Afford Anything - Ask Paula: Did the Great Recession Lead to the FIRE Movement?

Episode Date: July 20, 2022

#392: Colleen and her husband own SEVEN paid off rental homes. Now they’re heading into retirement and disagree on what to do with some of that equity. Kevin wants to hit FIRE (Financial Independence, Retire Early) and believes his motivation comes from witnessing the financial trauma of the Great Recession. He’s wondering if others are motivated to reach FIRE for similar reasons. Anonymous wants to learn more about utilizing HSA accounts and Susan wants to learn more about investing in tax liens. In today's episode, former financial planner Joe Saul-Sehy and I tackle these tough questions. Do you have a question on business, money, trade-offs, financial independence strategies, travel, or investing? Leave it here and we’ll answer them in a future episode. Enjoy! For more information, visit the show notes at https://affordanything.com/episode392 ________________________________________ Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention to any limited resource that you need to manage, saying yes to something implicitly means, turning away other opportunities. And that opens up two questions. First, what matters most? And second, how do you align your decision-making around that which matters most?

Answering these two questions is a lifetime practice. And that's what this podcast is here to explore and facilitate. My name is Paula Pan. I am the host of the Afford Anything podcast. Every other episode, we answer questions that come from you, the community. And my buddy, former financial planner, Joe Saul Seahy, joins me to answer these questions. What's up, Joe? I am sitting here watching you get ready to answer questions and eat a grapefruit.

Yes. That's exactly what I said right before we started recording. I was like, I need to grab a glass of water and a grapefruit, and then I'm ready to go. Because nothing says I'm ready to podcast like grabbing a grapefruit. Healthy body, healthy mind. Absolutely. Yes. But I got to tell you, if you're chewing on a grapefruit while I'm answering a question,

it's going to be a little distracting. Then I'll be sure to chew directly into the microphone. I did have this. Can I tell you this little story when I was on Channel 7 in Detroit is their money man? I had one anchor. She was a backup anchor. and she would always, when she knew that the camera shot was on me and me alone, she would pick her teeth, Paula. And I would have the hardest time answering this financial question while the person sitting across this little table from me is picking stuff out of her teeth.

I'm like, what are you doing? I'm trying to talk about credit card debt and she's going after like a little piece of a pretzel. Oh, man. When I was a newspaper reporter, I used to sit at this desk with these two guys, and one of them would clip his fingernails at his desk. Oh. And so I would be on the phone. I'd be like interviewing a source. And I look over and there's some dude sitting like five feet away from me just clipping his nails, clipping his pinky.

And that's why I just take off my socks, pop my feet right up on the desk, start ripping those nails off. Because who needs a clipper? I think that's a point of your story, right? Yeah, just use your teeth, dude. That's it. It's frugal. It's more frugal. Everybody's wondering what we're doing.

What are we doing, Paula? We got some great questions. All right. We got four questions that we're going to tackle today. Kevin wants to know why people are motivated to pursue fire and financial independence, early retirement. And if some people who have that motivation are inspired by witnessing financial struggles or witnessing periods of great financial stress and pendulum swing over to. the fire movement as a response to that. So that is the question that we kick off with. That comes

from Kevin. After that, Colleen and her husband own seven single-family rental homes, free and clear. They have a net worth of about $6.5 million, four million of which is in properties, and another 2.5 million of which is in the S&P 500. And they are wondering what shifts they ought to make. Anonymous has recently been hearing about the advantages of opening an HSA health savings account and has a few questions about it. And Susan would like to hear about our thoughts on tax lien investing. We're going to answer all of these questions right now, starting with Kevin. Hey, Paula and Joe, great meeting both of you at the Chicago Meetup.

This question isn't actually a nuts and bolts question. I just wanted to know your opinions. I've given a lot of thought to my motivation. for pursuing fire. I believe one of the primary motivations resulted for me being a teenager during the Great Recession. I saw friends and family go through job instability, and some people even lose their homes. I resolved to have financial freedom so something like this doesn't happen to me and my family. I've noticed a lot of people who are interested in the fire movement are millennials like myself, some of whom had similar trauma from the Great Recession. Do you think

many people pursue fire for similar reasons? If not, What are your thoughts on what motivates fire adherence? Thanks. I really love the show. Kevin. Kevin, thank you so much for your question. And thank you for sharing your motivation, your experience, for why you are interested in financial security and financial independence. It certainly stands to reason that there are many people in this community who share a similar experience,

who witnessed friends and family lose their jobs, lose their homes. They witnessed these periods of great financial stress, often triggered by broad macroeconomic forces that were partially or largely outside of their control. And, you know, when you see something like that, it affects you. It affects you for life, particularly when you see it at a young age. I would be cautious about ascribing that motivation to an entire generation. You mentioned that you wondered if many millennials share that experience. I think the reality, is that we are impacted by the macro and the micro. And every generation consists of a wide diaspora of humans whose personal experiences will vary. Diaspora? Diaspora, yeah.

