Afford Anything - Ask Paula: How Can I Reach FIRE in 11 Years?

Episode Date: February 16, 2021

#301: Amelia is worried that she and her husband are under-insured. Should her husband get a short-term disability policy, even though it’s expensive and they’re unlikely to need it? Sarah wants to refinance her owner-occupied triplex, but she’s torn between a 15-year and a 30-year option. Which is better in her situation? Steven just discovered the financial independence (FI) movement in July 2020, and he wants to reach FI in 11 years. He has $30,000 in cash and $26,000 of student loan debt. How should he use his cash given his FI goal? The South American Anthropologist wants to make a career change. His baby daughter has inspired him to become an example of living life on your own terms. Will his financial independence plan sustain him and his family for years to come? Annalis and Mike are hunting for their first rental property, but they haven’t found anything nice that meets the one percent rule. Should they purchase a mansion and rent the rooms on Airbnb? For more information, visit the show notes at https://affordanything.com/episode301 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention, anything in your life that is a scarce or limited resource. Saying yes to something implicitly means that you're saying no to other opportunities, and that opens up two questions. First, what matters most?

Second, how do you align your daily, weekly, monthly, yearly decisions to reflect this? Answering those two questions, questions is a lifetime practice. And that is what this podcast is here to explore. My name is Paula Pan. I am the host of the Afford Anything podcast. Every other episode, ish, I answer questions from you, the community. And today, former financial planner Joe Saul Seahy joins me to answer these questions. What's up, Joe? I just wish people could see behind the scenes and know that for the first time that you and I've done this together, I'm surprised we made it this far in the show. I know, right? So behind the scenes, I just had to, that intro, we've done like four or five retakes of it.

I stumbled over the word podcast. I stumbled over my own name. Well, the good news is we got the hard intro out of the way. Now we got the easy answers to these fantastic questions coming. It's all downhill from here. I've literally stated that same intro about 300 times. It was so good. I'm like, Paula, how often have you done this?

It's not your first. rodeo. It's the same thing every week. Oh, yes, this bodes well for what's ahead. And hey, speaking of what's ahead, how's that segue? Ooh. Here is what we're going to talk about in today's episode. We're going to hear from Amelia, who's worried that she and her husband may be underinsured, and we're going to discuss short-term disability. We're going to hear from Sarah, who wants to refinance her triplex and is torn between different options. We're going to hear from Stephen, who, who's who just discovered the financial independence movement and wants to know how he should be using

his cash. He's got some student loan debt. So we're going to talk about that. We're going to hear from Annalise and Mike, who are looking for their first rental property. And we are going to hear from the South American anthropologist who wants to make a career change. So that's what we're going to talk about in today's episode, starting with... Well, actually, actually, before we get to that, I thought we'd also preview the answers. The answers are going to be yes, go for it, welcome, stay small, and create an income stream.

Stay small. I say go big. Oh, here we go. It's begun already. All right, boxing gloves are on. Let's hear from Sarah first. Hi, Paula. I'm looking to refinance a triplex that I own. I currently occupy one unit so I'm able to get a primary residence mortgage. I have three options that I'm currently considering. Option number one is a 30-year loan at 3.375% where I don't have a one. to buy any points. Option number two is a 30-year loan. I would buy one point, and the interest rate would be 3%. Option number three would be a 15-year loan. I would buy three quarters of a point.

My interest rate would be 2.62%. I plan on moving out within the next five years, at which point I will run out the third unit. I have no plans to sell this property in the near future, nor do I have any kind of goals that would be time-dependent. What do you think makes the most sense? based on some of the analysis that I've done, I think it probably makes sense to buy that point if I go with the 30-year loan, but I'm not really sure about the 15-year versus the 30-year. I can easily afford any option, but there's a clear opportunity cost that comes with a 15-year loan because I'd be putting more money towards the house each month, and I wouldn't be able to use that money for other things, such as potentially purchasing another house or investing in the stock market. When you couple this with the fact that I can write off a portion of the interest on my taxes, I'm wondering which makes more sense. Any thoughts are greatly appreciated? Thank you. Sarah, great question.

Let's talk through your options. So, first of all, as you said with the 15-year loan, there's a significant opportunity cost there that is money. It's cash out of your pocket that's being tied up into paying off this property aggressively. And that means that you cannot use that cash, as you said, to buy another investment property to invest in the stock market, to build out an emergency fund or build out cash reserves, you know, there are opportunity costs that come with aggressively paying off a property.

Now, it might be the case that you want this property paid off as soon as possible. But what I typically like doing in most cases is if that is the goal, if the goal is to pay this off in 15 years rather than 30 years, it's still, in my view, often prudent. to get the 30-year loan. And if you choose to, you could pay into it, you could pay it off like it's a 15-year, but you still have the flexibility to only be on the hook for the lower monthly payments that come with a 30-year loan. So yes, your interest rate would be a little bit higher. We're talking 2.62% versus 3%. Sure, there's a difference of a handful of basis points there. But what you get for that slight interest rate difference is the flexibility of having

significantly lower monthly payments so that three years from now, six years from now, nine years from now, if something comes up, if you have a health emergency or a family emergency, and you could benefit from the flexibility that comes from having that lower monthly payment, that option is always available to you. I think that's the major benefit of a 30-year loan. That's basically another way of saying, don't think a 15-year versus 30-year as prescriptive with regard to the amount of time it's going to take you to pay off the loan. You can pay off a 30-year loan in 15 years. You can pay off a 30-year loan in three years if you had the money to do so. Same thing with a 15-year loan.

You can pay off a 15-year loan in 15 years or you can pay it off in 15 days if you – I mean, that would be silly, but you could. You can pay off a loan of any length in any amount of time that you have the capacity to do so. What matters is what you're on the hook for in the interim. And having a 30-year loan puts you on the hook for less, thus giving you greater flexibility. That's what I like most about Sarah's question, Paula, is the fact that most of us have debt. Very few people have a debt strategy. And I loved it when I was a financial planner kind of teaching my client. how to think about yourself as if you're a company.

We would lay everything out on a whiteboard and we'd say, okay, if I were a CFO of this company or if I were a shareholder in this company, what would I say? What would I do? And people, when you look at yourself as a company, you look at it much less emotionally. You look at it more pragmatically, more mathematically. And immediately, everybody could always point out the problem. Oh, I haven't saved enough for retirement. If I were a shareholder in this company, I would wouldn't.

not do that. And the same comes with debt, though. We all have debt. We get emotional about which one we pay first. I don't really like having student loans, so I'm going to pay this first, right? It has a lot less to do with the math. When we take a look at this debt strategy, I love your point of take the bank for whatever terms best fit your scenario and then create a separate strategy that you're going to use to pay it off in whatever time frame you want. That's exactly what a CFO will do. You know what? What's the longest terms you'll give me? with the lowest interest rate, I'm going to take that. And by the way, our ship's course is going to be something totally different.

And that gives them the power to do that. Now, there's something behavioral that we have to talk about here, though, which is, I've seen people go for the 30-year option, and then they refinance it again and again, and they get themselves into more debt and more debt, and more debt. The fact that you're listening to the show probably tells me you're not that person, but the danger of taking out the 30-year loan and investing the rest to pay it off earlier, people just generally don't do that. They just don't.

