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Preparing For The Unexpected (Protection Path)
What is up, Money Masters? I’m back for another episode of the show. I have to share something important that’s on my mind and my heart. We are in economic turmoil in our economy right now. It’s pretty bad. A lot of people are concerned about the deflation of the dollar, our purchasing power is being deflated, and the dollar could go away. It’s a scary time for a lot of us. We’re thinking about this stuff. The news isn’t helping in any way, but here’s the deal. When you’re prepared, you don’t need to fear. Let’s talk about preparations. When it comes to financial discipline and financial principles, one of the principles of successful financial management and being a money master is to have appropriate amounts of preparation. 
Parallel Financial Paths
I want to share with you what I call a financial framework. This is a framework that I received from a colleague in the industry, his name is Vince D’Addona. He’s had over 40 years in the financial services industry. He’s in something known as the Estate Planning Hall of Fame because his specialty is estate planning strategies. He’s not an attorney, but he is a financial services expert. He’s a wealth strategist like myself who happens to specialize in business succession planning, using last wills and testaments, trusts, and various versions of that to create specialized planning for higher net worth individuals. I got to know this guy because he’s been so long in the industry. He teaches me and my colleagues periodically about successful communications with clients and ways of being ourselves so that we can be an advocate for our clients and help them have greater success in life and greater confidence in their financial lives. He calls this framework the Parallel Financial Paths. Everyone I work with, myself included, is on these two parallel paths. You can imagine those paths are like the rails of a train track. These are parallel paths. One of those paths is the path of protection. Protection is things from liability, disability, and early death. Those are the three main things we’re protecting against. How we do that is based on the type of protection we get, the amount of that protection, and the positioning of that protection within our overall wealth plan. That’s the protection path. There’s another path that I’m going to mention but not get into. The wealth accumulation path is the second path. Wealth accumulation is about the things that we need for short-term situations such as an emergency or going to the hospital. We might need to replace the tires on a car. We might need to replace a water heater in a house and the HVAC system. We might need to replace our yard due to damage or whatever it is. There are all kinds of things that come up for short-term needs. Also, the longer-term stuff like retirement planning. If you want to be able to retire and you want to have the choice to not have to work, you have to set aside and accumulate some wealth like purchasing assets and turning savings into investments that are sound and successful. This exponential growth curve is sometimes called the hockey stick curve. Imagine a hockey stick. It’s pretty flat for most of the stick and then it has this sharp curve at the end. The compounding of our money and our assets happens a lot like that. It’s a slow build over time, and then as those assets build, they start to build upon themselves. We call that compounding. The earnings or the value increase, then increases again the next year by 4%, 5%, 6%, and then again and again. We have a bigger and bigger volume of money that’s accumulating at a similar modest growth rate, but then the volume of that earning that next year is bigger and bigger. We have this exponential growth. That’s the wealth accumulation path so that we can have some opportunity to have growth.