Like, well, essentially what I'm trying to say is a generation is not a monolith. Sure. I do think that a lot of millennials were attracted to the fire movement, but I think it's much more because of the fact that the rise of this movement happened at the same time, and the popularity happened at the same time, when millennials were at a portion of their career where you're more likely to be feel disenfranchised. You're more likely to feel the angst of the fact that you're going to have a lot more years of work in front of you and to be looking for a different path. But I also think, Paula, this is a powerful thing because I think what Kevin really is alluding to is that events happen to all of us,

and it's much more about what you do with the event than the event itself. Events will continue to happen. We can't stop them, right? But whenever bad things happen or good things happen, what we do with that information and what we do with our positioning in that, I think is really important. And Kevin made a great point, which is that so many millennials were, entering the workforce, we're in high school, in college, when they saw people lose their home, when they saw people lose their job, I know that this for some people, and I've seen the

statistics, part of the reason why many millennials got started investing late was because they saw so many fortunes destroyed when they were at a very formative time. And they decided, well, if investing is a great way to lose your money, I think I'm not going to do that, which is we know today was the wrong answer to that, right? Certainly joining the fire movement, a much healthier answer. I'm going to instead double down on my investment strategy and I'm going to get there much more quickly so that if this happens again, I'm independent enough that I don't have to worry about it. A much healthier thing than I'm not going to go near. I'm not going to go near real estate. I'm not going to go near stocks because I saw what happened to these companies.

I'm actually going to disagree with a couple of points that you just made, Joe. First, I think that rather than a feeling of disenfranchisement, many people, millennials and people of all generations, came to the fire movement based on feelings of empowerment. Because what's more empowering than realizing that you have the ability to aggressively save and invest to such an extent that work becomes optional? I think those people exist, Paula. No, and I think there's probably, lots of those people. But I also think that the fire movement is incredibly attractive to somebody who doesn't like where they are today, much, much more than somebody that is in a job that they love, in a life that they love. I don't think those people are thinking, how do I get more financial security today? If I already feel secure, I'm not looking for more security. Again, I think we're painting with too broad of a brush. A person might love their career but be motivated to look for greater financial security because they come from a childhood or from a background that was characterized by financial instability. For example, or a person might love their career but be motivated to pursue greater financial security or financial independence because they generally have a nervous or anxious disposition, which applies to all aspects of their life, not.

not just their finances. Or a person might love their career, but they want the flexibility to one day be a stay-at-home parent or to be a digital nomad or a mid-career Peace Corps volunteer. You know, the rise of the modern fire movement also coincided with the popularity of the internet, which sounds silly to say. We forget how relatively new this technology is,

but the information superhighway, the explosion of ideas, and communication allowed for niche communities to form and allowed for ideas that once would have been too radical to permeate the mainstream to take hold among small but sizable groups of people. It's not a coincidence that both fire and YOLO, both the passive index fund characterization of fire and the Robin Hood meme stock Yolo crypto crowd, both of them proliferated in the first 20 years of the internet, which is essentially the first generation. I guess that what excites me about this whole thing and about what Kevin said, isn't so much the

history. Like how people got here isn't something I spend a lot of time on. What I do spend a lot of time on is during these formative years, and this still excites me about Kevin's question, during those formative years when millennials were really entering the workforce that you have this Y path, I think that so many of us have. And I think we always have that choice. What do we do with this place that I'm at right now? I was in a discussion recently that was talking about many of the inequalities that we have, that we have a large racial financial divide, that we have a gender financial divide. And this person I was having the discussion with

a great gentleman named John Hope Bryant and a great leader in the black entrepreneurial community said that knowing that the system is broken is important. It's important to know that. And it's not a reason. And some people use it as a reason to give up because of the fact that the system's not fair. He said, even with a system that's not fair, that is the reason why you work harder, which I thought is this great thing where we're all in this place of empowerment. We're all in this spot. And I went from being very frustrated at the beginning of that discussion, because I see these statistics, and I think about, I think about all these people that haven't gotten a fair shot. And I think that what Kevin is talking about is this great inflection point. There are many

people, Paul, as you know, with YOLO decided not to invest. I'm going to YOLO instead. And there's other people who got super excited and said, you know what? Let's put myself in a spot. where the next time this happens, and of course it will happen again, that I don't have to worry about it next time. It reminds me of that expression, it's not your fault, but it is your responsibility. Yeah, yeah, good. I will say broadly that everyone's perspectives are influenced not just by the broader forces of society, but by the personal household forces that impact themselves and their immediate families. the experience of someone like me who immigrated to the United States as a baby is fundamentally very different than cousins of mine who came here when they were 18.

