Emergency Fund Planning, Credit Cards, and Disability Insurance – Interview with Joshua Sheats of Radical Personal Finance, Part 1
April 7th, 2021
By Matt Miner, MBA, CFP®
How big should your emergency fund be? Are you uninsured or underinsured for a $5M+ asset you own? When you travel overseas, does it make sense to keep a credit card in your shoe?
Today’s conversation with Joshua Sheats of Radical Personal Finance has the answers.
This episode is the first in a two-part series with Joshua. The second episode is linked here.
Emergency Fund Planning
I’ve written a huge article about Emergency Fund planning here, so we’ll leave that one to speak for itself.
Disability Income Insurance
Disability insurance is a cornerstone of financial planning. I would rather give a Ted Talk in Spiderman underpants than be uninsured for disability. I don’t sell the stuff, but if you or your family rely on your income to live, DI is incredibly important and should be carefully planned to meet your family’s needs and goals. I would forgo any other type of insurance in order to have the disability insurance my family needs.
Key Takeaways
Joshua Sheats’s Seven Stages of Financial Independence
Financial independence comes in stages. It’s a graduated scale, not a finish line to cross. In fact, with the right mindset, you can enjoy many of the benefits of Financial Independence, Financial Freedom, and Financial Abundance right now. Joshua and I address this topic near the beginning of our conversation, and he and Paula Pant carry on a fuller discussion here if you need more.
Stage 0 – Total Financial Dependence
Stage 1 – Financial Solvency
Stage 2 – Financial Stability
Stage 3 – Debt Freedom
Stage 4 – Financial Security
Stage 5 – Financial Independence
Stage 6 – Financial Freedom
Stage 7 – Financial Abundance
Think differently about retirement and financial independence. There’s a solution that’s easier than than retiring at age 45 with $6M. Instead, cultivate work you care about for reasons that are important to you, makes you happy when you do it and provides an excellent lifestyle. For example: I am staying oceanfront in a lovely home with family and friends this week, but I don’t own a beach house. I can live like a beach house owner several weeks per year without committing $2M to real estate that’s susceptible to wash away in a hurricane!
Disability Insurance, Health Insurance, Life Insurance, and Property and Casualty Insurance become part of your financial plan near the start.
Disability Income Insurance is at the top of the heap in terms of what you need to own. Despite this fact, it’s one of the least owned, least understood, least paid attention to types of insurance, because people underestimate the value of their income and underrate how much better their life is when they’re properly insured for disability.
Independent online publishing is an important way to share ideas with the world. Depending on your professional context, and your personal interests, skills, and abilities, it can be a growth engine for your business.
Introducing Joshua Sheats, MSFS, CFP®, CLU, ChFC, CASL, RHU, REBC, CAP
Joshua is a trained financial advisor with an alphabet soup of designations behind his name. A little over six years ago, Joshua had a growing insurance and planning business with Northwestern Mutual. In July 2014, he tossed his designations and hard-won client revenue over the side and built a new career as a podcaster. He hit a great spot on the growth curve for that medium and with more than 750 episodes in the RPF archives, to call him prolific is an understatement! Joshua’s opinions generate strong feelings, and he’s not bashful sharing ideas that push the boundaries of our thinking, which is why his show’s called Radical Personal Finance.
Transcript
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[00:00:00] Matt Miner: Within the realm of financial planning, risk management generates lots of discussion. You've got questions, and today's show has the answers. Is your cash stash big enough? I want you to pile that stuff up to the ceiling. When you travel in foreign parts, do you keep a credit card in your shoe? My guest does. Are you walking around uninsured or underinsured for a $4 million, $6 million, or $10 million asset you own? Unless you thoroughly understand your disability income insurance, it's likely that you are.
Hey, and welcome to Work Pants Finance Podcast. I'm Matt Miner, your money guide, and Work Pants Finance is the show for MBAs, entrepreneurs, and other professionals who want their financial plan to work as hard as they do.
Now, here's your money guide quick tip. Disability insurance is a cornerstone of financial planning. In your life, make sure the disability insurance you carry, whether through your employer or privately, addresses your family's actual needs and goals. I'll go on the record right now and say, I would do without any other type of insurance in order to have the disability income insurance my family needs.
I would rather give a TED talk in Spider-Man underpants than be uninsured for disability. I don't sell this stuff, but if you or your family counts on your income in order to live, DI is incredibly important. If after today's show, you want to chat about your income plan if you become disabled, schedule time with me. You can go to lifemeetsmoney.com/start and click the button, “Build a financial plan that works as hard as you do.”
Now, today's show features an influential voice in my life as I made the switch from corporate work to financial planning. My guest's opinions generate strong feelings and he's not bashful about sharing ideas that push the boundaries of our thinking, which is why his show is called Radical Personal Finance.
You got that right, today I am talking with Joshua Sheats. He's a trained financial advisor with an alphabet soup of designations behind his signature. Until a little over six years ago, Joshua had a growing insurance and planning business with Northwestern Mutual. In July 2014, he tossed all his designations and hard-won client revenue over the side and built a new career as a podcaster. Joshua hit a great spot on that growth curve for that medium, and with more than 750 episodes in the RPF archives, to call him prolific is an understatement.
I know you'll enjoy today's show, which features the first part of our conversation on the topic of risk management. We address emergency funds and insurance planning and be sure to stick around till the end when Joshua presents conclusive evidence that automotive tint shops are located in the shady part of town.
Today's episode is Emergency Fund Planning, Credit Cards, and Disability Insurance. My interview with Joshua Sheats of Radical Personal Finance, Part 1. The second half of the interview debuts next Wednesday on the Work Pants Finance Podcast, April 7th, 2021. You can read more at workpantsfinance.com/14.
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[00:03:13] Matt: Joshua, I am absolutely delighted to be here with you today. I feel like this is a huge milestone on the show to have you on. Thank you so much for spending some time with the Work Pants Finance listeners.
[00:03:23] Joshua Sheats: Thank you for having me.
[00:03:25] Matt: I always start by asking my guests to give us a little bit of background on their history, both personally and professionally, whatever you'd like to share on this show to introduce yourself to people who haven't met you before.
[00:03:35] Joshua: I have an interesting background in the sense especially for a financial show that I feel like I have a decent understanding of most parts of Finance. Really, that really crosses the gamut. When I was younger, I was very interested in personal finance. I remember being a teenager and getting all the classic-mainstream personal finance books from the library and from the bookstore. I would read The Automatic Millionaire.
I remember when I was in high school, I would go to tickets. I went to T. Harv Eker's Millionaire Mind weekend event. I was really interested in becoming wealthy. I studied most personal finance stuff from the perspective of a consumer. After college, I went and joined a marketing and brand management consulting company and I got laid off from that job in 2008. I didn't know what I wanted to do.
I knew I wanted to run my own business in some capacity, and my former boss suggested that I consider becoming a financial advisor because he knew about my interest in personal finance. I was the nerd, I would hand out personal finance books at work. I'm making that up. I remember I gave him a copy of my Total Money Makeover by Dave Ramsey. It had been very influential for me. It's like, “Here, you should read this.” He read it and we talked about it when he was done with it.
He said, “You should go be a financial advisor.” I went and started interviewing around the financial advice industry and I realized that I could probably build a lot of my personal lifestyle ambitions by becoming a professional financial advisor. In 2008, I started that process. I started with a life insurance company, primarily selling life insurance, disability insurance, long-term care insurance, a little bit of health insurance on the side.
