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Steal someone else's lines. Welcome Radicals, my name is Joshua Sheets. Welcome to the Radical Personal Finance Podcast. I guess inside all of us, somewhere deep down inside is a frustrated radio DJ. So today I use my radio voice, let's use some radio announcements. And let's talk about live Q&A.

I got some good ones for you today. I hope you enjoy it. I've got a recording for you of a live call with patrons of the show. This was a number of people who joined the call recorded live on Thursday. And we got together and answered questions. We got a bunch of good questions in today's show.

We talk real estate, we talk about how much money to put into deferred retirement accounts versus to keep in non-taxable, excuse me, non-qualified, there's the word, non-qualified accounts. We talk about bank on yourself and the use of life insurance policies for cash accumulation. We talk about investment options and portfolio allocations.

It's just basically real live conversations. This is something I've been wanting to do a little bit for a while. I wrestled seriously with my show concepts, frankly, over the last few months. I wrestled with it a lot during December of 2015 trying to figure out like am I doing what I need to be doing?

Should I be adjusting things? I seriously pursued the option of switching over to a radio show, doing a live show. I ultimately decided that wasn't what I wanted to do. I'll share more details on the stuff in the beginning at a later date. But one of the things that I did want to do was bring more live interaction onto the show.

And so I decided to do it with a conference call format. And so I invited all the patrons of the show to join this conference call and to have a live Q&A. I'm intending to do it more going forward in the future. You can let me know how you think it worked out.

If you feel like this was valuable content, I hope it was. I really enjoyed the live interaction with the audience and I think it will make for good podcasting. So that's the story. Check it out. Check out the show. Let me know if you enjoy it. I do intend to do it fairly regularly.

I'm still working through my vision and the changes. I've got to change a few things, but it's been challenging. So I'll share that story in the future and tell you what I'm thinking and get your feedback. But for today, enjoy the interaction with the audience and enjoy the live call.

Before I hit play on the recording, the sponsor of the day today is Jay Fleischman and the Student Loan Show. If you have student loans, call Jay. You've heard me do this ad I don't know how many times, right? Go to studentloanshow.com/radical. Have Jay check out your situation. Good guy, sharp guy, student loan attorney.

He is the guy to go to if you are in any kind of difficult student loan situation. If you have loans and you're looking to know, "Is there a little shortcut for me to be able to pay these things off sooner?" If you have loans and you're falling behind, go to Jay's site and get a consultation with him.

While you're there, subscribe to the Student Loan Show in iTunes and make sure to let him know that I sent you. With that, here is the recording from the Q&A. All right, Radicals. I've been looking forward to doing this. I had a lot of fun doing these conference calls, and we're going to kind of create a hybrid today of Friday Q&A shows and call-in talk radio.

Tell me your name and where you're calling from. My name is Joel, and I'm calling from Texas. I've got a question. You've helped me in the past with some perspective when I was able to get a much better paying job, and I've followed a lot of that advice. I've maxed out my 401(k) and my health savings account, and now looking for other places to invest.

So far, I have not invested in any taxable mutual fund type investments. Instead, I'm looking to go into rental properties. I already have three units and looking to add one or two more this year. My question is if you could give me some items to consider as far as leveraging it and doing it faster or slowing it down and paying it cash.

Just some things to consider in that decision, please. The age-old question. You didn't start me with a nice easy one. You started me with the one that real estate investors constantly debate on all sides. A couple of quick questions before I answer. How long have you been investing? You mentioned you have three units.

What type of units are those, and how long has it taken you to acquire those? Sure. I asked you a question about a year and a half ago, and since then, I bought a duplex, which is two units, and then moved my own residence. I rented the old residence, which was paid for, so that's three units.

I've been managing these three units now for about a year, but I had some property management experience for other people's properties, just things I was doing on the side, which was more than five years of collecting rent and keeping properties up. At least a year of my own experience, but more if you consider some others.

What's your long-term investment goal? To build enough passive income, so-called passive income, so that I could have some career options, maybe build a lifestyle around some part-time work and have my property support my family. What's your target monthly income that you're trying to hit from your portfolio? I'd like to hit about $4,000 of monthly income from the portfolio so that I could basically slow down on my day job.

Okay. So I think in watching this study, the real estate people – I'm a novice when it comes to personal experience, but I have studied it a lot from an outsider perspective. So you need to filter my answer through that and then work with other people who have been through up and down market cycles.

I recently released the show of my interaction with John Schaub, and one of the biggest reasons why I wanted to meet Schaub personally was because he's an old real estate investor. He's been doing this for 40 years. So he's been through four recessions. He's been through every market cycle, and I really appreciate his type of perspective in a situation like this.

I've only been through a couple of recessions in my adult lifetime. So that's the reason why I went to seek him out, and you should seek out people who have been through different market cycles. But in looking at leverage, leverage is always – it's always a double-sided sword. It can – it cuts both ways.

It can massively improve your returns, but it can also sink you if it's employed improperly. The most reasonable, sensible approach that I can find is to use leverage, especially in the beginning, and to use it safely, to use it carefully, to consider how you do it. And that's what's so unique about real estate is that real estate, the debt that you can put on real estate is unlike debt on other types of assets.

A couple of examples. Number one, if you were going to use debt to invest in stocks, let's just keep it very simple, ignore options trading. Let's just say that you're going to establish a margin account on your portfolio, and you're going to borrow money to buy and sell stocks.

That can work really well and can increase your returns, but the problem is that if your investments don't work properly, then you run the risk of facing a margin call for all of the money. And the same thing can happen in real estate if you don't do a good job.

So the most famous story – probably I would say the most famous spectacular story of that would be Dave Ramsey. When he began his career in his early 20s as a real estate investor, he built his career on buying lots of units. And as he tells the story, when he was 26 years old, he had control of about $4 million of property values if my memory is correct.

But the majority of that was financed on short-term notes with a local bank. And so when the banking industry hit some challenges, and I believe his bank was sold, all of a sudden his bank was sold and he found himself sitting there and looking at a new loan officer who didn't know him who's sitting there and saying, "Who is this 26-year-old kid who owes us millions of dollars?" And so they started calling his notes.

