Today on Radical Personal Finance, it's Friday. That means live Q&A. Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now while building a plan for financial freedom in 10 years or less.

My name is Joshua Sheets and I'm your host. On Fridays, whenever I'm able to do it, we're a couple of weeks behind here, I do a live Q&A where I show up to a phone line and patrons of the show call in and ask their questions. I know the topics that are coming, but I don't know the specifics.

So together, let's find out what they are and see if I can provide some useful ideas. If you'd like to do Q&A, I've always loved this format of radio. I always enjoy hearing individual people and the problems that they're facing and I figured out a way to do it and bring it to Radical Personal Finance without necessarily setting up a phone screener and all of that.

We do it in the form of a conference call. So every week when I'm in town and I can sit down in front of my computer, we set up the conference line, I open it up, and these calls are open to patrons of the show at a certain patronage level.

If you're not a patron of the show, you can become a patron at radicalpersonalfinance.com/patron. You'll find all the details there and then that will enable you to have access to this call in line where you can call in and ask a question. So thank you to all of you who do support the show as a patron.

Again, details at radicalpersonalfinance.com/patron. Right now we've got three, oh, four, five. We've got five callers on the line. So we're going to start with the first few that I know and then we'll see where we go from there. We're going to kick it off with Chris in Minnesota. Go ahead, Chris, and let me know what your question is and let's see how I can serve you today.

Hey, Josh. I really appreciate these. I think these are an awesome way. I agree with him. I think these are an awesome way. I agree with you that radios need more caller participation. So my question is around defined contribution benefit plans for pensions. I work for a state government, which I'm sure you're not a big fan of, but I like it.

My question revolves around the, there are a lot of people who really don't like defined benefit pension plans because they lose a lot of their control over being able to decide how they invest their money, what they're going to get for payouts, those kinds of things. I was wondering whether you had any suggestions.

There's been talk about maybe allowing people to pull out of the defined benefit plan and invest in my 457 instead of a defined benefit plan. I was just wondering what advice you could give me on that. Are you asking the question because you have a specific decision that you need to make or just kind of generalized what are your thoughts on the subject in general?

I don't have a decision I need to make yet, but there has been talk in the Minnesota legislature of going ahead and removing the defined benefit plan and replacing it with a 401k style plan. It would allow us to either continue in our benefit plan as current, the people who are already in can be grandfathered and maintain it until its end, or I can roll over into a 457.

Okay. All right. Let me give you just a little bit of background and explain this for the listeners and then we'll cover your particular situation. The difference of these terms where we talk about a defined contribution versus a defined benefit plan is important and it indicates a difference of how the money is set aside.

So when we use the word pension, most people think of that word pension as meaning a steady stream of payments that's guaranteed by a government entity or by a large corporation. So the best example here would be payments that are similar to what we all understand social security payments to be.

When you retire and when you file for social security, you're going to receive a steady stream of payments coming in no matter what happens behind the scenes. You're not concerned with the balances in the account. You're not concerned with whether there's money there or not. You're just going to get a check.

Government employees are the most common ones who have these, whether it's someone like you who's an employee of a state government or whether it's someone like a firefighter or a police officer. We all know the benefits there. If you know a firefighter who retired at 55 years old and they got $5,500 a month coming in for the rest of their life, that's because they were enrolled in a pension plan.

Now the term pension plan should be used, if used accurately, to be both a defined contribution and a defined benefit plan. But in normal kind of non-financial planner speak, most people use the term pension plan to refer to that type of plan. That type of plan is called a defined benefit plan.

The reason is because what's defined is not how much money you put into it, but how much your benefit is, the defined benefit. That's why you can have a chart that says when you retire at the age of say 60 years old, you're going to receive 75% of your final year's salary.

There are some variations to that formula. But all defined benefit plans are calculated based upon the actual benefit amount that you're going to receive. Then they're funded, ideally, enough to achieve that benefit amount. Now that's contrasted with a defined contribution plan. And this would be what we would usually understand as the standard structure of something like a 401k plan.

There are many other types of plans, not just 401ks, but we're most familiar with this 401k type of plan. So under a defined contribution plan, you're not calculating how much the benefit is and the actual benefit is not being guaranteed. You're just simply have an amount that you can contribute.

So we know, okay, you can put $16,000 into your 401k plan. And then we don't know how much it's going to be in the future, but we're just guaranteeing that this amount is going to be put in. We're defining the contribution. We don't know what the benefit amount is going to be.

Now, historically, when companies provided pension plans for their employees, the majority of them used a defined benefit plan structure where they promised that when you retire, we'll pay you 60% of your final year's salary. And this worked out pretty well for the employees because most people are pretty bad investors and they're not going to receive much.

They're not going to make good investment decisions. They're not knowledgeable. They're not emotionally stable enough to make good investment decisions. And so under this circumstance, they didn't have to worry about it. They just know they're going to get their check and their only job is to figure out how to depend on the check.

This was also good because it kept professional investors in charge of the funds where the professional investment managers probably had enough expertise and knowledge to make good investment decisions and they were trained and there were mechanisms in force to help them to keep them from responding emotionally, not making bad decisions just simply because of a market up or down.

So these plans worked out really well for the retirees and they worked out well for the investment managers. What didn't work out well was for the companies who were sponsoring them because when you promise to pay a certain amount of benefit in the future, you have to fund that plan and the company has to set aside out of its money a certain amount to fund that plan.

