2021 EP0323 PLANNING MATTERS - BUDGET CREDIT DEBT & INCOME

We want you to plan for success. Welcome to Planning Matters Radio.

And welcome into the program. This is Planning Matters Radio. I am Peter Rishon, founder of Rishon Planning. We are a full service financial investment and retirement planning firm, and we always look forward to assisting you in your financial matters. Any questions you have with money, any way we can. Give us a call if you would like to get a plan put together or just have a quick question on your mind.

919-300-5886, 919-300-5886. And for listeners to the program, do always offer the opportunity to get a plan in your hands. If you'd like an optimized retirement plan, looking at all aspects of planning, your investments, your income, your taxes, your healthcare, your legacy, we offer to put that together for you.

No cost, no obligation. That is the value added opportunity that you have just for being a listener to the program today. So if you'd like a plan for your financial future, a snapshot of where you are, recommendations on how to achieve your goals, 919-300-5886. With me today, excited to have Crystal Holland. She is a member of the team here at Rishon Planning that handles the life insurance side of things, helping people to cover the unfortunate, worst case scenario that can occur, the loss of income, the loss of a family member, and the loss of financial stability that can result in that. So Crystal, first off, welcome into the program. Hi, thank you very much. Good to have you here.

Good to see you today. Now, I want to talk a little bit about debt, about credit, about budget, about income, and why all of these things do play into a well-rounded financial plan. Okay, now I'm sure that in your life you've got income on one side, you've got expenses on the other, and somehow each month you gotta make them meet in the middle and match them up. Right.

Yeah, and that's most people's scenario. Now, we work for our income. During the course of our lifetime, we set our alarms, we show up to work, we put in our sweat equity, and we trade our time for money. In making that trade, it would seem like that the money is the more important out of the two, because we're trading our time for it. But in reality, time is much more important to us, much more valuable than money. So what we're trying to do is trade just enough of our time at a fair rate of compensation to be able to do the things that we want to do with our time. And as a financial advisor, I tell my clients all the time that the quality of life, the time, is much more important than the money. But it's our paycheck that provides us that ability.

Right. And unfortunately, sometimes that paycheck stops. And it can be for many reasons. You know, a job may tell us we no longer need your services. We may have a slip trip accident, injury, sickness. We may pass away and that income can stop.

And we've got to be prepared for that. So I've got a list of 12 questions to know if you're ready to retire. And the number one question is, how much income would you be able to generate if your paycheck stopped today? And I think that that one is important for anybody, whether they're 65 years old or they're 25 years old.

Very true to be able to have some kind of answer to. And as I've talked about on the program before, I'm a Dave Ramsey SmartVestor Pro. Dave Ramsey's a pretty well-known financial guru.

You've heard of Dave. I know Dave Ramsey and his baby steps to financial success. They begin pretty basic. They begin with having a thousand dollars in the bank. That's your baby emergency fund.

And the next step is something that we're going to be talking about today. Debt. Baby step two is clearing out your debt. Debt's not our friend. Debt works against us. And I get a lot of questions from people. Hey, should I really attack my debt or should I simultaneously be saving for my retirement?

And there's a couple of different sides to that question. You know, if there's a match on your 401k, it could be really tempting to say, well, maybe I'll put a little less emphasis on the debt and a little bit more of my contributions will go to my 401k so I can capture that free money that's there. Well, the reason why Dave says to attack the debt first and he will tell you to, if you have had trouble with it, if you've had trouble managing debt, he'll tell you to put your retirement savings on pause is because when you invest money in the market in your 401k, there's no guarantee that at the end of the year you get a return on that investment, right? If I put a thousand dollars away into an investment account today and then I look at it a month later, there's no guarantee that there's a thousand dollars there at the end of the month. Right.

I would say pay your debt off because then that gives you more money to be able to put towards an investment, whether it be your work, 401k, an IRA, you need to clear your debt. We could build a fantastic castle to the sky, but if there are tunnels and holes underneath of the foundation, you know, we're not built on solid ground. We don't have a firm foundation to build upon. Debt is not even termites.

It's, it's literally it's tunnels underneath. It's instability. And most debt has an interest rate that's tied to it, right? You have borrowed money and if you don't pay that money back, you owe some additional interest on that money.

Correct. So if you look at the two on a balance, your investment does not have a guaranteed rate of return versus a credit card you are paying interest. And in most cases, you know, for credit cards specifically, that interest rate is double digits.