But when he had financed it with this rolling line of credit, these 90-day notes, he couldn't get out of the deals in time for him to satisfy his financing obligations. He wasn't able to unravel his situation quickly enough. So he tried. He and his wife, they sold everything just as quickly as they could.

As he tells the story, they went through and were fire-sailing every single property they could come up with as quickly as they could to raise cash to pay off the loans to keep things afloat. And then ultimately, they never – they ultimately, however, didn't – couldn't do it in time and then he wound up declaring bankruptcy.

So if you finance real estate wrong, then you can severely – you can cause yourself major problems. But if you finance it right, you can massively juice your returns. And so the key is to, I think, harness the power of real estate but to make sure that you have a plan – excuse me, harness the power of leverage but to make sure that you have a plan to avoid the disaster.

When I went to Shab's seminars, one of the things I really appreciated about his seminar was right in it, he put one of his newsletters and the newsletter was exactly that. That was the title of it, "Leverage, Harnessing the Power and Avoiding Disaster." And in that specific article, the newsletter, he goes through and he talks about how to borrow properly and then how to cover your risks and how to make sure that you manage the risks of the individual transaction.

So if you compare the risk, let's compare just the two very simple things of – one is you owe the debt on 90-day notes like the famous Dave Ramsey story is. Or the other is that you owe the debt on a 30-year mortgage. Well, which of those is riskier?

If you owe $200,000 on a 90-day note, it's callable – it's due at the end of 90 days. You've got to come up with $200,000 to satisfy that loan. And so you're basically – if you don't have the money, you're constantly floating it from one debt to the next, which is what Ramsey was doing.

If you owe $200,000 on a 30-year mortgage that's a fixed rate, you know you're only going to have to come up with, let's just say, $1,200 to make that monthly payment. So with that monthly payment, you're going to be able to go ahead and satisfy the debt as long as you have enough months.

So the key is to leverage the debt, leverage the real estate, plan for it, have enough cash. So we've got the cushion so you don't get your back up against the wall to have to make a bad deal. And then make sure you always have multiple exit plans. So one of the things that – and I reached down and just picked up the manual from Schaub's Building Wealth One House at a Time seminar.

And one page I remembered from it that answers the question specifically is here are the factors that make the debt that you owe risky for you. And so you want to – if you want to keep your debt low risk, you want to make sure that you do the opposite of these things.

So the first factor that makes debt risky is a high payment. If you have a high payment amount, by definition, you've got to come up with more money. So the lower you can get the payments, the less the risk that you face. This is why when you're financing real estate, the longer you can stretch the loan, 30-year loan instead of a 15-year loan, the better because it reduces your risk.

It reduces the payment amount for you. Next payment that makes debt risky is short-term debt. The longer the term of the debt, the less risk because the more time you have to come up with the money. If you set up a five-year loan with a balloon payment at the end of five years versus a 15-year loan with a balloon payment at the end of 15 years, by definition, the longer-term debt is less risky because you have more time to work things through, more time for your investment strategy to pay off.

The next thing that makes debt that you owe risky is balloon payments. So that's really, really tough. If you've negotiated something where you're making interest-only payments for five years but at the end of five years you've got a balloon payment, you've got a problem. So balloon payments can be very, very risky to you.

They might be a useful tool but they will increase the risk. The next thing that increases the risk of the debt that you owe is personal guarantees. So if you've personally guaranteed a debt, that means that all the rest of your assets are subject to the claims of the creditor.

So in the interview that Shab gave on Radical Personal Finance here, he talked a lot about that. He talked about never give personal guarantees for the debt. Now, there's a difference between having a legal personal guarantee and having your word. Shab told me and told us at the seminar, he said, "I've never once in my life not paid a debt," and to me, I believe that is the moral and ethical thing to do.

You always pay the debts. So if I give you my word whether or not it's attached to – that I'm going to pay you, whether or not it's attached to a specific asset doesn't really matter. I will pay you. However, there's a difference between doing that as your word of honor versus the legal guarantee because if you have given a guarantee on an investment that goes south and now all of a sudden your creditors can come and invade your other assets to pay the guarantee, that might destroy the whole plan.

So you want to avoid personal guarantees if at all possible. The next two factors and these are the last two is – the next factor that makes debt risky is illiquid collateral. So the example in real estate would be a duplex. Your duplex is going to be harder to sell than is the single-family house that you own.

Now, duplexes are really not that tough to sell generally, but your duplex would be more liquid and easier to sell than a 10-story office building that you invested in. An office building might be very illiquid. The number of potential buyers is much smaller. Their expertise with regard to real estate is much higher, and so it's going to be much less liquid than a single-family house or even a duplex.

And so again, that was why Schaub argues for investing in single-family houses. They're very liquid. You can sell them quickly. And then the final factor that makes debt that you owe risky is negative amortization and where if you have a loan where you're not amortizing it, it can just continue to grow up, and that makes the debt riskier.

So those are some factors to pay attention to, high payments, short-term, balloon payments, personal guarantees, illiquid collateral, and negative amortization. Finally, I do think that when you're building a financial independence plan like you've described, the goal should be to set up the portfolio first. So my personal real estate investment plan, and I have to struggle with how much time and energy and money to devote to this for me versus – into real estate versus my business because I have better leverage and higher returns in my business, but I don't want everything to be in my business.

It's a challenge for me. My personal plan is build the portfolio first. So if I have a target monthly income of $4,000 per month, the first thing is to build the portfolio toward that. Next question is how quickly do I need that $4,000 a month? So if you wanted to be as a full-time property investor and let's say you're putting together different deals and you can – so you're borrowing the money and you've got $1,200 of cost including proper allowances and you've got $1,600 of monthly income.

So you've got $400 of cash flow on each property. Well, the first thing to probably do would be to work – what I would do in that situation is I would try to accumulate 10 properties, each of which are cash flowing $4,000 – excuse me, $400, which gives me $4,000 per month.

