Afford Anything - Ask Paula - How to Handle an Inheritance, Should I Invest in Properties or Start a Business, and More.

Episode Date: May 8, 2017

#76: This week, my buddy Joe Saul-Sehy joins me to answer another round of listener-submitted questions. A listener from California asks: My husband and I will be inheriting money, which we plan to invest in index funds. We believe that our inheritance will eventually make us financially independent. However, I feel guilt about the fact that this money is unearned. Do you have any thoughts on this? Eric wants to know: Should he stick with a high-deductible health insurance plan if he's starting a family?   Hailey says: I just graduated from college; I'm making $30,000 per year, but I only work 30 hours per week, so I have time to work on side projects. I'm working on two small businesses, and also interested in buying a rental property. Where should I focus my time and dollars? Enjoy! For links and information to the resources mentioned, like Glassdoor.com, Salary.com, and Paula's article: Should You Pay Cash for a Car? -- visit http://affordanything.com/episode76 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything, every decision that you make, whether it's about money, time, energy, focus. Everything that you spend is a trade-off against something else. Saying yes to one thing implicitly means saying no to another. So, what are your priorities? What's important to you? And how are you going to make sure that your day-to-day actions align with those priorities? This is the Afford Anything podcast where we look for answers to those questions. My name's Paula Pan.

I'm the host and today I'm answering questions that you, the listeners, have sent in, and I'm doing so alongside my buddy Joe Sal Sihai. Enjoy. Joe! Paula! We start every single one like this, like with me just yelling out your name. Like, like, I love it when women yell my name. Are we cutting that part? At least it's not an angry guy. Joe!

That's right. Joe, or if it's mom, right? I mean, when mom does that, when we're not cleaning the basement like we should be, it's Joseph Andrew. It's not Joe. It's Joseph Andrew. I don't think I've ever known your middle name. I've known you for, what, four years now? And I've never known your middle name was Andrew. No, that's what I know. She's mad. My middle name's Frank. No, I'm kidding. It is Andrew. So, but I'm glad to be back. I haven't ruined the show yet, apparently. So you're giving me a another shot. Oh, something like that. All right. Deal. Deal. So let's roll straight into the first, which comes from Hillary. My name is Hillary. I'm a recent college graduate working at entry-level job. I have been saving up my emergency fund, but I keep depleting it to pay for things like the mechanic and doctor's visits and vet visits. My current position is temporary, though, because

I'll be going to law school in about a year and a half, which I know will be a massive expense. I assume that I will be taking out massive student loans to pay for it. My question is, does my financial planning have to be on hold? I have some student debt from undergrad, but not much. It's a drop in the bucket compared to what I'll be faced with after law school. Is there anything else I can do now to set me up well for the crushing debt in my future? Okay, crushing debt, that's fun. Yeah, Hillary needs to buy a helmet.

That's it, because of crushing debt, you don't want to hurt your noggin. Oh, make sure to finance that helmet. Over 36 months at 18%. I'm sorry, we shouldn't be joking about this. Cindy, send your angry letters to Joe at Stacking. Beep, beep. Easy on that. You know what I like about what she said, Paula?

I like the fact that she's wondering about planning ahead because most people will get into crushing debt and they don't plan at all. They just hope it works out better later. So I really like questions like this. And for somebody just out of college asking this type of question, bravo, Hillary. Yeah, I agree. I'm going to relate this to a Simpsons episode. This scene, it was so terrible, but it was so telling. It was this episode where Mr. Burns decides to start a for-profit university.

There's a scene, it's graduation, and all of these people are coming up on stage, and they're wheeling like a wheelbarrow full of gold coins. And then they drop it at Mr. Burns' feet, and he hands him a diploma. And then the next person comes up with this big stack of cash and drops it at Mr. Burranz. Burns his feet and he hands him a diploma. You know, and the next person comes up with rubies and pearls and emeralds and drops it at Mr. Burns' feet and he hands him a diploma. The camera takes a wide zoom angle and he looks out over the entire auditorium of like recent graduates. And they're all like, okay, now where are jobs?

And Mr. Burns is like, welcome to your first economics lesson kids. And then he pushes the button and the trap door like releases underneath them and they all fall into a fiery hell. Well, and that's Hillary's goal, right? Don't be caught in the fiery hell. So this, Paula, I think, is an income question, which is how much money do I need to make to make sure that my debt isn't crushing? And obviously, when it comes to student loans, if they're government student loans, she can defer student loans to a certain point. I don't think we need to get into that too much, but while she's looking for the right job. So before she takes on the crushing debt, I think there's just some math she needs. to apply, which is go to a place like glass door or to...

