Afford Anything - Ask Paula: How Much of My Company Stock Should I Buy?

Episode Date: October 21, 2019

#221: Vanessa is curious about Fidelity and Vanguard. She asks: what are your thoughts on the no-fee Fidelity index funds? What are your opinions on Vanguard’s financial advisors? Andy wants to know: should my wife and I continue maxing out our traditional 401k and backdoor Roth IRA, or should we start contributing to the Roth 401k my employer offers? Kyle is wondering - how can he minimize his taxes when he earns $450,000/year? Rob is self-employed and has been maxing out a Roth IRA, but recently discovered that he can open a self-employed IRA. Should he move his Roth IRA money over, or just open a new account and fund it from scratch? Christina is torn. Her and her husband have been saving to buy a house, but because they live in New York, their savings won’t go very far. Is it a good idea for them to continue renting, despite their dreams? Mercedes is wondering how REITs compare to stocks and owning actual real estate. Additionally, she’d like to know more about Forex trading. Craig has an employee stock purchase plan (ESPP). Since these tend to be risky, he’s wondering: is he better off moving the $25,000 that he puts towards the ESPP into mutual funds? Or is an ESPP a good way to diversify his funds? Myself and former financial planner, Joe Saul-Sehy, answer these questions in today’s episode. Enjoy! For more information, visit the show notes at https://affordanything.com/episode221 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every decision that you make is a trade-off against something else, and that doesn't just apply to your money. It applies to your time, your focus, your energy, your attention, anything in your life. That's a scarce or limited resource. That leads to two questions. Number one, what do you value most? And number two, how do you manage your resources in a way that aligns with your values? Answering these two questions is a lifetime practice, and that is what this podcast is here to explore.

My name is Paula Pant. I'm the host of the Afford Anything podcast. Every other episode, we answer questions that come from you, the Afford Anything community. And today, former financial planner Joe Saul Seahy is here with me to answer these questions. What's up, Joe? We're back. We got the band back together. Absolutely. And we are going to jump right in with our first question, which comes from Vanessa. Hi, Paula. This is Vanessa. Thank you for everything that you do. I love your podcast. I was wondering, what you thought about the no-fee fidelity index funds, both the domestic and international. And then I also was wondering if you had any input or insight onto the Vanguard financial advisors. I recently inquired about that and I was told that they charge 0.3% on your entire portfolio, but they help rebalance and tax efficiency, things like that. So I was just wondering what your thoughts were on that. Thank you so much. Vanessa, thank you for asking that question. Let me address your second question first, which is about the Vanguard advisors. What I would recommend doing rather than getting an advisor through Vanguard who will only look at your portfolio, I would instead get a financial advisor who could look not just at your investments, but at your overall financial picture. Because your investments are only one component of your overall financial plan.

planning, right? You also, in addition to managing the tax efficiency of your investments and the asset allocation of your investments, you also want to manage the decisions you're making about how much money you are putting into investments as opposed to money that you're putting towards other goals. You want to manage your spending. You want to manage overall tax planning. You want to manage estate planning. There are so many components to overall financial planning, of which investments are one subset. So go to an advisor, a no-fee financial advisor. A no-fee financial advisor. who will look holistically at the whole picture, you're going to get much better service that way. Specifically, when I say no fee, what I mean is go to somebody who charges an hourly rate

rather than a percentage of your investable assets or assets under management and go to somebody who has a fiduciary duty to you at all times. Those are the operative words to say when you are interviewing potential financial advisors. Do you have a fiduciary duty to me at all times? yes or no. And then the follow-up question is, are you duly registered? Yes or no? Those are the two questions that you should ask when you're interviewing advisors. Joe, let me kick this to you because you are a former financial planner. Yeah, I love that advice because I think what I was a financial planner, Paula, that most of the quality things that I did for my clients had nothing to do with the portfolio. They help people build the portfolio more quickly by focusing on maybe holes that you

had in your budget or having your risk management strategy put together. What's interesting, I just said risk management strategy. Insurance companies, as an example, we'll talk about buying insurance, but a risk management strategy is much more thorough. And the cool thing is, is if we don't start with insurance, sometimes you don't have to buy any, which is awesome. So much better. Actually, let me jump in here because I love that you gave that example, because oftentimes when people ask questions, they ask misguise. questions in which they assume the solution within the context of the question. So, for example, people often ask me, should I put my properties in an LLC? And the phrasing of that question

assumes the solution. What people are actually asking is, how do I best protect my properties from the risk of a lawsuit? That's their actual question. But if I were to answer their question literally or at face value, then I would be addressing only the proposed or assumed solution rather than the bigger picture umbrella question that people often don't articulate because they haven't gone through the deep thinking behind wondering why they're asking the question that they're asking, right? And that's what a good mentor or coach or somebody who helps look at the overall big picture rather than addresses only one narrow subset of solution. That's what that person can do. It's funny you say that because before I

I started questioning the context of questions that were asked me, I had a mentor who would always do it with my questions. And he would always tell me, he'd say, Joe, you're looking at the tree. I'm looking at the forest. And now I always think of it that way. I'm like, back away from the tree, Joe, and look at the entire forest. Exactly, exactly. And that's what your insurance example reminded me of. So the similar question, should I buy insurance? Really what you're asking is, again, how do I protect myself or how do I manage risk? And the question of should I buy insurance is a subset or an assume solution. And as you and I know, there are many other ways, depending on the risk you're looking at, to control the risk or to mitigate the risk, rather. We can't always

control it, but we can mitigate it. The other part of your question, this is the hot topic right now, isn't it? Everybody going free. So as of a couple weeks ago, Charles Schwab said, hey, guess what? We're going to make our trades free. By and large, almost across the board. Within hours, TD Ameritrade countered and said, hey, we're doing it too. And then a couple days later, E-trade came through and did it. So this idea of no-fee trading isn't just with fidelity anymore, Vanessa. It's pretty much across the board, which also makes me think, and this is not going to be the point of my answer. What does this mean for Robin Hood? Exactly. I saw this big YouTube video about, is this going to, I mean, Robin Hood's competitive advantage was that they allowed you to trade stocks for free.

