Afford Anything - Ask Paula - How to Convince a Spouse to Invest in Low-fee Index Funds?

Episode Date: January 15, 2018

#112: How can I convince my spouse to invest in low-fee index funds? How should my fiancé and I combine our finances? If I'd like to invest in rental properties, should I also buy stocks? Former financial planner Joe Saul-Sehy joins me to tackle these audience questions and more. Thomas asks: My wife is suspicious of Vanguard. She questions how they could stay in business while charging low fees -- isn't there a catch? She's also reluctant about investing the majority of our money in a broad-market index fund like VTSAX. She'd prefer more diversification. Recently, we met with a major brokerage firm that charges a 1.75 percent management fee. How can I get my wife to see the detrimental effects of choosing this high-fee broker? Shy asks: My fiancé and I are getting married soon. We both live with our families at the moment; we'll form a new household after our wedding. Neither of us has ever lived independently before. How should we budget for this, given that we're not sure what expenses to expect? Also, any tips on how to commingle finances? Paris asks: I'd like to invest in rental properties. Should I still make stock market investments? Should I contribute to a 401k? Kristin asks: I've been DIY'ing my household's finances and taxes. So far, our situation has been simple. However, in a few years, my husband is going to retire. When this happens, we'd like to sell our home, perhaps invest in rental properties, and move either out-of-state or out-of-country. Our financial and tax situation is about to become a lot more complicated. I'd like to talk to a financial professional ... but whom should I choose? Should I hire a financial coach? a financial planner? an accountant? an investment advisor? someone else? We tackle these four questions on today's show. Enjoy! ______ Resources Mentioned: Thomas: Calculator - How do expenses impact fund returns? https://www.calcxml.com/do/inv12 Article - How a 1% fee could cost $590,000 in retirement savings https://www.nerdwallet.com/blog/investing/millennial-retirement-fees-one-percent-half-million-savings-impact/ Article - The Impact of Investment Costs https://investor.vanguard.com/investing/how-to-invest/impact-of-costs Shy: Article - The Anti-Budget http://affordanything.com/2013/03/05/anti-budget-or-80-20-budge/ Article - Three Methods for Co-Mingling a Couple's Finances https://www.thebalance.com/three-methods-for-co-mingling-a-couple-s-finances-453849 Kristin: FINRA Broker Check website CFP.net Guidevine (website) XY Planning Network 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's true, not just of your money, but also your time, focus, energy, attention, anything in your life that's a scarce or limited resource. So the questions become twofold. Number one, what do you prioritize the most? What matters most? And number two, how do you align your day-to-day actions to reflect those priorities? Answering this is a lifetime practice, and that's what this podcast is here to explore.

My name's Paula Pant. I'm the host of the Afford Anything podcast. Every other week, I answer questions that come from you, the community. And today I've got my buddy Joe Saul Seahy joining me on the show. Hi, Joe. Paula! Hey. I can't believe you asked me back. That's always appreciated on my end because I enjoy hanging out and helping you answer listener letters. Oh, thank you. And Joe, you're a former financial advisor, right? Or recovering, is that the word? Right. For 16 years, right? And after 16 years, they have to drag you away. And I went to. through some rehab, but I'm okay now. Awesome. Well, I'm glad you're okay now. So we can jump in with today's show.

Our first question comes from Thomas. Hi, Paula. Thomas here. And I have some questions regarding asset allocation and advisors. My wife has been investing longer than I have and has her Roth IRA with Edward Jones. She's become unhappy with them and is looking at moving it somewhere else. In the meantime, I've discovered FI, J.L. Collins' stock series and Vanguard, the whole nine yards. Here's where it gets interesting. My wife, who is highly suspicious over how low

vanguard's expense ratios are and how they charge no fees, she says, I can't see how they can afford to pay their employees, is equally skeptical about keeping the majority of our assets in BTSAX or an equivalent fund. I've also been reading Paul Merriman's work about diversification and the historical premium for small cat value. I'm currently am investing. in Vanguard small cap ETF for my Roth, and in my works 403B, I intend to invest in VTSAX. Here's the issue. My wife and I went to visit Raymond James, and they charge a 1.75% management fee, along with investing in a mixture of index funds, the ETFs, and actively managed mutual funds. One mutual fund I saw was an American fund, with a 5.75% load and an over 1% expense ratio.

I cannot seem to get her to see how the fees swallow up returns and how we can even diversify to her content with indexes, even from places outside of Vanguard, if she has some hesitation, going all of them. What would you say to someone who really is drawn to an advisor? How can you limit expenses and yet still get the security from being able to bounce ideas off of someone? Thanks. All right, Thomas, first of all, a 1.75% management fee? Are you freaking kidding me? Okay. How do I explain why that's a bad idea? The simple thing that I would do, first of all, I'm sure there's got to be an online calculator. Well, I'm going to look for something and link to it in the show notes. There's got to be an online calculator that shows the detrimental effect of fees over a 20, 30, 40 year time horizon in a portfolio. If you wanted to artificially create something like that, just use an online calculator to look at compounding interest, use any of the compounding interest calculators, and then just deduct 1.75 or 2% from your expected returns if you want the quick and dirty hack from it.