They're pretty high interest on credit cards, 12, 13, 20, 25% interest in some cases based on your credit score and rating. And so on one hand, if you don't pay off a thousand dollar debt, you know, on, on the other side, there is a guaranteed rate of return that's working against you in the form of that interest rate. Plus, just like you said, if we attack that debt, if we clear it out, we'll have more money free each month to put toward our retirement savings so we can catch back up later. But number one top concern is let's clear out that debt. And so Dave talks about the baby step two is the debt snowball. You line up all of your debts smallest to largest and you attack the smallest one first. Here's another area where people seem to have a question about the system and difference of opinions on how to do it. Absolutely. I get it. Let's attack the one with the highest interest rate cause that makes the biggest difference.

Here's the thing. You're looking at money only from a mathematical perspective. And while money is a lot of math addition and subtraction and finding that bottom line, there is also a mental and emotional aspect to your money. And if you get that sense of accomplishment and momentum that you've done something that you've knocked out a debt, then you will have more enthusiasm about attacking the next one.

Well, and if you had five credit cards and you only had X dollars per month to put towards them, so you're paying the minimum for each 50 bucks, 50 bucks, 50 bucks, get that cheapest one paid off because that gives you $50 to put towards the second. Now you've got more momentum. You're building strength and speed as you get. That's how I would.

Absolutely. And again, so it works twofold. Now when you've got additional discretionary dollars, sure you knocked out just the smallest one, so it may not be a whole whole lot, but you're making that much more progress. You got the first one paid off. You felt a sense of accomplishment. Now you're getting the second one paid off even faster. That's going to give you a sense of accomplishment and that you are moving forward. And so a lot of times I help people lay out this plan for it, for how to tackle that. And theoretically the plan, you will be making this much payment, this much progress each month and it will take you two years to get this debt paid off.

Well guess what? After they get the first one knocked out, now they're charged. Now they're enthusiastic and they're making that much quicker progress on things. They're, they're certainly in the mindset that they're not going to rack up any more debt and that's kind of the beginning. After step two, it goes back to funding the emergency account. That thousand dollars, it was not meant to make you feel comfortable. It was not even an appropriate full emergency account. Now we go back and fully fund that emergency account, three to six months worth of living expenses. Right.

Okay. Now the purpose of that is to be safe, to be liquid. It's called an emergency account. The purpose is actually to prevent emergencies.

If you can stroke a check for a problem and it's solved, it's not an emergency. It's an inconvenience. Most people have $40 that they could maybe handle and much above that they're going into debt to handle that problem.

And I will say I'm, I'm 46 and I was raised old school and my grandmother has always said, you need six months of bills put in the bank, you know, and you know, of course in my twenties and early thirties I'm like, who the heck has six months worth of money to just sit in the bank? You know, but now I get it because life happens. Yeah.

Yeah. Now why do you think there's an upper limit on that? Even Dave, who's all about stay out of debt, don't, don't put yourself in a situation where you can go into debt.

He puts an upper limit on how much should be in that emergency account. My grandmother could have done Dave Ramsey before Dave Ramsey and then I would probably have a ton of money right now because we wouldn't be making books. But yeah, she always said six months and that's a woman who is 90 and has no credit because she has always paid for everything with cash. Yep. Cause she had it.

She had the ability to do that. And Dave's not a fan of having credit available, but Dave's in that same boat. If Dave needed a hotel room for the night, he could probably just pay for the hotel and cash, right?

Right. For the average person, they do need something to put down as collateral. You know, whether it's a debit card with a visa backing to rent a car, to get a hotel room for the evening, there is some need there to have some collateral form of payment, whether it's a debit card or a credit card. Companies have gotten bad for that too, where a lot of stuff, you have to have a credit card or you can't. It would seem that way.

A vehicle or you know, online. Yeah. Nope. In many cases. Now you can handle some of that with a debit card. They love putting you in debt.

Yeah, absolutely. They do. But uh, you know, the, I saw a crazy statistic, um, that some, uh, I don't know the exact number, but it was something like $40 billion were earned by the banks in 2019 in overdraft and maintenance fees to access your money in the bank. And because we're not very good at understanding how much we have there because of the electronic ease of access that we have, because we're not holding that cash in our hands and saying, this is all I've got and I've got to spend less than this because we can access that money without actually having it there. They charge you fees for that. Those are, Oh, I hate those fees. My son actually got, uh, just got his first card and this past and I own his bank account so I can see what he spends his money on and I had to have a talk with him. He used an ATM that charged him $3 and 50 cents or something. Yeah. And it was only $2 and 50 cent.