And the way that we perceive risk, the way we perceive opportunity, the career aspirations that we have, our approach to work and life. I mean, even coming from the same family, coming from the same country, both being immigrants, The distinction between coming here as a baby versus coming here as a college freshman, these are worlds apart. And likewise, I know for myself, being an immigrant who grew up in Ohio, that's an incredibly different experience than if I had grown up in California or New York. And coming from a nation where we are currently ruled by Maoists and we don't have a free economy. I mean, you know, you see what the conditions are like in your home country. and that inevitably frames the way that you experience the opportunities here in the U.S. So am I a millennial?

Sure. Did I live through the Great Recession at a formative age? Absolutely. But there are a variety of other factors, both demographic and personality, that would make the way that I respond to that external stimuli, very different than someone else's. someone of exactly my same age. But to Kevin's root question, what motivates fire adherence? I think it's going to be different things. Yeah. I think it's the same discussion we're having here.

It's going to be so many different things. Right. I think for some it's aspirational and for some it's, for some it's offensive and for some it's defensive. Absolutely. I think this is the reason, Paula, why you've seen over time too, the movement has gone from a group that, you know, and it got some criticism in the early years because the loudest voices by and large were people that were high income engineers that could easily reduce their expenses and maybe I overuse the word easily because there's a lot of people who say they can and there's people who actually do and so it's easy to point the finger to our people and go oh it's easy for you to do well if it were easy you'd have more people actually doing it so maybe I overstated that a little bit

But they were six-figure income earners. The last voices were six-figure income earners. And that's very different than being in the mid-fives. Sure. And you've seen it spread out now. When I went to Camp Five this last year, it was exciting to see so many people. And at the Economy Conference, see so many people that were not making a lot of money who are looking at fire in many different ways.

So it's been super exciting to watch it spread out, to watch people from different backgrounds, with different motivations get there, which is I think all because this core message that goes way beyond the fire movement, right? I mean, Vicky Robin, when she wrote, your money or your life, the word fire movement hadn't been created yet. And even before Vicki Robin,

she was popularizing this idea that it existed before her and Joe Dominguez, but she and Joe did it so wonderfully well in that book that she was able to bring this message that is widenable, if that's a word. You know what I mean? That it is wider than people with a big six-figure income that can reduce discretionary expenses much more easily than somebody living on $35,000 can. And to that point, and this is a final point that I'll make, is that the popularity of the modern fire movement has also coincided with the explosion of the side hustle, which itself has been facilitated by the surging popularity of 1099 income, independent contractor income, which is enabled, again, by the internet. People are now, more so than ever, able to pursue remote, flexible work done on their

own hours and in a location independent manner. And for some people, that's a full-time career. For others, it's a side hustle. But one way or the other, that puts greater income autonomy. me back on the individual, because if you have the ability to become someone with a side hustle, someone with 1099 income, then even if you are making $35,000 in your day job, you can increase the gap between what you earn and what you spend by tending to the earning side of the equation. And that's a power that people have today that they didn't have to as great of a degree back in the 1970s or 1980s. when you had to physically go into a brick-and-mortar location during specific prescribed hours.

So I think a lot of these forces have worked together to get people super jazzed about all aspects of their financial life, including their careers, their side hustles, their income, their spending, and their investments. Investments are another thing. I mean, again, the fire movement, the modern fire movement has also coincided with the explosion of passive investing and indexed. funds, the explosion of popularity of that, which again puts greater power back into the hands of the individual. You no longer need to go to a broker. And by that, I mean place a phone call to a human broker in order to place a trade, nor do you need to pay 20 bucks every time you want to place a trade. Now you can trade through an app on your phone in fractional shares

and it's free for no cost to you. And so all that you. of these factors work together? I think there's an extension to this, which is to go back to your side hustle comment, I think about empowerment, Paula. I think the great resignation is a big piece of this because we realize that there are so many different ways that I can make money now. There are so many different ways that I can bring in cash, that I am no longer beholden to my boss, who's a complete jerkwad.

and I don't have to take it. I don't have to take it. I can go, you know what? There's plenty other ways for me to make a living because of side hustle nation, as our friend Nick Loper calls it. So those are a wide variety of variables that have played together to fuel the modern fire movement, as well as the modern Yolo Crypto Robin Hood movement, meme stock movement. Side hustle movement.

Yeah, exactly. Side hustle movement, 1099 movement. I mean, before remote work was popular, people were talking. about location independence and being a digital nomad. These days that's day rigor, but five years ago, that was still considered adventurous. I will point to, though, Kevin, that while all those things may be offshoot of the same stimuli, that the one movement really came from a little different place, and that is the spin drift movement. Oh, my goodness. I thought you were going to say the bowel movement. So, no, I did not. Oh, come on.

