Afford Anything - Ask Paula: My Dad Died, and My Mom Is CLUELESS About Finances

Episode Date: February 1, 2023

#425: Ellen’s dad died unexpectedly. Her mom is clueless about finances. How does she help a 70-year-old unravel financial complexities? Mike has an opportunity to buy into his friend’s growing business. What should be his legal, financial, and relationship considerations? Pepp wants to know what’ll happen to her Restricted Stock Units when her company goes private. An anonymous caller needs to build her nest egg. She’ll be a full-time student with no income. She has 20 years until retirement. Should she execute a Roth conversion? Former financial planner Joe Saul-Sehy and I tackle these four questions in today’s episode. Enjoy! P.S. Got a question? Leave it here. For more information, visit the show notes at https://affordanything.com/episode425 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else. And that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention, any limited resource that you need to manage. Saying yes to something implicitly carries trade-offs. Whether they are known to you or not. And so that opens up two questions. First, what matters most?

And second, how do you align your decision-making around that which matters most? Answering those two questions is a lifetime practice, which we sometimes get wrong, often get wrong. And that's okay. This is a judgment-free zone. Here to facilitate and explore that practice are myself, Paula, the host of the Afford Anything podcast and my buddy, Joe Sal Cahy, former financial planner. What's up, Joe? What's up, Paula? Wow, that was a bitch. Wow, did I know. I got to get that down. Sorry about that, everybody. Sorry. There are a few thousand people like holding their ears, bleeding ears. We haven't had that review yet. Made my ears bleed. I'm closer to reaching the deductible on my health insurance.

What a way to kick off 2023. Thanks, Joe. Thank you. Appreciate it, Mr. Squealer. Well, I did want to squeal, though, Paula, because we've got some great questions today. Amazing questions. Very important, heartfelt questions that get to the core of why money matters. And to illustrate that perfectly, we will begin with a question from Ellen. Hey, Paula, this is Ellen. I've been a listener to your show for the past few years. And this is a question that pertains to my mother. My father died a couple of weeks. weeks ago unexpectedly. And though my parents were separated, they were still married. And my father

managed all of the money and they also have a couple different properties. Certainly an enviable situation, but my mom is really struggling and I'm trying to help her and I'm trying to figure out the best path forward. She has a job. that will pay her salary basically until she dies. And it's a good salary. And so she makes a fair bit of money, but she also spends a lot of money. And her level of kind of understanding about, like, online banking is very rudimentary.

I didn't even realize that she didn't know how to log in to her checking account. And my father ran all the finances in somewhat of a complicated fashion. multiple bank accounts. I'm sure he had his reasons, but I'm just kind of trying to figure it all out at this point. I'm wondering what options there might be out there for folks in this situation. I think the learning curve for my mom to manage multiple properties, an investment account, et cetera, on her own. It just doesn't seem realistic at this point in her 70s. I'm wondering if a trust is a good option. I'm wondering if a trust is a good option. I'm wondering. wondering about clever ways to sort of manage the condos that she now owns solely a retirement, you know, kind of house that she'd like to use part of the year. It's just a lot. And I'm starting

to realize that I cannot, I can't just take it over for her. There's this quality of if it were my own money, if it were my own properties, I feel like I could do it, but it's just not sustainable. and I'm trying to figure out how to help her. And there's just such a knowledge barrier and it's just really overwhelming. And I could see it really damaging our relationship if we don't find a solution. Any thoughts you or Joe might have are very much appreciated. Thank you. Alan, thank you so much for asking that question.

And first and foremost, I'm so sorry to hear about the loss of your father. as hard of a time as this is for you, for your mom, for everyone in your family and everyone who loved your dad, for you to have the strength in this moment to look after your mother, to care about her finances, her well-being, that takes heroic resilience. I'm sorry to hear about your loss and also very proud of you. you and admiring of you for the work that you're doing and the care that you're giving.

To your question, there are a few big picture guidelines that I'd like to establish as a foundation. One, create as much simplicity as possible. You mentioned that these assets are spread out across a wide variety of accounts. And I know exactly what that looks like, how it's easy to accumulate multiple checkings accounts, multiple savings accounts, multiple taxable brokerage accounts and 401Ks and different types of IRAs. It's easy to accumulate account clutter. And that only adds to the complexity and makes things feel unnecessarily overwhelming. So to the greatest extent possible, consolidate everything into as few accounts as reasonably possible. To the greatest extent possible, consolidate into one checking, one savings, one taxable brokerage, have there be one credit card, one debit card.

This is in reference to her personal assets. The rental properties will talk about in a bit because those. are technically a business, and businesses have to play by a different set of rules. But with regard to personal cash, personal market investments, all personal assets, consolidate into as few accounts as possible. One of the things that I do, just as a quick example, and this is antithetical to what a lot of people in the fire movement do, I only have one credit card. and a lot of people in the fire movement play the points and miles game

where they have whole spreadsheets tracking all their different credit cards and all their accounts and the minimum spend that they need, blah, blah, blah, blah, blah. Man, that sounds exhausting. That sounds like a part-time job. Good for them, if that's what they're into, if that's a great Friday night for them, awesome. That's your jam go do it. But personally, for me in my life,

having just one credit card so that when I'm trying to track my spending, I only have to look at one account statement. That creates a level of simplicity that I am happy to have. I think that's the message here, Paula. The message for Ellen's mother is that this doesn't have to be complex to get to her goal. you can have your assets very simply arranged and you can get there. As evidenced by our mutual friend J.L. Collins, who talks about you can get there with one fund. Not the way that I would do it, by the way.

However, his proof is, and this is what I love about J.L. Collins' work is he proves that all this stuff that we get all worried about, all this complexity, we get so nervous. You can just go out there and do it. you can forget about buying the perfect fund just by the total market index and you're going to be okay you will be okay or just buy the target retirement 2020 or the target retirement 2030 if she wants to be a little bit more aggressive I don't care which one what I envision she talked about a trust maybe she talked about it's so complex or so many things what I would do is help her mom just make a spreadsheet and start with the easiest stuff to understand first like you the checking and the savings account.

