Afford Anything - Ask Paula: How to Handle a HUGE Bonus, Commission or Windfall

Episode Date: October 5, 2022

#405: Daniel and his wife want to go on an extended vacation and leave their jobs next year…and still have money in case there’s a problem at their rental properties. Would a HELOC help them? Anonymous and her husband have received a large commission and want to understand how to better plan for their future by optimizing for these inconsistent windfalls. Brian has hit coast F.I.R.E and would like guidance on how to prioritize between tax advantaged accounts and retirement accounts. Anonymous and his wife have been focused on getting short term rentals in a single location - is his portfolio too focused on this singular strategy?? Former financial planner Joe Saul-Sehy and I tackle these four questions in today’s episode. Enjoy! P.S. Got a question? Leave it here. Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention, any limited resource that you need to manage. And that opens up two questions. First, what matters most? Second, how do you align your decision-making around that which matters most?

Answering these two questions is a lifetime practice, and that's what this podcast is here to explore. My name is Paula Pant. I'm the host of the Afford Anything podcast. Every other episode, we answer questions that come from you, the community. And my buddy, former financial planner Joe Saul Seahy, joins me to answer these questions. What's up, Joe? Got the coffee and I'm ready to go, Paula.

I am so ready. Let's do this. We've got amazing questions, as always, amazing questions today. We're going to kick off with someone who just received a 750,000. thousand dollar windfall. They're trying to figure out what to do with it. They're thinking about moving into a $1.5 million house, but there are some questions around whether or not that would be a good idea, and if so, how much to put down. We're going to tackle that question first with a discussion about how to optimize for these types of inconsistent windfalls. After that, we're also

going to answer questions from Brian, who has hit Coastfire or Coastfy, and would like some guys on how to prioritize between different types of investment accounts. We're also going to hear from Daniel. He and his wife want to go on an extended vacation and leave their jobs next year, and they're wondering if they should open up a he lock in order to have access to more money just in case they need some additional cash reserves. And we'll hear from Anonymous, who has been focused on getting short-term rentals in a single location and is wondering.

if his portfolio is too focused on just one singular strategy. We're going to answer all of these questions right now, starting with anonymous. Joe, we give every anonymous caller a nickname. Oh, man. You know where this is going. Where's it going, Paula? I'm curious. What should we name this woman who's calling to ask about how to handle inconsistent income and a $750,000 windfall?

For New Afford Anything listeners, they may not know that I always. reach for the latest thing I've watched on TV or the latest movie that I saw. You know what I'm watching now, Paula? This series on Amazon Prime called Reacher. And I saw the Jack Reacher movie starring Tom Cruise and I thought that it was really good. However, I'd heard from a lot of people that while the movie was good, it was nothing like the real Jack Reacher from the Lee Child books. And so I was very curious to watch this. And they're right. The real Jack Reacher is this here. huge guy. Tom Cruise has a lot of things, but he's also very short. He's incredibly muscular, and he's kind of a jerk. He's lovable, not lovable. He's one of these charismatic people,

but you don't know why you like him. But while he's not always likable, there's a woman who plays a police officer in town who's amazing. She's played by Willa Fitzgerald. Her name is Roscoe Conklin in the show. And from the very, beginning. You absolutely love Rosco. She is smart. She's funny and just a great character that I really like. So I think we're going to go with Roscoe. That was a long journey to get to Roscoe. I just wanted to give people a little bit of the review of the show. The show, by the way, I'm only halfway done with the season. Really good. Can't stop watching. This is the Afford Anything Financial Podcast and Show Review Podcast.

You're welcome. All right. Well, then our first question comes from Roscoe. Hi, Paula. Longtime listener and student. You have given me an invaluable education in finance and real estate investing over the years. I am a devotee. Context for my question. Together, my husband and I earn great money from our base salaries, but he's in a sales role, so we typically budget around our base salaries alone without any of his commission. Sales tends to be feast or famine in his world, so we don't always know if or when extra money will commence. Last year, however, he received a windfall to the tune of $750,000 post-tax for one of his deals.

I should say we are diligent sabers, have fully funded 401ks, we have post-tax money invested, emergency funds, and have been right on track to retire a few years early and live a comfortable lifestyle. And we currently own a condo, our primary residence. He has received windfalls in the past as well, though never quite this size. All that said, we've started thinking about moving into a bigger home from our condo with our young child and possible future children. We are based in a large and expensive metro area. In the suburbs we're looking, houses are around $1.5 million and taxes are quite high. We can't really afford to live there on our monthly base income alone, given all of our other commitments. My husband also doesn't support putting down

more than 20 percent, as he believes, perhaps rightfully so, that the extra money has better served in the market, which I agree is true if you don't need the money in the short term. I also want to note that we've worked with an advisor and run the numbers, and we can still meet all of our future financial goals if we put up to $300,000 down. And that's without even selling our current home. So we are in a good financial position. We didn't run the numbers beyond 300,000, but there's a high likelihood we'd be able to put more down without sacrifice. What I need help with is understanding how these inconsistent but significant windfalls can be helping us in our home buying journey and frankly our goals in general, when the quote unquote smart thing to do is always to invest the funds in the market. I would love to better understand how our money can afford us flexibility and work to our advantage in buying a home we love in a town we love instead of reverting to relying on. our minimum-based salaries alone. I can't help but wonder how people pay all cash for primary residences or how there's tons of people out there who receive inconsistent income and they make it work for them. I'm certainly not suggesting putting so much down that we risk any of our other

goals or commitments. I just want to learn more about how we can intelligently and realistically make something work not only supported by our baseline income and frankly better understand our budget, which I realize is a personal question, but something I might be able to answer myself if I have a solid framework. Thank you, Paula, and Joe. Appreciate you both. Roscoe, thanks for the call. I love the fact that you have put together numbers that show that your goals are already being reached the way that you are planning currently. And this is important because I very strongly believe that if you begin with the end of mind, if you start with the goals and you work backward, how much do I need to save for those goals?

