Welcome to Pension Attention, the best show for first responders who want to take control of their finances.
After advising Los Angeles city firefighters for over 12 years, financial advisor, Brad Barrett now shares how you can grow your wealth, build your legacy and enjoy a life of freedom. And now here's your host, Brad Barrett. [00:19.9]
Brad: Welcome to Pension Attention, the show for you, first responders who want more out of their deferred compensation and pension plan. My goal with this podcast is to reach you where you are at whatever stage in your career you are in to provide my nearly 15 years of experience working with both active and retired service members on their investment and retirement planning. My team of fiduciary advisors here at ONE Fire and Police are dedicated to ensuring you take control of your finances and build the life you deserve. To find out more about me or our team at ONE Fire and Police, you can go to our website at www.pensionattention.com or you can give us a call (805) 409-8150. Again, our phone number is (805) 409-8150. [01:05.8]
The Bible has a lot to say about money and for good reason. Money, we find has a uniquely powerful way of exposing our hearts and displaying our priorities. If you're listening right now, I promise you this isn't supposed to be some large evangelical mission I'm trying to accomplish here, but to me, God cared so much about us, that he wrote about money and the troubles we would face when it comes to money. It's almost everywhere in the Bible. It has so much to do with our daily life today that we don't realize that it comes from the Bible, for example. Okay. One of the things that we say quite often is money is the root of all evil. That right there is one of the largest misnomers in the Bible. It's right up there with Jonah and the whale. It was never explicitly said it was a whale, was a big fish, and we tend to use these in our life. And it actually comes from the Bible, but the reality is that comes from the verse 1 Timothy 6:10, that the love of money is a root of all kinds of evil. Okay. The love of money, money itself is neither good, nor bad. It's how we relate to it and ultimately use it. You see, ultimately we see that it comes down to a matter of loyalty. [02:06.3]
For example, it said in the Bible, Matthew 6:24, No one can serve two masters for either, he will hate the one and love the other, or he'll be devoted to the one despises, the other. We can't serve God and money. He specifically says, God and money. Now we're moving the biblical aspect for a second. I want to talk about our relation to money, which is what today's discussions around. Okay. We're going to talk today and ultimately get to the fact of how we manage our debt, debt of any size. Okay. So if you're sitting here listening to this podcast right now, and you're thinking, Brad, there is no way you can tell me how to effectively and efficiently get down the mountain of the debt that I've created. (02:39):
I promise you, we can, there's always a way. We live in a beautifully free country still. Okay? That is important for us to understand the rules and regulations around how we can manage our debt and then devise the right plan that makes sense for you; on a specific and tailored basis, which is what we do here at ONE Fire and Police. We get involved with the planning as we well know, we discuss the investment management, which is what our team builds out for you. A custom built investment management plan. Okay? [03:04.5]
But we also discuss the cash flow analysis, which largely has to do with debt management, which is what we're going to talk about today. But understand this, our culture offers nearly an unlimited array of opportunities to get into debt, especially those of us here in SoCal. I mean, shoot, you just ride drive down the 101 or the 405 or you're talking to your buddies at the station, or you go on social media. I mean, we're burdened with debt obligations or things that we think we need versus things that we actually want. Okay. That's two, four letter words I want to discuss that are really big here NEED and WANT, something that we misconstrue on a minute by minute basis throughout the day. And by the way, for listening to this thinking all that, that's definitely me and I'm the only one, I promise you you're not. I ideal with it, my wife, Veronica deals with it, my family does, all the clients I serve. This is a behavioral trait in all of us because of our society in the way it's built that debt becomes such a large part of our life, which is why I really want to spend an entire episode talking about how we manage debt. We want to not only treat the symptoms of it. We also want treat the disease. Okay. [04:05.1]
