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Skip the mall madness! We've got you covered with fast, free shipping. What are you waiting for? Go to BlendJet.com and take advantage of our epic Black Friday sale. That's BlendJet.com. Q&A show today. We're gonna continue with the questions I wasn't able to cover on yesterday's show due to the time restrictions.

We're gonna kick it off with Melissa's question on how to pay off a primary mortgage with a HELOC. Good morning, my name is Joshua Sheets. This is the Radical Personal Finance podcast for today, Tuesday, January 13, 2015. We're gonna get started and just see how far we can go with the time allotted.

So let's kick it off with Melissa's question. Melissa, you're up. Hi Joshua, it's Melissa from Pennsylvania and I have a question for you. I keep a money journal where I just jot down ideas and books and different things as I come across them and I was reading through a page that I had jotted down a note from a year or two ago about paying your house off with a HELOC loan.

Essentially it was, from what I understand, it was you deposit, you create a HELOC, you deposit your checks into it and pay all your bills out of the HELOC, almost using it as a savings account and in turn paying off more of your principal and decreasing the length of your loan.

Basically I come to you for advice on if that is a legitimate idea and also if you have any knowledge of that. Also in the page I jotted down it must be associated with a book called Master Your Debt and a website TruthinEquity.com. Any advice you have would be great.

Thanks a lot. Melissa, it's a great question and by the way I point out and commend to you Melissa's strategy of keeping a money notebook. That might be a useful strategy for some of some other listeners to adopt. It's a good way to keep organized and to have ideas and to organize your thoughts.

I personally don't keep a separate money notebook but I do keep a comprehensive journal that basically has every idea or every thought that I want to remember in the future and I try to write down resources and things like that. It's a combination of a paper notebook and an Evernote journal.

I do have some financial tags in Evernote as well so I commend that to you. It's a simple solution. So Melissa, it's an interesting question to me and this is the type of question that I love getting on the show. I had a guess as to what I thought this would be but I wasn't sure.

I had never heard of Master Your Debt as a book. I wasn't aware of it so I went ahead and after you called the question on the voicemail line I went ahead and bought the book in order to read and see what it says and it sounded like an interesting book so I just got it off of Amazon.

The used books paid a buck or two for it, I can't remember, and was able to get to this chapter and I do have a little bit of a history with this idea. Let me give that history of the idea first and then I'll get to the actual idea and we'll talk about it and see if this is a reasonable idea for us to consider implementing.

I remember this years ago when it was probably five or six years ago, maybe more, when it was popularized with something that I think was called You First Financial and I think they go by United First Financial now and it was I would say semi popular at the time to promote this idea to take and take out a home equity line of credit on your house and then essentially you put all of your income into that home equity line of credit and you pay your bills out of it and hopefully by putting in more income than expenses out of it then you could actually get ahead and pay off your mortgage more quickly.

I spent a long time actually sitting in the office of a representative of that company, at least about two to three hours, trying to understand how this product that he was selling worked and essentially primarily what it seemed to be was a software package to help you track your income and expenses and help you track all of these details and it seemed from what I could figure out that the primary motivation there was the fees for the software package.

As I remember it was a few thousand bucks, something like $3,500, but I couldn't quite ever get my hands on how it worked so I was interested in researching this a little bit further. So I got the book and this is what I love doing the show that I can have a little bit more time to research these things that I've wanted to research but haven't been able to do and I'm gonna explain to you how the book presents it and some of the details on it and then talk about whether or not this is a useful strategy in my opinion.

I've never done it, I've never known anybody that's done it, I have checked out the website, the website is TruthinEquity.com, I looked through everything I could find there without signing up for a consultation myself so I haven't gone through the process of actually trying to test it but I looked through all the information to do my best to present an important valuable insight into it.

So in this book, Master Your Debt by Jordan Goodman, it's chapter 6 and it's entitled Mortgage Free in 5 to 7 Years and I'm gonna read just a few paragraphs from it and let's start with the beginning of the chapter. He says, "This whole chapter is a big secret but it's one you're going to be very happy I am sharing with you.

It's a secret that will more than pay for this book. You could use my secret to become completely debt-free in less than a decade. I'm talking about a new way to manage your mortgage and your monthly cash flow so that you and not some banker get to squeeze the most out of every dollar that comes in and every dollar that goes out.

Used correctly, this strategy will enable you to pay off your mortgage in as many years as some people take to pay off their cars. The strategy is called equity acceleration or mortgage acceleration. It's not such a big secret in Australia and the United Kingdom where as many as one in four homeowners are accelerating their mortgages.

It's legal. It's not a scam. It's entirely above board. Anyone with a decent credit score and good bill management skills can accelerate the end of their mortgage and other debts by using the system I am going to lay out here. Here's a basic outline of how it works. You finance a new home or refinance an existing one by obtaining a home equity line of credit, HELOC, requiring an interest-only monthly payment for at least 10 years.

You use the HELOC to pay off your existing mortgage, if you have one. The HELOC replaces a new or existing conventional mortgage. You send your whole paycheck into the HELOC every time you are paid. This covers your monthly minimum payment and then some. The HELOC becomes the new depository for your income.

You pay your bills out of the HELOC as close to the due date as possible. That maximizes the amount of time your money sits in the HELOC, cutting your interest. Any extra money you have left in the HELOC account after you pay your bills and make the minimum interest payments on the HELOC goes toward further accelerating your debt reduction every month.

The key to grasping the power of equity acceleration to eradicate your debt so quickly is understanding how interest is calculated in a traditional mortgage and in a HELOC. As you learned in the preceding chapter, a HELOC is a revolving loan that gives you the flexibility to make interest-only monthly payments every month or to make larger payments if you want to.

In a traditional fixed-rate mortgage, the monthly principal and interest payment is predetermined and calculated according to a conventional amortization schedule and the principal is assessed every month on an ascending scale. And he goes on and gives some more details. In a HELOC, interest is recalculated every month on the basis of the average daily balance of the principal owed.

The more money you run through your line of credit, even if the deposits do not stay there long, the more you are driving down the principal and setting the stage for those interest costs to be calculated on a lower average daily balance. As the monthly interest is pushed down, more and more of your cash goes toward paying off the principal owed and that results in lower and lower interest charges every month.

That gets compounding working for you instead of against you. So that's his introduction to the strategy. He goes on and gives a couple of examples and he uses an example in the chapter for Mark and Susan. They own a home in Indiana, 12 years left on a 15-year mortgage with a fixed rate of 5.25%.

They owe $192,000 left and then they goes through and says their monthly take-home income was about $7,500 and their monthly expenses came in at $5,250. Here's the key. The couple was a good candidate for an equity accelerator because they had a substantial positive cash flow. They also had equity in their home, good credit scores, and more important, a willingness to take an active role in managing and controlling their financial future.

