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♪ Got to sort of tell 'em ♪ Two destinations, one loyalty card. Visit yamava.com/palms to discover more. Prudence and Preparation, episode 76. (upbeat music) Welcome to the Radical Personal Finance Podcast. My name is Joshua Sheets. Today is Tuesday, October the 7th, 2014. Thank you for being here. Today we're going to be talking not about tactics, but about character qualities.

Specifically the character qualities of Prudence and its associated quality, although I guess it's not necessarily character quality, of Preparation and their impact on financial planning success. I thank you for being here. I'm excited about today's topic because I think it's one of those things that you probably already know intuitively, but I'm going to try to give some language to this topic.

A lot of times there are many things that we kind of know and we intuit them and we think that they're common, but if we don't actually explicitly get them out of our heads sometimes, then we can't really do a lot with them and we can't recognize them. So then if we don't recognize them, then we can't really defend them in the way that we should and we can't pay attention to them in the times that we should be paying attention to them.

So today we're going to be talking about Prudence and personal preparedness in every way. Now, preparation for the future is fundamentally what all financial planners and all Prudent individuals do. The problem is that a lot of times, especially in the financial world, this conversation is limited to the types of financial preparation that can result in the sale of a financial product.

Usually that would be either an insurance product or an investment product of some type. So because that is where the income is coming from for the person who's talking about preparation, then that's the type of preparation that's usually emphasized. But today I'm going to talk about and emphasize some other types of preparation that don't actually involve the sale of any financial products.

Now, don't get me wrong. I'm very good at evoking emotion around financial needs. I can paint some amazing disaster scenarios to you that would really cause you to really see clearly the benefit of certain financial products. I'm very good at that, and that has its place. It's very important sometimes.

I find a lot of times when working with clients in the past, I'll try to specifically provoke a client because a lot of times you need to provoke somebody in order to get them to think about something. So I'm very good at that. But today I'm going to focus on provoking you with some ideas that aren't going to lead to the sale of a product.

So you don't have to be fearful about having to buy anything. We're going to have some mind games. But I want to start on the mindset of preparedness. The Boy Scouts' famous motto is "Be Prepared." And it's this motto and this mindset of preparedness that will lead someone to make prudent choices throughout life.

Now, those prudent choices oftentimes are going to involve the financial products. But it's actually less important to focus on the product than it is on the mindset. And the key thing is having the ability to challenge yourself with scenarios that may or may not occur and then thinking them through in advance before you actually face them.

Oftentimes people, especially in the financial world, think purely about money. But I want you to remember that money is usually not the goal. Really, for anybody. Money is a means to the actual goal. Now, that actual goal may be a sense of security. So one person may have the perspective, "If I have a lot of money, then I'll have a sense of security." To another person, the money may be a means to the goal of experiencing a lifestyle, maybe a high-consumption lifestyle.

"If I have a certain amount of money, I can fly in a private airplane. I can wear this certain brand of clothing. I can surround myself with beautiful objects of art and beautiful objects that are comfortable for me to live in." For other people, the goal of money is power.

So there are many people throughout the world that the only thing that the money really means to them is power, the ability to exert power over people. Other people, money may lead to a sense of freedom. This is probably, for me, the biggest thing that money represents is not so much consumption or power.

I'm not interested in having any power over anybody else, and I don't care that much about consumption. But money, to me, is a key aspect of freedom. That's my personal connection with money. It may be different for you. But the key is to recognize that oftentimes money is just simply a means to a goal.

And sometimes if you can grasp the goal, then you don't need the means, you don't need the money. So I like to challenge myself as a financial planner, and I like to think about what would I do if certain financial products weren't available. Now, as a planner, you actually often face this scenario.

For example, what do I do with a client who comes in and comes into my office and tells me, "Joshua, I've just been diagnosed with a severe form of cancer. I'm probably going to be fine at any rate. I probably have at least 5, 10 years, so I'm probably going to be fine, but I'm not going to be able to get any life insurance now.

How do I plan?" So instead of having the simple go-to answer of, "We'll go buy life insurance," which would be the simple solution, I don't have that solution, so I have to work out another plan. I have to help them find another way. And I've thought a lot about this just myself, musing on it, as I've studied the history of financial products, things like life insurance, I thought through, what did people do before life insurance was invented?

I think throughout the history of mankind, there have been prudent people who have planned in advance for providing for the needs of their family if they weren't there. I remember as a boy, actually, this is something that I observed firsthand with a family that my parents knew, and I don't know why, but this always stood out to me as a boy, and I've thought of it many times.

We knew some people that the father ended up dying, but I remember being impressed that he-- I don't remember what he died from, and I was a very young boy. He and his wife had a large family. I think they had 12 children. But years before, they had moved out to the western U.S.

I don't even remember what state. I think it was Wyoming. They'd moved out to the western United States. They had purchased a house, built a house themselves. I think it was a log home, one of these very archetypal stories, build a log home, carve it out of the woods.

They built a home, so the house was debt-free. They grew some of their own food on the property, and he had a couple of family businesses. And the older children were very involved with the family businesses. So this man actually died. It may have been cancer, because I think he knew that he was going to die for a while.

But to the best of my knowledge, they didn't have any life insurance, but the income and the situation for their family was already established. And so from all accounts, it seemed that they were well on track and they were able to continue as a family, even in the absence of life insurance.

I learned a lot from that when I was a kid, and I've thought about it many times, especially in planning scenarios. Now, the need for life insurance is probably less common, although I have faced that. One of the big examples, though, would be something like long-term care insurance. Oftentimes I've faced this with working with clients who are retiring, that they're concerned about the impact of needing ongoing long-term care of some kind, and they want to protect that.