Make those simple first. And then just take it piece by piece. The other cool thing is it doesn't have to be all done tomorrow. It doesn't have to be done right away. So I would definitely do that. And I'd love to hear what you say about the property because my thought extends Paula to the property. She doesn't have to own this property, which is more complex in her plan to reach financial

independence. She can have much more of a passive approach and she'll be okay. So she can really, really make this simpler and still be in the right category for short-term and long-term needs. It can be a lot simpler. Right. So I'll talk about the property in a bit. But, Joe, to echo what you said, I was struck when Ellen talked about the complexity

of managing investments. There's really nothing to manage. Put everything into a Vanguard Target Date 2020 fund and you're done. Boom. You never have to think about it again. You can truly have a one fund portfolio. Oftentimes when I'm talking to new people who have never encountered personal finance before and who I can tell are avoiding making any contributions to a 401K because the whole thing just feel so overwhelming.

like 401K, what are these letters and numbers, right? When I encounter someone like that, right off the bat, I tell them, just, look, just put everything into a target date and let it go. Because so much of what we talk about in Nerdville on these podcasts, we're talking about the icing and not the cake, right? We're talking about the 20% of the 80-20. The bulk of what needs to happen in order to have a satisfactory financial life is very simple and very straightforward. And when we get into much of what we talk about on this podcast, when we get into Optimization Nerdville, you know, we're trying to eke another 2%, another 3%.

It's like travel hackers who are trying to squeeze an extra. business class ticket to Paris out of their spending. Sure, you can do that if you want to squeeze the lemon for all the juice it has, but that's not necessary. There's the concept of satisfacer's and maximizers. A satisfacer, and no, that's not a mispronunciation, that's what the term is called. I don't know why. I've never heard it in any context other than that. But a satisfacer is someone who has minimum criteria for what they're looking for, and the moment they find the first thing that meets their minimum criteria, they're like, cool, I'll take that. And they're done.

That's it. And that's how they approach buying a couch, buying a car, choosing what city to live in. That's how they approach every decision in their life. Those are satisfacers. By contrast, maximizers are people who pains. mistakenly research the pros and cons of everything in order to try to find the quote-unquote best option. And what researchers have found is that satisfacer's actually end up happier with their decisions than maximizers too, largely because satisfacer's never second-guess their decisions, whereas maximizers are constantly,

even after they've made the choice, constantly second-guessing themselves, should I have, should I not have? So in terms of overall life satisfaction, you can approach your finances like a satisfacer. You don't need the quote unquote best investments. Just pick something that's good enough and be done with it. There could be a continuum here too, Paula. I mean, not that her mom's not a satisfacer. She may be or she may not be, but she hasn't done this in a long time.

And maybe if she goes out and she starts making a few. few of her own financial moves that she hasn't made in a long time. She may find after a while or realize, wow, these, you know, making a few mistakes, pressing a few wrong buttons isn't going to kill me. And then she can read more complexity to optimize a little more if she decides to do that. But first, people beginning playing a sport don't run the most complex plays. They start off with the basic things. And if you just give your mom the basics and she understands those, I think she's going to be better off. Can we talk just for a second, too, about her relationship with her mom before we get to the real estate, because I think this is important as well. I think two things. Number one,

I think it's going to be great for their relationship if as they're doing this and they're making the portfolio simpler, mom handles as much as she possibly can herself so that she learns more quickly that it's okay to not understand the website at first. You're not going to get exactly what button to press. You're going to. And she just gets used. to the trails that we all follow. I mean, I was thinking the other day as I was turning on my computer how I do so many things just because I've done it 500 times, right? I know to press this button. I know to go there. I've been to this website. Oh, I used to not remember this thing, but now I've been there so many times that I know this. Like the more, the more mom does it herself

and maybe messes a few things up and finds out that that's okay, then I think that's great. And plus, I think it also changes that relationship where mom's not leaning on daughter as much for the stuff that seems maybe right now very foreign. And that's over the short term. Over the longer term, if she truly thinks that mom needs somebody to talk to about her money, maybe one of the best things she could do would be to go with mom and start interviewing some fee only planners that are on mom's wavelength, where they get along really, really well. some fiduciary CFP that mom can talk to and that Ellen feels comfortable with and knows that this person, because Ellen knows a lot more right now than mom does and can help her, I think, make a good choice of who those people would be. I think that might be a gift that helps their relationship as well. Yeah, if they think one is necessary, they may or may not. Well, I think always, because I'll push back on this one, I think always having smart people in your corner is important.

And I know especially a lot of us that continue to ask the question, are you smart enough to do this yourself? I believe they're asking the wrong question. I think we always want to surround herself with smart people. And if Ellen thinks that she shouldn't be that person, then helping her find good people for mom to surround herself with so that she's still making good decisions over time, I think she should definitely do that. Joe, I'm going to push back on that a little because I think that that introduces another level of complexity to this whole equation. Right now, the goal is to reduce complexity, to create simplicity. Choosing a good financial planner is itself a skill set and a very difficult one, right? Choosing who's to be on your team is a difficult skill. I didn't say we do this now.

Did I insinuate that we do this right now? No, no. But if this is a down-the-line thing, like a year from now kind of a thing, sure, maybe. but I think at the earliest this would be like a year from now thing, not a now thing. Absolutely. Oh, absolutely. No, I mean, hear me correctly. You start off with this spreadsheet of what's the lowest hanging fruit. Mom can't hire a financial planner. And I know this is really what you're saying, Paula. So my voice that I'm hearing going up is not directed at you. This is directed at just this conversation in general, which is that you can't hire a financial planner when you're going to abdicate the throne. you have to be the queen or the king who's in charge, and you can't be in charge until you know

what's going on. Mom doesn't even know what's going on. So before you hire advisors to help you, you have to know the basics of where you're trying to go because it's your mission. It's not your advisor's mission. And this is why so many relationships with financial planners go south is because we just think we're going to hand it off to somebody else. Mom's going to come in six months from now if she does that and she's going to be screwed.