Goes on and creates some charts and shows that they would actually, by following the proposed plan of mortgage acceleration, they would be paying off their debt in under five years. So instead of 12 years remaining on their 15-year mortgage, they would be out of debt in less than five years.

And then gives another example of Megan and Jared, and I'll skip some of those details. Now, at the end of the chapter, the author sets up some information and he talks about who it's a good fit for. Here are a couple of important things that you need to know.

Do you understand the concept? What the accelerator system does is funnel more of your money into debt reduction and set the stage for you to begin to benefit from this immediately. By converting your lazy money, that's money sitting in accounts without connection to your home equity, such as a checking account, into money that works to pay off your mortgage, you reduce the amount you owe.

That cuts your interest costs and hastens the day when your mortgage is but a distant memory. It's not for everyone. The mortgage acceleration concept won't work for everyone. Like the other strategies in this book, it requires discipline. You have to be a smart cash flow manager to make it work.

You also have to have high enough credit scores to get a good HELOC and confidence that your income stream will continue. Implementing this strategy will improve your cash flow from day one, but it may not be enough to mitigate the effects of a variable rate loan. This is why I recommend a thorough analysis of your personal finances by a qualified expert before blindly implementing this strategy.

If you decide to implement the equity accelerator concept with one of my recommended suppliers, you may be charged for the cost of the software, closing costs associated with the new loan, or a consultation fee. You won't be able to do this without any costs, but done right, the system will be profitable.

The risks of mortgage acceleration are these. If you fall back into conventional practice, relying on your checking account for deposits and bill paying, you defeat the purpose of the strategy and could extend the life of your debt instead of paying it off quickly. If you aren't disciplined about paying your bills on time out of your HELOC, you could end up with late fees.

If you lose your job and the extra cash flow that makes the mortgage acceleration system work, notice that, and the extra cash flow that makes the mortgage acceleration system work, that leaves you dependent on that open-ended variable rate environment. If interest rates then rise, you could end up going backwards.

However, if there is a disruption in income, you can rely on the available equity in the HELOC to sustain your lifestyle until income is restored. In this scenario, the acceleration process will be interrupted, but you won't find yourself in a stressful situation wondering how to make ends meet. Goes on and talks about how to do it right.

He says to do it right, you have to get the right kind of loan, you have to set up easy transfers, you have to make sure you're using the HELOC as the primary depository for your income, and that you can do it yourself if you're driven and disciplined, but you need-- it's probably better to connect one of the companies.

And he gives four suggested companies for how to do it. Number one is TruthinEquity.com, which is mentioned a couple times in the chapter, and then I went back and checked the front cover. TruthinEquity.com was founded by a man named-- evidently named Bill Westrom, and I looked at the front cover of the book and it says "Jordan E.

Goodman with Bill Westrom," so he's a contributing author on the book, and that's his favorite. Then number two is the MoneyMerge account with United First Financial. That was the one that was quite popular in years past. No More Mortgage, which is another opportunity, and then Harge Gill's Speed Equity, which evidently started in Australia and grew from there.

And then at the end, notice here, he says at the end of the chapter, "Once you've gotten the mortgage acceleration plan down, there's a lot you can do with it. As long as your line of credit is sufficiently large, you can consolidate all of your other debts into it and get completely debt-free faster than you thought possible.

You can pay off your home in five to seven years, and then with this new heightened level of financial expertise, you can use your HELOC to buy a second vacation or retirement home. Don't look now, but real estate prices are pretty attractive. You can also self-finance your next car, self-finance your next tuition bill, or start that side business without having to fill out a million forms and beg some banker.

You can be your own banker now. I told you it would be a good secret." So I hope you're sold based upon reading the narrative in the book. It all sounds very compelling. After all, if we could just understand a slight difference of how a conventional mortgage amortization schedule works as compared to a home equity line of credit, interest payment, and amortization schedule, then just take advantage of the arbitrage opportunity, we can get rich, right?

I'm not convinced. And I'll tell you why. And this is one of the reasons why I am in such favor of enhancing financial literacy. So much as I did several years ago when I was speaking with the Money Merge account, United First financial representative, I spent hours trying to understand the concept and went away thinking I was just dumb and that I didn't understand it, but it was the greatest thing ever.

And in this one, I spent, you know, I read the whole chapter and I thought, "Wait a second. Is there something I don't know? Is there something I don't recognize?" Because yes, I understand how amortization schedules work, but the key is you got to go and look at the charts.

And this to me is the big difference. For both of the case studies, there is a before and after chart illustrated which illustrates the amortization schedule. And I like to look at numbers because if I can understand what's going on with the numbers, I can be more compelled by the evidence.

Before I jump into the details of the numbers, I hope you understand the strategy. Essentially, the strategy is you swap out the normal conventional mortgage for a home equity line of credit. And then every month, you're paying it down by the amount of your net paycheck. And then you're increasing the amount of the mortgage by the amount of your bills which you're simply paying out of the home equity line of credit, hopefully with an account that might have something like check writing privileges to pay your bills with.

So assume for a moment that you owe $200,000 on your house and it's valued at $300,000. You apply for a home equity line of credit for $200,000 to wipe out your existing mortgage. They go ahead and approve you for that. You pay off with the new bank. You pay off the existing mortgage with the $200,000.

Then in that first month, let's assume that your monthly income is $10,000 and your monthly expenses are $7,000. So you apply the $10,000 that you receive on the first of that month toward the home equity line of credit. That reduces your balance from $200,000 down to $190,000. Then throughout the course of the month, you pay your expenses little by little.

And at the end of the month, because your expenses are $7,500, you have increased the balance of the home equity line of credit up to $197,500. Then you do it again in the second month. You apply the $10,000 of income. You drop it down. So your balance drops from $197,500 to $187,500.

You increase that by $7,500 and you wind up with $195,000. So now at the end of the second month, you're at $195,000. That's effectively how it works. What I was interested in is, is there actually a way to get an arbitrage by getting a home equity line of credit where the interest calculation is primarily based upon what the current balance is as compared to the early years of a conventionally amortizing loan where you're paying a lot of interest up front and little interest down the road?

And the answer is, I don't think so. So if you look at these scenarios, the first scenario that's given in the book, the debtor owes had an original loan balance of $225,000. And in their third year of their amortization schedule, they owe $192,934. Well, they propose changing that out with a new loan.

But there are a couple of bits of details that you need to look hard at. First is what is the interest rate? And in this scenario, the interest rate on the 15-year fixed conventional mortgage is 5.25%. The proposed interest rate on the home equity line of credit is 4.00%.

So 1.25% decrease in interest rates. That will make a substantial difference in the amount of interest that is paid over the course of a loan. Now, how frequently is it that you can get a home equity line of credit at a lower interest rate than a conventional mortgage? I simply don't know.

I don't know what those current numbers are. I think they change over time. In general, with something like a 15-year mortgage, the interest rates on these, at least in the last few years, have been absurdly low. But what's that difference? I don't know. But I'm willing to give them the interest rate.

