Afford Anything - Ask Paula - How Can I Learn about Money from the People Around Me?

Episode Date: November 20, 2017

#104: This week, I answer 4 questions about quitting a depressing job, learning how to ask probing questions, saving for a downpayment, and more. Edward asks: How can I learn from other people around me? I'm 28, and my wife and I have some money that we'd like to invest. We know people who've had both successes and losses in the investing world, but when I ask them questions, they tend to become a little more private and shy away. How can I encourage them to open up, so that we can learn from them? Sara asks: For the last 2 years, my husband and I have lived on one income and used the other to pay off our student loans. We also saved $40,000 to make a downpayment on a house. We need to move to England for 2 years, and we'll buy a house when we return to the U.S. In the meantime, what should we do with the $40,000 downpayment that we've saved? We'd hate to see the money in a savings account, but it doesn’t seem wise to invest in index funds. What should we do? Britney asks: I’m at a job that I hate. I’d like to start a small business and find other part-time work so that I can quit my job. I’m planning to move in with my in-laws, so my cost-of-living will be low. Do you recommend that I start a blog as a side hustle, so that I can pay the bills after I quit my job? A listener in the Midwest asks: I’m a 37-year-old single woman living in the Midwest. I live in a one-bedroom with my 5-year-old son. I bring home $3,800 per month. My rent is $1,150 and my son's preschool is $700 per month. I have $40,000 in retirement savings and a $3,000 emergency fund. I don’t want to be making rent payments in retirement. Should I take $20,000 from my 401k to make a downpayment on a rental property? ____ I answer these questions in today's episode. Enjoy! For more, visit the show notes at http://affordanything.com/episode104  Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything, but not everything. Every decision you make is a tradeoff against something else. So the questions become twofold. Number one, what do you value most? And number two, how do you align your behaviors to reflect those values, those priorities? Answering those questions is a lifetime practice. And that's what this podcast is here to explore. My name is Paula Pant.

This is the Afford Anything podcast. Every other week, I answer questions that come from you, the listeners. We're kicking off with a question from Edward, who's, asked a fantastic question that I have never gotten before, and I'm really excited to answer it. Take it away, Edward. Hey, Paula. My name is Edward. Love the podcast. I have a quick question for you, one that I think can be great for a lot of other listeners. My question is, how can I learn from other people around me, learn financial experiences, learn about them and be able to apply them into my life.

I'm 28. Just now, my wife and I have gotten quite a bit of money that we're excited to invest, and we've got people around us that have had a lot of experience financially with some successes and with some losses. And my question is, how can I learn from these people? What questions can I ask? Oftentimes I'll get tidbits from a successful father-in-law who's an orthopedic surgeon. He'll say things like, oh, I've lost a lot of money here or I did great on this. But then when you ask follow-up questions, people usually shine, become a little more private. I have another uncle that did great, selling a business, making millions of dollars.

Same type of thing. my question is how can we ask questions? How can we dig into things a little bit more with people around us and allow them to share their experiences and help us to learn so that we can make better financial decisions? Hopefully that question makes sense and you can get to it on the podcast. Thanks again for the podcast. We love it. This is a great question.

Okay, so you have access to people whose judgment you trust and whose experiences you believe you can learn from, but you're not sure how to get them to open up. Here are a couple of tips. Number one, when you're asking them a question, ask about their thinking process prior to going into a decision. Most people don't ask questions like that. Instead, they ask these incredibly detailed, narrow questions in which the answer that I would give is not pertinent to them. For example, people ask me all the time, are your properties in an LLC? Well, who cares what mine are in?

what the person wants to know is should that person's properties be in an LLC? And more broadly, what they really want to know is, how can I best protect my existing assets? That's what they're really asking. But instead of asking the question, the broad question of, hey, what are your thoughts on strategies for asset protection? Instead of asking that at the broad level, instead they want to know like a very specific detail about my own business. And yeah, I mean, for me, that's not uncomfortable because I've, you know, I blog and podcast about this continuously for years, but to the average person who isn't so public about what they do, I can totally understand why that would be uncomfortable because it's a super detailed, specific question about their business, and frankly, it's irrelevant to what you're actually trying to figure out because you're trying to figure out how to protect your own assets. Another example, if a person asks, hey, Paula, can you tell me exactly what allocation of stocks versus bonds you hold? and how much of your money is in the market as compared to real estate?