She's going to have to accept what this person says of the truth because she doesn't even know how any of the stuff works. So I'm not even talking about a year. This has got to be after mom has a basic understanding of what her actual plan is, how the stuff works, where she goes. But she still is going to need smart people around her. And if it affects the relationship that Ellen is having with her mom, I think a gift of helping her find those people when she's ready is a fantastic gift that she can give to her. her as somebody who knows more than mom does. I think it's a huge gift to give her. Sure. Yeah. I'm with you there. But this is step number 99. First, we've got to go through steps one through 98. My point bringing that up right now, Paula, is just I said, can we address this relationship problem

that Ellen said she has with her mom? I think that's the solution. Get Ellen out of it in two ways. Number one, let mom do things herself and make mistakes and realize those won't kill her. Number two, help her find a team that doesn't include her. See, my approach to the relationship element of the question is approach this. And Ellen, I'm hoping that you and your mom live in the same city or in the same vicinity as one another. I'm hoping that you live close enough to at least be able to make weekend visits because in-person interaction is going to make this a lot easier. but approach this as though you are teaching a child or a teenager about money. And I know that comes off as sounding patronizing.

That's not something that we normally hear. But when I say child or teenager, what I truly mean is a beginner, because that's what your mom is. Your mom is a beginner. And sometimes when we're teaching adults, it can be difficult to recognize that that adult is a beginner, particularly if that adult is older than us, particularly if they're a generation older than us, a parent. But by flipping the script, sort of inverting that parent-child relationship and parenting your parents saying,

hey, you know what, I'm going to approach you with the patience that I would give to a child who I'm teaching this skill set to for the first time. and we're going to both log on to your Vanguard account together, but I'm not going to move the mouse or push the buttons. I'm going to sit in a chair next to you while you navigate, and I'll tell you where to move the mouse. I'll tell you what link to click on. I'll explain why you're clicking on that link and what these fancy jargony words mean.

you be the driver and I will be the designated adult in the passenger seat, that's the teaching relationship that could actually bring you closer together. I'm going through this right now actually with a friend of mine who is in his 40s and he's just opening a retirement account for the first time. and he doesn't know how to do any of it. He doesn't know what these words mean, what does vested mean, what is a contribution,

what's the difference between the account itself and the investments, the underlying investments inside of that account. And so I just sit next to him while he navigates this on a website, and I do exactly that. I'm like, click here. okay, now see that pie chart.

This is what that pie chart is trying to say. And so every element that we see on the website becomes a jumping off point for discussion. And we keep it as simple as possible. He's not invested in 15 different funds. I've put him in one. And that's it. And we're done. Could you imagine him going on for his first time and trying to buy 15 different funds?

Like seriously, you and I have talked about. about the efficient frontier and how important it can be for somebody who's an experienced investor, you can't start there with somebody who's brand new. Hey, I've got these eight different things. Eight. I just imagine eight. I just found out what a mutual fund is. Like how really eight? Right. Well, I mean, it's like your sports analogy. If you're learning a new sport for the first time, you don't try to execute a complex play. I went ice skating last week. weekend. I don't know how to ice skate. I literally, my first lap, I was clutching the railing the entire time, right? So my friends were great. They were holding my hand and guiding me across

the rink, but I do not know how to ice skate. If left to my own devices, I would fall on my butt on the ice. That is not the time to be instructing someone on how to make spins, or turns, right? I've got to learn how to get from point A to point B without holding onto the railing first. And eventually, once I learn how to do that, then I can graduate to more complex things. That's fabulous. There's so many analogies there. Like the first time that you glide on ice gates across the ice and you don't know how to stop, you experienced this last week then, you're sure you're going to die. Fortunately, I was at all times either holding onto a railing or holding onto a friend's hand.

Oh, so you still have that to go. You still have that coming. Oh, wait until you glide for the first time, Paula, it is terrifying. You're going right at people and you're trusting that they know what they're going to do, or you're about to hug somebody inadvertently, maybe get kicked out of the ring. And you think then, you know, about somebody's first time going through a down market or somebody's first time opening up a Roth IRA or somebody's first time doing all this. And it can be terrified. Like, well, what if I need this money later? What if I put it in and it all goes to zero,

you know? And the more you know about how markets work and exchange traded funds work or mutual funds, the more you, it's not going to go to zero. And if it does, how safe is your FDIC insurance? Like, none of it's safe if this goes to zero. But you don't know that at first. So starting with one. Yeah. One checking account, one savings account, one investment brokerage house, one fund inside of the account. Do not introduce any complexity unless that complexity is absolutely necessary, which means, Ellen, for you, undoing all of the complexity that has already been created. The clutter, as it were.

fund clutter, account clutter. This is a decluttering act. It totally is. That wasn't that the first thing you thought when you heard Ellen's question? Yeah. Well, I mean, I relate to it because I have so much account clutter myself. I have drawn it on a whiteboard. I've whiteboarded on one column, a list of all accounts, and on another, where those accounts pay into and where they go.

And the whole thing looks like a big tangle of spaghetti. It's so fun. It's like going through a class. closet or weaving a garden. Ellen, related to the rental properties, my recommendation would be hire a property manager who will look after those properties. I don't know if all of them are in the same location or not, but hire as few property managers as possible, meaning if all of them are in Cincinnati, then great, you only need one

property manager because they're all in Cincinnati, you know, versus if half of them are in Cincinnati and half of them are in Cleveland, then that adds to the complexity because now you need two. Likewise, if the properties are in LLCs, you truly only need one LLC per state. So in order to reduce complexity, in order to create simplicity, keeping all the properties that are in the same state, in the same LLC, will maximize simplicity. And then in order to keep those funds separate, because they're business funds, so they need to be kept separate, one business checking account, which has one debit card associated with it, all the income goes into that business checking account, all of the expenses associated with the property come out of that business checking account

with the debit card or with the checkbook. And that's it. No more additional complexity beyond that. Property manager that's handling it, one account to capture all the revenue, link that account to QuickBooks. Hire a bookkeeper to reconcile QuickBooks, hire an accountant to do the taxes.

