17.800 | Now you can go back and you can say yeah, but in the last decade it's been really good
00:43:20.600 | and that's true.
00:43:21.760 | It has been good in the last decade, but we're speaking on a Friday, February 28 where the
00:43:26.360 | market has dumped off 10%.
00:43:28.640 | So when you actually look at that and you realize that you can't predict when you get
00:43:35.480 | those returns, that's where you get into some more areas of potential having to kind of
00:43:41.960 | smooth things out a little bit.
00:43:44.400 | And now when you actually think well I'm retired, then you wind up in a different situation
00:43:49.120 | because when you're retired the $500,000 account is not only trying to provide for your mortgage
00:43:55.240 | payment, it also has to provide for the cost of your taxes and for your insurance and for
00:43:58.680 | your other living expenses.
00:44:00.480 | And it would be a very stressful position to be in as an early retiree if you had a
00:44:05.240 | $500,000 mortgage and a $500,000 investment account, which is where we get to some range
00:44:11.240 | of figuring out what works.
00:44:12.480 | Now if you have a $2 million investment account and a $500,000 mortgage and a couple thousand
00:44:17.800 | dollars of monthly expenses in addition to your mortgage payment, well now that's a very
00:44:21.560 | safe, very reasonable approach to take.
00:44:24.920 | But that only works because you have enough money to where you can actually comfortably
00:44:30.480 | ignore the short term fluctuations.
00:44:32.760 | And then even in that situation you need to make sure you have some cash on the sidelines.
00:44:37.200 | So mathematically if you can earn 5% of the stock market and pay 3% interest, you should
00:44:41.880 | never pay off a mortgage early, mathematically.
00:44:44.720 | Every single time you're going to come out ahead with regard to the investment.
00:44:48.320 | The trick comes in that there's not really anything you can do where you can earn a guaranteed
00:44:52.640 | 5% every single year.
00:44:54.560 | And thus you have to take a little bit more of a cautious approach.
00:44:57.280 | Does that make sense?
00:44:58.280 | Yes it does.
00:44:59.280 | Now wouldn't, so then, I mean with that mentality, couldn't I guarantee the interest rate on
00:45:07.360 | my mortgage, that rate of return by simply paying off my entire mortgage and then saying
00:45:11.400 | okay well now, since I paid my entire mortgage off, I'm making 4% of my return on my investment.
00:45:19.280 | And then my retirement per se, by increasing the value by the rate of inflation or whatever
00:45:26.040 | else, and then when I sell that home, that will be my investment return on that investment
00:45:33.840 | and actually not even losing capital in that sense.
00:45:36.840 | I mean, even paying off my mortgage through an investment account by getting 5% or whatever,
00:45:43.600 | I'm still basically just reusing financial albatross to a certain degree and just re-putting
00:45:52.240 | that money somewhere else, just taking that money from my investment account and investing
00:45:55.880 | in, or not investing because you called it a liability, but putting it into the liability
00:46:01.560 | that is a home that is ultimately an asset when it's sold.
00:46:05.400 | So I mean, that's what I'm kind of seeing.
00:46:08.640 | So if you did it that way, then the way you could think about that from an investment
00:46:12.480 | perspective is you could say, I'm increasing my exposure to real estate as an asset class
00:46:19.200 | and one of the returns of my real estate as an asset class is this guaranteed 3% or 4%
00:46:26.000 | that I'm getting from paying off my house.
00:46:28.140 | And so what you're doing functionally is you're reallocating money from equities to over to
00:46:33.680 | your, to real estate.
00:46:35.120 | If you invest the money into your own home and can that work?
00:46:38.040 | Yes, it can work, but you're still going to have to have money to live on.
00:46:41.320 | And so usually where you come out on this situation is you come out with a balance of
00:46:45.920 | the two things.
00:46:46.920 | Now the thing that I point out first, if you have a paid off house that can provide you
00:46:53.980 | with a great deal of comfort and flexibility.
00:46:56.400 | I'm very much in favor of that.
00:46:58.460 | But mathematically, if you're trying to, if you're trying to do something like using a
00:47:04.080 | 4% rule or a 3% rule, and that's going to be the basis of your retirement plan, that
00:47:10.480 | you're going to have a million dollars and have $40,000 of income from that account every
00:47:13.800 | year.
00:47:15.200 | Mathematically, that plan only works if market returns are up at the 7% range of returns,
00:47:22.680 | which means that that's going to be better to just put money into the investment account
00:47:27.040 | than paying off the house early.
00:47:28.760 | Now if it buys you more mental safety, that's fine.
00:47:31.120 | Again, I'm in favor of that.
00:47:32.360 | If it allows you to be more relaxed and be willing to take a go of it, that's fine.
00:47:35.880 | You got to do whatever you can do if you're going to invest in stocks.