I was sure that's where this is going. I was not. No. Just let the record state that Paula Pant went there. I did not. All right. I think we've answered Kevin's question. Kevin, thank you so much for asking that.

We are going to take a break for a word from our sponsors. When we come back, Colleen and her husband own seven single family rental homes totally free and clear. They are thinking of selling at least one rental house. And they're wondering if that's a good idea. We'll hear from them next. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology,

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Don't miss out on early Black Friday deals. Head to Wayfair.com now to shop Wayfair's Black Friday deals for up to 70% off. That's W-A-Y-F-A-I-R.com. Sale ends December 7th. Our next question comes from Colleen. Hi, Paula and Joe. My question is about untapped real estate equity. My husband and I disagree, and I'm hoping you can help us come to an agreement. We own seven single-family rental homes free and clear. Their value, along with our personal residence, it's about $4 million. We also have about $2.5 million in retirement savings invested in the S&P 500. With the massive increase in property values over the past few years, I would like to sell at least one rental house. With the one I'm thinking of, we are

currently making about $10,000 net annual cash flow, and I believe it could sell for about $1,000. $450,000, about $400,000 net after taxes and closing costs. By freeing up all that equity, we could invest that $400,000 in a passive real estate fund we've been invested with for several years, which pays out about 10% annually. So instead of $10,000, we could have closer to $40,000 in annual cash flow just from selling this one house. We're about to retire at the end of 2022, so cash flow is very important. Also, we're not interested. in doing a cash out refide because we are 100% debt-free and we want to stay that way as we head into retirement. My husband is hesitant to sell as he likes having a real asset that we have some

control of, and he thinks values will likely increase in our area for many years to come. He says, why should we sell a cash flowing appreciating real estate when we don't really need to? But I just keep thinking of that untapped equity. I'm curious to hear your recommendation for us. Thanks so much. Colleen, thanks so much for that question. And we'll let our resident real estate expert go second because I really want to widen this, because this is not a question, Paula, I think about real estate at all. I think this is a question about how do we evaluate when to sell and when to keep investments?

And there were two things about Colleen's call that worried me. And number one is the presence of emotion in the decision making. Liking an investment, liking the rental house, liking the appreciation that it has is not a reason for keeping it or for letting it go. It's a partial reason, but not the emotion in that. And if there is any emotion, maybe there's not. Maybe I'm overstating that. But you definitely don't want to hold on to investments because you like them and get rid of investments that are performing because you don't like them. But the bigger thing is getting also away from speculation. Your husband says

that he thinks the property will appreciate overtime. We don't know that. So we have to give that away. We have to say that we don't know what the future brings. So instead, here's the place that I like to start from. And it's to back up to the fact that you are retiring in 2022. That is the most exciting thing for me when it comes to this discussion because you mentioned. that you are going to want cash flow. And my first question is, how much cash flow do you need? And then my second question would be, how much appreciation do you need? Because if you move into a real estate investment that's going to provide a 10% rate of

return in terms of cash flow, that takes away from the potential for future appreciation. You don't get 10% for free. So knowing that you're giving away some appreciation, I don't know if you need appreciation. So my first question is, how much cash flow do you need to get by later on this year if you're going to, if you're going to retire this year? And then the second question is, what rate of return do you need your investments to appreciate at? Then the third question is, which I know that you have this information, but it wasn't on the call, which is what I'm really interested in is what is the total rate. to return on that current rental house. Now how much is it cash flowing today?

What's the total rate of return? Because if I sell it and I didn't need the cash flow, I still want to make sure that this rental property is keeping up with whatever rate of return I need to get through the rest of my life. So I think I would build Paula a timeline that looks at what cash flow, Colleen and her husband need in the future and start there. And that gets rid of two things. It gets rid of some of the emotion and the decisions.

And it also gets rid of the speculation on which way we think the market's going to go. Well, my answer was going to be a lot more straightforward. So as I calculated it, she has $10,000 of net annual cash flow on a property that's valued at about $400,000. So that is a 2.5% cap rate. It's not a great cap rate. But, I mean, if it's a Class A property that's fairly hands off, I can see there being a justification for that. But, Joe, to your question, what's the total rate of return? here we bake in some assumptions about market appreciation.

And the way that they could do it, given that all real estate is local, they could take a historic look at what has been the market appreciation in that specific neighborhood or that specific location over the course of the past decade or two decades. They could take that historic data and project it out forward and add that to the cap rate in order to get the total rate of return. So if this property has a 2.5% cap rate, and again, for people who are, you know, who are listening cap rate is essentially the dividend that the property is paying out, add that 2.5% to, let's just say, hypothetically, based on historic data for that particular neighborhood,

an appreciation projection of 5%, 6%, 7%, whatever it might be, well, that gives them a total rate of return. It seems unlikely to me that whatever that total rate is would be higher than the 10% that she's quoted for that passive real estate fund. And so then my follow-up questions would be, if they are going to keep this property, is there a way to either boost net annual cash flow, perhaps by raising rents, by reducing vacancy, by streamlining operational costs? Are there ways that they can improve that net annual cash flow? That's my first question. Second question is, how predictable, how consistent, how secure is the return projection for that passive real estate fund? Third question, what is the value to them of any depreciation or other tax benefits that they get by virtue of holding onto this physical, tangible rental property?