Then, I went on and started working my way through the process of becoming licensed with the securities on the security side of the business, became a financial adviser, started managing portfolios, et cetera. Along the way, I invested heavily in my professional education. I became a certified financial planner, a chartered life underwriter, a chartered financial consultant.
I studied group benefits, I studied health insurance, I studied charitable planning. I wound up getting a Master's Degree in Financial Planning. In that context, I learned a lot that, in some ways enhanced what I had learned as a personal finance aficionado, but in some cases, contradicted it. Along the way, I continued to consume mainstream personal finance stuff.
I listened to Clark Howard, I listened to Dave Ramsey, I enjoyed that kind of content. I would find myself shaking my fist at the radio saying, “Come on, Dave” or “Come on, Clark, you don't understand this” or “You're not articulating that.” In 2014, I decided to start a podcast, and I launched a show called Radical Personal Finance.
My goal was to take some of my background and knowledge and bridge the gap between personal financial advice and professional financial advice because in my experience, that gap was very, very large. That professional financial advisors with a deep background in the technical forms of analysis, number one, they can't really talk to the public, legally speaking about a lot of the intricate stuff. Number two, when they do talk to the public, everybody just zones out because it's horribly uninteresting.
Yet, in the personal finance world, that's where the listeners are, that's where the education is, but a lot of times, the people speaking don't have the deep technical background. A professional advisor wants to beat their head against the wall, sometimes in listening to it. I thought somebody with my background should cross the divide. I had to leave the financial-planning-advice industry in order to be able to do it effectively, the way that I wanted to. I closed my firm, and I launched Radical Personal Finance in 2014.
Now, about six years later, I have a podcast. It's a primary outlet, a podcast of about 750 episodes, where I teach financial planning in public. The tagline of the show is, “How to live a rich and meaningful life now while building a plan for financial freedom in 10 years or less.”
What I try to do is, I try to show how having a clear understanding of what you're working towards, in personal finance is the foundation. Then, having a good understanding of the technical tools involved, and how that understanding and that education will help you achieve those goals faster. That's my personal story.
[00:07:50] Matt: This is a fun and poignant interview for me. One of your key tenants, or at least one of the ones that I love most from your show, and I've been following along since about 2015, is the idea of doing work that you would do if you would never retire. That was a key kind of philosophical motivator to the big career switch that I made about two-and-a-half years ago, following you into the financial-advice profession, where I plan to stay. I found a way to do this media stuff on the side and in a compliant way and in a way, that's helpful. I'm enjoying doing both right now. Thank you for all the service that you've rendered to me in my career and to my family along the way.
[00:08:30] Joshua: My pleasure. I think that's one of the ideas that I have sought to popularize, because if you're working at work that you care about, for reasons that are important to you, and you don't want to retire. Then in many cases, all of your financial planning becomes simpler and easier.
It's dramatically easier to find and develop a job or a business that you love that provides you with a really excellent lifestyle than it is for many people to accumulate the millions of dollars that most of us need to never work again. I'm all about doing an 80/20 analysis on life and going with a few things that are going to make the biggest difference. I'm convinced that that's a cornerstone idea and I applaud you for being willing to engage in the training, and the hard work necessary to make that career switch.
[00:09:18] Matt: One of your go-to pieces and another one of the things that I enjoy from your show is your framework for the stages of financial independence. I'll save you mentioning that you cribbed this from Tony Robbins. Anyway, I like the way you say it better than the way he says it, and your advice is better than his too. Even if he owns more islands, I'm interested in your ideas. I wonder if you'd walk us through those stages.
[00:09:39] Joshua: Yes, this came from reading the money book that Tony Robbins wrote after many years of not writing books, he published a book called MONEY Master the Game. In that book, he was talking about the stages of financial independence. I was inspired by what he said, but I disagreed with some of it, and so I wrote my own. The basic idea behind developing stages is to break down large goals into more meaningful steps. Because most of us understand that the way that you accomplish a big challenging goal is by understanding the basic steps and the levels to that goal. In my experience working as a professional financial advisor, I learned that if I just told someone, "Oh, look, you need $4 million," and they had $30,000 they would often walk out of my office demotivated and lacking clarity on anything that they needed to do because the goal wasn't tangible. It was far off, it wasn't meaningful to their life. It was just a number which is hard for the human brain to grasp.
I developed these stages to try to give somebody an idea that when you're working towards personal financial independence, it comes at different levels. It's not like you're either dependent or independent, rather we're dealing with ranges or percentages of independence. I began it with stage zero, which is financial dependence. We all begin our financial lives from a place of financial dependence. My children are totally dependent on me for their living, for their food for everything. They're totally dependent on me.
This can apply to adults as well, we might be a dependent adult. Perhaps we've suffered some kind of setback, lost a job, went through a health scare of some kind, and we find ourselves depending on other people to provide for us. That's where we begin. The first goal is to move from stage zero, which is financial dependence to stage one, which is financial solvency. I define financial solvency as simply the ability to pay for your living expenses and being current on your debts.
One place of dependence that many people find themselves that they find themselves behind on debts, unable to make their required payments. The first goal is to get current, get current on your debts, and to be able to cover your own living expenses. That's solvency. Stage one, financial solvency.
Then from financial solvency, we want to move on to financial stability, which is stage two. Financial stability simply means that you have some margin in your finances. This means you have some savings. This can be as simple as developing a beginning emergency fund. For a young person, perhaps you have an 18-year-old son who is leaving the house, well, if he doesn't have any debts and he's able to get a job to pay his living expenses, he's solvent. He's no longer dependent on you.
If that same son saves $1,000, he's now starting to accumulate some measure of financial stability. If he needs a new tire on his car, it's not going to sink him, he's not going to fall into debt for that. That's financial stability. For most of us who are adults, financial stability brings in some larger numbers. The basic idea is you want to figure out how much of an emergency fund do I want to have? How much savings do I want to have, and start to accumulate that?
I think there are a number of numbers that are useful, it might be $1,000, it might be $10,000. It might be three months of expenses or six months of expenses. For some people, maybe a year's worth of expenses, but you want to develop some form of savings so that you are financially stable. That's stage two.
Now, the next thing that I talk about and I put it at stage three, although it may not go at stage three, is debt freedom. The goal that many of us have of living a life free from the encumbrances of debt is a very worthy goal because if somebody is debt-free that means they have full control over their future.
I'm not arguing that debt may not be a very useful tool at some points in life, but any form of debt commits you to certain actions in the future. If you want freedom and independence in your life, being debt-free should be on your list of priorities. I put it here, as stage three, that the goal is to be debt-free.
If somebody has enough money to pay their living expenses, if they're current on all their bills, if they have an emergency fund of, let's just say $10,000, and if they don't have any debt, or at least don't have any consumer debt. They may have a mortgage on their house, but they don't have car debt, credit card debt, et cetera, that person is very very independent.
That person has the ability to change almost anything in their life. They can leave one career, retrain and start another career, they can move across the country, they can move from a house that doesn't suit them into a better house that does suit them. If their elderly mother gets sick and they want to go and nurse their elderly mother, they can submit their notice that their work and go and nurse their elderly mother. They have independence. Independence can be won fairly simply through those basic steps.
Now, there are four remaining stages and the next three, stage four, five, and six are basically variations on a theme. Most of my listeners and clients have a goal of being able to work because they want to not because they have to. Most of my listeners and clients have a goal of being able to live on the income from their investment portfolio, but there are wide ranges of income that they could live on.