The listeners to this show do. And that is the right thing to do, by the way, is take out the 30 because of the fact that the interest rates, when you look at them over time, Paula, it's not going to get much lower than this. Yeah, it's not. Yeah, this is interest rates right now are at absolute historic lows. Lowest in our lifetimes and possibly the lowest in our lifetimes. I mean, we don't know what the future holds, but. 3% is historic inflation. It is hard to imagine rates going any lower than this. And if you look at historic interest rates, we're at rock bottom. So the danger in buying points is that you will

refinance this loan, right? Because you're adding to the cost of the loan to drive down that interest rate even further. So that's the risk is that we're going to refinance. The discussion you and I just had, you're probably not going to refinance based on rates. So buy as many points as you possibly can now to lock in as low rate as you possibly. This is one of the few times where I think you and I both would tell people buy points. If interest rates right now we're at seven or six, we'd say, no, no, no, no, don't pay points. That's silly. Right now, pay the points and get it as low as possible.

Go with the 30 year, calculate what your interest rate is. Set up then, because as I mentioned, part of this is behavioral. set up automatic payments into whatever fund you're going to set aside to be the difference between your 15 and the 30 into whatever fund that is. So that you do it because if you don't do it, you're just buying yourself debt for a longer period of time. And by the way, I'll tell you how this comes out. The financial markets did really well in the late 90s.

And in the mid 90s, I set this up for people. Some people got to the point where they had enough money set aside. by 2007 that they could pay off their loan. Every single time, people never did it. And these are people that hate debt, said, you know, I love this idea, Joe, of paying the debt off quicker. So let's set it aside. We put it in like an S&P 500 fund.

The money would grow. And we finally get to that point. And I'd say, okay, you can pay it off if you want. Nobody ever did it. It's the ability, it turns out from my colloquial perspective, like I haven't done a whole study on this. But colloquially, it seems to me it's the ability to pay off the debt whenever the hell I want that's important. Because you get to the point that you can pay it off and you realize that this is at a low interest rate, why would I pay it off? Right. I'll tell you what

some people did do, though. They would take money from that pile of cash and they would have that start making the payment every month. Right. Exactly. Which means that then that pile of cash would have to be invested in a way that's appropriate to that timeline since. Yeah. Exactly. We would change the investments so that it became a cash machine. But it was really cool. It was really neat to see what would happen at the end. And just the thought is not having the debt is freeing, but it's equally as freeing to just be able to pay off the debt and be completely in control to pay it off whenever you want. Exactly.

Yeah, to have that bucket of money that's sitting there such that you know you could throw the whole bucket at it if you wanted to. Yeah. And choosing not to is like a flex, you know? Yeah. Exactly. So Sarah, that's what I would say to you that calculate the difference between what your monthly payment would be on a 30 versus a 15 and then set up an automatic monthly transfer for that difference to go to whatever you want it to go to. It doesn't matter to me whether that's going to go to an emergency fund, cash reserves, investing in the stock market, saving up for a down payment on another property. That choice is yours.

but make sure that that difference in payment is automatically transferred to some concrete financial goal and make it automatic. One other thing on the conversation about points, Joe, you brought up the fact that the risk of buying points is that you may refinance in the future, but that risk is not present at this current moment given how low interest rates are. The other risk is that you may sell the property in the future, even if you're not necessarily planning on doing it today. Yeah, good point. You know, there are a lot of people, students in my course who have talked to about this, who come to me and say, hey, we plan on buying and holding this. We plan on never selling it. But plans change. You know, what happens if, Sarah, I don't know if you're married or not, but if you're a couple and you get divorced, and part of that divorce involves liquidating the property so that the assets can be split, well, there's an instance in which you didn't plan on selling a property. And maybe you used points to buy down the interest. and then surprise you're having to sell it. This brings up something else, I guess, sociologically. When you look at large populations, this is a whole side discussion, Paul, but I think it's

interesting. When I started my career in the early 90s, it was right at the end of us believing that we would work for the same company for 30 years and they'd take care of us, right? And I remember the whole 90s was this coping that a lot of people in the baby boomer generation were having when they were realizing that these companies weren't going to take care of you like they thought they were, that a lot of pensions were underfunded. Of course, we still have that today, but the prevalence of pensions isn't what it was. So then the question became, are you going to stay in your house long, not because you love your house or don't love your

house, but because you'd have to relocate, right? You get a new job and you'd have to relocate, and now you're brand you, which we're still living that today, right? We are brand ourselves, and our job is to interface and find the next opportunity. And the concept of 30 years, I don't think is even there anymore for anybody. We're going to change careers multiple times. And even if we don't change careers, we'll just change the companies we're affiliated with multiple times. But that meant that even if we loved our house, that we might move. But what's interesting now in the last year is what did we see with COVID?

More and more people able to work from wherever they want. Many of our jobs have transferred online. We're becoming comfortable with Zoom calls and telecommuting where before we had to have you in the office. My question now is this. Are we going to see people living longer in their house because they can because of the ability to live wherever the hell you want? And that career move, the career change of going from one job to another, which before meant that you had to be comfortable with moving from city to city to city, there's not a correlation anymore. Exactly. You can still get a high-paying job even from your hometown of Kansas City. Yeah, or Texarkana. Yes, or Texarkana, Texas.

The center of the universe. And the home of Joe Sal C-Hie-high. Absolutely. Best town in America. And the other component of that is that oftentimes in those discussions, how long are you going to live there is used interchangeably with how long are you going to hold the property? Now, in Sarah's case, she stated she plans on moving out in five years, but she plans on holding the property forever because it's a rental property. Yeah. I did that with my house that became a rental house. Lived there.

Moved, held it for another 12 years. What was it after 12 years that inspired you to sell a rental? I hate being a landlord. I understand that it's a great opportunity and I love it for people that love that. The physical property has never been something that has been a key to my strategy. And even though I had a fantastic, the third tenant I had in there was fantastic and long term. Just even once a year, whenever he called, just, you know, dealing with, yeah, it's just not for me. So you didn't have a property manager then?

You were self-managing? I had one property and a phenomenal tenant. There was no reason for me to hire somebody to get between Mike and I. And Mike is a guy that I've known forever. The reason, part of the reason he was a phenomenal tenant, I knew Mike for a long. long, long time before that he had some personal things happen, need a place to stay at the same time that I needed a renter. So after my first two, which were okay, my third one was a guy that there was no way I needed somebody between us. Cool. Just, just didn't like it. By the way,

I've now been, the appropriate phrase for me is rid of it for six months, seven, no, eight months now. Jeez, never been happier. So happy. not owning that house anymore. Well, there you have it, folks. Well, and right, that's know yourself, right? I mean, over the long term, over long periods of time, the North American real estate index and the S&P 500 get to about the same place. So my position has always been.

Use both, not either or, but lead with the one that you're most comfortable with. So I still have real estate, my portfolio, Paula. It's all just reits now. Yeah. And I tell people that all the time, actually. when people will call in and ask, hey, I keep hearing everyone talk about rental properties, rental properties, rental properties. Do I really have to have them? My answer is always, absolutely not. You don't have to. If you want to have them, if you want to do this, then it's a fantastic opportunity. But rule number one is that you have to want it. And if you don't actually want it, it's like any career. If you don't want it, you're not going to do well in it. If you don't want it, you're not going to do well in it. If you don't want it. If you don't want to be an engineer, but your parents force you to major in it in college, you're going to suck at it.