Driving A Car
Most of my clients that I’ve come across over the years have been stuck in that mindset that I only ever need to accumulate wealth and often overlook the value of protection. I want to give you one more visual representation of this. Imagine the car that you drive. There are parallel paths on a freeway as well. There’s a line that delineates the hard right edge. It’s a solid white line, then there are these dotted lines that indicate lanes. There’s usually a solid yellow line on the left-hand side so you know where you are within those paths. You know the rules associated with that. Imagine the car you drive on a freeway. In Utah, our speed on our main freeway, Interstate 15, which goes through Salt Lake City and runs north-south in the state, is mostly 70 miles per hour. Yet some people go 80-plus miles per hour sometimes. When we get into the more rural areas, it is 80 miles per hour when we’re traveling from Salt Lake down to Southern Utah, for example, where the canyons are. What gives us the confidence to go at such speeds in a vehicle that can be quite dangerous? People die all the time in car accidents. Unfortunately, this is the case. What do car manufacturers do? What did the laws do back in the ‘80s? When I was a kid, seatbelt laws were no such thing. We would lie down in the car. We would have babies in mom’s laps. We would have station wagons with beds in the back, and we would loaf around on these long road trips, for example, that we were taking. People then started dying. The rigidity of vehicles was recognized to be too strong. Instead of the impact being taken by the vehicle, it was taken by the physical body of the people inside, and people were getting injured and dying. How do we fix that? Let’s make crumple zones in vehicles. Let’s put seat belts in place that are not just a lap belt but a cross-chest strap as well. When I was a kid, it was just a lap belt. The back seats and the middle seat in particular started to have a chest strap as well. They then became a common theme within vehicles because they were so important to the safety of the humans who were driving the vehicles. What else is important besides the safety system of seat belts? How about the braking system? There are two main systems in a vehicle. There’s the driving system of the engine and the drivetrain that gets the vehicle moving, then there’s the braking system that produces the stopping force and allows us to slow down or completely stop if necessary and when necessary. I would ask you this question, which is more important? Is the engine more important? Are the brakes more important? When I ask that of clients, I get the comment all the time that the engine is more important. “How come?” “The engine is what makes the car go. It’s what gets you from point A to point B.” I said, “Absolutely.” They then go, “I guess the brakes. If I’m going but I cannot stop, I guess the engine isn’t very useful. Maybe the brakes are more important.” It’s a paradox. One is not better than the other. There are parallel systems in the vehicle that make it a successful transportation tool for us as drivers. In the same way that we need both brakes and an engine in a vehicle for it to perform its proper function, which is to get us from point A to point B safely and speedily, in our personal finances, we have the protection path and the wealth accumulation path. The protection path is like the brakes. The wealth accumulation path is like the engine in the vehicle. I would suggest to you this. The brakes or the protection aspects give us the confidence to use the engine to its full capacity, to hit the accelerator, and to go up to 70 or 80 miles per hour.
Overlooking Protection
I am a race car driver at heart. If I have a straight way and there’s nobody around on a rural road, I’m going to hit 100 to 140 miles an hour sometimes. I only will do that because I know that the braking system is working. In our financial lives, why do we overlook this stuff? Why do we overlook the value of protection? Why have we lost sight of the role of the brakes in our financial lives? Is it because of the cost? Is it because there is an insurance premium we have to pay for? Is it because it’s forced upon us? The state requires auto insurance and if you have a house, the mortgage requires that you have homeowner’s insurance. Is it because people say it’s a necessary evil and we don’t like things that are necessary or evil in our lives? We prefer to have choice and freedom. Perhaps it’s because we misunderstand that these risks are real because we haven’t seen them happen to other people. Maybe we have so many good protections in place already that we don’t recognize the risks still exist. I’m not sure exactly what it is, but I have some hunches based on my experience. That is we largely are so much in the consumer mindset that we don’t see value in protecting. The consumer mindset includes the immense amount of money, the billions of dollars telling us that we should be invested in the wealth accumulation path always and that cash is wasteful. It’s not keeping up with inflation, so we cannot use protection vehicles like having cash in the bank. I refute that. Being invested always is a bad idea because it’s like using an engine with no braking system. We have to overcome this mindset that protection is bad or it’s too costly. Protection is a means for those of us who have a producer mindset, and what I mean by producer is someone willing to produce more in society than they take from it.
Being invested always is a bad idea because it’s like using an engine with no braking system.