But the problem is, due to some personal reason, the long-term care insurance is simply not available. The insurance company won't cover them. And so the question is, what do you do? Well, oftentimes the assumption in that scenario is either that-- it's usually this case, at least in my experience, is that oftentimes it's the parents.

The parents don't want to put the burden onto their children of providing for their care. So the assumption is that the family won't provide the care. At least they don't want them to provide the care. Or maybe they can't. And that's true, I think, in some circumstances. But it might not be true in all circumstances.

One of the things that they teach you to-- when I went through some long-term care sales training, one of the key buttons that I was taught to focus on when selling long-term care insurance is the desire of parents not to burden their children. But I always struggle with that because I have a different mindset.

Although it may be true that many families can't or won't provide care for their parents, and I have no problem with that, in my family we can and we would provide care. And I think we will provide care. And frankly, I'll consider it an honor to love and to serve my parents in that way.

I watched them care for their parents, my grandparents, and I was involved in that. And it's an honor to be able to honor your parents and care for them if they need care. So there's a different mindset that can be developed. So I give you these two examples to illustrate to you that it's not necessarily that you have to pursue one course of action or the other, but rather that having a specific mindset can really lead to different options.

And the mindset of preparation in advance, before you need something, is what leads people to buy financial products. But now, what if we went away from the connection with standardized financial products, and we talked about how a prepared mindset can avoid the need for the connection with money or with the financial product?

Now, this is a little bit of a mind game because we can't ever completely, I think, get away from the monetary system that we use. But here is some example as I was preparing for the shows that occurred to me. Consider something simple. Convenience stores generally have some of the highest priced food available when priced in a dollar per calorie or whatever the unit pricing would be.

But they serve a valuable function in our general society. They're convenient. So right when you need something, you can count on, I can just walk into the convenience store and I can grab it, but you pay a price for that convenience. And I think this is just inappropriate. The convenience store is offering convenience, and you're paying for the price of convenience.

But in order for you to avoid the convenience store, you have to be prepared in advance. So, for example, if you're going to avoid buying a high-priced cup of coffee or avoid buying high-priced convenience food, you have to already have your coffee and your food with you. In the past, historically, this was a fairly normal procedure.

If you set off on the road, you would bring your thermos of coffee with you. You would have a large vacuum-sealed thermos, and it would be filled with coffee, and you would pour it out with the little cups. This is probably something your grandparents would do on a road trip.

And you would bring a basket of sandwiches or a cooler full of food. But culturally, maybe some of us still do that, but most of us nowadays, we just stop at Starbucks. That's what Starbucks is for. Why would I prepare coffee in advance when I could just simply stop at Starbucks or Dunkin' Donuts or Tim Hortons or whatever your local coffee chain is?

But if you want to avoid the extra $2, $3, $4 cost on the 20 cents worth of coffee, you have to be prepared in advance. You know, it used to be standard that if you were going to work, you would bring your lunch with you, and many people still do that.

But more and more, we either eat at school, we pay for the school lunch, or we go out to lunch during a work day. So one of the key easiest frugality tips when somebody is making the transition from being a spender to being a bit more frugal is simply brown bag your lunch and bring it with you.

A little bit of preparation in advance can save you a substantial amount of money. Even on trips, I've learned to do this with my family. My wife has this kind of weird low blood sugar thing where if she doesn't have any food for a certain amount of time, she gets grouchy.

I mean, there's nothing medically wrong with her. She just gets a little grouchy. And so I've learned. We keep food in the car. Because if I don't keep food in the car, then she's going to be a little grouchy, and it's more important for us to make sure that we just have some nuts or something ready to go, and that can avoid stopping and buying fast food, which is not going to be great for our physical health and is not going to be great for our wallet.

Also important to plan ahead and prepare and plan the travel time well so that you're working around good meal times. Another example is we try to always keep some food at home that's easy to make or that's already made. So if we get home and we're tired and nobody feels like cooking, then we don't have to go and impulse order a pizza or something like that.

A carry-out pizza, a take-out pizza is awesome. It's delicious. It's wonderful. It can be there in no time at all. But by the time you pay for it and add tip for a couple people for a pizza, it's going to be $15, $20 by the time you get it delivered.

Well, for about $2, you can make something in advance and keep it in the freezer and have a bag full of soup or something made. Or you can have a frozen pizza if you're going to eat a pizza from the grocery store, and you can have that at home ready to go, and that avoids your having to pay for the convenience.

So a little bit of prior preparation makes a big difference. It's preparedness that always makes a key difference in the financial outlay. And I've learned this just in my family, looking through just about every expensive situation that we ever have. Frankly, I could have avoided it if I had simply planned ahead a little bit better and taken some additional steps of preparation.

And that responsibility is mine. The more I plan ahead, the more I'm prepared for various outcomes, the better my financial decisions can be, and I can save mucho money. I really can, just by preparedness. Here's another example that I thought of that I think will be instructive. I thought of the example of an automobile.

Generally, it's assumed that usually the second biggest purchase that most people make in an average middle-class Western society is the purchase of a car. My observation has been that many people often will impulse buy on a new car, and oftentimes this comes as an emotional decision, an emotional reaction, to problems with their existing car.

Usually it's, "I'm just tired of this thing breaking down all the time. I'm not going to replace yet another time this starter motor. I'm not going to replace this thing yet again." And so oftentimes we're so frustrated with our old, broken-down car that we rush out and make a purchase decision.