And now that advantage has been wiped out. That was my very first question. Because Robin Hood, for those people that don't know, they don't have the tools that all these other places have. And if you don't need tools, by the way, leaving your money at Robin Hood is fine. We've had people ask us. You probably people ask you, Paula. Should I move my money from Robin Hood? I don't know that you need to do that if you're not using any of.

the tools, but there certainly is no reason if you have a Schwab account and a Robin Hood account to put any more money with Robin Hood. I think Schwab gives you a lot more flexibility. There's a ton more things that you can do. So it'll be interesting to see how Robin Hood responds. Yeah, and I do. I have a Schwab account and a Robin Hood account, and a TD Ameritrade account, actually, and a Vanguard. I've got way too many accounts. But yeah, I was logged into my Robin Hood account yesterday, and I was kind of looking at it going, why do I have this? And the only answer that I can come up with is I like their user interface, but I don't know. Is it going to come down to just that? Is it whoever has the best user interface is the one that you stick with? Because these companies are now, to the benefit of us, to the benefit of the end users, they are homogenizing the cost structure of what they offer to free, which is great for us.

I think it's a really exciting time with all this news lately. So to directly answer the question, there are three separate terms, free, suitable and best performing. And each of those is a different term for a reason. Just because more things are free, do not make them better. Also does not make them suitable and doesn't make them best performing. So as long as you remember that, I think you're a long way along the path of doing what's right for your goals. Cool. Well, thank you, Vanessa, for asking that question. Our next question comes from Kyle. Hi, Paula. My name is Kyle. I had a tax-related question for you. I understand the disclosure that you're not an accountant, but for educational and entertainment purposes, I am a high-income W-2 employee. I make about $450,000 a year, and I wanted to see what else I can do

to minimize my taxes. My taxes every year are extremely high, even though I think I'm doing everything I possibly can. I max out my 401k. I do a backdoor Roth IRA, max out my HSA contribution. I do tax loss harvesting when applicable. Other than that, I can't really think of much else for a W-2 employee to do to minimize the taxes. I know there's a lot of things when you own your own business. But in my situation, I don't have a lot of those deductions. So I just want to see what else I could possibly do. Is there anything else other than real estate? Because I'm not really comfortable investing with real estate. I prefer stocks much more. What else can I possibly do? Thank you so much for your help. Kyle, thank you for that question. I don't know what type of

flexibility you have in terms of location independence. If your job allows you to choose the state in which you live, you could move to a state that does not assess state income tax. There are seven states that don't charge personal income tax, and those are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. So those seven states don't charge any personal income tax. And on top of that, New Hampshire and Tennessee also have no taxes on earned income, although they do charge taxes on dividends and investment income. So living in any one of those states, having any of those states as your primary residence could spare you from paying a significant amount of taxes with regard to at least the state

income tax portion of what you're dealing with. And many of those states, Paula, make up for it in other ways, maybe higher property taxes, maybe higher registration fees, sales taxes, things like that. So I'd also look at those as well. Absolutely. Oftentimes the ways in which those states make up for it are, based on your spending or your consumption rather than your income. So, for example, Texas has high property taxes. One way to get around that is to live in a modest or frugal home. Nevada has the

highest alcohol taxes in the nation. One way to get around that is the obvious. So a lot of states that don't charge income tax make up for it in other consumption-based forms of taxation, which then, of course, you have more direct control over. Tax-wise, I think once again, just like we talked about with Vanessa, we want to broaden the discussion. And the real discussion we want to have is what's the most important thing? Because I often see people trying to maximize the wrong thing. I'll give you an example.

My goal, Paula, is to have Bill Gates tax bill. If I can pay as much money in tax as Bill Gates pays, that means I probably have a whole bundle of money. And if my goal is to have more money and not to minimize taxes, I think then I keep the right frame of mind when it comes to this. Based on what you're saying, there are really only a few other moves that you can make. And you mentioned real estate as one option that you don't like. Another one would be to directly own some businesses. Once again, not exciting.

There are some estate planning, charitable giving techniques that you can use where you will get some credits. also just tax credits in general. Investments that provide a tax credit, though, historically, do not grow very quickly. Kyle, when I first heard your question, the first idea that popped into my mind was that you could start some type of a business on the side because when you own a business, you can write off a lot of the expenses. But again, if you own a business, then that business, ideally, will start earning money. And when that business starts earning money, then that's additional taxes that you'll have to pay, which is great because it means that you're earning more money, but you know, but you're getting taxed on that money that you're earning. And you can't have a business that posts losses year after year after year. You can have two out of five years with losses, but once you get to year three or four, the IRS is going to start looking at that very carefully. Now, certainly if you had some type of a side business, you might qualify for additional retirement plans in which you can use money from that business to make additional contributions. But again, we're still talking about having a side business, which is going to occupy a huge amount of your time, your energy, your mental bandwidth,

your attention. And if the purpose of doing all of that is to try to save some money on taxes, and then that business ends up occupying this huge chunk of your energy, and then it grows and you end up making more money that you get taxed on. It just sounds to me like the whole motivation for starting the side business is misplaced. So that was a reason that I didn't suggest it right away because I don't think I would go there. I mean, sure, yeah, you can make a few more write-offs if you have a side business, but at what cost? Even having money in a brokerage account is usually taxed less than money in your paycheck. And certainly when you're making over $400,000 a year, W-2.

income is going to be taxed higher, Paula, than any other way of making money that I know of. Right. So converting more of your income away from W2 and toward investment income, that's a great savings. And it sounds like you're sheltering as much of that as you can now and building that bridge. So kudos to you for doing that. Because the quicker you can get away from that high W2 income and use that money to build a, even if it's just an ordinary dividend income, would be. a fraction of the tax that he's paying now.