We’re willing to do within our work environment, whether we’re W2 or whether we are business owners, that we produce value. We solve problems. We create value. We do things that are of greater value than the effort we’re putting in, and that our employer or our customers are willing to pay us in exchange for that. We’re exchanging our goods and services with their goods and services, and we create what we call unequal exchange because we’re both getting something we perceive as more valuable than what we currently can do. The only reason exchange ever happens is if it’s unequal. In other words, that is fair. I want you to think more than just fair exchange where you both get something you value but think about abundance exchange. This is a success law that I’ve learned recently from some important people in my life. The success law of abundance exchange. When we think beyond that, we’ll recognize that I want to do more than what is required of me. I want to give a little bit more than just fair exchange. Ultimately, we want to have that abundant mindset when it comes to protection as well. Why do we protect? Because it’s the right thing to do. If you are married and you’re a breadwinner for your family, whether you’re the man or the woman and you’re bread-winning, you’re supporting the family, you have a responsibility to make sure that your ability to create an income is covered, which is your most valuable asset. How do we do that? Life insurance. How do we do that? Disability insurance. How do we do that? Medical insurance. These are all what we call human life value protectors. These protection vehicles, although they have a premium, what it does for us is freeze up our mental space so we can focus on productivity. When we’re willing to pay the premium for these insurances, it covers the catastrophic things like early death, being too sick or injured to be able to work, or where an accident causes you not to be able to work temporarily, but not so long that it’s disabling beyond 90 days or more.
Insurance, Cash Reserves, And Physical Reserves
These things provide us a certainty. It’s that certainty that allows us to be productive at home as parents, as good friends, and partners in a marital relationship or a committed relationship, as colleagues in your work environment, and as leaders of businesses and organizations. When we have the proper protections, we can be better leaders. What do I mean? Insurance is one type of protection. We should have appropriate insurance and we should be willing to pay for that because it frees up thousands if not hundreds of thousands of dollars that can be used for productive activities. Instead of storing it up in cash reserves that cannot be used to invest because it’s needed to replace a house or a physical injury to somebody, the premium frees up all those thousands to hundreds of thousands of dollars so that we can be productive with it. We transfer the risk to a different entity. That’s one type of insurance. What about cash reserves? Cash reserves give us the freedom to choose to move from one job to another if we don’t like the environment that we’re in. Cash reserves give us the opportunity, like the client I shared with you in my prior podcast, where for most of the past five years, it has only been an upward trajectory of success in the business. Suddenly, in the past two quarters, the environment changed in his business. I had instructed him to have some reserves on hand and to change the methodology with which he was handling his day-to-day financial transactions. There were cash reserves available to deal with this instead of having to go to his business line of credit and having an additional cost called interest. That line of credit is still part of his backup, but we had cash first to deal with this. It created a major ease of stress. It didn’t relieve all the stress, but it was an easing of the stress because there was cash availability. There’s another client of mine at the beginning of COVID. We started working in late 2019 to now in the spring of 2020. He says, “If I didn’t have these principles you’ve been teaching me, I would have been freaking out about how to manage my business right now. Instead, I feel at ease and I feel at peace. I know I’m going to be able to get through this because I have a good system in place and I have cash reserves to work with.” Cash is a major important part of our reserve system and our financial peace of mind. How about physical reserves? This is perhaps the most overlooked. Having some food on hand, some water on hand, and even where necessary, fuel on hand. Food supply. There are many companies out there that offer freeze-dried foods that are prepackaged into one-month, three-month, and even a year supply that you can acquire for a few hundred to a few thousand dollars, depending on what your needs are.
Cash is a major important part of our reserve system and our financial peace of mind.
