Reduce Debt Increase Wealth

All Things Considered

October 23, 2022 MIsterchuck Season 3 Episode 136
Reduce Debt Increase Wealth
All Things Considered
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Show Notes Transcript

There is more to personal finance than reducing debt. While reducing debt is the biggest problem it not the only item that is needed in life. The second item is savings the third is protecting the assets that is owned. 

 Article Links: Edited By Sam Price

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Charles McDonald:

Hello, I'm your host, Mr. Chuck, I retired accountant turned truck driver, I reduce my debt in a relatively short period of time, debt reduction, to achieve financial freedom takes commitment, confidence, determination. All things considered. There is more to personal finance than reducing debt. While reducing debt is the biggest problem, it's not the only item that's needed in life. The second item is savings. The third is protecting the assets that are own. I'm going to take this as an opportunity to explain why I put personal aids in about the middle of my episodes is some of you may be hearing them. Some of you may not I don't know. But this a little bit of revenue that I can earn, that helps pay for some of my expenses to do this podcast. So far, I made enough money to pay for one month of my host services, which is, you know, not a lot of money. But you know, every little bit helps. So that's why I'm doing the ads that are short listen tune, there are about other podcasts that you may be interested in listening to. So that's all I have to say about that. I have a link in my show notes for an article from the price law eight ways to protect your assets from a lawsuit suit you should know about? Well, the number one thing is keeping your debt under control. And if your debt is already out of control, is reducing that and getting debt free. And the second most important thing you should be doing in your personal finance is savings. Whether your savings to build up your emergency fund, so that you can help reduce your debt and stay debt free. Or your savings for some other reasons for your retirement should be high on your priority list, and savings for your college or your children's college education. If that's the case, you may also be saving to say buy a home or to buy a second car or first car. Whatever your reasons, you should be saving money to pay yourself first, as a lot of people say, set aside a certain amount of money that you're not going to be needing, put it into some type of savings account and and build it up. Once you have more than what you need for your emergency fund, which should be at least three to six months worth of your expenses, then maybe you can start looking at other things to do with your money. Investing is the best way to go for the long term, because it will grow and compound and you reinvest all your dividends and interest that you receive, because it's not gonna be a lot of first. But if you keep using your dividends and interest to buy more investments, it will grow even faster. So that when you get to retirement age, you'll have enough money to survive to live the lifestyle that you're used to living. Of course, if your lifestyle is living paycheck to paycheck, every pay and not doing things because you don't have any money, then maybe you don't have to save as much. But with all things considered savings is a high priority on everybody's personal finance list. As even when you're struggling to pay down debt, you should still be putting money into a retirement account. Whether it's a 401 K through your work, or your own traditional retirement account. Don't consider any Roth IRAs until you have significant amount of money in a traditional because you're not going to have any tax related issues if you don't have a lot of money. So then this third thing is protecting your assets. When you buy a home your mortgage company requires you to have homeowners insurance. They also may or required to have mortgage insurance, which protects them in case you default on the loan or something bad happens. You always got to plan for the worst. When it comes to insurance. You're planning for the worst things to happen to you. And then insurance can help you get through that crisis, at least the financial part of it without much of a struggle. And same goes with your automobile, when you have a loan on your automobile, the lender is gonna require you to have insurance. Even when you get the automobile paid off, the state is gonna require you to have insurance. So those are your two biggest assets, and you're gonna be required more or less by the lender. Or maybe your state to have some type of insurance on those assets. So you're at least partially protected from anything that may ban happen. The other types of insurance you should consider is life insurance, if you're the sole earner, and you have a family, and something bad wouldn't happen to you like an accident and you are deceased. In life insurance will provide some money for your spouse and children to maybe pay off the home pay off some debt. So they can live comfortably, even though you're gone. So that's life insurance. If both of the spouses are earning, you both should have some type of life insurance term is the cheapest way to go. Term Life insurance is year to year. If you're young enough, and you get in with the right company, the chance the yearly premium may stay locked in for a 10 year period. I heard that on TV ads, you both should have some type of life insurance, if you're both earning money, and your income is both needed to pay your bills. The other type of insurance is disability insurance, you have short term, which is from zero from the date of the accident for six months. If you were in an accident, and you're you're not to CS, but you're still unable to work due to your injuries, then this would kick in and help pay you a set amount based on the