But it doesn't have to be that way. A little bit of preparation and proper prior planning can make a big difference as far as the car's lifespan. If we can extend the car's lifespan, we can massively decrease the lifetime costs of the vehicle. Now, it might seem expensive to maintain a car well, but it's really not.

The better we prepare for various scenarios, even associated with a car, the more not-so-great outcomes we can avoid. For example, do I make a habit of maintaining some emergency equipment in the car? Having some safety flares or safety triangles in the car really could help. So if I'm broken down on the side of the road, it can help avoid and keep somebody from plowing into me while I'm sitting there.

And if somebody plows into me and kills my kid sitting in the car, that would be a problem. So it's a little simpler to simply have some preparation, some emergency equipment. Now, if I have a fire extinguisher handy, that may allow me to quickly extinguish a simple electrical fire instead of having to stand back and watch this thing engulf my entire car and suffer a total loss.

If I take the time to prepare in advance and make sure that I have tires with decent tread and traction, that may allow me to completely avoid the accident because I didn't hydroplane in the wet weather. And that accident may have led to the injury of a spouse or a child and thus forever damage my financial plan.

An alarm system or a locator device really might allow me to keep the car instead of it being stolen and having to shop for a new one with the insurance check, which almost always seems to be less than what I think it should be. Or it might allow me to simply track the car down quickly if my 15-year-old heads off in the car or if a forgetful elderly parent takes off with the car.

So it might be worth it for me to invest in a little bit of preparation with some sort of GPS locator device on the car. What about the idea of paying attention to the crash test ratings and making sure to purchase a car that is safer for the occupants?

That type of proper prior preparation and planning doesn't matter until it does, and then you're thankful to have a vehicle that has slightly better ratings. Or did I plan ahead and research the cost of insurance and compare that among different models in advance of actually buying the car? I learned this with mine.

My wife and I, we have a minivan, and the minivan has the lowest insurance cost of any of the major brands of minivans. And it's a Hyundai Entourage, the Kia Sedona and the Hyundai Entourage, when I was--they're the same car, just different badges. And what we learned when I was researching them is it was substantially cheaper to insure a Hyundai or a Kia than it was to insure a Dodge or--I guess Dodge is a dead Chrysler--Town & Country or a Toyota or a Honda, largely because of the higher resale value of the Japanese brands and the better crash test ratings of the Hyundai or the Kia.

So just a decision like that can save thousands of dollars over the life cycle of a car. Resale value, what about researching and preparing for the resale value of a vehicle? Making sure that your vehicle has a disaster kit in the car. We're always taught to make sure you have a winter preparedness kit in the car with an extra blanket and some extra food and some extra water in case you're stranded on the side of the road.

Do you follow through and do that? One of the great benefits of preparedness is that it puts you out of sync with the general society. And so this allows you to have opportunities to save money or also to profit on what's going on in society. If you are prepared with food and clothing and an extra blanket and you have to spend a few hours on the side of the road, that may avoid you having to go and purchase an expensive hotel room to get off of the highway.

Or it may not. I mean, I haven't spent much time in winter areas in the snow in the car during the winter. But I remember one time I was driving across Vail Pass out in Colorado and they shut the road down right behind me and I was completely unprepared.

If that had happened, I had a rental car and I didn't have anything with me other than my clothes. And I'm not sure what I would have done if I had faced that scenario. But if you were prepared, you would maybe have a plan in place to do that, to face that scenario without it costing a lot of extra money.

Preparation allows you to follow your path and to make prudent choices at times when things are cheap. Now, this allows you to save money, like I said, and also to just to be out of sync and to be in good shape. The problem is this is probably going to require a much higher degree than normal of self-confidence.

Going your own way in the face of general opinion is challenging. We all know that we should be able to do it. We know we're supposed to be greedy when others are fearful and fearful when others are greedy. But how do we actually prepare to be able to do it?

It's a different thing. I recently finished on my recent trip, I had a chance to listen to the book called "The Big Short" by Michael Lewis. And it's an account of the 2008 financial crisis. And it's really amazing, but my favorite character in the book was a man named Dr.

Michael Burry. And he was a physician from out in California who became an excellent value investor while working as a physician. He would post his stock ideas in the middle of the night online. And he had hundreds of people, maybe thousands of people following his tips for the investments that he was making for his own personal portfolio.

And at one point in time, he got the offer to go and start a hedge fund, actually, a value investing hedge fund. And left the medical profession to do that. And then the fund was quickly funded. And he had an amazing investment performance from this fund, just really amazing investment performance.

But the fund was focused on buying value stocks. And that was what he was known for. That's what his investors wanted him to do. To the best of my knowledge, he was the first person to really see the problems in the subprime mortgage fiasco and figure out a way to invest in it.

At least going just based upon the data presented in the big short, other people saw the problems, but they couldn't figure out how to profit from the investment. But Dr. Burry, he didn't know anything about bonds, but he researched it and he spied the opportunity. And he was one of the first people to develop, actually develop the insurance contract called a credit default swap.

He's the one who had the idea and he went and negotiated with some of the big investment banks to develop this insurance contract so that he could profit from the eventual destruction of the subprime mortgage bonds. He saw the opportunity. But what was incredibly instructive about his story is that he saw it in advance.

He was absolutely right. And they ultimately wound up making a ton of money. But everybody bailed on him. His investors desperately tried to get money out of the money out. It's just everybody bailed on him through the situation. And it was his personal degree of self-confidence that allowed him to follow through and ultimately make a massive amount of money on the trade.

It actually also interestingly drove him out of the investment business because he couldn't stand the fickle nature of his investors who, even though he explained and explained and explained and explained why this was such a momentously valuable opportunity in the market, they simply weren't willing to go with it.