And so the actuaries every year on these types of plans, the actuaries every year are sitting down and they're calculating how much money do we need in the pot in order to pay out these benefits to our retirees. So this put the companies on the hook. Well, once the cat got out of the bag with companies realizing that they could start to use the defined contribution plan, most popularly the 401k profit sharing plan which technically is a profit sharing plan where individuals can make their contributions to it, make your 401k contributions to it, then they realize the benefit.

The benefit is that the company is not on the hook to guarantee your retirement check. All they have to do is just write a check up front for the amount of their match and you're on the hook for it. Now people who are participating in the 401k plans often like these types of plans especially if you're a savvy investor.

It's possible that you could invest more aggressively. It's possible that you could invest more wisely and that you could come out on the other side with far more money. And they like the fact that they would have access to the money in the term of a lump sum instead of just you're going to get $6,000 a month.

I might have a million or $2 million in this account in theory. So it's very much a matter of competing priorities and it's a real question as far as what's better for me and how am I actually going to navigate it. Which brings us to today. One of the pressures that's on most large companies have done away with a defined benefit plan and they've transitioned over to a defined contribution plan.

You will sometimes see defined benefit plans. People more often see them as a form of executive compensation rather than for rank and file employees. The 401k type of plan has really swept across the marketplace and the companies really like it. If I were a business owner, I really would like having the 401k plan because I am not on the hook for future contributions.

But many governments have still been holding out and have still provided these defined benefit plans. And there are a couple of reasons for it. You could say, well, maybe they're more conservative. Maybe they feel this serves the interests of their participants. Maybe so. I don't know. Personally, I think that one major factor of this is that it's easier for politicians who have to face election to promise very strong retirement benefits and those retirement benefits to be in the future.

And depending on how the large investment markets are functioning at a certain time, they can get away with this or they cannot get away with this. And the idea here is that if I'm an elected politician and Chris is a state government employee, I know I've got to keep my state government employees happy.

I've got a limited amount of tax revenue and I've got to figure out how do I keep my employees happy, keep my union representatives happy without going over my budget. Well, if I promise a bigger retirement plan in the future, then I don't have to pay for that today and some future politician's got to deal with it.

No, by the way, we're in a strong period of strong market performance and so we can figure that our investment plans will probably get about 10 or 11 percent. We've got plenty of money. Our actuarial calculations are doing fine. And this is what has happened to a lot of governments where they – both local, municipal, state – I can't confidently say federal because I haven't researched that, but it very much impacts local, municipal and state governments where they've promised very large retirement packages.

And if you speak with many local and municipal and state government employees, you'll find that they're primarily interested in their retirement package. The pay today is not great but they really love the retirement package and one benefit that they love is this guaranteed payout. So the challenge, Chris – let's come back to your situation.

The challenge that anybody who is making this decision has to face is they have to look at their state's budget. Some states are financed well and these funds are capitalized well and there hasn't been all kinds of skullduggery behind the scenes where the promises have been too high. Rather, the funds are well capitalized.

They're in a good position and they're strong. Some states, it's exactly the opposite. Some cities, it's exactly the opposite. And your guarantee of a retirement program – of a retirement benefit is only as strong as the government entity and their taxing authorities' ability to deliver it. And so it's a major challenge to sort through because it's so broken up and each city is different than another and each county is different than another and each state is different than another.

So you've got to look at the specifics of your situation. So that's the background, Chris. Are you leaning towards one or another? Well, I guess my grandfather was always telling me about how wonderful a pension is because it's defined how much you're going to get and always get that and everybody who doesn't do that is dumb.

But he was not always the poster child for financial responsibility. So I guess all I really know is that the defined benefit sounds great, but because I'm so young, I'm 24, I could afford to take a few more risks. I could potentially earn more by being a little bit more risky now and have time to recoup if it doesn't go well.

It might make sense for me to pull out of the pension and go for the defined contribution if it becomes an option. I guess I'm not sure which way to lean. I would lean more towards the pension if I were a bit older, but because I'm not, I'm not sure whether I should look at the...

You took the next question was going to be how close you are to retirement. If you're 24, you're quite a ways from retirement, especially within the context of the pension plan. So a couple of things that I think would be your major factors that you would need to weigh in making this decision.

Number one, do you know anything about the health of your state's pension fund and how well funded it is? Yes, it is currently funded at 88% and they have a whole bunch of weird rules that indicate as soon as it gets up to, or as soon as it gets down to 85%, then the employer share goes up from the currently the employee and the employer both chip in 5.5%.

If it comes down to 85% funded, then the employer share goes up to 6.8%. And then if it drops all the way down to 75% funded, then the employee share comes up to 6.8% as well. The challenge with the funding things, and this is where you've got to look deeply at it, and I would search carefully to see if there's somebody who's carefully analyzing your pension program.

But I don't know all of the rules on how they report those ratings of how well funded it is. So does that mean when they say this is well funded, does that mean that they have this amount of money sitting in reserve assets, which are currently capable of doing that?

Or are they counting on future contributions? My guess would be that would be the first one, but I have very little confidence in people's willingness to disclose difficult facts. And the challenge for states and local municipal governments with regard to funding their pension obligations, the challenge they have that the federal government doesn't have, is that people find it very easy to move out of one tax jurisdiction into another.

So if things start to become a problem, then the situation starts to get bad, people will quickly move from one county to the next, one municipality to the next, one state to the next even. And so a lot of times, the assumption of revenue, the assumption of the tax base, the assumption of those things that's being calculated, starts to break down when you encounter population shifts.

I don't know how to give you advice on that without reviewing in detail your plan, and I think that would put me beyond where either I have the interest or the legal ability to do without going in a rough direction. But I would encourage you to dig deeply into your state and see.