I think once they answer those questions, they can then create an apples-to-apples comparison between the total returns on this particular property versus the total returns in that passive real estate fund. And again, the big red flag for me is how predictable, how dependable is that 10% return in the fund that they're discussing. That to me is quite literally the $400,000 question. When I hear the words dependable and 10% together. Exactly. Yeah. That's why that stood out as a red flag for me. But I love how you came down on that, Paula, because I think we got to the same place,

which is we need to compare these two properties. But I think we also need to compare them on whether you need the cash flow or not. Because on the other side, why have something, why have an investment that gives you a bunch of cash flow if you're not going to use it? Because this is a great way to increase your taxes unnecessarily. If you're going to use it and you need that cash flow, then by all means. But if you're giving away some appreciation, potential appreciation, because you're taking such a high payout, which when I hear 10%, I can't imagine how you get any capital appreciation on top of that. I just don't.

Right. Can't imagine there's anything left. Right. And capital appreciation is taxed as capital gains, long-term capital gains, which has better tax treatment than income. And because it's capital gains in two ways. Number one is it gets taxed at the lower rate to your point. But number two, Paula, it also is not going to get taxed until you use it.

Right. If you turn into cash flow, it's taxed at a higher rate. and it's taxed on a continual basis. And if you take that money, you sit in your savings account and you don't spend it. Now you've taken a capital appreciating asset and turned it into a stationary asset, especially in a savings account where it would lose money when compared to inflation. And you're taxed at a much higher rate. So I would be reticent from that perspective until I looked at it.

But man, if you're going to spend all that money, 40,000 versus 10,000, sign me up for 40. Like, that's an easy math. So, Colleen, I hope this shed some insight into your question. Essentially, the takeaways are, number one, make a comparison between these two investments in terms of their total return, including factoring for the value to you of their total return once tax implications are taken into account. So you might have to spend a few hours of the spreadsheet to run a comparison between the two. Number two, contextualize those total returns, those total tax-adjusted returns through the framework of volatility, which is essentially the opposite of dependability, reliability, because that risk-adjusted return or that volatility-adjusted return is particularly as retirees, something that will be paramount. And then number three, compare the two through the lens of what are your expenses going to be in retirement and how much cash flow do you need?

Because there can be drawbacks to bringing in more money than you need, more cash than you need, when that cash comes at the opportunity cost of potential equity growth. So thank you for asking that question, Colleen. Best of luck as you compare the two. We're going to take one final break for a word from the sponsors who make this show possible. And when we come back, we're going to answer two questions. We have an anonymous caller who wants to know about the advantages of opening a health savings account in HSA. And we answer a question from Susan, who wants to know more about tax lien investing. We're back.

Joe, we give every anonymous caller a nickname. Typically, that nickname comes from a movie, a television show, some piece of media that you've recently been consuming. Joe, what have you been watching lately? I have to tell you, my mom's neighbor, Doug, from stacking Benjamin's, told me that I would really like a new show that's on Hulu. And I've watched now two episodes, and I'm fascinated. It's only a half hour long. It's about a fantastic chef, this award-winning chef whose brother has committed suicide. And he runs a small sandwich shop in Chicago.

And he decides to quit his job and go back to Chicago and make this struggling sandwich shop successful. and it's so gritty, it is so, so good. I've only watched two episodes. I hope it finishes well. It's called The Bear. So it is called The Bear. But this woman who he doesn't listen to enough, who has just started at the same time that he started,

and she's kind of his first true believer, while all the other people that work at the sandwich shop are scoffing at the fact that this high-end chef is working with them, and they really don't like him. But she knows what a genius he is. And she's trying to convince him, him to do more and he's pretty reticent. And I don't know, she's, in my view, she's probably the biggest badass in the entire show so far. Her name's Sydney. So I think that because this caller

is a badass too, that we should call her Sydney. All right. That was a long walk to get there, Joe. Just give me the freaking name. I don't care about the story. It all started on a misty October morning in 1972. Here to four. All right. Well, well, With that established, our next question comes from Sydney. Hi, this is Anonymous from a small rural mountain town in Northern California. I want to first thank you and Joe for all that you guys do. I have learned so, so much from you both and have made, have had the confidence to make financial decisions that I was always putting off. So I'd like to thank you for all of that.