What I'm not willing to give them is this. They illustrate on the first one what the deposited net income is, $7,500 per month. That's what the couple is earning. And then it illustrates what their expenses are. The monthly living expenses are $3,191, and the total monthly expenses are $5,249.72.

In the first amortization schedule, it simply illustrated that that money is spent on cash flow. In the second amortization schedule, it's clear that that money is not spent, but rather that money remains in the debt. And so I ran the math on it. I said, "What would happen if I was able to actually do this by hand?" I said, "What if the person was willing to put all of that excess cash flow into their conventionally amortizing mortgage?" I calculated the normal monthly payment, which is about $1,800 a month.

Then I calculated what the excess cash flow was, the difference between the expenses and their income, which the difference is $7,500 minus $5,250. So that was about $2,250. I added those together. It was about $4,050 per month. Well, if they would just pay a total of $4,050 per month, the normal monthly payment plus that additional amount toward their conventionally amortizing loan, right in five years, they would be out of debt, even without an interest rate savings going from 5.25 to 4.

And then on the next page, how long does it take with the mortgage accelerator? Five years. There's the magic formula. So on that basis, all we're doing is saying we're willing to put all of our excess money. Instead of being in a checking account or in some other alternative investment, we're putting every excess dollar that we have against our mortgage.

And you'll be debt free in five years. My problem with it is that the facts, the numbers, are not illustrated by the narrative. So in the narrative, you think this is something complex. And the way I just said it right there, hopefully it's clear. That's why you're out of debt in five years.

Interestingly, listen to this narrative. And I'm going to actually read this to you because I want to use this as an example simply to show how you've got to look at the numbers. Let's read about Megan and Jared. Here's another quite different example of how the system can work for a Manhattan couple who don't have the extra cash flow that Mark and Susan enjoy.

So we just said that Mark and Susan was the numbers I just used. Megan at 35 earns a salary of $75,000 as an editor at a New York publishing house. And her husband earns $90,000 as an art director. The balance of Megan's inheritance, $50,000, is in a mutual fund that has been returning an average of 8% a year.

Megan and Jared bought a co-op in the Upper West Corner of Manhattan nearly five years ago in Hudson Heights, where real estate prices aren't nearly as high as further downtown. They put $75,000 down on a co-op costing $475,000. Are alarm bells going off in your head yet? One thing I have noticed with financial lies is that they're often embellished with beautiful pictures.

It's like the example goes, if you have a fixer-upper that's a handyman special, if you talk about its quaint and its rustic and its antiquey, those should be code words for old and run down. Why do we need to know that it's a co-op in the Upper West Corner of Manhattan five years ago in Hudson Heights where real estate prices aren't nearly as high as further downtown?

Why do we need to know that she's an editor at a New York publishing house and an art director? Let me continue. They have 25 years left on their mortgage, which has a fixed interest rate of 6.25%. Their combined take-home pay is $9,000 per month. Their monthly mortgage payment is $2,463.

When you add in their commuting and parking costs and other expenses, there isn't much money left at the end of the month. Now how much money would you say is not much money left at the end of the month? If you have $9,000 in take-home pay, a mortgage payment of $2,463, and then commuting and parking costs and other expenses?

There isn't much money left at the end of the month. Well, flip to the next page. It illustrates that their deposited net income is $9,000, and their total monthly expenses are $6,637. I don't know about you, but that's, in my world, that's a pretty healthy amount of money left at the end of the month.

That's $2,363 left. That's almost a third of their income available. That's not insignificant. Let's continue. During the five years they've owned the apartment, Megan and Jared have sent their mortgage company over $147,000 in principal and interest payments. Of that, $121,121 was interest, and $26,651 was applied toward principal. They still owe over $373,348, or 93% of their original mortgage.

If they continue on this path for the next seven years, after 12 years of payments, they will still owe $318,903. They would have absorbed an additional $152,000 in interest costs and would still have 216 more payments before they would be mortgage-free. Are you lost in the details yet? This is another thing that you've got to watch out for, and people lose you in the details.

All they've done is taken a very simple amortization schedule, which if you've ever looked at an amortization schedule, you should understand, and add an entire paragraph of confusing text, which simply means you drop down to, what was it, line year 15 or so, year 15 and 22. You drop down to the appropriate line on the amortization schedule and take a sentence to explain what every number means.

Be careful when you're reading things like this. Megan and Jared have a couple of options if they are to take advantage of the equity accelerator concept. If they simply refinance their current mortgage into an equity accelerator, and Megan keeps her $50,000 inheritance in a mutual fund, they could be debt-free in eight and a half years.

This would save them over $262,675 in additional interest costs, and their mortgage would be paid off. In comparison with their current mortgage, Megan and Jared would still owe $303,811 of the original balance and $183,836 in additional interest costs at that time. If Megan decides to close out her mutual fund and apply those funds toward an equity accelerator line of credit, Megan and Jared would own their home outright in only six years, nine months, and would save an additional $36,679 in interest charges and be mortgage-free.

He goes on, "Got the concept. What the accelerator system does is funnel more of your money, debt reduction, et cetera," which I already read for you. Here's why I'm belaboring this point. Was everything that the author wrote on those pages technically accurate? It's all technically true. What does it miss?

You should immediately ask yourself, "Well, what's the interest rate that Megan and Jared are earning on the mutual fund versus what's the interest rate that they're paying on the debt?" In this scenario, the illustration was that they have a mutual fund earning 8%. That was what was stated in the facts.

They have a current mortgage of 6.25%, and then under this proposed equity acceleration program, they're going to drop that interest rate to 4%. Then we're going to take a mutual fund, which is earning 8%, and use that to pay off the 4% debt. Then we're going to talk about how little interest we're paying.

Yes, but how much money would we have had if we just stuck with the original? Here's the thing. This to me is a perfect example of how you can take a concept that might or might not be valid, which I'm going to cover again in just a moment, and you can completely twist it into making somebody think it's the greatest thing in the world simply because they're too ignorant to ask the right questions.

In this example of A versus B, it looks very compelling. After all, in A, they put in there the full 30-year amortization schedule, which by the way is another interesting sleight of hand. They start with the opening balance of $400,000, which illustrates 30 years. Then they show, "Okay, well, we're in year five." But then in the comparison one, they start that at year one, which is actually year five on the original schedule.

They do that in both of these. You've got a misrepresentation of data. This would be akin to whenever you look at a chart. If instead of illustrating the scale of the axis starting at zero and going from zero to 100, the chart maker may start at 80. Then by zooming in and not illustrating the full scale of the axis, then the chart maker looks like it's a major problem.

But in reality, it's a very minor variation in data. It's the same thing here. It's a specious false comparison of data. Now, it might look prettier, fine, but it's making it look like a 30-year loan versus a nine-year, when in reality it's a 25-year versus a nine-year. Just a small thing.

