Afford Anything - The Seven Stages of Financial Independence, with Joshua Sheats

Episode Date: September 16, 2019

#215: We are really digging into the archives with today's episode. This originally aired back in 2016! Besides being another fun and fascinating interview, this is one of our most popular episodes. Which isn't surprising, given the topic we're exploring. :-) Financial independence means many things to many different people, which might be why we find it challenging to settle on a definition that everyone can agree on. Regardless of what your personal definition is, Joshua Sheats, a financial planner and host of the well-known Radical Personal Finance podcast, says that financial independence can be separated into seven stages. We explore these seven stages of FI in this episode, and we also talk about how to enjoy the journey no matter what stage you're at. Enjoy! For details, visit the show notes at https://affordanything.com/stages-financial-independence-joshua-sheats/ Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything. You just can't afford everything. Every choice that you make carries an opportunity cost. Every choice comes with a trade-off. And that doesn't just apply to your money. It applies to your time, your energy, your attention. It applies to any resource that you manage. And this leads to two questions.

Number one, what do you value? Number two, what choices are you going to make as a result of those values? Answering these two questions is a lifetime practice. And that's what this podcast is here to explore. My name is Paula Pant. I am the host of the Afford Anything podcast, and I am recording this from a hotel room in Tokyo, Japan. It is currently September 2019.

And if you've been a long time listener, as you know, I am taking the month of September 2019 off from producing new podcast episodes. I'm referring to this as my September sabbatical. So I'm taking this month off from creating new episodes. And instead, I am re-airing some episodes that we already. originally aired a while ago episodes that many of you may have missed. And so today's episode is one that we originally aired almost exactly three years ago. We originally aired this in August 2016. This episode that you're about to hear is one in which we talk about the seven

stages of financial independence. Now, what does that mean? In the financial independence community, many people, when people are having conversations around this concept, people tend to talk about FI as a binary yes, no, you've reached it or you haven't. That's the concept that a lot of people have around it. I really disagree with that framework. I view financial independence as a spectrum or a dial or a set of stages or steps. And so the interview that you're about to hear, which again was originally published in August 2016, this interview that you're about to hear is one in which our guest, Joshua Sheets, talks about what he refers to as the seven stages of financial independence. And what I love about his reframing of FI into

stages is that it steps away from this yes or no line in the sand construct of FI and I think really rounds out the picture. It creates a much more nuanced, more complex and I believe more true to life understanding of the notion of financial independence and the journey towards it. So the guest, Joshua Sheets, has a master's in financial planning and ran his own financial planning firm for many years before he walked away from it in order to be the full-time host of the Radical Personal Finance podcast. So with that said, let's go right into it. Here's Joshua Sheets talking about the seven stages of financial independence in an interview

that we recorded almost exactly three years ago. Enjoy. Hey, Joshua. Hey, Paula. Thank you for having me today. I'm so glad that you're here. I know that a lot of my listeners also listen to your podcast, Radical Personal Finance. Will you tell us a little bit about it? Oh, that's a story. It's been doing the show for two years now. And I come from the background of working as a professional financial advisor, which probably makes me unique in the personal finance space. There are a lot of shows now, but I'm only aware. of a handful that are created by people who come from the professional financial planning background. I closed my financial planning firm in order to start radical personal finance because I got

frustrated with the challenge of people presenting technically accurate information in the personal finance space. And as a longtime financial advisor, I always got frustrated when the loudest voices in the personal finance world were Dave Ramsey and Susie Ormond. And I would always say, come on, why doesn't somebody else create something? So I said, well, let me do what I tell other people to do. If you see a need that's not being filled, stop whining about it and go fill it. So two questions there. Number one, how do you present really technical information in a way that is accessible and engaging? And actually, let me take that a step further. Can you give us an example of something that you think people should know, like a little snippet of personal

finance wisdom that's technical but also approachable? Sure. Here's the best. My favorite testimonial email I ever got from a listener was a listener who sent me an email and to paraphrase basically said, Joshua, I want to thank you for the content of radical personal finance. Today is my wife's last day at work. I said, based upon listening to the strategies that you present in your show and what you teach us to do, we found $30,000 per year of savings from my wife not working. So what we're planning to do is she's going to be staying at home with the kids and we're very much looking forward to it. So because instead of us both hustling through a busy morning, hustling through rush hour traffic to get to the office, babysitters for the kids,

I'm going to be able to get up early, go to the office early. She's going to have a leisurely morning with the kids. I'll get off early because I'm going in early. I'll skip all the traffic and we're going to have a better family life. And it's all based upon implementing what you've taught us with regard to professional financial planning. And so that's the meaning and the impact. And that's not the only email like that. It's just the most dramatic where I've posted it on my social feeds and whatnot so I can prove the email exists.

But there have been many of those. And so the principle behind that is that when I teach people to budget or, more appropriately to set up a cash flow statement. I teach them to start and account for all of their income and all of their expenses. And so this is an important technical financial planning tool because usually we as financial planners, we want to start to address taxes and figure out how we can minimize the cost of taxes. The biggest category expense that most of us have in our budget is not our house payments. It's not our food payments, not our transportation, it's our taxes. And so I teach people to start with their gross income and then itemize each and every expenditure. And then

then tackle each one of those things. So where that $30,000 of savings came from, it came from being able to have a different student loan, excuse me, income-based student loan repayment. It came from being able to lower the marginal tax bracket in which this family was, recognizing that the wife's income was being earned at the highest marginal tax rate. And it came from being able to reduce and lower many of the specific expenses for working. And so they found the $30,000 of savings,

including also fewer child care expenses, etc. But that's only possible if you actually look at all the numbers. And so it's a standard everyday fair in the world of professional financial planning, but most people, when they sit down at their budget, they try to look at the latte factor or try to figure out how do I save a few bucks on my car insurance. Well, that's important. But let's start with the big one, which is taxes. When you say to put all of your income in one account, do you literally mean one account? Because my first thought when I heard that was, well, wait a minute, I have business income that cannot be commingled with my personal income. You know, I've got dividend and capital gains income. I like to reinvest that. I don't want to go too far deep down that rail, but what

exactly do you mean in terms of implementation of that? Yeah, I don't mean account. What I mean is statement. So it doesn't matter how many accounts you have. I have multiple accounts. We all do. You're going to have different accounts for different purposes, different businesses, different investments, different approaches. So it doesn't matter whether you have one. one actual checking account or whether you have 30, the key is to have everything reflected on one statement. So the mistake that people make is when they budget. And let's just talk about very simple, no investments, just a standard employee.

They usually start with the money that shows up in their checking account. But what they're missing is the fact that their income taxes have been deducted, their employment taxes have been deducted, their health insurance has been deducted, then any group benefit costs have been deducted. And all of that stuff is missing and they can't see it. Well, if you can't see it, then you can't plan for it. So I teach start if you've got a $60,000 per year salary, that doesn't mean that your monthly paycheck shows $5,000.

It just simply, but start with $60,000 and figure out how much did you pay in income taxes last year? That's probably the biggest one. When I was a professional financial advisor, I'd always ask people, how much did you pay in income taxes last year? And I would guess 80% of the time somebody said, oh, I didn't pay anything. I got a $4,000 refund. So wait a second, no, let me ask you the question. How much did you pay an income taxes last year?

And the average person has no idea how much they spend an income taxes. They only know if they were over or under or if they got a refund. Well, that's bad planning because that's one of the areas where we need to focus on first to figure out, is there a way that you can adjust your situation and lower your tax bill? Right. Yeah, if you don't literally write the check, then oftentimes you're not aware of the expense. I think that's a reason that so many expense ratios on various different types of investing accounts are so high because it's a silent cost. Right. People don't literally write the check. Right. Yeah. You have an alphabet soup of credentials. I mean, you've, like, you're Joshua Sheets, comma, the entire Roman alphabet, you know. You've obviously spent quite a bit of time getting those credentials. What made you shut down a business that you had, you know, kind of sunk so much cost into time cost and probably financial cost as well? How and why did you shut that down to go into podcasting of all things, which is. a difficult medium to gain traction in.

The credentials are just simply an indication that I try to practice what I preach. And the best investment that most people have the opportunity of making is in their career. Most people should ignore just about any other business or investment opportunity until they've established themselves as a leader in their field. And they should have a plan within the next few years to go from the bottom 80% of their field to the top 20%. And they should have a plan over the next few years or decade to get from the top. 20% to the top 20% of the top 20%, which is the top 4% of your field. And there's a very simple, straightforward path for most people to do that. But if you look at the amount of money that you're earning today and you look at who is in

the top 4% of your field and the amount of money that they're earning, there will be an exponential difference. And so all of those credentials were just simply me practicing what I preach when I was working in formal financial planning and systematically building myself and moving up in my field. Now, the reason I walked away from it was because I think asking people what they would do if they were retired is not a great question to start with. Oftentimes, in the world of personal finance, especially I play a lot in this early retirement world or in the world of just mainstream financial planning. We talk a lot about retirement. And I think that's useful.