And that's how you make that as simple and as hands-off as possible. You'd mentioned a trust. Joe, I'm curious what you're going to think about this. A trust, I think, will only increase complexity. It'll only make things worse. I don't see any reason to have a trust unless you're worried about some family member coming after the assets and you're trying to protect the assets. I don't see any reason to have a trust. To me, that's just going to drastically increase the headache factor. Yeah, I don't know what's a family situation is like. And I also don't know what the total value of assets add up to. There's certainly, if it's in the tens of millions of dollars, which I think for most of the

stacking bedemines and afford anything audiences put together, there's going to still be very few people. I think it's one in 700 people, Paula, I read earlier today, have an estate planning problem based on the value of their assets. So if it's one in every 700, people listening to the show might have, might have an estate planning problem. I think if that is the case, though, then definitely get a trust. If not, I think she can put beneficiaries on all of her accounts and make sure that the right things happen. If there are children by prior marriages, if there are other relationships that mom has had besides Ellen's dad who passed away, that also can increase complexity and a trust might be necessary.

But if it's straightforward, I agree with you. Put beneficiaries on everything. But, and I also think, even if you think that a trust is necessary, doing the spreadsheet stuff first and getting mom involved and lit up and in charge of her situation first, while you have just beneficiaries on everything to make sure there's a smooth transition while she's going through all this is a much better place to start. One last thing that I'll say, a major area of vulnerability that you and your mom will both want to be extremely hypervigilant about. And I don't mean to end this on a negative note. Are scams targeting senior citizens, scams targeting the elderly. If you Google elderly financial scams, you will find many are.

many articles, including trusted resources like FBI.gov, AARP.org. Look for articles there. They've got a lot of stats. They've got descriptions of some of the most common elderly scams. There's one called the grandparent scam. There are telemarketing scams. But there are, unfortunately, an enormous number of scams that target people over the age of 65, especially when someone is grieving, when someone is dealing with a lot of complexity, dealing with topics that they don't fully understand, those increase vulnerability. One thing to note is that when scammers contact you or contact your mom, in order to close the deal, as it were, a scammer will create a sense of urgency. And so one thing that your mom should absolutely keep in mind all times is that any time someone implores her to do something with her money and that person is creating a sense of urgency, that's her signal to stop. The more urgency pressure she feels, the more she should do nothing. Jo, you even have a quote about that.

I think I quoted you on my Instagram stories once. the more people pressure you to make a decision right away, the bigger the red flag is. Yeah, you should run. Oh yeah, if you've got to make the decision right now, then you have to run. Yeah. Some of these scammers will, for example, impersonate a police officer, and they'll call and say, hi, I'm officer so-and-so, your grandson was arrested for a DUI, he's in jail, we need you to wire money for bail. and the panicked grandparent who doesn't want their grandson to be in jail will wire the money. That's how they create that sense of urgency. And unfortunately, scammers often know when somebody is over 65 and those are the people who get targeted.

In fact, the former director of the FBI, he's 99 years old. He and his wife were relentlessly targeted by some scammers. And of course they turned him into the FBI. That's great. But he and his wife were relentlessly and aggressively and aggressively targeted, the 99-year-old former FBI director. He has a whole PSA about it now. It's really fun to watch, actually. It's a lesson to all salespeople, know your audience.

Yeah. Yeah. So, Ellen, not to end the question on a down note, but if there's one thing that you really want to impart to your mom, It's that. How to be aware of scammers. But overall, thank you for asking that question. I'm so happy that your mom has someone like you to look after her. What a blessing to have a family member who cares about your best interests. So thank you, Ellen, and best of luck.

We'll come back to this episode after this word from our sponsors. Fifth Third Bank's commercial payments are fast and efficient. But they're not just fast and efficient. They're also powered by the latest in payments technology, built to evolve with your business. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the fintech hustle that got them named one of America's most innovative companies by Fortune magazine.

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Hello, Paula and Joe. My name is Mike, and I have a question about buying into an existing business. I've been offered a job by an old co-worker that I deeply respect and have a great relationship. with. He started his own business in the engineering services sector about eight years ago. He says he is very busy and growing steadily and expressed he thinks there's lots of room to grow in size and revenue with existing and new clients, and it's close to hitting the $1 million annual revenue mark. The small business is a limited liability corporation and currently has a few employees with plans to hire a couple more, including myself. In our casual talks, he brought up

the idea of buying into his company, presumably slowly by setting aside portions of my paycheck. check rather than a lump sum. I'll be making somewhere around 120,000 per year salary for reference, which is similar to my current one. It seems simple at first glance, but obviously it may be complicated when considering legal, financial, professional, and relationship perspectives. I have zero experience in business ownership, much less buying into an existing one. So I'm hoping you can provide some general advice and recommendations for my potential situation. What are some questions I should ask him? Is there outside professional or personal support I should find? Are there books or online courses you recommend?

Some specific questions I'm starting to come up with include. Is there a structure for buying in that works best? How do I protect myself in my own assets? How do I set myself up for short-term and long-term profit? How do I determine what the company is worth and how much I should own? To be clear, this is just an idea for now, and I am fine working for salary if it doesn't appear like it will work out. But I am getting excited about the concept of being part of owning a business, even if it's just a small part. and having some skin in the game.

