It's Friday and here at Radical Personal Finance, that means Q&A. (upbeat music) Welcome to the Radical Personal Finance podcast. My name is Joshua Sheets and I'm your host. Thank you for being with me. This is a show that's dedicated to providing you with the knowledge, skills, insight, and encouragement that you need to live a rich and meaningful life now while building a plan for financial freedom in 10 years or less.

And today on Friday, we do Q&A. You ask questions, I do my best to give you good advice. (upbeat music) These Friday call-in shows are done as a live conference phone line. I show up, I ask who's there, and then we see what we talk about. And then I release them as a podcast episode.

If you would like to have your question or comment featured in a show like this, feel free to call in. First, if you are a patron at a certain level, make sure that you are keeping an eye on the Patreon page. You can find that at radicalpersonalfinance.com/patron. And if you're not a patron of the show, this is one of the benefits that you get for becoming a patron.

You can become a patron at radicalpersonalfinance.com/patron. I've worked hard to try to keep this show listener-supported and grassroots to the biggest extent possible. But I've also tried to work it and figure out what are some of the benefits that I could offer that fit in well with the show.

And I decided access to a Q&A call was one of the best solutions. So I would urge you, if you would like to have your call featured in a show like this, become a patron of the show at radicalpersonalfinance.com/patron. Welcome to the Q&A call. John, go ahead. How can I serve you today?

- First off, thank you very much, Joshua. I appreciate your time. So the first question I wanted to throw at you was a question about taxable deductions. And in particular, the way in which we think about tax rates as being marginal tax rates and effective tax rates. But I don't think we necessarily approach tax deductions in the same way.

And specifically, to put it into context, so married, filing, jointly, standard tax deduction of $12,600. When we talk about things like the home mortgage interest deduction, and people use the phrase as to, well, that's a tax deduction, save 25 cents on the dollar if you're in the 25% tax bracket.

Albeit there is some truth to that, depending on how you approach it from a math standpoint. That $12,600 standard deduction is a big step to overcome in terms of really getting any effective benefit from further tax deductions, as opposed to considering it from a marginal perspective. So I wanted to engage you in dialogue on that.

- Yeah, I think you're absolutely right. It's the home mortgage interest deduction, I think is one of the most oversold deductions. Most people who have a house and who have a mortgage on it are quite happy with the fact that they have a mortgage because they are confident they can deduct the interest.

But in practice, I think many fewer of them actually deduct the interest than they think. I can't pull the statistics to mind right off the top of my head, but many more people even who have a mortgage will simply use the standard deduction than the itemized mortgage interest deduction.

It would be an interesting thing, I haven't done this recently, I did it in the past, but it's good to sit down and just calculate how big of a mortgage and what the interest rate would have to be on a certain size mortgage in order to have simply the mortgage interest deduction exceed the standard deduction.

I think for many families who are buying modest houses, and especially in today's relatively low interest rate environment, where the actual interest paid on mortgages is somewhat modest, and also as you move through the amortization schedule of a mortgage and the actual interest that you're paid starts to decrease, I think many people find that the standard deduction is often in excess of the mortgage interest deduction.

So I think your point is absolutely correct. We should pay attention to that and say, is this actually, I'm not sure what words we would use, but what's the marginal rate of this versus not? So I fully agree with your point. - So how do you think people approaching home ownership should take that into account, and/or what mindset should they approach that with?

- Well, I think the best thing to do is to calculate the total cost, and most people don't do that. Hopefully listeners of this show have become a little bit more sophisticated so that they are actually calculating the total cost. But for example, if you look at the average principal, interest, taxes, and insurance payment, the taxes and insurance are usually a hefty amount.

Most people don't take those into account as a pure cost. Then when you move to the interest, that also can be a hefty amount, and that also has to be taken into account as a pure cost. Your payment is not allowing you to build equity. So I think the best way to handle it is to unbundle it, unbundle the PITI payment, calculate what your actual principal deductions would be under a certain course of action, calculate the interest, and take a guess as to whether you'll be able to deduct it or not, and then calculate the other costs in.