I advise people, if you've never done it, ask yourself a journaling question. Pretend that you want a million dollars tax free and a lottery. Now, pretend that you're financially independent. What would you do? That's an important question. But I teach people that they should start with a different question. And that question is, what would you do if you knew you could never retire? I think we make a mistake of always focusing on retiring comfortably until we first developed a plan and a strategy to work comfortably.

Because the reality is most of the things that you would do if you were retired, you could probably figure out a way to build an income or a business on doing those things now. The story that I go to because it's so appropriate is I go down to the Keys every summer down here in Florida where I live. And I always run into these guys in the Keys who are working as fishing guides. And guess who they're guiding on their fishing trips? They're guiding people who are desperate to come out on vacation and fish. Or they're guiding people who are going on their big trip when they're retired. Well, guess what? You don't have to wait for vacation or retirement to go fishing.

You can just go and build a business or get a job as a fishing guide. A lot of these guys do it. So if you really want to fish, recognize that you don't necessarily need to invest 40 years into becoming a multimillionaire so that you can fish. Just go and think about fishing. So I looked at my plans and I looked at my careers and I looked at this world of podcasting and this world of personal finance and I followed it for a very long time. And I said, you know what? I've got an idea. I've got a hunch.

I've got some ideas on how I think I could build a business related to this concept I came up with a radical personal finance. and I said if I were running that business the way that I'd like it to be in my head, I think that'd be really valuable and I think it could be profitable. And if I had 10 million bucks in the bank and I were completely financially independent, I think I would still want to do radical personal finance the way that's in my head. So why would I spend another couple of decades working and building this financial planning firm just so I can retire and do this? Why don't I just go ahead and make and develop a plan to get there a little bit quicker?

And that's why I left. So how did you make and develop that plan? And I'm asking for the sake of any listener who may not necessarily want to start a podcast, but may want to leave their current job in order to do something that is a little bit more risky, has potential, but also has risk. How do you plan for that? Well, a couple of things. And all of the history is there in the archives, if you want, I can send you some shows to listen to.

But I've told the story fully publicly, all of the details. But the first thing to developing a plan is to test an idea. So the first 10 episodes of Radical Personal Finance were recorded, while I was still a financial advisor. And I thought I had created a plan in a way that I would be able to do both things concurrently. So I recorded the first 10 episodes of the show without any plans to close my firm. And I published them. And it was based upon the audience feedback where I started to see that, yes, there is a demand for this.

There is traction. There is a desire for this type of content. So I tested it first. One of the keys to business success is test, test, test, and then iterate. Don't spend a lot of time creating something, working on it, and trying to develop it, and then go out and see if the market wants it. Create as much contact with the marketplace between you and your product or service as quickly as possible. The best entrepreneurs are the ones who as soon as they have even the hint of a working idea, they draw it on a napkin and go find somebody and they try to sell it. That's what the best businesses are based on.

And they sell it. And then they say, how can I make it better? And they get it back and they sell it. And as soon as they've got the minimum viable product, they sell that. And then they take that back and improve it. That's what the best entrepreneurs in the world do. So you should do that with your businesses and with your career. So I tested it and I got some good feedback.

Now, I had to shut the show down. I'll skip that whole story. But at that point in time, I was sitting there questioning, well, wait a second, what can I do? Because, yes, to launch into the world of podcasting as a profit-making opportunity, it was kind of like a jump off a cliff. I compare it to saying, hey, I'm going to become a millionaire by writing best-selling novels. Yeah. In theory, it's possible.

They're people who have done it, but if you've not written a dozen best-selling novels, it's not a great financial plan. So the way that I figured it out, and number one is I was in a good position financially. I've always kept my expenses low. I was very short on cash when I started it because of some investment mistakes that I had made and about the fact that I bought a house and had just a bunch of expenses, having a kid, some things like that that wiped out my cash. But I always kept my expenses low. So I didn't need to make a lot of money. I didn't need $15,000 a month to live on.

I just needed a few thousand dollars a month to live on. So ultimately, though, the plan that I came to was that all I needed to do was get out of the financial planning industry. And the reason I had to get out of that industry is because in order to create public-facing content, I had to get rid of my licenses. When you're licensed, do you have to deal with the FINRA and the SEC? And it's just a nightmare. And so I had to dump all my licenses in order to get out from beneath their regulatory system.

And so the plan that I came up with is I'll get a part-time job. and I'll get a part-time job. I'll make enough money from some kind of dead-end job to support my family while I'm building the business. And I bounced around for a couple different things, tried all kinds of different things. But ultimately, I did wind up finding a consulting contract in the financial planning industry, but one that didn't require me to be licensed. And that was enough for me to pay my bills from while I worked the rest of the time to build radical personal finesse until it was finally profitable. Wow. So yeah, key takeaways. Test and iterate the idea first. And if the idea passes the test, if it passes muster, build yourself a safety net, which in your case was a part-time job. Right. Excellent. I'd like to ask you about the seven stages of financial independence. We talked about this in an earlier episode on this podcast in an interview with J.D. Roth. He cited your seven stages of financial independence. And in my opinion, that was one of the most compelling parts of the interview because I think that this is, it's an idea. that I've never heard anywhere else. Can you walk us through, actually, before you take us through the stages, can you walk us through conceptually what seven stages means? The idea of seven stages is to figure out how to make big goals more concrete and more specific and able to be

achieved more quickly. So in the personal finance world, the big cahoona is Dave Ramsey. And his key to fame is the debt snowball, where he talks about. get yourself some quick wins of paying off some little debts as quickly as possible and just get yourself that wind in your sales. And he's proven across millions of people that this is an effective psychological tool and tactic. So I'm just using that because it's in the personal finance world. You can see this in every part of the world. Make goals small and specific. And you can get big things done if you have small steps. So when it comes to building for retirement, I learned this as a professional financial advisor. I would ask people, hey, do you

want to be in a position where you don't have to work if you don't want to at some point in the future or when do you want to retire? And they all say, yeah, I do. Sixty-five and I want to spend as much money as I'm spending now. Well, the average person has no chance of retiring because they'll never save enough money. And so I'd come back with a requirement that they start setting aside $15,000, $20,000 a year to hit this goal. And they'd look at me and it was completely irrelevant to them. Right. So I learned that in order to make progress, I would do everything I could to make that first little behavior modification small. I'd try to get that number of what they needed to save as small as possible. And then I'd tell them next year, I'm going to come back and we're going to

increase. And let's not start with $15,000 a year. Let's start with $250 a month. And then let's plan to contribute and increase it a little bit as time goes by. And so the stages of financial independence or stages of financial freedom were just my attempt. And I was inspired, I appreciate JD mentioning it because I know that he was inspired by mine. I was inspired by it when I thinking about the problem and reading and reviewing Tony Robbins' book Money Master of the Game when that came out a year ago. And he was talking about these stages. And I said, wait a second. This is a good concept, but we should break it down more. So I took his stages, changed all the words, changed all the stages. But that was who I credit the idea to as well for me. And so the ones that I came up with as being the most applicable was stage zero, financial dependence, stage one, financial solvency, then financial stability. And I'll explain these in a moment. Debt freedom. financial security, financial independence, financial freedom, and then financial abundance. So let me go through them quickly because what I was trying to envision was how somebody could go systematically from deeply in debt, broke, to wealthy and experiencing complete financial abundance.

