Afford Anything - Ask Paula -- Help! I'm Underwater on My Car!

Episode Date: February 12, 2018

#116: Stacy and her boyfriend would like to downsize to one vehicle. But they're collectively $14,500 underwater on their car loans. 
 Stacy owes $11,000 on her car, but its trade-in value is $7,200. She's paying a 12.74% interest rate and her payoff date is 2021.  
 Her boyfriend is in worse shape. He owes $18,500 on his vehicle, but its trade-in value is $7,800. He's paying a 21.5% interest rate and his payoff date is 2022. 
 Theoretically, they could sell Stacy's car to a private party, and she could pay off the rest of her loan. But the boyfriend's car is not in great shape, and probably won't survive for the next couple of years. And neither of them have found better refinancing deals. 
 What should Stacy and her boyfriend do? 
 _____ 
 Rachel earns $65,000 per year. She’s 27 years old, contributes 20 percent to her retirement account, and holds $5,000 in savings.  
 She owes $19,000 on a car loan, at a 4 percent interest rate, and $170,000 on student loans, all with different interest rates, but the highest at 7.9 percent. 
 She’s hesitant to consolidate her student loans, because she’s currently on a government plan that gives her flexibility, and she doesn’t want to switch into a plan that requires her to make a fixed monthly payment. 
 She’d like to know if she should use her savings to invest, or repay her loans. 
 _____ 
 Misty is 40 and has no retirement savings. She lives overseas and is able to save about $20,000 per year. She plans on living overseas for a couple more years before returning to the United States. 
 Her employer doesn’t offer any retirement benefits or match, and her health insurance accounts are not HSA eligible. 
 She’d like to contribute to index funds. Is this a good strategy? Does the fact that she lives overseas change her considerations? 
 ____ 
 Nicole is from New York and is living in Abu Dhabi. She’s been living there for three-and-a-half years and makes good money. She’s repaid her student loans and has a lot of cash saved. She’s single. 
 She wants to become financially independent. What should she start doing now? 
 _____ 
 Karen is 32 and lives in Los Angeles. Her take-home pay is $4,300 per month. She supports her parents financially, which costs $1,200 per month; she also lives with them.  
 She paid off $60,000 in student loans in 5 years. She’s has $100k in a high-yield savings account and $100k in 403b. She holds $12k in student loan debt from graduate school. 
 She wants to make 20 percent downpayment on a home with the cash that she’s saved. She’d like to live there, but also have the potential to rent out this home if, at any point, she decides she doesn’t want the burden of a mortgage anymore. She’d like to keep her mortgage to $2,000 per month. 
 Given that the housing market is so high, should she buy a home? Or should she wait for a market crash and keep saving in the meantime? 
 ____ 
 Former financial advisor Joe Saul-Sehy and I tackle these questions in this episode. Enjoy! For more information, visit the show notes at http://affordanything.com/episode116 Learn more about your ad choices. Visit podcastchoices.com/adchoices

anything but not everything, every decision that you make is a trade off against something else. And that's true, not just of your money, but also your time, focus, energy, attention, anything in your life that's a scarce or limited resource. So what do you value most? And how do you align your actions to reflect that? Those are the questions this podcast is here to explore. My name's Paula Pan and with me today is Joe Sol Sall Sihai. Hey, Joe. I value my time with you. Aw, thanks, man. And you know why I value. I value. my time with you?

Because we disagree. It's because when you and I get together, we answer questions that come from the audience. And it's so fun. And sometimes we disagree, but it always makes for lively discussion. It is so, so fun. I look forward to it. So let's start with our first listener submitted question. And it comes from Rachel.

Hi, Paula. My name is Rachel. I recently came across your website, Googling, 3 o'clock in the morning, alternatives to a 9 to 5. and I love everything that I read. I just have two questions for you. My first question is, how much money do you recommend having in the bank for purchasing your first rental property

for a down payment and for repairs? And my second question is, how do you feel about saving leftover income after expenses, including student loan payments, saving that income for an investment purchase versus putting that money back into student loan debt? I guess I feel like I should grow my income, versus trying to pay off my student loans with my current salary.

Just to give you some background information, I'm 27 years old. My salary is 65,000. I have a retirement plan that I contribute 20% in my employer matches currently at $27,000. And I have $5,000 in my savings. I have two main debts. I live right now with my parents. So my only two debts pretty much are my car loan at $19,000 with a 4% interest rate. My school loans, $170,000, all with different interest rates, the highest at $7.9.

I am on a government plan where I can pay zero for a year. I don't do that. I always try to make a payment every year, even though I don't feel like I'm making much of a debt, because my interest alone is $1,000. So I'm focused more than anything on paying my car as fast as possible, because I do feel a little bit better about myself when I see that balance going down. I am a little hesitant about consolidating my school loans because I'll lose, you know, the comfort that I have right now with the government plan where I can choose to not pay anything for a particular month and decide to double up on my car payment. And I feel like if I consolidate, that's not going to fly.

I'm going to be expected to make a set payment every month. and I feel like that might be difficult for me to do. Or I feel like instead of doing that, I can save the money again for an investment purchase. So any insights you have, I really appreciate it. Thank you so much, Paula. Bye. Rachel, thank you for calling in. And first of all, congratulations on saving 20% of your income in a retirement fund.

Isn't that fantastic? That's so great. Yeah, you're doing really, really well there. The number one thing that stood out to me from listening to your question and listening to your current situation is that I would get rid of that car payment as soon as possible. And that's for two reasons. Number one, it sounds like the car payment is holding you back from consolidating your student loans. And given the fact that your highest student loan interest rate is 7.9%.

The sooner you can get rid of that car payment, the sooner you can consolidate the loans. And then the sooner you do that, the sooner you can lower the interest rate on your student loans. So paying off the car loan will not only help you save money in terms of the insurance. interest that you're paying on your car, but it will also have that trickle-down effect of lowering the interest rate on your student loans as well. Yeah, it buys her flexibility. Exactly, exactly. And I do have to say, you said you have $19,000 that you owe on a car. Consider, I don't want to tell you what to do, but strongly consider selling it and getting a less expensive car, because 19,000 is a very expensive car. That's a more expensive car than anything that I have ever owned or

driven myself. I think that you could be perfectly happy in a car that cost $6,000 or $7,000, and they're certainly very safe, reliable cars at that price point. So if I were you, I would sell your car, get a cheaper one, and ideally you could either buy that cheaper one in cash, or even if you did have to finance it, again, if the total price of that car is only $6,000, you'd be able to pay that off much faster. I totally agree, Paula. And you know, what's funny, we just had Clark Howard, your friend and my friend Clark Howard back on. He's been on your show, but on ours before. And he said something. We were talking about like the auto show circuit that's going on right now and how to make your best deal on a car. Listen to this. He said people who keep their

cars 10 years or longer are able to retire five years early. So you couple what you're saying, which is buy a less expensive car and then put money into it to keep. keep it moving instead of, you know, people say their cars nickel and diming them. I'd rather be nickel and dime versus having a car payment any day. So keep your car longer, buy a less expensive car, retire early. It all seems to go together. Yeah, absolutely. The money that you'd spend on maintaining a vehicle with 100,000 miles on it pales in

comparison to the invisible cost of depreciation that you pay without, quote, unquote, feeling it when you have a new car or a newer car. Yeah. I'd love to peel off the second half of this question. which is invest versus pay down or student loans. Clearly with the interest rate where it is now, you know, investing is about two things. Actually, life is about two things. I think it's about confidence and math, right?