You're going to hate your college experience. You're going to hate your courses. And if you go get a job in it after you graduate, you're going to hate that too because you never wanted to do it in the first place. So, yes, it pays well. It's lucrative. Plenty of other people like it. But if it's not a right fit for you, it's not a right fit for you.

What's funny is in my family, it's still close to home. As you know, my son, Nick, is actively buying houses. He's up to four houses. He's 25 years old. He owns four houses now. He loves rental property. Good for him. Good for you.

Yeah, exactly. It comes back to you've got to want it. Yeah. So then to Sarah's question, Sarah, I mentioned, I don't know if you're married or not. If you are, something like a divorce could be something that forces you to sell the property. If you're not and you become married in the future. And if you and your future spouse decide to commingle finances, then the question of, do we want to continue owning rental properties or do we want to liquidate and how does that fit in

with our future life? I mean, these are all of the factors that can influence how long you hold a property. So it's very easy to believe at this point in time, I'm going to hold this property for the next 30 years for that to change as your life changes 10 years from now. And it's not just marriage, by the way. It could be, I don't know if you have family, if all of your family is in the United States or if you have family overseas, but maybe you have family that lives overseas. and somebody gets sick or somebody has several children and you want to be a more involved aunt or, you know, somebody has a great business opportunity, but you would need to move to that overseas nation in order to pursue it with them. You know, there are all of these

various factors that come up in our lives that make our lives 10 years in the future unrecognizable from what we believe that they will be today. So that's not to say that you shouldn't buy that point. Frankly, I would buy the point if I were you. But it is to say partially for you, Sarah, and partially for everyone who's listening, even if you believe that you're going to hold a property for the next 30 years, don't put too much faith in the future that you are predicting because your future has a way of going in a very different direction than how you think it might go.

So thank you, Sarah, for asking that question. Our next question comes from Amelia. Hi, Paula. I wanted to call in because I think in general, my husband and myself are on good track to be prepared for retirement. We have a solid six-month emergency fund and we're saving towards the goals that we're looking for in our lives. However, I do worry that we are underinsured. I have a term life insurance policy and a disability policy through my workplace. However, my husband does not, and we have not purchased one for him. In terms of life insurance, we currently live such that we could live on one income, and we have not purchased one for him. In terms of life insurance, we currently live such that we could live on one income, and so I'm not so worried about the life insurance at this point when we have no dependence, although we are trying to have a child, and so perhaps in the future I would want to push for life insurance. For disability insurance, I had him take us an assessment of what short-term disability would cost.

It was quite high because he is categorized as obese and he has asthma. I understand his viewpoint that he thinks that it's very likely that we would never need to redeem this policy because he is a very athletic guy who tends to be categorized as obese. He's always trying to lose weight, but in general, he's probably healthier than the insurance companies think he is. Given that, are there any alternatives to insurance that provide the same benefits? Is there a way to save into a specific savings account for this? Is there a way to save into a specific brokerage account for this that would provide the same protection as insurance, but would allow us to make the decision that we think that insurance companies are charging more than the actual risk of disability that he poses, given that we think he's generally a healthy guy who takes care of his health.

I hope to hear from you and love everything you do. We've informed so much of our strategy. And other than this one question, you've really made us comfortable with our finances. Thanks for all you do. Amelia, thank you so much for asking that question. Here's what I would do if I were in your shoes. Short-term disability insurance, as you said, costs a heck of a lot of money. I think that it is a far better deal to buy long-term disability insurance

that doesn't start until one year or two years after a given disability begins, and then to have an emergency fund that could cover that interim period. So if your husband were to become disabled, you would have the savings placed in a savings account or placed in a money market account, placed in some type of, it could be invested very conservatively, for example, in Jenny Mays, but you would have those savings that are conservatively held that could cover the time span that short-term disability insurance would otherwise cover. It would cover a time span of six months, one year, all the way up to two years. And then at that two-year mark, long-term disability insurance kicks in. I love that point because it encourages people to do, I think, something better

than ask about insurance. And not Amelia, that this isn't a good question, but there's a broader question, which is instead of starting with, do I need insurance, it's what's my risk management strategy? Because when we take it from buy insurance, which is what insurance companies want us to focus on, and we enlarge that to what's my risk management, now all of a sudden your assets and your risks come in, and now you can think of other ways that you'll handle things outside of insurance, right? So imagine that one of the two of you is disabled or one of the two of you pass away. She already said, Paula, to your point, on short-term disability, she already said they have a great emergency fund. Once you have a great emergency fund in place, you don't need

short-term disability. Your risk is that one of you is disabled long-term and not bringing money in. So forget about the first year or two years, which, by the way, when you start to make that, what's called the elimination period, the part where they don't pay when you make that longer. So they don't pay until you're disabled for a year or for two years or whatever it is. The longer you make that, the cheaper the insurance is. The cheaper it is. Yeah, exactly. said, long-term disability isn't cheap for two reasons. And I want to also circle back in to reason number one, what I'm going to talk about in a second about life insurance. Don't bet against actuaries. Your husband is a physically fit man. He works out. He does all these things.

Actuaries, and I hate to say this, know their stuff. And they know the probability. And while you may think the probability is better, and he might be on the clean side of his pool. of people, actuaries are very good at pricing things for a reason. I want to remember the words of Jack Welch, who was the longtime magnificent CEO of General Electric. And he said, we always like to look at reality the way that it is and not the way that I hope it is. And I would say that your husband sounds like he's healthy, but he does have these issues. And actuaries are just going off of those numbers. So I would play the game that the actuaries might be right, not that. I hope they're wrong, follow me.

Which means two things. Circling back to disability coverage, long-term disability still is going to be expensive. And the reason it's expensive is because the only people who buy disability outside of work are people who think it might happen to them, which is sad because statistically a disability is the chance of a long-term disability, Paula, is much higher than people think. Right. Which is the second reason it's expensive. is because there is a higher probability of it happening to any of us.

So I would tell everybody in this Afford Anything family to look at what would happen if you were disabled and make sure you have adequate coverage. Don't just say I have coverage through work because it's priced so high. It's priced so high because actuaries think that this is your biggest risk. This is a huge risk. So of the two, getting his disability insurance put in place with long-term disability, not short-term, I think is job one. The second thing when it comes to life insurance, when we push back, are there any expenses

that you would need today? And it sounds like you're saying no, that you would need covered today if he passed away. It sounds like, Amelia, you're saying no, which means, to your point, I think there is no life insurance need today. But the fact that you're having the baby, what does that change for your family? And then think about where your income streams would come from if that were the case. and if it were, unfortunately, there's no savings account you can save into that replaces life insurance. Life insurance is the only way to go. I would look for insurance companies that specialize

in riskier policies to minimize that cost over time. And the second thing I would do, I would think about financial independence as much as possible here. Because what the idea of financial independence means to you is, yeah, we're going to have to pay this extra. amount of money for life insurance today for a short time. But let's make sure it's a short time by putting as much money aside as possible, right? Let's keep that savings plan as strong as possible, which gives you two things. He lives for a long time, Paula. They end up enjoying financial independence for a longer period of time. There's nothing wrong with that. The second thing, though, they get rid of this insurance much more quickly, which is going to be more expensive for him than for

other people. So I wouldn't avoid the short-term insurance cost. I would just make sure the life insurance cost is as short as it can possibly be and reevaluate that need fairly often to see how much you need. There is a product out there that's not incredibly prevalent. That's not incredibly prevalent, but they're policies where the amount of, it's similar to mortgage insurance, where you can reduce the amount of term insurance you have every year. And he may be able to buy into a policy that's like that. So in other words, I'm going to use a ridiculous number. Let's say you start with a million dollars of insurance. Three years from now, that reduces to 800,000. Five years from now, it reduces to 500,000. That reduces 300,000. So over time, not only does it go away like a regular

term policy, but even during that period, you're buying less and less and less to mitigate the cost of the fact that he has these health issues that are causing the insurance to be more expensive. and you know that you're adding to your assets aggressively during that time, so you know you'll need less every year, right? Because that gap is smaller over that 10 or 20-year period, whichever period you want to go through. This is a case where I would call somebody. I think I'd work with an independent agent who can look at lots of different policies.

