Afford Anything - Ask Paula: How Should I Invest $4,000 Per Month for Early Retirement?

Episode Date: October 7, 2019

#219: Stella is working toward FIRE and wants to know: how can she create passive income in her retirement years? Is a portfolio with stocks and bonds enough, or should she invest in real estate? Travis and his wife are also on the FIRE path, and are comparing their investment options. Travis is concerned about the inefficiency of reinvesting returns in real estate. How can you factor this into your decision when buying a property? Stephanie and her husband are also interested in FIRE (hooray!) and they have $20,000 to invest. How can they best use this money to help them FIRE sooner? Cade, a 24-year-old listener, wants to FIRE by age 30 (we’re on a roll!). He’s saving $4,000/month and wants to know how to invest these savings. Anonymous and their partner are taking a mini-retirement and have questions surrounding the logistics of healthcare. What options should they consider? On a different note, Amanda works in academia. After listening to Episode 12, she’s looking for tips on managing long-term, complex collaborative projects now that she’s in a leadership position. Steve’s question brings us to the topic of building an online business and social media following. Should he have one brand for all of his interests, or divide these interests into separate channels? I tackle these questions in today’s episode of the show. Enjoy! For more information, visit the show notes at https://affordanything.com/episode219 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. And that leads to two questions. Number one, what matters most in your life? And number two, how do you align your daily decisions to reflect that?

Answering these two questions is a lifetime practice, and that is what this podcast is here to explore. My name is Paula Pan. I'm the host of the Afford Anything podcast. Every other episode, we answer questions that come from you, the community. And this is one of those episodes. So today, here's what we're going to cover. Stella wants to know how she can generate passive income during retirement.

She's 37 years old and wants to retire in the next seven years. Travis and his wife are also on the path to fire, financial independence, retiring early, and they're concerned about reinvesting your returns if you invest in real estate. How do you manage this and how big of a factor should this play in your decision making? Stephanie and her husband are also on the path to fire and they have $20,000 to invest. So what should they do? Cade is 24 years old and wants to reach fire by 30. He's saving $4,000 a month and wants to know what to do with these savings.

Anonymous is taking a mini retirement and has questions around health care. Meanwhile, Amanda works in academia and is wondering how to manage long-term complex collaboration. project now that she's in a leadership position. And Steve wants to know about building an online business and a social media following. Should he have one brand for all of his interests or should he manage multiple channels and multiple brands? We're going to tackle these questions right now, starting with Stella. Hi, Paula. My name is Stella and I'm a huge fan of yours. I'm 37 years old and I have saved about $400,000 between my retirement accounts, personal savings and progress. rich accounts. I'm striving to reach fire in the next seven years. The only debt I have is the

mortgage. The current balance on that is $110,000 now. My question to you is regarding generating passive income during my retirement years. Can I retire only with my stocks in bond market portfolio, or should I be investing in real estate, such as buying rental properties to ensure there is solid income coming from those resources. My current real estate investment is limited to only my house and a few rates that I have. I would really love to hear thoughts. Thank you. Stella, first of all, congratulations on saving $400,000 and on having no debt other than a mortgage with $110,000 balance. That is incredible. So big congratulations to you. Now, as to question, I actually hear two questions in there. I hear the question, how do I generate passive

income when I'm retired, specifically in your case when I'm early retired? And then I also hear the question, should I hold real estate in my portfolio? In this context, should I hold real estate as a subset of the first question? But the big question, I hear them as two separate questions and the big question really is, how do you generate passive income when you are retired? Particularly given that your portfolio needs to last for perhaps 60 years, 70 years? How do you manage a retirement portfolio under those conditions? Now, there are a few approaches here. The first thing that I would do is as you think about your expenses during retirement, I would separate those into two buckets, which are your wants and your needs. For the sake of example, let's assume that by the time you retire,

your mortgage will be paid in full, so you'll be completely debt-free, and let's just say for the sake of example that you want to live on a budget of $40,000 a year, but maybe 30,000 of that are needs, groceries, property taxes, insurance premiums, utilities, things of that nature. Let's say that that occupies $30,000 a year, and then the other $10,000 a year that you live on are wants, hobbies, travel, dining out, things like that. One potential approach that you could take is to use your portfolio only to cover your needs and then to have some alternate source of income in order to cover your wants. And this is just one of many possible approaches. There are a lot of ways to structure this. But in this example, if you retire in seven

years, debt-free, mortgage-free with a million-dollar portfolio, split 50-50 equities and bonds, and you draw down at a 3% rate, so 30,000 a year, you'd be using your portfolio to cover those basic living costs, and then you could have some alternate source of income, such as a side hustle that you use to generate the additional 10,000 in order to cover the wants and the fund spending. The benefit to this approach is that you're drawing down from your portfolio at a 3% rate rather than a 4% rate. And for a lengthy discussion about that, check out episode 216, which was our interview with Dr. Wade Fow. But as a quick Cliffsnote summary of it, when you are retiring early and then trying to make your portfolio last for a period of