Not only will you save much closer to the right amount, but you'll also save into the right types of investments. You put together a plan that is less likely to fail you than trying to know everything about everything. The good news is, too, you can really focus in on those investment choices that meet your goal rather than trying to know everything about everything, which is very difficult. I feel like, Paul, most people, when they don't start with the end of mind, they are an inch deep and a mile wide when it comes to their investing.

And so they know a little bit about all these different things, but they don't know some of the critical stuff. But when you start with the end of mind and you know the smaller grouping of investments that meet that goal, you can really go deep and understand those investments so that when things go wrong and every investment has an Achilles heel, you actually know what the move is to make. And as an example, the last time I was here, we talked a lot about equities and about the market being down and people being very fearful when the market's down. And you and I replied that this is the time in equities when you should be taking advantage of the fact that the market's down. Because if you begin with the end of mind, you know that your goal is over 10 years away if you're in that type of investment. So this short term is an opportunity if it's 10 years away. If you need the money tomorrow, it's horrible, which is why you don't use those for goals tomorrow. So turning things around is great.

And I love the fact that you already know that your goals are being met. And that's why my recommendation is going to be different than what you've done in the past. Because I think that you can very safely put more money down onto real estate, full well-knowing, by the way, that over long periods of time, your husband is correct. But the cool thing is it doesn't matter. At this point, what matters is you can free up cash flow by having more money down on those properties. That gives you the ability to do maybe more today that you might want to do. The other thing is, our friend Wes Moss wrote a great book called What the Happiest Retirees know. I knew you were going to quote this.

I'm going to tell you exactly what you're about to say. Beat me to it, Paula. West Moss in What the Happiest Retirees know cites data that shows that the happiest retirees are debt-free, even though it does not make financial sense, even though they could make more money. As your husband says, that money would do better in the market. That is absolutely 100% true. And yet, the happiest retirees, meaning people who self-report the highest levels of happiness, have made the mathematically less optimal choice, but the psychologically better choice,

to pay off their homes, not have that worry and free up that cash flow. Bam! High five. Let's virtual high five. Woohoo. Zoom high five. Paul and I highfiving over the internet here. It doesn't have to be optimal.

That's the cool thing when you begin with the end of mind. It has to be optimal for you. And so if it gets rid of this freedom from worry, lets you relax a little bit because you don't have this payment hanging over your head every month. That can be awesome. Now, there's another move that we can make in your husband's direction, which is you can use this extra money to supersize your goals.

You can dream bigger. And I feel like sometimes when people feel like they're going to be okay, I often think that they're just not dreaming big enough. Like we think about ourselves and our security, and that is awesome. And for many people listening, it's going to be a chore to just get there. But if you get to the point where your goals are being fulfilled, there's a whole different level of happiness when you bring a community along with you, when you help the things that you care about. or you could even upsell it for yourself. You could take instead of one European vacation a year, you could take two trips and go around the world instead, right?

Go to all kinds of different places. There's an opportunity here to make your goals even bigger. And if you do that, if you decide that you do that, then I think I side more with your husband, which would be to invest this money toward those things. Once again, begin with the end of mind, invest these things in appropriate places for the timeframe to get whatever the new add-on goals are and go get those. But if you're happy with the goals the way they are and you want the freedom from worry,

pay off the debt. So I think, Paula, where I'm coming down with Roscoe is this, there's another conversation here that needs to happen. I mean, there's a great conversation about what's next. What do we truly want? So, Joe, what's interesting to me is what you essentially told her is if she's, you she wants to spend more money, she should also put down a lower down payment, which means take out more debt. Is that the advice that we're giving now? I don't think I said it that way.

I hope I didn't say it that way. That's what I heard. What I heard was you could decide to spend more money. And in order to do that, put down a smaller down payment, i.e. take out a bigger mortgage. Yes. On the Afford Anything podcast. Joe recommends taking out more debt so you can spend more on consumer discretionary purchases. You know, Dave Ramsey has that debt-free scream. We're going to have the debt full scream. I'm up to my eyeballs in debt. Well, people scream that.

All right. For the record, that is Joe's advice. This is not mine. I would like to set the record straight. And Paul's like, this is my podcast and not his. But this is good. This is exactly why people like listening to both of us because they get a variety of perspectives, and you're the person who is actually a former financial planner. You're the one with

the credentials and the alphabet soup after your name. But don't you think that there's another conversation here about what's important? Well, I think that the husband wants to do what is mathematically optimal. And the impression that I get, and she didn't, Roscoe didn't quite outright say this, but my impression is that she might want to put down a little bit more as a down payment, a higher down payment. Oh, second. Mm-hmm. And if that's the case, then it seems like a conflict between what is mathematically

optimal versus what is emotionally more comforting. The only way to solve that is to ask yourself the question of these goals that we're okay for are these truly the goals? Because when you've excess money, I think those are the two options, aren't they? Is there another option? either make the goals bigger and continue along the mathematically efficient route or become more comfortable and potentially happier living in the goals that you already have. It sounds to me as though their goals are already fairly clear.