So, you know, run two different compounding interest calculators online, one that assumes, say, 8% returns and the other that assumes 6% after fees. And boom, right there, I think your wife should be able to see that detrimental effect, that high fees. have on a portfolio over the long term? Well, and I think there's a bigger question here that she seems to have, which is that when she asks, with fees that low, how can they pay their people, she thinks that Vanguard might be spoken mirrors, which, I mean, to people that know the industry, know that that's not the case, but to somebody I can see how they would think, how can they charge lower than everybody else and still pay their people, is a valid question.

Until you look at the size of Vanguard. And so I think what I would do, and you can find this anywhere online, look at the biggest money management firms in the world, and you'll find Vanguard at the top. Look at the fastest growing, and you'll also find Vanguard at the top. And so, you know, it's an old joke that a lot of salespeople have is that they lose money on every deal, but they make it up on volume. Vanguard certainly is it losing money, but how do they charge so little? They make it up on volume, and they certainly have tons and tons and tons of volume.

They also do it through their cost structure, where other firms are for-profit cost structure. Vanguard has a little different cost structure that, sometimes if you read about this enough, it'll make your head explode. But Vanguard's cost structure also is different. And the type of offerings they have are different. So there's lots of reason. So I think part of that is education and just doing a Google search about how Vanguard operates differently. And I think you'll see the answers. It's also important to note that Vanguard is a co-op, meaning that it's member owned. There's no conflict of interest between a group of owners versus the customers or clients. Every client of Vanguard is a partial owner. So if you're

familiar with REI, the outdoor clothing store, it's the REI of brokerages. It's completely owned by the members. And so for that reason, the structure of Vanguard is such that they want to keep the majority of returns in the members' pockets because the members are the owners. Yeah, and that was specifically what I meant by the way the thing structured. There's no outside shareholders that they're trying to impress, it's internal. Exactly. And the other thing is Vanguard doesn't, they don't have a marketing budget that I'm aware of. And I know this because a lot of bloggers and podcasters have gone to Vanguard saying, hey, we love you.

We would love to have you as a sponsor for our show. We would love to have you as an advertiser. We'd love if you had an affiliate link. Like a lot of people have gone to Vanguard and said, we genuinely love you. We would love to promote you. How can we do it? And time and time again, what we've always heard is, Nope. Sorry. We don't spend money on marketing. It's word of mouth.

Well, when I was a financial advisor, you know, financial advisors used trading platforms, which include a bunch of different mutual fund companies, a bunch of different offerings. And usually there are enough that the advisor doesn't have to worry about, you know, finding other things. But one company that suspiciously absent from most of those is also Vanguard. Because Vanguard also doesn't, they say, listen, if we want to be the low-cost provider, we're not going to pay extra to be on Merrill Lynch's system or to be on, you know, UBS's system or somebody like that. So you can buy Vanguard funds through UBS and through Merrill Lynch, but you're going to pay the higher fee of them going out and getting it versus what you pay on their local platform. I do want to correct one fee thing that Thomas talked about Paula, and that was about the American fund.

and he talked about a 5% fee and then charging a 1%, the advisor charging 1%, in every case that I've seen, doesn't mean that it's every single case, but every case I've seen, if you're paying that 1% fee to an advisor, that 5% fee is waived. So while, you know, we can have a long discussion about fees and the advisor's 1% fee, we can have that discussion. But the advisor, in every case I know of, isn't charging both of those fees. So you want to make sure you get that right. Both the front load and the expense ratio, you mean?

Nope. There's an additional, on top of the expense ratio, the advisor charges what's called a rap fee, which is a 1% fee on the value of the account that they have, and that's how the advisor gets paid. They don't get paid often on what's inside of it. Some cases they do, but often they don't. They get paid a fee based on the value of the assets that they're helping the person manage. So if they buy an American fund inside of that, instead of charging you a 5% upfront fee, and then have the expense ratio, they'll charge you 1% ongoing fee, and you'll still have the

expense ratio. But all that said, if you're going to pay such exorbitant fees, you had better be getting some value for those fees. And historically, what we have seen is that there's no additional value that comes from paying incredible fees to these expensive brokers. So if your wife is uncomfortable with going entirely with Vanguard, I would suggest also spreading out to some of the other low-fee brokerages, such as Charles Schwab and Fidelity. Those three brokerages, Vanguard Schwab Fidelity, have a reputation for having the lowest fees on the market.