60 or 70 years, one of the primary things that you want to shield yourself against is having to draw down principle during years when the market is bad, by having multiple sources of retirement income such that your portfolio is not the only source, you have the flexibility to draw down at a higher percentage in years when the market is doing well and to refrain from selling or refrain from selling as much in years when the market is not doing well. And so to the initial broader question of how do I generate passive income for retirement, a strategy that gives you flexibility in the percentage of your portfolio that you withdraw, a strategy that does not lock you into 4% every single year, but rather gives you some wiggle room, combined with having multiple

sources of income could be one good approach. Now, when we talk about multiple sources of income, in what I've just said, I gave the example of a side hustle. And the reason that I gave that example that was intentional is because I assume that the reason that you're asking about real estate is because you see real estate rental properties as another example of something that exists outside of your investable portfolio that could be an additional source of income. So the rent money that you collect could be an additional source of income and diversifying into rental property. can produce that alternate stream of income. It can help you diversify into those multiple streams of income. That's absolutely true, and that's one of many options. But the reason that I used side hustle in this example is to illustrate that rental

properties are one of many options. So I don't want you or anybody who's listening to feel as though rental properties are a requirement. Are they a great option? Absolutely. The rent checks that you collect are not going to move in lockstep. with the overall market. And that makes them a great way to diversify. So they're a great option, yes, but they're not mandatory. And there are plenty of people who have successfully retired early

without any rental properties or real estate component in their investments at all. So while they are a good option, they're not required. You could do the gig life thing. You could start a side hustle. You could either start or purchase a company that is fairly hands-off on a day-to-day basis. You could collect royalties from software or music or books or something else that you've created. There are many other ways that you can create passive income. And so to the second part of your question, which is should you own real estate, my question back to you is, do you want to? I mean, of the many ways that you could create passive income,

is that the option that appeals to you the most? Or is there some other method of creating passive income that appeals to you more? because you are more likely to be successful at the thing that you find most interesting. So what I would recommend is that you follow your curiosity. If you think that investing in rental property sounds intriguing and interesting and fun and you'd like to learn more, then that might be a viable path to pursue. But if you are reluctant going into it, then you're not going to enjoy it and you're probably not going to do as well in it. So diversify your sources of retirement income, have multiple streams of income. and pursue, when it comes to going outside of your portfolio, pursue the option that interests you most.

Thank you for asking that question, Stella. Our next question comes from Travis. Hi, Paula. This is Travis from California. My wife and I are fairly early in our path to financial independence. We have a few hundred thousand dollars in low-cost index funds will also maxing out our retirement accounts. I'm very interested in buy and hold rental investing because of the ability to increase my rate of return by applying hard work and knowledge. One factor that I haven't heard many real estate experts talk about in detail is the loss of efficiency in compounding from reinvesting your returns.

In an index fund, the growth is constantly compounding with no additional work. In rental investing, the growth doesn't compound unless you take action to reinvest it. How do you factor this into your overall strategy when running the numbers on a potential rental unit and the returns it provides? I love your show and the approach you take to talking about finance. I've learned a lot listening to you. Thank you. Travis, that is a fantastic question, and it's one that I've thought about a lot. So there are a couple of different approaches.

Now, first, what you could do is when you receive rental income, step one, of course, is save an emergency fund. That's true in your personal life, and that's also true in your business life. Step one, save an emergency fund. I like to have at least six months of gross rent in an emergency fund. When I say emergency fund, I'm talking about cash reserves that are supposed to be. specifically for the rental property. So these are cash reserves that are separate from your personal emergency fund, right? So step one, save those. After that, then what you could do is every month, as rent comes in, as the rental income and the cash flow from the rental properties come in,

you set up an automatic transfer in which you automatically deposit a certain amount of money every month based on whatever cash flow you're receiving into an investment account. This way, the cash flow that you're collecting from your rental properties automatically gets reinvested, which then gives you the benefit of compounding growth. So that is the workaround. However, this strategy does come with a drawback, and the drawback is as follows. If you plan on using the cash flow from your rental properties as the money that you're going to use in order to buy more rental properties, right? If you're planning on saving up all of the money that you make in year one and year two and using that to buy a property at the beginning of year three, then

that's not necessarily money that you want to expose to the risk of investment because it's money that's earmarked for a short-term use. Money that gets invested, and particularly if it's getting invested in equity index funds, that's money that you don't want to have to liquidate within the next five to ten years. So if this money is earmarked for use within less than five years, then you treat it just like you treat any other bucket of money that you plan on tapping within less than five years, which is that you don't expose that to market risk in order to preserve your liquidity. So really what you'd want to do is make a decision as to what you are going to do with the cash flow that comes from your rental properties.

Is this money that you want to reinvest immediately so that it can have that compounding growth, even though that will subject it to market risk. Or is this money that you want to hold in cash so that you have less market risk, more security, more options, and the ability to use it to buy another property in the relatively short term? Now, you could try a hybrid approach. You could decide, you know what, I'm going to set up an automatic monthly transfer that immediately invests my cash flow from my rental properties. That way, it's compounding right away, it's growing right away. And two years from now, I will reassess if two years from now the market is doing well and that investment has grown, then I can realize that growth. I can realize those gains and then sell out of those positions, sell out of those index funds and use that money in order to make the down payment on the next property or depending on your cash flow in order to pay cash for the next property. But if the market is not doing well, then you decide that you're just going to let that money stay in the market.