Salary.com. Yeah, yeah, Department of Labor and take a look at statistics for the type of job that she's going after and make sure that this crushing debt isn't a huge mistake before she jumps into it. Yeah, yeah, exactly. I hear the same thing. I mean, so if you isolate only the debt itself, the thing is student loan debt is not the same thing as debt that you rack up on a credit card because you've made one

too many trips to Nordstrom and the buckle. Student debt is an investment if, and like the major if is like if you are using that money in order to put you into a career path that A, you want to be in and that you'll enjoy, and B, that provides a particular payout that justifies the cost of it, you know, of the diploma. So, for example, if you wanted to be, I'm just a. going to pull something out of thin air here. Like, let's say that you wanted to become a doctor. There are two possible ways that you could go about doing it. You could either work for a very, very, very long time and save up the $100,000 or the $200,000 or however much it costs

to actually go through med school and then pay for all of that in cash. But that would take you an incredibly long time to do. Or you could short-circuit that by taking that. out those loans, going to med school, and then beginning your career. And over time, the fact that you are in this career, assuming that you want to be there, assuming that that's what you want to do, you're in a career that you enjoy and that pays you well enough, you've more than justified the cost of it. So I feel like, again, I feel like I'm repeating myself here, maybe just for the point of, for the sake of like reinforcing the point. But as long as, as long as those two conditions are met, then I don't think the debt will be crushing.

The debt will be an investment. I think that's the key. You have to make sure it's an investment. I have a distant relative whose son is in his third graduate program and it's film studies. And he hasn't really done anything with it. And he takes on more and more and more debt. And his dad, his dad said, boy, hoping they don't listen to the show. Don't worry, nobody listens to the show.

It's just you and I. I said, wow, so where's his career going? And he kind of rolls his eyes. He goes, I don't know. My job's to be supportive. And that's a whole different show, by the way, because I thought, no, it's not. Your job is to parent. But the fact that, you know, he sees in this film studies dead end, film studies doesn't

have to be a dead end, but it clearly seems to me like there's no point except taking a lot of film studies classes and maybe avoiding growing up in this particular case. Yeah. There was something else that Hillary said that I wanted to point to, which is she was talking about her emergency fund. And I heard a little frustration, didn't you? When she was talking about how the emergency fund keeps getting depleted. Yeah, I could hear that.

That's what the emergency fund's for. You know, the emergency fund is supposed to be that first line of defense. And the cool thing is Hillary has an emergency fund so she doesn't have to worry about credit card debt, which if she were calling and saying, oh, I keep paying off my credit card, but then the balance goes up, comes back down, goes up, comes back down. That's what I usually saw when I was a financial planner was people would struggle with. So struggling with your emergency fund. on is is is way better now i can give somebody give hillary and everybody else a little uh cool thing

that we devised when i was a financial planner and that was if she wants to see that money come out of the emergency fund a little slower make sure it's at a place that doesn't have instant access so we do we do this cool thing where we would put the emergency fund at a bank across town and we would cut up the debit card and the online access make sure that that's not hooked up so when there was an emergency, Paula, what my client had to do was make a decision. Would you rather drive across town to get it or solve it a different way? And what was cool was that just when you put that little roadblock between you and your money, the emergency a lot of the time would evaporate and you'd find a whole different way to get stuff taken care of when the money wasn't right there.

Yep, I totally agree. I've done that myself in order to hide money from myself. Yeah, it's all these cool little tricks and stuff. Yeah, yeah, I did that with a Wells Fargo account once. You remember Wells Fargo. Well, I have 16 Wells Fargo accounts, apparently. 15 of which I never knew about. I didn't, but I'm happy to have more. Yeah, but I did that with a Wells Fargo account.

I hid money, I threw some money in there and just kept it there, made sure that I, you know, wasn't getting any monthly fees, paying any monthly fees at the time. I've since closed it down. but I tucked some money away in there and then I cut off all access to it. That's awesome. There's no way for me to get it other than physically going to a Wells Fargo branch. And that was just inconvenient enough that I never did it. That's so cool. Yeah. Build it correctly.

And it's amazing what your brain can do. Yeah, exactly. The other thing that I would say, though, Hillary, is, well, okay, so on the topic of emergency funds, just be sure that when you are tapping your emergency fund, as I see it, there are two different types of things that people make consider emergencies, right? So car repairs and home repairs, you know that those are at some point going to happen. You don't know exactly when, but you know that at some point they will happen. So those are irregular expenses. And then on kind of a different branch, you've got things that are genuine emergencies, like things that you just could never have even expected. You know, like if a tree falls on your roof and you break your leg and you lose your job all in the same week, sort of a thing. It's a bad week.

Your dog bites you. The good news is you'll have a country song contract. Immediately. And so what I tell people to do, and this is a little bit more advanced because it's not something that people can do when they're at the beginning of their financial journey. But over time, I encourage people to set the goal of creating two different funds, one that's for irregular expenses such as home repairs and car repairs, things that you know will happen. You don't know when, but you know they will happen. And then also, in addition to that, have an emergency fund that's for those total Black Swan events that will probably never happen. I love it.

Absolutely. Yeah. Yeah. I don't know what to say there, Paula. Do I just go, ta-da. Tada. Yeah. And then back to the student loan question.

I mean, I think it's great that you're thinking about that right now. And the fact that you're calling in and asking this question is a clue. that you're not going to take out any more debt than you need. So I think there's really nothing else to say other than maintain an emergency fund, live reasonably, and make sure that the diploma that you are getting is something that is worth the investment that you're making. Think of it this way. Let's say that you want to be an architect. Do you wake up thinking, I want more than anything, I want to be an architect? and I want that so much that I'm willing to borrow $40,000 in order to make this dream come true.

Like, is that the attitude that you have towards it? And if it is, then awesome. But if that's not your attitude towards it, if you're doing it because your parents expect you to go to grad school, or all your friends are going to grad school, or people say that you're never going to have a future unless you at least have a master's degree. Like, those are the wrong reasons to do it. Boy, that's why I came on this podcast was because my parents thought it would be great. And you made me pay all that money to be on.