She didn't talk about wanting to travel. She didn't talk about wanting an early retirement. She seemed to outline very clearly wanting to move to the suburb. and purchase a home that's valued at about 1.5 million and maintain the lifestyle that would accompany that. Then if that's the case, and that's all true, Roscoe, and you're already doing well, I would go suboptimal and put more money down. Yeah, that's exactly what I would do.

When I heard her question, the first thing that popped into my mind is I'd put the whole $750,000 down as a down payment, assuming she's a $750,000. She had an adequate emergency fund to cover whatever the new baseline of expenses would be, right? Assuming that, I would put the rest of the money, we'll just say all 750,000 minus emergency fund contribution. I'd put all of it down as a down payment. Even with a $750,000 down payment, we're still talking about a mortgage of the other $750,000. That is still a sizable mortgage payment. It's a big chunk of money to have to pay off.

And it makes sense to me that when we're talking about borrowing on a primary residence, which is debt that you're taking out that does not produce an income, so it is consumer debt. It's not debt that you're arbitraging in any way. In those types of situations, it makes sense to me that if you are going to choose to buy a very expensive home, that you would show up to the table with enough cash such that you wouldn't be in over your head with excessive debt on the type of purchase that isn't even income producing. It's just such a discretionary purchase. Most people don't think of a primary

residence as a discretionary purchase, but this is such a discretionary purchase that it seems to me that reducing the amount that you borrow on it makes sense. As I think about our discussion while you're talking, I thought of another issue that we hadn't pondered, which is things are okay based on their current rate of spending, their current budget, their current cash flow. And if they went to a bigger mortgage, that might also upset that apple cart. I don't know what that huge mortgage would do to their ability to live on his base salary only if they could still even do that. So there's also Paula something to be said for the cash flow piece, solving for cash flow instead of for optimization of the asset.

Because the true optimization is going to be able to live a life where you can continue to budget based on just-based salary and not the other money that comes infrequently. I love that idea, by the way. I think that's fantastic. So the question is, what would the payment be? What does this do to your monthly payment and your ability to absorb that? She asked another question, by the way, which is how do people with inconsistent income, how are they able to do some of these things that they do?

I can tell you a strategy we used Paula with people that had inconsistent income that got large buckets of money at certain times. If there was any predictability from year to year, maybe not from month to month, but from year to year, we would always have that go to a separate savings account, which is still considered in my client's head. It was considered a business account. It was not considered part of the budget, part of the reserve, part of anything. This is business money. and then we take a number that is a little lower than we get on a consistent basis every year. And once we get enough that we're far enough ahead that we can continue this, we then start a drip from that account into either the main account to supplement the budget

if they needed it or into investments. So we paid it out like it was a consistent paycheck instead of this. boom bust cycle. Because what happens with a lot of people, and I know Roscoe already knows this, with a lot of people, when they get paid commissions or they paid inconsistently, they will live on ramen noodles, ramen noodles, ramen noodles, ramen noodles, and then they get this big amount of money. Because you don't know when it's going to come again, you celebrate and you say the most dangerous three words, which are, I deserve it, right?

And you buy something that you truly can't afford that you think you deserve while the money's there because you're not sure what's going to happen again. And so you go buy a big screen TV and you wreck it. You wreck your budget. And then you go back to ramen and then you buy another thing that you don't need. You wreck it. And then you're continually in this horrible cycle of boom bust. And the way to get out of that is to make it an income stream that's consistent.

This consistency means your budget can be more consistent. It means your savings can be more consistent. You can dollar cost average wherever you want to. with a lot less worry. And by the way, once or twice a year, depending on how my client got paid, we would then do a smaller bonus out if we knew the money was going to be extra. And that money would then truly be celebratory money. It would be go buy the big screen TV or take the Disney World trip or whatever it might be. That would be an extra bonus because you did far better than you expected. So in other words, you put that money to the side and then mimicked the experience of

consistency. Exactly. Yes. Yes. And this is a big aha, Paula, which is you need to divorce the way you're being paid from the way that you pay yourself. Number one, just because a company pays you $120,000 does not mean you have to pay yourself $120,000. You can choose to live on $30,000 or $100,000. $150,000. Once you divorce your income stream from your employer from how you're going to live your life, I can do anything I want. And then that extends to things we've talked about before. A bank offers you a 15-year loan and a 30-year loan. Just because the bank's giving you those options does not mean you need to pay it off in 30 or 15. You can pay it off however the heck you want to. Your student loans, whatever it might be, you get to choose exactly how you pay it,

as long as you meet their minimums. So for some people, when interest rates are very close, they will take out a 30-year loan, but they'll pay it back in eight. You don't have to do what the institution is telling you. If the institution's telling you, we're going to pay you $120,000, I don't spend all that money. If the institution says, I'm giving you a 15-year loan,

don't pay it back in 15 years. And I love that. And it seems kind of basic, but when you work with as many families as I worked with, it is truly a huge aha. When you start living your life differently than a reflection of ringing out every dollar that you're being paid this year. Well, Roscoe, this was a great discussion. I hope that this gave you some insight into what your next steps should be and some discussion points to mull over in the coming weeks and months.