You're not going to convert paper losses to real losses. So what you could do is take a hybrid approach in which you are automatically investing the cash flow that comes in from your rentals. And whether or not that money is earmarked for a short-term goal depends on how the markets are doing. So in other words, the flexibility, like one way or another, you're going to be preserving flexibility, right? The question is, are you going to be flexible about the goal or are you going to be flexible about the account that the money is stored in? If you want to be a little bit more rigid about the goal, if you definitely want to buy the next property at the beginning of year three in this example, then in order to preserve the rigidity in the goal, then you need flexibility in the way in which you hold that asset, meaning that the money should stay in cash or cash equivalence since it's earmarked for the short term. but if you have flexibility around the goal or flexibility around the purpose of the money, then that could be your opportunity to take that hybrid approach.

So that's how I would handle it. That's a great question. When I first started investing in rental properties, I spent a lot of time thinking about that too. Because I knew that if you use the cash flow from your rentals to invest in more rentals, then eventually you get to the point where your rentals are buying rentals, your houses are buying houses. It's great. But there's that interim lag time in between. purchases, and that interim lag time can be six months a year, two years, three years. So what do you do

with the money in that time? I mean, that's kind of another frame for looking at the question, because it's a variation on how do you automate the compounding and how do you make that clock start faster? So thank you so much for asking that question, and best of luck with whichever approach you decide to take. We'll come back to this episode after this word from our sponsors. Do you want to wear shoes that are environmentally friendly, sustainable, comfortable, and look good? Check out Rothies. They make really good-looking flats for women and girls

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I just found your podcast and it's awesome. I'm learning so much. My husband and I are in our mid-30s living in Vermont, and our main goal is to be financially independent as soon as possible, so we don't have to work at a job, and we can focus on our homestead growing our own food. We have no debt besides our mortgage of $265,000, and we pay an extra $1,000 a month to principal. We also have a home equity line of credit that is used for emergencies only, but I'm now considering using it to pay off the mortgage quicker. We are able to save about $2,000 a month and have about $20,000 cash. to invest. We also are not planning on having kids. I'm wondering how best to use this money to become

financially independent. I'm very risk-adverse, so I don't want to go into stocks, although we both pay 6% to our 401k just to get the match. I'm very open to the idea of rental properties, and we have an opportunity to purchase my mother-in-law's North Carolina investment property below market value. It's worth about 125,000, and she is willing to sell it to us for 80,000. It already has a tenant that is paying $825 a month. However, we could get rents of at least $1,000. We would take that a loan, but since we will have built in equity, do we still need to put down a down payment?

And what would the tax consequences be for my husband and I, as well as my mother-in-law? Would gift taxes apply? How can we structure the deal so are my mom? mother-in-law has no closing costs. For more specific details, would we contact a CPA or a real estate attorney? And does it matter if they're in Vermont where we live or should we find one in North Carolina where the investment property is? Thanks, Paula. Stephanie, first of all, congratulations on being debt-free other than your mortgage on having such fantastic goals that you are actively working towards. It sounds like you're on the right track. You're making progress

every single month. So that's great. Now, you mentioned that you have a he lock that you are thinking about using in order to pay off your primary residence mortgage. I would not take that approach, or I would caution you against taking that approach, assuming it's a conventional primary residence mortgage. I see no reason why you would use a helock to try to make payments on it, especially since you're already paying an extra thousand a month towards principal. If you want to get rid of that primary residence mortgage, I would focus on aggressively putting cash towards that rather than trying to use money from a he lock, which is not going to be money that you access at terms that are meant to be as friendly or as long term as the

terms that you're getting on a primary residence mortgage. Now, in terms of what to do with the rest of your money, first of all, I'm very glad that you have the self-knowledge to recognize that you're risk-averse and don't want to go heavily into stocks or index funds. Self-knowledge is the most important factor when it comes to making investment decisions. And so the fact that you know that about yourself, that's awesome. Congratulations. Glad that you're putting that 6% towards your 401k. So your strategy makes sense to me of using the rest of your money outside of your 401k match to either pay down the mortgage on your primary residence or invest in a rental property. Now, if you were to buy this rental property from your mother-in-law, from a cursory glance,

the numbers to you look good. You buy this property for $80,000. you can rent it out for a thousand. That easily exceeds the 1% rule. So that's fantastic. In terms of whether or not you have to put down a down payment, it depends on what type of loan you're taking out and from whom. So is this going to be an investment loan that you get from an institution? Is it going to be a loan that your mother-in-law provides for you? So who is the loan originator? What type of a loan is it? All of that is going to play a factor in what the requirements of the loan are. You asked about how to spare your mother-in-law from closing costs. I mean, closing costs in this case are going to include hiring an attorney who can draft all of the paperwork around this, running a title search, and depending on the laws of the state, you may or may not have to pay a transfer tax. I mean, those are the unavoidable costs. And if you want to spare your mother-in-law from paying this, then you volunteer. You and your husband would volunteer to cover the closing costs. Yeah, the good news is because there's no real estate agent involved, there's no agent commission, but there are, of course, just the fees associated with making the transfer itself, the administrative fees, and the attorney fees. Now, as far as gift taxes are concerned, this is going to depend on what the fair market value of the property is.

And the fair market value can be determined by an appraisal. But if a family member sells a home to another family member at below fair market value, then the IRS will look at that as a gift. So if the sale price is less than what the property's fair market value is, if it's significantly less than that, then the IRS will count that transaction as a gift. So if an appraisal does determine that the home is worth $125,000 and she sells it to you for $80,000, that's a $45,000 gift. However, there's an annual gift tax exclusion of $15,000 per person, which means that between you and your husband, $30,000 of that would qualify for the annual gift tax exclusion. Now, in addition to that annual gift tax exclusion, there's also an $11.4 million lifetime exclusion.