If you tell me, "Joshua, how much money do you want to retire?" I'm probably going to give you a big number that involves extravagant international travel, lots of consumption items, lots of expensive experiences, et cetera. If you said, "Joshua, what's the bare minimum that you would need to retire?"
Well, there's a big difference in those numbers. I might want to live in a beautiful home on the lake, but I could live in a small trailer in a modest trailer park in Central Florida. I might want to take international vacations every year, but I could take a domestic hiking vacation if I wanted to.
What I did was I broke this into stage four, financial security, stage five, financial independence, and stage six, financial freedom. I define these in this way. Stage four, financial security means you have enough money coming in from your investment portfolio for you to cover your basic living expenses, for you to cover the rent on your apartment, the mortgage on your house, food in the pantry, basic utilities, et cetera.
If you have enough income coming in from your investment portfolio that covers your basic living expenses, then you have a degree of financial security. If you were disabled and you could never work again the rest of your life, you would be okay. That's what I call stage four financial security.
Stage five is financial independence. Financial Independence means you can cover your current living expenses. Based upon the income from your portfolio, maybe you could live on $3,000 a month if you had to, but you're currently spending $7,000 a month because you do a lot of things that you enjoy doing. Financial independence means covering your current living expenses.
I use that word independence because that's what most of us think of, "I can live my current lifestyle on the income from my portfolio." I think there is another level that we want to consider and I call it, stage six, financial freedom. Although I could live at my current lifestyle forever, there may very well be some additional things I'd like to do or some additional things I'd like to own.
Maybe I'd like to own the lake house and I'd like to go ahead and put a nice ski boat there, maybe a pontoon boat as well. We have options. Maybe we're currently going around and spending our summer vacations in a small travel trailer. I'd like a luxurious motorhome of some kind, and I know that that's going to add another $10,000 a year of operating costs.
What I find is stage six, financial freedom, is simply you lay out all of your personal spending ambitions, your personal lifestyle goals, and you cover those expenses from your portfolio. When you do that, you're totally financially free. You could spend more than what you have right now, if you wanted to. You could spend more than what you're currently spending.
Then stage seven is financial abundance, which I think is simply an expression that if you continue to live the way that you're living as an accumulator of wealth, in the fullness of time, you're going to have more money than you need, you're going to have more money than you want, and many people are going to have more money than they could ever practically spend.
That's what I call stage seven, financial abundance, which means I have more money than I could ever spend than I want to spend, so now what do I do with it? Money is no longer a constraining factor, but now we move into the point where I have to say, "I'm the steward of this wealth. How do I make sure that this wealth flows to places where it's productive, where it's useful, where it does good in the world? Do I give it to people? What do I do with it?" That's what I term financial abundance, stage seven.
[00:19:12] Matt: I really appreciate you walking us through those. One of the things that I just noticed practically with clients, this is a simplification, but at retirement, there are two kinds of people in the world. Those are the kind of people that are trying with tears in their eyes and by the skin of their teeth to achieve financial security in their late 60s', and then there are those people who come in with financial freedom or financial abundance.
Usually, if you're trying to solve for some exact retirement number, that's just not the way it works out. Instead, people who are accumulators accumulate vastly more than they could ever use based on their own desires and goals or they're just wondering how they're going to be able to get by in retirement. I appreciate you illustrating those stages. I don't know if that was ever something that you ran into with clients as well, but I see that.
[00:20:08] Joshua: I think it is, certainly. In my experience, I experienced the same frustration when I worked with individual clients. It seemed to me that the people who were the most desperate to retire, the people who very much wanted to retire, it was very difficult for me to figure out how they could retire. On the other hand, the people who could easily retire because they had loads and loads of money, generally didn't have very much interest in retirement.
Earlier we mentioned the concept of finding work that you like. That was one of the lessons that I learned from analyzing the problem. I discovered that people who couldn't retire, but who very much wanted to were often trying to retire so that they could get away from a life they didn't like.
They were anxious to stop working at a job that they considered to be a soul-sucking job. They were anxious to be able to have more control over their life. Yet that anxiety had often led them to building a lifestyle that sucked up. Most of their investible cash flow. Thus, they didn't accumulate enough wealth to be able to retire. Whereas people who started by building a life that they weren't desperate to retire from, they had a job that was a good fit for them. They built a business that they enjoyed running. For them, they accumulated wealth, but it wasn't connected to an extremely important goal that at age 63.5, I'm going to retire.
That's where I've developed the philosophy of starting people. Not by trying to figure out how much money you need to retire, but by trying to help people imagine what a life that they wouldn't want to retire from would look like, what would it look like if you knew that you could never retire? That's the question that I like to ask.
I've found a lot of value in asking people, what would you do if your rich uncle died and left you $5 million tax-free? That's a useful question for you to think about, but another useful question that I personally developed was simply, "What would you do if you knew you could never retire? What would you do if you knew you would never be able to retire?"
I think that when people stop and really consider the answer to that question, generally, what they would do is focus on building a life that they love rather than building a life that they want to escape from. A simple example, I often hear people say, when I retire, I want to have more time to fish. Okay, fair enough, but did you know that if you like fishing, you can go now and build a life where you generate your income as a fishing guide? Or people say, "When I retire, I want to travel a lot. Fair enough."
You can go now and you can build a lifestyle where you make your living traveling. It's not easy, but there are many, many ways to do it. Everything from starting a tour company where you get paid to organize tours, to going in being a work camper, living in an RV as many 60s' and 70-year-old people all across the United States do.
Begin by building a life that you don't want to retire from and then bring that into your overall financial plan so that you're enjoying the process of life now while accumulating for the day in which you either choose not to work or in which you can't physically work.
[00:23:29] Matt: Good stuff. I think that that first question about the rich uncle lets you answer in your own life whether what you're doing right now is in alignment with who you are and what you value. Like how much your life would change if you got the rich uncle result, let's you know maybe how you should be looking to change your life right now. Then that other question is a great way to craft your vocation and figure out how to spend your time.
I brought you on the show for a couple of reasons. You have deep formal expertise in the insurance area, but you also founded a podcast called radical personal finance because your views are not entirely conventional. I am very interested to talk with you today about the big topic of risk management, including both the traditional insurance part, as well as other ways that ordinary people should be thinking about that.
One of the things, because you've gone so far as to build an internet course about this, that I want to ask you about is if you'd share your views on how having money, particularly cash in the bank, currency on hand, and credit cards is a big part of a risk management strategy within a financial plan.
[00:24:38] Joshua: When you think about risk management planning, there are some common threads that go through all the different kinds of risks that you're facing. When you're trying to prepare for risks, you need to start by analyzing, is this a problem or is this a risk that can be solved by money or is this not a risk, a problem that can be solved by money? Many years ago, I heard somebody say that if your problems can be solved by money, they're not actually problems.
Now, that's probably a little bit too far because certainly, money problems have very real consequences in our lives, but there's an element of truth that makes us not along with a statement like that. We understand that if my son was just in a terrible accident, then it's a very severe problem. I can't just necessarily throw money at the problem and fix it.
Whereas if I just drove over some broken glass on the highway and I needed new tires, okay, it's frustrating and it's an inconvenience, but I can solve it with money. I like to analyze problems and say, "Is this a problem that can be solved by money, or is this a problem that can't be solved by money?" That helps us to understand where our solutions are.