policy for the first six months, then we have long term Disability insurance that's six months and after. So it doesn't kick in until a six months has passed. And believe me, so security disability, which you still would qualify for, will not be enough to cover all your bills. So you need to have additional long term Disability insurance to cover your bills. So you can pay the mortgage pay for your cars, so that you can continue on live in life, you'll still have an income stream when you're still unable to go to work. Then we have long term care. For more when you get older. If you're like have dementia, and you need somebody take care of you, you can't rely on family members, because it would be it put a strain on him. So if you go into some type of a nursing home, and they're expensive. So if you have a long term care program, in maybe when you're 58 years old or older, is when you start looking into something like that. But I'm gonna go to now, we're still talking about protecting your assets. And most individuals who are not, don't have a business insurance is gonna be your number one thing that you can do to help protect yourself from anything bad happening. If you have a small business, there are eight ways to protect your assets from a lawsuit suit you should know about and this is some of it applies to individuals but most of it applies to businesses. And the first one is used business entities. Whether you're a sole proprietor, you should consider you know, or if you have a partner your might be a general partnership, or a limited partnership or you may be a corporation or a limited liability company. If you have a small business you should in and you're a sole proprietor or you're a general partnership, you should considered looking into other forms of business entities. And one of the most common ones nowadays is a limited liability company. And they also provide asset protection against business lawsuits for their owners. But with fewer restriction on ownership than an S corp. an S Corp is a you incorporate at the state level, then you elect to be taxed as a Subchapter S Corp. For federal taxes. I'm not going to get into the details on that. But a limited liability company also allows their owners to choose whether to file federal tax as a corporation, or a partnership. And if there's only one owner, a sole proprietor, there's one major advantage LLC is having some jurisdictions, charging order protection. If your corporation loses a suit, a judge could award a number of shares of the business to the creditor, this thing gives them access to your books. With an LLC, even if the plaintiff gets a membership interest, he can't force a distribution of cash, but he still gets tax as if he receives it. This poison pill can help you permit a lawsuit or say settle on favorable terms. So what does that mean? Something happened in your business and somebody is suing you, for whatever reason, they partially win the lawsuit, and the judge gives them 10% ownership of your business, because you're a limited liability company. So now they're technically a member of your company, they cannot force you to give them cash or to make a distribution to them. But if you have a profit, they still have to pay income tax on 10% of the profit. So that's what they're talking about. So you don't give them any money throughout the year, you have an R profit, say you make $100,000 profit 10% of the profit, they're gonna have to report as income, and they're gonna have to pay income tax on that, and they never received any money. So it's like phantom money, I guess, help you protect yourself, because nobody wants to have to pay tax on money they never received. So that's why that's called the poison pill. And to own insurance, which we already talked about homeowners insurance. If you have a business, commercial liability insurance, or workers compensation insurance if you have employees that's required. Auto insurance, umbrella insurance, umbrella insurance. Coverage is a backup insurance that can be used, in instance, that your coverage are inadequate, in the event of your auto homeowners or other liability coverage are exhausted. Umbrella coverage pays benefits up to the limit of the policy. For example, if you have a $1 million in auto liability and get hit with a $2 million judgment, the auto your umbrella policy will pick up the additional 1 million in coverage. Otherwise, the plaintiffs can start coming after you just sees assets for damages. Typically, these policy gets underwritten for one to 5 million in face value. And it's very affordable I have that. So why are you doing with umbrella coverage is it it's called umbrella because it covers your home and your automobiles. And you can set it so that you can increase the limit that you're covered for. So let's say that your homeowner's is covered for a million, and your autos covered for 500,000 You can make a umbrella coverage to cover everything up to $2 million. So it's going to take up the difference. And to have that it's like $200 a year so what I'm paying is fairly inexpensive, for the peace of mind that you get. So something happens somebody at your home and they sue you or if you're an auto wreck and they sue you you got protection more than the what your initial auto or homeowners policy or it's given you then you have long term care, long term care insurance protection you against financially devastating saving cost of in home or nursing care for chronic airmen such as dementia, Alzheimer's strokes, and on the goes. So we talked about that. That's something you need to consider later in life probably bout age 50 and older. Use retirement accounts and this is what I didn't really know about. Federal law provides unlimited assets protection, qualified retirement plan up to$1 million in assets and an IRA and event of bankruptcy. Some state providing even more protections IRA, some states have opt out. So check the laws in your state to see how much