Then the – now that I have the 10 properties and you buy them slowly, little by little, now I have the 10 properties. I've got the cash flow, which allows me to be that full-time real estate investor or that part-time job, part-time business, and part-time real estate investor. Then I want to divert that cash flow.

You would need to have a little bit of excess if you're just living on that. I want to divert any excess cash flow to paying down the mortgages on the properties that I most want to have forever. And so you pay off the mortgages on your best properties. And if you have some market appreciation, let's say that you wind up and your properties have increased in value by 20 percent, go ahead and sell three or four of the properties that you don't want anymore.

Take the profits from that and use that to pay off the mortgages on the properties that you really want to have for a long time, your really good properties. That way you're managing your debt. You're managing your risk. You keep minimal cash out of pocket until you build the portfolio.

Keep maximum money in the bank, which helps you to get through if you make a bad deal or you have a bad couple months with no tenants. Cash in the bank helps you and then manage the business to produce the cash flow. That's the faster way. That said, nothing wrong with doing it slowly, doing it with cash.

I know people very well personally, some in my family, who have built a very nice real estate portfolio with never borrowing a dime. And they just did it, never borrowed a dime, financially independent with a number of properties, and it works great. And there's no risk from that. It's not the most efficient way to do it, but it's the lowest risk.

And these people, they value more than anything else. They value their personal freedom and their personal autonomy. So that's my answer to you. Joel, any follow-up question on that before I go on to the next one? That's perfect, especially with regard to the level of risk because in all my scenarios, I was either taking bigger risks to get more properties quickly or slowing it down but always using some leverage, 30-year mortgages and so on.

I did buy Shab's book after hearing your show, and I'm going to look into this newsletter as well. But perfect. Appreciate the help. Thanks, Joshua. Reach out to him. Send him an email and ask him if he'd be willing just to send you that copy of his newsletter. The title of it is – just tell him you heard me mention the title of it.

The title of it – I closed the book – is just basically on leverage. Interestingly, he has a course. I want to take his course. I haven't taken it yet but I want to take his course on investing for retirement with real estate. But he devoted an entire course to this question and it's actually his opinion that everyone, even heading into a full-time retirement, that you should always maintain some leverage on the portfolio.

But just because you have some leverage on the portfolio doesn't mean you have leverage everywhere in the portfolio. So the goal is to get your favorite houses completely free and clear, eliminate that risk, but to continue to use leverage because leverage gives you better negotiating power. And that's probably the biggest thing that's not talked about is how much – if you are an owner of property, if you own that property free and clear, you don't have much negotiation power.

So it's actually in some ways riskier to you to have a property owned free and clear than it is to have a property that's highly leveraged. Best example, he gave some examples where he had lent on a property. He was the owner of the property. He had sold it using owner financing to an investor.

And so I'll use numbers that are close to the real ones because I forget the real ones. But he sold the property to the investor for $280,000. But this was before market values declined dramatically. And now the property was worth about $180,000. So there was $180,000 of missing equity.

Now, he was the lender on the property and the investor is having trouble getting rents enough to cover things. Now, is he worried about that situation as the lender? The answer is yes. He's worried about it because the investor has all of the – has the leverage. The investor can walk away from the property, return the property to Schaub, the owner, and can basically walk away because he's like, "Well, I lost $100,000." So what he did was as the lender, he picked up the phone or – they had a conversation.

They said, "Let's talk." And because the property was fully leveraged, the investor had leverage over the lender, had power over the lender. So they renegotiated the deal. Schaub knocked down – they refinanced the property, knocked down the terms, cut down some of the money. Schaub ate some. The investor ate some, and they refinanced it so that they could keep the deal going.

And that's one of his big emphases which I think is so fascinating. When you deal with people, when you deal with owner financing, you can work the deal. And if market conditions change, everyone is eager to revisit it and keep the deals win-win. It's different than being in an adversarial position against Bank of America.

So definitely check out his stuff. The reason I went and the reason I profiled him on the show and I'm hoping I'm going to talk to him and see if I can resell some of his courses is it's no nonsense. It's no junk. It's just clear, actionable advice from someone who's been there and done it.

All right, next question. Who would like to go next? Hey, Joshua, this is Matthew from Tennessee, and I want to keep it on the real estate while we're on the topic of it. And this is kind of a personal question for you, so don't feel like you actually have to answer it.

But my main question is when you're talking about investing in real estate for an extended period of time as your investment plan, have you, based on your research, come to a return on investment percentage that you're trying to hit between maybe a range or anything like that? That's a hard question to answer.

So the answer is no. I haven't hit one of those. And it's because depending on the way that you measure the rate of return and depending on the strategy that you use, the rate of return can vary significantly. What I'm personally looking forward to, what I'm trying to build for myself is I'm trying to build passive income.

So what that means is I'm not interested in flipping houses, and you could create – if you could flip a house properly and in four months do a flip where you net $40,000 and you used investor money, I mean your rates of return individually measured can be very, very high.

I'm not looking for that at this point because for me and my business, my online business has the potential – enough potential for those higher rates of return for me to be satisfied. What I'm looking for is passive income or as passive as you can get with real estate.

Real estate is never going to be truly passive. There's always going to be some level of management or involvement. But I think I can get it passive enough to where I'm happy with it. And I don't want it to be fully passive because I want to use it as a tool where I can teach my children.

I can involve other people in my business enterprises. So I think it's passive enough for me to be satisfied with it. In that situation, I expect my rate of return in the beginning to be relatively low in this sense. I don't think – my first deal will probably be my worst deal.

I'm inexperienced with negotiation. I'm inexperienced with finding the properties. I'm inexperienced with all of the strategies. So I expect my first deal will probably be my worst deal and I hope to get better over time. And I also am planning to use my own money and not to try to work fully with investors.

And that's due to the stage of life where I am versus other stages of life. If I were – so again, Shab, he's going to get a lot of publicity today, which I'm happy to do because he's a great guy. When he started, he went to college and in college, he studied real estate.