I personally have a three-month reserve as it stands right now for a family of eight, mostly freeze-dried foods. That allows me to have my own personal safety net in case the grocery stores are having difficulty. I can turn to my own food supply. I also have a 250-gallon water tank in my garage that holds fresh water. It stands vertically and has a spigot at the bottom. I clean that out every couple of years to make sure that it’s in good standing. I have a water supply. I also have a fuel supply. My fuel is on my roof. I have solar panels that power my house during sunny days and I have a battery backup system. It stores up extra energy fuel. I have some propane tanks and a barbecue in case my natural gas lines to my house go out and I cannot use my oven, or my electricity goes out so I cannot use my microwave. I have some physical wood on hand that I can build a fire in my backyard if I need to. I have a bit of land where I have some empty space where I could do that if I need to. I don’t personally have this, but some people I know have guns and ammo as reserves so they can go out and hunt for food. I have people who suggested that to me in the past. I want a bunny. I want to have a honey hive. I want to have some bees so that I can have something sweet to exchange with people because one of the things that we love as humans is something sweet. I wanted to have something to exchange with other people in the form of honey. There are all kinds of ways we can reserve physical supplies as well. I invite you to do that and get serious about some of your own personal reserves, your cash reserves, your physical reserves, and some emotional resiliency. Get to know your neighbors. Get to know what your neighbors have as supplies. Build some friendship and comradery in the neighborhood so that you know who has what. My neighborhood is good about this. For whatever reason in Utah, we’re good about looking at each other’s circumstances and being helpful as neighbors. We have what we call block captains in our community, where we have a list of who has what. If something difficult happens in our community, we have power outages that are significant or a major storm or something, we can call upon that and say, “We need a chainsaw. We need somebody with a truck. We need somebody with a certain skill like electrical skills,” or whatever it is. We can help get things improved very quickly in the neighborhood. Get to know your neighbors and what they have to offer. What you have to offer and building that camaraderie is a major safety net for you in the community so you don’t have to lean on governmental support. Have an inventory of your home. Take a video inventory in case you have major damage to your house. This is a form of protection.
Get to know your neighbors and what they have to offer. Building camaraderie within your community is a safety net so you do not have to lean on governmental support.
What it does is it speeds up the transaction with your insurance company. If you have a claim on your home because you have major damage, and there are lots of other people who’ve had similar damage, if you have a video inventory of what was in your house, you can easily make the list of what needs to be replaced, and it can be quantified, and then the insurance company can write you a check much faster than your peers and you can move on in life faster.
Episode Wrap-up
Take a video inventory of your house. It takes 5 to 15 minutes to get your cell phone out. Walk around your house, and talk about what is in each room. Don’t worry about how clean or messy it is. The point isn’t to showcase your house but to identify what you had in case of fire, flood, or some other natural disaster. We’re getting a little bit long on this, so I’m going to wrap it up here. The concept of protection. We need to have mental protection in the form of an abundance thinking and good healthy relationships. We need to have physical reserves on hand. We need to have cash reserves. We need to have easily accessible funds so that we can deal with crises. We want to avoid consumer debt. Asset-backed debt is something we almost all need and cannot do without like backing up our homes, our vehicles, and business debt. The consumer debt, we have to focus on getting rid of that. Once we have some reserves in place, we can have the cashflow and mental freedom to focus on freeing up cashflow by paying off consumer debts and then never getting back into it. That’s a form of protection as well. Not having consumer debts that are constantly nagging at you that require payments all the time and that cause mental frustration. I believe deeply in who you are, in the human spirit, and resiliency. I want you to be Money Masters. I want you to feel confident with money. I want you to have a sense of fun and ease when it comes to money. I’m trying to get these principles across to inspire you to take some action. My invitation to you is to start to look at how you’re handling money. If you need to, grab my spending tracker and planner so you can get a sense of how your day-to-day spending is going, and you can identify some ability to save some money and set it aside for these unforeseen circumstances.
Perhaps you’re over-depositing money into 401k or IRA accounts, it’s creating illiquidity and deferring tax into the future. Maybe you’re putting at risk in the stock market. Instead, you should be putting that aside so that you have cash reserves so you can get some of these physical things in place. Once you have that foundation, you can go back to an investment strategy on the wealth accumulation path. I want you to know it’s okay to stop those contributions for a period of time. It is perfectly okay. It’s often necessary to get your financial life in its proper order, and then reposition yourself for greater success moving forward. I love you. Thanks for tuning in. Thanks for being here. Please share this with other people. If you haven’t done so yet, jump on Apple. Do an iTunes review for me, so this can be shared with more people. If you’re finding this valuable, please share the word. Pass it on to your friends. We’ll see you in the next episode.