Like, what are the proportions there? Again, I blog and podcast about this all day long. So by virtue of being a niche public figure, I expect to get questions like that. But to the average person, that question is, A, incredibly personal and B, completely unnecessary. Because the intent behind the question, really what you're trying to figure out is, how do I make a decision about what type of risk exposure I should have within my own portfolio? How should I make decisions about equities versus bonds? How should I make decisions about the overall broad market versus real estate versus other types of investments such as commodities or buying small businesses?

That's what you're really trying to figure out. You're trying to figure out how this knowledge applies to you. And so if that's what you want to learn, ask that. because it's a, less invasive, less intrusive, and B, it's the most direct way to phrase the question that you're actually asking. So that's tip number one. Ask questions at the 30,000 foot high level, at the broad level, that apply to your own life rather than asking nitpicky questions about the other person's lives, the other party's life. And by the way, if you need a framework for thinking about this, one exercise that I sometimes go through is just a key. Keep asking why.

So again, going back to that LLC example, if the first question that pops into your head is, hey, I want to know if you put your properties in an LLC, then pause and ask yourself, why are you asking that? Okay. Well, I'm asking it because I want to know whether or not I should put mine in an LLC. Okay. And why are you asking that? Well, I'm asking that because I'm concerned about the risk of a lawsuit and I want to know how to protect myself. Okay. All right.

Now we're getting somewhere. So by continually asking the why behind, asking yourself, the why behind a question that pops into your mind, that's how you'll be able to work backwards and get yourself to that broad, high level, here's what I'm really asking. And once you're at that broad level, you'll be able to frame it in a non-intrusive way. That's tip number one. Tip number two is to just volunteer a few details about your own life. if you want to encourage somebody to open up and share, lead by example. So if you're the first person to throw a few numbers out there and say, hey, we have X amount of dollars in a savings account right now, not really sure what to do with it, you just put that information about yourself out there and then maybe ask a broad, open-ended question like, do you have any thoughts? so that they know that they can give you solicited opinions and solicited advice,

because a lot of people don't like to give unsolicited advice, state your situation, make it clear that you are soliciting feedback, and then go quiet and let them volunteer what they will. And then tip number three is to find out who their mentors and influencers are. You could simply ask, hey, who are some of your favorite authors within the world of business and money? Who do you like to read? Who do you like to listen to? How did you learn what you know? Ask them who their mentors are, who their coaches and authors and, you know, mentor sounds very formal. But ask them for the names of the people who have influenced them. And that'll actually have two benefits. Number one, you'll have those names directly. And number two, you can then ask the follow-up question, oh, what did you like about them? Or what did you learn from them? And that's a great opener as well to get somebody to spontaneously share a story or an anecdote that could be very illustrative. So Edward, I hope that helps and thank you so much for asking that question. Good luck. Our next question comes from Sarah, who is kicking butt right now. Check out her situation. Hi, Paula. First of all, thank you so much for all the great work you do at afford anything.

My husband and I are huge fans and we've learned so much from you. Here's our situation. For the last two years, we've lived off one of our incomes while using the other to aggressively pay off our student loans and save for a house. We've reached the goal of paying off all of our loans, and we've saved about $40,000 for a down payment on a house. Buying a house was a plan until my husband was offered a job in England for two years. We decided to take it, and we will be moving in November. The job is temporary, and our plan is to move back to the U.S. in about two years. So here's our question. What should we do with a large chunk of money we've saved while we are in England? We will be renting over there and would still like to use the money as a down payment on a house in the U.S. when we return.

We will be settling in a fairly high cost of living city in order to be close to family, so we will probably need at least this much money to make a decent down payment. I hate to see the money sit in a regular savings account earning nothing for two years, but it also doesn't seem wise to invest in index funds when we'll need access to the money in such a short period of time. Are there any short-term, higher-yielding, lower-risk options that you know of? What would you do in our situation? Thanks again for all you do and keep up the great work. Sarah, congratulations on living on one income and saving the other.

That is awesome. Steve, can we get a round of applause here? So you've got $40,000 that you will need in two years. You hate to see it in a savings account because savings account and money market accounts and CDs all pay like pretty terrible interest rates right now. But of course, as you said, it does not make sense to put this into index funds or any other equities because the volatility is just too high. The risk of loss is too high.