They didn't see it and they tried to bail on him. So it drove him out of the investment business. He closed his fund and now he just purely invests his own money. But it was instructive to me to recognize the importance of self-confidence and the ability to go your own way.

And a lot of times when you're preparing, you've got to be doing so when nobody else is. Because when you're caught up in a market where everyone else is doing something, the cost goes up. The cost on the side of the road at the rest stop for food is very high because that's where everyone's stopping.

But the grocery store 15 miles away from the highway, on your way to the highway, is pretty cheap. So you've got to stop at the grocery store to save the money instead of going to the store on the side of the road where it's convenient. I live in Florida so probably the disaster scenario that I think most about is usually hurricanes because every year we have hurricanes coming through.

They don't always hit but there's always a threat of one and it's a good example. It's a good metaphor. The time to prepare for a hurricane is before the hurricane's there. Preparing in advance is usually pretty cheap. But you have to be willing to think about the hurricane in the time when there's not one.

We're just coming up to the end of hurricane season here at the end of November. And this is the time to think about next year's hurricane season. We're all familiar with the Wayne Gretzky quote of you have to skate to where the puck will be instead of where the puck is.

But how many of us do we actually do that? We have to have a future orientation in everything in life and see where things are going and be willing to move ahead of the pack. Hurricane shutters are cheap when there haven't been any hurricanes in years. The demand is low and so therefore the price is low.

But I tell you I remember when we had four storms come through Florida in one year, maybe four or five, and for the next 12 months the price of getting hurricane shutters was through the roof. And generators are expensive when you're in New York City and Hurricane Sandy is bearing down on your house.

Or you're in New Jersey and Hurricane Sandy is coming down. But they're cheap a few months later when you're surfing Craigslist and getting good deals. So make sure that you either did it before Hurricane Sandy was announced or that you did it after the fact and you're cruising Craigslist and getting your deals.

Think about all of your assets in an integrated way. Don't just think about money. Think about things that money buys you and then just consider simply buying those things. I'll give you another example from myself. Think about with insurance. Think about protecting from the things in advance that insurance pays for after the fact.

As I was brainstorming and noodling on my own hurricane preparations for next hurricane season, it doesn't look like there's going to be any storm here this year, but who knows, maybe there will be. We've got another couple months in season. I was thinking about next year and I was thinking about what I want to improve for next year.

I thought of my chainsaw and I realized that I've got a hole in that I don't have any protection. They're called chainsaw chaps that you can wear to protect yourself from an errant chainsaw blade. I just was realizing maybe it's a mark of getting older. I used to ignore this stuff when I was young.

Maybe it's a mark of getting older and maybe getting a little bit more maturity. But I'm a little more conservative and cautious than I used to be. I was thinking, "Well, would I rather go and I went and checked the prices. They're 50 bucks. Would I rather just go and pay 50 bucks and get this extra piece of safety equipment to wear when I'm using the chainsaw?

I mean, that could save my legs. Better for me to spend the 50 bucks on the chaps and save my legs than have the risk of using the saw and messing up one of my legs and having to deal with it. Yeah, the health insurance can pay for the medical cost, but what about preventive preparations?

I've been watching this--kind of what sparked today's show, I decided to do it-- is I've been watching this Ebola thing develop over the last few months. I've been role-playing the scenarios in my mind. It really doesn't seem to be--as I record this on October 7-- it doesn't seem like it's really going to be a risk or a major threat for us right now in the United States.

There is minimal exposure, and the medical situation and medical ability that we have here in the U.S. is very different than what it is in West Africa. So I'm watching it, and I think it's probably going to be a minimal impact, but you never know. And so what I try to do is, any time I see a scenario like this, like the Ebola, I try to sit down and I say, "Well, what would happen at the worst-case scenario?" And I try to do this with anything, actually, that I see around the world.

How would this impact my investment portfolio? What would this impact my lifestyle? How would I plan for this? And I run the role-playing scenario. I play the "what if" game. What would I do in this situation? A lot of times, if you don't do this, by the way, I'd encourage you.

Doing it and thinking it through is really, really valuable, because that will help you to identify weaknesses in your planning. It'll allow you to identify opportunities for your planning. Journaling this out, writing it down is often helpful. It helps me to write things, so that way I can see them and debate with myself and see what I actually think.

And the key is, you can't judge things in advance. One of the idiotic things I see oftentimes is people in our society who are simply polarized, and they say, "This is what will happen. This is right. This is wrong. I know what will happen." I don't get it. I really don't.

I don't get that kind of thinking. Why do we not simply admit to ourselves that there are things that could happen that we don't know? You look at the evidence and see what's likely, but recognize that things can change. Things can happen. So I simply prefer to be a bit less emphatic on "Here's what will happen," and simply try to be prepared for multiple situations.

I'm not God. I don't know what will happen. I do know that you have to deal with human nature, and you have to deal with facts, and you have to deal with events, but I don't know what will happen. So why would I worry about saying, "Here's what will happen"?

Why would I not simply consider what could happen, and then plan and prepare for multiple scenarios? And then by taking that approach, I'm probably in a lot better shape if one of the scenarios that I've thought through happens, because I've at least thought it through in advance. I think one of the reasons why this happens--and I'll tell you, it's nice not to have a horse in the race, because a lot of times the people who are so convinced that this is what will happen, they're convinced that this is going to happen because they have a certain inherent bias.