Now I'm feeling a little self-conscious. You're borrowing all this money from Steve. Is there a spotlight on me? It's getting hot here. Steve's like the lender who, all the guests who come on, they pay a fee. They borrow it all from Steve. He's collecting like,

15% interest. Yeah, something about keeping my kneecaps. I don't know. All right, cool. I think we've run that question into the ground. Yes, ma'am. All right. Thank you so much, Hillary, again, for asking that question, and good luck with everything.

Sounds like you're going to be fine. Our next question comes from somebody who wants to remain anonymous. Hi, Paula. I am a stay-at-home mom in Southern California, who shall remain anonymous. and my question is about inheritance. My husband and I receive yearly gift money from his parents, plus occasional larger chugs that they distribute from the family partnership. We used to spend most of it on just stuff, hashtag lifestyle inflation.

Then we got smarter and used to pay off all of our debts, and now that we're debt-free, we're dumping it all into index funds with the hope of retiring early. This inheritance money is fast-tracking us toward financial independence, very quickly. I think we're just a few years away from our goal. But it's also a source of some guilt and shame for me whose role models are self-made millionaires like you and Mr. Money Mustache, even my husband's parents who worked their way out of poverty and built a large estate that they're now passing on to us. And so I kind of feel like I'm cheating somehow.

Like maybe I don't deserve financial independence. Do you have any advice or for those who receive inheritance or undeserved windfalls. How can we work past the guilt and use the money wisely? Do you have any other general advice about inheritance to share with us? I feel like this subject is kind of taboo, so I hope it's not making you uncomfortable. But anyway, I appreciate any wisdom that you might have. Thank you so much, Paula. Well, the first thing that I would say is congratulations for handling your inheritance.

wisely, there are a million things that you could be choosing to do with that. You could be spending that on champagne and caviar, but you're choosing to steward over this money in a way that will allow it to sustain you and sustain your family for indefinitely, you know, for decades into the future. So you're allowing yourself and your family and you said you're a stay-at-home mom, so you have a a child and or children. So you're allowing, you know, you and your kids slash kids to be able to have two stay at home parents as a result of the way that you are handling this inheritance. And there's a lot to be said for that because a lot of people would just blow the money on hot tubs and hot air balloon rides and hot wings and hot pockets and hot pink glue guns. And other things that begin with the word hot. Hot pants? Is that a thing?

Yeah, I'm wearing hot pants right now. What are hot pants? Aren't they like really tight pants? Is that what they? I thought those were skinny jeans. Well, I think for some people, they're skinny jeans and for other people, you know, the cougars out there. I don't even know where this podcast is going. Okay, I'm Googling this right now.

Google, what are hot pants? And she's wondering, anonymous woman right now is wondering, how do we get from my serious question to hot pants? Tight, brief, women's shorts worn as a fashion garment. There you go. Like I said, I have on tight women's shorts right now. Perfect. Yeah. You know, my thought, Paula, was that, and I totally agree with everything that you said, is that, is it that guilt is not uncommon?

It's funny because having been someone who was in the trenches, you would see that guilt. And man, is it tough? Because I agree. You don't think, hey, I didn't earn this money. There's other people working their butt off and I just had handed to me. But I think that what you have to do is respect it more than. The fact that it seems to weigh on her so heavily that she didn't earn this money means that those dollars, don't get me wrong. You should respect every dollar, but respect the fact that you've had this opportunity that a lot of people don't get, which she's totally already doing just by the question, right?

But respect the fact that you have this opportunity and make the most of it. The thing that frustrated me is the same thing that frustrated her at the start of her question is, you know, they used to spend it on just things. They'd spend it on stuff and next thing you know, it's gone. So I would live my life, my normal life, as if that money didn't exist. And then I would take that money and use it in a way to make things a little easier in the future or maybe make things a little easier now, but not in terms of budget or going out to eat every day. maybe it's upgrading, you know, the property that they live in, or if they want to invest in properties to use it to buy properties, or to expand their investment portfolio so that they can, they can, you know, if they want to decide to stop working, they can do that earlier.

But I would use it in that much more positive way. Clearly, it was a legacy. And this is a frustrating thing for me, not to get on my soapbox, but you see these people, and I had clients that were like this, they would work their entire life, save a bundle of money, they'd hand it to their kids. If they wouldn't hand it to their kids, they'd pass away, right? Their kids get the money. And the kids didn't earn it, so they blow it.

And this is an opportunity to make it a legacy, to keep it in the family and make it easier for everyone. But I think it also has to come with, you know, some education of kids. And it also has to come with some responsibility. Right. Right. Exactly. Like there's an old saying that wealth lasts for three generations. The first one builds it.