He knew that he wanted to do real estate. So he actually got a degree in real estate from I think Florida State University. And at a point in there, he got a real estate agent license. But he started investing and when he was investing in the early years, he had no cash.

So in real estate, if you have no cash, then you've got to develop a strategy that allows you to use other people's cash to put the deals together. When measured in percentage rates of return on money, the rates of return there will be very high. And I believe that if I went broke today, one of the business models I could do would be to build a real estate investing business.

It's a skill set that I have a good basis in and that I could develop. And I could start with no money by finding the deals and putting them together. So the rates of return on money are going to be very, very high because you're using other people's cash assuming the deals work.

But you've got a lot of time involved in it. So for me, I'm looking for a place to invest my money. And so in that situation, I'm willing to take a lower rate of return on paper. What he teaches is his 10/10/10 rule. Buy the property 10% under market value.

Invest – buy the property at 10% under market value. Make sure that you get a 10% cash on cash – excuse me, 10% rate of return on your cash down payment and – what's his last 10% rule? I totally blanked on it. And pay no more than 10% down.

And so those are his rules. So initial – your initial money coming out of it is going to be 10%. One example that he gave in that seminar, continuing the real estate theme here, is he gave the example of how if you work with an investor, you can juice your returns substantially.

So here's the money on – that he gave as an example of what the type of deals that he would – he used to do. So let's say that you start with – you have $50,000 to buy houses and you buy $400,000 worth of houses. It could be multiple houses.

It could be one house. You buy $400,000 worth of houses. You invest $50,000 into those houses. You buy them under market value. You have $100,000 of equity and you have $300,000 of loans on those properties at a 4% interest. You turn around and you sell them for $400,000 and you sell them to an – you sell them out financing it.

You collect $32,000 of interest. He goes through this. I'm going to skip the numbers because it really works well visually. He goes through this example in his course where you're demonstrating that you have a $20,000 interest income on a $50,000 investment, which is a 40% rate of return. But then what you can do is you turn around and you sell an investor a $40,000 interest in the deal that you put together that will yield them the 10% return that you're charging, which means that you now have – you're now getting $20,000 of net interest income.

You're paying $4,000 to the investor and you're netting $16,000. So your original investment was $50,000. You pulled out $40,000 and sold that to another investor. So you now have $10,000 of capital tied up in it and you're getting $16,000 of interest income, which is 160% rate of return. So when you're in the beginning, if you talk to most investors, when you're in the beginning, you do these very aggressive deals, very – you're scraping for money, trying to find as many investors as possible.

Those rates of return are very, very high, but they require a ton of work. Down the road, you might start to move toward that passive income model, and you're not just trying to do deal after deal after deal. You're trying to generate the income from the portfolio and sit back and spend the money on your lifestyle.

Does that help? I got a little tongue-tied in the middle there with all the numbers, but is that helpful? Yes, Joshua. That is really helpful. I was just wanting to – I guess I was just trying to go through that framework myself that if I had X amount of money today in 15 years based upon this parameter of return, then what am I expecting to have in 15 years to be able to hit those goals?

I guess it's more of the framework of how is this fitting into my goals? And that's – or how can I hit my goals in the future? But I really appreciate you taking the time to answer that in terms of how you're looking at it right now from your perspective with your business and also something that's cash flowing on the side.

Right. Rate of return matters hugely, and this is why I actually asked Shav. I think it was 119. It was the episode with him. I asked him what his rate of return was. If memory is right, he said 20% last year. That was what he made. Now, who knows how those – I bet you his rates of return were much higher in the early years than they are now.

But he said they were 20% last year, and I thought that was probably fair. I've worked with some local investors. I have some friends of mine who work locally as real estate investors, and their entire business is putting together these deals. They do the entire thing. They all started broke with no money.

They put together the machine, the business machine to find the deals, and then they solicited the investor money, getting people to invest money that was in their 401(k) or their IRAs into their company, and then they scraped the profits on the top. When you can scrape profits off the top of putting the deal together and you're investing very little amounts of your money, you're getting a very high financial rate of return.

But as always, remember, you also are doing the work. So you're doing very active investment management for that higher rate of return. That's what – when I talk about on the show about passive versus active, in the stock market basis, it's not – if you study those who are strong advocates of the passive investing approach, they don't necessarily say that an active investor can't ever beat the market.

What they say is that an active investor can't beat the market in a predictable fashion and can't beat the market net of the costs of finding those deals. That may be true in the S&P 500, and especially it may be true if you're running a mutual fund and you're trying to find very large deals.

I'm convinced you can generate much higher rates of return locally in an inefficient market like real estate because I've just seen too many people – I have friends I graduated from college with and they're millionaires, some multimillionaires based upon their real estate investment. Projects in the last decade. So I've seen it done.

All right, next question. Hey, Josh. I got one. Hi, Josh. Okay, Dylan, go ahead, and then whoever that was next, you'll be up next. Go ahead, Dylan. Okay, recently you – actually yesterday you did a podcast on – that touched on the topic of putting money into an IRA or the TSP in my case versus like a taxable account or some other fund that you can get access to quite a bit easier.

I just had some questions on the decision procedure. Okay, go ahead. Where to put funds. So right now I have seven years left on my contract in the military, and I'm putting about $750 a month into the TSP and another $200 a month into a robo-advisor account. Okay. And you made me hesitate a little bit for contributing so much to the TSP.

I feel like I might be missing out on some opportunities that might come up in the future. So I was wondering how you go about deciding – or how would you go about deciding in a case like mine whether to contribute to an IRA or a taxable account? What types of opportunities would you look to invest in outside of your TSP?

Well, recently real estate has become – I was starting to read about it I guess listening to BiggerPockets podcast and all that. So eventually I would like to get passive income through real estate, probably just single-family homes, duplex, quadruplex, that sort of thing, but nothing like the flip and sell or 100 deals a year sort of thing.

Maybe just get five to 10 houses and live off that income. It's a hard question for me to answer because it's something I've struggled with so many times. I'll just tell you how I approach it, and it's a mixture of my answer as a financial advisor versus my answer as a person, as just Joshua, a friendly guy that you can have a drink with, and there's a difference between those two.