But then look at the numbers. Again, their existing loan is 6.25%. They're refinancing at 4%. That's a massive savings, a 25% cut in interest costs. Then B, in the first payment, they're only making a monthly payment of $2,462 on the loan. In the second payment, remember they have a net income of $9,000 and monthly living expense of 6,600.

Let's do the math. What's the difference between those? 9,000 minus 6,637. We've got 2,363 plus the 2,462 they're currently putting. They're putting $4,825 a month toward the balance of the loan now. So how long would it take, if I compare these two things, how long would it actually take to pay off the mortgage if we just made those two changes?

Let's just ignore the interest rate for a moment. How long would it take if we just put that extra payment toward the original debt, which is what you're doing in essence? Well, the math is fairly simple, and this is why I want you to learn to run a financial calculator.

Let's clear our register, put in $373,348.97, change the sign, put that in as our present value. That's the present value of the mortgage payment. That's the amount that we owe on the debt. Put in 6.25, hit that number, and let's convert that into a monthly amount. So we're going to hit the button to turn it into monthly amount.

It's 50% of monthly interest. And let's put in now that $4,825 as our monthly payment. That's what we're going to actually be paying towards the loan. Zero for the future value, and let's calculate the end, the number of periods that would be required. It comes out to 99. Divide that by 12.

That equals 8.25 years. So in scenario one, if they keep their existing traditionally amortizing payment, but they put the additional amount available in their cash flow toward that payment, their debt would be paid off in 8.25 years. In scenario B2, which is the proposed payment, how long does it take for things to get paid off?

Somewhere between eight and nine years. So question, is it this magic gimmick of the mortgage acceleration program or is it the fact that there's an extra $2,363 on top of the minimum payment going toward the debt? That's the key variable. Why did I spend so much time on this?

In my mind this is a very important example of what happens every day in the financial world. People create a good narrative and in essence divert your attention from one thing to the other. It's like a magician where if they're going to do something with the left hand, they want to make sure you're looking at the right hand.

That's how most sleight-of-hand tricks work. This is a big deal, because the only way to actually understand if this is a good idea or not is to know to look for the interest rate and what the amount of money going to the payment is. Without those two details you can't make sense of this.

With those two details you can immediately see that all we're doing is putting a bunch of excess money towards a mortgage payment. This was why, at least in my memory, United First Financial was charging $3,500 for this thing, for this software package. It's a bunch of baloney. It's a bunch of nonsense.

Now if I'm wrong in my analysis, all I've done is just read this chapter of the book. But if I'm wrong, and any of you listening, if Jordan Goodman or Bill Westrom, if you think I'm wrong, tell me I'm wrong and show me where I'm wrong. I'm happy to be wrong.

All I did was read one chapter of the book. But to me that's about as clear of an open and shut case as I can come up with, of a total waste of time and just technical truths that are represented in such a way that it's lying. I don't appreciate that.

So my hope is to equip you to spy that and not fall prey to it. So what are some of the concepts that you could apply towards this? Well, number one, I think this is something that anybody could do. Now I don't know about the actual products. That's what happened is the mortgage market changed and the products weren't available and the home equity disappeared for people.

That was why I think the market for that stuff dried up some years ago. So I don't know what's available, what's not. I would have no problem checking with a guy like him to see, "Can I do this? Are there products available?" I wouldn't pay big fees for it, but maybe there's a better mortgage product.

But any of you can do this and in essence set up a home equity line of credit. That way if you're aggressively paying on your principal mortgage, you can have access to the cash if necessary through the home equity line of credit. Because that's the problem is once you pay down the debt on a mortgage like that, then you're stuck where all the money's locked up in your house and it's much harder to get it out than it was when it was sitting in your checking account.

It would have some advantages to have a more flexible mortgage option where you're just paying interest only. I actually like the so-called pick-a-payment loans that used to be available. I don't even know if they're still available. But where you could essentially choose how much you paid every month. One would be an amortizing payment, one would be an interest only payment, and some of them would actually be a negatively amortizing payment where your balance would actually increase.

It wasn't even a full interest payment. I think that'd be useful to have as an option on a mortgage simply because it keeps flexibility and would allow you to maintain your flexibility. I think flexibility is an underrated benefit in a financial plan. It's always nice if you can help save you.

If you suffer a job loss or if you have an unexpected illness or disability, something like that, I like having flexibility. Now there's trade-offs with everything. That could be a benefit. But you could set that up yourself. If you want to have the money in the home equity, that could be great.

You pay it off and then just tap the home equity if you need to with a home equity line of credit. Years ago, and we'll finish up the discussion on this topic with this, years ago when I had that meeting with the representative of United First Financial, what most impressed me about what he said was the software that they had created.

I looked at the software. What was neat about the software is it illustrated how long it would take for somebody to be debt-free based upon certain decisions. In essence, there was a meter there and it illustrated, "Okay, if you spend this $50 on a haircut or you cut your hair yourself, then you'll save this amount of money and interest and you'll be out of debt this much sooner." It was almost like an immediate feedback loop in the software.

I'm not sure it worked quite as well as he was showing me that it worked, but I thought it was a brilliant idea. What I compared it to is the idea of having a fork for a dieter. Let's say that you have a fork and this fork shows with every bite whether or not you are adding inches to your waistline and pounds to your scale or whether you are taking them away with every bite.

If you're eating a bite of chocolate cake, with each bite it says, "0.13 pounds, 0.13 pounds." By the time you finish the piece, you know that you've gained 1.2 pounds of additional weight. Let's say you're shortening your lifespan and it's calculating that by the end of this piece of chocolate cake, you've shortened your lifespan by 14 minutes based upon the extra weight that you're carrying from it.

If you're plunging your fork into a green leafy salad, then you can see the numbers ticking up and you can see the weight dropping off and your lifespan increasing. I thought, "How cool would that be to have a magic fork that showed that? Wouldn't that be so helpful?" Before I'm about to tuck into a 2,000 calorie milkshake, I would have a bit of a moment of contemplation and ask myself, "Do I really want this?" I would love to see, and it's just an idea for some of you intelligent people out there, maybe you know of a software package that does this well.

I've never seen a software package that does this well, but I would love to see somebody create a personal financial management system that would bring in this immediate feedback loop and that would illustrate in real time, "Here's how much longer you are toward your financial independence goal. Here's where you are with regard to your debt payoff.

If you choose to avoid dining out instead of eating at home, you'll be out of debt this much sooner. Congratulations, by the way, these decisions that you've made this month where it seemed like it wasn't a big deal because you only saved $327, but the reality is you're going to be out of debt three months sooner.

You're going to have your mortgage paid off three months sooner because that's the equivalent to three months of your principal payments on your mortgage balance, something like that. I don't know how to do that, but I would love to see that. I think it's a product that would help.

You see this happening in the fitness world with all of the biomarkers, I guess it's biometrics, where you count, "Okay, here's how many steps I'm at," and you can see for the day, "I'm at this many steps. I've been starting wearing one of these Fitbit things, and so far today I'm at 3,749 steps." Well, I know that's not very much.