I thought you were going to say interest rate and cash flow, but all right. It's about pizza and beer. All right. Go on. Confidence and math. Yeah. So doing what you said around the car is going to give her much more confidence, right? And so I think that you have to do what makes you more confident.

But the thing that I can't get around is the math of 7.9% versus investing. She feels like she's getting behind by not investing. But consider this, 7.9%. If she doesn't consolidate those loans, she's getting 7.9% on her money. So it is an investment earning 7.9%. She would have to beat that by a bunch to make the volatility involved investing actually makes sense. So if she doesn't consolidate her loans, she's going to have to pay those down first versus start her investments. Yeah, I absolutely agree. So historically, the long-term aggregate

average of the U.S. stock market, if you look at the total stock market index, depending on what years you look at, historically, the U.S. market has returned around 8 to 9 percent just depending on what years you look at. Warren Buffett has predicted that in the 21st century moving forward, he believes that the U.S. stock market will over a long-term aggregate average return around 7%. So we'll just use that. You can use either 7 or 8%. It doesn't really matter. Pick whichever number you like better and use that as your benchmark. If you assume that a broad market investment will return 7 or 8% into the future, and yet you have a loan that has a 7.9, essentially an 8% interest rate, then the added risk premium or uncertainty premium that you may or may not get from investing in the market is, I'm basically just using a lot of words to describe the concept of it ain't worth it.

Right. And that is true, by the way, not just of investing in index funds, but also rental properties as well. So again, if you assume that a rental property appreciates at the rate of inflation, but no more, which is historically around 3% per year, and that property has, let's say, a 6% cap rate, then the total return on that property is 9%. And if you have a student loan that's costing 8%, then it doesn't make sense to hold on to, um, a loan that is guaranteed to take 8% away from you in order to be in an investment that could return 9%. And yes, I know that there are those arguments about cash on cash return. And if you use leverage to get into a rental property, then the actual return that you're getting for your cash in the deal is quite a bit higher, yada, yada, yada, I've gone over that

in some of my previous Ask Paula real estate focused episodes. But again, I would evaluate all investments based on the assumption that you are buying in cash, including rental property investments because you should never use financing to make a mediocre deal better. So, TLDR, pay off the car loan. It sounds like, I mean, I don't see any reason why you couldn't consolidate your student loans right now. It sounds like that's more of a comfort issue and a personal preference issue than it is anything else. But given the fact that you are not comfortable consolidating your student loans for as long as you have the car payment, given that set of circumstances, I would, number one, sell the car by a cheaper one. Number two,

either pay for that cheaper one in cash or pay it off as fast as possible. Number three, consolidate your student loans and get them to a lower interest rate. Number four, then if you have a substantially lower interest rate on those student loans, and I'm talking three, four percent somewhere around the historic rate of inflation, then at that point I would look into buying a rental property or concentrating on other types of investments. You're more confident then and the math works. Yeah, exactly. the interest rate arbitrage actually starts working out, whereas Rachel, in the situation that

you're in now, there is no interest rate arbitrage. There's no substantial or significant gap between what you are paying an interest and what you can reasonably expect to make as a return. Now, Rachel, to the very first part of your question, you also asked how much money should you have saved before you purchase a rental property? I don't think that in your specific situation, you're ready to deal with that yet. But for the the sake of everybody else who's listening who might be ready to buy, here's how I would answer that question. I would have enough set aside, depending on the price point of the house that you're purchasing, enough set aside for the down payment plus closing costs, plus at least three months

of initial holding costs after you purchase the property, by which I mean, if you buy it in rent-ready condition, meaning if you buy it in a condition at which you do not have to put any more money into it to get it rent ready for the first tenant, then that does not mean that you will start earning money from day one. You still may take a couple of months to be able to find that first tenant. So have at least three months of holding costs, i.e. mortgage payments, payments for repairs, maintenance, a house cleaner, a photographer, have enough money set aside that you could hold on to that property comfortably for a few months before you find that first tenant. And then, of course, if the property that you're purchasing is not rent-ready for the first tenant, and it needs

repairs and maintenance before that can happen, then you would need either a loan such as a 203K loan that would enable you to fund that or the cash set aside for it. Notice I'm not giving a specific number because that number is going to vary depending on if you're buying a $50,000 house versus if you're buying a $250,000 house. But those are the types of payments, the considerations that you're going to make before you purchase your first rental property. And the cash set aside, I think Paula, should be a very conservative number. By conservative, I mean, set more aside than you think. Because it seems to me, well, you've had stories like this.

There are always surprises. Always. Always. You know, there's, for people who travel, like for Globetrotters and World Travelers, there's this famous saying that's, before you leave for your trip, lay out all of your money and all of your clothes, then take half the clothes and twice the money. And the thing is true for buying a house. Are you saying run around naked with bunches of money?

Yeah, exactly. That's exactly what I'm saying. I might have interpreted that wrong. Well, thank you, Rachel, for asking that question. And best of luck with everything that you're doing. And congratulations again on the 20% in retirement funds. That's awesome. Absolutely.

Our next question comes from Karen. Hi, Paula. My name is Karen. I am 32 years old and I live in L.A. with my parents in a home that they own. Currently, my take home pay is $4,300 a month. The reason why I live with my parents is because I support them financially, which works out to about $1,200 a month. And I've been doing that for the last 10 years ever since I've graduated from college. The first five years after college, I've paid off about $1,200. $60,000 in student loan debt. And so would not have been able to support my parents, pay off student loans, pay rent, and still be able to save anything. And so currently I am at a point in my life where I am single, not dating. I have about $100,000 sitting in a high-yield savings account. I have a 403 set up through work that has about $100,000 as well. And I have about $12,000.

in student loan debt from graduate school. So I would like to put that $100,000 that I have in my savings partially into a 20% down payment for a home, either a single family residence or a condo. And the purpose for doing that is for me to live in, but also have the potential to rent out to either generate an income or build equity at any point in which I decide I don't want the burden of a mortgage anymore and decide to move back in with my parents. So my question for you, Paula, is with the housing market as high as it is right now in L.A., do you think this is a good decision to make? I would like to keep my monthly mortgage to about $2,000 or so, because in addition to the 1,200 that I spend supporting my parents, I wouldn't have very much left over,

but perhaps this is a good sacrifice for me to make. Or do you think I should wait out the market, wait for it to come down and keep saving in the meantime? I appreciate any thoughts, Paula, and thank you for your time. Karen, congratulations on everything that you have done so far. Like your financial accomplishments are incredible. You've paid off $60,000 worth of student loans in five years. Isn't it fantastic? That's amazing.

And if that was where the story ended, that would already be amazing. But you also saved $100,000 into a savings account. You have $100,000 in a 403B. And you're supporting your parents. It's so cool. She's like the perfect daughter. Yeah. Oh, my goodness.