At this point in time, I have, in the coming decades, especially given your age, in the coming decades, I think that the trend will be that many local municipalities and state governments will start to face more and more significant financial headwinds. When you look at some of the early warning signs of some of the different municipalities that have declared bankruptcy over the last couple of years, and you watch and you see what's gone on, you see the trend.

Now the problem with it is that I don't see any immediate fear. For example, people are often talking about, "Well, everything's going to collapse this year." No, that's not what happens. It happens over a period of time. It happens over decades and decades. But I don't see how, with the structure that many governments have brought onto themselves, I don't see how they can maintain it over time.

And so what will happen is, politically, the pensioners will get stiffed. And that's happened many, many times with all the municipalities. Many, many, it would be too strong of a statement. That's happened many times with the municipalities which have gone bankrupt over the last couple of years. So I would consider that and research it carefully.

And I would generally trend towards not trusting at first, but I would allow myself to be open if I could trust it. For example, when I was with Northwestern Mutual, I had a pension plan, a traditional defined benefit plan, and I dug into it. The company was very financially strong.

There was a long track record, and I really liked having that traditional defined benefit plan because I was confident in its funding and its performance. So I like the structure of a defined benefit plan if it's well-funded. But the question is, is it well-funded? The second thing that I would consider if I were you would be how long you intend to be at this employer.

A defined benefit plan usually has a relatively long vesting schedule. And in order for you to benefit from it, you're going to want to be there for a long time. And that's sometimes hard to predict. How confident are you that you've been at this employer for a long time and you're going to be there for a long time?

Pretty confident or less confident? Reasonably confident. My employer has a different style of vesting structure where after five years, you are eligible to receive your full benefit, but then they prorate the benefit based off of your years of service as opposed to a 25%, 50% sort of thing. It's a 1.7% for every year of service.

And so after five years, I'm eligible for the full benefit I can achieve, but it is variant based off of how long I stay here. But I also really like what I'm doing. I'm trying to reduce regulation and improve our government's ability to actually function without being strapped for money and all the rest.

I increase efficiency. I think it's a good mission. And so I like being here. I think I might be here for a good while longer. Well, if you can survive, I hope you can and I hope you can do the work. If you're going to be there for a long time and if your plan is well-funded, I think they're really, really strong.

I love doing retirement planning for a couple where they have a defined benefit plan of some kind to rely on because it solves that major problem of having a floor under your income and it helps you to be more aggressive in other areas of investing. When I used to work with clients, I would always use this example when it came to retirement planning.

Remember 2008? And I said, "Remember that and think of your friends." Everyone has a friend where one of the person where the husband is a retired firefighter and the wife is a retired teacher and they're living just on their pension income, their defined benefit income. How nervous or uncomfortable were they in 2008?

Not very. Way less nervous and uncomfortable than the retired executive where all of his money was sitting in a 401k and he's sitting there looking at his stock values and saying, "What am I going to do?" So that confidence that you can have when you have a guaranteed number is really powerful in planning and I think it should be given some priority.

That doesn't mean that you can't additionally invest to get what you're hoping for to be higher returns from another place. So given the facts that you have described to me, I would investigate the health of it and I would probably lean toward pursuing it myself and I would lean away from investing in the 401k at least if my choice was either/or.

I think you're a good candidate for the defined benefit plan if you can verify and keep your eyes on those factors. All right, next let's go to Rocky. How can I serve you today? Hey, Joshua. Thanks for taking my question. Today my question is more of a behavior question versus tactical.

As I talk to people who achieve financial success and that just means that they've been able to build up a decent retirement account and I read books, it seems to come down to two simple principles. One is spend less than you earn and the second principle is take that amount that you've saved and invest it, save it, do something to make it grow.

Every time I sit down and I talk to these guys, they all say the same thing. It's these two simple things and then we scratch our heads and we have this one big question I have never been able to find the answer to. Why don't more people just do those two simple steps?

So that's my question for you. What do you think? What's your opinion on the subject? You know, I think it's probably two things. One, I don't know that everyone is taught that and two, there's no money in delivering that message. So you know, the auto dealer is not going to deliver it.

The guy, you know, selling stuff at Walmart is not going to deliver it. Your boss doesn't want you to retire. He wants you to keep working for him. So I think people in general are probably or people just want more and then they have to balance. So there's no money in selling that message to people for the most part except maybe for the financial planner.

If I could answer that question, I could probably get rich off of answering that question. So because you're right, it is the fundamental. I'm looking for your answer. There we go. All right. Well, I'll give you some ideas and these are probably more speculative. I haven't done a PhD dissertation on it.

But when you look at people in my informal survey of stories that I've read and people that I've talked to, I think one of the strongest influences behind whether or not somebody will put into practice those simple routines is their example, either the positive example or the negative example.

So we know for whatever reason that in general society's wealth, wealth distribution, income distribution is going to be generally governed by the Pareto principle. 20% of the population is going to own 80% of the wealth. 20% of the population is going to earn 80% of the income. 80% of the population is going to earn 20% of the wealth.

I don't know why that is. I've never read a satisfactory explanation of why the Pareto principle seems to hold so consistent, but it seems to be consistent in just about anywhere under just about any system. So if you recognize that, that means that 80% of the population is only holding 20% of the wealth and is only holding 20% of the income.

That means that 80% of the population is seeing a negative example. Only about 20% of the population is seeing a positive example. And then the higher you go in the numbers, the Pareto holds true at every distribution of income and wealth. The top 20% of the top 20%, so that would be the top 4%, own 80% of the top 80% of income.