So you can kind of, if your wife is more comfortable spreading out money between a series of different brokerages, you could certainly go that route. And that would be more advantageous than paying a 1.75% management fee to somebody at Raymond James. Now, that being said, there's one other thing that you also mentioned that I want to touch on. You mentioned your wife is skeptical about putting the majority of your money into one single fund, which is VTSAX. I totally understand that I can completely sympathize with that. But that being said, there are many other very low-fee Vanguard fund funds that you could spread your money out among. So, for example, instead of putting everything in VTSAX, you could also have a Vanguard Total International Stock Fund. You could have, if you wanted to,

a Vanguard total bond fund or some sort of a bond allocation, you could have some portion of it in a broad market Vanguard emerging markets fund if you're so inclined to go in that direction. As you said, historically we have seen small cap value stocks over the long term, slightly outperform large cap funds, of course, with a lot more volatility along the way. But if you're comfortable with that volatility, then absolutely you could put your money in, you know, spread your money out instead of just putting it in VTSAX, you could put some of it into a Vanguard small cap value fund as well. So there's no reason. Yeah, I'm going to take a little harder line, Paula, because I think this is also an education issue as well, which is if this were a fund that were managed by someone,

I don't want all my money with one manager. But when we look at the nature of the Vanguard total stock market index, which is VTSAX, is the ticker symbol, what you see is that you don't have a manager. So you don't have that risk of a manager coming in on an upset stomach and making some bad trades, right? It's all based on an index and you own everything. I mean, you own the total stock market. And when you own that wide of a diversified thing and there's no manager involved, I think that risk that his spouse seems to be, and obviously we're getting it, we're getting his interpretation, but what seems to be her view of the risk, I think when she realize is that you're buying everything and you don't have a manager involved, I think that makes

you a lot more comfortable. This is not, you know, you can't compare this to a managed mutual fund like Fidelity Contra Fund. If you told me you're putting all your money in Fidelity Contra Fund, I go, are you crazy? What are you talking about? VTSAX, the Vanguard Total Stock Market, not the same bear. Right, absolutely. And I guess that plays into is her discomfort the fact that it is just one fund, or is her discomfort the lack of asset allocation? You know, so is the objection, geez, I'm not sure if we should put everything into U.S. stocks that skew large cap, which is a much more reasonable objection, than, oh, I'm not sure if I want to put everything into just one fund. Because, Joe, as you said, that just one fund doesn't have a manager, and it represents the entire U.S. broad market economy. We don't know this.

But in most cases, when I had clients that would have that type of an objection, it was because grandma told me, not to put all my eggs in one basket. And once you find out that this is not having all your eggs in one basket, it's a lot easier to swallow. Yeah, absolutely. I mean, I see it both ways. I don't think I, I love J.L. Collins, and I would have zero objection to a person going entirely into VTSAX. That being said, I personally also like to have a total international allocation and a small cap allocation. Yeah, I also, I totally agree with that. I would go even further. I like looking at now, here's the Joe nerd. I like looking at the efficient frontier and looking at where on the efficient frontier I should be in choosing an asset allocation based on efficiently how I would have gotten there in the past. That's what I would do.

But that's a whole different thing. Right. Right. And at the end of the day, I mean, we're talking about different stripes of the same zebra. Is that the expression? Yeah. You know, I don't want to make, what do they call? I don't want to make perfect the enemy a good, right?

Exactly. Thomas, the biggest win that you're going to have is going to come from. being in funds with a very low expense ratio. Because right now, if the alternate that you're considering is something with nearly a 2% management fee, reducing that down to the incredibly low fees that Vanguard or Schwab or Fidelity has, that's your 8020 right there. I'll go further than that. I will go even further than that, which is I will take somebody who keeps the high fee funds and realizes that all of that is the second dragon behind actually saving money. I will take somebody that uses high fee funds and knows that they need to save

lots of money well over somebody. I can't tell you, Paul, the number of professors I met, and by professors, I mean people that would tell me low fee, low fee, low fee, and then I would say, well, so how much money have you saved? Like, well, you know, I'm just, I'm kind of, well, yeah, once again, don't make perfect the enemy a good. I'd rather have high fee funds and be a saver, but certainly once you've got, and it sounds like they have the saving muscle down, then, you know, pay attention to your expenses. Yeah, yeah, absolutely. And Joe, I agree with you.

Contributions are the number one determinant of your eventual results. Amen. Awesome. So, Thomas, thank you for asking that question and good luck. We'll return to the show in just a moment. But first, freelancers and small business owners, I feel for you. Tax season is here. And there's a good chance that many of you are trying to dig your way out from underneath a pile of receipts and spreadsheets.

Do yourself a huge favor and stop digging. Before you completely disappear under that abyss of paperwork, go and check out FreshBooks' cloud accounting software. Not only is it going to save you a ton of time and stress, it might actually change the way you feel about dealing with your taxes. Need to send your accountant a quick summary of the amount of tax you've collected last year? How about pulling together a profit and loss summary? FreshBooks can generate these reports in seconds instead of the hours it would take you to do them manually. You can even set up FreshBooks to import expenses directly from your bank accounts, which means next time you use your debit card for that meal or that tank of gas or the new computer, boom, the purchase is recorded instantly in FreshBooks.

All this, and FreshBooks is ridiculously easy to use. It's made especially for people who don't like dealing with numbers and dealing with their taxes. Right now, FreshBooks is offering a 30-day unrestricted free trial to my listeners. To claim it, just go to freshbooks.com slash Paula. That's freshbooks.com slash p-a-u-l-a. And when they ask, how did you hear about us? Put in, afford anything. Again, that's freshbooks.com slash Paula.