One of the biggest financial regrets that I have is so heavily funding IRAs, Roth IRAs when I was younger. Now, simply because when I look in retrospect at what I could have done with the money if someone had given me a different path, it's hard for me to see – I would be financially independent at this point if I had had a different plan.

And so in my mind it comes down to what your goals are. For me, my goal is financial independence, and when I look at the situation that we face today and I look at the mainstream investments that are offered in mainstream capital markets, I don't know what the future will hold.

I do know that we're facing a difficult headwind. I'm not convinced that the world is going to melt down and we're going to face just utter complete total financial collapse and all of a sudden the world is going to melt down. I'm not convinced of that. I'm also not convinced that companies are not governments.

So just because the US government's fiscal situation is a disaster doesn't necessarily mean that Apple can't make a lot of money along the way. But when I look at – on the whole, the capital markets, I'm at least convinced that we face a challenging time and one of the most – coming in the future.

Will the next decade be a massive bull market? I don't see it. Does that mean it's not something good to participate in? I don't think – I mean that's up to each individual person. Probably the biggest frustration that has happened though is I turned 18 and started investing in 2003 and today it's 2016.

And when I look at that time period, the S&P 500 has basically slid sideways depending on how you calculate it. And that's really frustrating because – and this is partly where, again, I'm just speaking as a person now, not as a financial advisor. What's really frustrating is to say I thought that this was going to lead me to be rich and then I turned 30 and I'm like, "Yeah, OK.

I'm doing better than most of my friends." But still, I thought I did things better than that. And that's frustrating because I guess maybe it's my age or maybe it's something. But it's like I want faster results. At this point, I view publicly traded securities – for me personally, I view them as, well, it might work for some money over the long term.

Just throw it away – throw it in there and see if it works. But I don't view it as anything that's actually going to lead me to become wealthy. And that was the conviction that I came to from – that was the conviction I came to over time. As I said, it's my own business activities and my own investment activities that are going to lead to my becoming wealthy.

And so I should be focusing on that. In retrospect, if I were to do it over again, I would not put any money into IRAs. I would not put any money into 401(k)s. I would have gone 100% the route of entrepreneurship and I would go 100% of that because having experienced the control that that gives me, the wealth that that can create, the wealth of lifestyle and the financial wealth, the rates of return, it is just so much more powerful than putting money aside for 40 years where I can't touch it.

Now, I can't give that advice to everybody, and this is where it has to be, okay, what is personal financial advice? If somebody has a career that they enjoy, a job that they really love, they're not going to – and they're just not going to make the time to spend time – they're not going to take the time to spend their evenings going and knocking on doors looking for rental houses.

I can't tell them that that's what they should do. Their best advice is to put money in a 401(k) and leave it alone for 30 or 40 years and enjoy their time and their career and with their family, but that's not me. So when I give advice, I have to answer, am I a financial advisor asking you about what's best for you or am I just Joshua saying, "Here's what I'm doing and here's why." At this point, if you get many – I spoke with – I've always felt a little bit bad about my opinion because it's so out of the – it's out of the orthodoxy of financial planning.

I'm on the fringes of the financial planning industry, but when I look at it, I recognize what makes financial planners rich and financial advisors rich is not how much money they have in their company's retirement plan. What makes them rich is the fact that they make a lot of money in their business.

And when I – I was speaking with one financial advisor privately who is a leader in – public leader in the industry. I asked him the question because I was kind of feeling bad about the fact. I said, "I don't know if I'm ever going to put money in an IRA or 401(k) again," and he said, "Joshua, I haven't invested in my tax-deferred retirement accounts in," I think he said, "a decade." And this is somebody who teaches all the ins and outs.

He said, "I haven't done it in a decade," and he says, "because I got too many other great opportunities for it." So I guess that's the jump. When I was younger, I could never figure out how to make that jump into the world of entrepreneurship. And so I just was working a job and putting my money in my retirement accounts.

But now I've got opportunities before me. I've got more opportunities than I can handle, and now I look at if I can execute, which is a big, big question. If I can execute, the rates of return are so astronomical and they just build and build and build that of what benefit is it to me to buy an index fund in my IRA?

It just isn't a benefit to me. So that's why it's so difficult to me on the show because you've got to ask, "What do I want?" And if people don't have a burning desire – I mean entrepreneurship is not for everybody. I see the value of it, but if people don't have a burning desire, they're not going to force them to push through the hard times, and they're better off just buying mutual funds.

Does that help? Joshua Bellett: Yeah, that answers my question. Thank you very much. I would at least – at this point, I would at least do a lot less, and I would recommend – I've tried to figure out what would be an ideal percentage of something. And if you were going to save – for me, if I were going to save 30% of my income or 40% of my income, I'd want to put maybe 10% into just cash in the bank.

That's my emergency fund type of thing, and that should grow over time. I'd put, I don't know, 10% into mutual funds as my, "Hey, if I screw up my whole business, then I have a backup plan, and then I'd put 20% into my entrepreneurial activities." But that's just kind of a mental model to say that the big return is going to come from business or from active investments, but you could screw it all up.

I could today completely torpedo myself, torpedo radical personal finance. That's why I want some rental properties in my portfolio because that gives me a fallback plan. So if I torpedo radical personal finance, I've still got a fallback plan, and I think every business owner needs the same thing. So it's not so much one versus another.

It's a matter of your goals and your stage of life in business. That's the best I got. If you come up with something better, let me know. I'll have you on the show to teach us how to think about it. All right, next question. Somebody had jumped in previously.

Hey, Joshua. John from Pittsburgh. A question about creating an income plan off of retirement accounts, well, a combination of retirement accounts and non-retirement accounts. We've spoken before in the past to get some ideas like the 72 key role, I think it was, in Roth conversion ladders. But other than those two, are there any other tools that I should be looking into?