Financial dependence, stage zero is where we all begin, where we're in a place of dependence on others, whether that's because we're children and we're depending on our parents or because we've been in a difficult spot and we're depending on charity or government assistance of some kind as an adult. But the first thing to do is to go from financial dependence to being self-supporting. That's the first stage. So that's stage zero. That's stage zero. Well, actually, stage zero is in a place of financial dependence. Stage one is financial solvency. And so how I define becoming financially solvent is that you're able to support yourself on your own income without the aid of others and that you're current on all of your bills. And this is a disease and an epidemic among

my age group. I'm 31 years old and it seems like everywhere you turn, there's another story about some millennial or some 20-year-old who's moved back home and is living off of their parents' dime. And so I wanted to say, listen, the first thing you need to do is get off of the financial assistance program and get onto your own two feet. Have a little bit of self-pride and self-worth and become financially solvent. The other aspect of this is being current on your bills. And when people are behind on their bills, you can't do anything until you're current on your bills. There really is nothing that's more important. And so I wanted to factor that in here as well. And just to clarify, so this is not being debt-free per se, but this is being current

on the minimum payment required on your various bills. Correct. Not being debt-free, just simply being current. If somebody's behind on their bills, they've got to figure out a way to get current. Excellent. You know, we had several episodes ago, we had a guest on here, named Evelyn Connors. And she explained, she kind of came from the normal person point of view and explained that she was, she's always been financially solvent. And she thought that as long as she was financially solvent, she was doing really well. You know, she kind of thought that stage one was where it stopped. And she's only recently realized that there are more stages above and beyond that. That's what this reminds me of is I think there are a lot of people who

stop at stage one thinking that that's good enough. But there are many more steps. to go. One of the biggest challenges that we face when designing financial philosophy is we generally have a problem. When considering the things that we can do, we usually have a problem of what would technically be called selection bias, meaning that our reference group is usually relatively small. If you grow up in a certain neighborhood or you're exposed to a certain type of person, they become your reference group. So if your reference group is, well, most of my friends are behind and as long as I'm just current on all my bills, everything's good, then you'll realize that that's about as big as you can go.

But when you change your reference group and you find out all of a sudden, hey, you can become a millionaire, you can build a business, you can achieve X. It changes your approach and it changes things. So one of the most powerful personal and self-development principles is to constantly challenge your reference group. And this is hard because usually we also, another bias, we also want to engage and indulge in confirmation bias. We have a tendency, you know, I have a tendency to filter my Facebook feed based upon the stuff that I want to see. Well, then I don't, I'm not left with any challenging opinions. And I'm not left with anybody that can challenge me. And so one of the healthiest mental habits that we can build is to always challenge our opinions and say, okay, I believe this.

Now, who has the exact opposite opinion of that? And let me go and find the strongest argument against what I believe. And let me see how I can deal with that argument. Right. Yeah, that's how you dismiss confirmation bias. But selection biases, you know, it reminds me there's that quote, a famous quote from Jim Rohn that says you're the average of the five people you spend the most time with. That absolutely reflects selection bias. You tender mirror the people around you. Yeah, and it's very true. When you get to the point where, I mean, I could give all kinds of examples, but you just start to see it.

You start to see it. When you hang out with entrepreneurs, people who control their schedules, you start to reflect that. When you hang out with employees, you start to reflect that. When you hang out with wealthy people, you start to. to realize, wait a second, they've got a different approach. So we can change that. I think the danger of that quote is to say, well, I'm just going to go and change all five people. I'll tell you where I started. I didn't ever know all kinds of tons of rich and successful people, but guess what? You can change your book. You can read their books and you can start to surround yourself with their ideas and their concepts and their thoughts, and that'll have an impact in your life. You can know them virtually. Absolutely. You know, I have found that just by surrounding myself with people who have achieved

things that I want to achieve. One of the biggest things that I gain from listening to them or reading them is noticing that they often tend to think bigger than I do. And that always jumps out at me. I realize time and time again, Paula, you're thinking too small. I have the same problem. So financial solvency is stage one. What happens after that? Where do you go from there? Stability is where the next state to move from solvency to stability, which I just simply defined as being current on your bills and having built a buffer account. Now, I don't know what you want to call it. Whether you call it, yeah, emergency fund, rainy day fund, cash reserves, buffer account

doesn't matter. And so here's where I'm kind of leaving it open if somebody's doing, again, Ramsey's baby steps. That's his first thing. And I think that's a really important deal because there are two aspects of it. If you don't have cash, then an unexpected problem can knock you down or you might miss out on an unexpected opportunity. And so I've done a decent amount of research, both personal exposure and also just studying people who are very poor.

And one of the things that you see that's so challenging about poverty is often people who are very poor is they can never scrape together enough money to not be knocked backwards. It's like, okay, I had these medical bills. Well, then all of a sudden my car got broken. And so now I'm fixing the car that was broken, et cetera. And they can kind of never get just a little bit ahead. or on the flip side, sometimes there's an opportunity of, hey, let me move from this dead-end job and a dead-end neighborhood to move to another city and another state where there's a more bustling economy where there are many more opportunities.

Well, why can't I go? I don't have the money to pay for the move or I don't have the money to pay for the first, last, and security on the apartment. This is the reality, and I feel like we in the personal finance world often ignore this reality of those among us who are the poorest. And so the key is to have some money in your hands that's not in a retirement account, that's not stuck away from you, but to build some cushion and some savings. Now, I don't know how much money that is, and I don't define it.

That's exactly what I was going to ask. I think it's different amounts. I mean, for some people, $1,000 is life-changing. For other people, $10,000. For other people, $100,000. I'm convinced that one of the major damages that we in the professional financial services world do is we get too much money out of people's bank accounts and we put too much money into investments.

If you put thousands of dollars into the average person's bank account and let them experience what that is, they need to get there little by little so they don't spend it because many people, if you woke up a thousand of dollars and you didn't put it there, you'd spend it. But you start to see, hey, all of a sudden, I've got tens of thousands of dollars at my disposal. It changes your decisions. You can make different decisions. So I don't know the amount at least three or six months of expenses for very poor people or deeply in debt. Maybe it's $1,000. Maybe it's $100,000. I'm not trying to define it.

I'm just saying you need a buffer account of some kind. So we'll return soon to this conversation with Joshua Sheets in which we talk about financial independence. But one thing that strikes me is that so much of what we talk about involves lifelong learning. When we talk about anything ranging from investing to entrepreneurship to side hustles to even time management, there's a huge lifelong learning component to it. And that's why I'm really proud to have Skillshare as a sponsor of the show. Skillshare offers over 30,000 online classes in area. like entrepreneurship, finance, marketing, productivity, freelancing, blogging, and much more.

So if you've always wanted to start side hustling, for example, Skillshare is a great resource that will help you develop the skills that you need to succeed in these areas. Mike Vardi, who's been a previous guest on this show, he has a class called Productivity Habits That Stick, Using Time Theming, so that's a class that he teaches on Skillshare. I've struggled with procrastination my entire life, so there's a class that. by Jill McCabe that's called Get Unstuck, Beat Procrastination once and for all. And when I stop procrastinating, I will finally get around to taking that class. So the point is, whether you are returning to a longtime passion project or whether you're

challenging yourself to get outside your comfort zone, you want to explore something new, like, whatever you're trying to do, Skillshare has classes that can help teach you how to do the thing. So if you're interested, join the millions of students who are already taking classes on Skillshare with this special offer, which is that you can get two months of Skillshare for free. Again, that's two months of Skillshare for free. Skillshare is offering this as a special promo for Afford Anything listeners. In order to sign up, go to Skillshare.com slash Paula. Again, go to Skillshare.com slash Paula to start your two free months right now. That's skillshare.com slash Paula.

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slash afford anything 80 and enter afford anything 80. That's afford anything 80. Hellofresh.com slash afford anything 80. What would you say to people who are afraid of keeping that money in cash because it's losing out to inflation? There's opportunity cost in terms of not having it invested. That's a common objection that I hear. I would say try it and see if you go back. And here's what I mean. Certainly, there are reasons why you wouldn't want to keep the bulk of your money in cash. I would not recommend to somebody who has, let's say, a net worth of $2 million. They're 63 years old and they want to retire.

I would not recommend to them that they keep $2 million in cash. That's not solving the problem. But that's very different than giving advice to somebody who's 25 years old and has $10,000 to their name and saying, listen, just keep the $10,000 of cash in a savings account. Because for a 25-year-old, $10,000 is a really great start to a freedom fund. That's what allows you to chase the better job offer. That's what allows you to be able to walk out of the place that's not treating you well and go to a place that is because you have a few months of expenses to your names. That's the money that allows you to be able when you've got the business idea to invest $4,000 or $5,000 into the business idea.

And so the mistake that people make is thinking that you're doing something for the long term. One thing you'll see, if you interact with people who are wealthy, they generally have the ability to get their hands on a significant amount of cash in a relatively short period of time. And I am convinced the ability, I think of an example. When I bought my minivan, I was looking for a minivan and I was looking and looking and looking. And the model that I was looking at was worth selling for about $8,000. And I came across one, it was either $5 or $5,500. It was listed a little bit more. But I said, this is what I've been looking for.

Let me see if I can move fast. Called the guy, went to see him. It was a Saturday deal on a holiday weekend. And by being able to put, I think it was $5,000, being able to put $5,000 of cash in his hand, allowed me to save a couple thousand bucks, being able to move. move fast and get the deal. And I've seen that happen again and again and again and again. Being able to move fast and buy things and I do this, I've done this frequently with different vehicles. I come across a trailer on the side of the road. Okay, here's cash. Make it happen.