Wow. So, Steve, can we get like a massive round of applause, maybe some fireworks? All right. So on to your, so congratulations. And on to your question, here's the first thing that jumps out at me. If you had a mortgage that costs $2,000 a month plus you're supporting your parents, which costs $1,200 a month, that equals $3,200 a month. Your take home pay is $4,300. So that means that you'd only have $1,200 a month in Wiggle Room. And that is not a whole lot of Wiggle Room. If that $1,200 has to cover your cell phone, utilities, groceries, gas, clothing, everything, absolutely everything else that is required for living has to come out of that $1,200. That means that your budget would be pretty tight if you had to start paying $2,000 towards a mortgage. I love this analogy, though, that you're using Paula because I think that if she thinks about herself as the chief financial officer of her company, right? She's done a great job of so far building what she's built. And what you're saying is one of the most important things to do is protect your cash flow.

Because if you eat up most of your cash flow, your decision making starts to get really tight. You've got to start chasing short-term dollars instead of long-term dollars. And long-term dollars are always where the money is. Absolutely. So my question to you, Karen, is why do you want to purchase this home? because from a strictly financial framework, it doesn't make a lot of sense, given the fact that it would take such a big bite out of your take home pay. If you were to do it, I would want a very compelling reason why. And given the fact that you're thinking about moving out for the sake of your own personal satisfaction,

but you're already considering that you might not be that happy there because you might be stressed out about the payments and then you would have to move. back in with your parents, sounds like moving into this place for your own personal satisfaction is not totally the reason. I guess what I'm trying to say is, I want to caution you against buying this home because you think it will be a wise financial move. If what you're looking for is an investment, if what you're looking for is a wise financial move, you would be better off either buying purely a rental property, something that is not a home for you to move into, but that is bought for the purpose of being a rental property, in which case you would be evaluating it by a very different set of criteria than you would evaluate your own primary residence, or focus on index funds,

focus on market returns, because there's a ton of opportunity there too. I think I'm probably in a very non-concise way trying to say, if what you're looking for is an investment, then get an investment. And if what you're looking for is a personal residence that you would enjoy, then that would be the only reason to justify purchasing this home. But from the way that I hear you asking that question, it doesn't quite sound like that's what would shake out. Well, so then maybe if it is just for her personal residence, you know, the answer is to put down a bigger down payment so that she protects her cash flow more. Yeah, exactly. Put down a bigger down payment or get roommates or buy something cheaper.

I mean, buy the smallest little shoebox hovel that you can in a bad part of town and fill it with roommates. I mean, if that's what you want, I would not be. You make it sound so appealing. I mean, at a certain point, getting a tiny little shoebox hovel in a bad part of town that's also filled with the roommates can be more appealing than living with your parents. It depends on your parents. Yeah, it depends on your parents. It depends on your family situation. But certainly for many people, one or the other is the more appealing option.

You might as well be telling her to buy a van down by the river. Oh, yeah, that's actually a really good idea. No, I'm serious. Like, there are Dodge Sprinter vans that you could buy and live in that are actually pretty nice. And you can finance them over five years. You're good. Or you could even buy it in cash. I mean, you can buy one in cash for about, what, $25,000?

or so. You can save that up. She's got $100,000 in cash in a savings account. Yeah, I mean, if you want your own place, you could actually buy a camper or buy a van. Oh, boy. No, I'm completely serious. I know you are, but I'm just not there. So again, I guess it depends on what are you looking for. Are you looking for a place of your own where you have some privacy? Yes. Because if that's the case, then depending on the standard of living that you want, van or a camper or something that is a lot cheaper would be your best bets. This idea. If what you're looking for is an investment, then don't get an investment that's going to take such a big chunk out of your cash flow. Yeah.

And this idea of waiting, I don't like waiting until the market cools down because we don't know when the market's going to cool down. Whenever we start playing that game, we lose. And the market, whether it's real estate or stocks, the market goes up the majority of the time. And if you're betting on this thing that may or may not happen soon, the housing market in LA could keep going north for a long enough period of time that when it finally does come down, it doesn't come down to the place it is now. So I never like that idea. Yeah, I completely agree. The thing about market timing is that you have to be right twice. You have to be right when you buy

and you have to be right when you sell. The probability of that happening is slim. So buy a house, when it makes sense within your own personal budget, and don't worry about what's happening in the broader market. Or just buy a van down by the river. Oh, final thing that I want to say is you've got $12,000 in student loan debt. I don't know what the interest rate on that is. If the interest rate is higher than about 5 or 6 percent, I would probably pay that off right away, particularly given that you have $100,000 in a savings account right now. 12,000 is 12% of the money that you've got sitting in a savings account.

So I don't see any compelling reason not to pay off that student loan debt right away. And I know that the 100,000 that you've got saved is money that you want to put towards a down payment on a property. But again, just to reiterate, if you do buy a property, either buy a personal residence or buy an investment, but don't conflate the two. because what you would buy for the sake of your own personal enjoyment is very, very different than what you would buy for the sake of it being an investment. And so even though those two might on the surface look like appear to be the same because they are both houses, they are actually incredibly different animals. A chihuahua and a Great Dane are both dogs, but they are very different. Don't know if that was a right analogy, but I'll throw that one out there and see if it works. Best analogy ever.

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All right, here's our next question. It comes from Stacey. Hi, Paula. My name is Stacey, and I absolutely love your podcast and your blog. I feel so fortunate that I've found you. I've been a financial disaster my entire life. I'm really trying to turn it around and adopt your afford anything lifestyle. With that in mind, I have a situation that I really need your advice on.

Currently, I live with my boyfriend. We're renting a house. We have two cars, two car payments, two car insurance payments. It's costing us a fortune in interest and insurance. I've also recently taken a job where I will primarily be working at home. So it is possible that we can share one vehicle and get rid of at least one car payment and one insurance payment. However, we are both underwater on our vehicles. My situation is I owe about $11,000 on the payoff at a 12.74% interest rate.

it won't be paid off until 2021, and my trade-in value is only about $7,200. He's actually in a worst situation, so his payoff is $18,500 at a 21.5% interest rate. He won't have his vehicle paid off until 2022. His trading value is about $7,800. So with those figures in mind, I calculate. that we owe about $14,500 above and beyond what both of our vehicles are worth together. Now, we could sell my car to a private party and perhaps make a little bit more money, and then I could pay off the remainder of my loan.

However, his car is not in great shape, and we're worried about it running for the next couple of years. I seriously doubt it's going to make it until 2022 when it will be paid off. So I really need your help. I'm in a complete quandary about what to do or if we should do anything. I've read that if you are underwater on your car loans, that it's usually best just to keep making payments until it's paid off, possibly refinancing. However, I'm not finding great deals on refinancing.

right now either. So I don't know what to do. I need your help. Please, please, please. Thank you so much. I love what you do. I think you're amazing and you're helping a lot of people out there. Keep doing it. Thanks. Bye. Stacey, that is a tough situation. First of all, I'm sorry to hear that you are having to deal with that, but I'm glad that you are facing it head on and that you are dealing with that. Here are a couple of thoughts. Number one, I think that The initial gut response that you had, which is sell your car to a private party, not trade in, but private party, and then pay off the rest of your loan. I think that is your best bet. So your car, you said trade in value is $7,200. If you sold it private party, you could probably get, I'm guessing, maybe around $9,000 for it. You owe $11,000, so that means that you will just need to come up with the additional $2,000. So that will get you out of your car loan and also free up some additional cash. because what it sounds like to me, first and foremost, yes, you have a being underwater problem, but it sounds like you also have a cash flow problem. And so in addition to wanting to get you out of both of those very high interest rates, I think that what you need right now is that additional cash flow. And so getting rid of your car will go a long way towards freeing that up.