The 72 key doesn't really appeal to me. I'm sure a portion of a Roth conversion ladder would be part of the plan. But are there any other additional ways to liberate qualified account money without paying penalties or limiting the penalties? And related to that, would you – I guess the answer is probably yes, but would you start your income plan with your non-qualified accounts and draw from those first?

So the assumption here is that you're pulling from your retirement accounts before age 59 and a half. And the reason I'm pointing that out is it's a very different answer to the question. If you are 59 and a half and older, you're not dealing with the tax consequences. You're dealing with how do I create a sustainable income stream for life.

If you're under the age of 59 and a half, then you've got to deal with this tax thing. So let's just stay focused on the tax thing. I only know a few ways, and you've listed them off. So number one is pull money from non-qualified accounts. That's rule number one.

Rule number two is to do a 72(t) distribution under the various options that you have under the 72(t) distribution. Idea three is to do the Roth conversion ladder, which is where you convert the money into a Roth, leave it there for five years to let it season for five years, and then you take out your principal contributions.

Or beyond that, you just take it out and pay the penalty and go. There's the limited exception if you're retiring from a job where you have a 401(k). You can take it at 55 instead of at 59 and a half. But essentially, those are the only ones that I know of, or at least I can think of off the top of my head without having prepared the outline.

Those are the only ones that work. This is why I've become much less bullish on retirement accounts than in the past is one of the features of retirement accounts is it's a deal with the devil. You give up some of the taxation, which is a major savings, but you also give up the control and you give up the use of the money.

And so those things – those are the only options that I can – that I know of right off the top of my head. Now, sometimes I think it might be okay just to take the money out early, especially in an early retiree scenario because if you actually calculate the 10% penalty tax, if you're a high-income household and you're working, working, working, which is kind of the scenario we're describing here, a high-income household working to save money, funding all these accounts, if you go through your actual cost of living, assuming that they're going to be lower, and if you have some income source from part-time employment, if you have some income source from non-qualified accounts, and then if you have to take $8,000 a year from a 401(k) to make up the difference but total your other sources of income are relatively low tax, then all you're going to basically be faced with is a 10% penalty.

So let's just run that example. Let's say that you're taking $10,000 from a non-qualified account. Well, that may be taxed at a low long-term capital gains rate, which depending on your earned income could possibly be zero. So you don't have a lot of income there from earned income. You're in a low tax bracket.

You could be taking Roth IRA contributions out, just doing distributions from a Roth IRA. So that's non-taxable income. You could have some – a part-time work, and if you have a part-time side business, then some of your expenses are being covered by that business, and so there's, I guess, a tax benefit from that business.

Well, now when you're taking out money from a 401(k), you're just going to pay your 10% penalty tax plus probably a pretty low income tax rate. So it could be much less than what you would have paid of taking the money out as a high-income high earner. So it could work.

Do you want to give any more specifics, John, or is that general enough of an answer for you? Yeah, that was a good answer, and I think it answered almost everything I was questioning. I guess at this point I'm at a point where I have a good amount of savings, but more than half of it is already in qualified accounts.

I'm wondering if continuing to – outside the conversation of entrepreneurship and building businesses externally, I'm just wondering about at this point, since I know my plan is to try to do something to retire early, would it be more beneficial at this point to stop funding the qualified accounts and get the tax benefit now if I know I'm going to be turning around to get a penalty later or having to jump through hoops to get it more penalized?

But overall, I'm glad to know that I'm aware of the tools available and there's not some missing way to do this that I'm just completely ignorant of. One of the ideas that you could possibly use that could help you would be run a calculation of what your portfolio will be worth under the current balances with whatever you estimate your investments to return at your age 65.

So what I mean is let's say that I'm talking with somebody who is a 45-year-old person who's wanting to retire early, and they've got $500,000 in their 401(k), and they're saying, "Well, I could keep funding this 401(k) or in a few years I'm going to be 50, and I really want to diminish my savings in this account so I can do something else over here that's going to be a little bit more flexible to fund my early retirement bridge." Well, most people don't ever sit down and calculate how much their portfolio could be worth.

Let me make it a little more extreme. Let's say instead of the person's 45, let's just move them up to 35, and so they're having the same discussion. Well, $500,000, so $500,000 present value at 35, fast forward 30 years, and let's use an 8% return with no further contributions.

Oops, I hit the wrong button. Okay, $500,000 present value, 30 years for our N, 8% for our I, zero for our payments. Our future value at age 65 is $5 million. So that's a huge number, which let me just do it again to make sure I didn't mess it up because that seems unusually high to me.

$500,000, 30 years, 8%, zero payments, future value, $5 million. Okay, so that 35-year-old who has $500,000 in their account, if they're sitting there and looking at that portfolio and saying, "Man, I can't live on a 4% rule of this. $500,000, 4% is only $20,000 a year. I can't live on this," but if you flip it and you say, "Well, if this money just sits here and grows for the next 30 years and for the next five years, I'm going to take all the money that I was putting in that 401(k) and use that to build the business, at the end of the day, I've got $5 million at age 65." And so I think this type of approach – and then for the earlier question from – I think it was Matthew who was talking about the TSP.

This type of approach I think can be a good way to solve that question. Okay, I've invested a few hundred thousand dollars here. This is going to be fine, conservative assumptions, assuming normal market conditions. This account will grow to be a few million bucks. I've got enough money there.

Now, can I divert my money in some other way that's going to really be more efficient for me or something like that? $5 million is probably enough in your account at 65, especially if you are an early retiree. So that would be my answer to you. All right, next question.

Hey, Joshua. This is Matthew again. I'm going to just ask another question. We had a little bit of dead air there. And I guess my concept is on the Facebook group, there's been a concept thrown around, the bank on yourself concept has been thrown around here lately. And I'm curious if you wouldn't mind to just give a brief description of what that concept is.

Sure, sure. So I'm the one who put that out there because I am doing a research project. So let me explain. There are two major brand marketing names. One is called Infinite Banking and the other is called Bank on Yourself. And the idea here is it's a marketing term for the use of whole life insurance policies as an investment plan.