Now, money will be used to solve all of the problems related to money and it will influence many of problems that are not directly caused by money. You may have personal health problems. You can't just simply buy a solution to those problems, but your ability to have money will certainly probably contribute to the solutions.
Money might allow you to take time off from your normal activities, your normal work. You can spend more time focusing on your health money might allow you to pay for better medical care. Money might allow you to get a second opinion. Money might allow you to transport yourself to the other side of the world where some novel treatment is being developed for your personal situation. We can see that even in situations that are not directly caused by lack of money, money is itself useful. If money is useful, we need to pay a high amount of attention to how to have it when we need it, which comes into the topic of savings.
The basic formal approach to savings is to use an emergency fund. When I was becoming a certified financial planner, I was taught in my classes that, "You, as a financial planner or to recommend to your clients, that they generate an emergency fund of three to six months worth of expenses." I believe that's good. That's a significant number. Most people don't have three to six months' worth of expenses. The way that you decide whether it should be three months versus six months, as you analyze carefully, how likely it is that your income would be affected.
If you have a household where this dual-income household with low debt and generally good financial planning, then you say, "Well, three months of expenses is adequate because if one of you loses your job, the other one probably won't. Whereas if you have a household with a single income or perhaps a household where somebody is engaged in a riskier occupation that's more likely to lose income, then you point the client towards six months of expenses." I think that's important.
In my experience, there's a little bit more texture that could really be added to that. The first thing is many people keep all of their emergency funds exclusively in the bank. I think that's a real mistake because there are times that you need money and what you need is physical money, physical currency, stacks of green papers with dead presidents on them. If you're in the United States or multicolored papers in other countries, but what you need is physical cash.
There are a number of things that can happen where you need to gain access to cash and if all the money is locked in the bank, then it's not available to you. I'm, well-known for encouraging people to have significant portions of their emergency funds available to them in physical cash. Assuming they have a place that is secure and private, where they can keep the money.
You don't want to be foolish if you're talking to your 18-year-old daughter and she has nosy roommates and lives in a college dorm with four other girls, then she should be very cautious about keeping significant amount of mounts of physical cash in her dorm room, but that's not the situation that most of us are in.
I encourage people to make a list of what are the kinds of things that you might need money for. Now, I come from Hurricane country that influences a lot of my personal thinking because when the Hurricanes come through, everything is shut down. The banks are shut down. The ATM's are shut down when the power is out, you can't access money. I often think, how much money would I need to get myself through a couple of weeks without power?
You see this when there are other kinds of blackouts, for example, there's the famous blackout in New York, or over the last year, there've been significant blackouts across the United States? In a blackout, most of the payment systems that a store relies on don't work, the credit card machines don't work. They can't accept electronic payments and so they can't take your money. It may be very important for you to be able to buy something in those times. Some spending money can be useful. There might also be expenses that are suddenly forced upon you that are unforeseen. I think of, what do you do if somebody that or somebody in your family goes to prison unexpectedly, and you've got to come up with cash bail. Do you have the ability to go and pay bail so that you can spring them out of prison?
That might sound like a funny example to use, but it's not. It's a very serious example. It's the thing that happens to a lot of people, and prisons are generally really nasty places. I don't want one of my family members to be stuck in prison a minute longer than is absolutely necessary.
Other examples as to why cash might be useful? Where I find that I use cash the most is simply to take advantage of opportunities. You're driving down the road and you see in some beautiful backyard that a guy just put a for sale sign on this really beautiful ski boat. You've been thinking about getting a ski boat and you walk over and you say, "Hey man, tell me about the ski boat."
He says, "This was my grandfather's, he died and I'm just putting it out for him. We need to sell it quick because I'm here in Illinois and I need to get on an airplane and fly back to Florida tomorrow, but I was figured I'd put it out here and see if anyone is interested. It's worth 20 grand, but if you give me 10 grand a day, I'd be happy to sell it to you."
I've done this. I didn't do it with a ski boat, I did it with a car. Where it taught me was, I went and I was like, "Okay, I need to go get money, but all my money was locked in the bank." I'm going to the ATM and I'm trying to take out money, but the ATMs are locked at a stupid $400 or $500 limit. Then my bank has the money locked down and I'm going around to 10 different banks trying to get money out of the ATM.
I vowed, never again, will I not have enough money to buy something that would be reasonable and get myself a deal on something like a ski boat, or a car, or whatever, little toy or something that you need. Those are some reasons that are just practical examples as to why I encourage people to have physical currency as their savings.
The second component of savings is you want to have substantial savings in the bank. There are different ways that you do that. That's, I think the most discussed part of personal finance, but you want to have the ability to get access to those savings. What I would encourage people to think about is setting up in their banking infrastructure, a bit of diversity. What you don't want to have is all of your money in one bank, in one bank account, then all of a sudden you get flagged with one question transaction and the bank locks your funds down and says, "We're not going to let him more money passed whatsoever."
I travel a lot internationally. I have spoken to many travelers who made the mistake of going off on some long-term adventure. I've spoken to people who sail around the world for months or years at a time, or who travel or live outside the United States. All of a sudden something at their bank gets triggered by some automatic law, some automatic flag. Now they have to literally fly back to the United States to talk to their bank, to get their bank to release their own money.
It's a catastrophic scenario in some cases. I've had this happen multiple times on my accounts where I get triggered. I can't get something out of the ATM. They blocked my debit card or something like that. Then I can't get through to the bank because this heavy right activity is busy or something like that. You want to have multiple banks and you want to think about having access to your money with the form of multiple debit cards would be another example.
Then the third thing I would point out is the use of Credit cards. Credit cards are an interesting thing to talk about because they receive a lot of abuse. I think rightly so, Credit cards for many people can facilitate overspending, which is catastrophic to a financial plan. There's good evidence to indicate that we spend more money when we swipe a Credit card, versus when we spend with physical currency or possibly even with a debit card, we spend more money.
It's very easy to make impulse purchases, which if those impulse purchases or for consumption items can often put us into debt. The terms of borrowing on credit cards are often difficult. Come with significantly high interest rates, et cetera. We've all known a lot of people. Who've had a lot of trouble with Credit cards?
On the other hand, Credit cards can be an extraordinarily valuable tool if somebody understands their dangers and the risks. When my debit card gets locked and I can't get physical currency out of the bank, if I've got a pocket full of Credit cards, I have the ability still to spend. When I travel, I always travel with a pocket full of Credit cards and I put one Credit card in my wallet. I put one Credit card with my passport secured in another place. I put a credit card in my shoe. I put a credit card in my bag. I put a Credit card in my hotel room.
I just have half a dozen credit cards that I go with because I've had my stuff stolen. I've had my wallet stolen. I've had all those things stolen and it stinks, but it's a whole lot easier to handle if you have access to money. Credit cards give you very nice access to money.
Credit cards also have some interesting benefits that many people don't understand. One of the biggest benefits of credit cards is that they are unsecured debt, which means that if you don't pay them, there's not an automatic process for somebody to come and repossess your property.
If you don't pay your mortgage, your mortgage lender can very quickly start the process of foreclosure. Within a period of months, you may wind up moving out of your house with the sheriff, watching you, making sure that you're gone by the certain date. If you don't pay your car payment, you may have the unpleasant experience of coming out from your job and watching your car roll away on the back of a tow truck.