Thank you for all the grand information you have provided over the years. Afford anything and stacking Benjamin's are my go-to podcast. When I'm walking the dog or mowing the lawn. Mike, thank you for your question. I'm glad that if you're walking the dog or mow in the lawn, you've got financial wisdom coming in. I have a couple questions right off the bat. First of all, and I'm sure your buddy is awesome,

and this is a great business, but just putting on my skeptic hat for a moment. Number one, he started the business eight years ago. It is only now making the first $1 million in annual revenue. Why did it take eight years to hit $1 million in annual revenue? That's as far as top line gross revenue goes, that's not a lot for a business, especially a business with multiple employees. So that's the first question that comes to mind. And has he been doing it full time for all eight years or was it part time for the first few?

Second question, of course. And maybe you just didn't want to share this or maybe he hasn't shared this with you. But if $1 million is top line gross, what is bottom line net? Third question, what are the primary revenue sources in the business? How reliant is it on just one or two major sources of income? So, for example, are there one or two major sources of income? or two major clients that drive most of the revenue. If so, then that business has some vulnerabilities, because what happens if the one or two big sources of income dry up? How cyclical

is the business? Is this something that tends to do very well in certain economic conditions, but not so well in other economic conditions? Or is this something that performs well across all market cycles and all business cycles? And not that either of those answers is a deal breaker, But that's important information to know. How recession proof is this business? If the business is going so well, why does he want a partner? Given that he's willing to hire you at a good salary, at the same salary that you're making right now, what reason would he have for wanting to give away equity, partnership in this thing that is his baby,

that he spent the last eight years growing from scratch? why give that up the most important asset that he has? That's my number one question. Yeah. That's the first one. Companies, I think, Paula, only solicit small investors. If one of two conditions happen, either one, they just want to include friends and family, usually not the case. They go to friends and family because they're the easiest people to get money from.

But the second reason is, is because big investors have passed. usually when client to mind when I was a financial planner, sometimes people with millions of dollars were presented opportunities. In most cases, we found out doing our due diligence that the only reason that we were asked for money was because bigger firms had said, no, thank you. And that's a red flag. If companies with huge departments that can go dig in and do due diligence say this isn't a good idea. If they pass, why is it good for you? And it doesn't mean it's not, which, Paul, I love how you began that, not to be negative, but this is your job here. Your job is to think of all the things that are bad so that you can

put all these in front of your friend and have him answer each one of these questions. Right. Exactly. But I also wouldn't take his word for it. I definitely would want to see the books. and I love what you said about the business being cyclical and about where revenue comes from. But I also want to see what the debt situation looks like. Obviously, we don't want to see debt. I don't want to put money into a business just to do debt service. I want to be able to grow the business. And then number two is I want to see then also free cash flow that is every month because

that also gives you room to expand. So the first way I would answer Mike's question about what does he need to know. I'd want to sit down with a CPA, somebody that knows how to look at the books and help Mike learn how to read the books. I had a great discussion with Sharon Lecter, who's the co-author of Rich Dad, Poor Dad. And Sharon had this wonderful phrase that I totally agree with that accounting is just, just another language like Spanish or Italian. It is, it's just another language. And when you start learning some of this language, A, you'll know it forever like riding a bike. But then second, you can then discern problems or opportunities that you couldn't before you knew that language.

So learning how to read that language will give a lifetime of better investing to my. Yeah. You know, I go one step further. So I took an accounting class last fall. It was absolutely fantastic. Mike, I would strongly recommend. You don't necessarily have to take a class. Go to YouTube. There are some amazing accounting channels on YouTube. That's where all the fun people on YouTube go. Honestly, there's some pretty fun ones out there. There's one. What's his name? Accounting. Is it accounting tools? Let me find it. He has the greatest YouTube thumbnails I have ever seen. Oh my goodness. Like I watch his videos partly for accounting and partly just as a tutorial on how to make great thumbnails. I've definitely known some people in accounting who are tools. Ha ha ha ha ha. Accounting.

Says a guy, by the way, who is a financial planner for a long time. So accountants, you can bring it back at me. That's fine. All right. Accounting stuff. Accounting stuff. Accounting stuff on YouTube, 510,000 subscribers. Sweet. Oh, that's awesome.

Right? That's fabulous. Yeah, I would binge this YouTube channel for a weekend. Mike, do that before you make any moves. And then start a side hustle as a graphic designer based on what you've learned from watching this guy's thumbnails. Wow. I mean... I can answer another of Mike's questions.

He said, how do I protect myself and my assets? Generally, Mike, when you invest in an outside company, If it's private, you're going to sign an agreement that means that you are not a general member of the business. You are a passive member of the business. And you want to make sure that this is clear. Because if you're going in as a partner and the business gets sued, there is a possibility that your assets will not be protected. However, if your job is just to give money to the business in exchange for some shares, you know if kellog corporation gets sued paula and you have stock in kellogg this would be the same thing on a micro level if it's set up correctly

your assets would not be subject to a lawsuit against kellogg if they got sued just as a shareholder that wouldn't happen so just be clear about that and if you set it up the right way that you are just buying quote shares of the company then at that point your assets will be completely protected there is no risk to your assets Hmm. But by contrast, if it is a partnership, like a true partnership, then you'll want to set up agreements that cover what are referred to as the four D's. So the four Ds are death, disability, divorce, and disagreement or distress. And these, the four Ds are often where business arrangements fall apart. Death, for example. Imagine one of the two of you passes. away and your heirs or beneficiaries receive your share of the business. Great. Does that mean that the surviving person now has a business partnership with the heirs or beneficiaries of the one who passed away? So does that mean, for example, that suddenly your business partner is that guy's kid or that guy's niece or nephew?