And those little things when you're building will make a much bigger difference than the $122 of foregone interest that you could have gotten if you had invested in. Maybe. So there's an opportunity cost that comes with not having liquidity. Right, right. And when you experience it, and I'm trying to, not to put numbers on it, but I'm trying to establish the concept. When you experience the freedom that comes with it, I come from professional financial services. Many young people routinely cash out their retirement accounts because they want to make a life change and they didn't plan for it. Now, you say, yes, it makes you hurt. But I had many clients who even though I worked

hard to try to prepare them, they would start a Roth IRA and then cash it out. They start a 401k and cash it out. Well, you get so destroyed when you pay expenses at that high rate. A significant thing I learned working with clients, as I said, I am going to emphasize and encourage people to have more money at their disposal and not invest so much so they have more money because having money changes and opens up worlds of opportunity to you. Okay, so stage one is financial solvency. Stage two is financial stability. Stage three is debt freedom. My recommendation, if you have debt, you probably want to get rid of it. Now, I have to admit that not all debt is created equal. So I don't make just a blanket statement of pay off all your debt. There's a major difference

between debt that's tied to consumer debt that's tied to something that's going down on value versus debt that's making you money, whether it's a productive debt or tied to a business asset or an investment of some kind. So I'm, and there's different ways you've got to look and assess each thing specifically. But I put debt freedom here to say that I think most people would be most well served by getting rid of debt and never going back. Does that include mortgage debt? I'm willing to include anything. Again, I would need to look at it. And so that question, there is an answer to it. It may not. For example, I wouldn't if I had a low fixed rate interest mortgage debt and I were looking at other investments. I wouldn't just say, let me just focus on

paying down my mortgage excessively. So I'm primarily here talking. about clearing consumer debt, clearing any old unpaid debts and getting rid of any high interest rate debt, clearing any bad debt. But the idea here is by encouraging people to get free, I think you gain a huge amount of freedom. Again, go back to the worst case scenario. Go back in 2008 when we went through the Great Recession. One thing that challenged many people that kept them stuck was the fact that they owed too

much money on their house and they couldn't sell it and get out of it. And so there were opportunities that the economy wasn't bad everywhere. The economy was just bad in some places. And there were other places that were desperately hungry to get workers there. But because they couldn't get out of their house and they couldn't sell their house for what they owed on it, many people were stuck. And so by focusing on zero debt or on very low debt, you gain a tremendous amount of freedom and flexibility quickly that leads to more opportunities for you than by still being heavily in debt. How do you define, you mentioned high interest debt. How do you define high interest? I don't have a strong definition for that. I think of double-digit interest as high interest

today's world. It's hard because these things are relative. When you say double-digit interest is high, you go back to the 80s and that was not high. And so I look at, you look at the 80s. And so I look at it and I think about it more in terms of the process and the outcome. And one of the challenges that I have, Paula, in answering questions like that and even in doing a show is I can argue multiple sides of an issue. So here would be an example. Is it good? Should I pay off my debt or should I invest? There is a very compelling argument to say that no matter what the debt is, you should just invest because you should be focused on investing and earning at a higher rate than the debt. So if somebody's an entrepreneur, somebody is an investor of some kind, somebody's wheeling

and dealing and doing business and doing transactions, for that person to have a little bit of high interest rate credit card debt that's left over or that they're working on is much less concerning than somebody who's working a job with a stable salary, who is overspent for years and years and years and years and who doesn't show any indication of focusing on something else. And so I would recommend to the person who's the business person, I would be encouraging them, don't worry so much about the debt. Let's go and do some deals. Let's go and make some money. Let's go and make some good investments and focus on that. And then we'll come back and clean up the debt when we can. Whereas if I'm working with somebody who's in that very stable scenario, they're working a job, they have a very stable salary. Now I'm going to be saying to them, maybe you need this behavior modification. Let's clear this debt. Let's focus on getting completely debt free and then just building systematically over time. That is a far more nuanced answer than I've heard from most. Well, it's the truth.

And that's what most of the time, that the answer in personal finance is always, it depends. And it's what I try to do on my show that some people love and some people hate, but I try to say here are the variations of it. It depends. Give you an example. Paula, in what order should you pay off your debts? What debts should you pay off sooner versus others? Well, if you took the Dave Ramsey Snowball approach, which is based on psychology, then you would start with the debt that has the lowest balance regardless of interest rate so that you can get the psychological

wins. If on the other hand you were to take the mathematical approach, you would start with the debt that has the highest interest rate regardless of the size of the balance. Right. And so that's as deep as most people go. And that's an important distinction. But what most people miss is the only reason that that is a valid comparison between those two. And the only reason that a guy like Dave Ramsey would say ignore the interest rate and focus on the time is because he's, focused on a two-year time horizon. He says in his book and in his work, you should have a plan to get out of debt in about one to two years. Well, when you actually run some numbers and you look and you compare various collections of debt and their interest rates associated with them, but you put

them on a one to two-year timeline, even the mathematical approach, there's a very little mathematical difference between those. So when I look at that, and I have an entire show on this, episode 32 of my show is called, in what order should I pay off my debts, a rational guide to the debt snowball, debt avalanche, and other considerations. But here's what the actual consideration should be. Number one, the amount of debt. Number two, the interest rate of the debt. Number three, the terms of the loan.

For example, I'd much rather get rid of a debt like a student loan and keep around a credit card debt because the student loan is not dischargeable in bankruptcy. If I wind up in real problems, I can't get rid of the student loan, whereas the credit card, it's an unsecured debt. So you need to consider the terms of the loan. You need to consider is the interest deductible or not? Is the debt secured or not? Is the interest rate fixed or not? This falls under terms. Is the debt bankruptable?

Like I said, can I refinance this debt? Is this debt consumer debt or business debt? When you start factoring these things one on top of another, the right answer will generally emerge. But it's not as simple as A or B. You have to have a specific set of facts in a specific circumstance to be able to give good advice on something like that. Right.

Absolutely. It's hard to, and I guess this kind of goes back to my earlier question about explaining the deeper nuances in a way that is also approachable because it's very hard to put that in a headline. It's very hard to put that in an article. Indeed. You can't fit that in a 500-word blog post. That's why that, let's see, how long was that episode? Episode was something like probably over an hour. I try to make it accessible and I try to make it comprehensive. I don't know how to make it short. I'm a big believer in going long when that's necessary. One of my most popular and most controversial blog posts is about the rent versus buy conundrum, and that one clocked in at about

5,000 words. Yeah, you have to. It's most of the people with different opinions are reasonable, rational people. They're just looking at something from one side. It's like the old example of the elephant. Three, four blind guys are touching an elephant and trying to describe it. One guy's holding onto the tusks, and he says it's sharp. It's like a spear.

One guy's holding a trunk and says it like a snake. One guy's holding a tail and says it's like a, it's like a, a fan. Another guy's holding the legs and says, it's a tree. They're not all wrong. They're just looking at one aspect of the elephant. And personal finance is very similar to that. How much credence do you give?

You know, oftentimes, in books, on blogs, in the mass media, you hear people talk about, pick the option that lets you sleep easiest at night. That is a very diplomatic and non-controversial piece of advice. How much credence do you give that? I mean, how valid should that piece of advice be?

I give it a lot. As long as there's a caveat that perhaps you need to learn something, let's give an example. I had a financial planning client when I was working as a financial planner. And this client, they were retirees. They were coming up on retirement. They were in the mid-to-late 60s. They had been excellent accumulators of money. They were financially independent. They had no debt. They had low expenses, et cetera. And one of the debates in the relationship was that the wife liked to keep at least $100,000 in her checking account. And the husband, was like, why do we need all this money in our checking account? They spent very little money. He's like, we don't need this much money. Why don't you invest it? And she didn't have a rational answer for it other than it makes me feel good. Well, my answer on something like that was keep the $100,000 in the checking account. They weren't, I mean, they had somewhere like a million and a half bucks, something like that. So it was a substantial number for them, but their income was sufficient for even their bills. Their investment capital was relatively low. And I thought the peace of mind in that situation that she drew from it was really substantial and that she was definitely going to

be well served by just being comfortable and that was her safety blanket and so i've learned not to discount when people the feelings that people have feelings are important many of the major mistakes that we make with money are are uh are uh are because of problems with rationality we we get we start to feel fear and so in a situation like that the way that i would defend it if i were called to defend it to a financial inquiry board, would be to say, listen, having $100,000 in that checking account helps her to feel more confident. So now over here, when I've got the money invested, and we go through a 35% decrease in the account value, I turn and look at this checking account and say, listen, you've got two and a half, three years of expenses just sitting here in the checking account.