Now, you mentioned that your hesitation about doing so is that his car is not in great shape. and you said probably not going to survive for the next couple of years. A car will always survive. The question is simply, how much money are you willing to put into a car in order to get it to survive? So in other words, at what point does the cost of repairing a car exceed what is reasonable for a car of that value? Because cars will always survive. You can always put a new engine in a car. You can always, I have put a new engine in a car.

I have put a new engine in a car before. You're strong. Well, it wasn't me personally. Oh, okay. But the car was, at the time, it was worth $4,000, and it needed a new engine, and replacing the engine would have been $2,200. And I really deliberated that for a while because on one hand, it didn't seem worth putting in a $2,200 engine into a car that was only worth $4,000.

But ultimately, the reason that I decided to do it was because I didn't have $4,000 to go out and buy a new car. It was easier for me to come up with the $2,200 to put an engine into that car than it was to come up with $4,000 to buy a completely different car. The point that I'm making, the reason I'm telling that story is because the amount of money that you will put into getting his car to survive is, I think when you do the math, more of a worthwhile expenditure than paying two car payments, particularly at those high interest rates and to insurances and. two depreciations and all of the maintenance costs that come with having two vehicles. And so I absolutely support getting rid of one of the two cars. Your car is the easiest one to get rid of based on the smaller gap between the payoff and the current value. So let's get rid of your car and then focus on paying off his as quickly as possible, as well as looking more into some refinancing

because I would hope, I know you said you couldn't find good refinancing deals, but I would hope that there is something better than 21.5% interest rate that you could. get into. Joe, so tell me some of your thoughts, because I kind of monologued for a while. What do you think that Stacey should do? And more broadly, if you're underwater on a car loan, should you keep paying it off? You changed my mind. Really? Yeah, I thought because of my first visceral reaction when I heard her question was, you know what, if his car's not going to make it, totally get rid of his, just suck up the fact that there's a lot of room between that trade and value and what he owes, but I'm with you because as a financial planner, and as I thought through your

answer, I thought the biggest thing here and the biggest thing for most people, it's cash flow first. And once we have good cash flow, then we start looking at interest rates, right? Right. So cash flow first, interest rate second. And this totally meets that. And at some point, you know, the two most expensive things you're going to have in your life are a house and a car.

This is the second most expensive one for Stacey. So it's going to be really difficult. going to hurt for a while, which also means that she's going to have to cross her fingers here, she and her boyfriend, and say, there's no place like a car that keeps going. There's no place like a car that keeps going. It keeps thinking that. And hopefully, hopefully she doesn't have to put much work into the car until she gets around the bend and can get onto the next vehicle. Yeah, exactly. And, you know, the one thing is, Stacey, by selling your car, I'm assuming that you can sell your car for about 9,000, you owe 11,000 on it. So step one is saving you.

up the $2,000-ish to pay that difference. After that, by selling off your car, because you have free cash flow, you can start putting that cash flow into an emergency fund. And in fact, what I would do is go one step further. You can have a general emergency fund that's for anything in life. And you could even set aside a specific emergency fund that is purely for repairing and maintaining the one vehicle that the two of you will be sharing because you know that there will be repairs that you're going to need to make, perhaps some pretty substantial ones. Make that with the newfound cash flow that you have. Make that your primary focus. Stacey already knows this, but when it comes to a car, much you say this with real estate that you make your deal when you buy the property.

It's the same thing with your car. And we look at his car. If he owes $18,500 on the car, it's a 21.5% interest rate. It's only worth $7,800. That was doomed for. in the beginning. And I think that because this is the second biggest thing in your life, making the best car purchase, I can't stand negotiating. I absolutely hate it. This is the one thing, Paula, where I, I'm such a negotiator when it comes to cars. I'm a big time negotiate. I force people to do it over email because I don't want to have the back and forth verbal exchange. If I do it over email, I can think through my responses to, but I'm going to negotiate, negotiate, negotiate, because there's nothing there, nothing on his car at all that I like.

Yeah. Yeah, I'm trying to understand why there is such a gap between the amount owed versus its value. I don't know. I have a family member that seems to do this all the time, gets what he thinks is a great deal. And it's a great deal for somebody, but definitely not him. Yeah. Joe, what advice would you give for somebody who's trying to refinance a vehicle but can't find good deals, which is another piece of Stacey's conundrum, right?

now? Well, I think it's going to credit Sesame, you know, because you can go there for free. It doesn't hit your score because it's going to be a soft touch on your credit. So my answer to that depends on how her credit is. If her credit's good now, there's certainly, certainly refinance opportunities. I like looking at your credit union. I think credit unions have fantastic deals. I think it's because they don't have shareholders. I think it's because the people that are members of the credit union own it, which is the reason why you see lower, better deals. I also like, you know, going to a place like magnify money where you can compare a bunch of different places. But my answer that all depends on your credit. If your credit score is not great, well, certainly there's no deals.

So I don't know why she's saying she can't find the deal. I don't know if she hasn't found comparison sites or doesn't belong to a credit union or if it has more to do with her credit. But either way, I think go to Credit Sesame first, check out your credit score and then work to improve it and then use those comparison places and credit unions. and she'll be much happier. Broadly speaking, if a person is underwater on a car loan, should they pay it off or should they get rid of it? Once again, I don't think I have enough information

because the piece of information I need is this. They're underwater on the car right now. I don't know how long, Paula, that car's going to last, right? You made your deal when you bought the car and the car's now underwater, so it wasn't a great deal. It wasn't a great deal when you made it. Clearly not a great deal today. But if I can have that car last for a long, long,

long, long, long time. You know, if the car's in great shape, who cares if it's underwater, right? If I can't sell it, it doesn't matter if I can't sell it for a lot of money, if I can drive it for X number of years. I think the how many years can I drive this car for is what I want to sell for, not whether I can sell it or not. Right. You know, and I was, thinking something similar because I was thinking the same thing about people who are underwater on houses or, you know, anytime that you discuss being underwater on a leveraged asset, or even any time that you discuss the value of a leveraged asset falling, like when people's home values fell during the recession.

Value is purely theoretical until point of transaction. That's true for a house. It's true for a car. It's true for anything. And with assets like homes and cars, the fewer transactions you make, the better because there are high transaction costs every time you buy and sell. Broadly speaking, I encourage people to hold on to homes and cars for as long as they can. I totally agree.