And when they ask how you heard about them, mention afford anything. Our next question comes from shy. Hi, Paula. my fiance and I are getting married soon. We both live with family and will be living together on our own once we get married. How would you recommend going about creating a monthly budget, having never lived on our own before, and not knowing how much things cost? And how would you recommend that we handle joint finances as a couple? We both have no debt and make around the same amount annually.

Thank you. I love these questions. You know what always happened, Paula, when I was a financial planner? I would never, well, I won't say never because it does. did happen, but I was always surprised. People in her position would come and meet with me, and we would have these important discussions ahead of time. And do you know how many arguments she's avoiding by having this discussion now versus, you know, 10 years from now or five years from now, realizing that we have completely different philosophies about money, my new spouse and I?

It is, it is amazing. So I love that. So I think what I would say is that this is a process, like to her point, she does not know what things cost. It's their first time living alone. So it's going to be a process. And you've got to be okay with mixing it up. One of the biggest problems people have when it comes to their budget is that they think they have to be perfect. They have to use the perfect tools. They got to get the budget right. If you go in realizing you're going to mess it up, then it gives you permission to keep iterating and keep, you know, changing and changing and changing. I was talking to a mutual friend of ours, Paula, Liz, Mrs. Frugalwoods. And Mrs. Frugal Woods, I was telling her how great her new book looks.

And she said, well, you know what, I rewrote that like 18 times. And it's that rewriting of your budget, rewriting and rewriting and rewriting that allows you to get it right. Do not think you're going to get it right at first. So I would say that. And I would tell you that in my marriage, that the biggest thing we do has nothing to do is spreadsheets, with paper, with money knowledge. It's that we have a meeting once a week. It's 20 minutes long.

It's over wine. Sometimes we have it with dinner. So we try to make it fun. We keep it short. But it's a discussion of what bills do we have that week. Let's try to open up some of those. We look at the app together, see what came in. We see what's going out.

And then we talk about our big goals that are coming up and big money things that are happening in the next week or two. And because we just have that simple discussion once a week and we keep it light, we keep it fun, and we're on the same page, money fights. go, well, not even money fights, our goals seem to align most of the time when it comes to money, you know? It's not just about avoiding the fight. It's also about making sure that we're headed in the same direction. And, you know, I get fired up when Cheryl and I both were singing off the same song sheet. We're very excited about the same things that are coming up with our budget.

Nice. Shai, just to add to that a little bit, you asked about how to combine finances. So one thing that's really excellent for both of you is that you have no debt and you earn about the same amount, that makes this process much easier. There are a few different models for how to commingle finances. One model is that you could both go completely 100% in. So you could lose all sense of yours versus his and everybody's money goes into the same pot. And particularly in your instance, again, because neither of you have debt and you make the same amount, there probably wouldn't be any major problems with that. Some other models that you could consider, though, and some other models that are popular that other people use, one is a model in which each individual maintains

their individual accounts with their individual finances and then contributes also to a shared account and shared bills are paid out of that shared account, but each individual still has their own personal money as well. And particularly in cases where two people earn different amounts, you could contribute either an equal sum to the shared account or you could contribute proportionately from what you make into that shared account. Both of those models are popular and lots of households use both. So those are some of the different ways to do it. And there isn't like a right or wrong way.

A lot of it is just going to depend on what you're comfortable with. Do you want to have money that you know is just yours or do you want to just go all in and create a boundaryless us right away? financially speaking. Yeah. To the other part of your question, in terms of how to budget, one thing that I like to do is something that I call the anti-budget, which is to decide how much money you want to save, pull that off the top, and then live on the rest. Because I think a lot of the point of budgeting is making sure that you have, that you're setting aside enough to be able to meet your long-term goals. And so if that's the point, then why not cut to the chase and start with that?

And so what I often tell people is determine how much you want to save, whether that's a percentage or a raw dollar amount. And every time that you get paid or once a month or, you know, some regular interval of time, just pull that off the top, redirect that into a separate account, then whatever is left over is the money that you're working with. And when I say save, I'm referring to anything that improves your net worth. So that could be accelerating payments on a, I know you don't have any debt shy, but just for the sake of everybody else listening, It could be accelerating payments towards a principal payments towards a mortgage. It could be making retirement contributions or it could be literal cash savings in the bank.

I'm using save as a shorthand for any net worth improvement. Awesome. Cool. Finally, Shai, one other thing is that I know that you aren't sure of what your expenses will be in terms of the, in terms of irregular or discretionary spending. You don't know what those numbers will be, but fortunately you do know what your fixed bills are. So, for example, you know what your rent is going to be. You know what your cell phone payments are going to be. Any other regularly recurring bill that is always the same amount that you pay every month, you know what those numbers are.