Okay, do me a favor. Just sit tight for six months. Come back and see me in six months. And if we need to adjust then. Well, in six months, chances are the investment account is probably adjusted. And even if it takes a couple years for the value of that investment account to adjust, then still, I'm going to keep saying, give me another six months, give me another six months. So that $100,000 to solve that emotional need of safety and security is a really valuable tool, which allows me to keep the money invested over here in a way that's going to grow more over the long term. Okay. Actually, what I'm hearing in there is a, I kind of hear two examples. So on one hand, there's the peace of mind, there's the emotional satisfaction that comes from cash, liquidity.

On the other hand, there's the panic that comes from when the market drops and some people want to turn paper losses into real losses. So there we've got kind of two different examples of emotions, one in which acting in accordance with your emotions can produce a positive benefit. But the other may mean that acting in accordance with your emotions means that you're selling out of all your positions in March 2009. Sure. And that's why I said you have to educate yourself. So flip it around. Had a different client, totally different family, different circumstance. About a million bucks. They were in their late 40s, early 50s, good income earners, solid six figure income, million bucks sitting in cash.

And I said, why is the money not invested? We're not sure. We're not sure what to do. I just don't feel right about the situation. I just don't feel right. Okay. So we work through that. First, we go through a formal financial planning process. What do you want? What are you trying to accomplish? That financial planning process shows that based upon extensive interaction, that in order for you to get what you want, you need to invest the money. I don't feel like it. I just don't feel great about it. Okay. Let's talk about how to invest the money. Go through extensive work of education. Here, let's, here are different options. What are your options? Okay, here's an option over here that would be a really great option for you. And as the advisor, this is a well-constructed portfolio in this

situation. Investing in public-traded securities was the best solution for them, well-managed, well-constructed. It was the ideal solution, and this will help you achieve your goals. Well, I'm just not so sure. Spent a couple years working on them. You need to do this. And finally, in that situation, the feeling was extremely damaging, and it was systematically damaging their financial future. So the attack that I took as an advisor in that circumstance was to say, listen, we can't do anything until you decide to overcome this feeling. And so you either need to find somebody that can fix the feeling for you because I've done everything I can with education, with knowledge, with adjustments, with changing. I've tried different ways of saying, maybe you can, here's how we can

test it and see what this feeling is. You need to go and find somebody who can help you, but you can't keep going year by year like this or you're going to wind up in disaster because the money over systematically nothing's going to change and the money systematically going to disappear due to the effective inflation. So I think feeling needs to be tempered with education and with knowledge and with trusting the professionals or finding a professional that you can trust to help you with that. We'll come back to the show in just a second. But first, have you ever wondered what food sensitivities you have? I know that there have been plenty of times where I felt tired or or foggy-headed or bloated or just generally lack of energy.

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Education in the area. Fear or feelings are usually, they're normal. And you need to be well educated on the subject that you're experiencing the emotion on in order to work with it. And so in the beginning, that's probably going to mean consulting with other people. I don't, I live in Florida. We have out there's, there's alligators in every single body of water. I'm not worried about alligators. And so it's irrational for somebody to be on a boat, driving through a river across a lake and say,

oh, I'm just scared of alligators. This isn't irrational fear. You need to get over it. But that doesn't mean that I'm going to go and play with them and rub their heads. So in anything, education and experience will help you to sift and to filter through the feelings and discard the ones that aren't useful or helpful to you and embrace the ones that are. Gathering information, gathering data, learning whether or not the feeling is backed by facts. Right. It's like now, at the end of the day, flying is much safer than driving,

but there's still people who don't want to get on an airplane and love to get on a car. Sometimes facts and data don't necessarily solve all the problems, and I don't have a way to help. I don't know that. That's an answer to above my pay grade. Let's move to stage four. So just to reiterate, stage one is financial solvency, which is where you are just, you're able to pay your bills and live on your own paychecks without help from others. Stage two is financial stability. Stage three, debt freedom.

What's stage four? Stage four is financial security. So recognizing that as we're moving up this plan, we're moving towards financial freedom. And I define financial freedom as having enough income from your investments or businesses to pay your expenses such that you don't have to work if you don't want to. That's my working definition of it. Now, the challenge is that many of us are living a lifestyle that probably includes some fluff, include some necessary, and include some enjoyment.

And so what I say is instead of trying to hit everything that you're currently doing, let's just start with the basics, financial security. So I define that as having enough income to cover your basic living expenses, enough investment income to cover your basic living expenses. So let's include that in there, things like your basic housing expenses, your utilities, your food, transportation, insurance. You're not going to starve. You're not out on the road. You're not necessarily taking ski vacations to Whistler every year, but you've got your basics covered. And let's celebrate that.

because if you've got your basic level of expenses, your lifestyle, basic living expenses covered by investments, that could give you a huge degree of freedom to do something like transition from the career that you're into a career that's better suited for you, or to go ahead and start that dream business, or to go ahead and move to that place that you've always wanted to move to. So let's celebrate that. That's where these next three flow together. Stage four is financial security, getting investment expenses up to the point they're covering basic living expenses. Cool. Can we pause there? Oh, go ahead. Sure. So just to clarify, for the sake of any listeners who might be wondering, within stage four, does this mean that you have to be drawing out that investment income to pay for your living expenses or just that you could?

So, for example, if you have dividends coming in from index funds, you could live off those dividends if you chose to. Yeah, I think it's just a chart. No, it's definitely not drawing out. It's like, you know, let's say you're going to go and buy a car. One investor I know, he says, anytime I want to, any time I want to, anytime I want to, to buy something. I got to go, I force myself to go and buy an asset that's going to pay for it first. So if he's going to buy, if he's going to go and buy a new car, he wants a toy, he's got to go and buy a new house and make sure that that house is going to pay his car payment. So playing little mental games like that is how I view it, of celebrate, hey, I've got $1,000 a month of dividends that are coming in from the companies that I own. Okay, well,

great, let's celebrate that with the fact that now my rent is covered by my dividends. How cool is that. But no, it doesn't mean that you're actually spending the money. You're probably letting it accumulate and you're celebrating the milestone. Right. Exactly. I've asked you that because that's a point that I just kind of want to clarify because I find that a lot of people hold the misconception that if you can pay for your costs through investment income, that necessarily means that you do. But, you know, that's not necessarily the case. Sometimes you choose to and sometimes you choose not to. I think very rarely will you ever actually pay for your cost with your investment income. Now, I can't prove this. I recognize that it'll be. that'll sound strange, but in my personal experience, I've met very few people who were diligent investors who actually ever stop earning money and start living on their investments. It's not that they can't. It's just simply that they generally don't.

Most people, and I've, again, I can't prove it. I've done some shows on the history of it a little bit and some of the data, but most people who have the money coming in from their business and investment activities to be able to afford to retire, quote unquote, are generally the type of people who will never retire because they're engaged in something that they care about. They've built discipline and their life is the things that they're engaged in are meaningful to them. Now, it's possible that they could stop working for money and they could begin volunteering their time or doing something else. But by the time you've reached this point in time, it seems like your business is generally going to be profitable and you're probably going to have

money coming in just from different engagements. So the people who can the most afford to retire are often the ones who don't retire and the ones who are desperate to retire are often the ones who never accumulate the money to retire. It's a bit of a paradox. That's a very interesting observation. I've noticed that as well. Jim Rohn, you mentioned Jim Rohn. One of my favorite sayings of his is that the whole point of becoming a millionaire is to become a millionaire. It's not the million dollars. You know, you hear the statement that the rich get richer and the poor get poor. Well, that's true for a variety of reasons. The reason that the rich get richer and the poor get poorer is that the rich do things systematically that help them to get rich.

And when you are the type of person who does those sorts of things, it doesn't all of a sudden stop when you get a million dollars. It just keeps on going and it keeps on going. And then you start to enjoy compound interest. The key is to become the type of person who's doing the things necessary to accumulate a million dollars. And once you become that type of person, you're just going to continue to accumulate and accumulate. And so generally, for most people, Your wealth can continue to increase throughout your lifetime, even when you start to live on more and more of your dividends. I think that what I'm hearing you say is one of the benefit of financial independence is the independence. It's the fact that you can make those choices.

Really, it comes down to choice and being able to have that self-direction over your life, that self-control. Right. And that's why earlier, why I put such a big importance on having that buffer account, financial stability. because I'm not yet financially independent in terms of being able to meet my living expenses based upon my investment income. I don't expect to be there for a few years. I'm working hard on it, but I'm not there. I can't stand the retirement system that we have in the United States. I can't stand how people are divorced from their money. The money that's in their 401k is tucked away and they can't see it and they can't use it. Now, yes, there's a valid argument to say that putting a little bit of distance between me and my money is a good thing. I get that.