I think we should build some of these tools with financial management. If you are capable of that, then I commend it to you as an idea. Hope that's helpful. Let's jump in and do another question today. I think we've got time. Let's answer Robert's question. We're going to shift gears pretty dramatically here about defined benefit plans, actually about non-qualified deferred comp plans.

Kick it off, Robert. Hello, Josh. My name is Robert. I'm a frequent listener to your podcast, and I have a multi-part question. In keeping with the theme of the show, it'll be a little bit on the lengthy side. My wife is an executive at a publicly traded utility company.

She has the opportunity to participate in a deferred compensation plan that pays her a "guaranteed" rate of return, currently in the 5% range, but fluctuates with the prevailing interest rates. This is a Fortune 500 company with a track record of solid financial performance, but I'm a little bit concerned about the safety of such a non-qualified plan, even though we could really use the ability to defer income currently.

We have been participating for several years. I have three sort of related questions, or maybe there's one question and a two-part question. How safe are these plans, and do they ever really default? The second question is, if they are reasonably safe, how much of our overall net worth of investable assets can we contribute?

We have also are required or strongly recommended to keep one year's salary in her company's stock, and between the two, currently, between the deferred comp plan and the company stock, we have a little bit under 10% of our investable net worth tied up in her company in one way or the other.

We have no debt and are in the highest income tax bracket and expected to pay less in income tax in retirement. I'm 49 years old and she's 50 years old, and we both work full-time. Thank you for considering our question. It's a great question, Robert. This is going to be a fun one because we're going to go into an area that very few people really talk much about.

The percentage of population that has access to a plan like you're describing is very small, and so this is not commonly discussed, especially in personal finance. It's a little bit difficult for me to answer without knowing the specifics of the plan, which is the way I like it because I can talk a little bit about the theory and then keep the onus and responsibility back on you to go and take the responsibility, as you already are, to make your own decision.

I'll talk a little bit about the theory. Your primary question is about safety. How safe is the plan? Then your corollary is how do I fit this into my personal financial plan? Let's deal with safety. It's a tough question to answer because I don't have all the facts, but I'll give you, again, the thought process.

This sounds, from the way that you described it, like non-qualified deferred comp. This is one of those magic areas that we love to talk about. We financial planners, it makes us feel really cool to talk about, "Oh, we'll set up a non-qualified deferred comp plan," just because, at least for me, it was always kind of like the sexy side of the business that I always wanted to, "Oh, I'd love to do it.

Yeah, I specialize in setting up non-qualified deferred compensation plans for owners of highly-compensated." It just sounds cool, or at least it always did to me. Maybe that's a bit juvenile, but I always thought it sounded cool. In essence, what we're trying to do is we're trying to solve the problem of how do we set money aside without setting it aside for all of our employees.

Let me define some terms here because in order to understand this, you need to understand a few terms. Let's start with non-qualified. When financial planners or tax wonks use that term, it has a very specific meaning. In this context, non-qualified means that this is a plan which is not governed by the rules of what we call ERISA.

ERISA stands for the Employee Retirement Income Security Act. This is a law that was passed in 1974, and it established all kinds of standards and rules for employee benefit programs. We usually just refer to it as ERISA, E-R-I-S-A. This is actually an extremely complex area of planning. It's very specialized, and it's very important for companies to make sure that they are in compliance with ERISA.

Depending on the type of plan that you have, the compliance may be simple and straightforward, or it might be more challenging and difficult. ERISA can cover essentially any kind of benefit plan. It can cover health plans. It can cover retirement schemes such as what we're most used to as 401(k)s, 403(b)s.

Those are the ones we're used to. There's all these detailed rules that have to be followed. I'm not an ERISA expert. Technically, I guess I'm supposed to be. I did a designation that's called a registered employee benefits consultant. So technically, I'm supposed to be. All I know after reading two massive textbooks on it is that I don't know what I'm talking about.

I'm going to leave it to the experts that practice in it day in and day out. I read the textbooks and passed the exams. It's such arcane, difficult information that I only have the basic concepts of it. The plans that people are used to participating in, again, 401(k)s, 403(b)s, we call these qualified plans.

These qualified plans fall under the purview of ERISA rules. The ERISA rules ensure that all employees are treated equitably. That's the basic function of ERISA, is to make sure that you don't have some filthy business owner who is giving special treatment with one fancy-dancy benefit to two favorite employees and then just completely destroying the rank-and-file employees that are actually the backbone of his business.

That's the whole point of ERISA. You've got all of these different classifications. You've got the top hat rules. You've got highly compensated employees who are highly compensated employees who are not. You've got all these ratios and things that indicate it. Basically, if your plan falls under ERISA, then it needs to treat all of your employees in a like manner.

You can't discriminate in favor of your key employees. You can't discriminate in favor of your wife and your wife's brother who work at the company and give them a special package that you're not offering to everybody else. You have to treat everybody alike. Otherwise, your plan is disqualified. If you're out of ERISA compliance, it's just a world you don't want to be in.

If you just simply choose to avoid ERISA, then you have a little bit more flexibility, but you also have some limitations. In order to actually avoid ERISA, then a plan must meet these two qualifications. It must be unfunded, and it must be maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.

I'm going to define these terms in just a second, but it's important that you recognize that specifically in order to get out of ERISA compliance, which is where all of the government rules and regulations are to protect the so-called working man, the common worker, there's going to be some additional risk involved.

These plans need to only be available for your highly compensated employees or for a select group of management. That's the key is where you mentioned that your wife is an executive at a publicly traded utility company. That's why she has access to this type of plan. Now, let me additionally now define the term I said.

It must be unfunded. When we use the word "unfunded" in employee benefits, it has a very specialized meaning. For tax purposes, the distinction between a funded plan and an unfunded plan simply involves the question of whether the employee has received property from an employer or simply received the employer's promise to pay in the future.

For income tax purposes, the treatment of a transfer of property is very different from the transfer of a simple promise. If the employer transfers property to the employee, then the amount of the tax and the timing of the taxation, that's determined under IRS Code Section 83. In essence, Section 83 simply says that if an employer transfers property to an employee as compensation for services, then the employee is taxed on the fair market value of that property in the first year in which there is no substantial risk of forfeiture.

I've mentioned that little lingo on the show previously, the substantial risk of forfeiture. That's the doctrine that actually is applied to see when does this transfer occur. For income tax, again, when the employer transfers the property to an employee as compensation for services, then you're taxed on the fair market value of that property in the first year in which there is no substantial risk of forfeiture.

What would be an example of this? Well, it would be your paycheck or your wife's paycheck in this example. As soon as she receives the paycheck, then she's taxed on that in that year because there's no substantial risk of her losing it. There's no substantial risk of forfeiture. She has the paycheck and now she's going to be taxed on it, which is the whole goal, what you're trying to do.