So you can start your budget with that. And then in month one, you can make a reasonable guesstimate as to what those irregular numbers will be, such as groceries, gas, clothing. saving for trips and holidays, all of those other irregular numbers. Month one, you make a reasonable guess, and then every other month from there, you just iterate upon that guess. I know when Will and I started budgeting right now, we practiced the anti-budget now, but years ago, we used to have a line item to budget, and we would actually have, we had a spreadsheet and we had two columns. One column was what we estimated we would spend that month. And then the second column, which happened in hindsight, was what we actually spent that month. And so then we were were able to see the difference between what we thought we'd spend versus what we actually spent. And doing that over the course of a few months, there were some patterns that emerged. So that allowed us to make more realistic projections. That's all I could have. I almost did that.

Shai, thank you for asking that question. And good luck. We'll answer more questions in just a moment. But first, I want to chat about clothing. Now, if you're a long-time listener, you might know that my weight has been fluctuating for quite a bit. I lost 25 pounds, and then I gained back 12 of them. So over the course of the past year and a half to two years, I've been everywhere from a size 2 to a size 8. Most of my normal clothes don't fit me anymore.

I have jeans that are too tight, and I've got yoga pants that are too baggy. Shopping for new clothes is a hassle, and getting stuff only to have it not fit in a few months is a huge waste. It's a waste of time. It's a waste of money. it's a waste of everything. That's why I'm a really big fan of Littote. Litoat is a monthly subscription service that sends clothes to your doorstep. They will give you a personalized box of rental clothing and accessories. You have total control over what goes into your box and you can swap out items to fit your schedule and your style. They have a selection of workwear, things that you can

wear on the weekends, things you can wear on special occasions. So you can look good and have stuff that fits well, no matter what the occasion. And if you're expecting, by the way, they have maternity toads. Because you know what? Your size is going to be changing a lot over the course of nine months. Why bother buying maternity clothes that you're never going to wear again? So check them out by going to litote.com. That's L-E-T-O-T-O-T-E.com. And enter promo code Paula at checkout to get 50% off of your first month. Now, you can get a classic box, which has three garments and two accessories, starting for $59 a month. But by entering the promo code Paula at checkout, you will get 50% off of your first month. Once you sign up, you'll get a completely customized

tote within days. Wear what you want and return everything in the mail when you're done. Again, that's letot, L-E-O-T-O-T-E dot com. Intercode Paula, P-A-U-L-A at checkout to get 50% off your first month. I got a notification from one of my credit cards, letting me know that there had been fraudulent activity. And so they're shutting down that credit card, a whole bunch of stuff I have to deal with. You better believe I'm going to be watching my credit really closely. And I'm going to be doing that through this awesome website called Credit Sesame. Will and I are both members of Credit Sesame. We've had accounts with them for years. Credit Sesame is a website in which you can check your credit score for free. Plus get personalized

credit tips to better manage your credit. Totally free and updated money. monthly. They're creditcessamy.com and they do not require a credit card or a debit card for you to sign up. So you can check your credit score for free and you get personalized financial tips based on your specific situation. And you can use this to improve your financial health. With your membership, you also get free identity theft insurance worth up to $50,000, which could be a lifesaver in the wake of the Equifax data breach. Or a lifesaver if you like, you like, me find yourself in Ecuador and are trying to deal with some fraudulent activity on your card from out of the country. And if you ever need it, there's a live helpline where you can talk to

identity restoration specialists for free. So check them out. They're totally free and it's great to know your credit score and to get educational content. Creditcesami.com. Our next question comes from Paris. Paris Woods here. Have a quick question about investing for those of us who are interested in real estate. You have a great post about how to invest in stocks and bonds for those who are not interested in real estate. And I'm just curious, if we plan to purchase property, should we still be getting our employee match? Basically, what should we be doing with paper assets if we're interested in owning property? Thanks so much. Paris, that's a great question. So first of all, yes, absolutely get your employer match.

the employer match that you get for a retirement contribution is the best opportunity that anybody has in the world of investing. It's the only quote unquote guaranteed return. And so for the sake of people listening who aren't familiar with the employer match or who may not know what I'm talking about, in many cases, an employer will match contributions to a retirement account, such as a 401k or a 403B, up to a certain amount. So it might be that for every dollar that you contribute, your employer will match contributions to a retirement account, such as a 401K or a 403B up to a certain amount. So it might be that for every dollar that you contribute, your employer employer also chips in 50 cents or chips in another dollar up to a maximum limit. That is the best return that you can get because it's guaranteed. Free. Yeah, exactly. You put in a dollar and risk free, you know that you're going to be getting 50 cents because you put that dollar in. So there's absolutely nothing that can beat that. Once you get the employer match, however, at that point, it's really a personal preference thing. I don't see a strong argument one way or the other and terms of contributing more to a 401k or an IRA as compared with saving the down payment for a rental property. It very much just depends on what interests you more and what your goals are. The way that I

like to look at it is that an asset can gain value in one of two ways. There's capital gains or capital appreciation. And then there's also the dividend or income stream that that asset kicks off. In the case of a rental property, the capital gain or the appreciation on a property will be the lower of the two. The majority of the return that you could reasonably expect to make on a a buy-and-hold rental property would come from the income stream that it produces as represented by the cap rate of the property. So if you've got a property with, say, a 6% cap rate and the property also appreciates at the rate of inflation, which we'll say is 3%, then that property is providing a 9% total return. But that return is divided out 6% as its dividend and 3% as its capital