That's the best I've got, is just to simply actually look at the real numbers for a specific situation, and then to pay attention and be aware of the fact that as you said, the standard deduction is a sizable amount, and most people would need substantial itemized deductions in order to exceed it.

Now, it's possible you might have other itemized deductions that are in addition to the mortgage interest, so you have to look at an individual situation. But just by breaking the numbers out and taking a look at it, you can make an accurate assessment. And then taking into account those other itemized deductions, whether it be charitable gifts or state or local taxes, that also raises the question as to, well, which one are you wanting to credit that I'm getting that marginal rate back on?

I'm getting that 25 cents on my dollar. But hopefully for many people who are making charitable gifts they aren't doing that out of pure motivation. - Right, right. Yeah, I don't know how we would apply a formula to it. Your point is a good one, that we often treat the actual mechanics of it a little bit clumsier.

We're good at talking about marginal and effective rates, but when it comes to actually the deduction, we kind of lump it all together. But because it's almost a cliff, it's almost a cliff where until you exceed that amount of itemized deductions, you get zero benefit, and then you get the full benefit at the marginal rate.

I'm not sure how to talk about it. I'll put that one into the back of my mind and invite any listeners who can come up with a better term. Maybe we can coin here, maybe on the show here, we can coin a new way to refer to it to demonstrate the case.

So you have more to say on that topic, John, or did you have another question? You said that was the first thing you wanted to talk about. - So it's changing gears a little bit, but still on the topic of taxes. I thought you might find it interesting of the experience which I had over the past few months of volunteering, doing low-income tax preparation work for folks in the Washington DC area through a local community organization.

It was something that I was first introduced to as an opportunity through an announcement at my church. And the person making the announcement made a note that in a way doing tax preparation work for low-income personnel was more complicated than middle-income taxes, which I did find to be partially true.

Just the way the credits work, the complexity of filing for some of those credits. But it was a really rewarding opportunity over the February to April timeframe of giving up a few hours on Saturday mornings to go do that volunteer work. - What was the two questions I'd love to hear from you?

Number one, in working with the low-income population that you were serving, what did you find to be their general knowledge of even just the way the taxes work? Did you find them to be not at all knowledgeable, somewhat knowledgeable, very knowledgeable? What were your impressions? - Generally, I found them to be not very knowledgeable, though some had benchmarks as to what they were expecting relative to their tax returns from last year.

I did have one person who, after we worked through his taxes, and then me being a volunteer, then had a more experienced reviewer check over the taxes. And when, after that was complete, we talked about what his returns were gonna be. He said that that wasn't enough, and he didn't want us to file his taxes.

And he was gonna go off and consult H&R Block to try to achieve a higher tax return. So there was some experience as to, relative to what they knew before. And there was also some opportunities for people just learning pieces of information and/or hearing something. And one of the really rewarding stories was an elderly woman who received a mailing.

I think it may have been through, that she received a mailing in a, mentioned about the Washington, D.C. property tax credit. And she had actually paid a accountant in Georgia to complete her federal and state tax returns. So she had already filed, but she received this mailing. And she consulted with us as to whether or not she may be eligible for some additional returns.

And through the 2014, 2015 taxes, filing an amended return, she was able to get back nearly $2,500 over those two years, predominantly for two things. One was the D.C. property tax credit, which is a credit for low-income folks, whether they be homeowners paying property taxes directly, or even renters in a calculation that is done as to a portion of their rental payment that would be equivalent of property taxes.

And then second, the accountant failed to take into account her age and having the higher standard deduction for being elderly. So that was a pretty neat story that she was able to get that additional refund back. And we were able to help her in that regard. - That's really encouraging.

- Not too much broad level of knowledge, but just some benchmarking. Some people came in with their previous year's tax return, some which were filed there at that same local volunteer site. - That's awesome, and that's encouraging when you can help situations like that lady you referred to. I mean, $2,500 can be very impactful for her to be able to do certain things that would be important to her.

Do you recommend this to other people as far as it seems like it was a fulfilling area of volunteer service for you? Do you recommend it? And what type of training did you receive or would other listeners receive if they were to participate in this type of program? - I would recommend it.