Kyle, thank you for asking that question. Our next question comes from Mercedes. Hi, Paula. This is Mercedes calling from Trinidad and the Caribbean. In episode 144 and 174, there were callers asking about investing in real estate versus REITS crowdfunding syndicates. In both responses, you pointed out

that when you invest in these options, you own source decision-making. While I hear that you are raising this as a disadvantage, I actually perceive this as an advantage. And I get the impression that both of those callers, like myself, would appreciate outsourcing decision-making to reputable companies and just get the cash flow benefits of owning real estate. The question is then, can I depend on REITs to give me a similar cash flow

to owning real estate? And inherent in this question is, do REITs behave more like stocks or do they behave more like real estate in response to market cycles? My second question is, in episode 181, Joe said that if you know anything about the Forex market, you would stay away from it. Now, my understanding is that nowadays, some traders are not relying on older techniques like Fibonacci sequencing that attempts to predict market performance with some variable

level of success. But what they're doing is that they're lugging into the market 15 minutes before the close of the trading day. They're trading once a day, not this constantly trading, you're tied to your laptop kind of trading. And if they see a clear opportunity to make gains, they make a trade. If there's no such opportunity, they don't make a trade. And so that sounds to me like it's less room for speculation. Can you commence a little bit about this and for X trading in general? I want to say thanks, Paula, thanks, Joe. We really appreciate everything that you do. I just binged all of your episodes. I just listened to episode 199, which is the most recent one. But thanks a lot. I think you force us to focus a little bit more on

what's really important. And of course, I decided to join the fire train. Thank you. Bye-bye. Mercedes, thank you for asking that question. And congratulations for being on the fire train. With regard to real estate, it's clear from the way that you've asked your question that you don't want to directly own investment real estate yourself. If that is your goal, I think REITs are a much better way to have exposure to the real estate market than crowdfunding or syndication deals. So to directly answer your question, REITs behave in the market, they behave more like real estate than they do like stocks. meaning that the performance of a REIT does not directly correlate to the performance of the overall equities market. And so exposure to REITs gives you a level of diversification outside of equities and bonds. The reason that I like REITs better than crowdfunding or syndication is because when you are going into some type of a crowdfunding deal,

your risk exposure is still, is concentrated in a small handful of deals. You are choosing a shopping center in Fort Myers, Florida, or an apartment building in Brooklyn, New York. And you are deciding that you're going to put $20,000 into a deal in which some investors have decided that that particular shopping center on that particular street in Fort Myers, Florida is the thing that you're going to pick. That's a huge level of risk concentration. As compared with going into a REIT, which is far more like a essentially, it's not exactly an index fund, but it certainly broadens your exposure to a much greater extent than a lot of these crowdfunding deals. So if you want to have exposure to real estate in a way that it diversifies your portfolio without being directly involved in a deal yourself, I think REITs are a far better way to get

that level of diversification as compared to going in on a crowdfunded deal. On the second half of that, Paula, about the 4X market, I will just say this very briefly, Mercedes, the way you make that sound, if you listen to yourself, it sounds like it's incredibly easy to make money at the end of the day. And if it was, why aren't we hearing more people do that? And the answer is, is that, of course, it's a ton more complicated. Here's what I would do if you're interested in the Forex. Based on what you're saying, I think it shows that you know enough about it to try it out. And something I like doing with a part of my portfolio, I call my sandbox, I try out some sometimes pretty bizarre investment strategies. So I can just see how

they work. I'm fascinated by this. Like Paula, I'm a money nerd. So my advice to you would be to jump in and try it with not much money. And I think I'm going to predict the future when I say that six months from now, when you call Paula back, you will be telling her that it isn't worth it. There you go. And Joe, actually, I echo that advice. There's a small percentage of my portfolio, which I think of as the dumpster fire percentage of my portfolio, which is I'll take a certain percentage, a very, very small percentage of my portfolio, and I look at that money and I think, all right, this is money that I would otherwise just throw into a flaming dumpster fire, but instead of lighting this money on fire, I'm going to indulge my wild hair type of investments.

So this is beer money, this is fun money, and this is the money where I'm essentially speculating or gambling. So, Joe, I echo that in terms of, you know, when you are a money nerd and you start reading or learning about some of these different investment, quote, unquote, opportunities, it can be tempting to want to indulge in them a little bit. So have a small amount of dumpster fire money where you can give into that impulse and limit it to only that. It's a great idea. And then you can speak from experience. Yes, exactly. Exactly. So Mercedes, I hope that helps and thank you so much for asking that question. We'll come back to this episode after this word from our sponsors.

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My wife and I anticipate retiring age 60. I am 39 and my wife is 37. To accomplish this, we are maxing out our traditional 401K every year, or my 401K rather, and taking advantage of the employer match. We are also maxing out our individual backdoor Roth IRAs through Vanguard funds using a targeted retirement date Vanguard funds. So using the estimated yearly returns of 4 to 6% on Vanguard funds, 5 to 6% on my 401k, and the rule of 4% withdrawal once we retire, I anticipate that our investments will allow a comfortable retirement when combined with my employer pension and Social Security, which I expect to be around in some form or another when I retire, just not particularly generous. I don't think we'll have a lot of needs when we retire. I'll be able to carry my employer health insurance with me at a subsidized cost and will also qualify for Medicare four to six years after we do retire. Our kids will be in college and college will be paid for. Our home will be paid for we will no longer have a mortgage. Here's the issue. I just found out my employer has a Roth 401K. We enjoy the nice tax breaks that come from our traditional 401K. And I anticipate, as I say,

that we will be in a lower tax bracket when we retire. I have also planned our family budget around traditional 401K contributions and we would have to rework our whole budget to contribute to the Roth 401K, but the upside of a Roth 401k is you pay no taxes on what you take out. Now the employer match is still a tax deferred portion of the 401K. Is it better to maintain our current plan and just hope that tax rates don't go up too much by the time we've retired, or should I revise my whole family budget, lose the nice tax breaks that come with the traditional 401K contributions, and start contributing the max to a Roth

every year, or a Roth 401K every year. Thanks much. Andy, that's a great question. First of all, congratulations on your level of planning. I can tell from the way that you've asked this question that you have very carefully thought through both your current annual spending as well as your retirement planning. So the level of effort that you have very obviously put into financial planning, both short term and long term, is commendable. So huge congratulations on that. Now, from what I hear in the way that you've asked that question, it sounds, or at least the impression that I'm getting is that reworking your family budget to adjust from traditional 401-KKK program.

contributions to Roth 401k contributions might create some type of short-term financial stress that you would experience now. And it sounds as though that stress might not be necessary given the fact that you're already on track for a well-funded retirement in which you have made conservative projections about the growth of your portfolio, and it seems as though your portfolio, in conjunction with your pension and social security, will be able to cover all of your needs in retirement. And so it doesn't sound to me like the stress of having less money now is worth it, given that it seems as though you're already on track anyway.