gain. In the case of an equity investment within your 401k or an IRA, you may still get a 9% total return over a long-term aggregate average, but that return will primarily come in the form of capital gains. There will be a little bit of a dividend stream or an income stream from that, but the bulk of the returns come from appreciation over time. Now, that's not to say that one is better or worse than the other. You know, they may both produce relatively similar-ish returns, they may both produce 9% returns, but the form of those returns will be different. And also, your ability to influence those returns will be different. If you put money into an index fund, you are beholden to whatever happens in the broad overall market. And that's for better,

for worse. I mean, the good part about that is that you have no responsibilities. You just put the money in a broad market index fund and then chill out because there's nothing that you can do about it. So there's a certain relief that comes from that. The fact that you are not responsible, responsible for improving those returns, at least not directly, but there's also sort of a certain, you know, hand binding that comes from that in that you can't do anything. Exactly. Whereas with a rental property, part of the major benefit that I see with rental properties is that it's a bit of a hybrid between running a business and having an investment in that you can directly influence the type of return that your property produces through the business.

the way that you renovate and manage that property. And that is also for better for worse. I mean, the good news is that you have that level of influence and control over this asset that you hold. The bad news is that that is a level of responsibility that you do not have when you just buy into an index fund. So again, which one of the two are you more interested in? And I think also part of the answer to this is going to be, which one of the two are you likely to save more money for? Where will your contributions? Which of the two will inspire you to have higher contributions? Because as Joe and I just talked about, contributions are the single biggest determinant of your success as an investor. So if you get so excited about investing in rental properties that you're going to be on fire for it and you're going to be saving the money for a down payment and you're like, you can't wait, then yeah, totally put your money there because it means that you'll probably end up saving an investment. a lot more, you'll have higher contributions. Yeah, over long periods of time, these two asset classes, and, you know, one rental property versus a national average is going to be, your experience is going to be different. But the stock market versus rental real estate end up in pretty close

to the same spot. So your 9% to 9% analogy that you use, Paula, really isn't that far off for longer periods of time. So I'm with you. Use the one that excites you because those are both going to get you the same way. I do like having them both. I mean, even regardless of the match, I like having them both because it's interesting when you look at their profiles of how they got there, like the standard deviation profiles, the swings in the market every year. A stock, of course, is going to swing much more violently than real estate will, but also stock is much more liquid. So if you need the money right now with real estate, you can't just sell off your bathroom when you need a little quick cash. And even if you apply for a loan, right, against that real estate, it's going to take you a little bit of time to get that money. So it's not instant where a stock, while it's not instant, it could be, you know, a day or two for you to get your money.

So I think that both of them together works better than one of the other. But certainly, to your point, lead with the one that excites you because that's going to drive everything. Absolutely. And I will say personally, I have, I've got lots of both. I love index funds. And I think that I've developed a bit of a reputation as the rental property. person and that yeah i know right and that has kind of overshadowed the fact that i love index funds as well so you know and that's a big part of my portfolio so do both yeah absolutely can i say something

else i think it's pretty cool yeah absolutely because you know when i was talking about funds going up and down in this whole risk reward thing this is kind of neat a neat offshoot of dr hurry markowitz research when it came to modern portfolio theory and this whole idea of efficiency with assets people think that to make your portfolio less volatile means, take what you were going to do. We talked earlier about the total U.S. stock market index. So the first thing an investor will do is they'll add bonds to it, you know. But you could actually add emerging markets to that, or you could add just international funds in general like you were referring to earlier or add precious metals.

But by adding these things that by themselves are more aggressive, but because they have a different risk profile, what a lot of these studies have shown is. that you actually, of your total portfolio bouncing around, the bottom line number, it bounces around less because these asset classes bounce at different times and they bounce in different ways. So you can actually make your portfolio run smoother by adding more aggressive stuff to your portfolio instead of doing the default, which most people do, which is adding less aggressive stuff. I always think that's pretty cool. Yeah, that is really interesting because at the end of the day, it's really all about

the correlation between different types of asset classes. Right, exactly, yes. Paris, thank you for asking that question. Our next question comes from Kristen. Hi, Paula. My name is Kristen. First of all, I want to say thank you so much for your no-budget budget idea. We've been using that the past couple months, and we've actually come in under budget,

which is like a miracle for our family. So thank you so much. It's working for us, and we don't know why, but it's an awesome idea. Second, I have a quick question. I have been DIYing my finances and my taxes for the past, well, always, because they've been really simple up to this point. But in a couple of years, my husband's going to be retiring early. We're going to be selling our home, possibly buying other real estate, and probably moving out of state or out of country. So there's going to be a lot going on. And we want to make sure all of our ducks are in a row and that we are set up

optimally for early retirement. The thing is we're not sure whether to hire a financial coach, a financial advisor, a tax planner, a CPA. There's so many different professionals, and I don't know really what the difference is between them and which one would be best for our situation. So if you have any ideas, I would love to hear them. Thank you.