You said, "I could really use the ability to defer the tax." Here's the key. To defer taxation on property that is transferred as compensation, then the employee must have a risk of forfeiture. That's when we're dealing with property. The flip side is to defer taxation on a simple promise, then we get into a different code section, not Section 83.

We get into the requirements of Code Section 409A, which is one of the code sections that governs a lot of these plans. Then we've also got to deal with what are called the constructive receipt rules. When does the actual employee actually have constructive receipt of the property and dealing with the promise of the property?

The definition of a funded plan, so we're trying to define unfunded and funded. The definition of a funded plan for tax purposes draws that line between what is a promise to pay versus what is actual property that's transferred. If we're dealing with a promise to pay, then we're dealing there under constructive receipt and when does the employee actually constructively receive the property.

Anything different than that is covered by Section 83, which is what we're all used to dealing with. In a tax sense, a plan is unfunded if there's no fund of any kind set aside. But it's also considered unfunded even if the employer has set aside money or property to the employee's account as long as the assets are available to the employer's unsecured creditors.

The assets can be protected against the employer itself, or they cannot be, but they must be available to the employer's unsecured creditors. In essence, the IRS doctrine says that in an unfunded plan, the employee's rights to any assets set aside must be no better than those of an unsecured creditor of the company.

This makes sense. Again, remember what we're trying to do. We're trying to defer taxation. To defer taxation, we have to make sure that the employee doesn't receive that money. We've got to make sure it's set aside, the employee's not receiving it, and there has to be a substantial risk of forfeiture.

Property has to be available to the company's creditors. Because this is a fairly flexible arrangement, we've got to make sure that, unlike the qualified plans where it's set aside, we've got to make sure that the company's not just going to go ahead and tuck money aside. Let me compare the two examples.

If we're doing an ERISA qualified plan versus a non-qualified plan, an unfunded non-qualified plan. In an ERISA plan, let's assume that your wife is at this utility company, and she's participating in her 401(k). When she's tucking that money aside into the 401(k), and then all of a sudden her utility company goes bankrupt and the creditors come calling, and they say, "Hey, listen, you've got all this money here in the pension accounts, in these 401(k) funds.

We want that money to pay our bills." Well, the answer in that case is no. That money is separated and is protected in a trust. There is actually a trust that's established that holds those 401(k) dollars. So the money is protected in the 401(k). But in exchange for that, the rules are very, very specific.

All the employees have to be covered, and so you can't have key management all of a sudden tucking $400,000 into that 401(k). That's why there are the restrictions there, according to the tax doctrine. Now on the flip side, a non-qualified plan, a non-qualified deferred compensation plan is very flexible.

It can be started, it can be stopped all the time. Unlike a 401(k), which you have to go through all these hoops to set up, they can start it, they can stop it, they can set one up for one employee, you can set up others for multiple employees. So in this case, in order to avoid the abuse, you can't have this plan protected from the claims of creditors, because if the key management knows that the company is going down, all they do is just take all the company assets, funnel them over here into the plan, look, hey, it's covered.

And they walk away rich, fat, and happy, and the creditors get stiffed. So that's the – I know I've used all the technical lingo, but that's the doctrine essentially that's actually being followed, is they're trying to protect from the key management being able to tuck money aside into these non-qualified accounts and saying, well, these are protected from creditors.

So let's get out of the weeds. The biggest danger with non-qualified deferred compensation plans is that they're simply not secure for the employee. The money is available as part of the company's general operating fund. Now, it may be accounted for in a separate manner. So I assume your wife has a separate account, which is being calculated based upon individual performance maybe of some kind of fund.

And so it's technically separate. But the reality is that if you have a couple – $300,000, $400,000 in there, that money is not actually hers until she actually receives it. It's still the company's. And so from an accounting standpoint, they might actually be an accounting ledger that's illustrating a balance of $400,000.

But company management could have chosen to employ that $400,000 into the purchase of a new power plant or whatever they've decided is a good use for the money. So that's the tradeoff. In exchange for not being taxed on the income currently, you give up control of the income. And you don't have the ability to get it until the future, and so there's some chance that you're going to lose it.

And because you have that substantial risk of forfeiture, you're not currently being taxed on it. That's how it works. As soon as – your wife no longer has that substantial risk of forfeiture. As soon as she has the money and it's a sure thing, well, at that time, you'll be taxed on it.

That's fundamentally how they work with the tax doctrine behind it. And so the answer to your question is how safe is it, that's a hard question to answer because the reality is you do have a substantial risk of forfeiture. It is possible that you could lose the money, and that's why you're getting the tax deferral.

That's how it works. In order to get the tax deferral, you have the risk of loss. If you give up the risk of loss, you also give up the tax deferral because now you've received the property and now that property is going to be taxed. So what do you do?

How do you look at it? Well, this is where it depends on – very much on the company. And the first thing you've got to look at is you've got to say how strong is this company? Is this company financially strong? Is it financially viable? Is it well run?

There are some different ways of actually funding these accounts, and I'm going to go through them in just a second, but the key is they don't actually have to be funded. Technically, they are unfunded. There is no separate trust that is established and set aside where the money is just protected.

These assets are part of the general assets of the employer. Now, the employer may choose to handle them in a separate way and account for them and set them aside in a separate account, and that's probably a good thing, but they don't have to. These are part of the general assets of the company.

So you very much are dependent on the general – how strong is the company? And let me use a layperson's example to make this clear. If I work for the big utility here where I live is FPL – no, it's NextEra now, so let's just say it's NextEra. If I work for NextEra, which is a large utility company, and the president of NextEra comes to me and says, "Joshua, you're just a marvelous employee.

Listen, we're going to offer you this special deal. If you fulfill the terms of this employment contract, we're going to offer you an additional $15,000 of employment – excuse me, $15,000 per year of retirement income every year of retirement." That promise has some weight because NextEra is a large – it's a financially viable company, and the employer is making a promise to pay in the future, and that payment might just be made out of the cash flow of the company.

There might not be any funds set aside, no reserve account, anything like that. And that could be completely valid. That could be a completely valid example of a non-qualified deferred compensation plan. I am working now in exchange for compensation, which I've deferred for the future, and this is a special plan that's been set up exclusively for me.

I don't have any actual transfer of property. I just have a promise to pay in the future, and so therefore I'm not taxed. I haven't constructively received any property, so I'm not taxed on the money now. I'll be taxed on the money at 65 when I receive that first $15,000 check.

But in the meantime, the company could close up and blow away. Now, on the flip side, but that promise still has some strength because it's provided by NextEra Energy. Now, if Joe's coffee shop next door hires me and they say, "Joshua, you're just this genius, and we want to hire you, and we're going to pay you $15,000 per year from 65 on," that also falls under all of those same arrangements.