Thank you for calling in. and I hope that the whole community benefited from this discussion. I know that there are people who are listening who can't imagine numbers like this, but to everyone who's listening to this, regardless of your own numbers, I think the discussion that we had around how to handle inconsistent income, around how to handle unexpected money, regardless of the number of zeros that accompany it,

around how to balance what is mathematically optimal versus what is emotionally comforting around budgeting, saving, spending, debt, I think a lot of those discussion points apply to the whole community. So Roscoe, thank you for sparking this discussion. And best of luck with whatever you decide. We'll come back to this episode after this word from our sponsors. The holidays are right around the corner and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens.

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That's your commercial payments, a fifth, third better. Our next question comes from Brian. Hey, Paula, Joe. This is Brian. I've been a longtime listener of both of you now. I've been with Afford Anything since the very beginning. And Joe, I've been listening to Stack in Benjamins for going on nine years now. I'm really appreciative of all the years of wisdom and reinforcement I've received from both of you.

So my question involves tax advantage accounts versus taxable accounts. I've always been taught that tax advantage accounts are mathematically optimal, even if you have to withdraw before 59.5. But is it possible to have too much in your retirement accounts? I'm concerned that psychologically, I won't feel comfortable with drawing early from retirement accounts and end up working longer than I need to. I'm also concerned that the lack of flexibility might prevent me from making major moves, like if I ever got the itch to buy property or travel elaborately, to borrow one of Joe's favorite phrases,

I've reached Coastfire, and our family is starting to transition away from full-time work. Now that our income is falling, we can't afford to max our retirement accounts and still invest in our taxable accounts. How should I prioritize between them? Is it okay to give up the tax advantages for flexibility or are the tax advantages simply too good to pass up? Wait, Joe, one of your favorite terms, is your favorite term travel elaborately? Because I've never heard that. No. Those two words in combination with one another, to travel elaborately.

I do like that. I think my phrase is travel busially, but no, that's not it. He's talking about Coastfire, and I'm not a huge fan of all these fire terms. Coastfire is one of your favorite phrases? Or is he being sarcastic? Poking the bear. He's poking the bear. Got it. Yes. I feel like while in any group using the phraseology helps identify the group and I agree with that, Paula, I also think that if our goal, which is my goal is to help spread financial literacy, whenever you use these terms that newbies don't know, it can be exclusionary. And we start talking about Coast Fire, Fat Fire, Lean Fire, Dumpster Fire, like all these different. different things, it confuses people and it makes new people go, yeah, I don't think, you know,

I don't have time to go to meetings. I don't want to learn all the phrases. You know, it just makes it hard. Just like when you first hear about Roth IRA or 401K, like, what the hell's that? Right. So that's why Brian knows I'm not a fan of those phrases. But he's on Coastfire. Speaking of which, should we define Coastfire for people who are new to this community and who haven't heard of it yet. Maybe we should. That means that if Brian's not there yet when you just identify the assets he has today, but based on his goals, he can coast in. He no longer has to save because of the fact that historically the assets he has during the time frame that he has until he wants to completely stop, he doesn't have to save anymore. Exactly. Yes. He's contributed enough to his retirement

accounts that at this point he can just coast. He doesn't necessarily. have to put in another dime. And by the time he's ready to retire, he is likely to have enough, assuming that the market performs as it historically has. You know, for people listening, they may go, oh, it was so big deal. I mean, that's nice. He doesn't have to save anymore. Here's what it does. And I'm going to point to somebody, a mutual friend of ours, Paula, who is very open about his coastfire journey. And that's our good friend Andy Hill at Marriage Kids of Money. Andy was able to stop working a high-paying job that he no longer liked because he was Coastfire and he could earn significantly less money doing something he loves working on videos and audio and all the fun stuff

he makes over at Marriage Kids and Money that pays him a lot less. But it serves his heart so much better doing that because of the fact that he did a great job saving early. So CoastFi allowed Andy to change his lifestyle. which was super exciting. Right, exactly. And because of that, he now works from home. He spends a lot more time with his wife and kids.

So there have been a lot of benefits, not just for his work satisfaction, but also his family life, his involvement in his community. I know you and he, back when you lived in Michigan, Joe, you and he used to live in the same neighborhood and hang out all the time. And he was very involved in his community. It still is. Yeah. I miss him very much. I miss drunk game nights with Andy. And that's what you can do with Coast Fire, kids.

Yes. Drunk board game nights. Yes. When you talk about community involvement, maybe not the definition. Brian has reached Coastfire. Congrats, Brian, for reaching that. It looks like Brian with Coastfire is also kind of traveling along the same path as Andy. He says that his family is starting to transition away from full-time work.

but with that comes the question, now that there's less money to invest, should he prioritize tax-advantaged accounts or taxable accounts, which is essentially a question that asks, should I prioritize tax optimization or flexibility? I love how purely accidentally our questions often group themselves together into themes. And I think it's purely accidental. Like you're just taking them as they come in, right, Paula? Right. Exactly. Yeah. This is a theme that we talked about with Roscoe earlier that solving for most efficient

is not always the best strategy. And Brian, you are spot on when you say that yes, even if you take the money early, if you know how to use the loopholes, putting money into tax advantage accounts, is going to give you less friction when it comes to taxation. However, I've seen so many people do exactly what you're talking about, Brian. They work too long. They work longer than they should because they're worried about how they're going to take the money out. They don't take advantage of opportunities because they're worried that their money is in a tax shelter and now it won't be.