So that's where you get into that 64%. And you can follow these distributions along. So what that means is that very few people are going to have a positive example. And many times when you talk to people who are wealthy, they'll trace back to a positive example in their life.

Usually, hopefully a parent, because mom and dad are the parents who have the most influence in their children's life. But sometimes it's also an uncle or it's a grandfather or it's a business person in the community or somebody else that they looked up to and somebody who took a mentor role.

If somebody is given a positive example, I think that can make a big difference. You also see the strong negative example, where many times you're speaking with somebody and they had just this strong negative example from their family. We were so broke, we couldn't afford any food. And I said, "That's it.

We're not going to do this again. I'm going to learn what I need to learn." But most people aren't in those extremes. They don't have that strong positive example and they don't have that strong negative example, or at least they're not able to respond to the negative example by completely changing something.

So most people just kind of are lackadaisical. They continue on the way that they've mostly continued on. And when you recognize that the majority of people are going to continue on in kind of a mediocre way, it means that the majority of the population continues on in a mediocre way.

It's not that the majority of the population is completely poor, at least not in the United States, and it's not that they're completely rich. They're just kind of average. And that's what you see with many people is when they've got to come up with some money to pay a bill, they come up with the money to pay the bill.

When they've got to get something done, they get something done. But they're not proactive about changing that. So the first thing I think is the power of example, which is why it's so important for us to be a clear example and to be vocal about our example for our children, for our community, for the people that are around us.

Number two is training. So when you get to the topic of proactive training, there's strong evidence to say that if you can train somebody diligently, you can help to change their behavior over time. But that requires something that's even additional to example, and it requires training. So when I work with a family, I'm working with a family right now that's in a crisis, just a local family here in my community, and they're in a financial crisis, training is tough.

And walking them through all the basics, step by step by step by step, it requires hours of my time and a tremendous amount of emotional energy. So few people are going to provide that training, but that training is what is needed. I think one of the challenges is that we constantly face the opposite training, and there are some social influences that are constantly working on us.

So advertising would be an excellent one. I've dug into a little bit of the subject. There's some good books written on the amount of advertising that our children see from a young age. It's relentless. And the advertisers are very intelligent about it to specifically target our children from a very young age with specific brands, with specific messages, with advertising content that's specifically tailored to them.

Now if you factor in, let's talk about the amount of television advertising, you factor in the way that the average family functions, that you kind of just, and I'll build a little bit of an archetype here, but calculate the amount of time that the average child spends sitting in front of the television, calculate the total ad impressions that that child faces through that TV channel and through other channels as well.

I don't have the data in my fingertips to cite, but just go with the concept. Calculate the number of hours that are faced there and then calculate how much time the average parent actually spends with their young child. That number is extremely low. And then calculate the amount of time that the average parent actually spends with their child in a period of focused example and in a period of focused training.

It's not very much. And so you've got this massive dominance of advertising messages that are carefully designed and tailored to appeal to the child's desires. Child psychology and all of those things are well understood, so let's build this advertising machine. And then on the flip side, there's not a lot of proactive training, and so most people have very little self-defense against advertising.

So I think that makes a big difference. You can look at how conformity is taught throughout culture. One of the most powerful lessons that we learn from the government school system is the power and the importance of conformity. You know that if you don't fit in, life is going to be unpleasant with you.

And so I've seen good arguments. I wouldn't necessarily stand up and preach them myself, but I've seen persuasive arguments that one of the major functions that comes out of the system of formal, universal, standardized government schooling is that you create a population that is easily controlled and easily sold to.

You can know if you go into just about any group of young people or just about any peer group, you can probably find the hot buttons that you can push and that you can sell to. And that's what advertisers know. I used to work in the business very briefly as a junior-level analyst, and we would analyze different population groups, and we would analyze them for their triggers.

And so I spent a lot of time working in different areas, but the best example would be something like fast food or we did some consumer packaged goods surveys. And when you get into the world of advertising, it's very, very carefully constructed. And so you find a peer group of people that are similar, and you find out what their buttons are, and you figure out how do I associate a message that's going to be impactful for this type of person.

I'll give you one simple example. When I was working with the company that I worked with, we were doing a large research study for a specific type of new light beer that was going to be introduced. And this light beer was being presented by a large well-known brand. And they were trying to figure out what was the, in the advertising speak, what's the white space opportunity?

What's the market segment that we can identify that we can exploit with our advertising message? So they had a beer that had all of the basic flavor and taste, et cetera, but it was a light beer and it was a luxury beer. And what they realized is that the marketing segment that they needed to fit was they needed to fit somebody who liked to drink lots of beer, so they were looking for a light beer, and they didn't want to be weighed down when they were in a social situation, but they didn't want to appear as basic or they didn't want to look like a redneck.

They didn't want to hold a Bud Light in their hand because they looked like a redneck. They wanted to look sophisticated. And so all of the advertising message was around what that bottle looked like in their hands, that they looked like somebody that was sophisticated. They looked like somebody that was an elitist in terms of their social standing, but yet they could still drink and drink without getting filled up over time.

So the point is there's a lot of conformity in different people groups, and I think that has a tremendous influence on people. Very few people would go out and make the purchasing decisions that they did if they weren't influenced to some extent by their peer group. And the final idea I have is just simply if you look at the amount of the thinking time span that most people tend to have, for you to defer gratification and to delay gratification to the future, you have to have an ability to think and to plan on a longer time span.