We set up a simple arrangement. This is a non-qualified deferred compensation program, and there are some rules we have to follow, but I'm trying to keep things simple. But the value of that promise, in my mind, it's not quite the safe. Joe's coffee shop that's just getting started next door is compared to NextEra Energy.

Big difference there as far as their financial viability. And so the ultimate safety and security of the program is based upon the financial health of the employer. Now what about the deferral? What about the fact that you can defer income into it? Doesn't matter. That's just a feature of the plan.

In the same way that a 401(k) is actually a subset, a type of profit-sharing plan. What most people don't understand about the technical way that the retirement accounts work is that a 401(k) is actually a profit-sharing plan with 401(k) provisions. And those 401(k) provisions actually permit the employee to defer some of their income and have it set aside.

But the employer can just maintain a profit-sharing plan without 401(k) provisions. But by being able to add that 401(k) option there, it's reduced the cost for the employer, and that's why they're so common nowadays. So same thing with non-qualified deferred comp. The plan can actually be just a promise to pay like I outlined that will give you this $15,000 if you perform the requirements of this contract, or I can defer, you know, will allow you to defer 10% of your income into this separate account.

So what about the funding? Well, there are a couple different ways that these can be funded. And these are the ones that are most commonly used. First, there can be just a simple reserve account that is maintained by the actual employer. And so here there is an actual account that the employer has, and this account can be invested in different types of securities.

It could be invested in all types of financial securities. There's no trust, so there's no separation here. There's no trust. And the funds are actually fully accessible to the employer and to the employer's creditors. And so this satisfies the requirements of being unfunded for tax and ERISA purposes. And so this is quite common.

There could also be an employer reserve account with employee investment discretion over the account. So under this idea, the employer, excuse me, the employee perceives that there's a greater security because they can select the investments that are in the account. They get to direct and say, "I want my money in a stock mutual fund," or "I want my money in a bond mutual fund," or "I want my money in a cash, you know, CD account." So that needs to be limited under the technical rules to some fairly broad investment classes, so equities, bond funds, some mutual funds, because you don't want to have the opportunity to select specific individual investments because that could cross the constructive receipt rules.

So if I had the opportunity that I'm going to have an account with the level of discretion where I can short Home Depot stock, well, now that's going to cross over. And yeah, the IRS would say, "Well, hey, guess what? You've got this money set aside, but the reality is when you can short Home Depot stock, you've actually pretty much received it.

You've constructively received the money, even though it's in a separate account. You control it just as effectively as if it were in your own IRA. So therefore, you have it, and that would violate those rules and we'd lose the tax deferral." So that's another way, though. So the first way, a reserve account that's just simply maintained by the employer, and the employer makes all the choices, or a reserve account maintained by the employer where the employee can direct the investments.

The funds could be deferred into corporate-owned life insurance, and this is called COLE. This is kind of an interesting area of planning if you are a life insurance agent. We refer to two different types of life insurance planning. One is COLE, corporate-owned life insurance. The other is BOLI, bank-owned life insurance.

This is an interesting type of planning. It's one of those sexy sides of the business. It's a very different type of life insurance planning than kind of kitchen table, here's how much life insurance mom and dad need to make sure the kids are taken care of if they die.

But under a COLE plan, then we actually put the money into life insurance policies on the employee's life, but the policies are owned by and payable to the employer. These are cash value life insurance policies. They're not term insurance. These are cash value life insurance policies, and this can actually be a mechanism for providing financing for the employer's obligation under the terms of the plan.

By using life insurance financing, then the plan can actually provide a death benefit, even in the early years of the plan, which can be really useful to younger employees. That can be a real benefit. So by participating in this plan, I know that, okay, I've secured a death benefit for my family.

This can be a valuable part of my deferred compensation. If I set $10,000 aside just into an investment account, I don't have any death benefit. I got to go buy life insurance. But if I have a death benefit and I have an investment account, that can be useful. So these are often funded with corporate-owned life insurance.

There can also be something set up which, if you are a CFP student, you need to understand the term what's known as a rabbi trust. Rabbi, like a Jewish rabbi, this was actually, it's so-called because the case that established this as an operating arrangement dealt with a synagogue with a rabbi who wanted to have the money set aside for his retirement.

So in essence, a rabbi trust is a trust that's set up to hold property that's used for financing a deferred comp plan. And so the funds are still available to the employer's creditors, but they're not available to the management of the company. So under this scenario, maybe there's a rabbi trust established.

There's a standardized document now. The IRS has provided standardized trust terms that will basically protect the account for greater safety to the employee. They'll protect the account from management being able to come in and say, "Look, there's this really great deal on this power plant that's going out of business." I don't even know if this happens in the power business, but follow my metaphor.

"There's this great deal on this power plant that's going out of business. We got a steal of a deal. We're going to buy it at 30 cents on the dollar. So we're going to take all the money that's in these deferred comp plans, and we're going to use this to come up with a down payment on the power plant." They can do that if there's not a rabbi trust.

If there's a rabbi trust, they can't do that. But if they go bankrupt, the creditors can still get the money. And then finally, there can be some sort of third-party guarantee that's established. And in this scenario, the employer goes out to a third party and obtains a guarantee to pay the employee if the employer defaults on the obligation.

And so that could be a shareholder of the company, a related corporation, or it could just simply be a bank, or they obtain a letter of credit where the bank agrees if the employer breaches its obligation, they'll go ahead and pay the employee out the benefit. This does raise a little bit of concern that because of the guarantee, then the plan will switch from being unfunded to funded for tax purposes, not for ERISA, but for tax purposes.

But if the employee goes out and gets the third-party guarantee independent of the employer, then it's not formally funded. So again, this is one of those specialized areas, just a little note that you need to be aware of. And obviously, I guess it's more for the general listening audience if anyone's setting one of these up.

So you need to ask how this account is funded and see if there are reserves that are held by the employer. But back to your question on safety, this is what determines how safe it is. I would boil it down. If your company is financially strong, then the account is probably as safe as the finances of the company.

So if you think the company is still going to be here, which obviously you do, but if you think the company is still going to be here when your wife retires, then it's probably pretty safe. If the company might not be here when your wife retires, well, it's not super safe.

Now what is of interest to me is what the 5% rate is based on. So I would say pick up the phone and ask them. Call Human Resources. It might be connected to some sort of rate simply for the convenience of the employer to track the performance of the account.

They might be using some external rate and saying, "We'll give whatever this rate is as a crediting mechanism to the account," when in reality the assets are not set aside, they're not invested in anything. Or that rate might be tied to a specific financial product. So if it's funded with a life insurance contract, that might be the rate that the life insurance company is paying to the people in the separate accounts.

And so they're just passing that through. Theoretically, it could be an annuity contract. It could be a guaranteed investment contract, a GIC, a G-I-C, guaranteed investment contract. Those are offered by insurance companies. It could be mutual funds, maybe a stock fund, mutual bond fund. It's unlikely to be a stock fund with a 5% guarantee.