They have to spend the money in the tax shelter. We get so hyper obsessed with being efficient that we forget to live. And really, if we think about this more as a fuel for our goals, we're going to solve more often. for flexibility than we will for optimization. Because you're right. Finding a down payment on a house, sure, you can use money inside your IRA to buy a rental property as an example, but trying to attach a mortgage to that and trying to follow all of the rules about how you can't touch it. You can't go there. You can't do all the things. Like people accidentally break those rules all the time and then it wrecks your IRA. Right. So using this tax advantage money to do some of the things, Brian,

like you're talking, you can't do it. And so that's the whole reason for flexible money that's in non-qualified accounts has nothing to do with efficiency as much as it has to do with the fact that as humans, goals change. Things change. And when things change, we want to be able to move the ship. And I've seen way too many people on their retirement journey that have maximized the hell out of everything and then life throws them a curveball and their money can't follow along. And now they have to use all these rules like 72T, the SCPP rule, which you're right, still can get your money out efficiently, but it's a big fat pain in the ass to follow that rule. As a guy who's followed it with many clients, it is a pain in the ass to do that,

where if we had just added a little flexibility ahead of time, it would have solved a lot of that. So love the question, Brian, and you are spot on, brother. is while we need to pay attention to tax efficiency, we also need to pay attention to having money in places where we can get at it when we need it. I agree, particularly in Brian's case, ditto is basically my answer. Me too. Yeah, I mean, particularly in Brian's case, he has enough money in his tax advantage retirement accounts that the bucket that he needs for age 59 and a half and over is taken care of. So what he needs to solve for right now

is the bucket of money that he's going to potentially tap prior to the age of 59.5 and a half. And if bucket number one, the 59.5 bucket is done, taken care of, case closed, the optimal place for money that he's going to tap prior to 59.5

is a taxable brokerage account. That doesn't mean put not nothing into a tax-advantaged account, but it does mean bias more of what you're investing into the type of account that provides that flexibility and fills the bucket that you need to fill. Can I give you an example, Paula, of the ultimate tax trap, in my opinion. There is an investment type that you will hear advisors use quite a bit. especially ones that get commissions.

It is not the devil that people think it is. I think it can be a fine vehicle. However, it can be a huge tax trap, and it's called an annuity. And annuities have a taxation called LIFO, last in, first out. But if you hear the term LIFO or FIFO, FIFO is the first money that comes in

is the first money out. As an example with a Roth IRA, as long as you follow, some fairly easy rules, Roth IRAs can be FIFO, meaning I can take out all my principal and spend it pre-59.5. No penalty and just leave the interest inside of the Roth IRA. Pretty cool. It's flexible. I can still put money in if I end up needing it later. I can get it that money, assuming I followed a couple just fairly simple rules. But in annuities, the opposite, it's LIFO, which means that the interest that that annuity earns are going to be taxed first.

You're going to pull the earnings out before you pull your principal out, which means the early dollars you pull out of annuities, you get socked with taxes. So in a financial plan, when you're in retirement, you're looking at, okay, what are the places I can draw from? I got this Roth IRA. That's all going to come out tax free in retirement. That's pretty cool. I've got my pre-tax money.

and I have these annuities. Well, the pre-tax, well, I have to take out over a certain amount of time. So I should probably take money out of there to lessen the burden later on in retirement, make sure I don't fall into some fairly onerous IRS problems. And then I have this annuity. And the cool thing is I can leave the money in there forever. And if I take it out, it really screws up my taxes this year. So you know what I'm going to do this year?

I'm going to leave the money in the annuity. So studies show that people, People that use annuities often do exactly what Brian says. They leave the money in there too long because of the fact that you don't want to take it out because you're going to get slammed with taxes on every dollar that you made on it before you can get it the money that's not going to be taxed. It's a frustrating thing in financial planning. When you're working with somebody in retirement, they've done a great job of saving

some money into this annuity and you're deciding every year not to take it out. And not because they don't want to take the Alaskan vacation, but because it's going to be a pain in the ass. That sucks. It's just, it's a huge trap and it's annoying. So, Brian, it sounds like we're both in agreement. Prioritize flexibility. Yeah. And by the way, thanks for hanging out with us for so long. Nine years, Paula, that is almost the whole time you've been on stacking Benjamins, I think. Almost. Yeah. It's weird that it's that long. It's just weird.

It's crazy to me that we have, we've been podcasting together for a decade. That's, wow. Stacking Benjamin's is about to do episode 1,300. Wow. Yeah. Wow. How you manage a production schedule of three days a week just blows my mind. It's pretty fun.

It's pretty fun. But not as fun as Anonymous 2's question. Ooh, look at that transition. Hey, you're not the only one. that can do a transition. Well, again, we give every anonymous caller a nickname. Do you have a second one planned? Well, I said Roscoe earlier, and I think, let's go back to the same show, Reacher,

because it is super good. I got to tell you, the other thing about Reacher is when I first saw him, this guy is drop dead, gorgeous, Paula. Like, just, I mean, he's got to be six, four, and just looks like he grew up. in a gym and just lived in a gym, just completely ripped. And I don't know, I'm a happily married man, but he is gorgeous. He's, he's amazing. He's a badass. He's very much a badass. And while he's, there's this salt and pepper thing going on, I think there's also this magnetism that makes you just really pull for him. Plus, his intentions always seem to be in the right

place. So we call him Reacher. Let's call him Reacher. All righty. Well, then our next question today comes from Reacher. Hey, Paula, hey Joe. This is Anonymous from Columbus, Ohio. I have a question about real estate and portfolio diversification, and I think you're the best two people to provide some needed clarity. A little background on our current position, my wife and I are in our early 40s. We're both federal employees, each making around $150,000 in salary per year. Our retirement savings amount to about $6,000. $130,000 when you combine our thrift savings plans, traditional IRAs, and Roth IRA investments. We are maxing out each of these every year and don't have any debt other than mortgage debt. In early 2021, we purchased a short-term rental property in a mature tourist market centered around Hocking Hill State Park, which is an hour southeast of Columbus, and is one of the top tourist attractions in Ohio, with millions of visitors each year. The number of tourists has also been consistently increasing year over year, long before.