The second preserves it. the third squanders it, and then it starts over again. That cycle starts over again at the fourth. And that's not literally true. I mean, it's not, you know, every three generations, but that's, that saying reflects the cycle of the way that money tends to exist in some families. It was always amazing to me. You would have a family where either mom or dad was an entrepreneur or did something where they made a lot of money in a lot of these cases. And you see this TV, right? If you're watching reality television, I know you don't, Paula, so you have no idea what I'm about to say. But they, the rest of the family is enjoying it. They're partying while the person that made it is excited about making the money, is excited about the fact that they built this wealth. And that also makes me feel bad. That has nothing to do with her question. But you'd see that quite often. I mean, I think it does have something to do with her question. I think it goes back to that. Like, you know, her question was emotionally, how does she deal with the fact that she is. receiving unearned money or she's benefiting from unearned money. And I think not partying with it,

i.e. treating it really wisely and stewarding it and treating it well is the way to deal with that. And so again, anonymous, the fact that you're putting it in index funds where the principle will be preserved and you'll be living just on a small, small portion of it and that small portion of it that you're living on will be enough to grant you financial independence so that you and your husband can spend loads of time, quality time with your kids. Like, that's amazing. That's exactly the responsible way to handle an inheritance. And I can't think of anything, any better use of legacy money than that. Right. Because that's the thing about financial independence, right? Like, the independence itself, the freedom itself, is actually just a symptom of the fact that the money has been planted in a sustainable way.

So here's what I mean by that. Like when you're trading time, not you, but when a person is trading time for money, that exchange is unsustainable. And so in order to go from unsustainable to sustainable, that money needs to be taken. out of the context of time and put into a context of capital working to grow more capital. Because that's the sustainable route of money creation. Once you've developed that sustainability, the financial independence that results, the early retirement that results is a symptom. It's a side effect of the fact that your money has been planted in that way.

I don't know if planted is the right word. I think it's a great word. Yeah. Like that 4% withdrawal that you make from the index funds, that's the harvest that you get from this incredibly rich soil of planted money. And that is, that's the true legacy. It's that sustainable. I just keep repeating myself. I'm just going to say the word sustainable, like 57 more times.

Sustainable hot pants. Sustainable hot wings. Sustainable Hot Pockets. Imagine that if you can have a sustainable hot pocket goes on forever. That'd be kind of gross, wouldn't it? Is it the kind of hot pocket that's cold on the inside or the kind of hot pocket that's like super scalding on the inside and burn your tongue? Now we're totally doing Jim Gaffigan jokes. Yeah, right.

Hot pocket. Yeah, I really like what you're saying. You know, who puts this really well is Robert Kiyosaki in Rich Dad, Poor Dad. And there's some of Robert Kiyosaki where I go, what? I don't know about that. But I love the main message, and it's that your money gets taxed so much lighter than you do. You know, when you earn an income, whether you're self-employed or not, but especially if you work for the man, you're paying all these taxes. You know the opportunity for write-offs that entrepreneurs have, and your money is just very, very heavily taken away.

But your investments have this single tax. Either, you know, if you have it in a tax shelter, maybe only paying tax before you put it in, like a Roth IRA or and you take it out like a 401k or a traditional IRA, but even in a non-IRA account, you're just going to pay tax, much smaller tax on dividends and on capital gains when you sell it. So it's really attractive to build this. His analogy is you build this other person

and you go to work every day, but so does your money. And your money has this lunch pail like you do and goes off to work. And while you're working, your money's also working. And if you get to the point that that guy's working hard enough that you don't have to work, anymore? Well, then you decide whether you're working because you like it or you stop. I love that

analogy that works for me. I won't say every day, but most days I wake up and I just think about me and my money going to work again today. Yeah, you know what? Will and I actually use that analogy. I didn't realize that it came. I've read Robert Kiyosaki, but I didn't realize that it came from him. Maybe I, it got planted, planted again, you know, maybe it got planted in my mind from that book and I forgot who the source was. But I remember years ago when we started building passive income, we began mentally conceptualizing ourselves as having a third person in the household who brought in money, but who didn't have any expenses. And so then mentally we were like, wow, we're a three-income household with only two mouths to feed. Yeah.

So. Good stuff. Good question. That totally went off the rails of her question a little bit by the end. But yeah, the TLDR of it is it's not the past, it's the present. You know, it's not where it came from. It's what you're doing with it now. Yeah. And that's the respect that I talked about, Paula. Yeah, absolutely. Hey, hey, we'll be back to the show in a second. But first, I want to give a shout out to Fresh Books. They have signed on as one of our main sponsors in 2017. And they have an awesome product. It's meant for freelancers, solopreneurs. small business owners. If you have a side hustle or if you're self-employed and you need to send out invoices to your clients, yeah, it's necessary. You've got to send invoices to get paid, but it's also annoying and it's time-consuming and nobody really likes doing it. It's just one of those costs of doing the job. Inter Fresh Books. They automate the invoicing system. You type in some basic information and their system handles the rest. It automatically sends follow-ups to invoices that haven't gotten paid. It lets you,

know whether or not your client has even opened your invoice or not. Basically, they take the suckiness out of invoicing. Give them a try for free for 30 days at freshbooks.com slash paula. That's freshbooks.com slash p-a-u-l-a. Our next question comes from Eric. Hi, Paula. I have two questions. My first question is about HSAs and high-deductible health insurance plans, specifically when starting a family. My wife and I are about 27, healthy and without kids. We have a high deductible health insurance plan with an HSA. My employer makes part of our contribution to the HSA each year, and we're maxing out the rest. My question is, are high deductible health plan still the way to go when we are ready to start a family? In researching other health

plans, it seems that even if we hit our out-of-pocket limit on the high-deductible plan, the cost of paying our lower premiums plus our higher deductible is still comparable to the cost of just the higher premiums on some regular health plans. Are people just so scared of the risk of being hit with a high-deductible? and not having the savings to cover it, that they're willing to pay higher premiums. I'd hate to lose the great tax advantages of an HSA, but I'm wondering if the smart thing to do when starting a family is to switch to a health plan with a lower deductible. Eric, I know you had two questions. We're going to divide these up and take them one at a time.