If you sell gold coins, it's likely that you're going to be focusing on doom and gloom, economic disaster scenarios, fear, and telling people that the prudent thing to do is to buy gold coins from gold.com so that they're going to be protected in this time of fear. If you sell stocks, on the other hand, stocks are inherently an optimistic investment because you're assuming that the growth of the economy and the growth of the companies will grow, and then over time, the growth of your share price-- there'll be growth in the value of your share price.

So therefore, if you sell stocks, then you've got an inherent bias towards being optimistic. If you sell education and you work in a college, a traditional mainstream university system, you've got a bias towards saying the value of education is going up, the cost is going up, but the value is also going up, and look at the value of what it costs to get a mainstream university education.

But if you're working outside of that system, well, now you have a bias to disparage the value of the mainstream university education and to encourage the value of a trade school or of self-education or whatever it is that you're selling. So for me personally, I like not being connected to any of these specific outcomes because it allows me to be less biased and more rational, and I'd encourage you to consider it as well.

Consider and identify your own biases and consider how they're impacting your thinking. The reality is we live in a world of endless cycles. It goes around and around and around and around. Solomon said there's nothing new under the sun. So these cycles just simply repeat and repeat and repeat and repeat and repeat.

So learn from what has happened in other places and learn from what has happened in the past, and then consider how, if various scenarios happened, how they would affect you. How would you plan for them? And what I've learned in doing role-playing scenarios is that a lot of times, one of the things you'll come through, and I'm tying it back to financial planning, is that one of the keys to consider is, again, the way I started the show, there's always financial scenarios and there's non-financial scenarios.

And I need to be flexible in my movement between the financial solutions and the non-financial solutions. If I plan ahead for just simply what the needs are going to be, sometimes I'll take money and sometimes I'll take the need. I can avoid Starbucks if I plan ahead and bring a thermos of coffee.

And I can also plan ahead, and if I plan to stop at Starbucks, I can do that in an intelligent way. You know, Joshua's little coffee trick. I still think Starbucks is actually one of the cheapest places to buy a cup of coffee if you're just going to buy a cup of coffee and not have one of the fancy coffee drinks.

It seems like just to buy a cup of coffee these days is around three bucks. Starbucks, you can get one for two and something. And if you have their gold card, then you can get free refills, you can get the free flavors, you can get all the free stuff.

So I actually still think just buying a cup of coffee at Starbucks is usually a cheaper price than most other places I can find. So I can plan ahead and I can deal with it financially, or I can plan ahead and bring coffee. Now, take this back to something like--now, here's where I'm going to show how this comes together.

Take this back to traditional retirement planning. So if you're listening to a show like this, you're probably interested in traditional retirement planning, and I am as well. So what do I actually need money for in retirement? Well, I need money to provide for the needs of life. So let's look at the wilderness survival community, because I think the wilderness survival community has perfectly outlined the things that we need in life.

I really enjoy the wilderness survival community. You can find a lot of stuff online. Man, if YouTube had existed when I was growing up in the way it does now, I would probably be running some kind of wilderness survival channel like some kids are nowadays. But I used to love this stuff.

I'd buy books on the SAS survival manual. I'd go and build survival shelters in the backyard and try to figure out how to make a fire with nothing. I enjoyed that stuff. I was really bad at it, but I loved doing it. So look at what the wilderness survival folks say that we need to survive.

Well, we need food. We need water. We need shelter. We need energy. And we need security. And there are others, too, depending on the list that you consult. You may need oxygen, clearly, obviously. You need sleep. You need a sense of purpose. I mean, there's all kinds of different things that you could put into a list like that.

But basically, you need some food, some water, some shelter, some energy, and some security. I mean, that's basically it. At its core, if you get dumped out of an airplane in the middle of the woods, that's what you have to provide for yourself. Now, we could take those out of the wilderness context and translate them into the modern environment.

And so all of those stand clear except food, water, energy, security, shelter. And then the other one that's added is health, health and sanitation. You need health. Usually in a survival situation in the woods, you're dealing with maybe an acute wound or something, and you do need first aid and medical help there.

In general, though, we're dealing with health. So this is actually the core of financial planning. What we're doing a lot of times with financial planning is we're trying to design a financial portfolio to buy those things for ourselves, the basic needs of life. We're trying to buy shelter, buy food, buy water, buy energy, and have a portfolio provide those things.

And then we want the other softer skills moving up the hierarchy of needs to we want to have entertainment, we want to have a sense of community, we want to have a sense of belonging, we want to have a sense of purpose, other things like that. So there are multiple ways to provide for this need in retirement.

We can build the portfolio. We can use something like the 4% rule, and we can bring this in, and we can say, "We're going to provide for all these needs. All of them is going to be we're going to rent a house, we're going to pay for food, we're going to pay for the water bill, we're going to pay for the electric bill, and the portfolio is substantial enough to provide for it." We could also eliminate some of the need for the portfolio.

So this is why when you get into retirement planning, you think about doing things like paying off a house. If you own a house and there's no debt on the house, you've eliminated some of the need for the portfolio to provide income for yourself. This may make the situation in the scenario easier, or it may make it more difficult.

It depends on how we work it out. But just simply by buying the shelter in advance, this is what most people do. We buy a shelter, and we plan to stay there. And this protects us from the ravages of inflation. We don't always have to keep up. We have the house.

As long as the house is in good shape, we can live in it. And it protects us from a lot of the financial-- maybe we feel a little more comfortable because we don't quite have the volatility of our portfolio to deal with. We know we've got shelter. And you can do this with wood, with water--excuse me, with food, with water.

If you have a rainwater collection system on your roof--now in the U.S. we're terrible at this, but many other places in the world, they do a much better job. I lived in Costa Rica for a time, and all of the water that is used for the household needs comes from a rainwater collection device.