I recently have been hearing a lot of talk and advantages of opening an HSA, a health savings account. And I was wondering if you and Joe could speak to this. And if you guys think it really is a financially sound and wise decision to make, to open one. And just some of the advantages of it, like how you can invest the money and the triple tax savings, as well as if you guys had any tricks to maximize the benefits of an HSA account. Thank you so much. Sydney, thank you for your question. If you are in a health insurance plan that is HSA compatible, then absolutely, in my view,

open an HSA and max out your contributions. First of all, your health insurance policy must be HSA compatible, and you're going to know this because the policy description, will say something very unambiguous like HSA. Yes. Literally, it will say something as simple as that. If you're not sure, either ask human resources if you're employed by a traditional W-2 employer or call your plan directly if you are self-employed and you buy individual health insurance.

Now, the official purpose of an HSA is that it is officially supposed to be an emergency fund for medical bills. And if money is tight and you need to use it for that official purpose, then cool, go ahead, use it for its intended purpose. But there is a way to hack the system, so to speak. And the way to do that is the following. First, max out your HSA, assuming you have the money to do so. All of the money that you put into your HSA is tax deferred. Second, make sure that your money is not just sitting in cash in an account. Put it into investments, such as a broad market index fund, like an S&P 500.

index fund, for example, so that you can grow that money tax deferred. Third, pay out of pocket for your qualified medical bills. And this is the kicker. So you will be spending after tax dollars, meaning regular normal pocket money, on your medical bills. Save the receipts. And that can be as simple as take a photo and upload it to a Google Drive folder or a Dropbox folder.

And then forget that those receipts exist. Your goal is to retire without ever opening that folder. If you need to do so, if there's a point in your life where you need the cash and you'd like to reimburse yourself for those qualified medical expenses, you can always do so in the future. Two years from now, five years from now, ten years from now, as long as you have the receipts, you can reimburse yourself whenever you want. But if you don't need that money, then let your HSA investments continue their tax-deferred growth. And then what happens next is that you turn 65. And when that happens, the IRS lets you withdraw HSA money, penalty-free, even if there are no receipts to back it up. Can we take a moment, Paula, then, talk about how powerful this is?

Because in this case that you just presented, we've now put money in pre-tax, just like a pre-tax 401k, and we've taken it out tax-free, which is the same advantage of a Roth IRA. Right. Well, let me put a little asterisk here. The money that you take, out that's backed by qualified medical expenses is tax-free. The money that you take out that is not backed by qualified medical expenses is penalty-free provided that you do so after the age of 65. So the stuff backed by qualified medical expenses is analogous to a Roth IRA. The stuff that is not backed by qualified medical expenses, assuming that you're lucky and you just don't have many medical bills, that is still withdrawn in the same way that you would withdraw money from a 401k, a traditional 401k. So there's my asterisk. I get super excited, though, about the opportunity to

have that type of tax treatment. Yeah. I think it's great tax treatment. And that's why this is, this is so great. I also want to dress for people that don't have access to an HSA, it's okay. You can get there without it. I know that I've gotten notes from people before Paula that go, you know, you guys will wax on about how great an HSA is and about how it's a wonderful tool. It is just that it's a tool. There are many other tools. And if you don't have one, you can get there. But if you do have access to one, Paula, I think we can both agree.

You want to explore that. Absolutely. And I also want to emphasize that an HSA is very different from an FSA. So an HSA is a health savings account. and FSA is a flexible spending account. The basic way to think about this is that an HSA as savings account is designed to store savings. An FSA, a flexible spending account, is designed to be spent. So any money that you put into an FSA is use it or lose it.

You have a certain deadline, and if you don't use it by then, the money's gone. They sound similar because they're three-letter acronyms with only one letter of difference between them. H-S-A-F-S-A. They sound very similar. They're often conflated. They are incredibly different. It's just that the nomenclature, the acronym, makes it easy to confuse the two, despite the drastic differences between them.

I don't think I have anything else to add, Paula, except this. Sidney, thank you so much for the kind words about both Paula and I and the help that we've given you. I just want to say something, Paula, not just to Sidney, but to all the afford-any-thing audience. that Paula and I are only helpful to you in that we're surround sound and that we help you. You're doing this by yourself. You are conquering this. And I know as a guy, Paula, who feels a lot of fear about doing anything, I often have to take things in baby steps or I will freak out.

I will totally freak out. And any success, Sidney, that you have had is because you did it. And I think you should take a second and pat yourself on the back. I love the fact that you're crediting us. And don't get me wrong, I think you have to fill your brain with the right voices. I think you have to listen to podcast. You have to read the books, read the blog posts, go to the meetings, do all the stuff. And that's just filling yourself with surround sound.