Now, that being said, there is also a very strong art. argument for biasing more of your contributions towards a Roth 401k because of the fact that there is uncertainty as to what tax rates will be 20 years from now. And you can protect some of your future income and reduce that level of uncertainty by paying taxes now. And so what I might suggest to you is some type of a hybrid approach. You don't necessarily need to make all of your contributions in a Roth 401k, you could, if your employer allows it, split the difference, make a portion of your contributions in a traditional 401k, and then make a portion of your contributions in a Roth 401k. And then, of course, your employer match will also be pre-tax money.

And by virtue of splitting that difference, you can mitigate the impact that it will have on your family budget today, while also giving you more tax-exempt money. I don't have much to add because there will be some calculations that he'll want to do. I love the way that he's already assumed interest rates on his portfolio and what it's going to earn. And I also like the fact, by the way, those are really low. Yeah. I would do something similar here with tax rates. I would say, let's look at tax rates being higher than we think they're. going to be, right? That they're going to have more, they're going to cause more friction to your

portfolio than you expect. I look at portfolios as a triangle that I call the tax triangle. One corner of that tax triangle, he's using a lot, which is where money goes in pre-tax. And when you pull the money out, then the money comes out and you pay tax on the gains. That, of course, is the 401k plan that he's talking about now. Another is where he is supreme flexibility. That would be like a brokerage account, but he's paying tax along the way on dividends. ends capital gains if he's buying and selling whatever he's going to pay he's going to pay more tax but he doesn't have to worry about the rules and then that third leg is the one that he's asking about which is where money goes in with no tax advantage but when he pulls it out he gets great tax advantages

later i want to make sure i have some of all of those right i mean especially his age if he were younger i wouldn't worry about the pre-tax option as much and i go wroth as much as possible but the fact that he's built this around pre-tax money already, I would just want to make sure that I have some money for flexibility that's in that, that's in that Roth side. So I really, Paul, for that reason, I really like your, you don't, it doesn't have to be all one or the other. Yeah. That both is a suitable answer here. Yeah, exactly. Exactly. And actually, it was Joe, it was your concept of the tax triangle that inspired the way that I answered that question. Because right now, if you imagine that triangle, he has a lot of money allocated towards the pre-tax

corner of the triangle. And he has almost, relatively speaking, almost no money in the Roth tax-exempt corner of that triangle. So I do want to see him have more money in that Roth corner of the triangle, but not if it's going to be a huge stressor. You know, just doesn't sound like stressing out his family budget right now is necessary and it doesn't sound as though that's going to be sustainable in the long run. I mean, if it causes huge headaches today, then it could have the opposite effect. It could end up being demotivating. If his plan works the way he's doing it now, this only takes a good plan and makes it better. Exactly. We both heard, Andy, the tone of voice you had when basically it sounded like you said, please don't make me redo my entire financial plan.

The good news is, I don't think you have to. But to Paula's point, if you can withstand a little bit more pain today, putting some in that tax-free later bucket would be fantastic. Yes, I agree. Thank you so much, Andy, for asking that question. And again, congratulations on the level of financial planning that you're doing. The next question comes from Rob. Hey, Paula, this might be a silly question. I've been following your podcast for a while.

really enjoy it. Thank you so much. I've gotten a lot of value from it. You're definitely a financial wizard. I'll keep it really brief. I recently learned because of your podcast about the Vanguard solo Roth IRA. I am self-employed. I do pretty well. I have two separate businesses doing well. I've been maximizing my Roth IRA with Charles Schwab. And I wanted to invest more since I just learned about these self-employed IRAs available to me where I can contribute more. It sounds like Vanguard solo Roth IRA is a good option for me. My question is, should I take all the money I have in my Schwab Roth IRA and move over to Vanguard or just leave it in the Schwab and then open up Vanguard additionally? If you have any thoughts about that,

what's better, doesn't matter. That'd be really helpful. Thanks a lot. Rob, first of all, thank you so much. I'm glad that you're enjoying the podcast and that you're getting a ton of value from it. So you asked about what you referred to as a solo Roth IRA. There's no such thing as a solo IRA. I assume that what you're talking about is a solo Roth 401K. So let me briefly explain the difference. So an IRA is an individual retirement account. It is not tied to any specific employer. So an individual can open an IRA and that IRA can either be a traditional IRA or a Roth IRA. Or you can have both as long as you contribute under the maximum contribution level for the year. And so the term solo or the term self-employed doesn't

apply to an IRA because any person, regardless of whether they're employed by an employer or whether they're self-employed, any person who has earned income can open and contribute to a traditional IRA or a Roth IRA. So when you talk about a solo account or a self-employed account, what you're referring to is a 401K. So what I believe that you're asking about in this question would be a solo Roth 401K. And that absolutely you can get at Vanguard. So Vanguard has a great solo Roth 401k option that is for self-employed people. when you're self-employed, you make contributions to a 401K both as the employee and as the employer.

So when you have a solo Roth 401K through Vanguard, which you can open at smallbiz.vanguard.com, then what you do is you make Roth contributions to that 401k as the employee, and then you make pre-tax or traditional contributions to that 401k as the employer of your the employer side contributions that you make have to be pre-tax. And so the great thing about having that self-employed 401K or that solo Roth 401K is that you have the opportunity to make contributions that are in both buckets. The contributions that you make as the employer of yourself must be pre-tax and the contributions that you as the employee make into your own.

401k, your own Roth 401k, get to be Roth. So you get that blend of both, which is great. So you can do that. And then in addition to that, you can also have that Roth IRA that you have at Schwab and keep investing in that as well. And I don't see any particular reason for you to move that Roth IRA out of Schwab. There's no compelling reason to do so unless you just want to consolidate everything into Vanguard. And that's fine too. But I don't see any reason why you would go through the administrative hassle of moving it unless you are just very compelled to do so. Yeah, there's lots of ways to track your money. I do think tracking what you have is very important. And the more screens you have, the more difficult, the more tabs you have open, the more

difficult it is to track your stuff. But, you know, you could do it through mint, personal capital, a bunch of other places that help aggregate all of your different investments together. But if you're somebody that really wants to have just one dashboard open, there's no downside to moving it to being. I can think of a downside to moving it to Vanguard. But to your point, the time it'll take to move that money over will take a long time to pay for itself. Yeah, exactly. So yeah, in terms of moving your IRA from Schwab de Vanguard, I don't think it really matters. No, maybe. Yeah. I mean, if you want to, that's fine. If you don't want to, that's also fine. not really going to make a difference. Is that where we say, meh? Yeah, pretty much, pretty much.