So if you have some substantial rainwater barrels out behind your house, and you have a metal roof and a metal gutter system that flows the water into them, now you don't need to purchase the water from the utility company. This is actually a pretty easy thing to do. I don't understand why more of us don't do this.

I haven't been able to set this up in my house yet, but I don't understand why more of us don't do this. What it allows you to do--see, if you're buying water--I'm not on the city utility system, but I'm on a well, and I have a well in my backyard.

So when I'm buying water, it's just coming out of the ground, and I'm paying for the electricity. But if you're buying water off the utility system, and that's what's providing for you, the major cost of that water is a labor cost, is a labor and equipment cost. So you have a sanitation department that's taking the water from wherever they're taking it, and they're developing it.

So as wages go up, as inflation increases, people need increasing cost of living, well, now your water cost is completely tied to the economic system, and you're paying for the increase in the cost of utilities as decades go by. So if I were doing planning for you based upon your utilities, and you were telling me, "Joshua, I've got a scenario where all of my water is coming from the grid, from the city utility system," I have to inflate that cost at my standard rate of inflation to account for wage inflation and to account for increasing cost of updating the equipment, all of those types of things, because the equipment's going to break down, and you're going to have to count on that to upgrade over time.

But if you're in a situation where you're simply collecting the rainwater off of your roof, and that's filling a rain barrel system, which is then plumbed to your house, and then you have a filtration system that's providing for your drinking water through the filtration system, well, now I don't have to inflate the cost, the monthly cost of the utility payment, just as much as I would in the other financial plan.

Now, I do have to provide for the cost of the replacement equipment. So maybe if you're 50 years old, we have to look and say, "Is it likely that your water barrel system can last for 50 years?" Well, you need some new filter elements, we need some new equipment, we have to account for that, and it's probably going to be somewhat imprecise.

We probably can't predict exactly when it would be, but the point is that we can purchase something for a set known cost currently and provide the water for ourself going forward, instead of having an increasing cost over time. This is a big deal, and this is the same in every context of financial planning.

So consider it. Are we going to fund something off of the portfolio, or are we going to buy the end need? Now, every situation, as I always hammer on to the point of probably getting annoying, every situation is different. But don't view these things as separate. Focus on integrating them.

The price of doing things in advance and preparation in advance is usually low, and the price of delay is often high. So consider how can you think about both of these things together. Let's continue on retirement planning. Let's focus on something like health. One of the things that you find when you study the formal academic literature on retirement planning is one of the biggest unexpected costs for retirees is the increasing cost of their health care, the medical care that they need to maintain their health in retirement.

It really hammers some people's portfolios, and there's a major increase toward the end of life. And that can be just in traditional costs of just basic normal health care, or it can also be in the cost of long-term care. So think about it in advance. You probably need to do both things.

We probably need to plan for a portfolio to provide for an increasing cost of health care, but you also probably can invest a little bit in your health now. I'm weak in this, but I'm working on it, trying to get in better shape and live a healthier lifestyle and prevent a lot of the illnesses that can happen that can take away the quality of life.

It's cheaper to take care of your health proactively than to treat the preventable diseases that will probably develop if you don't. So consider how to hold those things together. Food. It's cheaper to stock up on food in advance. To ensure that you can self-quarantine for a month or two if there's some outbreak of infectious disease than it is to get Ebola and have to depend on your health insurance to cover the cost of the disease, or to have to deal with the loss of a loved one and be compensated for that loss with a life insurance.

Easier to prepare for self-quarantine for a month or two. So consider it. And I'm using Ebola just simply because that's in the news. Is it going to happen in the United States, an outbreak? I'm pretty skeptical, but is it possible? Of course it's possible. It's happened before. So think about it.

The benefits of preparing in advance is that you can reap the opportunity when it comes. Consider the deals that you can get, like I mentioned earlier, the deals of buying stuff on Craigslist after a Hurricane Sandy or after a Y2K or after whatever the next thing is that comes through and gets people scared and the market reacts.

It could probably be Ebola. Everyone buys these hazmat suits or whatever. We'll just wait a couple months, and if it burns itself out, then you can go and buy them on Craigslist. The best I remember, a key example of this that hopefully will help you to see how you can apply this in every area, is a few years ago when gas prices peaked.

They just went up fast, and it seemed like everywhere everyone's selling their big, heavy, fuel-inefficient vehicles as quickly as they could and trying to buy new, efficient vehicles. It seemed like you could buy a big, heavy truck, a big, heavy Suburban, a big, heavy pickup truck for just substantially under market value.

That was the time to buy when it was out of favor. On the other side, I remember the original Honda Insight, those kind of funny-looking hybrids. When those things came out, they could not sell them. They had to discount them like crazy. But to this day, that is one of the best hybrid vehicles.

Seventy miles per gallon, just light, lasts for a long time. One of the best vehicles, if you would identify the opportunity. Now is the time to go and change careers. When the unemployment rates are coming down, it seems like the economy is going well. Now is the time to go and change careers.

Most people won't, though. They'll stay where they're at. Of course, I'd also probably say a good time to go and change careers proactively is when no one else is. But to deal with this, we've got to challenge what the psychologists call our normalcy bias, this idea that everything is going to continue the way it is.

Everything is not going to continue the way it is. Everything is always going to change because that's what happens in life. There are two ways to know what's going to happen. Wait for it to happen or make it happen. So I encourage you, constantly ask yourself questions. Play war games with yourself.

This is what the military does. They say, "What would we do if North Korea invaded us?" or "What would we do in advance?" And you play these things out, and that way, when the scenario happens, they've got a book. Here's what we would do if we do that. And they make multiple plans.