But the problem is that you've got people with hundreds of thousands of dollars in their name, but it's all locked away in a stupid 401k account and they can't enjoy the benefits of being rich because they can't touch it. And so they spend years and decades more of their life never experiencing the abundance and the independence that comes from having money. And again, place for them, sure, I'm okay with that. But we've got to figure out how to get more people to have money in their hands so they can experience it and they can enjoy the lifestyle, the rich life while they're working towards that financial freedom. That's why the tagline of radical personal finance is living a rich life now while building a plan for financial freedom in 10 years or less.

We can do them both simultaneously. So would you recommend that people look outside of their 401k IRAs when they're making investment decisions in order to have that ability? to enjoy their money? Yes. I was talking with a, I'm sure that in the future, I will use 401ks and IRAs and things like that in the future myself at some point. You don't? I presently still have a few, but I'm not actively contributing to any kind of retirement account at this point in time. Interesting. And I'll give you the story to it. I was talking with another financial planner in the actual industry. And this financial planner is a well-known commentator on the industry and we were talking about it. And I was discussing with him right.

of return. And I was pointing out at some of the things that I'm focused on investing in and we were talking about it. And I said, it's very difficult for me to imagine going back and putting my money into public trade of securities that's locked away in a 401k. And this is a person who's a leading financial advisor, a leading commentator on the industry. And he said, I haven't put money in my retirement accounts in a decade because he said, I have got too many opportunities on every side. I've got too many opportunities that are so good for me to tie up money in my 401k accounts. Wow. So I'm not the only one, which makes me feel good because I'm coming against the whole industry here.

Okay, what about the tax advantages that come with, you know, either making tax exempt contributions to Roth accounts or tax deductible contributions to traditional retirement accounts? So tax advantages, anytime you hear somebody say, oh, you should do this because of the tax advantages, you should immediately not be intimidated by that. And you should say, well, what are the tax advantages? So let me give a simple example. the tax advantages of 401Ks are much Ballyhooed. They're people talk about them. Well, all you get with a 401k is the ability to defer the income tax on your money from today to some point in the future. And this is one of the three major strategies of tax savings.

This is a tax timing, a timing strategy where you're choosing not to incur a tax today and you're deferring that tax until the future. Okay. But you're still paying the tax. and you're still paying it under ordinary income rates. And so all you're doing is getting the benefit of deferring the tax to the future. Well, let's talk about... Time out. Time out. So two things.

Number one is that by virtue of deferring it, you're theoretically able to contribute more money into that account. And also, as the money grows and compounds, it does so in a tax deferred manner. Actually, we'll start there. And I have a second question as well. But what would be your answer to that? No argument. That is technically correct. that yes, if you are paying taxes and let's say that the rates work out such that you're able to

contribute $5,000 instead of the $4,000 that you could because you weren't paying the income tax today, there's no question on that. However, let me give a different example. Let's say that I decide that on the weekends, what I actually want to do is I want to build a side business of some kind. Perhaps I want to start a horse training business. Perhaps I want to start a snow cone business. perhaps I want to start a house repair business. Well, now all of a sudden, I go ahead and now I open up the beautiful world of business taxes. Now, business taxes allow me to take some of my expenses that are associated with that business, such as my laptop computer expense, such as my cell phone plan, such as my web hosting expenses. It allows me to take some of my meals and entertainment expenses.

And if I'm engaging with a client, I can go ahead and deduct 50% of those expenses. It allows me to take something like an industry conference, and it allows me to put that money and to invest that that money and to spend that as a tax deductible expense. And as I'm building an acquiring equipment, I'm building assets for myself. Those are all tax deductions. And one of the cool things, if you structure it appropriately, so as a simple example, if you have a sole proprietorship where you're just simply filing a separate Schedule C, you're not using an LLC or an S corporation or a C corporation, just have a separate sole proprietorship is just your side business. If your business happens, to produce a loss in the first year of, let's say, $2,000 of your side business, but you're working

on it on a business like manner and you've satisfied all of the hoops that you've got to jump through to make that happen. Well, that $2,000 loss is also a deductible expense, and that's deductible against your income. So I can create the same exact tax benefit, except better, because now over here I have a business entity, and if I invest properly and wisely through that, I may be able to far outstrip the rate return that I get from something like a mutual fund held in a 401k account. Okay.

What about Roth accounts, though? Because Roth accounts seem to be the ultimate, particularly if you're young and that money has 40 years to accumulate tax exempt. So the number one mistake that people make with Roth accounts that you have to be very careful of is you have to recognize that the taxation in terms of percentage of money on a Roth Roth account versus a traditional account is identical. So many people have this misconception that, for example, if I put in, say, $5,000 to my Roth account today, and by putting that money in the account today, I'm only paying $1,000 of tax.

But in the future, I will have a much bigger account, and I'll have all of that money tax-free, that I'm somehow saving taxes. The reality is that a Roth IRA and a traditional IRA will have exactly the same percentage of their money go to taxes if you're putting the same money in it. But how is that possible if the capital gains and the dividends on a Roth-based investment are tax exempt? Because of percentage. So let me run a couple of numbers here real quick. I got a calculator. Okay.

So let's say that in a Roth IRA, let's say that we're going to calculate things based upon a 20% tax. tax rate. Okay. So under option one, let's first do a traditional IRA. And let's just keep this simple. So with your traditional IRA, I earn $5,000. And because I'm investing this pre-tax, I can invest all $5,000 into my IRA. Now, let's put that in as my, let's clear the calculator here. So $5,000, put that in as my present value. Let's say that I invest that money for 40 years. So we'll have 40 years of payment. let's use 8% as my annual increase and let's use $0.000 of payments. So we just have that $5,000. At the end of 40 years, if I've invested that $5,000, $108,622.61 in that account. And at that point in time, I now have to pay taxes. Now assume that I'm going to pay taxes at a 20% rate. So let's pull 20% off of that.

That leaves me with $86,898.98.9 to spend. Can I just jump in? Sure. Can I make a guess that the contribution to the Roth account will be 5,000 minus the 20%, so it would be actually 4,000? Is that where this is going? Exactly. Let me do the math to prove it because although you know that most of your audience doesn't,

this is the biggest misconception. And I was actually a licensed financial advisor for a couple of years before I finally realized that I was wrong on this case. And there are more extenuated circumstances. But now let's do the Roth, okay? $5,000 that I earn as a Roth, but because I'm choosing to do it as a Roth, I'm now paying the 20% taxes. So let's take 80% of that, which would be $4,000, and I have $4,000 to invest. So now my present value is $4,000. All of the same numbers at the end of 40 years under the same investment

return, my answer will be I'll have $86,898.9 to my name, which is exactly as the other one. The only reason that I know that is because I ran that calculation for myself when trying to decide which of the two types of accounts I would contribute to. But what happens if you contribute to a Roth account without subtracting for the taxes that you're paying? So in other words, you contribute the full $5,000 to the Roth account. Lucky for you, I have an entire episode of this on my show going through that in detail. and there's some interesting calculations there. Now, in that strict scenario, what you will actually do is if you're comparing it, you will have more money in the Roth IRA, but the reason is not because of a change of taxation.

The reason is that you put more money into it because you actually have to pay the taxes from another source. So it's growing more because you are getting a higher, you're having a higher contribution in the beginning. And so this is very, very important to actually go through the numbers. and to see, and to see those details. I did a show, and the best thing I'll refer listeners to episode 314 of my show, which is where I discussed kind of the numbers of this in some of the comparison,

especially with a focus on early retirement. It's called How You Can Get More Money for Early Retirement by using an IRA or 401K, even if you have to pay the 10% penalty. And I went through some different scenarios calculated out so that you can run the numbers. At the end of the day, the benefit or value of a Roth or a traditional IRA is not necessarily based upon the tax. It's based upon either the ability for you to put more money into the account because you're putting more money in like you can with a Roth.

You're paying the tax from another source. Or it's some other factor. And I think in general, the biggest factor that should be considered would be your likely income tax rates at different points in time. Now, there's tons of people who disagree with me. So we're dealing with one of those things where accountants and financial planner sit around and argue. But here would be my simple advice. One of the best benefits of a Roth IRA is the flexibility that it gives you with the ability to pull out your contributions if you need them.