you have protected. So any money that you You have if you put it in a retirement account that you not needing to use until age 59 and a half and you got to start drawing now at age 72. If you would file bankruptcy for whatever reason that money is protected up to a million dollars, some states may be higher, some states may be lower. homestead exemptions, some states provide a protection to home equity, which means that if you declare bankruptcy, the law provides courts from awarding home equity to creditors. In some states, including Texas and Florida state laws protects an unlimited unlimited amount of home equity other state provides relatively little protection. Again, check your state laws titling examine how your home is titled if you own your home with your spouse as tenants by the entirety, both you and your spouse own an individual interest in the home. The only one of yous name and a lawsuit creditors cannot force the other spouse to sell his or her interest in the home. Because the interest is indivisible. This can help you protect home equity, or the state law doesn't provide a significant homestead exemption. Annuities and life insurance some state provide protection on annuity balance and cash value life insurance policies. And those are more expensive than term life insurance. We talked about term, which is a life insurance you pay year to year it's good for one year, but they have cash value or whole life, I believe they're called which the premiums are a lot more expensive, but you build up a cash value in them. And you pay a pay you a dividend or interest every year. And at a certain point, you can use that to pay your premiums, which then slows down the amount of money that you're actually building up. And number seven, get rid of it. This option should only be used if you're solvent and a transfer does not renew you insolvent and meaning is not going to make you go bankrupt. creditors cannot seize assets that you no longer own. Therefore consider transferring ownership to in a rock and roll trust from which family members may be able to draw income or give the asset. Again, seek advice from your attorneys and seek advice from your insurance agent on all this stuff. Don't wait to protect her until the lawsuit is imminent before you make any moves, because then it's gonna be a little bit too late. So plan ahead is the jest of this episode. You worked hard, you've saved your money, you build up some credit, you need to protect yourself from something bad that could happen. The first step is to use insurance. And then after that the more money that you get, then you have other options that you can use by setting up trust so that you legally don't own that particular asset or that money or those investments that you have access to use the income or just buy and sell that item. You need to consult one a an attorney, insurance agent and or a financial planner in any of these areas that you're gonna get into. Because doing your homework, and having a professional that works in this area on a regular basis is going to be helpful and well worth the money to you. I'll be back in one moment was my final thoughts. If you want to contact me to request my spreadsheet for the budget, or leave a comment or ask a question, you can send it using my email, reduce debt, increase reduce debt increase wealth is all together no spaces. If you like to ask a question, quick question in the subject. If you'd like to request my monthly budget, put that spreadsheet in the subject matter if you want to leave a response of any kind is put a comment in the subject matter. I will get back to you as soon as possible. There's more to life than trying to stay out of a debt or paying down your debt and or saving money so you can acquire assets such as a home or an automobile. Once you achieve those goals. Do you need to protect those items that you acquired? and you need to protect your income from anything bad that could happen in the future. Also, you need to protect your family. That's the purpose of planning ahead, plan for the worst and hope for the best. As always a good motto to go by. Because if you plan for the worst, and that happens, at least financially, you'll have less stress on your life. And you'll be able to get through whatever happened easier, quicker and less stressful. And you're not going to be starting all over again with nothing, go have something you have something to start with. And you'll be three or four steps ahead of anybody else in the same situation. While insurance may be expensive, and not in your budget, you need to consider in the near future to put it in your budget and get the costs and start paying for it. So check with your insurance agent, find out what's available and how much is gonna cost and then work it into your budget over time. You don't need to do it all at once you need to well, if you buy a home, you need down the home insurance who own a car, you need to have auto insurance. After that, even though a few years and then get your umbrella insurance as you have more money in savings and the value of your home goes up, then having an umbrella insurance to protect you from the larger liability cases. Then, if as you get older, you need to consider protecting your income with disability income, income replacement insurance and short term Long Term Disability Insurance. And again, you need to have life insurance if you have a family. Say if you're a sole earner, you need to provide your spouse and your children with some money to help them get through the tough times and have them be able to live the lifestyle that you've currently set up for. So all things considered. Keep your debt control and you'll be able to afford the insurance. It your savings for retirement and whatever savings you're trying to save for started and put it in your budget and have all the proper insurance in place. So when something bad happens is not that bad. And you'll be glad you did. So