If you buy something with a credit card, although in time you can be sued, there's no direct connection between the thing that you buy or the money that you spend and the Credit card company's ability to repossess that. If I go and I buy a piece of equipment, maybe I'm totally broke and I go and I buy a piece of equipment that I'm using to generate money. Then I'm using it and maybe I get hurt and I can't use it and now I'm three months behind. I can still own the piece of equipment until eventually, the Credit card company sues me, possibly gets a judgment against me in court, but that process is very, very long.
Credit card debt can be very, very safe debt because it's unsecured debt, and that's a powerful thing to recognize when you do disaster planning. In addition, Credit cards for somebody with a high credit score and for somebody who understands how the game is played, Credit cards can have extraordinarily low borrowing costs, far lower costs than almost any other form of debt.
Now notice, I'm trying to be very clear. I'm not saying that they're always that way. Credit cards can very quickly put you at 19.9, 9% interest or 23.99% interest, which is very, very high, but if you understand how the game is played and here, I'm simply talking about the 0% Credit card offers that you get in the mail. If you understand how to use that system, you can use that system to allow you to borrow money at a very low cost.
I teach a whole course on this. It's called, How To Borrow Money Safely and Never Pay Interest Using Credit cards. I teach the details of it because if you put these things together, what a Credit card portfolio can allow you to do is it can allow you to keep your money in the bank during times when it's advantageous for it to be in the bank and to use Credit cards, and then on the other hand, to withdraw your money from the bank when you need it.
For me, for example, the way that I handle my emergency fund is, I have some money in physical currency. I have some money in the bank, but I keep the bulk of my large emergency funds, not just in my checking account, not easily connected to my debit card. My plan A, if I had a significant form of emergencies would be to use Credit cards.
I would use 0% Credit cards to cover my expenses for a period of time, but I have the money in the bank that I could pay off those Credit cards if I needed to. This allows me to keep my money. I'll invest it a little bit more efficiently, getting slightly higher interest rates than just what the bank may be offering on a savings account, but to do it safely with the backup of Credit cards.
That's a little bit of a Renegade approach. Most financial advisors aren't that comfortable with it. I would point out that it can be extremely risky. In my course on the subject I talk a lot about the risk and you have to understand, "is this a good risk for me or not?" but having access to money when you need, it can be an incredibly valuable asset.
Those three different things that you want to think about. Number one, physical currency, when you need it. Number two, access to savings due to proper planning, and the number three Credit cards can be some of your best ways to actually solve your problem.
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[00:38:24] Matt: This show is so big it needs three sponsors. First, it's brought to you by Radical Personal Finance, where Joshua Sheats provides 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.
Second, Work Pants Finance offers a huge vote of thanks to Josh Self at PLC Wealth Management. Thank you Josh for your support of the Work Pants Finance Show. And last, but by no means least, today's episode is brought to you by Matt Miner, Founder and Host of the Work Pants Finance podcast. Work Pants Finance is the show for MBAs, entrepreneurs, and other professionals, who want their financial plan to work as hard as they do.
You've talked elsewhere about how a well-designed financial plan fits with overall risk management goals. In fact, a lot of those goals are accomplished in that plan. As we begin to broaden up this discussion on risk management, I'd like to ask how a financial plan fits with the overall topic of risk management?
[00:39:34] Joshua: The first thing that a financial plan should cover is the positive side. The financial plan should cover, "What are my goals? What am I working towards?" As financial planners, we usually use the term in A, in a fairly structured way. We have financial planning software. We're doing projections on how long will your money last and we're looking at investments, et cetera. I do like to talk about it in a large frame, from the big perspective, because somebody's financial goals should influence their financial plan. If somebody has the goal of becoming a billionaire, their financial plan is going to look very different than somebody who has the goal of simply making sure that they're out of debt. You want to begin with the positive side with the goals. Then backing up from those things, you want to look very carefully at the risk management side. Let me use an example like asset protection planning. If my aunt comes to me, and she says, "Joshua, I have a little bit of money, I want to make sure that I'm secure in my older age, so how can I do that?"
The plan is fairly simple. I'm going to encourage her, "Well, make sure you invest the money, let's talk about a good portfolio that's widely diversified, that should be safe, should give you the rate of return that you need." I'm not going to get into any exotic packages, any exotic investments, any exotic forms of wealth, et cetera. On the other hand, if somebody comes to me, and let's say, I'm dealing with a very successful 35-year-old business guy, who's just a total shark, and he says, "I want to be a billionaire."
In this situation now, I need to think really carefully about the risks that are going to emerge from his business activities. We're going to spend most of our time carefully segmenting risk, we're going to make sure that his debt is carefully segmented on to assets that he's not personally liable for. We're going to make sure that he has abundant resources segmented where his creditors can't access it. We're going to do a whole lot of asset protection planning in that situation because we understand the game that he's playing is probably a lot riskier than my aunt's game, right? My aunt may have a car accident, somebody may sue her, that's very different than, my big shark of a business client, who's going out there and spending all of his time doing global international deals.
The goal is always to say, what risks does somebody face and then develop a plan that manages those risks appropriately and at an appropriate cost. I don't see how you can get away from it because one of the things that you realize is to do well financially, you don't necessarily have to have a home run. There are lots of people who become very wealthy without ever having a home run. If you have an abundant amount of time, you can work a job, a standard job, that fits you well, that pays you a decent salary. You can live well, but modestly. You can save and invest, you can purchase mainstream investments that are very good, very safe, et cetera, and you can do well. You don't have to have a home run.
What you can't have is you can't have a big loss or a few big losses. Good example would be something like disability insurance. If somebody is 35 years old and they're working a job, they're saying, "I want to retire when I'm 65," that plan may work out really, really well, unless they get in a car accident when they're 38 and they can't work, then the whole plan falls apart. You've got to look and say what are the big risks that can cause this plan to fall apart and how do we protect against them? That, to me, is what risk management planning is and it's fundamental.
[00:43:18] Matt: You got right into disability insurance and I feel like it's one of the most likely to be overlooked, and something that I always talk to folks about. I want to ask, do you feel like it's wise to only own it through work or are there times when private disability insurance is also very necessary?
[00:43:35] Joshua: I'll give you Joshua's short lecture on insurance. If I could only own one kind of insurance, only one, that one kind of insurance that I would own would be disability income insurance. I wouldn't own life insurance, I wouldn't own health insurance, I wouldn't own any kind of car insurance or other property insurance, I would own disability income insurance. That's surprising because I think disability insurance is one of the least owned, or if it fails that test due to the widespread use of group disability policies, it's one of the least understood or the least paid attention to.
If you think about the things that could happen to you in life, becoming sick or hurt and unable to work is one of the most significant things that has the widest range of consequences. Most people go to life insurance. Well, I have four children. I love my wife dearly, but if I die unexpectedly, and I don't have life insurance, that would put them in a difficult position, but they could figure something out, right? I'm dead, I'm gone, my wife could go and could get a better job. She could move in with family and they could support her. She might remarry. There are many number of situations that she could go into and at least the fact that I'm dead and gone means that her personal situation is a little bit simpler than it would be if I were still here.
If I'm disabled, now things are more difficult because it's harder for her to go and get a job because she's got to take care of me. It's harder for her to move in with family because what if I need a specialized hospital bed for my medical condition. Everything becomes difficult. She can't remarry because she's still married to me, and so everything becomes more difficult if I'm disabled. If I'm disabled, and we still have income coming in, we can make it through, but if we don't have income coming in, we've got significant problems. Or, I mentioned health insurance, why do I think disability income insurance is more important than health insurance? Let's pretend that I got sick and hurt, I couldn't work, but now I've got to go to the hospital, I'm spending significant amounts of time in the hospital.