00:47:39.040 | You got to do whatever you can do to be comfortable in a week where there's a 10% sell off.
00:47:43.480 | And so that's a really important function of being debt free.
00:47:49.280 | But if you're just talking about it financially, don't think that putting the money into the
00:47:55.040 | house mortgage payoff is going to be the trick if you're also planning on a 4% withdrawal
00:48:01.680 | rate.
00:48:02.680 | Good enough for now?
00:48:03.680 | Yeah, no, it makes a lot of sense.
00:48:04.680 | I mean, obviously, the value of being able to ultimately work whenever you can, whenever
00:48:16.040 | you want to return to work.
00:48:17.440 | I mean, with that mentality, ultimately, you can retire with any amount of income, just
00:48:22.040 | a small amount, $100,000, whatever, just to hold you off until you find something that
00:48:26.920 | you're entertained enough and like enough to retire off that.
00:48:30.640 | But mathematically speaking, I guess the last question is, mathematically speaking, in regards
00:48:36.800 | to what you're putting in an investment account versus what you're deducting off of your mortgage,
00:48:44.120 | that's one of the main reasons that paying off your home doesn't make sense, as I think
00:48:47.400 | you have alluded to in the past episodes.
00:48:51.640 | If I'm making, let's say, 4% return even, a very conservative amount, over 20 years,
00:48:58.040 | over 20 years, which is what I'm talking about, 4% over 20 years, and then my interest rate
00:49:04.520 | on my home is 4% over 20 years.
00:49:06.400 | Yes, but I have those ultimate, those other deductions, those tax deductions, whatever
00:49:10.960 | else, that are really reducing that 4% interest rate on my home to, I don't know, 3%, can
00:49:18.320 | I guess that?
00:49:19.320 | So, really, my 4% return is more than enough to pay that 3% return.
00:49:27.440 | I guess I'm trying to make it as safe as possible in my mind, so it's like ultra safe, like
00:49:33.600 | a 4% return on stocks over 20 years, I would think anybody would say that's ultra conservative.
00:49:40.920 | Yeah, so let me try to just give you a simple thing here to wrap it up, to give you.
00:49:48.640 | You're thinking in the right direction, and yes, if you, in general, there's a reason
00:49:53.000 | why almost any financial advisor ever will always say you should, if you're interested
00:49:58.680 | in wealth building, you should prioritize investing in stocks versus paying off your
00:50:03.280 | house early.
00:50:04.280 | In the United States, they throw money at you for real estate, and the interest rates
00:50:07.960 | are absurdly low, the interest rates are incredibly depressed, and so almost any financial advisor
00:50:12.800 | will say, yes, you should pay off, you should put money into stocks before paying off your
00:50:18.840 | house.
00:50:20.520 | Now, there's been major changes in the tax law, most importantly, the increase of the
00:50:26.760 | standard deduction, so the value of the itemized mortgage deduction is probably lower to you
00:50:31.520 | now than it once was.
00:50:33.640 | In addition, you're only going to do that in the beginning phase of the mortgage payoff,
00:50:38.200 | where you're going to be paying a lot of interest, and so many people who say, well, I shouldn't
00:50:42.520 | pay off my mortgage because of the tax deductions, that's a flawed argument, because they don't
00:50:45.800 | even need that, and you have to have a big house, a big mortgage, and a lot of interest
00:50:49.880 | to exceed what you can get with the itemized mortgage interest deduction versus just simply
00:50:54.520 | the standard deduction.
00:50:56.040 | $200,000 mortgage, you're not going to need the itemized deduction.
00:51:00.440 | Million dollar mortgage or $750,000 mortgage, yeah, maybe so, but a $200,000 mortgage is
00:51:06.040 | not going to do it for you.
00:51:07.160 | So here's what I would say, okay?
00:51:08.920 | Number one, fully fund your retirement accounts.
00:51:12.320 | If you're interested in retiring early, there's no reason to start with anything except fully
00:51:15.940 | funding your retirement accounts.
00:51:17.920 | So fully fund your 401(k), get as much money into that as you can.
00:51:21.440 | Fully fund your wife's 401(k), get as much money into that as you can.
00:51:24.640 | Fully fund your Roth IRAs if you're eligible to qualify.
00:51:29.320 | Fully fund a backdoor Roth IRA if you're not eligible to contribute to a Roth IRA.
00:51:34.760 | Fully fund an HSA if you're eligible.
00:51:38.040 | Fully fund every one of those tax advantage accounts, because as an employee, the most
00:51:42.240 | useful thing you can do as an employee is to save money into a qualified account.
00:51:50.920 | That's your biggest tax deduction.
00:51:52.240 | So start there.
00:51:53.480 | Number two, what I would rather you do is instead of paying off your personal house,
00:51:58.480 | keep living in your personal house and then go and buy a rental house and have your tenants
00:52:03.240 | pay off your mortgage for you.