The stock market, as you know, the stock market is not a high yield savings account. So here are a couple of options. Number one, you could buy treasury notes. Now, I'm going to pause here and we're going to go through a quick vocabulary lesson. Treasury bills are short-term government securities that have maturities that range for anywhere between a few days to at the most one year, 52 weeks. So that's a treasury bill. Treasury notes are government securities that have maturities of two years, three years, five years, all the way up to 10 years. And treasury bonds are government securities that mature in 30 years.

Now, the reason that Treasury bonds, which we also just commonly refer to as bonds, because they have a maturity within 30 years, you know, most investors don't want to hang on to them. I shouldn't say most, but many investors don't want to hang on to them for that particular period of time. That's just too long. And so there's this entire market where people buy and sell bonds all day long and sometimes make money on speculation as to whether or not bond prices will rise or fall. If you hold a bond to maturity, meaning if you hold a bond 30 years, you're not going to lose money on it. There's a whole bunch of frenetic trading activity that happens on a secondary market, but fundamentally if you, Sarah, buy a bond through the Treasury Department and you hold onto it until maturity, meaning you hold onto it for 30 years, you're not going to lose in that situation, assuming the full faith and credit of the U.S. government. of course, you don't want to hold on to something for 30 years. You want to hold on to something for two years. And so in your case, a treasury note could be ideal. Now, treasury notes, frankly, they don't pay that much. We're in a very low interest rate environment. So the good news for that is that you're likely to be able to get a mortgage with a low interest rate. But the bad news for that is that the yield that you'll be able to get from things like treasury notes as well as savings accounts, money market accounts, CDs. You know, it's low when you're trying to be able to get. You know, it's low when you're trying to.

be the lender, which is effectively what you're doing when you're buying a treasury note or a bond. And it's also low when you're being the borrower, which is what you're doing when you're taking out a mortgage. So, you know, we're playing in a low rate environment both for better and for worse. Now, if you want to buy a treasury note, you can do so directly at treasury direct.gov. We will link to that in the show notes, which is at afford anything.com slash episode 104. I just went to that website and I checked the table for recently auction securities that have not matured. And what I'm seeing is that as of the time of this recording, which is November 14, 2017, what's reflected on the Treasury Direct website is that two-year Treasury notes, also known

as T-notes, recently went for an interest rate of 1.5%. So is that better than what you would get in a savings account? Mostly yes. Again, we're not talking about jaw-dropping rates. But 1.5 is better than one. And if you hold it to maturity, you have very low risk. And that is fundamentally what you want. You want very low risk because you're going to need that $40,000 when you come back to the states in two years. So yes, it's possible that you'll miss out on some gains in the broader market, but that is the cost of protecting yourself against the downside. Now, for the sake of context, I do have to tell you that there are some people who would answer this question by discussing ultra short-term bond funds. Now, these are bond funds in which the fund managers invest in bonds with very short-term durations, very short-term maturities. Some people might talk about that. Some people might. I wouldn't

because, I mean, I guess I did just talk about it, but I would not personally go in that direction if I were in your shoes because the risk of an ultra-short-term bond fund is rising interest rates. You have, you're exposing yourself to the risk of loss. And to me, that risk premium isn't worth it. premium between what you might be able to get just buying a T-note for two years and holding it to maturity versus what you may be able to get with an ultra short-term bond fund. I just don't see that spread being worth the risk, personally. And then finally, of course, there are always CDs, certificates of deposit. I just did an online search and the rates I'm seeing there are about ballpark-ish, about 1.5% as well. But hey, you know what? For the 12-month period ending in

September 2017, the U.S. inflation rate was 2.2 percent, according to an update that was published on October 13 by the U.S. Labor Department. So if you're getting 1.5, 1.6 percent and the inflation rate is 2.2, you're almost keeping up with inflation. And if your need is to park your money for two years and preserve your liquidity and keep your risk minimal, then keeping up with inflation is really the goal that you're going for. And so T-notes and CDs can help you do that. I will put some links in the show notes. Again, that's afford anything.com slash episode 104 that could point you towards some of these resources. And best of luck, have fun living in England.