But the important thing that I do want to clarify is the conversation about the solo Roth 401K. And I'm saying that really for the benefit of everybody who's listening, because in the world of retirement options for self-employed people, it can be a confusing landscape to navigate, right? And particularly when we talk about all of these different types of accounts, IRAs, 401Ks, WTF, the waters can get very muddy. And I should, I didn't want to overcomplicate things, but I should add as an asterisk there, that that whole discussion that I just had about IRAs being either traditional or Roth,

within that conversation, I left out the whole discussion around simple IRAs, which are employer-sponsored, frankly, because that's not germane to this particular question. But that's where it does get a little bit more complicated, because even though, an IRA is technically an individual retirement account, there are types of IRAs that are employer sponsored, such as the simple IRA. I didn't want to go down that rabbit hole because that's only going to confuse the conversation further. But that is, I think, oftentimes why the vocabulary can get confusing when people are asking about IRAs versus 401Ks. I wish it were so much simpler. There's also the SEP IRA. You know.

which is also employer-sponsored. But let's not go there either. Let's just, for the sake of this particular question. And I'm bringing up both a SEP and the Simple IRA as illustrations of the fact that when we talk about these types of accounts, understanding what the options are for self-employed people can get fuzzy. But, Rob, to your question, if you have an IRA, just an IRA, It's not the simple, it's not the CEP, it's just an IRA, and you also have a solo Roth 401K. You're doing well. You've got the accounts that you need. So thank you, Rob, for asking that question.

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number one in their category with over 300 businesses on Trust Pilot. Go to upstart.com slash Paula to find out how low your upstart rate is. Checking your rate only takes a few minutes and won't affect your credit. So that's upstart.com slash Paula. Our next question comes from Christina. Hi, Paula. My name is Christina. I am a new listener to the podcast. I love you and Joe. Thank you for all you do.

I have been listening to your podcast and finding other podcasts. And I know that you are pro real estate for sure. I also was just listening to someone who recently re-edited or revised his book, saying that it does not always make sense to buy real estate. instead it sometimes makes sense to rent when you do the math. I was just wondering what the math would be or what I should be calculating to see if it makes sense to rent as opposed to buying a house. My husband and I are 35 each. We both have student loan debt. He has 70,000. I have 67,000 left. We have paid off all of our credit card debt, consumer debt. We currently save into our 401

or 403B for me. We both have separate Roth accounts, and we also have a 529 set up for our baby who is two years old. We are renting and have been saving for our house for about three years. We have 39,000 saved, but we live in New York, and that is not even close to the amount you need for a down payment of at least 10%, and definitely will not help when we need to pay an extra 10,000 probably for closing costs. So I'm just wondering if it's It makes sense for some people to rent as opposed to buying a house. I would love to have a house, but I'm afraid to use all that money that we saved and then be strapped when we need to do renovations.

We can't buy a new house. It'll definitely have to be a fixer-upper. Or should we just keep saving and maybe wait to buy a house in our mid-40s? Just not sure what you think is best. Thank you so much. Christina, thank you for asking that question. First of all, I want to clarify, I am definitely not pro real estate. Real estate is not a sports team. With a sports team, you're cheering for the Dallas Cowboys or the Cincinnati Bengals or the Seattle Seahawks no matter what. I'm not pro real estate in that I'm just cheering for real estate no matter what. Real estate needs to make sense and there is a huge difference between buying a, primary residence versus buying an investment property. I am pro some people buying investment properties assuming that they are in the right place in their financial lives to do so, assuming that they are

sufficiently motivated to do so, and assuming that they go through the math and analysis necessary to buy the right investment properties. In those circumstances, I have, I am pro some people buying some investment properties. And an investment property is not the same thing as a personal residence. So this person that you're talking about who recently updated his book, Rameit Saehi, he recently updated the book, I Will Teach You to Be Rich. When he talks about the fact that your home is not an investment, what he is talking about is your personal residence. right? Your personal residence is absolutely not an investment, not even remotely. Like, litmus test,

have you calculated the cap rate on your purse? And I'm saying for everyone who's listening to this, have you calculated the cap rate on your personal residence? Have you calculated the cash on cash return? Have you calculated any type of ROI whatsoever? Do you know the internal rate of return? No. Guess what? It's not an investment. If you're not running analysis spreadsheets on it, then it's not an investment, which is fine. When you're buying a personal residence, it's like buying any other consumer item. When you buy a car, that car isn't an investment. When you buy a pair of pants, those pants aren't an investment, but you still wear pants because you need to not be cold or not get arrested when you leave the house. So it's fine to make consumer purchases,

but a consumer purchase and an investment are just not the same thing whatsoever. So let's Let's not conflate primary residence with investment property. So with that said, there is a blog post, a 6,000 word, incredibly detailed blog post that I wrote on Afford Anything.com. I'm going to link to it in the show notes. That post in 6,000 words will walk you through the math of deciding whether or not in your particular set of circumstances, based on the price to rent ratios in your area, it makes sense for you to rent versus buy. So I'm going to link to that in the show notes, and you can access the show notes at afford anything.com slash episode 221. Again, that's afford anything.com slash episode 221.1.

I love using a resource such as that to make sure that even though your primary residence is not an investment, I mean, who wants to, to your point, Paula, who wants to sell their house to achieve financial independence? Like you have all these memories and attachment and all this fun stuff affiliate with your house. We don't want to have to move. Maybe we want to move, but you don't want to have to move because of the attachment. That said, when I was a financial advisor, I had people where their goal was to own a house. And it was not a great financial decision. It was just a lifestyle decision. I would only add this. If your goal emotionally is to own a house versus rent, then by all means, do it. But at the same time, that means something else is going to have to give in your financial plan to make that a reality. Right.