And there have been a number of research reports that have done it. I mean, the famous one would be the Stanford Marshmallow Experiment that I believe I've seen that verified, and you have to be careful with studies because sometimes you hear something and it's not true. But I've verified that one a couple of times, and I'm confident that that one is accurate.

And the idea here was they followed some students. They put students in a room and they said, "You have a choice. If you can have one marshmallow now or if you can wait five minutes, you can have two marshmallows." And then the researcher would leave the room with one marshmallow sitting on the table in front of them.

And they came back after a few minutes, and some percentage of the students, of the little children, went ahead and just ate the one marshmallow. Some percentage were able to defer their gratification and wait for the two for a few minutes later. And they followed those people throughout their life, and they found that of those who were able to delay gratification, they were able to amass more wealth, gain a higher level of income.

Well, look around and ask yourself, is there somebody or something or some influence in society at large that's teaching children to delay gratification? In general, my observation is no. We don't teach delayed gratification. Some people seem to have it naturally. I don't know what influences that, but we don't teach it.

And so if we're not going to teach that, when you start adding these things together, the fact that most people don't have any desire or experience or practice delaying gratification, they don't have a strong example of how they can build wealth. They think that they need to play the lottery to build wealth.

They don't have a lot of proactive training because that's very time-consuming for a parent to do. And you flip it and you add all the negative examples, the fact that they're marketed to constantly without having any positive instruction or training that's anywhere near the amount of time that the advertisers have with our children.

You look at the way that society is structured and has a lot of conformity and conformity is encouraged. You start to add these things together, and to me, it's not a surprise that people are not wealthy. It's a bigger surprise to me that more people are not poor, and that's the magic of the free enterprise system where there's still an opportunity for people to break it out.

So those are some of my ideas. Rocky, what say you? I think I agree with everything you've said, and I guess the question is, can we do something about it? But I think at the end of the day, there's just going to be 20% of us who have it and 80% who don't, and that's just going to be life.

It's funny because when I look at how I'm raising my kids, we don't follow any of those things that you've talked about. So there's no TV advertising, for the most part, or if we see ads, we talk about the ads and how they're looking for things. We don't teach conformity.

We kind of make our own path. And so my kids are growing up financially strong. I think we just did that. You're helping to put in words why those things are occurring and why it is. So yeah, I think I agree with you. And until people want to change, I guess they won't.

Right. It's the same from my experience. So here's some things that we can do. And just to corroborate what you're saying, my experience is the same, that my parents had very little advertising in the house. We never had a TV growing up. I spent most of my time reading books, only a few magazines.

I was outside of many of the mainstream kind of socially conforming pressures for the formative years. I only went to a private school starting in about seventh grade, with the exception of one year that I was in a government school in third grade. I was educated at home for the first six years, and those are the most formative years.

And I actually vividly remember how I had no concept of peer pressure going into seventh grade. I had no concept of, for example, fitting in and the cool kids and the uncool kids. Because I was surrounded in the home education environment, I was surrounded by people who took me and accepted me as I was, without any pressure to conform, without any stylistic cues.

I didn't know you had to wear a certain kind of shoe, wear a certain kind of shirt, comb your hair in such a way. I had no concept of those things. It actually took me about a year of being in a private school where I learned about cliques and I learned about peer groups and I learned about peer pressure.

And most of the things that I regret from high school, the times that I was rude and ugly to people and the things that I did that were just foolish, were after it took me about a year after I learned that, "Wait a second, I'm supposed to fit in and how do I do that?" But that stood me well and it prepared me to be able to stand alone.

I have no problem standing alone in an unpopular opinion or holding something that's a bit countercultural myself. And so that's been a major help to me when it comes to building wealth, to have that trained. And I also had some of the positive examples, positive training and I had a lot of negative examples, things I learned the hard way where I said, "I'm not going to do that again." And so you can do that.

You can break out. I think the biggest thing that we can do is number one, work with our kids, work diligently and proactively, restrict the influences that are going to be negative and are going to have a desultory influence in their life. Pull those things out. Work to establish them as an individual first before exposing them to the onslaught of advertising.

Training them. Anytime I take my children with me to a store or something like that, I get so, those are the best training opportunities. I get a little bit sad when I see parents who, the first thing they do, go to Costco and here's a digital game or here's a cell phone and you should be spending your time on the cell phone.

Well, you're missing out on the training opportunity. Let's talk about value comparison. Let's talk about why we're shopping at one store versus another. Let's talk about all of these different influences and use those as proactive training. The proactive training that we can do where we can help put in place systems, training in budgeting, training in savings, put situations in place where we're teaching them the value of delayed gratification.

I'm convinced these are skills that can be taught and can be acquired. They're not just some kind of genetic lottery that we win and we either have them or we don't. Certainly, there may be a natural predisposition in one direction or another, but it's a skill that can be learned.

And then that can extend out. We have the most influence over our children. Next we can go out into our social groups, into our more extended families and one by one you can impact people by and large. I don't know if it's possible to change the 80%. I don't know.

I've never fully understood why that principle seems to hold constant in seemingly every society and seemingly every aspect of life. So I don't know why that's the case. I just know that it is the case. But what I do think you can do is you can, whether or not we can move more wealth down so that more people in the lower ages are able to have wealth, I don't know.

But I do know we can move people up. And you can move somebody from the bottom 80% to the top 20%. And you can then move somebody from the bottom 80% of the top 20% into the top 20% of the top 20%. Now, can you go farther without natural inclination?

I don't know. But I know we can make an impact one by one. And as the old story goes about the person walking down the beach throwing sand dollars back into the ocean, no, you can't throw all the sand dollars back into the ocean. But it can make a difference to the one that you throw.