So I would send most younger people first to a Roth IRA before a traditional IRA. For those listeners who aren't familiar with it, your contributions are the money that you put into the account. And so because you've already paid the income tax on contributions to a Roth account, you can always take those contributions out without taxes and without penalties. And so what I love about this is we're building ourselves a buffer account, just like we talked about earlier, about the value of it, by being able to have access to it. So if I've put in $5,000 this year, $5,000 next year, $5,000 the third year, I've been contributed $15,000. And my account, let's say, has grown and that now has $18,000 in it. I can pull out of my Roth IRA up to $15,000 without paying any taxes and without paying any penalties. That can be really useful if I need an emergency fund, if I need a down payment on a house, if I need some other money to start a business.

That's really useful. So I really love the Roth IRA for that purpose. Yeah, absolutely, I agree. The reasons that I love Roth accounts so much are, number one, because it preserves that liquidity. So it's a little bit of the best of both worlds or the access to capital, I guess, I should say, rather than. And the other reason is that if you make the same contribution, meaning that you effectively are making a higher contribution because you are paying the taxes from, you know, because you're also paying the taxes as well as making the same $5,000 contribution, your ultimate gains at the end of the day end up being quite a bit higher. But it's because you're putting more money and you're suffering a lower lifestyle. Right.

So I'm just emphasizing that. So let's move to the next stage of financial planning. Now, so far, stage four is financial security, which is when you have enough investment income to cover your basic cost of living. What happens after that? So there I put in financial independence, which I'm defining as you reach a point where your current lifestyle expenses can be met with your investment income. And I'm including in lifestyle expenses, the fixed basic expenses and discretionary expenses. Most people, especially the type of person who's building this process, they're not. desperate to stop working. And so, you know, the idea that we just got to get out as soon as possible,

that's not going to work. And so we want to reach that point in time where the nice things are covered. The new, I don't know, the new camera all the time, the ski vacations of the family. Whatever your current lifestyle expenses are, that's what I'm calling financial independence. And so we know that number, whether it's an annual budget number or a monthly budget number, when you reach this stage, you're going to be good at budgeting. You're going to know your expenses. Once we reach it, we can sell a. right financial independence, knowing that if I want to disconnect myself from work, I can do that and live the same lifestyle I'm living now.

Right, right. And, you know, and I found a lot of my audience says that they don't necessarily want to stop working. They may just want to stop their current job and move into a different field and start their own business, you know, make some type of lifestyle change like that that would still yield income. Right, right. And I don't think you have to wait for financial independence to do that.

That's why, again, why I focus so much on. some savings. When you've got half a million bucks in the bank, even though you might not be financially independent, you can certainly afford to take a few years of a decrease in salary to move into a field that you want to move into. But it's really nice to know, hey, all of my current expenses are covered if I want them to be. Absolutely. It brings amazing peace of mind to know that. Tell me about what happens after stage five. Let's talk to six. Yeah, so I put in two more stages after this. The next one is financial freedom. And the idea here is many of, of us have a list of dreams or goals that currently exceed our capacity. It might be something

like I want to buy a new ski boat. It might be something like I want to buy a new lake. A lake, I'd love to have a house on the lake. I don't need it, but it'd be nice to have a second house on the lake. And it might be something philanthropic. I'd love to endow this organization with this amount of money or I'd love to do this certain thing. I'd love to buy this trip. I'd love to take all my kids and my grandkids on a cruise, whatever. But most of us have some goals that are beyond the current lifestyle that we're living because recognizing that we're generally making lifestyle choices that keep our expenses below our income. And as such, we're focusing on not spending too much money so that we can become wealthy. You have to do that. So just because we can meet

our current expenses doesn't mean we've met all of our dreams. And so what I define as financial freedom is make a list of all your dreams. If you want the lake house and you want to put a new scheme, keyboard on it. Okay, write that down. And now let's cover those expenses. So it adds extra money to your annual budget. Let's cover those expenses. Anything you can think of that is a dream or a goal of yours, write it down and let's try to get there from your investment expenses. That's how I just find stage six, financial freedom, true financial freedom, where all my goals are covered. Wow. All right. So stage four, just a recap for the listeners. Stage four, financial security is enough investment income to cover your basic living expenses. Stage five is enough investment

income to cover your current lifestyle needs and wants. And then stage six is enough investment income to cover big, big dreams. Right. And the idea that I'm just trying to emphasize, these are a little fuzzy, but the idea is to emphasize that there's going to be a growth process and you can celebrate it and you don't have to feel that just because I can cover my basic expenses, I've got to stop. Many people will want to keep working because you want to live a different lifestyle. You want to leave a legacy that looks different than what you're currently experiencing. Nothing wrong with that. So what is, is there a stage seven? I'm trying to just imagine what could possibly come after stage six. So here's, so here's what comes. Many people find themselves

in the situation where they have far more money than they're ever going to need. And I've called that's financial abundance, stage seven. And the idea here is that you've accumulated wealth beyond the amount needed to fund your own lifestyle expenses and you have a comfortable margin of safety. You've covered any goals, any dreams. All that stuff is covered and you have more money than you're ever going to spend. And certainly somebody who is just kind of retiring from a job and has their 401k and they're trying to make sure that this 401k lasts, they're not going to be in this position necessarily. they're going to be just how do I make my portfolio last. But somebody like you, Paula, you're going to have far more money under your supervision

during your lifetime than you could ever spend. And so the question is, what do we do? How do we responsibly manage all this excess money? How do we allocate it productively? And hey, guess what? You're going to die. And so what's going to happen to the money when you die? Who's going to control it?

How do you make sure that that money is used for good? good and not for evil. How do you make sure that money is fulfilling something that you want to have happen? And so what I want to get is I want this to be there because I want people to focus on this idea. When people get to this point in time in this stage of life, it is, it's not about the money for them. It's not about consumption. So one of the things that's broken is for you to become a rich person and to stay a rich person, you're going to break the idea. And the connection that money is about consumption, no matter how much money you have, there are so many examples, usually from the celebrity world, people like Mike Tyson, or there's always ones. No matter how much money you have, if you connect money to consumption, you will never have enough money.

Doesn't matter how many millions you make. Kanye West. He made a big thing a few months ago with a quote saying, hi, I have millions of dollars in debt, and I can't do it. That's right. He said he's like $53 million in debt, and he asked Mark Zuckerberg to bail him. Remember that? I totally remember that. That could have been related to business.

But what's remarkable is when you start pulling apart celebrity stories, people that come into sudden wealth, what you see is that almost no matter how big the money is that they have, they can spend it all and then some. And so they wind up broke and they wind up essentially broke and bankrupt sometimes. Mike Tyson, just study the story. It's very, very sad because they connect money to consumption. Now, when you disconnect money from consumption, you get to enjoy wealth. doesn't mean you're not going to consume it. There are some rich people here where I live that have some really nice yachts and have some really nice houses.

But in order for you to get and stay wealthy, you have to disconnect. The major purpose of money is not consumption. There's something more to it. And so the reason wealthy people play their games, the reason Warren Buffett is still investing, the reason people are still working is because for them it's a game. The point of financial abundance is to cause people to think and to recognize that you're going to reach a point in time at which you have more money than you. you need and more money than you can possibly spend. Now, when you're in that situation,

what are you going to do with your money? What are you going to do with your assets? What impact are you trying to make? And what I want people to do is to recognize that that's coming so that they're planning for it from the very beginning and not waiting until that point to make a difference. Because all the money's going to do is it's going to magnify who they are. If you're an ugly person and you get rich, you'll be an ugly rich person. If you're a generous person and you get rich, you'll be a generous rich person. And so you've got to be recognized, as Stephen Covey said and taught so well, begin with the end in mind. Recognize that you're going to have far more money than you ever need if you're following this path. And so make sure that you're

prepared for it. One of the worst things that happen to people is to wake up in sudden wealth and not be prepared for what to do with it. I genuinely pity people who wake up billionaires and millionaires and weren't ready for the process along the way. Because when you realize the responsibility that money brings with it, the responsibility of giving it, the responsibility of investing it and doing it wisely and not destroying people's lives with it, it's a heavy responsibility. And you've got to make sure that you're planning for it and preparing for it all along the way. Wow. Well, I think we're going to end on that note. That's drop the mic.

All right, I'll drop it. This has got a shock mount on us. You can't hear it, but consider the mic dropped. I mean, there is literally nothing I can say to that. That is beautiful. That's perfect. Thank you so much for coming on the show. How can the listeners find you? Just search the app store for Radical Personal Finance. That's the best way on any device. Just search the app store. There's a free mobile app there. has every archived episode of Radical Personal Finance. We're up over 360 episodes now, and they're still coming. I keep the show. It's a lot, a lot of variety. So if somebody's, there's probably something there for you.