So Paul, I'm not going to wait for you to call on me. You are the former financial advisor. Oh, boy. You know, each of these, Kristen, comes with a whole lot of baggage. And so, and a whole lot of explanation. So the first answer is, I don't know. I don't know what you do. I do know this. So I'm going to tell you my thought process and then you can take it from there. Because I think actually, that's what a good financial advisor is going to do. They're not going to tell you what to do, but they're going to tell you because they deal with money every day exactly how they think about something and you can glean from that what you will. As an example, a lot of times I look for

recommendations from reliable sources. I'll disagree with the recommendation, but because I saw their thought process, I knew if it fit me or not. And that's what I'm going to try to do here. So enough selling it. I'm going to tell you what I think, which is, first of all, I like the idea of having financial advisors. The people that were my wealthiest clients were all people that could have done it themselves, but they hired me specifically because I thought differently than them. So the first thing I think is you want to look for people who think differently than you. You want to look for people that are going to be on your team, but you don't want just somebody's going to pack you on the back and go, yep, great, fantastic. You want somebody who will disagree.

To that extent, a full-fledged financial advisor, it depends on where their emphasis is in their practice. A lot of financial advisors want to just really be investment managers. And if that's what they want, clearly that's not what you're looking for. You got a lot of important decisions in the planning side. So you really want to look for a financial advisor that's emphasizing planning, not asset management. By the way, just from where I sit, Paula, that's where the ball's headed anyway with financial advisors. Because as we see the commoditization of the investment management area, the only financial advisors, in my opinion, that are going to be around long terms are ones that are great at coaching people on what's noise and what's important out there. Because

there's so much information, right? A great financial advisor is like a good coach and is going to say, listen to this, don't pay attention to that. Here's what's important to you. Here's how the numbers stack up. Kind of do some of the legwork that you could do on your own, but it's probably best use of your time to hire somebody else to do that legwork for you. That's what a good financial advisor is going to do. So you're going to need to ask those specific questions along with some questions. Paul, last time you had an episode about questions, we talked about make sure you check broker check, which is a group called FINRA has that. And broker check shows you anybody that any complaints that advisor has had.

And then also make sure they use the word fiduciary when they talk about what they do. You want to make sure that you have in writing that they're a fiduciary, meaning they have to do what's in your best interest. Just a simple financial coach. Now, a lot of financial coaches are really concerned with budget aspects because a lot of people that will go to a financial coach, they do as an intermediate step before they get to. This isn't all financial coaches, but this is just the trend. So you want to make sure if you go to a financial coach that they're not just interested in budgeting and getting you ready for a financial advisory relationship. I know a lot of financial advisors that will have a financial coach.

They'll send people to kind of like if you know baseball, like that's putting people through the, farm system, right? The farm team before they can get to the major leagues and work with the full-fledged financial advisor, they'll do that. If it's a financial coach, once again, you want to make sure that they're worried mostly about planning. I personally, this could be my bias because I was a financial advisor. My job was to know a lot about the six areas of financial planning as defined by the college for financial planning. And one of those is tax management. Didn't mean that I was a CPA, but it knew that I knew when to bring in CPAs, I knew when to bring in tax advisors,

I knew when my client should have an estate planning attorney, we should get attorneys involved. My job was to stand next to my client, knew when to bring these other professionals. I can hear, by the way, a lot of tax people screaming at their device right now that I'm totally wrong. But if you're hiring a financial advisor,

my feeling is that would be first, because ultimately you're going to need somebody who kind of helps all these people dovetail. And the biggest problem I had, Paula, when I was a financial advisor, was when I was advising them and someone else was advising them. And the advice wasn't made to dovetail. It became what we commonly in the country would call a pissing contest. And we just don't want to start that. Joe, you mentioned that there are six areas of financial planning that you were required to learn as a financial advisor.

One of them, you said, was tax management. What were the other five? Right. And more broadly, they call that tax planning strategies, but financial position, which includes things like your net worth statement and your budget, how are those works on a day-to-day basis, risk management, which will include insurance, but I like the term risk management better because it doesn't necessarily have to include insurance. If you can handle a risk by self-insuring, you'll often want to do that. Investments, retirement planning, like when to take Social Security, how to work with pensions, how to set up with a lot of people called the three-legged stool. of retirement income strategies, how much money you're going to need, how to take that money out of different types of accounts, and then your estate plan on the end. So the six areas of financial planning, tax management, estate planning, investment planning, your financial position, risk management, and retirement planning. You got it.