We want to make sure we don't just slap a band aid over it. We want to actually treat the root cause of it, which is what I want to get into today. But before we do that, we have to understand how money relates to us, which is why I've been referencing the Bible and why I'm referencing these deep cultural references to what we feel as humans to our money. Now, I often say to clients, this is an important distinction here, I often say to clients that money is a great employee, but a terrible boss. And if you think about it that way for a second, the more we get in control of our money, meaning we feel that we have the higher power on our money, that it's in our control versus the other way around. It's a positive relationship we'll then have to money. And right there is the distinction between being debt free and having debt. Because when we have debt, we all, we automatically are in an obligation to serve that debt. Okay? Whether it's right or wrong, where that's good debt or bad debt, okay, it's still an obligation to serve it. [05:00.4]
So first and foremost, let's talk about good debt versus bad debt, right? In my view, good debt has three things, well, both good debt and bad debt have three things. You want to compare the three, okay. It needs to be low interest, typically tax deductible, if you can and foreign asset. Those are three positive aspects when it comes to good debt. So let's take an example, a mortgage now in the stations, we well know, and I was raised in the household understanding that there was two things in the station that was discussed, how soft by the time you retire and try to live on active duty pay and not sought, both of which are great scenarios. And the important thing now is we're sitting here in 2020 to know that it's a little bit different of an environment than when we were on the sixties and seventies. I mean, shoot, at that time, we were drove drive around in engines that had no roof on it. Now I know some of you still want that, right, be able to, you know, check out a structure fire on your way in versus having a roofing close. I mean, there's always changed in life and we have to adapt to it and this is one of them. So I'm not saying that having debt or paying your house off is neither good, nor bad. That's where the planning comes in, that we'll do with you or an advisor should do with you. But understanding what good debt and bad debt, the two, the characteristics that are involved in that is so important. And that's why I want to bring it up today before we get into how we manage our debt. [06:09.9]
So on a mortgage being what all categories is good debt, right? It's low interest, in fact, we're seeing right now as you well know historically low interest rates. Okay? So it's a low interest rate. It's deductible. We can typically write off on our schedule A, you know, are on our form schedule A on our taxes, the mortgage interest, okay. And it's for an asset, the asset being the house itself, it's a real estate. Remember there's five asset classes in this world. There's equities, there’s fixed income, there's commodities, okay. there's cash and there's real estate. So this is for an assets. So again, low interest rate, historical lows right now, typically deductible and for an asset, that's characteristics of a good debt. Now let's talk about the inverse, a bad debt. Bad debt is pretty much the opposite of all three of those things, right? It's higher interest rates. So let's take a credit card. Consumer debt, let's say credit cards for a second, all right. Credit card debt typically is double digit interest rates, all right. It's not deductible and it's definitely not for an asset. [07:04.1]
Now I should, shouldn't say definitely because there's things that we can use for an asset, there's certainly things that involve those kinda things. But typically it's not for an asset, its typically things that we want now, things we perceive as if we need now and aren't willing to do the discipline to save for it later, right? This is where Visa and MasterCard and American Express love to just pick on us, right? They're going to market the crap out of us to figure out; we need to tell them they need it now they're going to use our credit card to do so, right. That's the crutch of having credit card debt and that's the characteristics in my opinion of good debt versus debt, bad debt. Okay. So deductible, interest rate for an asset or not for an asset, all right. Now some of the categories are then mortgage, the second one that I clarify sometimes for clients is student loans. I believe student loans are good debt; they're lower interest rate, they're typically deductible, you get a 1098 B as the form you use, I think on a 1040, right? And then it's for an asset, the asset being you, you're the asset in that category, right. It's promoting educational knowledge, right? Which is the asset that you can use to then go into the workplace and use that knowledge and create income and money, and hopefully pay off that debt. [08:07.1]
Now real quick, if you're feeling right now, as you're listening to this podcast and I'm talking about debt and it's burdensome to you, whether it is good debt or bad debt, I mean, you remember the classification of good debt and bad there just from a financial perspective. But the reality is it's how we perceive it, like I said about money, right? Money itself is either good, nor bad, it's how we perceive it. If you are having emotional relationship to your money, that is negative, we need to work on that. Give us a call (805) 409-8150. You can also reach our website at PensionAttention.com. You can talk with my many fiduciary advisors that I've trained myself on serving our first responder clients. And we can discuss how the debt management or what you have going on in terms of your overall cash flow relates to your investment management and your retirement planning. Cause at the end of the day, these all fit into one big puzzle. We can't silo, okay. I'm gonna deal with my debt this way and I'm going to deal with my cash flow savings this way and my retirement that way. They all have to go, to be in concert with each other and work for a common goal, a goal that will define for you. [09:06.0]