I mean, it's just like stocks, right? we tell people to buy long term, you're buying these assets, buy the asset long term, because transaction costs will kill you. Financing will kill you. But buy and hold, baby. Yeah, exactly. But Stacey, in your specific situation, you know, the time to sell a car is when you have two cars and you can downsize to one car, that's absolutely one of the cases in which make that transaction. Go ahead and sell the car because having fewer cars is certainly better than having.

having more. Great time to do it. Yeah, exactly. So Stacey, thank you for calling in and asking. Good luck with that. And on the bright side, you are in a situation where you can get rid of your car. You know, you are in a situation where the amount that you could get for that car if you sold to a private party versus the payoff amount on that car of what you owe is a relatively small gap. So that is the bright side of all of this. Our next question comes from Misty. Hi, Paula, this is Misty. I'm new to the podcast and your blog as of about two weeks. And I'm also a very novice investor. I have just been working overseas for the last two years, 40 years old. And to this point, I have no retirement savings, nothing in a 401k or 403B, nothing in an IRA. Absolutely new beginner. And since I'm living in a. country that doesn't have taxes, I'm able to save all of my income, and I qualify for full tax exemption. So that means that I cannot contribute as far as I understand to an IRA. And I don't believe

that my health insurance company here will offer an HSA. I still need to look to see if I'm able to purchase that on my own. I'm not sure. So the third step, I believe, and I've been reading what you save for beginners. The third way to start investing would be an index funds. So I will be doing that. So my question for you is then, do you have specific advice for someone like myself, living overseas, able to save a very large portion of my income since none of it's taxed? I'm saving specifically around 20,000 a year and planned to be here for a couple more years. So just wondering where to put all of that money. Should it all be put into index funds since I don't have an employer who's contributing to any retirement funds and I don't have the option to contribute to the other things

that you suggested with the exception of the index funds. So where should I go from there? Should it be index funds first and then rental property second? I would love to hear your thoughts on how to invest if you're living and working overseas and saving a lot of your cash because you are not getting taxed. Thanks so much. Look forward to hearing your next podcast. Misty, welcome. Welcome to the blog and the podcast. Thank you so much for joining this community. It's fantastic that you are getting into the world of personal finance. Five years from now, you will look back on what you are doing today and be very, very glad that you did it. So good for you for getting started on this journey. Now, as to your question, first of all, whether or not you can

contribute to an IRA depends on how your income is reported on your income. tax forms. So if you show that you have earned income, but that earned income is tax exempt, such as it's offset by some sort of a credit, then you can still contribute to an IRA. In that case, you would contribute to, for example, something like a non-deductible traditional IRA, which means that you wouldn't get a tax deduction when that money goes into the traditional IRA, but once inside, the money in that trade IRA would grow tax deferred. So there would still be an advantage to contributing money to something like a non-deductible traditional IRA if you are eligible to do so. Now, without looking at your tax forms, I don't exactly know how your income is reported,

so I don't know whether or not you show if you have earned income or not, but an accountant would certainly be able to tell you that. So I would recommend going to an accountant, one who is familiar with U.S. tax law as it applies to people who are living and working overseas and ask him or her whether or not you are eligible to contribute to a non-deductible traditional IRA. You know, what's funny about that, though, is in the big scheme of things from Misty's point of view, as a brand new investor, a lot of people here, tax break, tax break, tax shelter. And I love that. I think a lot of people don't spend enough time on that.

But we always want to remember not to let the tail wag the dog, right? My personal goal is to have Mark Zuckerberg's tax issues. If I can have lots and lots of money and really have bad tax issues, that's great. I do see some investors that are overly concerned with that. So if it turns out, Misty, that you can't contribute to an IRA and you can't get in the HSA, not a huge deal. You look for investments that are tax advantaged. I'm sure we can talk a little bit about that because the good news is exchange-traded

funds for the most part, really, even outside of an IRA, you're going to have a low tax bill using those investments. And also with exchange trade funds or index funds, you have low expenses. And that's the other big killer of wealth is the expenses on a particular fund. So just by virtue of at the simplest possible level, going to something like a place like Vanguard and getting into a low fee fund, whether that's an ETF or an index fund, you are paying some of the lowest fees on the market. And again, Joe, I totally agree with you. Don't let the tail wag the dog. If possible, tax optimise by going into something like a non-deductible trad IRA if you qualify for it.

But if you don't, it's no big deal. Because even if you did qualify for it, the max that you could put in there per year is $5,500. And you can save $20,000 a year. So the majority of your income, one way or the other, is still going to go into a taxable brokerage account. And that's fine. I've got tons of money in taxable brokerage accounts. I've got friends that are taxable. No, I'm kidding. I think it's awesome that you're thinking so much about how to get into tax-advantaged accounts. And again, I strongly, strongly encourage you to talk to a CPA who is familiar with your situation. And I should add, who is also familiar with different types of retirement accounts,

because unfortunately I have talked to a couple of CPAs who the minute that you began talking, about retirement accounts, they look completely confused and they're like, well, you need to talk to a financial planner. And I'm like, whoa, hold it. All I asked if I was eligible to put money into that. Right. And they're like, well, you need a financial planner. And I'm like, okay, I think I need a different CPA if you can't answer to something that basic. Anyway, sorry, random rant. I'll back off the soapbox. You know, can I go next on an area where I think we might disagree? Yeah, sure. So here's what I would do. And actually, Misty, when it comes to the investment that you choose, I would do something I think a little different than what Paula, I think is going to say.

We'll see. I would choose an exchange traded fund or an index fund that uses the small cap value index when you're first starting out. Now, I can immediately hear people that know what they're doing screaming at their device, but wait for it. What I like about that is if you're starting from absolutely zero, using an index that takes a lot of risk because let's say that the market goes down 20% and you have $2,000 invested, your first $2,000, you're going to lose $400.

And in this case, the issue, by the way, is not the financial markets, it's investor behavior. Most people freak out when the market goes down. Instead, for you, if the market goes down, this is a huge opportunity because you don't have any money invested yet. So I would pick the most volatile index that I can possibly find and start there. And as the numbers grow and you get closer to your goal, then I'd go with a much more balanced type of approach where we're really managing risk. I think for you, the more risk you can take in a responsible manner, meaning sticking with

an index, number one, number two, because it's an index, having that widely diversified, I think volatility is your best friend. And you know, Paula, when everybody looks at volatility, they get afraid. I think the quicker you learn to take volatility and make it your buddy, the better off you're going to be. Well, if you're going for the most volatile index, why wouldn't you go for a frontier market index? Well, I could definitely do that. But we start getting into, we start getting into issues where, you know, yeah, emerging markets would be my favorite place to go.

Emerging markets would clearly be my favorite place to go. But I think the responsible person in me says, Misty's. brand new. Let's just start off with some small companies widely diversified and go from there. And Joe, you're right. I do disagree with you on that, but probably not for the reasons that you think. I guess my primary reason for disagreeing with that recommendation is because I think, Misty, again, you're new to the world of investing, particularly for people who are new, complexity is your enemy, simplicity is your best friend, because you're doing a great job saving. You're saving $20,000 a year is you're saving a fantastic amount.