But even for me, but definitely him being a high school kid working part time, I'm like, you just wasted $2 and 50 cent pull out 60 bucks. You know, that's where banks make a lot of their money and that's why we've got to have better understanding of it and better control over it. And again, that's why there is the upper limit there on that emergency account because we don't want to let the bank make money on money on us, on our backs, on our behalf. And the purpose for an emergency account is to be liquid and to be accessible, to be safe and to be there when we need to get our hands on it. Right.

If we need it. However, what does the bank pay us for interest next to absolutely nothing? Right.

1% is a high interest rate in this environment. So if we leave too much money sitting there for too long a period of time, we end up losing money safely. Right. We are leaving excess capital earning less than inflation. Right. So let's say that, forget the emergency account.

I, I personally had a need to feel comfortable and I didn't feel comfortable unless I had a hundred thousand dollars sitting in a bank account somewhere. Well, let's flash forward a year and that hundred thousand dollars has earned 1% interest. And I am being generous because today we're not seeing 1% in checking and savings accounts. It's 0.01 maybe 0.5 but let's say it's 1%.

Okay. So I've earned a thousand dollars on that hundred thousand that sat there. But historic inflation is 3%.

And guess what? This year, this past year, it's been way more than that. And the government may say differently, but I shop, you know, I buy things every day. Gas is up a dollar a gallon at least since last year. The price of a sheet of plywood down at Lowe's is three times what it was a year ago. Groceries in the store have gone up going out to eat. They're adding automatic gratuity on top of inflated prices everywhere you go.

Things are costing more. So that hundred thousand dollars that I kept there in the bank, let's just give it to the benefit of the doubt and say it inflation is only 3%. That ended up costing me $2,000 to keep it there. I didn't earn a thousand dollars in interest. I lost 3% in purchasing power. Now I earned 1% in interest back. So essentially I should have just written a check for keeping my hundred thousand dollars sitting there safe and accessible. I should have written a check for $2,000. That was the true cost of it. And so that's why we don't want to keep excess money over and above that six months worth of expenses.

And that's kind of the high end. If you are a single income earner household, if you've got dependent children, if you've got expenses and debts you need to cover, probably closer to the six months. If you're a dual income household, you've got two people earning an income, the chances of one of you, you know, or both of you losing your jobs at the same time, probably a little less than maybe closer to three months. But that's within range that's reasonable.

And that's to your comfort level, whether it's three months or six months. But at the end of the day, when we earn that paycheck, we bring that money home, we need to have intentions with it. We need to have a spending plan. So I help people to create and craft that spending plan. The first step in it is what I call the look back budget. And this is where we begin to get a feel for how much does life cost, right? Let's pull out your last six to 12 months worth of bank statements. We don't need to comb through every dollar that you spend and where you spent it. But that does show you how much you blow, right? Yeah.

Also how much life costs. And most people, I do deal with a lot of people that do have credit cards. They say, well, I spent money on my credit card too. Yeah. But did you pay the credit card bill out of the bank account?

Right? So most of the actual payments, the mortgage payment, the health insurance payments, if you make them the auto insurance, the car bill, the credit card bills, the utilities, and then stopping to go out to eat and all of the rest. Usually you're paying all of that out of one central banking account, right?

Let's look back at the last six to 12 months. Look on the front cover. There's four numbers. There's beginning balance credits. That's how much went in debits. That's how much came out and ending balance.

The debits is what we're paying attention to, right? What was that over the past six to 12 months? Was it $3,500 a month? Was it $7,000 a month? How much did it ebb and flow? Like was there one month that was $10,000 and another month that was $4,000?

What's the range there and why? Was it you were buying all the Christmas gifts in November or are you paying off the Christmas gifts in January? How are you managing, paying attention to how you manage your money? We're getting a handle now. We've got a baseline of an emergency account. We've attacked the debts and we're getting a true feel for how much is coming in and going out. And so now we're creating a foundation for financial stability. Now we can begin to make progress in building wealth. We're not just managing income and expenses. We're not just managing debt.

We're not treading water, just trying to keep our head above it to, to, to, to make minimum payments. Once we've got those steps handled, we can begin to make progress and build wealth. Now, why do we want to build wealth? Because you want to retire or you want to have an access retirement income on top of social security that you might have and you might not have when you retire and you want to be able to retire and oh, and it all, it all depends on what the person wants to.