The process of going through it is what's valuable. Who knows what actually happens? It's really hard to predict what happens in the short term. But the process of thinking things through will allow you to make active steps of preparation that will hugely benefit you. What would you do if you were laid off from work and you couldn't find a job for a year?

Where would you get the money from to live? How would your life change? How would it not change? What would you do? What would you do if your business were interrupted by a hurricane like Sandy? What would you do if you were living on the New Jersey shore and you couldn't reopen your doors of your business for three months?

What would you do if your business revenues declined by 50% overnight through a change in technology or just some event? What could you do now to insulate yourself from that? Again, I remind you of the story I've told on the show in the past of my friend with the construction business.

Construction took a dump in Florida and his business was structured however. He had no debt. He had little overhead. Most of his employees were independent contractors that just called when he had jobs. They weren't ongoing employees. So he was quickly and easily able to sever those employment contracts. He parked his equipment.

He didn't have any debt on it. It had low carry costs and he bought a boat that was on sale from another construction guy that had to sell all his stuff, all of his toys for cheap and he would spend his days during the week out fishing. Consider, are you set up where if your business revenues declined by 50% overnight that you would for a year or two, due to a change in your local economic climate, that you'd be okay?

I think about that. I'm working on it myself, but I've got a long way to go for that. Or have you thought through what the scenarios would be and what you could do now to prepare for that eventuality? I was just mind blown. My mind is blown a lot of times when I'm in Florida here and it seems like most gas stations don't have generators.

I'm like, "You have a lot of gasoline. Why don't you get a generator to run the pumps?" When the hurricane is coming and you're the one gas station around that's open, you can do major business. What you do is going to vary. What would you do if you have a business partner and your business partner just suddenly died?

I used to do this when I would do buy-sell planning for businesses. What would you do if you lose 50% of the shares of your company because your partner dies and now all of a sudden you're in business with your partner's wife or worse, your partner's ex-wife or worse, your partner's ex-wife's attorney?

It happens. Businesses are destroyed by that. We would plan it with a buy-sell agreement and proper insurance funding and all of that, but what would you do? What would you do if a family member of yours were diagnosed with a serious illness? Are you prepared for that? Do you have the margin that you'd be able to take time off and spend time with them?

Do you have the necessary insurance to where their income or your income would continue? What would you do if your house burned down? What would you do if your car broke down on the side of the highway in the snow? Pretty cheap to have a AAA membership. Saves you a lot of money over the $382 tow if you think of it in advance, but you got to be prepared.

What would you do if there were a large-scale flu pandemic like Ebola or like the Spanish flu in the past? How would you function? How would you maintain your family, your health, your livelihood? What would happen if you had a hurricane down here or an ice storm or whatever it is in the north?

In a power, we're off for a couple of days. Do you have a plan for avoiding losing all the meat in the freezer, things like that? Play this game with yourself. I love doing this. Personally, I enjoy it. I often find holes in my plans, and the key is that the holes can be big or little, but just playing the game, asking yourself the question, and then thinking about it will help because, A, you'll come up with creative solutions, and then you can implement some of them.

Some of them you can implement, some of them you can't. Playing the game is cheap. Actually, taking the action is sometimes more expensive. Creating this scenario doesn't cost a thing. Figuring out what you would do about something is sometimes more expensive, and you're not always going to follow through and actually do something, at least I'm not.

Sometimes you just say, "I can't deal with that right now. Not going to happen. I can't prepare for that." I'm going to set that aside and just choose to ignore it and hope it doesn't happen, but even if it does happen and I'm wrong, at least I've thought through it, and I would have some ideas that because it's not the first time I've encountered that idea and that thought, it's not the first time, and I'm not going to be freaked out by it.

This is what's so important about pilot training, professional pilots, is that they're constantly running scenarios and drills and what if this happens, what if that happens, what if this engine goes out, what if there's a fire here, how would we respond? Now, I'll bet you that a lot of times they face scenarios in the cockpit, an emergency situation in the cockpit that they've never faced in real life or even in simulation, but just the fact of knowing that there are procedures and following this checklist and we do this and we do that allows them to calmly work through it.

So that's what I think we should do with ourselves. So play the game. And the cool thing about preparing for things in advance, implementing this mindset of preparation, is that it saves you in many ways. So one, it can save you from the big mistake. I think one of the keys to having long-term financial abundance and maintaining it is simply avoiding the big mistake in life or the big mistakes.

I can't prove it, but my experience and observation has been that a lot of times the people who are rich, they didn't do anything really out of the ordinary. They didn't make it big. They just avoided the big mistake. They avoided getting divorced. They avoided losing the business to bankruptcy because they were over leveraged.

And they didn't make an astronomical rate of return, but if you've got enough time, you don't need to make an astronomical rate of return. So by preparing in advance, you can avoid the big mistake. Number two, preparing in advance saves you money because you're usually buying things sooner and buying at cheaper prices.

So by preparing to not have to make the coffee stop at Starbucks, I'm saving money because I don't have to stop and spend the money at Starbucks. And so whether that's Starbucks coffee or whether it's making sure that your business has a generator and a big fuel tank out back so you could keep operating when there's an ice storm coming or there has been an ice storm, or whether it's making sure that you've got reserves so that you can actually pay your employees.

I remember reading one story after Katrina from a business owner who was there, and when he was going to evacuate, he called all of his employees in, and he paid all of his employees two weeks of their pay in advance of the hurricane. He told them, "Go take care of your families.