Woohoo. Christian, I'm just going to add to what Joe said, it sounds to me, given how well you're doing, it sounds to me like you don't need a financial coach. Again, I'm basing this off of one minute of hearing you speak into a voicemail. Only you can decide that. But it sounds to me as though you're probably ready for the major leagues. You're probably ready to have a financial advisor rather than a coach because it sounds like you're going to need some more in-depth, strategic, meaty individual advice. So I would go to a financial advisor if I were you. And again, as Joe said, make sure that that person has a fiduciary duty to you. Those are the keywords. So, Joe, how can she find a good financial advisor? Sure. Well, the CFP has a fantastic website, CFP.net. But you said the CFP. Can you define what that is? Yeah, certified financial planner. So they've gone through all of the certification, the training that you have to have to get that important certification. The other thing I would add, though, is that that doesn't tell

you who the right person is. There's a couple other tools in places that I like. One is a place called Guidevine. Guidevine's a place where you can watch videos of different advisors and they will give you the pitch ahead of time. So you don't have to sit through somebody's pitch to know if they're the right one or the wrong one. That's in place of the more obvious thing. If I know that somebody's a certified financial planner, I also know that they're working in a fiduciary capacity. You know what? If I have a friend who is kind of doing something similar to me and they have a coach, They have a financial planner who's all of those things. I would gravitate there first because the thing that I think is a great driver of whether

your relationship with the advisor is going to be successful or not is do they work with people like me? And I'll tell you, as a former financial advisor, I worked with some types of people much better than others. A lot of advisors didn't work with engineers well at all. I loved working with engineers. I thought engineers were some of my favorite people to work with. So I like getting down into the guts of the issue.

So I would ask friends also. Some financial planning networks are really good. I really like the XY planning network. It doesn't mean that all XY planning advisors are good. But if you're part of that network, you have to be a fiduciary. You can't do any of the commission sales stuff going on. So you've got a couple hurdles that you passed already when you look into the XY planning people. I'll link to all of those in the show notes, which will be available at afford anything.com

slash episode 112. 112. So links to everything that Joe just mentioned will be in those show notes. Joe, for the sake of clarification, is there a difference between a financial planner

and a financial advisor? You know, it isn't... Not really. The answer is not really. I think that a lot of bigger firms use the term financial advisor because

they make most of their money on asset management. So they want to under-emphasize the plan. aspect of that. So financial planner, if it says financial planner in their title, they're probably more focused on the planning aspects versus a financial advisor doesn't want to deal as much with that nitty-gritty planning as taking care of your assets. It was funny because I was with one of the big firms and we started off calling ourselves financial planners and became financial advisors.

So as the firm made money, so my title went. So in terms of certifications or qualifications, there is no express difference between a financial planner and a financial advisor. No, really. It's just a branding positioning thing. Correctly. If it says CFP, that means that they crossed some hurdles that other advisors haven't crossed. It's very easy to call yourself a financial advisor or a financial planner. In fact, it's very difficult to become a certified financial planner. So when you find that CFP moniker behind somebody's name, you know that they've gone through some additional training. And final question, Joe, about this topic.

Would you recommend that Kristen seek out a CFP who is also a CPA, not to get into the Alphabet soup a little bit, but a financial planner who is also a certified public account and a tax professional? Maybe. Because, you know, why go to two different advisors when you go to just, can go to just one? Here's an issue that I have with that. And I'm going to have some advisors that are going to send hate mail for this one. But sometimes the one-stop shop is not the best alternative.

You can't be great at everything. And what I fear if I say that I recommend that is that you'll get somebody who's very great at tax planning, but they suffer in the other five areas. So I don't necessarily think that getting both of those in the same spot is a great idea. I also know that there are some firms that charge more because they offer both. And once they, you know, if they have you in one area, then they feel like they can overcharge in another area. So, you know, maybe, I know there's exceptions to that rule. Me personally, I keep them separate. I would have two separate people. I'd have a financial advisor first.

If that financial advisor then has a recommendation for a separate CPA, then, you know, I like the upside of having two different people that might sometimes fight it out a little bit. As I mentioned earlier, I don't want to have the, quote, pissing match. But I do want to have, there's nothing wrong with having a difference of opinion where my advisors, you know, similar to you and I when we give advice here, you know, I think people get better when they get two different qualified opinions. Awesome. Well, thank you, Joe. And thank you, Kristen, for asking that question. And congratulations on doing so well. I'm really happy for everything that's coming up for you guys in the next couple of years. That sounds very exciting. It does. Yeah. Well, those are our questions for today.

Thank you, Joe, for joining me on this episode. Well, thanks for inviting me. This is always so fun to hang out with you and answer people's questions. I love the questions that you get. They're awesome. Thank you. Joe, where can people find you if they'd like to know more? Well, you can find me three days a week sitting in my mom's basement, making the Stacking Benjamin show, which is a very light financial show. And it's every Monday, Wednesday, Friday.

And on Friday, I'm joined by this crazy person from Afford Anything, who's amazing, along with Len Penzo. And we tackle the headlines. We answer a couple listener questions there. And yeah, that's where I live. Stackybedjimins.com. Awesome. Thanks, Joe. Thanks.

Thank you to everyone who's listening to this show. My name is Paula Pan. This is the Afford Anything podcast. If you enjoyed today's show, please do two things. Number one, subscribe to the show if you're not already subscribed. And number two, share it with a friend. Again, my name's Paula Pan. You can find me on Instagram at Paula Pant.

Thank you so much for listening. I'll catch you next week. Thank you, Paris, for asking that question. Our next... Oh, I'm sorry. Got to fuck that up. Okay, sorry.