Or does it mean that you now have to buy out? that person, which means you have to come up with the funds to buy out that person, right? Does it mean that you now are faced with a liquidity crisis because suddenly you're forced to come up with the money to buy that person out? Or does it mean that the heirs and beneficiaries are entitled to sell their share to some other third party? And so now you're suddenly a business partner with random Allen from Kansas, whom you've never met before, right? That's what can happen with. And frankly, I've used death as the example,

but the same thing can happen with divorce. If there's a divorce and the former spouse gets a share of the assets, does that mean that you then can end up in a business partnership with the former spouse or that the former spouse can then sell their share of the assets to a third party or can try to force a buyout, which puts you into a liquidity crisis? So you'll want airtight agreements that govern death and divorces and disability. What happens if one of the two of you becomes so incapacitated that you're unable to work? How long does the other person cover until the other person eventually runs out of patience and says, you know what, I've covered for you for a year so far. I can't keep doing this. I need to force a buyout. Right? What happens in that

situation. You'll want to create airtight agreements that govern the four Ds. Death, disability, divorce, and disagreement. And the fact that that explanation took a long time, Mike, is why I would opt for, I would opt to own the stock. Now, the good news is if you do end up in a partnership, then you have a say on how the companies run. And I don't know what type of dynamic that changes because you said that you're going to go work in this company. How does it change the dynamic at this person's your partner as well? Because I think there's also an emotional game there, Paula. There might be a power dynamic.

This guy's been running the company alone for eight years. Now Mike is a partner and owner of the company and starts exerting some of that ownership interest to say, I don't like the way we're doing things. You begin to maybe create some possibilities for animosity. Paul, there's one other piece of this. that Mike asked, which is also interesting for anybody who might be thinking about buying into a business. And that is short-term profit and long-term profit. If you are somebody who's just investing in a business and you're not going to be one of the general partners, but one of the

limited partners, meaning that you're just going to kind of own shares in the company, usually in 95% of the cases of this that I've seen, there is very little to know short-term money that's being paid out. This money usually is going to be reinvested back in the company and you're just along for the ride until there's an exit event, meaning the company is sold, it's dissolved. The owners decide to just sell off all the equipment and sell the relationships to the customers. whatever that exit event is, is important, which by the way, brings about liquidity. I want to know then how and when under what circumstances can I get my money back out. Because usually if you put money in, I think Mike's got to know going in, Paula, there's a good chance you'll never get your money back. Number one. Number two is if you do get your money back, it could be a long,

long time from now. It'll be a long time from now. Yeah, the only reason that you would put money in is if you're expecting outsized returns greater than what you could get in an index fund, and you are willing and able to accept a lack of liquidity in exchange for those funds. And toward that end, Paula, because I think you make a great point, toward that end, entrepreneurs will always be happy to show you their projections of where they're headed. Entrepreneurs, and I'm one and Paula, you're one, entrepreneurs generally are optimists. We're very certain that our business is strong

and it's going to go really well. But back when I was a financial planner, when a client would bring this opportunity to me, just as a general rule of thumb, I would always double the runway that the entrepreneur shows me. If they think the profitability is in four years, I think it's going to be eight. And by the way, that always served me well. That always served on two occasions in two different scenarios. Number one is I didn't expect the money in four years. I didn't go in there expecting

my scenario is going to be as rosy. So if it did go longer than that, I wouldn't have friction between myself and the entrepreneur, you know? We wouldn't both be, we wouldn't be beaten heads. And then the second thing is, is that if it was out in four years, I was very excited by that. I was happy with it, which is great, because I like that that's a happy accident. So I think that making that projection longer than what the entrepreneur tells you is wise. On this same note, the very last point here that I'll have is that when an entrepreneur asks you for money and they're talking about how the business is going to grow, entrepreneurs also are always great at projecting strength. They have to because in your head, even if things are going poorly, it's going to be okay. You won't get through the weekend if you

don't think it's going to be okay and we're not going to get through this. So don't take an entrepreneur's rosy projection of the future as the truth as much as what the written documents say, which is why you always want to get in writing where the business truly is. And looking at the past is the best way to make approximations for the future on your own. So take a look at the past eight years or at least the past four years of tax returns. Take a look at the last four years of P&L statements, of balance sheet statements. That's why you spend a weekend binging on the accounting stuff channel on YouTube so that when you're looking at the P&L statements, you know what you're looking at. So thank you, Mike, for asking that question.

Good luck with this new opportunity. We'll return to the show in just a moment. This Giving Tuesday, Cam H is counting on your support. Together, we can forge a better path for mental health by creating a future where Canadians can get the help they need, when they need it, no matter who or where they are. From November 25th to December 2nd, your donation will be doubled. That means every dollar goes twice as far.

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Hey, Paula and Joe PEP here. I am wondering what happens when a public company goes private. I am one of the high-tech people who have been given RSUs and the company is probably going to get bought or a private equity firm is going to come in and take them back private. And I'm just wondering what's going to happen to all of those RSUs that I never sold. Am I going to completely take a loss? And how do people with a lot of stock when that happens,

are they forced to just sell it and walk away with short-term gains if that's what happens? and they're just left to deal with the fallout from a tax perspective. Any insight into, not that I have control over what's going to happen because I don't, but I'm just wondering, I'm trying to wrap my brain around it and trying to plan for the future. So I'd love to hear what you guys know about companies that are private, are companies public going private. Sounds like someone works at Twitter. What, too soon?

Is that too soon, Paul? I know, right? Yeah. this is a great question paula and i will always begin the way i think that everyone should begin you have planned documents related to your rsu plan and those are going to define everything for you but i can also answer this question a little more generally by saying that in most cases this is the way that it works so i just want to preface it that way the good news is is that that when your company is acquired and goes private, all the shareholders need to be bought out.

So the first thing you need to know is whether your RSUs, your restricted stock units, are vested now or if they're not vested. If they are vested right now, well, then that's fantastic news because then you now own stock units in the company. And you will receive one or two things. and it largely follows the same things that regular shareholders get. You'll either get a cash buyout or if it was an acquisition for shares of stock, you will get those shares traded for shares in the new company.