And I know other listeners of your show have the same interest as I do. Something like the tax preparation work is something we just find interesting to spend some time doing. So the fact that other listeners like me probably spend some time ourselves familiarizing ourselves and doing our own work, the ability to take those skills and help others is very rewarding.

And I also found the clients that I worked with to be relatively patient and also gracious and thankful for the work that we did. Even when at certain times it did take a little bit long to work through the process. As I mentioned, one of the steps was having a reviewer come and check over my work.

I was impressed at how patient and thankful most everyone was. In terms of the training, there was a organized training that I went to a local class and had three different training sessions to go through. One was a sort of introduction and overview of the tax code and talking about some of the detailed nuances such as their earned income credit, child tax credit, understanding some of those scenarios that apply in that regard.

Then the second training session had to do with familiarizing ourselves with the software that was used. It wasn't like what you think of as a online walkthrough questions type software. It was more interfacing with the forms directly. Now, numbers would carry over, calculations would be done, but sometimes you have to know where to navigate in order to enter the information, link to different forms and make sure things were falling into the proper places.

So there was the course that introduced you to that. And then the third course was actually going through the IRS exam. So the IRS has a exam where few of them were like short answer situation and questions. And then a few were preparing notional tax returns. And then a few questions from the tax return that you prepared to answer.

There was also a little bit of home study in terms of a conduct and ethics course, just navigate through that and answer a few questions at home. So relatively speaking, on one hand, it didn't seem like all that much. So it wasn't a very extensive time commitment, but then there was also some on the job training, of course.

And that's where the more experienced folks, including the reviewers and the site coordinator, who I worked under, were very helpful in addressing specific situations. - That's awesome. Thanks for sharing that with us, John. And I encourage other listeners to check it out. It could be helpful to others. Let's go on here.

I've got a Missouri phone number on my screen here. Welcome to the call. Introduce yourself, please. And let me know how I can serve you today. - Oh, hi, Josh, this is Kishon. I was just checking in to see if you, I know you talked about this in a prior podcast about the infinite banking concept.

You know, my ultimate thing is I wanna know what to do with some of my emergency cash and reserves, you know, the three to six months of cash I like to keep on hand, just in case of job issues and things to that such. And the infinite banking concept was introduced to me by one of my friends who's a life insurance agent and wanted to see your thoughts.

And if you think that's a viable option, or would you go with something different like a CD ladder or using the home equity line to store that cash now in this negative carry environment? - Yeah, I'm comfortable with it. I've promised it on the show in the past and I haven't released my reviews of the books on it.

I still intend to do it. I'm just a little intimidated by how to give it an accurate assessment. There are so many nuances and caveats and disclaimers that in many ways, it's difficult to navigate. 'Cause I am not comfortable with a wholehearted endorsement of the concept, nor am I comfortable with a wholehearted denial of the concept.

I think that either of those extremes is in my best present understanding, inaccurate. So rather than my talking in detail about the infinite banking concept in general, and for those listeners who aren't aware of it, to put it simply, the idea is by using a properly structured cash value rich permanent life insurance policy, you can avoid some taxation, enjoy a steady increase in the values of the contract and use it for various purchases and things that you would desire to do.

So that's the basic of the infinite banking concept. Let me just stick to the question you said that you're asking about emergency fund cash. I think that a well-designed, properly funded whole life insurance policy can be a good option for some of your emergency fund cash. Now, I wouldn't, you mentioned three to six months of expenses.

Let's say that, let's just stick with an example of a median household income. So around 45, 50,000 bucks. Let's assume that a family is spending about $4,000 a month, 48,000 a year. So let's say monthly expenses are $4,000 a month. So with three to six months of expenses, we're talking about somebody having a target of saving in this scenario, 12 to $24,000.

I would not pursue a life insurance policy for the purpose of saving $12,000. I think there's little benefit to it. I think there's a lot more benefit to just simply having the cash at hand. So the way that I would do it, if I were saving for a median household income of that amount, I would try to save a few thousand bucks in physical cash in a safe place that I could get my hands on it.