I try to do a lot of discussion of personal finance. So different aspects of personal finance. What we've talked about today is a good example of personal finance discussion. I try to do some interviews and I try to interview a diverse variety of people from people who are experienced investors to people who are just getting started. In the last few weeks, I had a mom who came on and talked about how you can save money cooking at home. Yesterday, I mean, I've done shows with multimillionaires, business leaders. Today's show that I just released as we're recording the interview was a show on how to hitchhike across Europe on $40 a week. And I went through all kinds of crazy strategies for how to sleep comfortably in a public train station and things like that. I do a lot of financial planning shows.

I'm teaching my way through the CFP curriculum. So if you want to get and grasp a stronger connection to the technical aspects of financial, planning, that's there, and then I do some Q&A. So all that stuff is found in the free Radical Personal Finance app on your phone. Excellent. Well, thank you so much. Thanks for having me, Paul. That was a great episode. What are some of the key takeaways? What have we learned? Well, number one, I'm going to take it way back to the beginning when Joshua said that instead of asking yourself, what do you want to do when you're retired, you should change that question around a little bit, ask yourself, what would you do if you knew that you could never retire? Because

that is an indicator of where you might have the passion to really drive yourself forward and get the results that will give you the income that will help you build financial independence. That was a big aha moment. I've never heard anybody phrase that question in that way. Number two, he also noted that the people who can most afford to retire are often the ones who don't. And I think that those two concepts tie into each other very closely. If you love what you're doing, if you're doing the type of work that you would do if you couldn't retire, then you'll be good at it. You'll probably make good money. And if you invest that money well, you'll be able to retire, but you might not want to. So that's one takeaway that I don't want to overlook. Another takeaway is when he talked about

his own journey of closing down a financial planning firm in order to start something risky, to start a podcast that would become his full-time job. And he offered two very valuable pieces of advice. Number one, test drive the idea. Don't leap from the boat to the dock before you build a ramp. And number two, if you test the idea and if you see that that idea has legs, build yourself a bit of a safety net before you make the full leap. In his case, his safety Net was part-time work, freelancer consulting work that he did on the side while he was building his podcast. Now, the number three takeaway, actually, and I'm saying this in no particular order, so I don't

mean that one is more important than the other. I'm just bullet pointing them out. Another major takeaway is that the tax advantages of a 401k are much balihood. I've never heard somebody use the word balihood before, so that was pretty interesting. He makes the important point that if you can control. less to a Roth account than you do to a traditional account by virtue of the fact that you're paying taxes, then those two come out equally. But I will have to say because I am an ardent fan of the Roth accounts, if you contribute the same amount of money to a Roth account as you would to a traditional

account, then you come out ahead having a Roth account. And in addition to that, you can also access the contribution that you've made to your Roth account without penalty. So you preserve the access to capital of having cash while simultaneously getting the advantage of keeping it invested. That's why I'm such a fan of the Roth. Got to throw that in there. But I do want to highlight the point that he made that if you're contributing less to a Roth than you are to a traditional account, then the two are really neck and neck. And stepping back from that a bit, the broader point that he made, don't look at retirement contributions in a vacuum. Look at it within the context of your whole life. If you are interested in starting a business and you think that that money could be

better spent investing in your business than gaining 8% as a long-term compounded annualized average in an index fund, then maybe you should put that money towards starting a business. And don't let the tax advantage of a retirement account be the influencing decision. Because you can also get tax advantages by investing in your business or by investing in a rental property if that's what you want to do. And really, zooming out of that into a much broader, broader point, don't make any decisions based solely on tax advantage. Make the decisions that fit your life and then look for ways to get tax advantages from those decisions. In other words, don't let the tail wag the dog. Tax benefits are the tail. But financial decisions that are aligned with the life that you want to

create, that's the dog. So let's start there. And that really flows in with the afford anything philosophy, which is to be incredibly intentional about the way that you direct your limited resources, including your money, time, energy, focus, and attention. Now, another takeaway that I got from this interview is to be smart about when to follow your feelings and when not to. Sometimes it's okay to follow your heart, but other times you do have to fight the feeling. And how do you differentiate between those two? Well, you've got to gather the data. You've got to do your homework by doing things like listening to this podcast so that you can learn whether or not your feeling is backed by facts. If you're in your 20s or 30s and you're terrified of index funds because you can't stomach any hint of loss, well, then maybe it's time for a bit more education.

Maybe it's time to fight the feeling. But if you want to keep an emergency fund that is higher than what is typically recommended, because it gives you peace of mind, then that's okay. That's an instance in which following your feelings, following your heart, has a lot of value and is a very viable path to take. Now, obviously, the major theme of this episode were the seven stages of financial independence. And just to review those one more time, those include stage one, financial solvency, which is when you can support yourself and stay current on your bills. Stage two is financial. stability. And that happens when you have a small savings account in addition to being able to support yourself and stay current on your bills.

Stage three is debt freedom. And it's up to you whether or not you want to include your mortgage within that. Stage four is financial security, which happens when you have enough investment income to cover your bare bones basic cost of living. No wants, just needs. Stage five is financial income. Stage five is financial income. independence, which happens when you have enough investment income to cover your current lifestyle. Stage six is financial freedom, and that happens when your investment income can cover really big dreams. You can upgrade that lifestyle. Stage seven is financial abundance when you have, quite literally, more money than you know

what to do with, and now your responsibility is to steward that money wisely such that it can leave a positive legacy on future generations. You can get a rundown of all these seven stages by visiting podcast.offordainthing.com, which is where you'll find links to some of the episodes that Joshua mentioned during this podcast, as well as a breakdown of these seven stages. Again, that's podcast.orgadanything.com. Hello, this is Paula again, recording from Tokyo. Thank you so much for joining us for this episode, this interview that we did with Joshua Sheets from the podcast Radical Personal Finance about the seven stages of financial independence.

As a reminder, during the month of September 2019, I am on a September sabbatical. So during this month, we will be airing some of my favorite episodes from the archives as well as we will also be airing interviews that I have done on other shows. So that is what's in store in the month of September. If you want to follow along with my travels, you can do so on Instagram. I'm there at Paula Pant. That's P-A-U-L-A, P-A-N-T. Check out my travel photos, travel stories. I put up a picture today with a long caption that was like, all right, here's how I really feel. I'm exhausted. You know, I talk about that. That's all on Instagram. At P-A-U-L-A, P-A-N-T. If you are interested in learning about real estate investing, we are going to be reopening our doors.

I have a course on real estate investing. It's called Your First Rental Property, as the name implies, or really as the name directly states. It's for beginner rental property investors, specifically beginner buy and hold rental property investors who want to achieve financial independence through rental properties and who live in the United States. So if that sounds like you,

you can download our free ebook. It's called seven expensive rental property mistakes to avoid. You can download that for free at afford anything.com slash real estate. And when you do so, you will join our email list and it's on that list. It's the VIP list. is what I call it, that you will find out when our doors open for enrollment, although I'll just tell you right now, our doors reopened for enrollment September 23rd. So we're reopening our doors for the second cohort of students at that time. And the second cohort of students, our fall semester, if you will, is going to run from basically the month of October through December. We all go through the material at a group pace together. It's very high touch, lots of interaction. There's office hours with me.

And we've actually hired a couple of TAs as well. So there will be TAs who are graduates of the first cohort of students. So you will be learning, you know, not just from your fellow students, but also from the graduates of our spring course, those who interact in the forums, as well as the ones who we've actually hired to be TAs so that we can make sure that our current students get their questions answered and get as much help as they need. So if you want to find out more about that, download the free e-book. and join our email list, and we will let you know. September 23rd is the magical date. That's when our doors open for enrollment for the fall semester. And again, you can download that ebook at afford anything.com

slash real estate. Thank you so much for tuning in. My name is Paula Pant. This is the Afford Anything podcast. Make sure that you hit subscribe or follow in whatever app you're using to listen to this podcast. And if you enjoy today's show, please share it with a friend. Thanks again for tuning in, and I will catch you next week.

So Joshua, what's your favorite flavor of ice cream. My wife loves all. I would say mint moose tracks. Publix Premium. Publix is a regional grocery store. Publix Premium mint moose tracks. And here's the deal.

Go to Publix when it's 2 for 7. And anytime you see it as 2 for 7 stock up, you've got to get yourself through. Their sales cycle is about four weeks. So when you see ice cream at 2 for 7, stock up on Publix Premium, my wife is the world's greatest ice cream connoisseur, and she says it's the best. You have optimized this ice cream purchase. Indeed. My wife, we have different aspects of her life, but one of the deals I have with her is she has an unlimited ice cream budget. That was part of our marriage. Now that, that is financial abundance.

Indeed.