before the pandemic, and that trend seems to be continuing. We have since purchased a second cabin in the area and are in the process of purchasing a third. We have been lucky to get all three off market. Between buying at a discount, our down payments, and price appreciation in the area, we will have approximately $850,000 in equity, with properties currently valued a bid over $2 million. My main question is whether this is too much concentration for our portfolio, being in one market. We have systems and good relationships with contractors. including our cleaners, making self-management doable.

Our plan at the moment is to use the cash flow to pay off our primary residence in two years. From there, we might debt snowball, somewhere all of the cabins, which would allow the cabins to cover all of our living expenses. Or we could use the cash flow to purchase long-term rentals in Columbus, invest in syndications, or something else. But before we get there, I'm wondering if we are simply too concentrated, leaning too hard into a single strategy, short-term rentals, and into a single market.

Warren Buffett advocates for concentration and stock investing when there's professionalism and confidence. Why not with real estate? Thanks in advance for your thoughtful response. Reacher, thank you for the question and congratulations on what you've built. You have a very successful real estate investment strategy, short-term rentals near Hawking Hill State Park, that are purchased at a discount off-market

They're appreciating beautifully. You've got a great team in place. I mean, wow, what a success story. And I can answer your question very quickly and directly. I do not think that you are too concentrated at all. You are in the process of buying your third property. If you had said that you were in the process of buying your 15th or your 20th, sure, at that point, I might say, you've got enough here. it might be time to go to a different market, but three properties, I'm not worried about that at all. Paula, you're from Ohio. Are you familiar with Hocking Hills? I am. Yes, I'm from Cincinnati. And I have not been to Hocking Hill State Park, but I have heard of it. My sister goes almost every year. Tina, who is in Michigan and works on our stacking Benjamin's team. She goes nearly every year. I went just for part of a day one time. This is a, it's a beautiful area. It's amazing. And while I'm sure everybody around Hocking Hills is like, please be quiet.

We just want to keep this beauty. I totally agree with Reacher. I'm sure that the number of people going there is expanding as word gets out about this area. Can I put a framework on what I think we're talking about here, Paula? Absolutely. There's two different ways to think about money. The first way is the way that certified financial planners will talk to you about money. And it's a great way to talk about money because of the fact that it will make sure that you don't lose.

Diversification is wonderful to protect your downside. It's absolutely fantastic. The more you diversify, the more you protect against loss and against not reaching your goals. I believe CFPs tell you that for a couple reasons. First one is they're exactly right. The second one is if you under diversify and it goes poorly, you will fire the them. So they are adverse to being fired like we all are in our jobs. So CFPs will often tell you do not under diversify. However, when you look at people that have gained large amounts of

wealth in a short time, they didn't do it through diversification. They did it through trimming their diversification and having more focus. So the key is, you need to hear this strongly because you'll hear the downside. If you want to get rich quicker, under diversification, and don't be wrong. If you under diversify and you're wrong, it's going to blow up. So every strategy, by the way, has an Achilles heel. And people often want a strategy that has none. There is no such thing.

So the key is if you're going to under diversify to know what your Achilles heel is. So Achilles heels around real estate and real estate in one place are is real estate can be an illiquid investment. So you have to ask yourself, what's my liquidity strategy going to be? what am I going to do if all of a sudden I have a cash crunch? You need to run some scenarios to have a way to get through a potential cash crunch in the future. The second thing is that when you're in a certain area, what if that trend of people going to Hocking Hills reverses? What are you going to do then? What if they're, they all of a sudden there's a gas spill or, you know, they find some environmental hazard or something happens where just, uh, uh, uh, the

season changes and people decide that this is not in vogue anymore. You'll see that over time, but what are the metrics that you're going to use to see that this isn't working, right? Because I think a lot of people, when it comes to their investing strategy, it hasn't worked for a long time and they stick with it, hoping that this trend will not continue when, you know, there's a rule in investing for a reason, in momentum investing especially, which is don't fight the trend. do not fight trends. If you're hoping that the trend is going to reverse and you're going to take advantage of it, you're probably going to lose that.

Try to bet with the trend if you're able to. So think about those things. And then the fact that you are in a concentrated area, there are some upsides. The upside is you have this team and now the team can service this one little area versus trying to find different teams all over the place, which you'd have to do if you were diversified, which means then you'd have to probably hire a second layer of people to help you with this strategy, which is difficult and also going to take money out of your pocket. You're going to know when the trend reverses because of the fact that you're only in that one area.

So knowing the area and knowing it really well, I think can also have some huge upsides. But again, knowing your Achilles heel also means you have to know why your strategy is winning, which means whatever data you can pull on a fairly consistent base, that shows you that this trend is continuing, I think is going to be important to track. Don't just assume that it's going to continue. I think maybe to check in once a year on this data and make sure that your concentrated position isn't at risk would be a great move to put in your calendar. Exactly.