That sounds awesome. And congratulations on setting yourself up into such a good financial position. Isn't it great that you're able to move to England with your student loans paid off? That's awesome. So cool. Have a great time there. Have an extra beer for me. And thanks for calling in, Sarah.

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Our next question comes from Brittany, who wants to know about side hustles. Hi, Paula, it's Brittany. I have a question for you. I'm at a job that I just started not too long ago, and I hate it. I'm trying to figure out what I should do next. I want to start a blog, but I haven't launched it yet. I'm hoping that that can provide some income along with maybe doing some part-time work. And I just wanted to get your thoughts on that.

I hope I'm not being too ambiguous, but I'm just wondering how I should transition. And the way that I was thinking I should transition would be to, just go to a part-time job and work on my blog. A little background. My fiance and I are getting married in October, but we're not doing a huge wedding. And we plan to move into the in-laws house to save and pay off some things. And so that'll ease some stress on the expensive side. So I'd just like to get your thoughts on what you think I should do.

Thanks, Paula, for being so. Awesome. Thanks for asking that question, Brittany. And sorry to hear that you hate your job so much, that it sucks to have to go to work every day in a place that doesn't excite you. We all spend a good chunk of our waking hours at work. So I believe it's extremely important to be doing something that you love. So to answer your question, the thing that I like most about the plan that you've outlined is that you would be creating multiple streams of income. So you mentioned that you would have a part-time job in addition to also having some type of online side hustle or online business. And we'll get to the specifics of that in a second. But the thing more broadly, the thing that I like

about what you've said is that you have income coming in from multiple sources. And that can actually be a fantastic way to transition out of a job, out of a full-time job that you don't like, because that diversity within income sources gives you a dose of protection. If you've got income coming in from, say, two or three or four different sources and one of them dries up, well, you haven't lost 100% of your income, which is the situation that a person is in when all they have is one full-time job and then they lose it. If you've got, say, three or four sources of income and one of them dries up, you've still got the other two or three. And the fact that you're living with your in-laws, which means your housing expenses are probably zero or close to zero. Your

cost of living is low, that's awesome. This gives you a perfect window of opportunity to be able to build something really great. Then the question becomes, what is it that you want to build? Now, you mentioned starting a blog. I wouldn't start a blog in order to make money for two reasons. Number one, because it takes a long time, long, long time before you'll begin to make money as a blogger and number two, because you're in a perfect position right now to create something that you're really passionate about, something that you could see yourself doing 10, 20, 30 years into the future if you wanted to. I wouldn't squander this opportunity just trying to make a couple of bucks here or there. Instead, I would spend it really digging deep into what is the work

that you want to be doing. And then start to build a business around that while you're also working somewhere else part time just to pay the bills. For example, you might spend 20 hours a week doing something that just pays the bills. And then with your other 20 or 30 hours, or 40 more hours a week, start building something that is at that Venn diagram intersection between what lights you on fire and what the rest of the world needs. Now, it might be that you have some type of a message to get out there, an idea to share, some knowledge, to teach. If that's the case, then a medium such as a blog or a podcast might be great for that or an e-book or something. I mean, fundamentally, when we talk about any of those blogging, podcasting, e-books, those are all mediums of communication. So the question shouldn't start with what medium of communication do I use. The question is, is transmitting information from myself to a broader audience the thing that I want to be doing? is building an online community and an online platform the thing that I want to be doing?

Because if it's not, then you're just going to burn out and fizzle after a couple of months. But if it is, then hey, 10 years you'll still be going strong. Now, on this podcast, we did an interview with Nick Loper, who outlined three different models of different types of side businesses that a person could develop. So he mentioned number one, businesses that are in the gig economy or the shift. economy. And so examples of that would be, you know, driving for Uber or Lyft, becoming an Airbnb host, hosting dinner parties through a website called Eat With, anything that kind of leverages the sharing economy or the gig economy. These are some of the easiest ones to get started in, but they also tend to pay the least general, I mean, as a broad general sweeping statement, but that's one good way to get started. Now, a step above that are side gigs that are within the freelance, slash expertise economy. So examples of that would be becoming an expert witness, becoming a tutor, becoming a coach or a consultant, anything that allows you to leverage your expertise within a

given area. And then the third example that he talked about is going into commerce, so selling physical products. So examples of that might be people who sell products on Amazon or on Etsy. So those are all kind of different umbrellas or different models for how people develop side businesses, and we'll link to that episode in the show notes. Show notes are available at Afford Anything.com slash episode 104. But I'm throwing that out there also so that you have some range of ideas around what you might want to do. So I hope that helps.