In most places, even if I don't have any money, I can be treated for my medical needs, my medical expenses can be covered. Even if I wind up owing the hospital hundreds of thousands of dollars, they'll still provide treatment for me, but if I'm in the hospital, accumulating hundreds of thousands of dollars, and I can't work and my family's getting ejected from our home, my family has no food to eat, now I've got major, major problems. If I have disability insurance, I have money coming in that can cover my living expenses at home and then I can figure out how to pay off the hospital bills down the road.
In a worst-case scenario, I may declare bankruptcy, and the bankruptcy court will remove my obligation to pay those hospital bills. The Disability Insurance is the cornerstone insurance policy, more important than almost anything else. What about car insurance? I have a car accident, I commit $40,000 worth of property damage and I owe $100,000 worth of bills. Well, if I'm still working, I can eventually pay that. I can sell some assets, I may eventually bankrupt out of it, bankruptcy is always an option, but if I'm not working, nobody's going to come and pay me income if I'm not working because I got sick or hurt and can't work, so Disability Insurance is the cornerstone.
Now in the United States, most disability insurance policies come through some form of a group disability insurance plan, and I have asked hundreds and hundreds and hundreds and hundreds of people about their disability insurance plan at work, and those same hundreds and hundreds and hundreds and hundreds of people can tell me nothing about it because nobody understands it. They don't understand whether it's good, whether it's bad, what it covers, what it doesn't cover, what it costs, et cetera. Put simply, the answer is it depends. You have to analyze the policy.
Many companies have disability insurance policies that they offer through work that are excellent. They're really, really good. If the coverage is sufficient for the individual involved, then there's no need for any additional insurance. Why pay money for insurance that you don't need? On the other hand, I have reviewed many group disability insurance policies that were truly terrible and they didn't have good coverages at all, in which case, the person thinks they're covered, but they're not. The way that you do that is you have to ask some specific questions, you have to either read the policy documents or ask them specific questions of the insurance agent or the Human Resources agent to find out what the policy covers.
Now, if somebody has a disability insurance policy at work, they may be able to get a small supplemental policy, and if they need it, if it makes sense, then yes, it's a good idea. The nice thing about supplemental policies is supplemental policies are not constrained to your work. If you get a disability insurance policy individually, that policy can go with you in any circumstance. I'll give you an example. I used to do a lot of work with lawyers and other professionals as well. What I try to do is I try to get them to get large individual disability insurance policies that they owned privately, not through their group benefits, but that they own privately because the nice thing about it is a lawyer is one of the safest, technically speaking, job classifications that you can have.
Lawyers can get these awesome policies with amazing benefits at a very low cost and once they have those benefits, they can go to any company, they can travel around, they can start their own firm, and they can still keep their coverage. One thing that's very difficult is when people are starting a new business is very difficult to get disability insurance coverage, and yet, that's one of the times when you really need it the most. Once you have it, because you've got your first job out of law school, you can take it with you even when you go out on your own and start your own practice.
In addition, one of the nice things about an individual disability insurance policy is it actually goes with you regardless of your job, and so I would tell lawyers, and this sounds like an exaggeration, but technically it's not. Nobody does this, of course, but technically it's not an exaggeration. I would tell them, "Listen, if you get this policy now that underwrites you individually, this is a guaranteed renewable policy, which means that the insurance company can't take the policy away from you. As long as you pay your premiums, they can't take the policy away from you."
I said you've got this as a lawyer, you can go and you can start a roofing company and maybe you decide that you can make all kinds of money as a roofer. You can go and start a roofing company and you still have this policy. 20 years from now you fall off a roof and if you're disabled from the job that you were doing at the time of disability, you're disabled from being a roofer because you fell off the roof, this policy will pay out because it's an individual policy. I don't know any lawyers who actually went and became roofers, but I sold a lot of policies with that language because it's technically true and it's really valuable to have the coverage individually. Should people have coverage more than what's at the work? It depends. It depends on the individual analysis, but they definitely, if you can't stop working today and be completely fine financially for the rest of your life, if you're not at least stage, was it four financially independent or stage five financially independent, if you're not at least there, you probably need some form of disability insurance coverage.
[00:50:34] Matt: I knew what your answer was going to be on this one. I always talk to clients about this. You mentioned sort of the positive reason to have private coverage of going out and starting your own thing, how that's a great reason. One, besides becoming a professional chainsaw juggler, which I had never thought of as a possible career change or roofer for that matter, the other one that I think about would be if you became disabled between jobs, if you were in a layoff situation, is another good reason to have that coverage that's separate and apart from your employer,
[00:51:05] Joshua: I think people underestimate how important their income is. I used to use this very simple sales technique when I was selling disability insurance policies, and I would draw a picture. Just imagine in your mind, my legal pad and my pen, and I would draw a picture on the left-hand side, that was your car. I would say, "How much is your car?" You would say, "It's $42,000." I would write $42,000. I would ask you how much you spend on car insurance and I would write that below. You would say, "I spend $140 a month on car insurance."
Then I would talk about your house. "How much is your house worth?" You say, "It is $340,000." I would ask you how much you spent on homeowner's insurance. Then I knew how much money you make and how old you are. I would take your income. Let's say you're 35 years old and you make $100,000 a year. Well, 35 years old at $100,000 a year, 30 times $100,000 is $3 million. That's the value of your income. That's not adjusted for inflation. If we give you decent raises for inflation, it's very likely to be $5 million, $6 million that you may earn over the course of the next 30 years.
I would just simply say, "How much money do you spend to protect this $3-to-$6 million asset?" It's a very persuasive picture because if you've got $3-to-$6 million coming in, you can easily pay for a car. If your car just becomes totally destroyed and you have to buy another one, you can easily do that. If you destroy someone else's car and you have to buy them another one, if you've got $3 million to $6 million, you can do that. It's not a big deal. If your house burns down and you've got $3 million to $6 million of income coming in, you can buy another $340,000 house. If that $3 million to $6 million goes away, everything goes away and it's so important.
The final point I want to make on it because you're pushing my buttons intentionally because it was a big deal to me, is people underestimate how much better life is when they're properly insured for disability. I had a client of mine who was, I think he may have been a cardiologist. He had been diagnosed with cancer. He is 51 years old. He'd been diagnosed with cancer. He had a very nice disability insurance policy. He was disabled from his ability to work as a physician and so he was collecting disability benefits. I think his benefits were within $15,000 a month.
When I came along, he was doing fine with his life. He had $15,000 a month coming in. He was entirely focused on getting better. He was doing all these wacky health protocols. He was working with his oncologists. The rest of the time he was taking his children to school every day, he was spending time working on some personal projects. He was playing, he was golfing. He was doing all this stuff that he'd wanted to do for a while because he had the money coming in. The cancer diagnosis, certainly, it was a big medical problem, but the cancer diagnosis was not something that changed his lifestyle.
He didn't have to, in the middle of this health scare, move his family out of their beautiful house. He didn't have to immediately pull his children out of their private schools. Life was able to go on. Having worked with people in some really dire circumstances. It just impressed upon me how, if you've got money coming in, when you're sick or hurt and can't work, everything is smoother. It helps you, as we talked about earlier, it helps you to solve the health issue much more easily than if you didn't have it.