00:52:05.400 | Whether you put a loan on that house or whether you own the rental house debt free and your
00:52:13.400 | tenants just simply make your mortgage payment for you every month by sending you $1,800
00:52:16.680 | or whatever your mortgage payment is, I would rather you do that.
00:52:19.680 | The reason that a house is considered in some – it's not, it's an asset, right?
00:52:24.420 | But in the kind of the rich dad, poor dad made famous by Robert Kiyosaki view, a house
00:52:28.160 | is a liability because it sucks money out of your pocket.
00:52:30.600 | It's a consumption item.
00:52:32.060 | You don't need to live in a $500,000 house.
00:52:34.160 | You could go live in a $5,000 trailer in a trailer park.
00:52:37.100 | So now you probably don't want to, neither do I, but you could and so that just simply
00:52:42.160 | identifies the fact that the house is a consumption item.
00:52:45.080 | So if you really want to be rich and if you really want to be financially independent,
00:52:47.880 | then go out and get investments and invest into things that are going to make your consumption
00:52:52.920 | items for you.
00:52:54.180 | So before you buy a car, go and invest in some way so that you can own an asset that
00:52:59.520 | will provide income for you to buy that car.
00:53:02.720 | Before you buy a house, go and invest in some way so that you can own an asset that will
00:53:06.120 | provide the income for you to live in that house.
00:53:08.800 | Now you've done that with your income.
00:53:10.240 | That's what we do with our income naturally.
00:53:12.500 | But the reason that most people don't get rich is that they just say, "Well, I got
00:53:16.000 | a good job and so now I'm going to take my income and I'm going to go and spend
00:53:19.720 | it on consumption items."
00:53:21.560 | But you got to add another step if you actually want to be financially independent.
00:53:24.400 | You got to start with your human capital, go out into the market force and put yourself
00:53:28.460 | to work, generate financial capital.
00:53:30.520 | And now with that financial capital, if you go right to buying consumption items, you
00:53:34.120 | won't become financially independent.
00:53:35.760 | Or if you do, it'll be very slow and long term.
00:53:38.800 | But if you'll put one more step, you take your human capital, develop and build financial
00:53:43.360 | capital and then take that money and invest it into assets that are going to provide income.
00:53:53.000 | Then once you reach that break over point where those investments grow, then for the
00:53:56.280 | rest of your life, you don't have to put your human capital work.
00:53:59.460 | Now your investments can create the income for you to pay for your consumption items.
00:54:05.280 | And it's perfectly fine if those investments are stock investments.
00:54:08.340 | There's no problem with that.
00:54:09.340 | It's perfectly fine if they're real estate, perfectly fine if it's businesses, if it's
00:54:12.020 | private businesses, perfectly fine if it's gold coins.
00:54:14.240 | It doesn't matter.
00:54:15.340 | The key is that you've interrupted and you haven't gone straight to consumption.
00:54:19.180 | And so that's the basic philosophy.
00:54:21.700 | Now with that in your head, then you can go back to the specific decision and make the
00:54:25.360 | best decision based upon your specific goals.
00:54:29.460 | So that's my advice as far as how to actually build financial independence.
00:54:33.460 | Thank you all for listening to today's Q&A show.
00:54:35.020 | That's it for today's show.
00:54:36.020 | Although I've still got callers on the line, but I'm going to break this out into another
00:54:39.560 | show.
00:54:40.560 | So stay tuned for that other second Q&A show.
00:54:43.420 | Thank you all for being here on a Friday.
00:54:44.980 | I didn't expect some questions on coronavirus, stock market investing.
00:54:48.220 | If I don't get any live questions, I'll tackle those subjects maybe on Monday.
00:54:53.580 | We'll see what Monday brings for us.
00:54:55.540 | Thank you all for being here.
00:54:56.540 | If you'd like to be on another Q&A show, remember to support the show on Patreon.
00:54:59.060 | Go to patreon.com/radicalpersonalfinance.
00:55:01.620 | Sign up there and that'll give you guaranteed access to this call.
00:55:03.980 | I had more callers today and I had to close the lines and there's been a couple dozen
00:55:07.780 | people who've been locked out because I closed the lines with too many callers.
00:55:11.020 | But if you want basically guaranteed access, go and sign up to support the show at patreon.com/radicalpersonalfinance.
00:55:14.340 | Your tough Tacoma is here.
00:55:23.180 | Your powerful 4Runner.
00:55:24.180 | Your stylish Camry.
00:55:25.180 | Your versatile RAV4.
00:55:26.180 | Even your fully electric VZ4X.
00:55:32.660 | Your new Toyota car, truck, or SUV is available now.
00:55:37.940 | So see your Toyota dealer today.
00:55:41.800 | We make it easy.
00:55:43.980 | Let's go places.