So let's start with this one that we just heard, which was the HSA question. I want to hear your answer to this one first. Okay. Hey, everybody. It's Steve, that guy who does stuff for Paula. I just got to hop in here really quick because this episode that was recorded with Paula and Joe was actually done two weeks prior to release. And the release date is May 8th, 2017. Which, by the way, if that's today and you're listening to this, thank you so much for being a loyal listener.

We appreciate you. But for me, right now as I'm speaking, it is currently 10.30 p.m. the night before release. So why am I hopping here at literally the 11th hour. just before release, well, they've been doing stuff with the ACA, which is something that's going to be addressed here in the answers to this question of this Ask Paula episode. So we just want to let you know that things may have changed. So the answers that Paula and Joe give might not be completely accurate. You'll need to do a little bit of research for yourself.

So buyer beware, enter at your own risk, and keep your hands in the vehicle at all times. Back to the show. So, yeah, I have looked at a lot of, I've looked at the plans that are available on the Affordable Care Act website. And a lot of them, Eric, you're absolutely right. When you do the math, the cost of the deductible that you pay plus the premium ends up being very similar to the cost of the higher premium, just paying the premiums on a higher premium plan. I've actually, because I'm this much of a nerd, I know I don't sound like it on this podcast. Right, not at all. Yeah, no, I sounds tote.

Hashtag tot's cool. But I am enough of a nerd that just for myself in shopping around for my own insurance, I've looked at several plans and put together a spreadsheet that calculated, all right, here's the copay percentage, here's the annual out-of-pocket maximum, here's the deductible, here's the premium. and I've looked at those plans comparing one to the other, and I found that a lot of the plans, the total amount of money out of pocket in a catastrophe year, in a year that you have high medical bills, ends up being about the same. The higher premium plans just, and that's ballpark. You know, there's a little bit of variation. But yeah, in a lot of the plans, the higher premiums don't actually.

buy you that much more. I mean, particularly, it depends on the plan. If you're comparing bronze to silver in many of the plans, that's what ends up happening for me. Again, and I'm looking at a 33-year-old living in Nevada, which is going to be different than, you know, obviously it's going to be different for everybody, blah, blah, blah, et cetera, you know the drill. But yeah, in a lot of cases, it makes sense to stick with the low. lowest possible premium, particularly if you don't anticipate having high medical bills. Now, the one thing that I will say, however, you talked about once you have a family, once the kids are born, assuming that they're healthy and they're not going to need a lot of

ongoing medical treatment, you may be able to go back to a lower deductible plan, but for the pregnancy and childbirth itself, be extremely careful about what plan you're in. Prior to the Affordable Care Act, I believe, and I would want to double check this, I believe that all of the ACA plans include pregnancy and childbirth coverage as part of the coverage. But prior to that, the only plans that I could find didn't include pregnancy or childbirth. So I was always insured under plans that just didn't include that. And I remember at that time, before I realized that the ACA was ever going to happen, I remember actually thinking about like, okay, what am I going to do if I ever want to have kids? I guess I could go to Thailand or I could go to, you know, a country where childbirth is a lot cheaper.

I mean, I literally was crafting those plans in my head. So anyway, long story short, there may be something to be said for going into a plan that has better medical. coverage for the actual pregnancy and childbirth itself because that could get very expensive, particularly if there are any complications. Yeah, I don't have a lot more to say because you've already done a lot of the math, but my point was just going to be there's clearly math that needs to happen there. And also, to his point, asking whether people just choose out of fear, yes. Yes. And you know what? And part of that is justified. I mean, Cheryl, my spouse, had twins. and so, you know, when we went from a family two to a family of four, the chance,

actually really that something bad could happen to one of us went up a lot. And especially during, you know, SIDS years, the sudden infidess syndrome, like the very, very earliest. Who knows what's going to happen? And so that's the one time that it really, to me, you need to do that type of math. And frankly, you know what? To be safe, what you could do would be to switch away from a plan with an HSA, give that away for just a little while until the kids are old enough that you kind of know where

your life is headed, right? And then switch back. Because there's nothing that says that any of these, you know, we make these decisions, Paula, as if we think that they're going to have to last forever. And we don't. The reason it's financial planning is because of the fact that, you know, a couple times a year, you're going, okay, does that still make sense for me? And, you know, once, let's say your children reach or child reaches four or five and you know that you're done with that part of your life, maybe then switch back. Actually, so I don't have any kids. What happens in the first few years?