The most popular publicized one is Bank on Yourself, which was a term that was coined by a lady named Pamela Yellen. She wrote a book. It's had a couple of versions and a couple of editions. Probably the more original – I'm not sure all the timeline, but Infinite Banking was a term coined by a man named Nelson Nash.

The idea is this. Instead of or in addition to investing in other types of investments, 401(k)s, if you purchase large whole life insurance policies, you can use those policies through the use of cash values and cash distributions and cash value loans. You can use those policies to fund the things in your life and so you can use it as a financing mechanism.

Lots of people are very negative on the use of whole life insurance for investment purposes, for cash value accumulation, and there are lots of good reasons for that. Most whole life insurance policies underperform. Most of them are very expensive internally by companies that don't do a good job with their insurance costs.

Most of the policies are poorly designed, and so they just don't – they don't generate very impressive rates of return on your cash value, a couple or 3%. The good thing is that Pamela Yellen's advice – she's built a whole organization around it. She's encouraging people to use policies that are properly structured.

So they're using traditional whole life policies from mutual insurance companies. That's an important point, mutual insurance company versus a stock insurance company. In general, all things being equal, the whole life insurance policy by a mutual insurance company will always outperform the whole life insurance policy by a stock company because the dividend and profits that are usually sent to stockholders in a stock life insurance company are credited to the whole life insurance policy from a mutual company.

So if everything else is equal, in general, a policy with a mutual company will outperform. The next thing is she's using policies that are designed for cash value accumulation. So these policies are what in the industry they call overfunded, and they have large amounts of what are called paid-up additions or additional cash values.

This is extra money that you put into the policy beyond the basic premiums, which all the extra money bypasses the insurance costs, which are the downside of an insurance policy. You have to always cover the cost of life insurance, and this extra money goes straight to the cash value.

So this improves the rates of return. So I decided – I've generally – my position on whole life insurance, I've sold whole life insurance. I own whole life insurance. I see it as a useful tool for some amount of what I call my longer-term safer dollars. So the money that I have in my family's whole life insurance policies is part of just the backup of backup plans.

It's not subject to market risk. It's very, very safe. It's very, very efficient. I use – it's never going to make me rich. It's never just going to have a huge rate of return. I view it as some of my last resorts. I expect probably – who knows where it will be, but I expect 4 or 5 percent annual rates of return on the policies over the course of my lifetime.

My hope is that I never use the money from them. I just leave them as life insurance policies for my family. I also view them as part of my emergency funds. So because the policies are very, very liquid, generally with most whole life insurance companies, in about 24 hours, you can get the money out of the policy through a bank transfer.

Legally, the companies are not obligated to give it to you that fast. Legally, I think it's six months is what is required. So depending on whether we're going to do technical financial planner speak, the answer is life insurance cash values are not liquid. They're not a cash equivalent. That's technical financial speak because of that way the contracts are written.

However, in practicality, when I've taken loans against life insurance policies in the past, I can get the money in 24 hours. So I view – I use them as part of my emergency funds. It allows me to keep cash that I want to have if I needed an emergency.

It allows me to keep it there. It's growing without current taxation, and it's growing at a decent rate, but it's going to be there. If I have a deal, I see a car that's for sale and it's way below value or I wind up in a bind and I just need short-term temporary money, that's what it's for.

Now, the key – so I own whole life insurance policies. I've sold them. I've always sold them carefully, and I've generally stayed away from the overly hyped approach. What I despise about the life insurance discussion is people sell it as an alternative to other investments. And the war is usually between, well, how is the stock market going to do versus life insurance?

And this war goes back decades, but people always make these comparisons. I view the comparison of a whole life insurance policy to a stock market as an unacceptable comparison. They do not have the same risk characteristics. They don't have the same return characteristics. They are very different asset classes, and I think personally there's a place for both depending on your financial plan.

So I decided, however – so I've generally been negative in the past on Bank On Yourself because they're very aggressive at using policies as the number one tool of wealth accumulation. And they're very aggressive about promising to use the policies for things – for not only life insurance but also for retirement and also to fund other things.

So fund purchases such as buying a car, things like that. Personally, my opinion is that's an inappropriate plan for the use of life insurance. However, I decided to take – I had lots of people asking me about it including a family member saying, "Joshua, please go and look into it." So I ordered 13 books on the subject.

I ordered every popular book I could find that's written on this strategy, and I'm in the process of reading them all and just searching for it. I started with Bank On Yourself, and the next time I'm going to read Infinite Banking and finish them all out and just try to flesh it out and to really understand.

There's one thing that I have always struggled with, and it's basically the key point in the discussion, and I will get an answer before I do the show on it. But the question that you have is essentially can you double dip on the money that's in a life insurance policy or not?

So usually when you take money out of a life insurance policy – so let's say I have $100,000 of cash value in a life insurance policy that's growing based upon the dividend crediting rate of the company with whom I own the policy. Now, what if I want to take $50,000 out and invest that in a piece of real estate?

Now, I'm going to be paying interest on the money into my life insurance policy, but the question is do I continue to receive dividends on the money and can I invest the money on the side and get my investment return there? That's what the argument is usually presented is with the companies that the Bank on Yourself and Infinite Banking people use is they talk about – I forget the – I'm blanking on the technical term just right here on the phone, but about the dividend crediting process.

But personally, I think it's a little misleading, so I'm going to get some actuaries on the phone, see if I can interview one of them for the show is my intent, and really dig to the bottom of it because it's something that is very complicated. I struggle to get it myself, and so I want to dig to the bottom of it before I present it on the show.

But that was where the conversation came from. Generally, my opinion, I am not interested in using life insurance policies as my own personal bank. I could be wrong. If I'm wrong, if I change my opinion after reading all these books, I'll let you know. But I do like to have it as one of my assets for those longer-term, safer dollars.

Does that help, Matthew? Matthew T. Leke (00:36:40): Yes, it does. Thank you very much, Joshua. All right. I'll take one more question if somebody would like to ask one more question. Mark Fischer (00:36:56): Hey, Joshua. I've got a question. Go ahead. Tell me your name and where you're calling from, please.