It's like Warren Buffett says, put all your eggs in one basket and watch that basket. So, Reacher, I think you've got a fantastic opportunity in front of you. I know you stated in your question that you don't seem to be planning to buy any more properties beyond this third one. It sounds as though you want to stop at three and then start paying off your primary residence and the properties that you hold. But if you wanted to expand to four, five, six, I still don't think you would be too concentrated. Once you start getting close to the double digits, that's when I might start considering other areas, such as long-term rentals in Columbus. but five or six in a specific place, I don't think that there's undue concentration risk. And to the contrary, as Joe said, I think there's a lot of opportunity to take advantage of the fact that

you have a team, you have systems, you have specific local knowledge, you have expertise in this very concentrated geographic area. And it is that expertise combined with the team and the systems that could allow you to really succeed very quickly here. So thank you, Reacher, for asking that question. We'll return to the show in just a moment. Our next question comes from Daniel. Hello, Paula and Joe. My name is Daniel, and despite having a couple of SBTs, this is my first time calling in to afford anything. To echo what many have said before, I love how this community has entertained and informed us in many aspects. I'm hoping you can educate me on this topic, unlike that other show where we learn nothing.

My wife and I are planning a five-month vacation next year, followed by a reduction in income, by leaving our corporate jobs and working on more meaningful things. We currently have about $43,000 in cash, a million dollars in pre-tax accounts, $140,000 in brokerage accounts, $57,000 in Ross, $43,000 in HSAs, and a laughable crypto amount not even worth mentioning. Our credit rating hovers around 820 to 825 for each of us. We became accidental landlords when we kept buying primary residence and have since moved out of. Being child-free renters ourselves, we have no primary residence and rent out our two condos. Our one-bedroom, one-bath condo, has an outstanding mortgage of $100,000 on $180,000 loan. Our two-bedroom, two-bath condo is

$250,000 on a $3701,000 loan. Our question survives, helocs on these secondary investment properties. $20,000 of our cash reserved is earmarked for these residents in case anything happens. But would a helic be a better option to open and not take out to help if the feces hits the rotary blade machine? How do you even go about getting a helic? Is it even possible to obtain a helock on investment properties? Would it be a better idea to take 10,000 of the 20,000 cash reserve and put it in an eye bond or something if and when, we open to He-Lock, our main worry would be not having enough cash to cover big expenses regarding our rentals when we are not working next year. We also plan on accumulating an additional

$50,000 in cash over the next year to fund our vacation and next life. I know you don't give out any AA swag, but I remember you given auditions for a voiceover and wanting to give Hampton a run for his money. I mean, I met Joe, we get along better. Also, do I can do in Spanish if you want, Adelante with Afford Anything Latino. Thanks again. This is Daniel. Daniel, that was awesome. I think Paula,

I think we have to define for the Afford Anything community that an SBT is not a sexually transmitted disease. That he's talking about a stacking Benjamin's t-shirt. Just to be clear what he says that he's gotten SBTs for me.

An SBT. It's like, wow, I've never gotten one of those. You know, my favorite line in what Daniel just said was when the feces hits the rotary blade machine. Just, oh, Lord. Wow. Far more imagery than I needed. Oh, far. Not imagery enough.

No, I have a perfect visual of that. It's pretty great. But based on his clearly, clearly fluent. narration style in Spanish, you could have both him and Hampton. You could have the English version and the Latino version of the afford anything show from the announcer point of view. How cool would that be? Like we could translate this show into Spanish? Right. Right. I've often thought about I'm like, if I did an offshoot, would I do like stacking pesos or, you know, what's the, what's the $100 equivalent in pesos.

I don't know. I don't know. But it's an adventure. Same thing for you. Now you got Daniel, who you could employ here in the afford anything headquarters. Like, just think of the possibilities with Daniel on board.

Plus, if the feces hits the fan. If the feces hits the rotary blade machine. Do we, do we want to talk about he, locks, Paula? Want to? It's a strong,

strong term. Want to. He locks, you can get on rental properties, but a lot of banks don't do them, so you're going to have to search. You are going to have to do

a little more digging, and because of the fact that homeowners are thought to take better care of their primary residence than they do a rental property, the interest rate might be higher on a HELOC on a rental property than a HELOC would be on your primary residence. The third thing is, while I like the idea, I like the idea of taking out a HELOC and not

spending it, you also do need to realize that HELOCs often come with an annual fee just to keep it open. So the fee has to be justifiable. You have to weigh that annual fee with taking it out in the first place. sometimes they have fees, sometimes they don't. Just got to ask that question, though. What's my fee every year? That said, a lot of real estate investors use Helox as a supplemental cash reserve or a supplemental emergency fund. I've never been a fan of that type of thinking, but I'm also not opposed to taking that action in cases when it's needed. So I'm not opposed to the action itself, but I don't want to encourage a mentality in which people begin to think I don't need cash reserves because I can use a HELOC instead. Yeah, I don't think it's in either or equation, Paul.

I'm totally with you. I think it's an and keep the cash reserve in place and then have this like the top of the ice cream cone on your reserve. But I do think that said that if he has a reserve that he thinks will get him through the average thing, You know, there's general rule of thumb financial planners used. Take the biggest check you can imagine writing, double it, and make sure that that is in liquid cash. And then often what an advisor will do will be to ladder some CDs or do something, put it in a high, high yield savings account, something that bumps up the interest rate. The problem with the eye bond is that it's got to stay there for a year, right? So I can go either way.