Because debt can introduce financial risks. Sometimes risk is wise as with maybe a reasonable mortgage, like I said, so the risk can be in regarding, okay, we're taking on some debt for an asset because low interest, deductible and for an asset that could be wise debt. Maybe it's a business startup loan, right? Or a credit card balance that you're using, but could be paid fully each month. That's that can typically be why there's nothing wrong with that. Right. But more often than not, if you're listening to this and it's not for one of those categories, we may want to talk about it. So give us a call or if not us, I really just big proponent of finding an advisor you can find trust in and build that trust and discuss these kind of topics. [09:40.0]
Do you know how much you should be contributing to your deferred compensation plan? Are you getting the most out of your current investment options? Looking at entering or about to exit the drop program? go to www.pensionattention.com to find out how we can help. [09:56.1]
Now going back to the Bible for a second, there's a proverb that I love, ‘The rich rules over the poor and the borrow is the slave of the lender.’ When someone hands you money, whether that's Visa or MasterCard in a virtual form or a lender for a mortgage, or when someone hands you money, they take your autonomy and reduce your freedom a little bit, right? We're now bound to them and what is almost a master slave relationship that will not be resolved until the debt has been paid in full. And that's the conversation I want when I get around, you know, being an employee versus being an employer, right? When you're an employer, you kind of make the rules, when the money is in your control, you're able to understand how that operates for us, right? And that’s the key component when it comes to managing your debt. So, for the past few minutes, we've been talking about the classification of the characteristics of how debt gets involved in our life, which is very common and we can use it in good ways for mortgages and things like that. And there's also the bad debt, the consumer debt, you know, the trips, the big TVs, maybe the, the, the overextension of a car, those kind of things that we wrapped up in something that tells us we need to do it now. And the reality is we don't, and I'm not saying we're not, we're not going to fall into that, but then it's managing that debt. And that's what we're going to talk about next. [11:03.5]
It's important to note that debt isn't something that some people have. Debt is something that most people have. So check these stats out. This is from debt.org, facts and figures about American debt. More than 189 million Americans have credit cards, the average credit card holder has at least four cards. On average, each household with a credit card carries $8,398 in revolving credit card debt. The total US consumer debt is at 13.86 trillion. Now that last number includes mortgages, auto loans and credit cards, as well as student loans. So real quickly, I'm pointing this out largely because you're not alone. What I really want to share in this conversation around debt and I shared all my clients too, is that we're all not alone in this, right? Some of it's debt that we need to, you know, put equity in a house and put a roof over our family. That's part of the good debt side of things. It's also one of those things where we look life is life and especially those of us in California, we know it's a state that's expensive to live, whether we like it or not, it's just the truth, right? [12:02.1]
And speaking of California, we take those same stats coming from debt.org, the average Californian owns $334,925 in mortgage debt, which by the way, that surpasses every other state in the country, the national average is right around 190, 2000. And we all know that where we live because of its great weather, it's great location, all the good things that we like to have about California and we like to say about California, it's an expensive place to live and these and these numbers don't lie. On the consumer debt side the average Californian carries around $10,496 of credit card balances, which is roughly $2,000 more than the national average as well. So again, I'm, I'm expressing and using some of these stats largely to mention that we're not alone in this debt (unclear) and even more so those of us in California, we need to make sure that we get debt into our control. Again, back to my employer, employee relationship and make sure that money in the relationship we have with our money and make sure we don't fall into that trap of the love of money and using the debt and wrong ways. Because at the end of the day, a lot of my clients, myself included have used credit cards for emergencies or situations that may come up medically, or, you know, the water heater broke those kinds of things, right? [13:09.5]