Anything to add, Grocky? Nope. I think we've done a great job of covering it. Cool. Let's go on now to, let's see, Daria. Go ahead and let me know what's going on with you. I want to see how I can serve you today, please. Thank you, Joshua. Well, first of all, thank you for all the work that you do.

I refresh my iTunes feed every day several times with something from you. And then I also wholeheartedly agree with what you said in the previous question. I think it's a painful question for me. But I agree with all what you said. And I grew up without ads because I grew up in a USSR that no longer exists, where ads didn't exist.

So I know how it feels with and without. But to my question is, I see an opportunity in the next several months to be independent in terms of work for myself. And the work would be consulting type of work for BISEC. So I was wondering what kind of things I should think about setting up this.

For example, I understand that maybe LLC is the better way to go, that some other options, there are probably some tax implications that I should start thinking about. If you could give me your ideas about where to start trying to make sure that at the end of the year of my self-employment, I'm not finding myself doing something illegal or not filing enough taxes or just tripping up.

Okay. That's a good question. Are you already doing the consulting work and being paid for it? No, because I am employed by a company. But my idea is to stop the employment at a certain point in time. And then I have enough money saved to sustain the transition. And I have enough connection made and I see the market opportunity where I can sit in to start it.

So this is the idea. Do you have the legal ability, for example, hopefully you don't have a non-compete or something like that. Do you have the legal ability to start taking on a couple of consulting clients while you continue to be employed at your current job? This is a good question, which I am trying to figure out with our legal team and see what my contract says.

But let's assume that I don't while I'm employed and let's assume that once I am not employed I can start right away without waiting for any certain period of time. So when you're starting something like a consulting business, let's first talk about the business aspect and then we'll go to the nuts and bolts of accounts and taxes, etc.

The big thing with any new business is to make sure that you actually have a market. And I don't need to know all that much about your business history. I'm going to speak generally and you can pull from it what's applicable to you, Daria. But generally people who are excited about going off and starting a business, if you haven't done it before, you might get excited about the wrong things.

And the thing that matters when going and starting a new business is can I get customers and can I make sales? And so you should practice that as much as possible in the lowest possible risk way. So if there's any way that you can go off and start the practice of getting customers and proving your systems and making sure that you can actually convert somebody from an interested prospect into a paying client, if you can do that now, go do it now.

I advise don't worry about any of the technicalities until you've gone and gotten a customer, until you've gone and proved it. So many times I see people that are wanting to start new businesses and I always just pick on someone like a photographer. You don't need a business card, you don't need a website, you don't need an LLC, you don't need a business bank account, you don't need to file a business tax return.

You need to go get a paying customer. So if you've got a camera, go take pictures of somebody and get somebody to pay you money. And you can deal with all the technical stuff after the fact. Same thing with consulting. You need to go and get somebody to pay you money so you can prove there is actually money here.

Now, of course, there are going to be many areas where the path of a consultant is well-proven and you can walk in the footsteps of somebody who's already done it and you can do it yourself. There are many industries that you can do it. So if you have a legally binding contract, if you want to do consulting in an industry that you're in and you can't go and do it on the side, then that's fine.

What I would be doing in those circumstances is I would be working hard to build and establish my brand and becoming a known quantity in my field even if I'm not providing actual consulting services. And it would be a rare contract. It would only be something like where I came from in financial services.

It would be a rare business where you can't do that while you have your job. And so you should be working as hard as you can on your marketing and on building and establishing your reputation before you go ahead and make that jump. Now when you go and make the jump, what do you need to do?

In the beginning, it's relatively simple. The first most important thing you can do is to establish a separate bank account for your business. This can be a business account and you should in your mind call it a business account. Whether it is an actual business account or whether it's just a personal checking account that you're using as a business account doesn't really matter that much.

But you need to establish a separate bank account. And then anything that you do that's associated with your business, you pay out of that bank account. And any money that comes into your business, you put into that bank account. And it doesn't matter if it goes into the bank account and then you do an electronic transfer from your bank the very next day to your personal account.

That's fine. The key is it's got to be run through that bank account because that will help you with the very simplest of records. And with something like a consulting business where it's just you, you're not going to have employees in the short term, it's going to be very, very simple.

Simple is fine. And by just establishing and keeping a separate bank account with separate records on that bank account, you'll have the equivalent of a profit and loss statement which you need every month at the end of the month. You look in that check register and you say, "Is there money here?" If there's money there, that means you're making money.

If there's not money there, that means you're not. And so it's pretty simple to sit down and figure out if you're making money. So you do need to establish a separate business bank account. Now depending on the type of consulting, you may or may not want an entity. Business entities, my opinion, are overrated.

People get bogged down in the details and then they don't go and do anything. A business entity will protect you from some liability. But in something like a consulting business, you've got to look carefully and understand what is my actual liability. For example, when I was a financial planner, my primary liability that I faced was not a professional liability.

The primary liability was professional liability that I would give bad advice. And so having a financial planning business owned in a separate entity like an LLC wouldn't make any difference to the quality of my advice. That was where I protected against that liability with something like errors and omissions insurance.

So it was a different liability. The business of a consultant has very different liabilities than the business of a local concrete manufacturer. If you're running a concrete plant and you've got a bunch of guys that are driving concrete trucks all over town, you've got a different kind of liability.

You've got employees now who might hit some little girl crossing the road and now you've got a lawsuit on your hands. Well, in that situation, an LLC and a business type of entity will protect you from that. But it doesn't protect you from giving bad advice. A doctor doesn't need an LLC to protect him from bad medical advice.