This is Mark from Grand Rapids, Michigan. Okay. Go ahead, Mark. Mark Fischer (00:37:17): My wife and I are currently about three to four years from financial independence. We're both currently employed, and we just started a new business that we're hoping in the next three to five years could start to provide most or all of our daily living expenses.

We've also got an investment portfolio that we obviously have been contributing to since we started working, and it's currently about 80% stock, 20% bond. And we settled on that allocation before we had started the business or anything. That was just kind of after doing a bunch of reading and going to the Boglehead forums and stuff like that, that's kind of what we settled on.

So our intention is that hopefully in the next three to four years, we can switch to just working on the business and leaving full-time employment, just working on the business and then letting the investment portfolio grow. My question is on the bonds. I've been thinking about dumping the bonds and just after listening to some more podcasts, listening to some more people talk who have done their early financial independence thing, is that maybe we don't want to have any bonds in our portfolio, that we would just want to leave it, especially if we don't think we're going to need to start drawing on it right away, just leave it in stocks.

And I know you don't really have the same investment philosophy in terms of having the marketable securities being such a high percentage of your net worth, but I just want to get your thoughts on that. We also may want to start adding some real estate investment down the road as well.

So I thought it would be between the business and the real estate that could give us enough diversification away from stocks that maybe we don't need the bonds. But I just wanted to throw that out there and get your thoughts on that. Yeah, and I can easily give you my – just because – go ahead and mute yourself, please, Matthew.

I can easily give you my financial planner answer to that question. And I certainly – just because my personal investment philosophy has changed, I have no problem answering the question. In general, I think one of the biggest mistakes investors make is transitioning their portfolios to be too heavy in bonds as compared to stocks.

However, nobody would say that an 80/20 allocation is somehow a conservative portfolio. That is a very aggressive portfolio allocation. If you look at what you're trying to accomplish and you look at the academic data, I think you've got to filter it a little bit. So most of the academic studies on portfolio allocation are – most of that stuff is based upon funding everything from your portfolio.

So if you imagine the situation, traditional 65-year-old retirement, you're retiring. You've got a million dollars in a portfolio, and you're going to live on this portfolio for the rest of your life and just have that portfolio income. Having an all-stock portfolio would be very, very volatile. It would have lots and lots of ups and downs.

And so that volatility is something that most investors can't handle. They can't handle it financially in that if your portfolio is down by 40% or 50%, where are you going to get the money to pay your light bill? So they can't handle it financially, and they also can't handle it emotionally.

Most people are not emotionally equipped to handle wild fluctuations in the value of their investment portfolio. The data proves it. Our own personal experiences prove it. Just ask yourself, how are you reacting to the market swings here of late 2015, early 2016? That will tell you a lot about your emotional stability.

So because of that, the advice is we need a more balanced portfolio. And what bonds in a portfolio do simplistically is they smooth the returns. They give you current income. They smooth the volatility out. But they also eat up your return. So for me, when I had diversified portfolios, my philosophy was I didn't own any bonds, 100% stock, because I was dealing with a portfolio that's for retirement, not for current income, for retirement.

And when you're looking at a 40-year time horizon to retirement, I'm looking at this and saying, number one, it's locked in a retirement account. I'm not going to use it. Number two, for me, I have a high degree of emotional confidence in the face of stock market fluctuations. I get excited when they go down, and I say, well, can I buy?

I don't get freaked out about it. I've done my homework. I know that I should expect on average about a 14% every year decline in the indexes. I know I should expect somewhere around a 30% decline every three years. And I know about every decade or two, there's going to be a 50% decline in the market.

So because I know that, I'm going to operate with that as my emotional base. I'm not going to freak out because the Dow is down a few hundred points. So I can handle the emotional volatility. And when I look at the impact of an extra 50 or 100 basis points over a 40-year horizon, I personally, I like the extra money.

So I've always geared my own investments as aggressively to stocks as I possibly could. There's not that much of a difference, though, in returns to 80/20. And here's where I'd have to refer you to your portfolio manager, and you'd have to talk to them. This is a relatively easy thing to run.

You can run the standard deviation on these portfolios. Talk to whoever is involved with your portfolio. If you're managing it yourself, you can pull the data and just read the prospectus and dig into the standard deviation, dig into the volatility. You can dig into the ratios of the portfolio, and you can see if you are acceptable.

What I think is an easier thing to do, what I find easier is I think financial planning is a tool that can go in the face of portfolio management. So for me, I would rather have an extra $100,000 of cash in the bank and an all-stock portfolio than an 80/20 analysis and less cash in the bank.

And what I'm trying to do for me is use financial planning, use capital location as a way to solve that problem. I want the highest return from that portfolio, but I'm going to make sure that I'm not risking my current emergency fund and my current eating expenses and things like that or my current business reserves for that goal.

So if you needed any of this money for business, I'd pull it out in cash. I wouldn't keep it in bonds. I would keep it aside in the cash account, however much you need to start the business. If you need money for emergency fund, for me, I would put it into cash.

And that to me is how I feel more comfortable handling it, keeping the balance of the portfolio as aggressive as possible. I couldn't give you – that's the limit of the specificity that I should go to in this type of financial discussion. That's how I've approached it and those are my opinions.

Beyond that, I just say look at some of the investment statements and the portfolio management tools and you'll be able to see the answer. Is that helpful? Yeah, very much. Thanks, Joshua. Cool. All right, I'm going to close us off there today for the questions. Thank you all for calling in.

I've enjoyed just interacting with you guys. I'd be happy – I intend to do these regularly going forward as my goal and to release them as a Friday Q&A show. I really like the interaction back and forth. I hope you do too. So check back next time and happy to have everyone on the call.

I thank you guys for calling in and you can expect to hear these questions go out on the show tomorrow. Just dream about paradise. Live it with Fiji Airways. Escape the ordinary with Fiji Airways Global Beat the Rush Sale. Immerse yourself in white sandy beaches or dive deep into coral reefs.

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