So $30,000 would fall under the gift tax exclusion and the remaining $15,000 would fall under the lifetime exclusion. So your mother-in-law would have to fill out a form. It's called IRS Form 709 to declare the gift, but then then, And that gift would fall under $30,000 under the gift tax exclusion and the remainder under lifetime exclusion. You definitely want to be working with a CPA. I don't think it really matters what state the CPA is based in. The CPA that I work with has clients all across the country. I think what matters more is that you're working with a CPA who is specifically experienced in real estate transactions, gift tax returns. I mean, you want to be working with a CPA who specializes in

or has experience in in working with individuals and families who are trying to manage their personal assets. As compared with, you know, let's say there are some CPA firms who specialize in working with the owners of companies that do $5 million in revenue, annual revenue, or more, right? A firm that specializes in that type of a client would not be a good fit. So I think what's more important is finding a CPA who's a good fit. As far as your closing attorney, I mean, since the property is located in North Carolina, you'll need to work with an attorney in North Carolina to process that. So all in all, it sounds like a great deal and a very good way for you to take some of the money that you're saving and apply it towards

investing in your first rental property. So congratulations on having this opportunity and good luck with moving forward with it. And again, the most important thing that I can tell you really is to enlist the help of experts to get a real estate attorney and to get a CPA because they will guide you through this process. Thank you for asking that question, Stephanie, and best of luck. Our next question comes from Cade. Hey, Paula, I love your podcast. I just started listening a couple months ago. I just finished grad school in 24, wanting to reach financial independence by 30. I currently have 30,000 in savings, no debt. I'm saving about $4,000 per month, and I'm wanting to hear your

advice on what I should do over the next six, seven years to try to achieve financial independence. Thanks. Kate, congrats. You are ahead of the game. You're 24. You've got 30 grand in savings. You're debt-free and you're saving $4,000 a month. You are well on track.

So in terms of what to do next in order to get to financial independence as quickly as possible, number one, you mentioned that you just finished grad school year in your first job. You're 24 years old. Hit it hard at work because your income potential, your earning potential, is massive. So angle for the bonuses, the promotion, the raises, the things that are going to boost your income in the next seven years, because what's cool about making more is that if you boost your income but keep your lifestyle at about where it is right now, then all of that excess immediately can go to savings after taxes.

So one of the most effective ways to save is earn more. And given that you're right out of school, you're an engineer, you've got a lot of potential for that. In terms of how you invest that, I would look at three buckets, equities, real estate, and business. So in terms of equities, you could put all of that money into an index fund. That's absolutely a viable and fantastic option. And I think if you were to want to focus your energy into hitting it hard at work and not put too much time or mental bandwidth into managing your investments, going a pure index fund route is a perfectly great. route. So that's certainly something that you could do with the $4,000 a month that you're saving.

Alternatively, you could choose to put a portion of that $4,000 per month into index funds, and then the rest of it into real estate or either starting or buying some type of a small business. That would diversify your investments a little bit. It would give you multiple streams of income. Those would be the upsides to that. The downside, of course, is that both of those options require up front more of an investment of your time, your energy, your attention. So you have to decide, first of all, whether or not that's something that you're interested in doing and that you have the bandwidth to do. Now, of this money that you're saving, assuming that you put some portion of it into market investments, like index funds, I'm going to give a slightly

nuanced answer as to the type of account that it would go into. And for a more in-depth discussion on this. Listen to episode 215. You can get that at afford anything.com slash episode 215. That was our interview with Joshua Sheets. But as a quick summary, Joshua made the point that a lot of us within the fire space and within the personal finance space in general, advocate investing your money first in tax advantage accounts. So a 401k, an IRA, an HSA, any type of account that has a tax advantage, we tend to prioritize those first, and only after we've maxed out all of those accounts, do we tend to turn to taxable brokerage accounts? And that can be a great strategy, but I'll give a little asterisk here. Don't let the tax tail wag the decision dog.

Because when you put money into a tax advantaged account, you are essentially making a deal with the government in which the government says, we will grant you a tax benefit on the condition that that you earmark this money in a certain way or that you treat this money in a certain way or that you don't withdraw this money until a certain age. That's essentially the deal that you're entering into. And so the advantage of putting money into a taxable brokerage account is that your money can be invested in the market while at the same time preserving flexibility. You have the ability to easily sell out of those holdings and use that money for some alternate

purpose two, three, four years down the road if at that point you decide that you want to use that money to buy investment properties or start a business or purchase a business or any other type of money-making enterprise. Now, there are ways, there are workarounds to taking money out of tax-advantaged accounts. We've talked about that on previous episodes of the show. There's the SEPP 72-T rule. There's, I mean, there's ways that you can do it, but it adds this layer of complexity to everything. And so as far as that $4,000 a month that you're saving in terms of whether you should hold that in a tax-advantaged account versus a taxable brokerage account, I would, in terms of answering that question, the framework that I would use to answer it is what is the likelihood that you're going to want to access that money at some point within the next seven years in order to invest it in some other way? If you do think that you want to tap that money, it might be better to at least put some portion of that money into a taxable brokerage account and then put the rest into 401k IRA, if your HSA qualified.