I hope that answers your question. And best of luck, I really applaud you for recognizing that you're not happy within your 9 to 5 and being proactive about getting out of that situation. That is amazing. There are so many people who are unhappy with their day job, but they don't actually do anything about it. So the fact that you are taking steps to create a better life for yourself, that's awesome. Congratulations. And keep going. We'll come back to the show in just a second. But first, regardless of whether or not you have debt, managing healthy credit is important. If you want to buy houses, whether it's a personal residence or an investment property, or if you want to open up new credit cards, if you want to lease a home in a different.

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And you can check your credit score for free. So check them out. It's great to know your credit score and to get personalized educational content. They're creditcesamy.com. Creditcessamy.com. Our next question comes from a listener in the Midwest. Hi, Paula. I am a 37-year-old single woman living in a large city in the Midwest.

I have about $40,000 in retirement savings right now. And I'm wondering if I want to. be in a position in retirement where I'm not making a rent payment if I should take $20,000 that's in my 401k to have a down payment for a primary residence for myself. I'm living in a one-bedroom apartment 1150 per month right now with my almost five-year-old son. I'm paying $700 roughly per month for his preschool. He has one more year of preschool. My including child support, my net income monthly right now is about $3,800. Money has been pretty tight paying for child care and preschool on top of rent payments,

et cetera. So I'm hoping I plan that when he's able to go to kindergarten next year and is going to public school, I'll be in a better position to save some money. Right now, I have only about $3,000 in like an emergency cushion. So my plan is to, like I said, not have a rent payment when I'm retired, but I'm close to 40. So if I'm going to ever have a mortgage, I feel like it would be better to get started in on that now rather than wait until I can save enough money for a down payment. I'm projecting once I'm able to start saving, that it might take me five years from now before I can get $20,000. So starting in on a mortgage at that time is either going to extend the years that I have to work, or it's going to mean I have to adjust my plan for making a house payment or a rent payment in my retirement years.

I'm probably looking at buying a two-bedroom condo. I don't have any, I'm definitely not going to be buying a single family home, but waiting five more years, living in a one bedroom with a child gets kind of challenging. And of course, I'm eager to do it sooner rather than later. But I'm just wondering if it's a terrible financial decision to use my retirement savings. Thanks. This is an excellent question. Thank you so much for asking it. There are a couple of factors that I want to walk through.

Now, first of all, I don't know what the price. of the condo that you're looking at would be. But you did mention $20,000 as the figure that you would withdraw from your retirement accounts. You mentioned you've got $40,000 in retirement savings. You're thinking withdrawing $20,000 for the down payment. My first question is, where does that number come from, the $20,000 number? My guess is, given that there are many two-bedroom condos in different parts of the Midwest that sell for about $100,000, I'm going to assume that that $20,000 represents a 20% down payment on the price point of the condo that you're looking at. If that is the case, if that is where the 20,000 figure comes from, what I would actually recommend

is not making such a big down payment. I do support you getting into a house or a home. I do support you buying a place to live, but you don't necessarily have to make a 20% down payment, particularly because you will be owner occupying the place. You can look for an FHA loan, which requires down payments of as little as 3.4. So on a $100,000 property, that would be $3,500. Even if the property that you're looking at costs more than that, even if it's $150,000 for that condo, that down payment would still be $5,250 in that case. So that is the road that I would urge you to take.