You don't want to keep that in cash. So in order to encourage you to get that money from cash into an investment as quickly and as seamlessly as possible, I would keep it as simple as possible. And leave the fancy footwork to that stage later in your life where you really become a nerd about this. That's what I would recommend. And if you want a more kind of elaborate or detailed explanation as to why the interview that I did with J.L. Collins on a previous episode of this podcast really lays that out very well. But then again, Joe, I don't think that there's anything wrong with your advice. You know, it's just I think, I think right now we're talking about different varieties of peas rather than the steak. Yeah, the stake is make the contribution and develop the investing habit. And what you and I are discussing is like what sauce goes on top of that steak. Why are you making me hungry? But Misty, just to wrap up, so your original question was, how should you start? And I think the big picture answer is that regardless of how you do it, whether you go into an IRA versus a taxable account, whether you go into a total stock market index versus a small cat value index, regardless of those details, the most important thing is to.

start because if you spend another six months with cash on the sidelines, that is six additional months that your money is not growing and compounding. So the most important thing is to get the contributions into the investment accounts. And everything else is kind of fine-tuning around that. We'll return to the show in just a moment. As I've mentioned in the past, we're about to launch the Afford Anything Store. And 100% of the profits from this will go. to Charity Water. The store is not up yet, but behind the scenes, as we've been in the process of researching how to process online orders and then ship physical goods online, we're finding that we're going to need a platform that allows us to compile orders from multiple

websites and then process those orders and then ship the goods. So for that, we'll be using Ship Station. Ship Station is a platform that helps you get orders out quickly. It helps you manage and ship your orders all from one place. So if you are an online merchant and you use Shopify, Squarespace, Etsy, Big Commerce, Woo Commerce, or over 75 other popular selling channels, ShipStation will bring all of these orders into one simple interface and you can manage it from any device, even your cell phone. And then ShipStation will create shipping labels for all the top carriers, including UPS, FedEx, the Postal Service. So with ShipStation, you'll be able to ship more in less time with the best rates available. And that's why ShipStation is the number one

choice of online sellers. Right now, you can try ShipStation free for 30 days and get an additional month free only if you use my promo code, Paula, P-A-U-L-A. So go to ShipStation.com. That's S-H-I-P-Station.com. and before you do anything else, click on the microphone at the top of the homepage and type in Paula, P-A-U-L-A. That's shipstation.com, interpala. Ship station. Making ship happen.

Are you happy with your bank? Are you getting the most from your money? Look, it's 2018. If your bank isn't making you money or providing an incentive for your business, it's time to find one that will. leading personal finance site go banking rates is back for the sixth year in a row ranking the best banks these rankings cover five categories best online bank best national bank best checking account

best savings account and best cd account there are also editors picks for categories like bonus offer high yield checking and much more now these are totally unbiased rankings absolutely no bank paid to be included or paid for any specific placement. So if you want to know which bank was voted best savings account or best credit card rewards, you can go online today to go banking rates.com slash Paula to see the winners and sort through the categories to find out which bank is best for your needs. Again, that's go banking rates.com slash Paula to check out these rank. Go Banking Rates has created these categories around high value banking features and products in order to help you make the best decisions.

GoBanking Rates wants to help you choose a bank that can do the most for your money on your terms. So bank smarter in 2018, find the full rankings at gobankingrates.com slash Paula, P-A-U-L-A. Our next question comes from Nicole. Hi, Paula, how are you? One of your fun listeners here in Abu Dhabi. I'm originally from New York City. I'm an educator. I've been in Abu Dhabi now for three and a half years. Actually considering a fifth year, took advantage of income out here, was able to pay off all my school loans, have a good amount of liquid saved. And now I'm looking to really speed up my investment. I've listened to you talk about real estate. I've listened to you talk about index funds. And as a person who's single right now, and I'm only relying on one income, what do you think would be the best thing to start doing now to help me prepare to be FI? Hey, Nicole, thanks for asking that. So first of all, that's awesome. You've paid off your student loans.

I assume, based on the way you've asked that question, what I'm assuming is that this means you have no other debt. So you're debt-free. You've got plenty of savings. You've got a good emergency fund. So you're in an awesome position. And you're living in the UAE where, you know, I'm sure there's some tax benefits that you're getting and probably a fairly handsome paycheck. So it seems like you're in a fantastic position. You've got all of the foundation nailed down. So I think you are absolutely right to turn your attention to investing. Now, as far as how to reach FI, broadly, speaking, the approach that many people take in terms of reaching FI is to either focus on index funds or focus on rental properties. And certainly you can do a combination of the two. But I guess the

way that I'm going to interpret your question and start to answer it is by comparing pursuing FI via index funds versus pursuing FI via rental properties. If you're interested in reaching financial independence through index funds, the advantage to that is that you can, it's simple, it's easy, it's straightforward. It takes almost no time. You can do it from literally anywhere. It's just the path of least resistance. And if you, you know, we've seen example after example of people who have followed this approach and done very well with it. So, you know, if you invest X amount of money into an index fund every month and you keep doing so, then eventually, and you reinvest the dividends and the compounding growth, then over time that balance grows high enough that it reaches a point at which

you are financially independent. And basically that point is once the balance of your portfolio is 25 times greater than the amount that you would need to live on. And the reason for that 25x rule of thumb is because it is the inverse of withdrawing 4% per year. So essentially, if, for example, you needed to live on $40,000 per year, you would want $40,000 times $20,000. which is $1 million in your portfolio. One million at the 4% withdrawal rule is that $40,000. So that's where the 25x rule of thumb comes from. And absolutely, you could do that with index funds.

And it's simple and it's straightforward. I guess the short, simple answer is you could simply do that. If you wanted to go into rental properties, the advantaged rental properties, in my view, is that most of the gains that come from rentals come in the form of the dividend, quote unquote, i.e. the cap rate that you receive from that rental property. So any investment grows in two ways. There's the appreciation on the value of the asset itself, and then there's the dividend or the income stream that comes from it. With a rental property,

the bulk of the return is in the form of that income stream. It's in the form of that dividend. And that is, I think, the huge advantage to using rental properties in order to reach financial independence. You'll have that free cash flow, that income stream, which you could choose to reinvest in the beginning years and then later live on if you decided to retire early. That being said, rental properties are, of course, more work than index funds. So that's the drawback. Those are the things that you'd want to balance. Yeah, and I don't think it has to be either or, right? Yeah, absolutely. You could do a blend of both. But I certainly would lead with, to your point, Paula, I certainly would lead with the one that excites you the most. And what's funny,

is, is that historically just taking big, huge averages, both of those help you reach financial independence at about the same rate. But obviously, that's going to be different for every single person. But if you look at the huge real estate market versus the huge stock market, both about the same rate. But they're both the two, the reason why Paula focuses on the two of those are those are the two asset classes that historically just beat the pants off of inflation over long periods of time and do it reliably. Absolutely. And, you know, with all this being said, Joe, I think while index funds and rental properties

are both excellent ways to reach financial independence, there are also less discussed alternate methods. So for example, you could. Selling plasma. You know what? I have a friend who actually, he did that for like a year. He made $50 a week selling plasma. Oh, man.

Yeah. He was at a time in his life where he was. Didn't have a whole lot of money. But the other ways of making money. Right. For example, you could start a business or buy an existing business, build systems, improve the efficiencies of it, grow the revenue base, get it to the point where it is mostly running itself.

You've got a solid team in place who are running it and you can be more of a hands-off owner that acts in a chairperson role rather than a CEO role. That's another example. So there are other examples of. other ways to reach financial independence. If you have some type of skill that lends itself to developing royalties over time, that's another example of a way that people build streams of passive income that could lead to financial independence. And two great books, if you're going to go that route, by the way, before you move on to another one, if that's where you're going, is you need

to read the e-myth. And the e-myth is the key to building a business to sell later. And then the second book is a book called The Goal, which is about setting up a efficient systems and processes. Just two very easy reads. And for anybody listening, those are where I always start with somebody that wants tone of business. And I will put links in the show notes to both of those books. The show notes are available at afford anything.com slash episode 116. That's episode 116. But you know, I think the reason that most people don't talk as much about those approaches is because the conversation that we could have about those at a high level has to be general. I mean, in a five-minute snippet on a podcast to give extremely broad,

high-level advice on buying a business that would eventually create a stream of additional revenue, a stream of, say, an extra $3,000 or $5,000 a month. Other than very, very broad sweeping statements, there's not a whole lot that you could say about that at the 30,000-foot level. And I wonder if that's one of the reasons why that's not talked about more. I don't know. Well, I think it's also, of the fact that it's hard to just do in your spare time. If you want the business to succeed initially, you probably have to be there a lot. I mean, you can build a business that you are able to exit later, but initially, most of the time, you have to have your boots on the ground. And, you know, with the equity index fund, I don't have to do that.