And I would be clear up front that you know it's going to be expensive. So what are some ways to mitigate that risk? Joe, I think you nailed it. Every time the topic of insurance comes up, one thing that I appreciate about your perspective, Joe, is that you always encourage the listeners to think not about insurance, but about risk management. In other words, you encourage the listeners not to assume the solution, but rather to focus on the root of the problem. I see the same thing happen in real estate when people are like, do I need an LLC? And at the root of that question, what they're really asking is, how do I protect my assets?

but they jump to an assumed solution rather than ask the root question. So thank you, Amelia, for asking that question. We'll come back to this episode after this word from our sponsors. The holidays are right around the corner, and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need serveware and cookware. And of course, holiday decor, all the stuff to make your home a great place to host during the holidays. you can get up to 70% off during Wayfair's Black Friday sale.

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Hi, Paula. My name is Stephen, and I usually live in New York City. I'm about to, well, I will have turned 29 by the time you air this episode. I have $30,000 total liquid right now. My usual spending per month is $3,500. I have knocked that down to $1,500, though, by moving home to live with my parents in the suburbs. I have $26,000 of student debt, with a weighted 6.25% interest rate. That is the only debt I have. My FICO score is 777 and my vantage score is

759. I started a Roth IRA at Vanguard this year with $1,000, which is my only investment so far. So my question right now is what is the best thing to do with my money to get me on a path towards FI? Should I max out an IRA with $5,000 more and start and max out an HSA with $3,500 and invests close to $20,000 in a mutual fund? Do I put $30,000 into an investment property? If I do that, my parents will gift me $15,000. So it would be 15 of mine, 15 of theirs for the down payment, and I would want to keep the additional 15 of my own left in case there are unforeseen issues with the property. Or do I forget all the investments and just wipe out my student loans, start from zero and go from there? My ultimate goal is to reach fire as early as possible. In 2019,

I made $30,000 from a W-2 job where I worked about 10 hours per week and made $65 an hour. I made an additional $12,000 that year from my own business. This year, of course, things are very different. My own business tripled its income and my W-2 gave me a $10 raise, but furloughed me in March. I discovered fire in July, and before that have routinely spent my entire salary on living expenses, which almost feels necessary. Living in New York, my rent is $16,000 a year alone. And while living in the city does give me the opportunity to work a reasonably high-paying hourly

job, I wonder if I should go somewhere else, spend less somewhere else, maybe make a little bit less, but maybe get an investment property and house hack, and that would kind of be offset doing that. Anyway, fire to me would be 40 years old with $50,000 a year of income after tax from investments. And I am down to make a mad dash towards FI, but I just want to figure out what the best way for me to do that is going to be. So I'd love to hear your thoughts. I love your show. I really appreciate how encouraging you are to all of us all the time.

And thanks a lot. Hey, Stephen, thanks for the question. And Paula, I thought I'd take this one first because as a guy who's 52, almost 53 years old broadcasting from his mom's basement, I know what it's like to live at home. So it is frugal. It's fantastic and keep doing it, man. As long as they'll let you do it. Keep doing it. You know, I'm of a split mind about which way you go here.

So probably the service Paula and I do best is to just tell you our thinking on this one. And then from where I sit, you pick. Paula might have a more definitive answer. But when I look at that 6.25% interest rate, I think that's a high enough interest rate that getting rid of that. That's a locked in return. Is it a great return? Absolutely not. But it's high enough as a guaranteed win that erasing that debt makes me go, hmm.

Now, the cool thing is that you're young enough, though, and could invest aggressively enough if your risk tolerance allows it, that you could still slow pay that debt and work on other things to get ahead. Because another thing the clock is ticking on is if you want to get the skills to go into, and this, you know, we've already talked about rental houses. If you want to go into that market, the quicker you gain those skills and you mess some stuff up, the better from where I sit. So I think there's going to be a learning curve. I think it's going to be different than you think it is until you're actually out there doing it. So if you're going to take that chance,

I would do that soon. And the fact that your parents will add $15,000 to that. That's a guaranteed $15,000 in your pocket today. I also like that move. Me personally, I said earlier, I don't go there. But the reason I don't go there is because I already know it's not for me. You don't know that yet. So if you're going to do it, I would get that education ASAP. So I like both of those. I'm interested in a couple other things that you talked about but didn't ask about. So I'm going to feel for you to comment on them, which is because I got a microphone. Number one is something that a lot of people interested in fire think about is reducing expenses. And you've already done that, right? You've already locked down your expenses. And once you've done that, one area I don't hear people think about enough is how can I expand my income? Because there are, there's only so far you can go shrinking things, right? You can never shrink your way to greatness. I think, though, you can expand your income to, to, greatness. So I look at the fact that your income stream has changed from your W2 job to your

self-employment job. And if I were in your corner and we were sitting over coffee talking about this, I would want to hear more about what you're doing there and how can we maybe ramp that up more and bring in more money in that way. Second thing, $50,000 a year is your goal. Love that goal. I like the fact that you've thought about it and you've set that number. Remember, and this is what a lot of people in the fire movement forget about, inflation is real. And $50,000 later is not what it is today. So when you're doing your financial plan, remember that $50,000, 18 years from now, roughly, is going to be $100,000. And then 18 years after that, it'll be $200,000. So I have seen some awesome. spreadsheets by people, frankly, one, who I won't mention by name, but I remember early on when he made his first spreadsheet, I said, where's inflation in here? And he went, oh, because he had this cool thing where he was living on X amount of money per year. And then once he put inflation in, it changed the entire game. So remember, that's kind of the silent killer that we're all

running from. Those are my thoughts, Paula. I could go either way on this. All right. So here are my thoughts. A few things struck me right off the bat. First of all, Stephen, your hourly rate at your W-2 job is $75 an hour, including that $10 an hour raise that you received right before you were furloughed. Plus, your business tripled its income in the year 2020. What that tells me is that your greatest opportunity comes from the work that you do, both the W-2 work that you do as well as the business that you run. Seventy-five an hour. is a heck of a lot of money. And if you want to extrapolate that to what it would be if you were working full time, the easy way to do that is to double it and add two zeros at the end. So if you're

working 40 hours a week multiplied by 50 weeks a year, that's 2,000 working hours per year. So take your hourly rate, double it, stick three zeros on the end. We're talking $150,000 a year. That is what the market values your work to be. And that does not include the business that you're running. So I would throw all of your effort there because, as Joe said, you can't shrink your way to greatness. And one thing that I think is not discussed enough is that income is the biggest predictor of savings rate. What I mean by that is that if you have an income of $200,000 a year, you're able to save 50% of your income or 60% of your income. If you're, if you're, you're, have an income of 30,000 a year, you can't save 60% of that. And I think one of the mistakes

a lot of people in the fire community often make is that they talk about savings as though that is the silver bullet, when the reality is that the more you make, the more you can save. So given the fact that you have proven that you can get paid extremely well through W-2 employment, and you have also proven that you can grow your business, you can triple your revenue in the middle of a historic pandemic. I'd put every ounce of energy that you have towards those two things. You mentioned New York. Your rent is $16,000 a year. That's $1,300 per month. It's $1333 per month. That is nothing. That effort to live in New York City, $1,300. dollars per month is absolutely nothing. There are plenty of people who live in Cincinnati or