Well, leading up, there's obviously all the prenatal stuff. But the big thing is, you just don't know if your children are going to be born healthy or not, right? You've no idea. That's a big one. And a lot of children are not. So that's a risk. But then during those earlier, if they develop issues, you're going to know, you're going to know by four or five whether you have a healthy, normal family or not.

not. And if not, why go with the plan when you're going to constantly use the HSA, that entire thing and you can't save any of it? And you can go with a plan that also covers a lot more stuff and makes a lot of sense. You become the dirty end of the pool. If in the insurance pool, you know, you're going to be the dirty one, well, then, I mean, which is why the Affordable Care Act so expensive, right, is because of that part. But I don't know if I answered your question or not. Well, yeah, Joe, I think you and I are in agreement. The low deductible plan, are great for people who are generally young and healthy and don't expect to have a lot of medical costs. But if there's any reason why you think you might have high medical costs, pregnancy and childbirth being one, and yeah, the possibility of a kid that is sick or a kid that needs ongoing medical treatment being another, yeah, that's a reason to switch out of one.

Yep. Or the possibility of a you that is sick and a you that needs constant care and constant medical attention. If you have some hint that in the future, your own medical needs or your spouse's medical needs might go up, that's also a reason to switch into a higher premium plan. Well, yeah, it's coming for all of us, right? At some point, I mean, life always finds a way to throw us a curveball. So it's a risk reward equation. That's why, you know, this whole discussion to broaden it out a little bit. I love this kind of talk where we're talking about risk management. I don't like talking about insurance. I like talk about managing risk because when you talk about managing risk, you widen the discussion and now you know that there's other options. I can pay for it out of pocket. I can build this HSA to maybe over the next five years build for whatever it might be. There's a lot of other things.

But notice insurance agents don't want to talk that way. Insurance agents often want to start with let's have an insurance discussion. Is this covered? Well, I like to back up and say, is this something I really need coverage for before I do? Like, you know, for a lot of people pet insurance, I don't really need that. Some people may. If you have a pet that is costing you an arm or a leg, then maybe you need it, but most people don't. Right. And this is something you and I were talking about, I think, in the last episode, where somebody had the question of, you know, why should I have insurance if I'm never using it? That's right. And I was like, well, good. I, you know, insurance is the thing that you buy that you hope you'll never have to use.

Right. Because a lot of people have the misguided impression that if they have health insurance, that means that they should not have to pay out of pocket for medical expenses or they should not have to pay much out of pocket for medical expenses. But that's not what it is. Health insurance isn't a prepayment for all of your medical bills. Health insurance, to whatever degree you own it and to, you know, to whatever stipulations your plan has, health insurance. is a payment against the risk of losing your assets due to medically related causes. Yeah, I don't wake up every day going, I didn't use my car insurance today. Damn it. Go hit a tree so I get my money back.

Exactly. All right, let's check out part two of his question. My second question is about rental properties. We currently have a rental property that we cash out refinance to get a about $50,000 in equity. We used some of this to beef up our emergency fund, and we were planning to use the remainder for a down payment on another rental property. However, we currently have about $100,000 in student loan debt with an interest rate in the 5 to 8% range, a $20,000 balance remaining on two auto loans at about 2% and a mortgage on our primary resident at 4%. Does it make sense to allocate this cash to another rental property like we were planning to, or to pay off the car loans and some of the student loans to start to snowball our debts. Curious what you would do. Thanks.

What I love about this question is that this isn't really a real estate question. This is a question about investing versus debt payoff. I can talk out of both sides of my mouth on this one. Yeah. Functionally, it's a question about, hey, here's a basket of money. Should I use it for priority A, priority B, or priority C. All I can do is tell him how I think about this issue, which is a lot of people think interest rate first. And you and I on some of these episodes, Paula, we've talked about the risk premium. So I won't go through that again. But we look at the interest rate.

Can we beat it with an investment? If we can beat it by enough, then there's definitely that. But there's also cash flow. And some of these debts that he's talking about are small enough that it gives me pause. You know, I don't know what his monthly payment is and how that would change everything and how quickly he could get back in the real estate game if he paid off the debt first. But there's a piece of me that says, man, these are small enough. And he's got the money sitting there. Does he just pay off the?

So I think I need a little more information about what the monthly payment is and what that does to his life and how quickly that gets him back in that rental real estate game. But I like them both. Yeah, you know, and I think that fundamentally, like, any time that there's a question, there was a caller a few episodes ago who asked a similar question about, you know, I've got some money coming in. Do I save it? Do I use it to invest or do I use it to pay off debt? And I think that's a common theme that I hear in a lot of questions. And the good thing about hearing questions like that is that there's, no wrong answer. But I agree if the risk premium, if the difference between the interest rate on your debt versus the expected return on an investment, if that difference is not sufficiently different enough, you know, if that delta isn't wide enough, then you may as well just pay off the debt. If, on the other hand, the interest rate is 3%, and you can expect a solid 8 or 9% return, then it makes more sense to me to go into an investment.

But that being said, Joe, I also agree with you. If we're talking about some really small debts, there's some psychological, there's huge psychological benefit to just wiping those out of the picture. Yeah, that's what I was thinking. Yeah. I was thinking how cool would it be to have a clean slate right now? Yeah.

Like putting myself in his shoes. He has to wear with all to do that. Listen, as much as anybody, I love the real estate investing idea. certainly you do, but that versus the clean slate, hmm. Yeah, yeah. You know, I'm big into minimalism and simplicity. And I love the idea of just, I mean, why overcomplicate your life? You know what? There was a blog post I wrote several years ago. It was back in 2013 when Will needed to buy a car because the car that he was driving got stolen. And it only had the minimum amount of insurance on it. So there was no insurance money to cover. the theft of the car. So we had to pay out of pocket to replace the car. So he was buying a new car. And the value, he was ready to spend $10,000 in cash on a new car. And so even though we had that cash. And so I'll just set up the scene here, right? We didn't have any debt other than mortgages.