I would urge you to make a small down payment so that you can continue to keep your money into your retirement accounts. Now, let me explain a little bit about why I got there, how I got there. One of the reasons that I support your decision to purchase a home is because it sounds like you plan on being in this home for decades into the future. Sounds like you plan on retiring there, which means that you'll be there for your 37 right now. That means you'll be there for the next 30 years at least. If you're reasonably sure that you are going to stay in one place for that amount of time, buying makes a lot of sense. And given that you live in the Midwest where the price to rent ratios are generally in favor of owning,

buying also makes a lot of sense. And finally, as you said, the psychological benefits of knowing that you can go into your retirement without having to make a rent payment, those are very real benefits. So for all of those reasons, I absolutely support you buying a home rather than renting one. I do think that that is a wise decision in your circumstance. And it sounds, from what you've mentioned, it sounds like you have no other debt, which is fantastic. So that also puts you in a favorable position to buy a home. home. Finally, you mentioned that your rent is $1,150 per month. So if you purchased a home for $150,000,

it's likely that your monthly payments on the home that you own would be lower than the monthly payments that you're currently paying right now on rent, even after factoring private mortgage insurance into the mix. And of course, it depends on how expensive your HOA fees are, because your condo is going to come with HOA fees. But still, it sounds like your monthly payment on your mortgage plus HOA plus private mortgage insurance combined would still be lower than what you're paying right now in rent. So not only will home buying allow you to start building equity, but it will also quite likely lower your monthly payments, which means that you would be able to save even more. Now, just to be clear, I don't think that home buying is a great decision

for everybody. I'm saying this for the sake of everybody else who's listening. I don't necessarily think that home buying is quote unquote always the better choice. But in your specific instance based on what you've told me, it sounds like it's the better choice for you. Now, as to the question of why make a smaller down payment, my reasoning is as follows. Number one, if you were to withdraw money from your 401K, you'll be paying a 10% penalty on the money that you withdraw, plus you'll also be paying taxes on that money. So in order to withdraw $5,000 from your 401K, you'll actually have to withdraw quite a bit more. You'll have to withdraw 5,000, plus the taxes plus the 10% in order to get to that 5,000 net.

So you're going to face a big haircut right off the top if you try to take money out of your 401k, which is one of the reasons why you don't want to take money out of your 401k. It would be much better for you if that money came from savings. Now, I know that saving is really hard right now. But next year, when your son starts kindergarten, you won't have to pay $700 per month for preschool anymore. So take that $700 per month, put it in a savings account, and within eight months you'll have $5,600 saved. And that is enough money to make a $3.5% down payment on $150,000 condo. Or a $5% down payment on $100,000 condo. Also, those penalties and taxes that I mentioned, that's only one of the reasons. The other reason is that I don't want to see you damage your future self. Your current retirement savings are off to a really good start. I want to see you go from good to great.

You mentioned that you're 37. The rule of thumb for a traditional retirement is that by age 35, you should have between 1.5x to 2x of your annual salary saved for retirement. Now, you currently have a little less than 1x of your take home pay saved, which is great. It's a great start, but it's not quite enough. So I don't want to see you lose any of the progress that you've already made. So the short answer is that next year, when your son starts kindergarten, you'll have $700 a month that's freed up in your budget. Put all of this into savings. And within eight months, you should have enough money for a down payment on a low-interest FHA loan.

By the way, I have a friend here in Las Vegas who's going through a very similar question. So she is 42 years old. She's about to turn 43. And she has a seven-year-old son. And right now, she is renting one bedroom in a three-bedroom house with roommates. So she lives with two other roommates, and she and her son share a bedroom. But her son is seven, and she's now getting to that point where she wants to be able to live somewhere where he can have his own room. And she has about $100,000 in her 401K.

So she came to me, we had a long conversation about this because she came to me a few weeks ago and asked me a very similar question to what we've talked about right now. In her particular case, I actually gave her the opposite recommendation. I told her not to buy a home. That's because she has about $50,000 in credit card debt. And so I told her, you know what, you are not ready to buy a house right now. You need to focus on paying off your credit cards first. So if you want to rent a place where your son can have his own room, move further outside of the city where places are a little bit cheaper and you can have more space. You know, do that.

That's fine. But keep renting, focus on paying off your credit card debt and keep your 401K intact. That was what I told her. All right, so I hope that helps, and thank you so much for asking. Coming up next week on the Afford Anything podcast, we have an interview with New York Times bestselling author, A.J. Jacobs on how we are all a little bit related. This guy is hilarious. He's one of my favorite writers. I've been looking forward to this interview for months. So that is coming up next week. My name is Paula Pan. This is the Afford Anything podcast. If you enjoy today's show, please share it with a friend.

The show notes are available at afford anything.com slash episode 104. And you can follow me on Instagram at Paula Pan. Thank you so much for tuning in. I'll catch you next week.