That's what credit cards were designed for for that quick liquidity cash. We may not have in our savings, and there's nothing wrong with that and we need to manage that debt. So if you're listening to this and you fall into that, you can trust me, you're not doing anything wrong, just because, you know, credit cards may be under the “ bad category” because it's higher interest, not deductible and not necessarily for an asset. The asset itself is the investment component, but the reality is we may actually need it for needs, right? Like a water heater broke or, you know, I need to put a new roof on my house, right. Those kinds of things that come up, we use that consumer debt in that way. And so we seem to make sure that we know how to manage it. So that's what we're going to talk about next. Now, whether you have debt of a small amount or a large amount, and really it's not for this podcast or really, for me, even to say what constitutes a small debt versus larger. I have people that I know that have a thousand dollars on credit cards and don't sleep at night. I have people that I also know that I have clients with and, and relations with that have $80,000 of debt and sleep fine. [14:02.8]
So the relativity between little and large is really more of a behavioral trait around the human nature and the financial characteristics around that person. But regardless of the debt, each debt has to be managed. You know, you have to keep up with your payments and make sure it doesn't get out of control. And if you have a larger amount, you have to make sure you put an effort into paying off your debt while juggling payments potentially on the debts you're not currently paying. So that's, that's the first thing we're going to talk about here. So number one, we wanted to find and know how much we owe, and then make a list of our deaths, including the creditor, the total amount of the debt, the monthly payment interest rate and due date. We can use our credit report actually to confirm the debts on our list as well. So if you do, if you use things like credit karma, or some apps like that, you can always look at those things, right? And that's just one of them, I'm sure there's many others out there, right? And having all the debts in front of you will, you allow you to see the bigger picture and really stay aware of, you know, your complete debt picture. [14:57.5]
Now, once we create this list, we don't just want to forget about it. We want to refer to this debt list periodically, especially as you pay your bills. We want to update our list every few months as the total amount of your debt changes. And we'll help you keep track of that as well. So number one, know your debts. Number two, we want to get into the discussion around deciding which debts on your debt list to pay off first. Rule of thumb here is you typically want to pay off the higher interest rate debts first, regardless of balance, right. And sometimes it gets misconstrued sometimes, cause you'll have a thousand dollars on a credit card that may be paying, you know, 11 or 12%, but you're so focused on your mortgage at 3% that you start making extra payments there. And you want to be careful there because interest is really the, the factor that we want to consider almost first. Now paying off credit card debt first is often the best strategy because those are the typical ones, the typical debts that have the higher interest rates, right? So all your credit cards, the one with the highest interest rate usually should get priority on repayment because it's costing the most money. Okay. [16:00.0]
So use your debt list to prioritize and rank your debts in order that you want to pay them off. You can also choose to pay off the debt with the lowest balance versus well, to kind of get rid of one of the balances as well. So again, make a list of your debts, number one. Number two, decide which of those debts on that list we want to focus on; and you might want to start looking first on that priority list of the higher interest rates first, which tend to be the credit cards. So number two, decide which debts to pay off first. So number three is budgeting. Now you may not think that that would come into a category around managing your debt, but using a monthly budget to plan your expenses helps you ensure you have enough money to cover your monthly expenses. So the analogy I mentioned earlier about not just treating the symptoms and trying to get to the root cause, if we have revolving credit card debt that keeps adding on, usually what I've seen with clients is it has to do with potentially not enough coming in for what's going out, right? [16:52.0]