Retirement accounts fully funded, emergency fund, fully funded. Everything's good. Everybody's happy. And then so we also had $10,000. We had more than that, but you know, emergency fund, blah, blah, blah. But anyway, so $10,000 that we decided to use towards the purchase of a new car. Not a new car, but a new used car. And Joe, it was on your show. It was on stacking Benjamins that I started talking about this. And Len and what was the name of the guy who used to be on there, Dominique?

Yeah, Dominique Brown. Yeah. Yeah, Len and Dominique both started telling me, wait a minute, why are you paying cash for this car? You should just take out a car loan. Car loans are less than 1% right now. And that had never occurred to me until I went on your show. Stacking Benjamins, the show that gets people in debt. That's the second I was thinking. I'm like, Ixnay on the day. But it was great. It turned into one of my best blog posts because then I went through this huge thought process of, wait a minute, why don't we take out a loan on this and then put this $10,000, if not towards an investment, at least towards paying $10,000 down on one of our mortgages. And we could then arbitrage the difference between the cost of the car loan versus the cost of the mortgage. If the car loan is at 1%, and the mortgage is at 5%, then cool. we've saved that difference on that $10,000. But then, you know, yeah, you've saved 4% on 10,000. That's not actually that much money.

And you'd go through all of this hassle in order to do it. And that's complicated. And why add that complication to your life if instead you could just be focusing on your business? So I wrote about this entire like thought process on the pros and the cons of all of these. And basically the long story short was just pick the simplest route and move on. No, I go with the complicated route. You like minimalism and easy, and I like complication and lots of noise. So then what would you do?

I would totally do the most convoluted thing of all. I'm trying to crack a joke here and it's not going very well. I'm trying to be a little contrarian. No, I totally agree. Yeah, sometimes, you know, what's that thing that my mom says about you penny smart and pound foolish? Come on. Really? I'm going to make an extra four bucks or whatever.

might be. Okay, just the psychic energy isn't worth it at all. Yeah, yeah, exactly. Joe's like, you know what I would do is I would start a podcast and invite people on there who would encourage their fellow roundtable guests. To take on lots of debt so we can laugh at them. Yeah, exactly. Where'd you learn that? I'm surprised that anybody learned anything on the show, so that was good to hear. Oh, it was back in 2013. Right. Back when we used to teach something. All right, cool. Well, I hope we sort of answered your question, Eric. I think we did, yeah? I think so. Yeah, ish. Yeah, sure. Our next question comes from Haley.

Hi, Paula. My name is Haley. I'm a brand new listener. I'm starting at the backlogs and working my way up. But I had a question for you in the next coming episode, so whenever this works, that'd be great. I'm 21. I just recently graduated college, and I'm working for the same organization that I work for all throughout college. It's a pretty modest salary. I think I'm only taking in about $30,000 a year, but I'm only working 30 hours a week, so I have a lot of flexibility to work on side projects. I currently am in the process of purchasing a condo for $103,000. It's got a great low HOA fee, and because it's in, a college town where there's a lot of property managers and a continual cycle of rentals, trying to decide if I should put all of my efforts into paying down the mortgage so that I can later refinance and turn it into a rental property, probably in the next three years. Or if I should maybe consider prioritizing other income streams. I've got two small businesses I'm working on right now that won't have a big payoff for another

couple of years, but I'm considering either going into debt with those businesses or using personal investments. So I just wanted to get your thoughts because I'm so young and so new, but eventually I'd love to be a quote-unquote real estate tycoon just like you. So any answers or advice for me that you have would be much appreciated. Thanks. Awesome question. Haley, what I love is that you've just graduated from college, you're making a modest starting salary of 30,000 a year, and yet you are already putting yourself on track for lots and lots of future awesomeness. I totally agree. The thing that drives me crazy is when somebody goes to work for a company and they go, you know what, that company didn't take time to train me or that company didn't

give me the tools I needed. It really isn't your company's responsibility to make you fantastic. it's your responsibility to make you fantastic and she's clearly looking at it with that lens. And that's just so awesome. Like, I mean, seriously, even people that think, well, you know, I'm not as well trained as I should be. Like, who wakes up, Paula every day and goes, I'm going to suck today? Does anybody actually say that? But if you think you're going to be great, you have to give yourself the tools to be great. And she's on her way to doing that.

Yeah, absolutely. And plus, one of the things I've learned, and we did a podcast episode, about this a few episodes back, the concept of taking radical responsibility for your life. Like, Haley, that's something in, when I hear your question and when I hear what you're doing, that's something that you seem to have really nailed. Like, you've internalized to the idea of taking radical responsibility. And while a lot of your peers are just sitting around moping about the fact that they don't make much, you are like, cool, here are my opportunities.