A doctor needs malpractice insurance. So look at your liability and understand what the advantages and disadvantages are. If I were just getting started as a consultant, would I start an LLC? Maybe. It's really, really simple to go on to your state's website and file just a standard boilerplate LLC.

It'll cost you 50 bucks. You do a report once a year. It's a pretty simple thing to do. But you don't have to. You can just file what's called a Schedule C and just operate the business as a sole proprietorship. So the key is go out and get the business profitable.

As you get the business profitable, at that point in time, you can go ahead and start to hire the advice that you need. You can go ahead and start to hire the advice of how to structure things. You can go ahead and afford to pay for good bookkeeping. You can go ahead and afford to pay for good financial advice.

All of those things will come with time. But the key is to get the business off the ground. The couple things that you do want to do. As you're earning money with regard to your taxes, you want to pay quarterly taxes. Basically take about 20% of what you're making-ish of your profit and send that to the IRS in the form of your quarterly taxes.

You want to make sure that you're doing that so that you're keeping pace on the amount of quarterly taxes that you're paying. Your accountant will be the one who will work through that with you. They'll give you the forms and the little slips that you send in to the treasury when you're paying your taxes.

Or if you're using your own tax preparation program, they'll print those out for you as well. But beyond that, it's pretty simple. When most of the work is on the side of the business, not so much on the side of the technical planning. Once you get down the road, once you're making a good amount of money, then you can come back and reassess your planning and make sure that you've got all those things buttoned up.

Perfect. Well, thanks so much. These are all great points. Now I know what to do, at least the first steps. And just to give you some good context about the great thing that you said, I think it's important to know that you're not just doing this for the money.

You're doing it for the business. You're doing it for the people. You're doing it for the people. You're doing it for the people. You're doing it for the people. You're doing it for the people. You're doing it for the people. And just to give you some good context about the great thing that you said about the fact that people jump to a business without understanding their market.

So I'm in a situation where my husband moves to a different state and I have to quit the job. But what I told my employer is that I actually do not want to quit fully. I want to continue to provide my work, but if we can do it on a contract basis or whatever, a consulting basis, that would be great.

Of course, it may or may not happen, but for me, it's a great opportunity instead of going right away and trying to find a job in a different state. I want to explore and see how it works, especially given that I can be on social benefits, on all kinds of benefits on my husband's new job.

And yeah, but I heard what you said and I think these are great points and I'm also going to speak with some of my friends who have done this to see what other things they encountered as independent consultants and what worked and what didn't for them. The situation that you're describing is really ideal for the purposes of setting up a consulting business.

If you can use your husband's group benefits to provide for your needs for things like health insurance, etc., and if you can use your employer as your first major contract, that can set you up to launch the new business and that can give you the stability to go ahead and bring on new clients.

That sounds like a perfect fit to me. The couple of things that you just want to do is let me not skip past, make sure that you're using that or that you've established that business bank account today and then use that bank account at all stages. So for example, if you're going and taking your employer to lunch to talk to them about your possibly working with them on a contract basis instead of a wage-based, that lunch appointment qualifies you as a meals and entertainment expense.

So 50% of that will be a deductible expense to your profits and you need to get in the habit of tracking those things from the beginning. So make sure you don't short-circuit that and then if you're moving or things like that, make sure that you're counting and carefully tracking the miles that you're putting on your vehicle.

That'll be a substantial savings for most people to be able to deduct your mileage expense, especially if there's travel involved. If you're traveling on an airplane, make sure that you're tracking those details and that you're making note of what you're doing. If you're traveling into town and you're flying back and forth, make sure that you're keeping those records, paying for those expenses out of your business bank account and then what you want to do is keep a diary of your actual activities.

Without going into all the details of deducting business travel today, just keep a diary, make notes of where you're meeting, who you're meeting with, how long your trips are, etc. so that you have that information so you can get the proper deductions that you're owed for those expenses. But it sounds exciting to me.

Deducting can be a great way to earn an income using a skill that you really have while giving you a good deal of flexibility. Any other questions, Daria, before I go on to our last caller? No, I just want to thank you wholeheartedly for what you do and thank you for the advice.

I'm so glad that it's been helpful to you and I'm so glad that you're here in the United States where you have more economic opportunity instead of in the USSR where you grew up. So I'm really thrilled for you. All right, I've got one last caller here with a Pittsburgh area code.

Go ahead, please. I was calling just to listen mostly, actually. I've talked to you before, Josh. You know my story. I work with family business and just kind of learning from everyone, listening. One thing out of curiosity, I'll just throw it out there as a conversation piece and see what your thoughts are.

I had a friend who is doing some flipping of real estate and kind of a similar situation to me, young family guy, couple kids, you know, money isn't flowing abundantly as always, but he ended up taking out a home equity line of credit to do his first flip and did very well on it and is now kind of taking what he made and continuing on, moving on to some bigger project than the original.

I wanted to see what your thoughts are on that as a strategy to kind of get into some real estate flipping and those sort of avenues of investing. Sure. And just a comment for you and then any other patrons, there's no need, if you just want to listen in, don't ask a question.

There's no need for you to call into the conference call. Just listen on the show. I don't edit the shows. I just put them out as they are. So you'll get the same thing on the show as you get on the live call and it helps me to make sure that I only have callers on the line.

Also in the future, just go ahead and listen in the podcast feed if you don't have a question for you and other members of the audience. Also on your question, nothing wrong with it. It can work. Basically, you're just trying to say, "I need capital," and if the capital is locked up in your house, you got to figure out some way to access the capital.