But just ask. You've got to ask. And that's the key. When I was with Northwestern Mutual, I had one of these plans, and I could use the deferred comp plan. And any money that I put into the plan would be credited based upon the dividend interest rate that Northwestern Mutual earned off of its general portfolio.

So an insurance company has a general account, which is their primary investment account, which is the reserve account for their insurance contracts. They need to fund all of the insurance contracts that remain outstanding. And whatever that portfolio earned, that was what my account was credited. And so it worked out really well.

It was a guaranteed -- it would change, it would fluctuate a little bit year by year, but it was a pretty high rate. And so insurance companies often will offer special types of annuities for these types of plans. I won't get into all the names, but there's some unique products, and that may be what this is funded with.

Just ask. You've got to ask. Hopefully, with a little bit of that background, that'll give you a bit of an idea to ask some questions and not feel bad about asking. But in essence, the safety of the promise is based upon the financial security of the company. If your company goes bankrupt, pools in Enron, WorldCom, whatever, all of the assets that are in that deferred comp plan, as long as it's a non-qualified deferred comp plan, and if I've diagnosed what it is accurately based upon your voicemail, all of those assets are available to the general creditors, the unsecured creditors of the company.

So let's answer part two of your question. You said that you've got right now probably about 10% of your investable net worth is tied up in a company. So the question is, is 10% tied up in one company? Is it a lot, or is it a little? I don't know.

I don't know. And this is one of those areas where it's very much a gut call. And I'm going to talk a little bit about this in the question, which now that I've stretched these shows into, instead of answering all these questions in one show, it'll probably be Wednesday or Thursday, I'll answer the question from the listener from Bonica in Sri Lanka.

Actually, it'll be tomorrow. Probably I'll answer the question from Bonica in Sri Lanka. He's out talking about asset allocation in his context. How do you figure out if 10% is too much or is too little? It's going to depend. It's going to be a lot of it depends here.

It depends on how much money you have. 10% of a million dollars is very different than 10% of $20 million as regards your standard of living. You could look at this in two ways. And so I'll paint these two parallels for you. Let's say you have a million dollars of net worth and you lose 10% of it.

Well, that's only $100,000. But the reality is, comparative to your lifestyle, the ability for you to have $900,000 versus a million dollars at that lower level of assets, that's going to make a dramatic difference in your lifestyle. But 10% of $20 million, if you've got $18 million or if you've got $20 million, is that going to dramatically affect your ability to make the BMW payment?

Is that dramatically going to affect your ability to go out and buy the next BMW? It's not going to make much of a difference. 18 to 20, you're all in the same club. But 900 to a million, that's a lower real number. But I guess to my mind, it'd be a higher perceived number as far as lifestyle.

You could argue that the other way and say, well, it's not really that much money, but $2 million, that's a lot of money. In my mind, the other thing you have to be aware of is that if it's 10% of your net worth, it's probably also 50%. You didn't say your position, but maybe your wife, if she's an executive, maybe she's a higher earner or substantially higher earner than you are.

So if it's 10% of your net worth, but if the company goes bankrupt, it's also 50% of your income or 70% of your income. That's going to be a substantial number. But on the flip side, if you actually look at your financial planning, it sounds like you've got plenty of other assets.

You've got no debt. You're asking questions. You're listening to shows like this. I'll bet the rest of your portfolio is abundantly diversified among different companies, different sectors that you've planned things out. So I simply don't know how to answer that question. It's one of those things where I don't have any mental models that would guide me.

I would have to look at it personally. And if you knew of some information where you were nervous about this company, then I would start trying to diminish it. If you knew of something that you were bullish on this company, if you had other assets where you could suffer a wipeout, maybe it'd be okay for more.

It's one of those things where I just don't have any mental models to apply to it. If any listeners do, come by and note those for me. This is episode 133, so radicalpersonalfinance.com/133. And I would love to know any ideas that you have on this subject for Robert. But I don't know.

I probably wouldn't want more than 10% tied up there, considering that you have sizable incomes and that it's at least half of your income. If I could conveniently lower it, if you weren't especially bullish on the future of the company, then just keep the one-year salary in stock and don't go more heavily in.

I'd pay attention to the company and to the industry. What happens to this company if oil prices are dropped? Is this company going to be affected? Affected positively, negatively? Frankly, I've reached the end of what I can do on a show like this, and I refer you from here to your financial advisor.

Hopefully you feel a little bit more confident with some of the information just by having a little bit of the technical background to understand. And I hope that this was a fun introduction for others of you who aren't familiar with non-qualified deferred comp to kind of have a bit of an intro to it.

It's an interesting world of planning. If I were going to go back and do planning, it's definitely one of the areas that I would consider working on. You've got to figure out a different business model because the sales cycle is extremely low, it's extremely complex, and this is one of those things where you need a national presence.

You're going to be working with companies all over the country, and you've got to be extremely expert from a technical perspective. You need a marketing plan that's going to get you in front of the right people. It's one of those things I could never figure out with my resources how to set up the things I needed on the front end to kind of crack that nut.

But it's one of those areas where you can do billion-dollar deals in the insurance business and the commission check on billion-dollar deals is a pretty sweet one. It's on my short list, but I can never figure out how to make it work. Maybe some of you can crack that nut.

That's it for today's show. I will come back. I've got two questions left. I'll come back tomorrow, and I'm going to respond to a question from Mary on where to incorporate California versus Wyoming and also how to incorporate for a son. Then I'm going to answer that question from Bonica, who's living in Sri Lanka, a listener to the show, and ask some questions on asset allocation and diversification from his perspective, living in Sri Lanka and trying to apply some of what I talk about on the show to his scenario.

I love scenarios like that because they help me to kind of think through and see the principles that exist in financial planning. Hope you enjoyed today's show. If you'd like to get in touch with me, you can email me, Joshua@radicalpersonalfinance.com, Twitter @radicalpf, Facebook.com/radicalpersonalfinance. If you've benefited from today's show, this show is supported by listeners, so I don't have any outside corporate involvement at this point.

If you've benefited from that, I'd be thrilled if you would join the membership program. That's how I'm setting up to pay the bills. You can find the details of that at radicalpersonalfinance.com/membership. Thank you to all of you who are listening. I hope that you have a lovely day. I'll be back with you tomorrow.

Thank you for listening to today's show. This show is intended to provide entertainment, education, and financial enlightenment. Your situation is unique and I cannot deliver any actionable advice without knowing anything about you. This show is not, and is not intended, to be any form of financial advice. Please, develop a team of professional advisors who you find to be caring, competent, and trustworthy, and consult them because they are the ones who can understand your specific needs, your specific goals, and provide specific answers to your questions.

Hold them accountable for your results. I've done my absolute best to be clear and accurate in today's show, but I'm one person and I make mistakes. If you spot a mistake in something I've said, please come by the show page and comment so we can all learn together. Until tomorrow, thanks for being here.

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