And sometimes it's a combination of both of those. You'll get some cash and some stock. That may create a taxable event. So once you're clear about what's going to happen to your shares, you want to meet with your tax advisor or work through your tax software to model exactly what the implications are going to be for you tax-wise so you're not surprised when you go to file your taxes. But that will create a taxable event. Unvested shares are a whole different, whole different thing, which means that, and this depends on your plan document, means that you might still have

restricted stock because the new company may want you to continue to work for those. I mean, you still work for the company. RSUs are a heck of a great incentive program. The company still want. So they may just make a change in what you actually get and how those shares are going to vest. I'll give you an example. Let's say that you own company A and they do a stock in kind purchase. So you'll get shares a company B that replace your shares of company A, you restricted stock units for your unvested shares may turn into unvested shares of company B. That's going to be based on the plan document.

The best thing to do in this case, by the way, PEP is going to be to wait because your unvested shares, you're going to get more details on. You will get more details about what happens to those because you're not going to be the only person with RSUs. I mean, unless you're at a really, really small company. But I bet you're not. If you have RSUs, you're generally at a fairly, at least mid-sized company.

And there's going to be a lot of people in that boat. And the company is going to be obligated because of the fact that you own these RSUs, even though they have invested, to give you more of a runway about what the decision-making process will be around what you can do with those or what you can't do with those or if they went away. Your planned document, though, may already spell that out. If our company gets acquired, here's what's going to happen to your RSUs, and it'll tell you, A, B, C. And if you trust people in HR, your human resource department is always, as long as you trust them, is a great place to ask questions like this.

Not a great place to ask questions. So do you guys offer severance? Don't go ask HR that question. Remember, HR works for them, not for you. Exactly. HR represents the employer. You have to remember they're going to evaluate. your question. But what happens to my RSUs is a completely valid question and it doesn't mean you're going

anywhere. It's just like, hey, I've got all these RSUs and a bunch that aren't vested. How is that going to work? Paula, I'm also going to give you a great resource from a blog called levels. FYI, which walks through what happens to my RSU when my company gets acquired. I think they do a really nice job of getting even more into the weeds on this than we did today. So I'll pass that along to you and you can put it in your show notes. Perfect. And the show notes are available at afford anything.com slash show notes. One last thing that I'll say about vesting.

And this doesn't refer to RSUs. This is vesting generally, including vesting that takes place inside of a 401K or a company, any other company sponsored retirement account. And Pep, this is not specifically for you. This is broadly for everyone listening. if your company does a round of layoffs or shuts down or lets you go against your desires, you know, if you were not the person to initiate leaving the company, if they left you rather than you leaving them, sometimes you can negotiate for the value of the unvested amount.

And it doesn't always work, but it's worth a shot. You're on your way out the door anyway, so you may as well try. I have known people in the past who have done that, who have been laid off. And in the span of that layoff, they've emailed the company and said, hey, the purpose of vesting is for the company to give me an incentive to stick around. My intention was to stick around. Y'all broke up with me. So given that there is this unvested amount in my 401K, can you please either turn that into a vested employer contribution or can you please increase the size of my severance package, increase the size of my final payout bonus by that amount of money in order to compensate for it?

And I've known cases in which that has worked. So that's a quick tip for squeezing some more juice out of the lemon, right? Sure. No. Like we were saying to Ellen, that's most of what we talk about on this podcast, is the optimizing rather than the satisficing. That's a prime example. A lot of people might think, well, a pep doesn't have any leverage in that case or, you know, they may be in the same situation, but you do. Here's the reason that you have leverage.

They want you to sign one or maybe two different documents. They want you to sign either a non-disparaging, hold harmless agreement that, hey, I'm gone. I give up my rights to anything related to this company. It's all gone. Bye-bye. They want you to sign that. And then they may want you to sign a non-compete on top of that. And if they want you to sign those, they know that you have some leverage.

You can say no. You can just leave. but they don't want you to do that because they don't know what you know. They don't know what you might be walking out the door with. And they don't want you to walk out the door with anything. So they want to give you the severance in exchange for this signature. So remember that the signature is what they really want. And I think Paula, that may give you some more leverage in your head.

I don't think I'd actually play the card. I wouldn't say, oh, well, you need my signature. Don't do that. Just realize that you have more leverage than you know and have some confidence when you make that ask. All right. We've got one more question today. And it's from an anonymous caller, which means Paula Pant, that we are assigning names of journalists. Mm-hmm.

I would like to name this anonymous caller after the Pulitzer Prize winning prominent journalist, Ida B. Wells. So let's name this next caller, Ida. Hi Paula. This is Anonymous calling from San Antonio, Texas. I am 40 years old, single with no kids, and not planning to have children. I recently quit my job in Virginia and moved to Texas to become a full-time student and a 16-month accelerated Bachelor of Nursing program. I'm really excited about this career change after spending the first 20 years of my professional life in an often setting, that was boring and not really fulfilling. I'll graduate in January of 2024 and I'm planning to work in the ICU and maybe move to travel nursing after a couple of years. I am planning to work until I'm 65.

So my question is, as a full-time student, I'll have no income to report in 2023 and I have $5,000 to invest for my retirement. Should I take that $5,000 and simply put it into an IRA and start investing? Or should I use that $5,000 to pay the tax burden for a Roth conversion so that I can move about $40,000 from a tax deferred account into a taxed exempt account? I know they both have benefits, but I can't figure out which one is better for me in the long run of 20 years. So a little bit more financial background. I have $20,000 in emergency cash, no debt. My car is paid off. And when I graduate, I'm also going to be completely debt free, which I'm really proud of. In my retirement accounts, I have $165,000, $80% of which is tax deferred, 20% is tax exempt. So, 2023 provides an interesting opportunity to do the Roth conversion because I'll have no income at all as a full-time student. Financially, I'm really proud of some of the successes I've had in the last couple years, which include paying off debts and saving money for this career change.