[00:54:16] Matt: Last thing on this from my side, and then we can stop banging this drum is just that I've known some older people who died, maybe had whole life policies in place, managed to collect on those. I don't know a single person in my life-- I take that back. I know one person who has ever collected on a term life insurance policy of all the hundreds of people that I know, but I just was in another podcast conversation a week or two ago, the person I was visiting with personally knew two people who had made disability insurance claims within the last year. It's a type of event that is statistically much more likely than some other types of insurance claims.
As we've talked a lot about insurance, I wonder whether you have any thoughts on percentage of income that is reasonable to go towards disability, health, life, and property and casualty insurances. This is something that comes up with clients because you want to have some insurance, but you also don't want to devote an unreasonable portion of your budget to insurance premiums.
[00:55:22] Joshua: Definitely. It's a difficult question because I don't know of any of us would like to pay insurance premiums. Insurance premiums generally feel like a total waste and so we're usually working to get those insurance premiums as low as possible. Now, I think those of us who've lived for a little while understand that when insurance pays out, all of a sudden, it's nice to have it. But when we're dealing with something like disability insurance, or life insurance as well, we probably have less exposure to people who've experienced the benefits of it.
You and I are unusual in the fact that we talked to people who are experiencing these, but most people know that many people who have collected from a disability insurance policy, and so it's difficult. Of these, I think disability insurance is the more difficult one to reconcile because the premiums are much bigger than life insurance, generally speaking. Let me talk about kind of how I encourage people to think about it. The first question that you have to think about is, do you need the insurance or do you not need the insurance? That's question one, do you need it or do you not need it?
If I am 40 years old and I don't have any money in the bank and I've got four children, my wife is home with the children and everyone is depending on my income, I need the insurance. It doesn't matter what it costs. I need it. On the other hand, if I'm 40 years old and I have $4 million in the bank and we spend $5,000 a month, I don't need the insurance. If I got disabled, we could live on the $4 million and the income that that's generating for us. I don't need the insurance.
Question number one is, do I need the insurance? Question number two, do I want the insurance? Because just because I may not need it, I might still want it. A couple of years ago, I had an experience where I bought a truck and I was getting ready to go about the truck, to pull a camper. I took my family and we lived in a camper full-time and traveled all around the country. I bought this truck and I didn't need to put comprehensive insurance on it. I only needed legally liability insurance, but I ran the numbers and I said, "Yes, okay, I'll go ahead and put comprehensive and collision on it and cover it properly."
It wasn't that much more. I didn't need it. I could have easily afforded to go out and buy another truck, if the truck were totaled, I had the liability coverage, but I decided I want it. Well, in my situation, it actually turned out very much in my favor because my truck got stolen a week before my trip. Literally, a week before we were planning, my truck got stolen from the parking lot. I was having the tinting replaced. It got stolen from the tint. The guys that stole it used it to bash into a race car trailer and they wound up totaling my truck.
Then through some negotiations with the insurance company, I was able to get a very fair settlement for the truck, which allowed me to be more than whole financially when I was in that situation. The nice thing about it was because I knew that I had the comprehensive coverage, comprehensive and collision, I was able to just immediately go out and I bought another truck. I wasn't able to leave right on time, but I only left on my trip one week late because a week and a half later, I bought another truck and I knew that I was totally fine. Having that insurance coverage made me feel good.
I think similar things come into disability insurance. One of the reasons we buy insurance is because we want it. Now, I said a moment ago that most of us don't like paying for it, but I think genuinely if you get someone in the right frame of mind, away from a pushy life insurance agent, and you say "Think, do you want this?" Most of us want what insurance has? Why do I have tons of life insurance? Because I want to know that if I'm dead, that all of my family's financial goals are still achieved. I don't want my wife sitting there staring at my casket to be thinking about, "Oh, what am I going to do for money," or "What other rich guy do I go and marry to support all these children that Joshua and I have."
I want her to know that I've got plenty of money and I can do what's right for me, without regard to the money and I'm happy to pay those insurance premiums because of that. Number two, do I want it? Number three is what are the actual premiums and what do I actually need versus what do I actually want. Now here's the thing about disability insurance. Disability insurance is priced more fairly than almost anything else, which means the price of the policy is very much driven by the risk and disability insurance is hard to teach about because it's so complex.
With life insurance, especially term life insurance, people understand it. They understand that if I want a million dollars of insurance and I'm 45 years old and I don't smoke, it costs X number of dollars and if I do smoke, it costs more. Disability insurance has a lot of options that life insurance doesn't have. The first thing is, what is your job? What occupation do you have? This is the biggest factor in a policy. A lawyer is a 5A classification. The lawyer is very unlikely to be disabled. A lawyer who falls in a skiing accident and breaks his leg is not disabled from being a lawyer. Whereas, that same person if the roofer falls and breaks his leg in a skiing accident, is disabled from being a roofer. The lawyer has a lower risk and the cost of disability insurance for a lawyer is much lower.
The next thing is how much money do we cover? A disability policy that gives you $15,000 a month is a very significant risk for the insurance company versus a policy that gives you $3,000 a month. You can choose how much money you need. That's a big thing that you can adjust. The third thing that you can use to adjust a policy, you can adjust the policy based upon when the policy benefits start and how long they last. You can sometimes have a policy, usually, this is not the realm we're talking about, but you can buy a short-term disability insurance policy that will pay you an insurance claim after as little as a week of being disabled. This should be the common thing. Aflac is a big brand name in this space. This is common among blue-collar workers where they say, "If I've got sick or hurt and I couldn't work for a week, I could have a problem." You can buy an Aflac policy, a short-term disability insurance policy that pays you benefits after a week. Those policies will usually pay you benefits up to three months or in some cases, six months.
For most of white-collar workers, that's not necessary. You can easily self-insure through two weeks of no pay. For white-collar people or wealthier people, generally, you don't even need coverage in that situation because your salary would continue. You have sick days, et cetera. For a blue-collar worker, somebody who doesn't have money, that kind of policy is a real lifesaver for them if they get sick for a few weeks. It keeps their rent current. It keeps their mortgage current. It keeps their cay payments current. It's very, very useful.
Now, for somebody with more money, what you can do is you can stretch out the start date. I've sold policies that began after years' worth of disability. That makes a big cut in the premiums because if you think about it, how likely are you to be disabled for more than a year? Not very, for most of us.
[01:02:21] Matt: You'll either be dead or better.
[01:02:24] Joshua: Right. It's hard to be disabled for more than a year. If you have a skiing accident, you might be out of work for two months, but you're not going to be out of work for a year. The kinds of things that disable you for more than a year are a very severe medical condition, very severe heart disease, very severe cancer, or more frequently some psychological problem. You can't deal with the stress of the job anymore. You go through some kind of personal mental trauma. You suffer some kind of breakdown. You experience early-onset Parkinson's disease or something like that. Those are the kinds of risks that are more than a year. If you push the start date of a disability policy out to more than a year, then the premiums drop dramatically.
The next option that you can adjust is how long the policy pays you benefits. You might have a policy that starts after 90 days of disability and pays you benefits out for two years. You might have a policy that pays you for five years, a maximum of five years or for a maximum of 10 years. There are policies that will pay you out up through age 65 or age 70. If you're young, of course, I'd like you to be covered for that up through age 70, but that's not strictly always necessary. If you want to spend less money on disability insurance premiums, you could simply drop the coverage period.