Keep yourself safe, and come back when you can." Well, that made--having the cash to pay two weeks ahead of all of his employees made a big difference to them. It allowed them to get their families to safety, and then it put them in a situation where they could come back, and all of his employees came back to work after the disaster, and he was able to rebuild his business after Katrina.

But what if he didn't have the cash to do that? What if he was running a razor edge, razor margins, everything just in time? What would he have done then? Well, he probably would have lost some employees. If he recovers, sure, but I just remember it being a really interesting anecdote of how he was able to keep his key resources, the employees that were faithful to him, and it made a big difference for him.

So you can save money up front sometimes by buying sooner and buying in bulk at cheaper prices, whatever the scenario is. And then, number three, in a really bad scenario, you've saved big time because of your thoughtfulness and foresight. If you've bought the house in advance and you've plumbed it with-- I'll use my water example.

You have a water tank, so you don't have to pay for the utility water scenario anymore. Well, then when you live in Detroit or when you live in--insert whatever example you want to live in-- you want to insert with increasing costs for the city employees because of the stupidity of the local governments, you're insulated from that.

That saves you big time. So always notice that all of these things work together. I'm going to wrap up just with three simple examples that--two simple examples that I thought of that I thought would be good examples to share with you. I don't like commuting anymore. I think commuting is expensive, and it's expensive now, and it's expensive in the long term.

So I made decisions to locate myself close to my work, and now I'm working from the spare bedroom. So the cool thing is I'm saving money now, and I'm in a situation where I'm saving money now, and that allows me to have more cash, and then I'm insulated from fuel spikes.

So if there's another increase in war in the Middle East and fuel prices go up from whatever they are now, $3.50 a gallon to $5 a gallon, I'm less exposed to that. And then if fuel spikes again and vehicles become more expensive, I can choose to go out and with the money I've saved, I can have the opportunity to go buy a big old pickup truck if I need one of those.

So the things I do now by eliminating the commuting, it reduces my exposure to the risk of fluctuating fuel costs, and it saves me money now, and it can save me money in the long term. Everything can work together. So the example I thought of when I was thinking about Ebola this weekend, I was thinking about what would I do if my family were to go into a kind of a self-quarantine situation where we had to just stay at home and avoid contact with everybody for a month or two.

Well, you want to make sure you have enough food to get through a situation like that. Well, if you have enough food on hand where you can go a couple of months and not have to go to the store, then that brings an opportunity to where if you're in a situation where you have income coming in, and then all of a sudden there's a dump in the price of an asset that's valuable, whether that's stocks and there's a dump in the stock market or something like that, you can take the money, even just without any worry about flu or something like that, and you can move the money that you were using just to spend on food, and you can move that over and you can buy the assets that are cheap and on sale, stocks, whatever, local cars, big pickup trucks that you then turn around and resell, whatever it is.

So there's no downside to planning ahead. If I plan ahead, I can react to the market situations and I can be an opportunist, taking advantage of the opportunities as they present themselves. I close today's show by reading to you the Webster's, or actually this is the Merriam-Webster definition of two words.

And I'm going to read to you the various definitions of these two words. And the first one is prudence. Caution in practical affairs. Discretion or circumspection. Is that not an admirable character quality to aspire to? Care taken in the management of one's resources. Is that not the essence of financial planning?

Consideration for one's own interests. And the condition or quality of being prudent. Here are some synonyms I particularly like these. Prudence, calculation, foresight, forethought. Implies attempted provision against possible contingencies. Prudence is care, caution, and good judgment. As well as wisdom in looking ahead. Sober prudence in handling one's affairs.

Calculation suggests a disposition to get a large return for as small an outlay as possible. And willingness to benefit at the expense of others. I don't like that expense of others. Although I get it because they're talking about cold calculation here. Calculation suggests a disposition to get a large return for as small an outlay as possible.

Foresight implies a prudent looking ahead rather far into the future. Clear foresight in planning. And forethought emphasizes the adequacy of preparation for the future. Careful forethought helped him deal with the emergency. That's a character quality that I wish to emulate. And how can you not? How can you not become wealthy if you embody the character quality of prudence?

Care, caution, good judgment, wisdom in looking ahead. Sober prudence in handling one's affairs, getting a large return for as small an outlay as possible. Consider how you can apply that in your own life. And then finally preparation. A proceeding measure or provision by which one prepares for something. Preparations for a journey.

Any proceeding experience or the like considered as a mode of preparing for the future. An act of preparing and the state of being prepared. That is fundamentally what all financial planning is about. And however, I wish that you take that beyond today. The topics that are generally discussed in the areas of financial planning.

And you consider how in your situation you can apply that. Because whatever you can apply in your situation, it's going to look different for each and every one of us. Consider playing those games, playing those scenarios and then thinking through how would you handle it in your life and in your situation.

It'll be different again. Dramatically different for all of us. And the scale will be substantially larger for some and substantially smaller for others. But I believe that if you'll play that game with yourself. And then think through and take action on the things that make sense to you. Whatever your scenario.

You'll be well prepared for the future and you'll be well prepared to lead the future. Instead of being a victim of it. That's it for today's show. I thank you so much for being here and for listening. This week I think I am going to launch the education series.

I think I am. I've been wanting to get around to it. And I'm going to try something a little bit different I think with that series. Instead of usually my current modus operandi which is to plunge everything in one show. I may try to stretch it out a little bit in the series and see what the feedback is on that.

So thank you so much for being here. I wish you an excellent Tuesday everybody. Happy Tuesday. With Kroger Brand products from Ralphs you can make all your favorite things this holiday season. Because Kroger Brand's proven quality products come at exceptionally low prices. And with a money back quality guarantee every dish is sure to be a favorite.

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