I should also mention contributions to a Roth IRA. The principal contribution you can withdraw at any time. So that's a nice, happy medium between the two topics that I've just been talking about, the taxable brokerage versus the tax advantage account. But zooming out of that conversation and more broadly, your question was, what do you do with your savings? You're saving $4,000 a month. What do you do with this money? At a high level, that answer is, because you're debt-free, invest it in some combination of index funds, real estate, or business, depending on your risk tolerance and your enthusiasm for each of those asset classes. Thank you so much for that question. And again, congratulations on being debt-free and having this great savings rate. you're well on your way to FI. We'll come back to the show in just a second, but first,

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Get quotes and apply in minutes. You can do the whole thing on your phone right now. Policy Genius. the easy way to compare and buy life insurance. Our next question comes from Anonymous. Hi, Paula. This is Anonymous, Colin. Your show got me thinking and digging deeper into personal finance

and come on board a five journey with my partner. They're actually planning on taking the leap away from working in the next 18 to 24 months. While we may not actually retire, we definitely don't plan on working for the first. few years. Our dream is to travel and we're thinking of being outside the U.S. for six to nine months of the year, so leveraging geo-arbitrage to decrease our expenses and manage our sequence of return risk. However, I'm nervous about our healthcare options as I'm unsure if we've saved enough.

Our current dental, medical vision, as well as life and disability insurance, are taken out of our W-2 employer paychecks pre-tax. So my questions are, number one, what resources would you recommend to educate ourselves on our healthcare options? We definitely don't want fear to cause us to overseen when we are already planning for a buffer.

Number two, can we turn US healthcare on and off while we're traveling if you're gone for six to nine months of the year? Number three, should we bother getting life insurance or disability insurance post-employment, or just consider ourselves self-insured with our portfolio. Number four, should we keep timing in mind for when to quit? For example, should we wait till the end of the calendar year because plans like the ACA require estimating income and our premiums may be exorbitant if we quit in the second or third quarter of the year and need to include our W-2 income?

We definitely don't want to keep pushing out our date to go explore the world, but are willing to wait if it's a more savvy move. Appreciate your thoughts and keep up the great work. Thanks. Anonymous, that's fantastic. Congratulations on being able to step away from work within the next one and a half to two years and taking some sweet mini-retirement. It sounds amazing. So in terms of your questions, so question one was what resources would I recommend for education about health? health care options. Now, you mentioned that you're going to be outside of the U.S. for between six to nine months of the year. And in that circumstance, there's a thing called expat insurance

or expatriate insurance that could be a very good option for you. Expat insurance is offered by companies like IMG or Cigna, and basically they give you health insurance worldwide for a fraction of what you pay in the United States. As long as you are outside of the United States, each one has a specified minimum requirement, but a lot of them you have to be outside of the U.S. for at least six months, which you're planning on being anyway. In terms of resources that I would recommend to learn about it, I'm going to link to a handful of articles in the show notes. You can access the show notes at afford anything.com slash episode 219. That's afford anything.com slash episode 219. I'll link to a bunch of resources that you can

use for further reading. To the second part of your question, which was, can you turn U.S. health insurance on and off? So in the United States, there's a piece. called open enrollment that happens at the end of each calendar year, which is when a person can enroll in individual health insurance. Now, you can buy individual health insurance outside of the open enrollment period, which means basically throughout the rest of the calendar year, not just at the very end of it, if you have what is determined to be a qualifying event. So, for example, if you move to a different state, if you lose your job, those types of qualifying events allow people. people to enroll in individual health insurance plans mid-year instead of just during the open

enrollment period. The long and short of it is that U.S. health insurance isn't really designed to be turned on and off in monthly increments. It's not like a month-to-month contract or anything like that. However, there are expat insurance policies out there that also include U.S. coverage. So again, if you were to buy expat insurance, that includes U.S. coverage, then as long as you qualify for that expat insurance. So if you're gone from the U.S., we'll say nine months out of the year, then the policy that you have, depending on the policy you choose, would cover you for the three months of the year that you are inside the United States. So that brings us to your third question, which is we've talked about health insurance. Should you bother getting life insurance or

disability insurance? Those are, I mean, I don't want to tell you what to do because those are very personal choices. When it comes to life insurance, I'm a proponent of term life insurance, than whole life or universal life. And term life insurance policies, particularly if you're young, are generally fairly cheap. So I might consider taking out a term life policy if there are other people who are depending on you or depending on your income. I guess that's another way of saying if your death were to cause a financial hardship for somebody else. So the purpose of a life insurance policy. You know, it's not for you. It's for the people around you. It's the people who would be affected by your death. And if your death were to make somebody else's life financially very

difficult because they're depending on you for a portion of their income, or maybe you own a home together and both of you are contributing to the mortgage payments on that home, and so if you were to die and your state didn't have money to cover the mortgage, then that would create an undue hardship on whomever you own that home with. You know, in those types of circumstances, I think term life insurance can be a great option. But if there's nobody who's depending on you and or if you have an estate that's large enough to be able to cover that, if your estate can cover those costs, then life insurance just might not be necessary. So that's what I would say with regard to whether or not you need a term life plan. Disability insurance is a whole other topic. We could spend a whole episode

on that. But the short answer is that there's both short-term disability and long-term disability. Short-term disability for people who are buying individual plans is very, very, very expensive. And so that short-term disability would cover expenses, will say, anywhere up to the first two years of the time in which you have a disability that renders you unable to work. Those first two years, that short-term disability, that's extremely expensive to cover. Long-term disability, those policies are competitive. comparatively cheaper, but there's still quite a bit of money. I certainly see the value in taking out a policy, particularly if you want to guard against the financial ramifications of being in a situation where you are unable to perform activities of daily living, buttoning your shirt,