Indianapolis or Texarkana, Texas, who are paying $1,300 a month. So if you have the ability to get paid significantly better in New York City and the cost of living there, I mean, think about the cost differential. Let's say that you are paying $1,300 a month to live in New York versus, I don't know, $800 a month to live elsewhere. We're talking about a cost differential, a $500 a month? Could you make significantly more than $500 a month by living in New York? I mean, you're the only person who can answer that because you know what your employment opportunities are better than anybody else does. I think there's a highly reasonable likelihood that you could make significantly more than that cost differential. That's where I would encourage you to focus.

Now, in terms of those student loans, 6.25% is a very high interest rate. I would see if you could refinance that. We're living in a historically low interest. rate environment, if you can get your student loans down to 3% or 4%, that would be a much better interest rate. 3%, as we mentioned earlier, is historically the rate of inflation. So if you can get your student loans down to a lower interest rate, I think that's the way to go. That way, that frees up your money to be able to do something else with it.

And I agree with what Joe said, if your parents are willing to gift you $15,000 if you were to buy an investment property. That's a pretty good opportunity. So if it is possible to reduce the interest rate on your student loans, then the approach that I would take is lower that interest rate and then use that total of $30,000 that you have to buy an investment property out of state if you were to continue to live in New York. It's a great idea. I hadn't thought of refinancing it. I'd let that one go. So nice, nice.

And by the way, I like all of this after you've locked down expenses. because as we've seen some people in Hollywood and elsewhere, there have been some high-profile names that make tons of money that still go bankrupt, right? So locking down your expenses first and then increasing your income stream, I think, is the one-two punch and reducing your interest rate makes it easy for you to focus on expanding that difference. Yes, but I think it's also good to note that the high-profile Hollywood stories, they grab headlines because they are outliers.

It's man bites dog. Well, no, actually I disagree with that because my problem when I was a financial planner was often people's expenses were so high that being able to create that gap between the two. You can keep making more and more and more money, Paula. But as you make more money, what's the American way? I can afford things, right? I can afford more. I can buy a bigger house. I can buy more.

And I buy it on payments because I have more income coming in. So I think the outlier actually is the people that build the. the difference between those two. So I think having the lockdown on your expenses first is the magic sauce that the average American, the reason they don't get anywhere, is because they burn through it all today on stuff they don't really care about. Okay, but I'm looking right now at U.S. savings account balances by income from 2013 to 2016. If your household income is between 70,000 to 115,000 per year, then as of 2016, average savings was $15,000. By contrast, if you're making under $25,000, then as of 2016, average household savings is only $6,000.

So wait a minute. So if you're saying that it's easier to save money when you make more money, the answer is yes. The answer is obviously yes. The answer is clearly yes. But you can't outrun with more income the fact that you suck with your budget. You can't. You have to have the budget skills first and then make more money. You can't outrun it.

You can't outmake bad money habits. Right, right. But, well, first of all, Stephen doesn't have bad money habits. He's already living frugally. Second of all, and I think this is the mistake that happens too often in the fire community, this over emphasis on cut, cut, cut, cut, can I make my own gatorade? Can I, you know, there is that like joke going around of, wow, how did Elon Musk become the richest person in the world? He must have just cut four billion lattes, right?

Right. How did Jeff Bezos? Jeff Bezos probably started using a good budgeting app to get there. Exactly. Right. Exactly. You know, the reality is, the more that you make, the more you're able to save. You know that I'm on that train.

I definitely am. But when somebody gets in trouble, and definitely it's much easier to get in trouble when you don't make much. And this wasn't directed at Stevens so much as whenever I look at somebody's financial picture, it always starts with what are our systems for making sure that our budget is in order? Because some of the, you know, I worked with people at the local TV station where I was in Detroit. There were people making $400,000 a year who could not make ends meet before they came to me. Couldn't do it. Just couldn't. And they had car leases that were obscene. They had super high interest rates on their property because they couldn't pay their bills on time because they didn't make the payments on time.

Even though they made tons of money, their credit rating was horrible. Right. But Joe, I'm going to challenge you on this. So those are anecdotal examples. Here's an article that I'm looking at right now. Next Advisor, which our mutual friend Farnoosh is one of the leaders of. So wait a minute. Before you get to this, though, Are you saying that you shouldn't lock down your budget first and get good habits? Is that what you're, because I'm not sure why you're challenging me? No, no, no, no. There's a difference between the prescription versus the demographic reality.

And what we know from demographic reality is that I'm going to read this study right here, according to a recent study from a Harvard-based research group, high-income households when the coronavirus hit, so as of the year 2020, after the pandemic began, high-income households reduced their spending by 17 percent, whereas low-income households reduced their spending by only 4 percent as of June 10 2020. So high-income households, when the pandemic began, according to this study, which was done by a Harvard-affiliated group, had the ability to reduce their spending significantly more because the more that they earned, the more that they had that flexibility to save.

So the reality when it comes to personal savings rates, as those are broken down demographically by income groups, is that higher income groups are able to save more and do save more when they are required to do so. And so when we see the Hollywood headline or hear the anecdotal example of so-and-so has a high income and yet didn't save, that stands out to us because it's extreme and our negativity bias and our love of extreme anecdotal example. examples makes that salient in our minds. But when we look at the silent majority, which is tracked through research, what we see is that higher income households do save more as an aggregate. I don't disagree with any of that. I mean, it seems fairly obvious to me that somebody that makes more money can cut back when things get hard. And people, you know, when I was making $18,000 a year, I couldn't cut crap. There was nothing that I could cut. And when I made $250,000 a year, was way easier to cut stuff, right?

It was also the way easier to let stuff go by. And so this 15% that people cut, that they could cut or 18% or whatever the number was, my question is, if you lock down that budget today and this stuff really wasn't important to you today, that's like a free win. That's a great win. That's a fantastic win. And if we let this slop go as we make more and more and more money, it's just this spending that does nothing. So why wouldn't I, going back to my original thing here,

why wouldn't I lock down my budget first? I still would lock down my budget first. And then I'd make more money. Figure out what's important to me. Spend money on that. And then as I make more money, save a bunch of money. You will not outrun your bad budget problems. Your ability to change course. Of course is better when you make more money. Oh, look at things are bad. What do I do? Well, crap. I know. ever watch Netflix. So I'm going to cut that. Oh, my cell phone bill is through the roof. I'm going to cut that. And I can do it because I have higher income. Right. That all makes sense to me. Yeah, no, I don't disagree with the advice of lock down your budget. Absolutely pick the low-hanging

fruit. I think that's great advice. But I also think that it is misleading to over-emphasize the high-profile Hollywood overspending examples. I think it's a fantastic cautionary tale for all of us to get your budget in order first. And it doesn't matter if it's an anecdotal example or what ESOP's fables really didn't happen. Spoiler alert. But we learn so much from those things. So when I see, when I see Billy Joel go bankrupt because of the fact that his manager was stealing from him, what does that mean? It means the cautionary tale here isn't that every rock superstar does this. There's probably tons of evidence that shows that that's not the case. But it's still tells me, you know what? Maybe I need to know how this stuff works. Maybe I need to have

smart people in my corner, but if I'm going to trust them with money, maybe I need to know how to oversee that. If I don't have time, I still need to be able to read the balance sheet. I need to be able to read my net worth statement. I have to know where my money's coming into. I have to have some checks and balances in place. Doesn't mean it happens to everybody. But man, I hear this Billy Joel story and I'm like, crap. How do I make sure that doesn't happen to me? That's my point. use the story to do better with your money. See, I think the problem in the fire community is that people use the story to absolve themselves from the responsibility to make more because there were so many times.