Yeah, that's true also. I think there's a large representation of people within the FI community who are working at nine to five jobs, full-time nine-to-five jobs, often highly paid jobs. And they want to quit those jobs. They want an early retirement, or at least they want financial independence so that they have that prospect of early retirement. I know when I started interacting with the FI community, I was surprised at the lack of freelancers who were there. I noticed that a lot of people used the date at which they quit their job as a proxy for the date at which they gained FI. And for me, that was absolutely not the case at all. The date that I quit my job was the day that I had a grand total of $25,000 in the bank, and that was

it as far as my net worth went. So I quit my job not because I was FI, but because I decided to become, well, first to just become a backpacker and sort of be a bum for a couple of years. And then after that, I decided to be self-employed, full-time self-employed. And so, you know, I think there's an underrepresentation of that in the FI community, people transitioning from self-employment into either FI or early retirement. And then to your point, Joe, yes, I think also probably hand in hand with that, there is a bit of an underrepresentation of people who are full-time entrepreneurs and who reached FI by virtue of growing a business and then exiting themselves from the business

while retaining ownership. You know, and I think that's not just with the FI community. I think it's also represented just in the society in general much more often. delay the fun stuff that they could do. They delay travel. Like when I was a financial planner, people would always want to talk to me about travel, but not now, Paula, they're going to do it after age 60, right? Or they're going to garden after age 60. All these things, I'm going to have no fun today. I'm going to have all my fun after I've achieved financial independence. And I don't think, as you've proven, I don't think the model needs to work that way. Right. Absolutely. I think that

there's a lot to be said for doing everything at every age. I mean, when I, I remember when I was traveling, I vividly remember being 22 and in Costa Rica. And somebody made this comment to me. She said, you know, I think it's really important to travel when you're young. I said to her, oh, you know, this is before I'd quit my job. It was before I was planning on doing a very, very big round the world, multi-year trip. I said to her, oh, you know, I'm planning on doing this big trip, but I need to work for several more years to save up the money to do so. you know, I'll probably be about 25 by the time I make it happen. Do you think I'll be too old? And she was like, no, no, no. I don't mean young like the difference between 22 and 25. I mean young like the difference between 25 and 30. And at the time, like 30 was like unimaginably old. Right. So I like cringed when she said that. And I was, of course I'm going to do it before I'm geriatric. And I've been thinking about that a lot lately because I'm, yeah, I've kind of played.

in the back of my head with the idea of doing another big multi at least one year trip six month to one year trip maybe when I'm I'm 34 right now so maybe at the age of 30 maybe in a year from now maybe at 35 or 36 I might want to do another big backpacking trip and the standard wisdom of do it when you're young I don't think applies and the standard wisdom of wait until you're retired I also don't think applies. You've, you know, there's a lot of wisdom to doing, to traveling or starting a business or whatever it is that you want to do at all decades and phases of your life. Because what you bring to the table is different and the world at that time is different. So the perspective and skills and experience that I have in my 20s is different than what I have in my 30s,

which will be different than what I have in my 40s and 50s. And similarly, the world is different in the early 2000s than it is in the 2010 decade that we're in right now. And it will be very different in the 20s, the 2020s and 30s. So there is something to be said for that. Sorry, Nicole, I know we're straying really far from your question, which is how do you invest for financial. Well, and just to stay straight out in the past year a little longer is there's a couple of people I like a lot. One is this guy, Austin Cleon, and Austin Cleon talks about how doing these other things, people think, oh, I can't get away from my job. I can't get away from, you know, my main source of income or whatever it is.

And he talks about how that having that side thing going on or having that travel or whatever it might be, something that's not your career, having this other thing in four. it without directly informing it. You know what I mean? The fact that he plays the guitar informs his art, even though guitar has nothing to do with his art. I find watching movies has a lot to do with podcasting, even though you think movies versus podcasting,

but they inform each other. And trips and seeing what's going on in the world informs it. And the other person, Laura Vandercam, who you've interviewed. She's been on the show. You know, Laura talks a lot about just this need to recharge. And man,

take those breaks and you never go do something that's way different than what you do on your normal everyday routine, I think the batteries really get worn down. Absolutely. And also the book Originals by Adam Grant, he talks about Joe, what you mentioned, Austin Cleon talking about. He describes how many of the people who are at the forefront of their fields in science or technology these very seemingly unrelated disciplines often have hobbies in music or theater or visual art, hobbies that seem to be incredibly unrelated, but that expand their way of thinking and allow them to have bigger, broader perspectives that they bring into their primary work. Yeah, yeah. And I'm going to link to all of those. Austin Cleon has a great book, Steal like an artist.

I'll link to that in the show notes as well as the Adam Grant book originals, as well as the Laura Vandercom interview on this podcast. So all of that will be at the show notes at afford anything.com slash episode 116. But Nicole, to get back to your question, in order to reach financial independence, index funds, rental properties, or if you have the time in the inclination, business ownership, either by starting one from scratch or purchasing one, those are, I think, three of the primary ways that, you would be able to reach financial independence. And the one that I would encourage you to choose is not mathematically the one that will get you there fastest, but rather the one that excites you most. And I realize that sounds a little fru-frew, like follow your passion unicorns and rainbows. But the reason that I say that is because it is genuinely the case that you will do best at the thing that you want to do. So there is, I think, increased efficacy that comes from moving in the direction of your interest. And so I wouldn't let you, especially given the fact that let's just go back to index funds

versus rental properties, for example, we do know that historically the total return on both are about, broadly speaking, about the same. It's just that index funds tend to make most of their money through capital appreciation, whereas rental properties, broadly speaking, tend to make most of their money through the income stream, that net operating income that they kick off. But the total return, when you look at the asset as a whole, is fairly neck and neck. So is one better or worse than the other? I don't think so.

The way that they produce returns is different, but both approaches will get there. I guess it's a little bit like picking a, you know, I'd like to lose 10 pounds. Do I go vegan or do I go paleo? I don't freaking know, dude. But if your diet is Doritos and Gummy Worms right now, then either of those two options would probably be better than what you're currently doing. But at a certain point, just do the one that feels right. You know, pick either vegan or paleo.

I don't know. Do the one that feels right because either way, it'll be an improvement over the status quo. And I think that's what's most important is just every day be a little bit better than yesterday. Joe, do you have anything to add? No. No. No, actually. That was awesome.

Cool. Thank you, Nicole, for asking that question. I hope that that answer was helpful. Awesome. So Joe, thank you so much for joining me on today's show. Where can people find you if they want to hear more of you? Well, you can come through Texarkana and I'll show you both great restaurants. How does that sound?