taking a shower. If you're in a situation for a prolonged period of years in which you can't do that. And you need home health care or a home health aid. I certainly see the value in having some type of insurance that can cover that. I don't want to go too far down the should you get disability insurance or not rabbit hole because it's a pretty complex and nuanced conversation. But I see the value in long-term disability insurance. I also see that it's very expensive to purchase as an individual. Those will be my two comments and I'll kind of leave it there, at least for this episode. What I will say is in terms of short-term disability,

so in terms of covering the costs that would be associated with being unable to work for a period of three months, six months, up to two years, if you can self-insure for that with your portfolio, that would certainly be the best-case solution or the best-case scenario. Now to your fourth question about keeping timing in mind around when to quit.

Yes, absolutely, I would. sense in terms of tax planning, and particularly if you think that you'll qualify for a health insurance subsidy, it makes sense to bias your income towards a particular calendar year and then start the new calendar year as of January 1st to knowing that you're not going to have much income that year because that way in that calendar year, your income will be low, which could qualify you for a health insurance subsidy. Again, I'm going to make the disclaimer here that when we talk about health insurance subsidies, we're talking about subsidies on plans that are sold on the individual exchange, so subsidies on ACA plans. I do not know how subsidies work with regard to

expat plans or expat insurance. So I actually, I don't know what that would, what the subsidy situation looks like if you're buying expat insurance. That would be something to look into. But to your broader question of should we keep timing in mind, yes, I would consider that overall tax planning, really. I would consider that overall a tax planning and by extension health insurance subsidy planning scenario. One thing that I do want to note, though, you mentioned that they ask you to estimate what you think your income will be. Fortunately, the way that the system is built is that if you estimate incorrectly, which many people do, sometimes it's hard to predict what you're is going to be. If you estimate incorrectly, then when you do go to file your taxes, you can make adjustments at that time. You don't have to have enough foresight to be accurate looking ahead at what you think your income is going to be because when you file your taxes and you have that benefit of hindsight about what your income actually was, that's when any subsidy-related adjustments will get made. Congratulations again, Anonymous, for putting yourself in a position where you

and your partner can quit your jobs and take this awesome mini retirement and go on a big adventure and travel the world. Have a great time. Enjoy the geographic arbitrage. Enjoy exploring the globe. That's amazing. And I hope for all the best for you because that just sounds incredible. Our next question comes from Amanda. Hi, Paula. This is Amanda from Nebraska. I found your podcast recently and have been listening to all of your old episodes. And I really appreciate the work that you do here and particularly your approach to thinking about many different aspects of work, life, and finances. Something you've talked about in episode 12 is really stuck with me, and I was hoping you could elaborate more on it. You talked about workflow and organization when hiring your personal assistant, and it sounded like you use specific tools and organizational

strategies to facilitate collaborative long-term projects and particularly have a clear vision of how this all aligns with your broader vision of your career slash business. I work in academia and the bulk of the work that we do is exactly these types of long-term and complex collaborative projects that require multiple people to pick up work on various aspects. I found with past supervisors, they don't often have clear pathways and visions of the tasks that need to be done and how it aligns with the long-term research for the project or the mission for the lab. And this often leads to people having to redo things multiple times because it isn't exactly what the supervisor is looking for, even though they didn't clearly communicate that.

And discord in the lab in general, because different people working on on the various projects are disjointed from one another, and it isn't clear how these different projects align with the broader mission of the group. It's super frustrating to work in this type of environment, as you can imagine, and I am now moving into one of these supervisory positions in my own career. I was hoping you could share more on your strategies than any tools specifically. You use to facilitate multiple people working on elements of your project and how you develop your long-term project visioning and professional alignment for thinking about your career and what this means for you in the long run.

Sorry if you've already answered this question. I'm only about two-thirds of the way through old episodes, but love everything I've been listening to. Thanks for everything. Amanda, thank you for finding the podcast. I'm glad you're enjoying it. I went back and I re-listen to episode 12 to listen to exactly what you're talking about.

And in that episode, I described how I've hired somebody in the company where, so this episode, episode 12 was recorded in 2016, I described in that episode how I have one Google Doc that had the entire vision for the year 2016. of everything that I wanted to accomplish within afford anything. And then inside of that Google Doc, I linked to various other Google Docs that kind of gave breakouts or more detailed answers or more detailed explanations and just basically everything was kind of interconnected in this web where I laid out a vision of what we were aiming for, how to get there, who works on what and how. Basically, the what the what I'm hearing you ask in your question is what I'm hearing you say is that you work. on long-term, complex, collaborative projects with a team.

And some of the problems that you've seen is that not everyone is aligned around the same vision. And so when people execute some type of work that isn't aligned with the ultimate vision of the project, then they have to go back and redo that work multiple times. So what I would recommend is start with the end in mind. Like when you get the team together and you're discussing a particular project, start with what the vision for that project is. Like ideally, what would be the ideal outcome or result? When I say outcome or result, I don't mean in terms of external accolades. So I don't mean, using a company analogy, I don't mean in terms of revenue.