So using a budget to be able to help cover our monthly expenses allows us to not get back into debt, if we look at paying something off from category number two, right? So want to plan far enough advanced and you can take early action on this, if it looks like you won't have enough money for your bills that month or next, so a budget can help you plan to spend any extra money you have left, after expenses are covered you can use the extra money to pay off debt faster as well. Something that we can create a game plan around for our clients. So using a monthly budget to plan your expenses is actually a proactive way to manage the debt probably after you pay off your debt, or we get the list down to a manageable amount, right? Then we start budgeting how we want to plan those expenses in the future, and also make sure we don't get into debt again. Cause that's the key component here, right? We can do all this great work to pay off debt, to build our debt list, to prioritize which debt we want to pay off first, be really disciplined and chip away at in which we can do for you, right. We can help you design that whole process. Okay. But then the last thing we want to do is not take care of the proactive nature of making sure we don't get into that situation again. So something we'll talk about. [17:59.3]
So the third piece here is using a monthly budget to plan your expenses both now and then in the future. So the fourth idea around managing debt and debt of any amount, again, this list, the first three, I mentioned of knowing how much debt you have putting a, putting a list together and then prioritizing that debt. Okay, those are all three things that can be used as tools to manage debt of any size. The fourth thing is making sure that we build liquidity to not only stave off future issues with debt, but to also have what some people call an emergency fund or things like that to fall back on, without access to savings. So this is the fourth thing using an emergency fund or liquidity account to fall back on. Something that I'm a big proponent of and I talked to my clients heavily around about it, making sure we have liquid cash savings, kind of that bucket planning environment of short term midterm, long-term, something we'll talk about on a later episode and good planning tools to use, right? [18:53.4]
So without access to savings, you'd have to go into debt to cover an emergency expense, right? So even a small emergency fund or a small liquid accounts will cover little expenses that can come up every once in a while. So first we'll work toward creating a small emergency fund, maybe $500 $1,000 is a good place to start, but also having a consistent contribution, a monthly or biweekly contribution. I don't care if it's $25 or 50 bucks a month, but something consistent that adds to that. And once you have that, we want to make it your goal to create a bigger fund, a bigger emergency fund and over time and discipline approach it'll grow. Eventually you'll want to build up a reserve of three to six months of living expenses. That's the good rule of thumb as a certified financial planner CFP that is a big rule of thumb that we discuss around clients having that three to six months of living expenses as a reserve. Something we will talk about on a case by case basis for each of our clients, but having an emergency fund to fall back on not only provides us with liquidity, but it also allows us to have a fund that we can use for items that may come up in the future that will then also alleviate us from getting back into debt. [19:53.9]
So a quick recap of the four things I mentioned of how to manage debt and debt of any size, okay, is one, we want to know our debt. We want to know what debts we have out there, make a list of those debts. Two, we want to prioritize that list, we want to target the higher interest rates first, typically that tends to be credit cards and design a process to chip away and pay down that debt. Three is creating a budget, a budget that allows us to plan for expenses and a part of that budget by the way, will be the fourth thing which is creating that emergency fund or that liquidity account. So those last two things are also a proactive way to help us not get in debt in the future while also paying off the debt from the list we're going to create. [20:35.7]
Thank you for listening to today's show before acting on anything discussed today, remember speak with a financial advisor near you about your specific situation, or if you'd like our help, you can visit our website at PensionAttention.com for a free retirement tracking and review discussion or you can give us a call (805) 409-8150, again, (805) 409-8150. Next week on Pension Attention, we’ll be discussing something I call word misconception. How certain words in the investment world can make us feel or do things that we may not otherwise do. Words like passive or aggressive or active. And we're gonna be discussing how those definitions play a role in investing and your retirement to achieve the goals that you have said. I look forward to seeing you there and until then stay safe. [21:22.9]
The information in this podcast is educational and general in nature and does not take into consideration the listeners personal circumstances. Therefore it is not intended to be a substitute for specific individualized, financial, legal, or tax advice.
To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a final decision. [21:46.0]