And again, in that regard, it's no different than any consumer purchase. If your goal is to take a two-week trip to Italy, then I support that goal, and it means that you'll have to redo your budget in a way in which that two-week trip to Italy is feasible. But that doesn't make that trip to Italy an investment. It makes it an emotional goal that you want to pursue. Oftentimes, because of the fact that a person's primary residence may rise in value at a rate that might be nominally higher than a number, inflation maybe. Because of that, people erroneously try to paint primary residences as investments. And they're just not. Agreed. There is no disagreement whatsoever between the real estate investing community and the people who caution against this mass market delusion that a personal residence is an investment, right? And unfortunately, there's the perception

again, it's that sports team perception. You're pro real estate, you're anti-real estate. So it's very easy to try to paint me as pro real estate and Rameet as anti-real estate. When Rameet and I are saying the exact same thing. But I think there are people when you watch Money TV who are pro real estate or are pro stocks or are pro bonds. And what you find, usually, Paula, when you follow the money, They're pro that type of investment because that's how they get paid. Yeah. What's TV, Joe?

I'm surprised you got a sports team. But I did see that when you were quoting sports teams, you made sure to get the Cincinnati one in there. Of course. Yes. The best football team in the nation, Cincinnati Bengals. No, I'm just kidding. It has been for a long time or maybe not. Yeah, the only people who are going to be pro buying property in any circumstance, regardless

of whether it's a personal residence versus an investment property. the only people who are going to be in favor of that are real estate agents who make a commission on the fact that they're selling you a home. And I say that as a licensed agent. I technically do hold an agent's license. And I can be the first one to say it's licensed agents who are like, yeah, buying a home is always a good idea. That's a whole bunch of baloney. Or people selling real estate courses, mortgages. Yeah. Oh, and I do that too. I sell a real estate course. And I will still tell you, Do not conflate your personal residence with an investment property. Nope.

It's always amazing when I watch CNBC. This is actually a fun game. Turn on, turn on CNBC, your Fox business and watch some expert. And let's say they talk phenomenally well about how growth stocks are going to do for the next six months. And then try to guess which growth fund manager that person is who's talking before they put their name on the screen. I love that. Yeah. I love, I love tuning in halfway through and they're saying, well, treasury bills are going to be, da-da, oh, this is a guy who has a T-bill bond fund. Sure enough, bam, almost always correct.

Yeah, don't ask a barber if you need a haircut. I fielded many voicemails on this podcast from people who are clearly not enthusiastic about the notion of owning a rental property and are only asking about it because they hear so much about it. it that they feel as though they have to, but they don't actually want to. And I would instantly say to those people, don't do it because you don't want to, and you're not going to succeed at something that you don't want to do. Likewise, there are people who are in massive amounts of debt. They've got huge credit card debt with double-digit interest rates. And I would say immediately to those people, don't buy a rental property, pay off your credit card debt. So certainly, as someone who sells a real estate investing course, I will still say there are plenty of people who

shouldn't be buying investment properties. And again, that discussion is isolated only to specifically investment properties, which is not the same as a personal residence that you're buying for your own personal consumption. So thank you for asking that question, Christina. And again, if you go to Afford Anything.com slash episode 221, you'll find a link to an extremely detailed article that walks you through the math of deciding whether or not buying a personal residence makes sense in your particular situation. So again, that's afford anything.com slash episode 221 to find the link to the article. Our last question comes from Craig.

Hi, Paula. My name's Craig. I live just south of Seattle. And I'm a little concerned about retirement. I started kind of late. I'm almost 48, but I think I'm in a decent spot. But I'd like your thoughts. Just to give some context, I make about 200k annual gross income. Currently have about 200k in my 401k, about an 80-20 split. I've got about 50k in company's stock with another 100K unvested, 40K in non-retirement investments with Edward Jones, about 35K in Roth IRAs for my wife and I, and about 50k in a high-yield savings account making about 2.45%. Right now, I max out my Roth 401k at 19,000. I max out Roth IRAs at 12,000 for my wife and I.

I contribute 27,250 post-tax that converts quarterly to Roth and goes into my 401K. Company matches 9,500. And I max out my HSA every year at 6,900. Right now, I've got about 15K invested and 5K available for my out-of-pocket maximum. The big question is, once I have all allowable contributions done for retirement, I also contribute 25K annually to my employee stock purchase plan. It's Microsoft, I get a 10% discount. I hold onto it for a minimum of a year, and then I sell it and use those proceeds to fund the next year's Roth IRAs and to build up that opportunity fund or emergency fund even further. So my

My total annual investments are a little over 100K, with 58,000 of that going into Roth funds. I plan to retire at 60. I cashed out my non-retirement investments and long-term held company stock in September of 2018 to pay off the last 200K of my mortgage, so now I'm completely debt-free with a $350,000 house. The big question is for the employee stock purchase plan. Obviously, there's higher risk with an individual stock. It is Microsoft, so it's stable, but it also stayed at $26 a share for 10 years and is now selling at 135. Am I better off taking that 25K annually, even though I get a 10% discount, and just invest in it in mutual funds, or is the ESPP a good way of diversifying?

I want to retire at 60. Am I on track, and what would you do differently? Thanks a lot. I look forward to hearing your response and love the show. show. Hey, Craig, I'd like to, Paula, if you don't mind, tackle this one for two reasons. A, my son, Nick works at Microsoft. Very nice. Yes. And you know Nick. I do know Nick. You and Nick and I went to an escape room together. Yes. And we went to a buffet, a Las Vegas buffet. That was not as good as I had promised. I think that's redundant. I think that was implied when I said we went to a Las Vegas buffet. Yes, it's a given. But anyway, but the second thing is back when I was a financial advisor during those years that the stock held for a decade, I worked with a ton of Microsoft

people, like nearly half of my client base was people that worked at Microsoft in the Metro Detroit area. So all that to say, my answer will probably not have a lot to do with Microsoft specifically, but I am familiar with your benefits and with your pain. I love the way you're using the employee stock purchase plan. And for people that have an employee stock purchase plan, I want to explain why I like the way that you use it. I think accumulating a lot of money in a single stock is a big mistake. You should keep a single stock in your portfolio. Maybe most, most CFPs will say around 5% or less of your portfolio in one stock. Microsoft, as you said, clearly has been a stable company lately. They seem to be moving in the right direction.