I get what you're saying. Yeah, there were so many times. Okay, so for the past 20 minutes, I didn't know what the hell you were talking about. Because I'm like, why wouldn't we do this? Yes, yes, I have seen that. Yes. I don't need to make more. I can just cut.

Exactly. Yes. And my point has always been that same point. You cannot shrink your way to greatness. You cannot. You never will. All right, Joe. It took us 20 minutes, but I think we found an agreement and made some good radio in the process. Kind of, but I think I was more right than you. But anyway. Steven's like, where did my question go within this?

He's like, mom and dad, stop fighting. Yeah, exactly. So, Stephen, there's your answer. Awesome. Well, thank you, Stephen. for asking that question. We'll come back to this episode in just a minute. But first, our next question comes from Annalise and Mike. Hi, Paula. It's Annalise.

And this is Mike. And we have a question about real estate investing. To give you an idea, we are about to be wed and we're about worth 500K between the two of us. And we really or I really want to get started investing in rental, properties. We live in Santa Fe, New Mexico, and I'll tell you about the reality of 1% properties out here is it's basically like touring an episode or 5 of Breaking Bad. I've met a lot of very aggressive pit bulls who actually I think are very cute, and I've toured a lot of drug and gun closets. So getting a 1% rural property and or duplex in my area isn't quite within reach. However, we may have

come up with an alternative solution that we find very intriguing, and that is buying a mansion, which is much less competitive, and going the Airbnb or VRBO route. And I've read as many materials as I possibly could about your own Airbnb advice and experience. And it seems promising in that if you can hit the 16 guest niche, a lot of people aren't competing in that area, and it's sort of undiscovered, especially during this time, a hotel, blocks are very impersonal and not very hygienic during COVID. So long term, it would be really cool to have maybe a four bedroom. Each bedroom houses at least two beds. And then you hit that like 16% guest capacity. And if we were to VRBO, Airbnb, a house like that, we would make quite 1% on it and then

some, even at kind of a low occupancy rate. So that is kind of our workaround that we were thinking of. But you are a genius and I love your show and I don't think I could do anything without truly hearing what you have to say about it. And I know that there are angles that I'm not looking at that you probably would be able to see having had experience, more experience than us. The other option would probably be to go long distance, but this is our first rental property investment and the whole thing feels a little intimidating. And we would like to be able to look at the property before purchasing and live close

in with the area and manage it in. we really get our sea lakes. Anyway, thank you for being the most inspirational and brilliant person I follow on the internet. I hope you are great and safe and healthy. Thanks so much. Thanks for the question, Annalise and Mike. Congratulations on getting married.

And Paula, I'm leaving most of this question for you. But there is one part of this that I'm wondering about, do they buy the mansion? No. Well, and that was my thought as well. and I'm just going to leave one thing here that I know for a fact, which is that when you get to hire, we'll just call them higher rent properties, the market changes immensely. And you always have to ask yourself when it comes to resale, why would somebody with a lot of money buy your property versus go just do their own thing? So it becomes a totally different market. So the second I heard by the mansion, I have that.

And these, by the way, to Paul's point, who's going to have some great. charts and graphs for us in a second. It's going to go, well, Joe, these are colloquial examples, but I'll give you another colloquial. I'll give you another one. I have friends. There's an area which is expanding very quickly in southeast Oklahoma called Broken Bow. And it's this nice, natural preserve, this beautiful lake, state park. And people from Dallas and where I am here go there all the time. And I have friends that are buying up these beautiful log cabins. I went to one a couple weeks ago that was just beautiful. The two, this is my sample size.

So once again, colloquially, the two people I know that have purchased investment properties there, these beautiful cabins that people go and stay in, have both decided to sell these big, huge properties in favor of what we rented, which is for a single couple, because the income stream is much more dependable. the ability to have it rented, the whole year is there, the margins actually end up being higher when you get rid of the amount of time that it's not. So, on a lease, you might have done,

it may be different in Santa Fe, but colloquially from the two people I have sample sized here, again, you get to the bigger house as Paula, it changes the game. Absolutely. And now I leave it to our real estate expert, Paula Pan. Well, thank you, Joe. All right, I have a lot of thoughts on this. First of all, let's talk about the 1% rule, because this is the most. misunderstood generalized rule in real estate investing. The 1% rule is not gospel. It is a broad, generalized idea that allows people to quickly filter through large reams of data. It should not be used to select specific properties. It is purely a first-pass filtering mechanism.

So let's pull back and ask ourselves, why does it exist? And what is it filtering for? What is the purpose of the 1% rule? Now, for people who are listening, who are unfamiliar with the 1% rule, it is, again, a broad, generalized idea that if you are looking through thousands and thousands and thousands of properties and you need some crude blunt force instrument to help you narrow those thousands of properties down to a few hundred that you can do deeper due diligence on, then one easy, crude method of doing that initial filtering is to filter for properties that

have a high likelihood of having a minimum 6% cap rate. Now, what is a cap rate? Cap rate is analogous to the dividend that you would receive from a rental property. Remember, any asset obtains value in two ways. One is its capital appreciation. The other is the dividend or the income stream that that property pays out. Properties that meet the 1% rule, have a higher likelihood of producing a 6% dividend or a 6% cap rate. That's the reason that the 1% rule is used as a crude, blunt force filtering mechanism. But ultimately, what matters is not whether a property meets the 1% rule. Who cares?