Maybe I'm working with somebody and they say, "I've got money in the bank. I've got money in 401Ks. I don't have enough to be self-insured, but what I'd like to is I'd like to cut my disability insurance policy premiums. What I'll do is, I'll take a policy with a maximum benefit of five years. There's a very small chance that I'll be disabled for more than five years, but five years would give me enough time to adjust. It would give me enough time for my wife to get a job. It would give me enough time for us to sell our fancy expensive house and move into a more modest apartment so that we could cut our expenses. Right now, we're living a lifestyle of $12,000 a month, but if we had to, we could live on $4,000 a month, and five years would give me enough time to adjust our living expenses. Then what we would do, is we have enough money in our 401K, in our savings, in our one rental property. We have enough money from those things that we could cover ourselves at $4,000 a month for the rest of our lives and be totally fine. I'll buy a five-year policy." You can cut the benefit period.
Then the final thing you can adjust is you can adjust the definition of disability. You can choose, and I'll use the generic terms rather than any company-specific terms. You can choose a policy that has an own-occupation benefit or any-occupation benefit in it. An example, of an own-occupation benefit would be the insurance company says, "If you're disabled from your occupation, then you qualify as being disabled." This is very important to the physician, to the attorney, to the white-collar professional.
Yes, I know that I could go and say, "Welcome to Walmart," in theory. I know I could that in theory and make $1,500 a month, but give me a break. I'm making $15,000 a month as a financial planner or as an attorney or whatever. I want a policy that covers me from my attorney work. Back to my physician client, his policy covered him if he was disabled from being a physician, he was covered. He didn't have to sneak around and pretend that he couldn't do anything, he was golfing. He couldn't go and be a physician because he couldn't put in the time and the stress associated with that.
On the other hand, you could always adjust down and you could take a policy that was a catastrophic policy, that said, "We'll cover you and we'll consider you disabled if you're ineligible to do any occupation or any occupation that you're suitable for based upon education, training, and experience." Those kinds of definitions are much broader and they give the insurance company the ability to say, "Okay, we understand that you can't be a physician, but could you go and be an accountant? Could you go and provide legal consulting services? So we're not going to pay you. Those are all cost of premiums."
That's some insight into the world. What I would say is, what an individual should do, is they should answer those questions, do I need it? Do I want it? They should talk with their insurance agent or their financial advisor about how to adjust the policy to fit them. It's not right or wrong. It's a matter of what do you want and what level of premiums is comfortable for you. I think that in general, you have to start with persuading somebody that, "Yes, this genuinely is a very, very valuable asset for me and that it's worth insuring properly."
[01:06:47] Matt: Great stuff. I'll just note there that one of the things too that I've seen frequently with company-provided insurance policies, is any occupation definitions of disability within the employer-provided coverage. Meaning that the employer is really looking to insure the worker in the event that they in some sense become totally disabled and not necessarily insuring their income in the event that they're unable to do the thing that they trained for or the thing they like to do with their career.
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[01:07:24] Matt: Joshua always brings value when you stick a mic in front of him. In many ways, his work paved the way for my efforts here at Work Pants Finance. Here are the key takeaways from today's show. Whether you are Joshua Sheats or me, why publish online at all? Well, he and I are both looking to provide high-quality web content that can help bridge the gap between personal finance and professional financial advice.
Next, financial independence comes in stages. There's stage zero, total financial dependence. Stage one, financial solvency, which means you can pay your bills. Stage two, financial stability. This means you can pay your bills today and anticipate that you can also pay them tomorrow. Stage three, debt freedom. This means that your future income is not committed to someone else. Stage four, financial security. The idea here is that income from your investments could meet your minimum living needs. Stage five, financial independence. In this stage income from your investments can meet your current lifestyle needs forever and ever, amen.
Stage six, financial freedom. In this stage, income from your investments can not only meet your current lifestyle needs but can also deliver an amped up lifestyle that you dream about, things that you've always wanted to do. Then finally, stage seven, financial abundance. In this stage, you've just got more money than you can ever imagine what to do with. Your main problem is figuring out how to give it away responsibly.
Then pivoting from those stages of financial freedom or stages of financial independence, Joshua and I take off on a long, not to say long-winded, discussion about risk management. When we're talking about insurance we're dealing in the financial stability stage of your financial independence journey. The right insurance needs to be in place early on in your life and early on in your plan.
Then Joshua encourages us to think a little differently about retirement and financial independence. For example, do you know what's easier than retiring with $6 million? You could instead cultivate work that you care about for reasons that are important to you. It's actually a whole lot easier to develop a job or a business you love that provides an excellent lifestyle than it is to accumulate millions and millions of dollars necessary to stop working.
Joshua goes on and urges us to ask what would look like if you could never retire? The answer to this question shows you what you're aiming for. He also asks, what would you do if your rich uncle left you $5 million? Answering this may highlight some areas where you'd like to make changes in your life today. For example, here in North Carolina, a common answer from someone who inherited $5 million might be that they would like to buy a nice beach house. When I hear an answer like that, I like to ask the client, "What is the most number of weeks that you have ever spent at the beach?" Then they come back and say, "Well, one time we were able to stay two weeks, and it also happened that we took four days there over Thanksgiving that year."
I'll challenge them and say, "Well, how long do you think that you would spend at the beach if you had your own house and had no constraints on your time?" Then they say, "Well, maybe I'd like to spend a couple of times there, two weeks, and a week at Christmas, and four days over Thanksgiving, so maybe that amounts to about six weeks in a year." Then I'd love to say to them, "You can spend six weeks at the beach every year without buying a $2 million beach house. You can do this in an incredibly nice home for probably $25,000 per year. What you should do before you buy the $2 million beach house is rent the $2 million beach house for all six weeks that you think you would use it if you owned it and see how that sits with you." This is an example of the kind of thinking of how the things you think you would do if your rich uncle left you $5 million may actually be within your reach today.
Joshua encourages us to define problems as those that can be solved by money versus problems that need to be solved without money. For problems that can be helped by money, a big emergency fund and maybe a pile of credit cards is helpful. For problems that can't be solved with money, other kinds of preparation are necessary.
Finally, remember, that disability income insurance is at the top of the heap in terms of what you need to own. Despite this fact, it's one of the least owned, least understood, least paid attention to types of insurance, because people underestimate the value of their income and underrate how much better their life is when they are properly insured for disability.
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[01:12:15] Matt: That's it for this week. Thank you so much for joining me for the first half of my conversation with Joshua Sheats. Please come back Wednesday for the second part of the interview when we tackle questions about physical preparedness and Joshua's work at Radical Personal Finance. Until then, this is Matt Miner encouraging you to build a financial plan that works as hard as you do.
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[01:12:36] Narrator: Matt Miner is a fee-only, fiduciary financial advisor and Founder & CEO of Miner Wealth Management, a North Carolina Registered Investment Advisor where Matt provides personalized, unconflicted, advice to clients for a fee. He’s also my dad, so please be nice when you talk to him! Matt is a Certified Financial Planner Professional and holds a Series 65 securities license. He earned his bachelor’s degree in Finance from Arizona State University, and his MBA from Duke University’s Fuqua School of Business.
Work Pants Finance is Matt's financial media business where he talks about work, entrepreneurship, kids and money, taxes, investing, and other personal finance topics. WorkPantsFinance.com exists to share wisdom and provide general financial information. It is not financial, tax, or legal advice. You are an individual and probably need personal advice for your specific situation. You should consider building relationships with helpful, caring, and competent professionals who understand your unique context and can provide advice that is tailored to your needs.
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