you see a lot of analysts like them, that all means nothing. Because if you remember a company called Enron, there were less than 10 people who really knew what was going on there. And the whole company ended up falling. And sadly, a lot of people got really hurt that couldn't afford to be hurt. Frankly, you never know when things are going to turn. So for that reason, whether a stock's good or bad, I think is irrelevant. I just wouldn't accumulate one stock. But I do like your conveyor belt approach. I like the fact that you get this deep discount on the stock. So as long as the stock just manages to hang in there and do zero, do absolutely nothing, you're going to get a free 10% rate of return. That's fantastic. With a stock market that historically does a little bit less than that

over time after taxes, you're doing something very simple that gives you a free return if the stock does zero. But once that stock comes off the conveyor belt, I also like doing what you're doing, which is sell it and diversify it. So my feeling is use the ESPP as much as you can to have this conveyor belt as you're putting more money on one end of the conveyor belt, buying more Microsoft shares on the other end, you're selling and you're diversifying at the same time. So you're never accumulating that stock. And hopefully if Microsoft does well, or even if Microsoft just manages is to do nothing, you end up coming out ahead of taking just regular stock market risk. So I really like that.

There's a few things that I worry about. I love the fact that you didn't ask for my opinion on these, but I'm going to give them to you anyway. I do like the fact that you paid off your debt. I think it's going to make it easier for you during retirement to meet your retirement needs. So even though I agree with you, you're behind. You're catching up very quickly by making these massive contributions every year.

and paying off your debt is going to help your budgeting needs later on. Whenever I hear the phrase, Edward Jones, I know Edward Jones is known for customer service. Their people are generally door to door, community-minded financial advisors. They are a commission-based financial firm. And even using the term financial advisor, I don't think is really appropriate. More of an investment seller. By the way, it doesn't make them a bad investment seller. I have known commission only people at firms like Merrill Lynch or Edward Jones, who I would send my mother to because they have a high degree of integrity.

But generally, there's a bell that goes off that a lot of people don't realize that you may be paying more. If you're not getting good service, you're definitely paying more than you would through a lot of other firms now by going that route. I'm the type of person that will pay more if I'm getting great service, but some people don't know the difference between one firm and another that immediately rang a bell when you said you have X amount of money with Edward Jones. Joe, I agree with what you said about the conveyor belt approach. And I think that the way that I would frame it is how much money in total do you have in Microsoft stock as a percentage of your overall portfolio? If you've got $25,000 plus whatever growth it's accumulated in the span of a year, if your risk is limited to just that amount, then I think that's a very reasonable and comfortable amount of risk that you're taking on. The thing that I would caution you against, and it doesn't sound as though this is a risk, but I'm saying this really also for the benefit of everybody else who's listening, the thing that I would caution you against is having too high of a percentage of, your overall portfolio in any one single stock.

And in your case, it doesn't look like that's a concern. So Joe, I agree with you. I think that conveyor belt approach is a perfectly reasonable way to take this on. Thank you, Craig, for asking that question. Before we close out today, I also want to play a comment that comes from Miranda. Now, Miranda is making this comment based on episode 209, in which Joe and us, had a discussion about actively managed mutual funds versus passively managed index funds. After that conversation in episode 209, Miranda called in with this.

Hi, Paula. It's Miranda from Wisconsin. I'm listening to your August 12th episode with Joe, so hi Joe as well, about active versus passive management. And I'm in this position right now. I had a financial advisor who put me in an active fund and I would like to. switch to a passive fund. And I highly enjoyed the discussion, but I'm wondering if we're missing a conversation about risk tolerance. Because I think what's happening is Joe is willing to pay a premium for potentially higher reward because it will beat the market, whereas you are slightly less risk tolerance because you're not willing to pay that premium and you just want to do as well as the market because you don't want to take that extra risk. I guess it's more of a comment, but

I just wanted to put in my two cents. Love the show. I found it about a year ago and I binged every single episode. Thank you so much for what you do. Miranda, thank you so much for that comment. And anybody else who has comments, ideas, anything related to this topic of actively managed mutual funds versus passive funds, I would encourage you to chat with one another in our community forums. So we today are rolling out brand new community forums. I'm going to talk. about that in a moment, but we've got our brand new forums coming out today, which will give everyone in the Afford Anything community much better enhanced capabilities to talk to one another about any issue that's on your mind, whether it's index fund investing, mutual fund investing, real estate, side hustles, absolutely anything. I'm going to talk in a few minutes about those community forums. But Miranda, specifically,

in response to your comment. First of all, thank you. I think that's very insightful. The one response that I would have to it is that part of the disagreement that Joe and I have about active funds versus passive funds is that I am not convinced of the premise that there is the potential for higher reward if a person purchases actively managed mutual funds. So it is not that I lack the risk tolerance to have that level of risk exposure, it's that I disagree that the potential reward exists if I were to go into that type of investment. And on my end, it's interesting because I am not, to set the record straight, to defend my honor. I'm not advocating for active investments as much as I was advocating for before you sell,

know what you own. It always frustrates me when somebody sells something and they have no idea what it is that they own. They just heard something else is really good. And it's like, I don't even know if my approach to X is working, but I'm going to sell it because somebody told me something else is better. So I thought that. However, and I do like this idea of risk because I also think when it comes to active, it isn't about, it isn't about accepting, paying a premium for a higher return because sometimes with active, you pay a premium for a lower return with a lower standard deviation attached, meaning I'm paying a premium to have a manager who's going to back off the gas pedal if the market gets all wonky. That's difficult to do.

That approach, by the way, also doesn't work very, very often. However, different than Paula will assert, it has worked. There are managers who have done it. there's a guy who I liked for a really long time with beacon funds named Michael Price, who was phenomenal at achieving returns that were nearly as high as the S&P 500, but with a fraction of the risk, he would deeply lower the risk. And I love that. If I can take a lot less risk and get an S&P 500 like return where it doesn't bounce

all over the place, sign me up for that. So in that case, I was paying Michael Price extra money to lower the risk, not to achieve a higher return in the S&P. Right. And that's a good point, Joe, because ultimately what people, what everybody is trying to do is improve risk-adjusted returns. And there are two ways to improve risk-adjusted returns. You can either hold the risk steady and try to improve the return, or you can hold the return steady and try to lower the risk. Yeah. And for both of those, you're going to pay a premium. I do think, though, that if you're on the side that we talked about, where this particular person that Paul and I were discussing, this fun was one that historically

had beaten the pants off the S&P 500 while directly competing with the S&P 500. In that case, I would just want to know it before I sold. But I do want to say, because I heard from a lot of people after that, that Joe, Joe like wears sweaters around all day going active rock, passive sucks. Not the case at all. Again, to go back to the sports team analogy, you're not. pro-active funds like it's a sports team. For you, it's context-dependent.