But generally in your emergency fund, I feel like you're flirting with danger there. I would much rather take part of your long-term portfolio and lock in a guaranteed nearly 10% on that money than doing it with emergency money. But Daniel, honestly, looking at the amount of money that you have in cash, you know, a HELOC is an option, but I'm not sure it's necessary. you will be saving up enough cash to be able to cover your expenses during your five-month vacation. So you'll have that bucket of cash to cover your living expenses over a five-month time span. And then on top of that, you've also got $43,000. So it seems as though you're in a good cash position. And I can see how a HELOC might give you additional peace of mind,

but your cash position seems strong enough at this point, assuming that you have a separate bucket, of money that floats that five-month vacation, the five-month sabbatical, you've got enough cash that I think a helock might just create unnecessary complication. That being said, if it provides peace of mind, I'm not opposed to it. I just don't know if you really need it. But we still haven't answered the biggest question, Paula, which is him becoming your new announcer dude. Well, we've used Hampton, the guy from the Hampton Inn. We've used his services on one episode of Invest Anywhere. We actually, come to think of it, have not chatted with him or heard from him on Invest

Anywhere in a little while. So, I don't know if we need two announcer dudes, given that we are rarely using the first one. but if he's gone, then maybe there's a huge opportunity, Daniel. Oh, no, it's not that he's gone. I think we've just forgotten to write him into the script. Oh. Daniel, I got your back here. I'll make sure that we work on this.

I'll secure yourself a job and take my agents cut. Actually, I haven't thought about that in a while. Yeah, we have just forgotten to write him into the script. I need to make a note of that. Too many details to juggle. Too much stuff going on. Yeah. Always the case.

So thank you, Daniel, for your very entertaining question. And have fun on this five-month sabbatical that you're taking. That sounds awesome. Joe, we did it again. We did it. And such good questions. And I love the theme of today's episode, which is flexibility. And sometimes that optimal way is not the best choice.

in three of the four questions, we talked about how kind of a rule of thumb, optimal way to think about things, we told somebody to do possibly the opposite, put more money on the down payment, where it might be better to put it in the market. Even though more money in qualified plans and IRAs is a much better tax advantage,

that can also lock you in too much so you experience less life, And then diversification is the answer. Did you just say so you experience less life? You do experience less life. You don't spend your money. You don't spend your money. It's a funny way to say it.

I just think of money as a fuel. And don't get me wrong, more expense does not always mean better. Plenty of free activities that are great. But having that money available to spend on other experiences is, I think, for me, an optimal way, a much more optimal way to live than to have money that I've accumulated, that I'm worried about the tax trap. And then the third is, you know, diversification. Everybody talks about the miracle of diversification. And it's true, again, diversification is awesome. But we advised Reacher to do something different. So on three occasions, we went across the grain. We went against

the grain, Paula. Absolutely. And that's what I love about the types of questions that people ask. They are nuanced questions that invite the type of discussion that gives this whole community a much more intricate picture of how to think about making decisions about money in life. So thank you for listening. And if you enjoyed today's episode, please share it with a friend or a family member. That's the single most important thing you can do to spread the message of making better decisions about your money, your career, and your life. You can subscribe to our show notes for free by going to afford anything.com slash show notes. please open up whatever app you're using to listen to this show, hit the follow button so you don't miss any of our amazing upcoming episodes. And while you're there, please leave us a review.

If you want to chat with other members of the community, go to afford anything.com slash community, where we have breakout discussions based on all types of ways that people connect. If you want to talk to other people in your same age group, you can find that there. If you want to talk to people in your geographic area, you can find that there. If you want to talk to people about a specific topic like debt payoff or index fund investing or rental properties, you can find that there. So afford anything.com slash community completely free. It's there for this community to be able to find like-minded people. Thank you so much for being part of this community.

My name is Paula Pat. I'm Joe Saul-Sehi. We will catch you in the next episode. Here is an important disclaimer. There's a distinction between financial media. and financial advice. Financial media includes everything that you read on the internet, hear on a podcast, see on social media that relates to finance.

All of this is financial media. That includes the Afford Anything podcast, this podcast, as well as everything Afford Anything produces. And financial media is not a regulated industry. There are no licensure requirements. There are no mandatory credentials. There's no oversight board or review board. the financial media, including this show, is fundamentally part of the media.

And the media is never a substitute for professional advice. That means any time you make a financial decision or a tax decision or a business decision, anytime you make any type of decision, you should be consulting with licensed credential experts, including but not limited to attorneys, tax professionals, certified financial planners, or certified financial advisors, always, always, always consult with them before you make any decision. Never use anything in the financial media, and that includes this show, and that includes everything that I say and do, never use the financial media as a substitute for actual professional advice. All right, there's your disclaimer.

Have a great day. We were talking about, I would love it if you could make an Alexa routine that plays whenever somebody asks you to do a thing that's associated with you. So if they want to play stacking Benjamins using Alexa, I would love it if we could make the response. Like that would be awesome. Wait, like, what do you mean? Like, like if somebody.

So like this, Alexa, play stacking Benjamins. I'm not sure why you want to do that. But okay, here you go. Oh, that would be great. That's what I want to do. That would be great. Oh, my God. Have you been drinking?

here you go. I'd love to have like four or five of them. You won't learn anything, but sure. Did you mean planet money? What?