What are your future goals? Do you want, do you want to be able to retire and just sit in a house and pay your monthly bills? But when I retire, I want my house paid off. I want, you know, I don't want a car payment. I want my money to be mine and I want to travel, you know, you got dreams, you got hope, you got a bucket list, you got things to do, places to go. If it costs me 60,000 now, I need that plus right when I retire.

Right. And I don't have a clue at 46 what social security is going to be. If it's even there, you know, right now the retirement age is 67 and there'll be some changes to social security and how much faith you want to put in. They're only giving you a couple of years. What's life expectancy down there? Well, they've already changed it once too, right? Full retirement age used to be 65.

You're correct. Now it is 67 and what's life expectancy? You know, the government only wants to give you about five years of freedom.

You know, they're going to keep pushing that back. So you wanted to retire at an earlier age. You need to, that is something that is a goal. You know, I don't want to work until I'm 67. I'll be too old to do anything. You know, I want to retire at 62. I want to retire.

So you at 46, I need to be thinking, what do I want to work up until you know, I'm about ready to kick the bucket. And you know, most of us want a few years of freedom and we work a long time to get to the point of financial success where we can feel confident walking away from that paycheck. Right. Remember at the beginning we said we trade time for money. And so by making that trade, consciously doing that every day for a lifetime, you would think that the money is the more important thing, but it is not. And that's the reason why we save. We save because the money is not the most important part. We save because we would like to enjoy some of our time at some point in the future. And that pile of money that's sitting there replaces our paycheck. It replaces our sweat equity and our work ethic. And something I've always been told when you let the interest you pay on these credit cards or when you let someone borrow money, you think about it when you go to work, if you made, let's say 10 bucks an hour, that was your $10 of sweat for ever how many hours you were putting towards that interest or that you let somebody borrow. No, you got to think of it like that. And if we're making progress and beginning to build and accumulate that wealth, how much does it take in order to replace that paycheck?

Right? That's the big question that people try to figure out as they are saying, well, I would like to retire in the future at some point in time. Well, what does it take to do that? Well, I want a million dollars.

Okay. Does that truly replace the paycheck that you're used to? Well, I want to do it at age 65. Does that arbitrary age mean that you're financially prepared for retirement?

The answer to both of those is no. You know, the lump sum that you build and accumulate, whatever that number is, nor a specific age that you pick out at a point in the future, neither one of those indicates that you are financially prepared to walk away from the paycheck and remain stable and confident. The way that you do that is through planning and having a spending plan and having an income plan and looking at what your expenses are and how that lump sum that you've saved up equates to reproducing it.

Right. Equates to replacing it. And so that's where we go through that planning process, that optimized retirement plan. It is a process of comparing your expenses to your sources of income, figuring out what the difference is, the income gap, and then projecting that out and saying, well, in order to fill this income gap, here's how much we need in that retirement account to be able to generate that income. And oh, by the way, you know, most retirement accounts these days are tax deferred. Another part of the optimized retirement plan is figuring out how to pay as little in taxes on that, on that account as possible. So how do we account for taxation? How do we control taxation? How do we minimize what Uncle Sam's share is and how do we maximize what we actually get to keep? And then we generate that income so that we can make it through retirement. Now, there's a lot of risks there. You know, if we've got that lump sum of money, how do we know that half of it's not going to disappear on us if we've got it invested in the market?

We want it to grow, so we didn't keep it in the bank. But the alternative is we put it in the market where it fluctuates. And man, does it seem like the market fluctuates a whole lot more today and in recent history than it did maybe 10, 15 years ago. Well, that's where you need a good financial investor that's actually keeping an eye on your money and letting you know, OK, we've had you aggressive.

We're going to go about more moderate. That's true. However, any professional in the financial field worth their salt is going to tell you that they cannot accurately time the market 100 percent of the time. And the market is unpredictable and past performance never guarantees future results. And any investment always incurs the risk of loss. Those are the standard disclaimers before you get into the market. And so we need to control what we can. We can't control the market. We can control how much risk we are exposing our money to, how much of the market we have in our portfolio.

Right. And so as a 25 year old, maybe I was comfortable taking a large amount of risk. Maybe 80 percent of my portfolio was in equities. As a 65 year old, I'm planning on not working anymore, not working for another 40 year career.

I'm trying to walk away from that paycheck. At that point in time, my portfolio needs to have undergone fundamental changes and adjustments to where I'm not taking on 80 percent of the risk of the market to probably where I'm taking on maybe just 20 percent. And I have worked for a career.