But at the end of the day, Sydney, all the success you've had is on you. And I think that's pretty awesome. Absolutely. So thank you, Sydney, for us. asking that question. Our final question today comes from Susan. Hi, Paula. This is Susan from Delaware. I love your podcast. Thank you so much for all the work that you do to share all of your knowledge. I have a question about tax lien investing. I read rich dad, poor dad, and then I read the 16% rule, and I'd really love to hear your opinion on tax lien investing and any sort of tips

or advice that you may have about it. Thank you. Susan, thank you so much for the question. the short answer is that tax lien investing sounds attractive on the surface, but there is a lot of risk involved, and novice investors can often find themselves over their heads or can get burned by the process. So let's break down tax lien investing. Now, first of all, a tax lien is a legal claim that a local government, a city or county, places on a piece of property when the owner of that property, fails to pay their property taxes. Tax liens often come before harsher penalties such as tax levies. A tax levy is where a government entity actually seizes somebody's property in order to recover the debt. So if someone receives a tax lien because they are passed due on their property taxes, then that local government creates what's called a tax lien certificate. And that tax lien certificate outlines how much money is owed in taxes along with interest and penalties, and then the local government

can then sell that certificate to private investors. Those private investors will cover that tax bill in exchange for their right to collect that money plus interest from the property owners. In other words, the local government essentially transfers or assigns the delinquent real estate tax lien to a private investor. usually this happens through a bidding process, and so if you as an investor end up being the winning bidder, you pay the balance, then if the property owner pays up during what's called the redemption period, if that property owner pays up, then in theory that means that you're able to collect the amount that they pay up.

And if they don't pay up, then in theory, that means you are able to then foreclose on the property. And so on the surface, it sounds very attractive. but there are a lot of risks associated with it. So, for example, sometimes the bidding process is aggressive enough such that the returns aren't really there. A lot of big institutional investors, banks, hedge funds, pension funds, a lot of the Wall Street players have gotten into the game. And that competition has driven down the returns to such an extent that you're not really even in the best of circumstances going to, be making that much. That's one potential problem. Another problem is that tax liens often have an expiration date. And so you have a tight window of time in which to initiate foreclosure proceedings

if you choose to do so. And the third is that sometimes you will be foreclosing on a property that you don't want to collect on because it has other liens against it. Ma'am, Paula, you're being far nicer about this than I would be. You are being far, far nicer So tell me then from the perspective of a former financial planner, specifically, why is it that you would not recommend tax liens? Well, it isn't that I don't recommend tax liens, that I wouldn't recommend tax liens. It's that it's investment number 42 of maybe a 50 investment portfolio. Why? Because of the fact that it's so complicated and the return on investment versus an investment that is much simple. simpler doesn't excite me, does not excite me. And I don't know enough about her specific situation

to know if it fits, but I'll tell you this, Paula, I'm pretty negative about it because I know it doesn't fit 99% of the people listening, that it's too far. So for people that want me to dive deeper into this, when you look at the efficient frontier and you look at risk versus return, tax lien investing is far out to the right and not very far north, meaning that the risk is very high and the returns are not that much greater than something that has a significantly lower risk. So in other words, let's say that I'll get 18% on a tax lien investment. I may be able to take half the risk of that investment of that asset class and let's say score 12. So then I ask, is the additional risk that I take to score this higher return?

Is it worth the additional risk? There's this idea that's associated often with the efficient frontier, and it's the idea of diminishing returns, right? We could take more and more risk, and is it worth all the research I have to do? Is it worth the time? Is it worth the effort? At some point, I'm spending hours and hours and hours evaluating my portfolio, and for what? maybe I've created a new full-time job for myself evaluating this thing that's eking out a little bit

higher return. Maybe you become an expert at it and you're phenomenal. Maybe. Maybe. But that comes after building your emergency fund, getting a broad-based portfolio that's going to be like the hull of your ship that helps you reach your goals that we know historically has gotten you there. I know you're trying to teach your tribe how to think. Exactly. Exactly. First principles reasoning. And I very much respect that. In certified financial planning circles, investing in something as complex as tax liens, it's not in the foundation. It's not in the middle. It's going to be out on the edge. And then I think what you do with it beyond the area is up to you. Joe, to me, the most convincing thing that you've said was when you talked about the efficient frontier and how the risk, reward imbalance in tax liens is often not justified. In other words, the rewards are. not adequately large enough to justify the risks. That to me is the most convincing thing that you've said, because that is commentary on the asset itself. I thought it was that Bing Rocks.

I thought that's what you like the best. I don't know. Let me look it up on Dogpile. Does Bing Rock, Dogpile. I'll email you at your earthlink.net account. Did you see? I was on Twitter. No, I wasn't. I was on just kidding. I was on Instagram and somebody had posted a screenshot of a tweet because I'm a millennial and I funnel all of my other social media through Instagram now. Right. But someone reposted a photo of a guy holding up a three and a half inch floppy disk. His caption was, I realized I'm old when one of my students looked at this and said, oh. You 3D printed the save icon. Oh, boy.