What matters is the cap rate that you're receiving from a property. So Annalise and Mike, I don't care if your property meets the 1% rule or not. What I care about is what is the cap rate? on the property. And so there are ways, if you're not finding properties that meet the 1% rule, there are many ways to improve the cap rate on a given property that you're looking at. It could be that you purchase short sales or foreclosures. It could be that you purchase off-market properties that are not publicly listed on the MLS. It could be that you purchase complete fix or uppers. There are a number of ways that you can create value in a property

that improve your likelihood of getting this property to at least a 6% cap rate or better. And that, that ultimately is what matters. You can't put the 1% rule in a bank account. You put your cap rate literally in a bank account. Cap rate is the unleveraged dividend that the property is paying out. And so to that end, cap rate is literally what you put in the bank. And that's the thing that matters. The 1% rule is purely a blunt force filtering mechanism. It is nothing more than that. So those are some thoughts on the 1% rule right there. Second, let's go to. to the proposal of purchasing a mansion and going the Airbnb VRBO route, several things that I would caution you about. The reason that my answer is just a blunt no. And you know me

well enough to know that typically I weigh the pros and cons. This is just a straight no for a few reasons. Number one, you have no exit strategy other than plan A has to go exactly according to plan. There's no plan B here. If you purchase this thing, you purchase this thing, it would not work unless you had a specific level of occupancy at a specific price point and in a short-term context. So those three things have to go right. It has to be used for short-term rentals, and it has to hit a given occupancy rate, and that occupancy has to happen at a given price point. And if any of those things go wrong, then the plan falls apart. To base an entire plan, such that plan A has to work and there's no plan B or it all falls apart, that's not a flexible

plan. And if the plan is not flexible, if you don't have multiple exit strategies, if you don't have multiple plan B, plan C, plan D of monetizing, there's a lot that can easily go wrong. All it takes is for one aggressive city council to say short-term rentals are no longer allowed here. Or short-term rentals are allowed here, but you have to have a special permit, and those permits are available first-come-first-served. Or you have to have a special permit, and there will be a lottery system as to who gets those permits. You know, all it takes is one aggressive city council to restrict your ability to rent out these rooms on a short-term basis, and boom, your whole business model is gone. And aggressive hotel lobbying can create

a city council like that. So that's one thing that could go wrong with this. A second thing that could go wrong with this is maybe people, maybe you might not get the occupancy that you were hoping for. Or maybe you might not get the occupancy at the given price point, since occupancy and price point tend to exist on a seesaw with one another, as price point increases, occupancy often decreases and vice versa. They're inversely correlated in that way. Perhaps you can't get occupancy at the price point that you were looking for. Perhaps the operating costs of this in terms of consumables that you as a short-term rental host would have to cover, that you would not have to cover with this or long-term rental, such as soap, shampoo, utilities, toilet paper, all of those consumables

that are associated with a short-term rental, perhaps those costs become higher than what you anticipated. Perhaps at some point you might want to move away from San Francisco. and you would have to pay for a manager who handles all of these turnovers, and that becomes cost prohibitive. So there are so many factors that need to go exactly right for this to work out that essentially at the end of the day you have a business plan with no wiggle room. So what I would prefer to see you do, now that I've shot down your mansion plan, what I would prefer to see you do is to go back and reassess the properties in your area, not a

through the filter of a 1% rule because, frankly, who cares about the 1% rule? It's just a crude filtering tool. It's nothing more than that. And it should not be taken as gospel. I'd like to see you do another search through Santa Fe of properties that are likely to give you a 6% cap rate. And that is a very different question. And my guess is that if you look at fixer uppers or if you look at short sales, or if you look at off-market properties, if you start driving for dollars and look at things that are not publicly listed, if you initiate a direct mail campaign and look for those off-market deals, my guess is that you would be able to find something that offers a good cap rate that doesn't rely on it being a short-term rental in order to work.

So, Joe, that's what I got for him. to-da, drop the mic. I got not as expected. Pure brilliance. Oh, why thank you. Thank you, Annalise and Mike, for that question. And best of luck with your search in Santa Fe. We've got one more question, and this question comes from the South American anthropologist.

Let's hear it. Hi. I'm a South American anthropologist who lived in the U.S. for several years. Now I'm living in working in the Caribbean. I chose anthropology because I wanted to understand the human. experience and had several adventures in the Amazon and elsewhere. I ended up working in international development for years. I'm a good saver investor and at one point I took a two-year sabbatical around the world. Now I'm 43 with a wife I love and a baby and I want to make a more

permanent change and start a new profession. I need to free my time for new adventures, for writing, for living exactly the life I want to live while I still can. This is more important than ever now that I have a daughter, as I want to give her the best example I can. I want to show her that life is to be lived. I know how to do that so it's time to do it better than I ever did. At this point, I have two apartments by the seaside in my home country. I plan to live in one and rent out the other one. I also have around 300k invested, around 180k in CEFs yielding 7% after taxes and 120k in SP 500 ETFs and some individual stocks. I will work a couple more years if I can stand it, which should allow me to get near 500k invested. That's on top of the two apartments. If I run a fire calculator,

I use the Seafire Sim and allow for a two-year sabbatical and then work income of around 12k a year plus the rent from one of the apartments, it says it should work out fine for the next 50 years. Making 12K a year between me and my wife should be easy, either consulting on my current profession or hopefully through the new one. I have assessed different foreign currency scenarios, given that my invested dollars need to support a life in a foreign country. I could say I'm geo-robitriding from home. Considering I will likely make a bit less than a third of what I need from my rental property, luck helping will need from $16,000 to $28,000 a year from my U.S. investment portfolio,

depending on the exchange rate. I am married with a baby girl who will be turning four when we move back to her home country in 2023. I'm about two years in change from retirement. So the question is, how should I invest my savings from now on? Do I keep buying stocks and CFs and trust the 4% rule on the first? simulators? Do I just buy stocks and ETFs until I retire from this profession list? Do I buy ETFs up until the last year and then buy something more like bonds? The CEFs have been the income part of my allocation strategy up until now. I was planning to put together a cash bucket for the

first couple of years of retirement just to complement the CF income up to our expected yearly expenses. Should I invest it all instead? Well, Paula, thank you very much for your show. It's been great listening to it over the last couple of years and it's been very helpful. I always look forward to the new episode and I saw a lot of stuff and I heard a lot of stuff that helped me put together my plan. I think the plan will work, but I'm looking forward to hear what you have to tell me. Maybe you have an idea and a perspective that I haven't had yet. I'll be very great. Thank you very much. Keep doing the awesome job that you do. Thanks for the question. What do I call them, Paul? Anthropologist?

Yeah. Thanks for the question. You know, South American anthropologist just sounds like Indiana Jones to me. Or is that archie, that's archaeologist. That's all different thing. Yeah, yeah, that's archaeologists. Yes. Anyway, we'll still call it. I've never seen Indiana Jones, actually. Of course you haven't. I wouldn't have expected you to have seen Indiana Jones. Is he from Indiana? There as, no, and that's the bummer, too, because Indiana can use all the help they can get, you know? No, I love Indiana. You and I've talked about this before, but some marketing, you know, just a little more marketing, Indiana. Visit Indiana. We'd go a long way.

The Hoosier State. Yes, because you just went to Indianapolis for the first time, and it's cool, isn't it? I went there for the first and the second time. I liked it so much that I went there twice in the month of January. There it is. Yeah. Love me some Indianapolis. But getting to Indiana Jones here's question, the first thing we have to do, I think, for everybody

is explain what a CEF is because a lot of people might not know that jargon. In fact, I frankly had to look it up myself to see. what it was. And then when I realized that he's talking about closed-end funds, that makes sense to me. But still, when I say close-end funds, doesn't make sense to a lot of people. So you know, Paula, how we have an individual stock, let's say, and that's kind of risky for the average person. So instead, we buy a mutual fund or exchange traded fund. And that's where we'll have a whole collection of investments in one spot. So if one company falls, we actually are buoyed by the fact that we own a lot of different things.

Close end fund has all that. But imagine then if you put that bundle together and instead of having the underlying price based on net asset value, the underlying price is based on where investors think it's going to go and how much it's going to be worth. So in other words, while the assets might be worth X, if people think, hey, this is a portfolio full of bonds,

I want to buy a bunch of bonds. I'll buy a close-end fund, maybe at a premium. So I may overpay for this thing because it trades much more like a stock. And the investor opinion makes sense. The other thing that happens with close-end funds, they can be a little more expensive because of that. So they're a little bit more opaque. The expenses on some close-end funds are off-the-charts high. So I always want to look at that.