I don't mean in terms of that because that's outside of your direct circle of influence or circle of control. I mean, in terms of the way that you work together as a team and the way that this all flows, what would be the ideal internal outcome or result? For example, when it comes to this podcast, my ideal internal outcome is that I spend my time doing research that helps me prepare for a guest interview. So for example, reading the book that the guest has written in order to prepare for the interview, like reading their book and brainstorming questions that I want to ask to that guest. My ideal outcome is that I spend my time in that research, deep thinking mode and then in front of the microphone. And so everything associated with podcast production that's not that, my goal is to have other people on my team handle those elements. And so when I start with that, when I start with that as the, this is the ideal vision, then I can get together with the team and we can work backwards to say, all right, how do we make that happen? What are all of the things that need to be done?

And how can we create systems, create a workflow, delegate responsibilities? Like how can we come together in such a way that Paula's role is research, interview prep plus being at the mic and then the team's role are all of the other millions of things that go into putting out a podcast. Right. And so it's starting with the vision and working backwards that leads to the pathways. So in your question, you said that past supervisors don't have clear pathways and visions. Vision first and good clearly defined vision leads to pathway. And those pathways get iterated over time, as they should. If the pathways are continually iterated, that means you're continually improving. But I think the most important thing is that

all of those iterations are pointing at that north star of the internal result that you want. Now, you asked about tools that we use. Honestly, I'm very simple. I run most of my business out of Google Drive and Dropbox. We've tried in the past. We've tried a bunch of other tools. We've try to Asana and Slack and WonderList and ToDoist and Evernote. And I actually still use, I use WonderList and Aduist and Evernote as places where I brain dump. But no matter how many tools we've tried in the past, I just keep going back to Google Drive and Dropbox. People often ask about tools. Although it is a good question, I think it's ancillary. Figure out the workflow first. Figure out what the vision is, how that breaks down, and who is responsible for what.

And then who communicates to whom about what and when. And once that's in place, then the specific tools that are used to facilitate that communication are, I mean, in my opinion, that's not what's going to make or break it. The tools are simply there to facilitate the process. But Joe Sal Siahy, who's often answers questions with me on these episodes, Joe, one of his favorite expressions is nobody goes to Michelangelo and looks. at the ceiling of the Sistine Chapel and says, man, what paintbrush did you use to paint that with? So in terms of the tools that you choose, you want something that reduces or eliminates friction, and that's good enough. Because as long as the friction is eliminated, then it's not the paintbrush that's going to create the masterpiece. It's the skill and the focus of the artist.

One final thing I'll say, and that's in terms of the structure of a team. You know, traditional business structure, traditionally, business is a run in a hierarchical sort of way where you have a few people at the top and then you've got a layer of managers underneath them and then another layer under that and another layer under that. And there's this hierarchy about who reports to whom. When you're working with a small team of up to five to seven people, people often like to use the analogy of a more flat structure. but I don't think that flat really explains it quite as well. I like to think of team structures in terms of a triangle or an octagon or a hexagon, right? It's not flat per se, but with a small team, then it doesn't need to be hierarchical either. And the more that you have cross-communication between everybody on the team, I mean, the more is that triangle or a couple of overlapping triangles, the more that you have a small group,

all working together rather than a handful of people who are all reporting to you. So as you are answering the question of who does what and who communicates with whom about what, when, keep those shapes in mind. Keep the triangle shape in mind. Thank you, Amanda, for asking that question. Our final question today comes from Steve. Hey, Paula. Love the show. My question is, if someone is starting a social media brand on different platforms, like YouTube or Instagram, should they combine different ideas into one channel to attract more followers or begin a new channel to target more specifically? My YouTube channel is starting to get some traction, but it focuses on myself and primarily music covers. I also occasionally have fitness and personal

finance videos since those are my other interests. Should I be separating these into new channels to make it less confusing or combine them into my own brand that is myself to attract more subscribers. Also, if you have any extra tips in general for turning a social media brand into a legitimate business like tax tips or anything that you learned along the way, that would be appreciated. Thanks again. Steve, congratulations on the success of your YouTube channel. Now, that's a really interesting question because niching into a particular topic is how you grow a channel. It's how you grow a following, right? People know that they can come to you for one specific thing, one specific topic.

And so finding a niche, choosing a niche, and then building a brand around that particular topical niche is how you stand out in a crowded field. That being said, forming separate channels. So if, for example, you were to have three separate channels, one for music covers, one for fitness and one for personal finance, that would, in my opinion, be spreading your energy far too thin because, as I'm sure you know, building a brand and building a following around one brand is a huge amount of work. So to split your attention between three different channels, I mean, you could do it if you took one of those channels seriously as

the business that you're building. And the other two were just essentially public journals or public diaries. They're little hobbies that you do just for fun, but you don't actually want to, you don't have any goals associated around it, right? You're not trying to grow a certain number of followers or grow a business around it or, you know, like if it's just a fun thing that you kind of do on the side while you have this one main channel, in that case, I would go for it. But I wouldn't try to essentially start three separate businesses at the same time. That's just spreading yourself too thin.

Now, one way that you could do it is that you could incorporate little bits of your interest in fitness and personal finance as a side dish or as an accent around your main channel of music covers. So the brand that you would develop would still be what you have right now. The brand that you would develop would still be those music covers. But then in terms of the occasional, like you sharing a little bit more about yourself, you know, you could have the occasional piece about fitness or about personal finance in a way that ties in or just in a way that kind of shares a little bit more of who you are. One very good example of this, there's a YouTube channel by a guy who lives right here in Las Vegas, where I live. His name is Andre.