And then I would just have a savings account funded with another five, 10,000 bucks. So 10 or $15,000 is, I don't see any reason to deal with the hassle of a life insurance policy because of some of the disadvantages, which I'll get to in a moment. In the case of just a small emergency of a few thousand dollars, I wouldn't wanna be going and being forced to take that first few thousand dollars in a life insurance policy.

Now, when you get beyond those basic numbers, and I don't have a hard and fast cutoff, maybe it's 10,000, maybe it's 15,000, maybe it's 20,000, I don't know. But when you get beyond that, that's where I would start to consider it. The key disadvantage of life insurance policy is that when you take a loan against the policy, which is the most cost-effective way to access the cash values for a short-term need, you need to continue making premium payments.

So the policy is able, if it's well-funded enough, it's able to make its premium payments out of its own cash values. But simply due to the fact that you've got this continual outlay of cash there that's needed, I wouldn't wanna pursue it for a small amount of money. What I think is a good perspective on it is for some of those other kind of deeper level savings, that is kind of the backup emergency fund type of approach.

The reason, the major benefit of a well-constructed, permanent cash value life insurance policy is the stability of the cash. It will grow steadily and slowly. So when people are trying to compare it, you gotta recognize it's gonna grow slowly. Perhaps your real rate of returns, your cash on cash rates of return will be somewhere in the, depending on the policy, two, three, four, 5% in that range.

So that's more attractive sometimes than other sources of stable cash, but it's not as attractive as investments. So I don't want all of my money subjected to market risk or to things that are gonna fluctuate. So I view cash value life insurance as kind of a component of that deeper level of savings.

So that's what I do with my permanent cash value life insurance policies. I have emergency funds, ready cash on hand, cash that could easily be accessed in case of car broke, et cetera, things like that. And then I just think of the cash value life insurance as some of just the deeper emergency funds.

I wouldn't see it as one versus another. If you can, for example, establish a home equity line of credit on your house with no cost or minimal cost to have access to it, that can be really useful. And you can use the life insurance cash value as a component of what you're doing.

Once you have the cash values in the policy, you can use them in a few ways. You can always take money out. You can take a loan against the policy, but you can also use it as collateral for another form of financing. This is one of the under discussed aspects of life insurance.

If you were going to look for a source of financing from a bank, sometimes you can go ahead and keep all of the money in your life insurance policy, but simply pledge it as collateral for another loan, as for a loan from a bank at a different interest rate.

And then you get the best of both worlds. The money continues to grow in the policy, and you are able to access cash on very favorable terms through the form of a loan from a bank. So there are some arbitrage opportunities. The major disadvantage of life insurance, and the final reason why I don't recommend it for the very short term savings, it just takes too long to get the money in there.

So let's say that you establish a policy. You need to keep-- because you're going to be funding a policy for probably at least a decade, more likely a decade and a half or two, even for an aggressively constructed contract. You need to have it as a small enough portion of your monthly income that you can commit to the payments with little fear of having to discontinue them.

Well, when you do that, it's going to take quite a while for the money to get built up into the policy. So hopefully, it's not going to take you a decade to save six months of expenses. So where I would recommend is start with just saving cash, building up an emergency fund.

Once that's done, if you need life insurance, if you value having whole life insurance, don't buy life insurance just for the cash value. You must also value and benefit from the life insurance. It's always predominantly is going to be life insurance first. With the benefits of cash value attached, then you can start funding one.

And it'll take a few years for it to be funded to the level where it's even substantial. Is that clear enough? Did I disagree with your insurance agent, or did I agree with them? Pretty much agree with them. Like I said, the IBC concept is sold by insurance agents.

And they do have very aggressive structures for some of these IUL plans, where they can get you a high cash value early on if you decrease your death benefit and decrease some associated fees with the riders and things like that. And they use the term "riders" to kind of help build that early cash value.