And I also get afraid of the fact that sometimes close-end funds close-end funds close-for. a period of time and they only open. You can only sell it certain times. So close-end funds will be, we'll trade much more like a stock because instead of just the underlying value of the securities inside of it, which is what an index is, we'll trade it a fair value. This is going to trade a little bit more on a motion as well and where people think that particular fund is going. So I know that's not a complete definition of what a close-end fund is, but I think that gives people a picture. A lot of people who buy close-end funds, buy funds that are going to invest in high-income funds. I rarely will see investments that will pay a higher dividend than a close-end fund. And that's because a lot of these managers inside close-end funds, they know that it's going to be a little harder for people to redeem their shares. And so it's easier for them to lock up money a little bit, which means the income potential of that investment, underlying investment, can be a little higher for them. So it makes sense that he is investing in close-end funds for income.

And that actually is the entire answer that I have, which is I don't know exactly what he should invest in. But the answer is no, I wouldn't put money in exchange-traded funds that are based on stocks if he's trying to build an income-producing machine as quickly as possible. I would begin or continue building an income producing machine because he needs the money in such a short-term time frame. So think about his investments differently. Often we look at investors and we're talking about these times in the future that we're investing for. His is much more the present and building money for the present. Now, once he gets enough money in income production machines that he can live on that sum today, then I think I would do the exact opposite.

Then I would start thinking long term, how do I get some growth on this portfolio, right? So the fact that he wants this money now and to have it come in into his pocket now so we can live on it, build that machine first and then worry about growth second. Exactly the opposite advice. And this is why personal finance is personal.

It's exactly the opposite advice, Paula, that somebody like you or I would give the average person, which is generally I'd say, forget about today. Let's make sure that you're okay when you're 95 and work backwards. to today. What's the quickest we can do that. And the quickest is to get the return we want long-term, and the way to do that is growth. But as we know, there's two different ways that investments make

money, growth or income. And so for him, I want to focus on the income because he wants that cash now. Yeah, absolutely. And I agree with you, Joe. I would focus on the income as well because ultimately it's not about age. It's about timeline. And his timeline to retirement, his timeline to withdraw. is near. Yeah, agreed. Which, by the way, this is on one side, he's looking at a situation of retiring early or doing what he wants to do, really, more than retiring early because he said he would still do what he wants, which for most of us is the goal.

This is the same thing when we talk about suitability for 85-year-olds. I have seen 85-year-olds invest in incredibly aggressive things and busy bodies that don't know anything about anything go, why is an 85-year-old investing in Amazon stock? You know why? Because 85-year-old isn't looking at their time frame. They're looking when this money's going to be spent. And it's in a trust and it's meant for the kids and the kids don't need the money right away. So there were oftentimes where an 85-year-old and I would have discussions about long-term investing. Right. Because they knew with their family plan that this has a 20-year-old. time frame, even though they knew they alone weren't going to be around 20 years. So whenever I see

people go, why is this 85 year old doing this crazy growth stuff? Well, you don't know their plan. Right. Yeah. And that's a perfectly illustrative example of it's not about age. It's about timeline. Yeah. You know, if you're setting up a charitable trust and you are investing an endowment that's supposed to exist in perpetuity, and that endowment, ideally, would generate returns. say it would be harvested at, let's say, a 5% withdrawal rate, but it would generate returns that would last for the next 200 years, you're going to have a very different approach to how you invest the money in your charitable foundation than you would money for yourself. You're going to have a very different approach.

Heck, if you're 30, and there's a portion of your money that you know that you're going to have to support your parents or your grandparents as they age, there's going to be a portion of your money that you're investing for yourself as a 30-year-old. And then there's going to be a different bucket of money that you are investing for the benefit of your age and grandparents. And you're going to handle those buckets of money differently. I could totally see some product hocking salesperson telling our friend here, our anthropologist's friend, why are you loading up on income investments based on your young age?

You shouldn't do that. You totally should. That's crazy. Well, it might be crazy for the average person, but for him, it's perfect. Exactly, because he wants to retire so soon. And not to overfocus on real estate, but I will say that if the goal is early retirement, which for him it is, income producing real estate is a fantastic strategy. So my recommendation would be if it is possible to buy another piece of income producing real estate that generates positive cash flow, the benefit to that different. Assets produce returns in different ways. Some assets are more dividend-focused, while other assets are more capital appreciation-focused. And real estate as a whole is the type of asset class that is more dividend-focused, more income-stream-focused. So as you are pursuing the

strategy of building an income-focused portfolio, real estate rental properties can be a big piece of that income-focused portfolio, as opposed to individual stocks, which are far more of an appreciation play. So thank you, anthropologist, for asking that question. Enjoy your upcoming retirement. I'm excited for everything that you are planning. You have two apartments by the seaside. That sounds amazing. So enjoy it. Congratulations on everything you've built and on the life that you are heading into very soon. Living in the Caribbean, we should go check it out. Yeah, absolutely, absolutely.

Listener meet up at his place. Exactly. Afford anything retreat, 2023. All right, that's our show for today. Already? We did it. I can't believe we did it. And we only argued once.

I know, right? What's up with that? I know. We've got to do better. Joe, where can people find you if they would like to hear more of your wacky ideas? You can find me and a lot of people's wacky ideas at stacking benjamins.com every Monday, Wednesday, and Friday. I'm the ringmaster of a show that's meant to be a three ring circus on financial topics. Recently, we had Mark Randolph on, the co-creator of Netflix, this little company called Netflix.

Never heard of it? Well, that's what I said. I opened up, Paula. by asking him if you pronounce it, I'm not sure how to pronounce it. Do you pronounce it Netflix? And Mark is not only an incredibly smart guy. Man, he just ran with that. He said, he said, no, it's actually called neat fleets. And people be getting it wrong. And finally, I decided to stop fighting that battle. Just without missing a beat, Mark did that. So really interesting discussion about when you have what you think is a good idea and people tell you that will never work.

He's had that a lot, as you can imagine. Yeah, so a discussion on how do you break through the noise? How do you break through the naysayers? How do you distinguish good advice from bad? And it's always, it's always, by the way, well-meaning relatives that don't want to see you get hurt, who are the first ones that go, yeah, you shouldn't do that. That's a horrible idea. So that's one of the many topics at stacking benjamins. When I began buying rental properties, everybody said that to me. Everybody. Same thing when I quit my job and started building out my own business. Everybody said that to me. Why don't you just do what's safe? Why don't you stay in your job? People said that when I sold my financial planning business at 40. It was, what are you doing? Exactly. That sounds like an interesting discussion.

So you can hear that on the stacking Benjamin's podcast. Thank you so much for tuning in. This is the Afford Anything podcast. If you enjoy today's episode, please share it with a friend or a family member. Leave us a review in whatever app you're using to listen to this. And hit the subscribe or follow button in whatever app you're using to listen to this. Thank you so much for tuning in. this is the Afford Anything podcast, and I will catch you in the next episode.

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advice. All right, there's your disclaimer. Have a great day. It being a short-term rental in order to work. That's all I got. Sorry. I did not even listen. I was like, okay, I'm going to return a few of these emails.

I'm like, she's got it from here. I'm going to say don't buy a mansion and go from there.