So maybe I've built up a substantial amount to replace that paycheck. I don't need to take more risk than is necessary than is appropriate to achieve my goals. If I can replace that income gap, if I can create the income to fill my lifestyle and to do so, I only need a four to six percent rate of return. Why am I going to invest as though I need a 15 to 20 percent rate of return and take the risk of losing half that money? If I lose half that money, then I do need a 20 percent rate of return.

And what are the chances of actually getting that consistently year after year? But Wall Street doesn't talk to us about this. You know, Wall Street talks to you about the investment allocation.

A diversified portfolio will be the solve all because stocks go up and bonds go down or vice versa. But everything will balance out. And we'll project out this nice eight to 10 percent rate of return that happens consistently every year into the future. And you're able to generate all the income you need and then you die and pass on three million dollars. Right. That's what all the financial plans look like.

But that's not reality. When I'm planning, I feel like I'm Murphy's brother. You know, Murphy's law. What can go wrong will and will probably happen at the worst possible times. That's the job of a of a true planner is to have that conversation before those bad things happen and say, here are all of the bad possibilities. Here's what can go wrong with your plan into the future.

Make those bad things happen on paper and in the planning process so that if they happen in real life, we've been prepared for them. We've gone through that spending plan. We've gone through the expenses. We know we can cover them.

We're building the wealth. And then, Christy, what happens is we pass away. Right. Eventually, the chances of making out of life alive zero percent.

Right. So we cover the worst possible outcomes. The life insurance need is a big part of planning. And a lot of people feel like that need goes away on the day that they retire. And I'm here to tell you, people pass away even after retirement. What's the most valuable type of life insurance? It's a trick question.

It is the type that's in force on the day that you die. Right. That's true. That now is the most important, valuable type of life insurance. Very true. But when you've got investments on the stock market and like IRAs and those are long term investments. So hopefully at twenty five, somebody said get a Roth, get a Roth IRA. But say you did. We're getting good advice.

They did. Yeah. Say you didn't say you have a regular IRA.

You need to know. And hopefully your financial adviser can say, hey, you know, you're forty five now. You have an IRA. Taxes are going up. Better to for us to convert it, roll it, whatever.

Now than to wait, you know, years from now. And what you're talking about is the different statuses for money, for your savings. Right. There's three different basic buckets or categories that you can put it in.

Right. It can be taxable. It can be tax deferred, which means you're paying that bill later or it can be tax free in the Roth. And certain types of life insurance can even help you build some tax free income.

And then when that income is created, everything creates different qualities for that income. Social security is taxed differently than pensions. They're taxed differently than withdrawals from your IRAs and 401Ks. Stocks, bonds, mutual funds, when they create dividends or yield, that's a different type of income. Certain bonds produce a different type of income. Savings bonds, municipal bonds.

There can be tax free income there. The bottom line is, for most people, this is confusing to bring all of this together and to say, where am I in my financial life and my progress and how do I get to that next step in that next goal? For us, we've done this a number of times. We've been through it.

We've seen a lot of different people's situations. And we do have a formula for a system for success that we follow. And we put that together for savers and investors and anyone planning for their future and serious about it, free of charge. No cost, no obligation for that optimized retirement plan. And again, this is going to address where you are currently, give you a snapshot, and then we will itemize and illustrate and detail a plan for investments, a plan for income, a plan for taxes, a plan for healthcare, a plan for legacy. So if you would like to get an optimized retirement plan, pick up the phone, give us a call.

Happy to talk to you. If you've got specific questions that you'd like to get answers to, or at least a qualified experienced professional perspective, we'd love to help you out with that and give you that direction. 919-300-5886. Again, 919-300-5886. You can go online, richonplanning.com. You can get in touch with us there as well. You can request a copy of my book, Understanding Your Investment Options. We'll get that to you digitally or a physical copy if you go online, richonplanning.com.

It's my last name, Rashawn, but it looks like richonplanning.com and request a copy there. Look forward to hearing from you soon. Thanks for tuning in to Planning Matters Radio.

We'll talk to you again next time. This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to take investment, tax, or legal advice from an independent professional advisor. Any investments and or investment strategies mentioned involve risk, including the possible loss principle. Advisory services offered through Brooks' Own Capital Management, a registered investment advisor. Judiciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker-dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission which may result in a conflict of interest regarding compensation.