So sometimes that means you sell the house and you use that capital to go ahead and do your deal. Sometimes that means you borrow against it and you mortgage the property through a home equity line of credit. So you need capital to do a business like flipping real estate.

Even if you're financing it, you're still going to need some capital to get good terms on your financing or to fund the project. And so if the capital is locked up in your house, you can't access it. The challenge is just simply to go slow and learn it. The big mistake that we all make is trying to get too big for our britches too fast, where we have a little bit of success in one area and then all of a sudden you switch from a $100,000 project to a million dollar project.

But on your second project, you didn't figure out how to keep a contractor from doing something that caused you significant financial problem and now you're in a much deeper hole. So it's a balance to say, "How aggressive do I be versus how careful do I be?" But many people have followed the path that your friend is following because when you decide to build a business, a lot of times it seems like the only money you have available is either in a 401(k) plan or in your house.

Those are the two places where most US Americans tend to accumulate their money. So sometimes you cash out the 401(k) plan and sometimes you cash out the house and go from there. Right. And the 401(k), if you were to access that, obviously you just take a huge tax hit.

Is that kind of what happens? I know you can pull out Roth contributions without penalty as far as the amount you've put in, not the gains. But is that true? Is that how people would do that? Is just take a huge tax hit on whatever they have in there?

Yeah. For an operation like you're describing where somebody's investing in a real estate and they're not under any of the exceptions, for example, there are exceptions to 401(k) whether it's educational exception, first-time home buyer, significant medical expenses, et cetera. And if they don't have an exception where they can do it after 59 and a half, then yes, they're just going to pay taxes.

It's not necessarily a huge tax hit. The way it works is you will pay a 10% penalty tax plus you will pay income taxes on the money. And the reason that can be expensive is because the distribution that you're making from the 401(k) comes generally all at one time.

And so when you get it, it might take you up into a higher marginal tax bracket. And remember that all tax planning is done at the margin. So if you are earning say $75,000 a year and you take out say $75,000 from your 401(k), now in this year instead of having a $75,000 income, you have $150,000 income and that can impact your bracket.

So you're often paying taxes at a higher bracket. But there are also ways of adjusting that. For example, if you are working and earning but you're planning to take money out of the 401(k) and flip a house, then just take it out in the following tax year and adjust it so that you're doing it in a year where you're not working or where your income is down.

The end of the day, I encourage people don't get scared of penalties. Just simply calculate them because it's possible, for example, in the scenario I just described, it's possible that I might be paying taxes at an effective tax rate of 20% right now. But next year, I'm going to take money out of my 401(k) and I'm going to be flipping this house and my income tax rate is actually going to go down so low, let's just say I go down to 0% for the sake of my example, that paying a 10% penalty tax on the money is cheaper than it would be if I just left it there and pulled it out when I was retiring.

So you just look at the numbers. You look at the rate of return that you're going to make with the prospective investment. You calculate the cost of the capital. And if you're going to take money out of a 401(k), you just got to sit down and calculate what is this costing me and make sure that there's enough margin and wiggle room in your decisions that you know you're going to be making money and with a comfortable margin of safety.

If it's compelling and it's financially compelling, personally I have no problem with pulling money out of retirement accounts in that situation if it's financially compelling. If it's on the edge, then I would wait or I would look for another source of capital. Right. Great. That helps a lot. Thank you.

Awesome. Well, thank you everybody for calling in to the show today. I really appreciate it. I enjoy doing these conference calls and I hope that you enjoy them as well. If you listen to enough of them, you start to hear that there are some consistent themes. I think it's so helpful to be able to learn from other people's stories and other people's actual challenges that they are facing.

From today's show, what I want you to take away from it. Today's show, take away just the idea of training, setting a good example and giving positive, proactive training to your children and to other people for how they can make progress. As Rocky said, building wealth is pretty simple.

Spend less than you earn and invest the difference. Increase income when possible. These are simple skills that people can learn. They can learn at a very young age. They can practice. They can build. They can develop these skills and abilities. You and I can make a big difference in their lives by taking the time to sit down and teach them.

Sometimes you can teach them in public. That's what I'm working on doing, obviously, is seeking to equip you with anything that I've learned and anything I can draw out of my guests. You know what? I reach a lot more people, but a much lower percentage of people take action versus perhaps you might not be able to reach so many people, but a much higher percentage of the people that you reach might actually take action.

At the end of the day, knowledge that is not applied doesn't do anything. Doesn't matter how much you know that I should make more, I should spend less, and I should invest the difference wisely. Just knowing it doesn't make it happen. Reach out today and help somebody. Help somebody with some crisis budget counseling.

Help somebody with help a young person. Give them a job. Give them an opportunity. Spend the time. Train them how to budget. Train them about investing. Look for ways where you can help and impact another person. Let's get more people out of the bottom 80% and up into the top 20%.

Along the way, what'll happen is what happens in free market and has been happening for a couple hundred years, which is incredible, is the entire, I don't know how to get people, how to change the 20/80 ratio, but we can get the entire thing to move up. So even if the people in the bottom 80% are living far better than people in the top 20% were living in the past, because that's the circumstance that we're in today.

If you would like to join for a call like this in the future, all the details at radicalpersonalfinance.com/patron. If you've enjoyed and benefited the way that I've worked with these individual callers, but you'd like to retain me to work with you on an individual question that you don't want aired or you'd like to get into more detail, you can book a phone call with me, a consulting call at radicalpersonalfinance.com/phonecall.

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