So I kind of went through some of the scenarios with them. And it does seem attractive for easy access to some cash value and the added death benefit. But like you said, it has a lot of caveats. And I have to investigate a little further. Here's where I have to let individual agents look at an individual situation and let individual people kind of deal with their own stuff.

This is not an appropriate plan for people who are novices at the financial market. There are a lot of ways to get hurt. And I think it can be useful for those who, I guess, have some experience and have done some research to be able to do it. But there are enough ways to get hurt.

You've got to be careful, and you've got to make sure you know what you're doing. A couple of key points on what you described. Yes, you can heavily fund a policy over a short period of time. In general, due to the modified endowment contract rules, you're almost always going to be funding a policy.

In order to retain the advantaged taxation, you're going to be funding a policy for at least seven years. And you're going to be funding it for two reasons. Number one, to fit those tax benefits. But also, if you get the ratio of insurance to premiums out of whack, it's not going to work from the basis of cash accumulation as well as it is if you have them more in line.

Let's say that you've got-- keep it simple just to illustrate the concept. Let's say you've got a million dollars of term riders on there, and you're just doing that so that you can fund the contract. You're paying for all that term insurance. And if it's unnecessary, if you don't need or want the term insurance, you're letting the expenses get out of whack on the policy.

So the policy should be designed appropriately. Now, it doesn't mean it can't be designed aggressively, where you're on a seven or 10-year plan to take it paid up, or however you're going to fund that individual contract. But it shouldn't be overly aggressive. Personally, when I used to design life insurance policies, I always liked somewhere in the 10 to 15-year period for accumulation.

I feel like that's a good amount of time. We're not necessarily planning on a 20- or 30-year plan. But 10 years is a good amount of time. And it would often work well in the contracts. But that's where the individual agent has to look at the situation, look at the contracts, look at the company, and make a decision from there.

So good question. All right, I got more time. John or Kishon, would either of you like to ask another question before I close the call? No, I'm good right now, Josh. Thank you. Great. John, anything to add? Sure, Josh. So I know that you've been on spring break over the last couple of weeks.

Can you tell us listeners a little bit more about how your spring break has gone and what we can expect here in the near future? Yeah, I was just-- I needed a break. And I haven't really taken a break in a while. And I was getting to the point where I was approaching where I could see burnout ahead if I didn't adjust something.

So I just decided to take some time off. The biggest challenge for me at this stage of radical personal finance has been to figure out, what am I doing, and how am I going to get it done? I know what I'm doing, but the challenges of getting it done have been really, really challenging.

And the business is kind of in that little dip where I need help, and I have to expand the help. But I'm the bottleneck in the process, my own skills and abilities. So I spent some time just thinking. And I didn't go anywhere, travel anywhere. I just stayed at home.

Also worked on some home projects that I had been ignoring. But I just tried to spend some time thinking and clarifying what am I actually trying to do, what's the vision for it. A lot of that was just even considering the format of the show. If I were-- I don't quite want to go into all the details of it, but just as far as my decisions and the balance, I'll talk about that stuff in the future.

But I had to give some serious thought to the way that I'm doing the show and what I'm actually doing it for, and how it's all going to work, what my monetization plans are, what are the products that I'm building and things, how am I going to get that stuff done.

So I have definitely settled into a much better approach to it. I have a clearer vision now after the fact. But I have plenty of work yet to do toward it. So I feel good. I've been able to adjust the way that I was doing some things, get a little bit more organized.

Launching a startup, I've never ridden a bull, but I've got to imagine that's kind of what it's like, where you're always kind of right on the edge of getting tossed off. And it's always a challenge, because what I often want to do is pull back and get organized and get efficient and get everything done.

I don't like having stuff undone. But with most entrepreneurial endeavors, if you do that, you lose your momentum and you lose the inertia. You lose what got you here. So I'm making progress, but it was a good chance to have a little break and figure out what the future looks like.

Still working on it. I don't have everything perfectly figured out, but I did settle some big questions in my mind. Good. I'm glad to hear that you had that time off and hope it was a rewarding time for you and your family. And thank you for what you continue to do for us.

Appreciate it. Gentlemen, thank you for calling in. I appreciate hearing from you.