Absolutely. That nice job. Well, thank you. Yeah, wait for me to bring it back. You said a bunch of sports teams and said I'm context-dependent. A little tear of my eye. I'm being very generous. Well, thank you very much.

Thank you so much, Miranda. And thank you, Joe. Where can people find more of you if they would like to hear more of your wacky ideas? Yes, for more wacky. Which is the way we market the show. More whack. No, but seriously, for a show that is very, very light, has a much different, I think some people that have come from afford anything and tried out our podcast, expect more Paula.

And there's only one Paula. And even when she's on our show, which is most Fridays, Paula is a subjected to a much lighter conversation. Yes. And what is the name of your show for people who do not know that yet? Yes, thank you. And it's called Stacking Benjamins. and you can come with us Benjamin stacking every Monday, Wednesday, or Friday, wherever

finer podcasts are distributed. So big announcement. Today, we are rolling out a brand new community platform. This community platform, it's free and it's open to everybody. You can join it at afford anything.com slash community. We're rolling this out because we want to give you, we want to give the Afford Anything community, a space in which you can. talk to one another and connect with one another based on commonalities and shared interests.

Up until now, the way in which you, the afford anything community, the way in which you've been able to talk to one another has been through a Facebook group. And that Facebook group is great and it's going to still keep going. But there are some limitations with Facebook groups. Number one, not everybody's on Facebook. A lot of people don't have a Facebook account or don't really use Facebook much. Number two, everybody is in one big group and there's no way to connect with people based on commonalities, like if you have the same shared profession, or you're in the same industry, or you live in the same location, there's no way to really connect with people based on that. And number three, with the Facebook group, you can't

follow certain topics that you're interested in. So if you're particularly interested in, in learning about or having discussions about side hustles or index funds or debt payoff or early retirement. There's no way to tag posts with particular topics. There's no way to follow topics. It's really difficult to go back through the archives and learn from things that people posted six months ago. Those are all some of the limitations around a Facebook group. And so in order to get around all of that, in order to make it easier for everyone, everyone in this community to connect with one another and keep the dialogue going and keep the questions flowing and give people the opportunity to deep dive into whatever topic you're

most interested in, whether that's side hustles or real estate or 401k investing. This community platform is set up so that you can do that. You can connect with people based on commonalities or shared interests. You can follow certain topics. So it's much more conducive to keeping this conversation going throughout the week. I'm here with you doing a new episode every Monday morning, but this way we can keep this conversation going all week long on anything that you're interested in, and you can connect with one another in a much easier and more targeted, more streamlined way. If you're an accountant, you can connect specifically with other accountants in this community. If you're in the arts, you can connect

specifically with other people who are in the arts in this community. So it's a great way for everyone to connect. You can join it for free at afford anything.com slash community. We're rolling it out today. Very, very excited for the launch of this new community platform. Again, join for free at afford anything.com slash community. That's afford anything.com slash community. So that is the good news.

I also, while we're talking, I also have some kind of sad news to share, very personal news from my own life. As of this past Friday, October 18th, 2019, I am officially, I've officially gotten a divorce. A lot of you have guessed that we've broken up. I've never actually come out and said it on the podcast before. But many of you have guessed, given the fact that I just kind of suddenly stopped talking about him. But we broke up in 2017 after a 10-year relationship. And for the past two years, we've been working out the details of that. And on Friday, it became official.

So it's been hard. And I'm grieving. you know, when you spend a decade with someone, I know that this is right and that whatever is in the future is going to be better than what was in the past, but at the same time, like, even though I know it's the right decision,

there's a lot of grief that I've been dealing with. In fact, I've never really understood what grief felt like until these last two years. And I've avoided talking about it because someone once told me I heard this quote to teach from the scar, not from the wound. And for the last two years, it's even though many of you have guessed, and even though those of you who I've met in person or face-to-face, I've been open about this during face-to-face conversations. but I haven't publicly aired it because the wound is too raw. So here's my public announcement, and I think that's probably part of the moving on process.

I will say this. My divorce was on October 18th, and then the next day, my birthday was on October 19th. So in the span of 24 hours, I got divorced, and then I had a lot of. a birthday, which is like the symbolism is just so over the top. It is quite literally the dawn of a new age. So that's nice. You know, it's a, it's a new age. It's a new year. It's, it's October 2019. We are two months away from the beginning of a new decade. So, I mean, in terms of timing, in terms of turning that page and starting that new year and, and starting the new age, starting the new era, the symbolism couldn't have been any more spot on.

So there's that. But I wanted to share that with you because that's what's been going on with me. So thank you for being part of this community and for being with me throughout this journey. You know, this podcast has gone on for almost four years now. And I look forward to many, many, many more. So thank you for being part of this community and for being with me throughout all of this. This is really a bright spot in my week. And I'm so glad to share this with you to this podcast, this community, everything that we're doing, this important work that we're doing in spreading financial literacy and spreading the word about financial independence. Thank you for being part of that. We are right on the verge of reaching 8 million downloads.

So this message, the work that we're doing here matters. And there's a lot of meaning and purpose that you're a part of, an important part of. As we continue to spread the message of financial independence, and as we continue to help people get out of debt, safe retirement, and get their financial lives in order, because when your financial life is in order, that's one less thing you have to worry about. And going through the experience of the last two years has really brought that home for me. While everything else in my life was falling apart, at least, at least I had my financial

life together. And it was just one less thing to have to worry about so that I could focus on the rest of my life. You know, so this platform, this podcast, Afford Anything, allows me to help more people find that financial stability so that that at least provides an anchor during those rough times. So that's what I wanted to share. Thank you so much for tuning in. My name is Paula Pant, this is the Afford Anything podcast. I'll catch you next week.