That's good, though. That's fabulous. I do find Instagram, by the way, it's just more fun. It is. It's my favorite. By the way, I'm on there at Paula P-A-U-L-A, P-A-N-T. And if you follow me, please, please, please be careful. There have been at least a dozen accounts, fake spammer accounts that have imitated me and that have

DM'd my followers. So please be careful. There are a lot of imposter accounts. And it's like playing whackamol. We keep reporting them to Instagram. One comes down, two more pop up. I have two on Stacky Benjamin's podcast. Yikes.

So yes, if you get a DM from somebody on Instagram who alleges to be me. And tells you to invest in tax liens. Or asks how your crypto is going or how your investments are going. I will never, put it this way, I will never initiate a DM. Nor will I ever ask you how your investments are going. nor will I ever, ever, ever try to get any of your personal information or sell you anything. Just please, please, please, if you follow me on Instagram, be careful. Because if you are following an account and particularly if you're getting DM'd by an account that is pretending to be me, there's a decent chance it's not me.

I'm at Paula P-A-U-L-A-P-A-N-T. There's my Instagram warning and also my tax lien warning. Well, and I think to wrap this up, I hope what Susan hears is not that there aren't opportunities here. I think there are opportunities here. I think that, yes, there are opportunities in tax lien investing. I hope she didn't hear that, that there are not. That is not at all, I think, what either you or I are saying. It's simply that it's the fringes rather than the core.

The pea's not the steak. The gutter, not the roof. Get your mind out of the gutter, Joe. The siding, not the cinder block. The Ask Chief is not the Google. The Bing, not the Google. It's the pink and not the Google. Hey, wait.

No, that's wrong. That one is wrong. Back away from that. It's the macaroni and cheese and not the ice cream. How about that? Oh, that's fighting words. Back at you. Ooh.

All right, Joe. I think we've done it again. Where can people find you if they'd like to hear more about your outdated search engines. That I get paid to use. Just saying, making money. Yeah, talk about side hustles. Back to that.

It's the Stacky Benjamin Show every Monday, Wednesday, Friday. You can also find my writing and a new book out called Stack. You're super serious guide to modern money management. The podcast is available wherever you're listening to us now, and the book is available wherever you buy books. Awesome. Well, thank you so much for tuning in. My name is Paula Pant.

This is the Afford Anything podcast. If you enjoyed today's episode, please share it with a friend or a family. family member, that's a single most important thing that you can do to spread the message of financial independence. Also, open up whatever app you're using to listen to this show and hit the follow button so you don't miss any of our amazing upcoming episodes. And while you're there, please leave us a review. If you want to chat about today's episode with other members of the community, head to Afford Anything.com slash community. Also, we have a book club. We are currently reading the book Atomic Habits by James Clear. You can sign up by going to fable.co slash afford

anything. I'm right there with you, commenting on all of my favorite passages and chapters in the book, fable, fable, fable, fable, dot, co, slash afford anything to be part of our book club. Thanks so much for tuning in. My name is Paula Pant. You're Joe Saul-C-Hi. I am. See you next time. We'll catch you, or I will catch you, one of us will catch you, in the next episode. Here is an important disclaimer.

There's a distinction between financial media and financial advice. Financial media includes everything that you read on the internet here on a podcast, see on social media that relates to finance. All of this is financial media. That includes the Afford Anything podcast, this podcast, as well as everything Afford Anything produces. And financial media is not a regulated industry. There are no licensure requirements. There are no mandatory credentials. There's no oversight board or review board. The financial media, including this show, is fundamentally part of the media. And the media is never a substitute for professional advice. That means anytime you make a financial decision or a tax

decision or a business decision, anytime you make any type of decision, you should be consulting with licensed credential experts, including but not limited to attorneys, tax professionals, certified financial planners or certified financial advisors, always, always, always consult with them before you make any decision. Never use anything in the financial media, and that includes this show, and that includes everything that I say and do, never use the financial media as a substitute for actual professional advice. All right, there's your disclaimer. Have a great day. Somebody just called me from somewhere. Was it the 1800s? They want their Bingback? Yes, exactly. Stop it. Do you also play Oregon Trail on the original DOS? Oh, wouldn't that be fun?

Oh, there are websites with emulators where you can do that. The DOS emulators, yeah. Yes, yes. Yeah, I have played it before with the up-down arrow keys, up-down side-side arrow keys. I tried to play the old, the original SimCity. Yeah. And I couldn't do it, but then SimCity 2000 I played and ended up playing it like laid into the night one night. Just this old DOS simulator game, fabulous. I've never played SimCity.

Of course. You're right. Of course not. Duh.