I actually don't know how to pronounce his last name, but it's spelled J-I-K-H. I'm going to link to his channel in the show notes. I've met him a couple of times. Super nice guy. Lives here in Vegas, and he has, he's a magician, and he also has this huge interest in personal finance. his YouTube channel, he calls it the magic of finance, and the vast majority of his videos are about personal finance. So I'm looking at his YouTube channel right now and his most recent videos are there's one about picking stocks, there's one about real estate versus REITs, there's one about Roth IRAs, there's one about compounding interest to get to a million dollars, there's one about what to do if you're broke at 50, right? All of his recent videos are about personal finance. But in terms of his popular uploads, he has a handful of magic-related or card trick-related videos that he's put up there that are super popular. He's got one card trick video, cardistry video, that has 14 million views, right?

And this is on a personal finance channel. So essentially, he's built this YouTube following. He's built this YouTube brand where people know that they can go to this channel to learn about personal finance. That's what he does. But people who binge on his videos, people who get to know him also know that he's a magician who's really into cardistry and card tricks. It rounds out his character. It gives him some personality. And the occasional video that he puts up about it gets a bunch of views. But it doesn't interfere with the primary brand. So I would suggest, check out his YouTube channel and I would suggest taking an approach like that for your own. That way you're not splitting your attention between multiple channels. But you're also not. creating brand confusion around your primary topic. That's the main thing that you want to avoid. You want to round out your character without creating that brand confusion. And remember also, final thing that I'll say here is when you are thinking, and this is really for the benefit of anybody who's listening who has a similar question, when you're thinking about the niche that you specialize

in, think broadly. I mean, personal finance in the most narrow sense is money management, budgeting, investing, things of that nature. But if you think more broadly, like you think about financial independence as an umbrella topic, there are so many interests that fall under financial independence, everything from world travel to credit card rewards, to index fund investing, to real estate, to entrepreneurship, to career success, even time management, productivity, even emotional mastery insofar as it relates. I mean, There are a lot of topics that on the surface might not sound as though they fit under this narrow scope of personal finance, but almost anything can be related back to it. Emotional mastery and meditation and heck, even good sleep hygiene.

Those are all things that I've talked about in previous episodes of this podcast and all of that can be linked back to how those play a role in helping people reach financial independence. And so thinking about a topic as an umbrella. and then following your curiosity and exploring a lot of different topics in the context of how they apply to your primary topic, I mean, that's one way that you can have a very multifaceted, multidimensional channel that still is about a particular umbrella topic. On this show, we've interviewed Gretchen Rubin about the four tendencies and how they play into motivation. We've talked to Mark Manson about the concept of hope. Gretchen Rubin and Mark Manson aren't personal finance figures, but the lessons that they teach have applications. And so that's what I explore and that's what I share.

So thank you, Steve, for asking that question and congratulations on the success of your channel. That is our show for today. If you enjoyed today's episode, please do three things. Number one, and most importantly, share it with a friend or a family member. That's how we spread the message of financial independence. If there's somebody who you know who has a question that is similar to one of the ones that you heard on today's episode, send them a link to this episode. You can send that link at afford anything.com slash episode 219. That's also where you'll find the show notes and where you can subscribe for email updates that come out every Monday about our future episodes.

Again, that's afford anything.com slash episode 219. If you haven't done so yet, please leave us a rating and a review in whatever else. you're using to listen to this podcast. If you want to go directly to the Apple podcast page, if you're on a desktop, you can go there at afford anything.com slash iTunes. That'll take you to the page on Apple Podcasts where you can leave us a rating and a review. As of the time of this recording, we have 1,800 ratings. So please help us get to 2000 by the end of the year. As always, make sure that you hit subscribe or follow in whatever app you're using to listen to this show. Thanks to our sponsors, Rothies, Brooklyn, PolicyGenius, and News. For a complete list of all of our sponsors plus the discounts and the deals that they offer, head to afford anything.com slash sponsors. And as a reminder, we have a big new community platform that we are going to be rolling out. It's free. It's open to everybody. On Monday, October 21st, 2019, we will be officially launching it. So get ready because on October 21st, we're launching this amazing new community platform that gives you a lot of free.

and flexibility to be able to interact with other people in the Afford Anything community based around whatever you're interested in. So if you're interested in international travel or taking mini-retirements or starting a business or index fund investing, whatever it is that you're interested in, you can form groups around that and ask questions and share ideas and communicate with all of the people in this amazing community. So again, Monday, October 21st, it's free. It's open to everybody.

We will be officially launching on that date. So get ready. Thanks again for tuning in. My name is Paula Pant, and this is the Afford Anything podcast. Have a great week ahead, and I will catch you next week. By the way, my lawyer says that I need a disclaimer, so here we go. This is purely for entertainment purposes. Basically, imagine that this is the least funny comedy show that you've ever listened to.

We are not professionals. We barely can brush our teeth in the morning. And so we don't hold ourselves out to be experts, or really for that matter, adults. Give us the same amount of respect that you would give, say, a goldfish. And always, always consult with a real grown-up before you make any decisions. That means consult with a tax advisor, consult with a lawyer, consult with a financial planner, consult with people who actually have credentials and who know what they're talking about, because that is definitely not us. All right, you've been warned.