Or you can find me at stacking benjamins.com where we have our podcast three days a week. My brand new podcast is five days a week. It's called Money in the Morning and we record it live without a net. And I got to tell you, Paula, recording live is so intimidating. Yeah, I can barely speak live. in person to like another person across the dinner table. I've already had just some just crazy stuff happen live. And so that's five days a week, wherever finer podcast are found.

Oh, hey, P.S. So Joe and I recorded this episode a couple of weeks ago. I'm recording this little P.S. This like after show snippet on Thursday, February 8th, because I want to comment about the market drop that has just happened. Unless you've been living in a cave, you've probably. heard people panic about the massive market crash, quote unquote, that has happened in the past couple of weeks. On January 26th, the Dow Jones was at 26,6,616. Today, which is February 8th, the Dow Jones is

at 24,124. So what that means is that the Dow has dropped about two and a half thousand points, which is roughly 10% of its value in the last approximately two weeks. For many people who are worried about a pullback, worried about impending losses. This is it, or this might be the start of it, this might be the end of it, this might be the middle of it. We don't know. But we do know that the Dow has lost 10% of its value in the last two weeks. To put that in perspective, what that means is that right now on February 8th, 2018, the Dow is at the same place that it was at two months ago. We are at the same place that we were at on December 6th, 2017. And that underscores why you should not try to market time.

It underscores why you should not stay out of the market in anticipation of a coming recession. Because the only thing that has happened is that at the moment, we are in the same place that we were in at the beginning of December of 2017. So if back in August or September or October, you had decided, oh, you know what, I don't want to put my money in the market because I'm worried about an impenement. and crash. Well, guess what? Then all of the games that took place between those months through December are games that you would have missed out on. In other words, when you refrain from investing because you are concerned that the market might drop, that is a valid concern. However, if the market does drop, it might simply come back to where it is today, which is one of the reasons, one of the many reasons, why market timing, statistically speaking, does not work out.

There's a great quote from the famed investor Peter Lynch, who says, more money has been lost in anticipation of the next recession than has been lost in the recession itself. By staying out of the market, by keeping the bulk of your cash in cash, you are statistically speaking and historically speaking likely to do worse. The research has shown time and time again that investing in the market regularly every month, regardless of what the market is doing, which is known as a practice that's known as dollar cost averaging, is historically speaking, the approach that is most likely to give you the results that you want, desired results. And that's just another way of saying, don't keep your money on the sidelines. We don't have a crystal ball. We don't know what's going to happen in the future.

Maybe this is the end of the pullback. Maybe it's the beginning. Maybe it's the middle. Who knows? Nobody knows and nobody can know. So sitting around trying to speculate about what might happen in the future is a waste of time. We cannot control the future. We particularly cannot control the broader economy. All we can control are our own behaviors. So operate within your circle of control with the facts as we have them, not with guesses as to what may or may not happen. And the facts as we have them state that. the market goes up and the market goes down, but over a long term, over the long term aggregate average, the market, the U.S. stock market generally goes up around, you can estimate anywhere between 7 to 9 percent over a long term annualized average. A 10 percent correction is normal, and all of the talking heads who are freaking out about it, that's just noise. headlines that scream things like the Dow has its single biggest plunge,

loses a thousand points on one day, biggest plunge in stock market history, those headlines are designed for clicks. They're designed to get eyeballs and page views because that's what sells, that's what makes money. A headline that screams, hey, it's cool, just stay the course, is not going to generate the same number of clicks.

So, chill out, don't worry about the volatility. It's all good. The Dow right now is a good. exactly where it was at the beginning of December. And, yeah, it might drop. Absolutely. But we're not day traders. We're not playing for what's going to happen in the next one or two months. We're playing for the long term. We have a long, decades-long horizon in front of us. Even if you're 65 years old right now, you still have a decades-long horizon because you don't withdraw all of your money on the day of retirement and put it all in cash. Even if you are 65 years old, you still have

30 more years of your money being in the markets. And if you're 35 years old, you've still got 60 more years ahead of you. And that is the time frame that we've got to think about. The rest is noise. Oh, and very quickly, let's also talk about Bitcoin. So Bitcoin was above, what was it? One Bitcoin was trading for about $20,000 in January. And it is now, as of today trading for $8,397 as of the time of this recording. So it's lost more than half of its value, but I'm using quote unquote. I'm using that in air quotes because the value of Bitcoin is purely speculative. This is the modern day equivalent of the Dutch tulip craze or anything else that we have wildly speculated on. This is pets.com, the dot com bubble of 2000, 2001, all over again.

And that is not a commentary about cryptocurrencies in general. That is simply a commentary about the valuation of Bitcoin specifically. When Bitcoin in January hit $20,000, there were a lot of people online who said, oh, man, I really regret not buying it back in, you know, years ago when it was back when it was valued at $7,000 or $8,000. And now that it's valued at $7 or $8,000, people are saying, oh, well, it's crashing. Don't get into it. It's crashing. Those two sentiments stated just a couple of weeks apart make absolutely no sense. And I think that goes to highlight the speculative nature of the way that many people are participating in Bitcoin.

Remember, the value of an asset, any asset, is ultimately based on the income stream that it produces. When we look at a stock, if you look at a share of Coca-Cola or a share of Nike, the valuation of that is based on the income stream that that company produces. and really that the value of that stock is the money that it produces today and the market's anticipation of what it will produce in the future. The portion of that stock price that is based purely on the earnings that it produces is true, true investing. And the portion of that stock price that is based on the market's anticipation of what it will produce in the future is to a degree speculation.

When it comes to Bitcoin, the entirety of its value, is based on anticipation of what it may or may not do in the future. That is the definition of speculation. So if you're going to foray into that market, two pieces of advice. Number one, don't. And number two, if you insist on doing it, do so only with beer money. Literally, treat it as though you're going to Las Vegas and gambling. And instead of actually literally flying to Vegas and gambling, this is your equivalent. In other words, treat it as though you're about to throw that money into a dumpster fire, but you've decided to put it on a completely speculative investment instead. Actually scratch the fact that I just said speculative investment.

That is, what's the word, not redundant. That is contradictory. It is, Bitcoin is purely speculative. So, okay, TLDR, two takeaways from my little volatility monologue here. Number one, don't panic about what the broader stock market is doing. And number two, don't get caught up in the Dutch tulip craze. Cool. Thanks for letting me monologue at you. And with that being said, that is the end of today's show. So thank you so much for tuning in. You can catch the show notes at afford anything.com slash episode 116. That's episode 116. If you enjoy today's show, please do me a huge favor. Subscribe to this show in your favorite podcast player. Apple, Overcast, Stitcher, whatever you use, hit subscribe and please leave us a review. Those reviews are incredible. My name is Paula Pant. You can follow me on Instagram at Paula Pant. That's P-A-U-L-A, P-A-A-N-T, where I am posting every day with some sort of thought or observation or snippet on business money, financial independence, investing, career life. So again, Instagram at Paula Pant. Coming up on future episodes of this podcast, we have an interview with Liz from Frugal Woods. She and her husband reached financial independence in their early 30. We're going to talk about how that happened. We also have an episode with Farnush Tarati, host of the So Money podcast, where we discuss relationships and money. So both of those are coming up. Thank you for tuning in. My name's Paula Pan. I'll catch you next week.