That said, I do wish I had more retirement saved. So really increasing my retirement that's only, $165,000 right now is my number one goal for the next five years. Further down the line, I have some other ideas about travel or buying a home, but again, really focusing on retirement, so it has at least 20 years to grow. Thank you. I really look forward to your help, and thank you so much for helping all the people with your podcast. Ida, thank you for your question and congratulations on saving $20,000, on graduating debt-free. Fabulous. On everything that you've done.

My question back to you, do you have earned income? I think she was clear that she doesn't. Right. And if not, that answers Ida's question. Yeah, exactly. Ida, if you don't have earned income, what is referred to for tax purposes as earned income, meaning income that you've earned this year during this tax period. It's weird how that definition works. Earned income means income you earned everybody.

You heard it from Paula Pant right here. Well, I mean, it can't be income that you have earned in the past. It must be income that you earned during this specific tax period. There's no like roll over. earned income, right? You couldn't have earned it back in 1992. After this program at Columbia, she's going to work for Webster's. Ouch, Joe. I know what you're saying. Just poking paula, poking paula. Yeah, there is, there's no, there's no decision. She's going to, and you know what, it is. With the market being a sloth right now, I think it's a great time to do the conversion anyway.

Yeah, but I'd have to answer your question, the conversion between the two options that you outlined to the conversion is the only option that you're eligible for. There is no choice. That's the one. Between the two that you mentioned, that's the one you have to do. You can only make new contributions with what is referred to as earned income. When she mentioned this, the only thought I had, and I'm sure you might, too, Paula, is this is the one time. If you're in school, who knows what's going to happen? So I would ask a question about the emergency fund first, make sure that that is more than adequately compensated for because this is the time when she might end up having to take on debt. If she uses this money to pay the tax instead of leaving it for a time when she's not going to have any income, usually I'm all about it. I would just ask that question first.

And if she's fine on her emergency fund, then go do it. Well, that was an easy question. Bam! Did we win the Pulitzer 2? I don't think we've quite hit Pulitzer caliber yet. No, one star for this whole Pulitzer thing. But it's something to aspire to. Probably. The Pulitzer people, call our people, please.

Is that how it works, Paula? The Pulitzer people call our people? No, no. Well, you have to submit to the Pulitzer Committee. You can, though. I mean, this is a podcast. You have a podcast. they'll take podcast submissions.

Oh, there it is. It's right there, Paula. I just don't think, well, I can't speak for your show, but I haven't yet done anything. Have you? Exactly worthy enough. Have you heard the jokes? To even constitute a submission. Have you heard the jokes we make up my show?

Like, I don't think this type of humor is appropriate for the Pulitzer Committee. We did during the trivia question that you missed, Paula, for people that just joined the show, is usually a part of our Friday roundtable. But like everything, she's taken a hiatus from that. But on the Friday roundtable trivia question, which is a year-long competition, Paulette Perhatch, who's on our show and has written things that have been picked up by the New York Times is an example. Great writer. But Paulette's anniversary of her FIFF Fund was just a couple weeks ago.

So we did the etymology of the word, maybe not. That may remove us, that segment of the show may remove us from Pulitzer eligibility. Oh, no, that's not a barring criteria. In fact, you should just submit that one. I probably should. Can you imagine these very serious people sitting around the table?

Oh, listen to Minute 32 of the Stacking Beddgroom show. Give them a good laugh. Yeah. You know what's funny, Joe? I am sitting in the Pulitzer building right now as we record this. Oh, there's a flex. No, that's just the name of the building. Look where I'm sitting.

It's simply the name of the building. That is cool, though, isn't it? The room where the committee meets is two floors down. No, but it still is really cool. It is. It is cool. To be around that much history and that many people who've done so many phenomenal things in journalism has got to be just a rush, like it around so many people that are moving in that business

and really truly show you what professionalism is all about. It's got to be great. Just great. It's amazing. Some of my professors that are people who have known their reputations for years. And so I'm a little almost celebrity starstruck by the fact that these people who are so renowned in the field are sitting 10 feet away from me. I have a question. Do you think it would help if you're not sure about like your class project or the term paper to ask for the autograph just before you turn it in? No. Next question. That was an easy one.

Wouldn't that be great though? I'm a big fan, by the way. Here's my paper. Just wanted to tell you ahead of time. I love that tie. Here's my paper. No. They might see through that, huh? Yeah, yeah, we're a skeptical bunch. Speaking of skepticism, Joe, where can people listen to your show? Well, as they just heard, they could hear all kinds of scintillating deep conversations on the stacking Benjamin show every Monday, Wednesday, Friday. We seriously do have some, as you know, Paula, have some serious and deep conversations. But we also laugh a lot like we do here.

Absolutely. Well, thank you for tuning in. This is the Afford Anything podcast. If you enjoyed it, please do three things. Number one, leave us a rating and a review in your favorite podcast playing app. Number two, share this with a friend or a family member. That's a single most important thing that you can do to spread the message of great financial health. And number three, subscribe to the show notes. Affordanithing.com slash show notes. Thank you so much for tuning in. I'm Paula Pant. I'm Joe Saul-C-hi. And we will catch you in the next episode. Here is an important disclaimer. There's a distinction between financial media and financial advice. Financial media includes everything that you read on the internet, hear on a podcast, see on social media that relates to finance.

All of this is financial media. That includes the Afford Anything podcast, this podcast, as well as everything Afford Anything produces. And financial media is not a regulated industry. There are no licensure requirements. There are no mandatory credentials. There's no oversight board or review board. The financial media, including this show, is fundamentally part of the media. And the media is never a substitute for professional advice.

That means any time you make a financial decision or a tax decision or a business decision, anytime you make any type of decision, you should be consulting with licensed credential experts, including but not limited to attorneys, tax professionals, certified financial planners, or certified financial advisors, always, always, always consult with them before you make any decision. Never use anything in the financial media, and that includes this show, and that includes everything that I say and do, never use the financial media as a substitute for actual, professional advice. All right, there's your disclaimer. Have a great day.