Here's what I'm going to do. You know, you're like all around you, you see opportunity. And your question is, which of these many opportunities should I pursue? And here's where the experience of a dude who's almost 50 is going to help her a bunch. Because whenever you think that a company is going to have a big payoff in two years, whenever you have a company, you should always double the amount of time that it's going to take for it to have a payoff. In your plan, that doesn't mean it's not going to go huge, but I think you always have to, a plan for the fact that this is not a Starbucks unicorn for Appuccino. This might be something

that takes a little longer to build. And if you build that into your plan, so when she said it's going to take me a couple years for a big payoff, my head immediately Paula said four years, not two. It's going to take four. Yeah. So the one thing, Haley, that concerned me, now I don't know the details of the company that you're thinking about starting, but you talked about going into debt for it. And that concerns me. Because going into debt for starting a business is risky, no matter what. And if you can limit that risk to risking your time rather than your money, that's actually the better risk to take. And I know that sounds contrary to, you know, when I'm constantly saying that time is your most valuable asset,

time is more important than money. The best use of money is to buy back your time. So I realize that sounds like a contradiction, and it is. But when you are starting a business, you're much better off risking your time than you are risking money. And if you are going to risk money on a business, ideally that money should come from money that the business has already made. So in other words, if you start a business and then the business makes money and you use that money, the money that the business is made to reinvest back into the business so that you yourself are still getting paid zero and all of the money that's coming in through the business is just getting pumped back into the business. That's awesome. That's exactly how to run a business. That's great. I fully support

that. Remember the earlier question about, you know, changing life insurances and we talked about thinking in terms of risk management. It's the same thing here, right? When you look at the failure rate, no matter how great your new businesses is and how great it's going to be, the failure rate of new businesses is very high. And the sad thing is, is a lot of the reason why businesses fail, especially when they're started by somebody who's your age, is that the corporate job all of a sudden becomes so much more exciting. And there's so many more opportunities that you just have to go, you know what? I got to set this aside because this is a bigger opportunity over here. And the problem is that if Haley invests in the side business extensively, she's going to make maybe two mistakes. She might be investing more time and energy into this business just because she has money behind it.

And she's going to miss the opportunity with her main focus. In fact, I'm a guy that for a long time, I thought that side hustles might be kind of overrated. I've changed my mind a little bit on that, a little bit, but not a ton. Because I think a lot of times, Paula, people look at side hustles and they go, oh, if I could make more money over it, here. And my first question always is, can you make more money at your main job? Because a lot of the time, and studies have shown this, people aren't making nearly what they could at their main pursuit. And when you try to divide your mind in two or three different things, it becomes convoluted. You know, you said you like minimalism. You like things simple. If I can make a ton of money

doing one thing and then I can make other passive income streams from other places, that's my favorite route. Right, right. And of course, none of that addresses the question of which route are you more interested in. Is your main job the thing that you actually want to pursue? Or is this side business the thing that you want to develop until it becomes lucrative enough that it can be your main thing? Once again, I'm annoyed that you got that before I did. I'm very annoyed. But even if the answer is option B, even if the side business is the thing that you want to develop until it reaches the point at which it can be your main thing, I'm very, very reluctant to recommend that anybody go into debt for a business. I mean, rental properties is one thing because the debt that

you incur is a mortgage debt that is secured by the value of the property and you can sell that property and recoup its value. And debt in a business, particularly debt that's used to cover operating expenses, that's not something that you can sell and recoup. So I'm just, I'm really reluctant to, you know, I certainly encourage you to go into some type of a side business. And if you want to invest money into that business, that's fine. If you want to, you know what, let me go back to your original question, which was, should you, should you, use your money to pay off the rental property versus put it into a business. And we'll pretend that you never said the thing about like debt for the business.

If you wanted to use that money to cede your business, that I think is totally fine. Because yeah, a business is not going to be making money from day one. Neither. Joe, you and I are both podcasters. Our podcasts were both deep in the red when they, when they began. Are you saying they're not in a red now? Is that what you tried to apply? They're like, what color comes after red?

Like burgundy? Chartreuse? I don't know. You know, so we had seed money in cash that we used to get these podcasts off the ground. And that's totally fine because if the podcast flopped, then we've lost our time and we've lost our savings, but we haven't gone into any debt. And so that I think anyway, like I feel like I'm getting a little bit rambly now, but No, but studies have shown, Paula, studies have shown that one of the main reasons, like I always look at why businesses fail and there's a variety of reasons, but one of the

main reasons are is that they were underfunded. And it kind of is, it's kind of a corollary to her saying that, you know what, it's probably two years from the big payoff and I said, no, no, it's four, is that you really need to double these numbers. It takes a long time to establish yourself in a market and have, of it is, is that you don't know what you're doing. My brother has a very successful business doing signage. So you walk into like a restaurant. In the bar, they have this thing that shows trivia. And then it also shows advertisements in the trivia. Those are his. He has them all over the

Midwest. He's doing great. It took him, he thought it was going to take two years. It took him maybe five and a half before it started rolling. And once it rolled, oh, baby, it rolled. I mean, it was amazing how much it rolled. But, you know, half it was, he didn't know what he's doing. He didn't have the right contacts. He didn't understand marketing like he should have. So I think investing more money into your business cash capital, I totally agree with you. That's a great thing to do because it buys you time.

Yeah, I agree. I agree. I'm totally in support of use using your money to fund this business for as long as it takes to give this business traction and get it off the ground. if she was going to put it toward the mortgage, I wouldn't do that. I still wouldn't do that. Really? Here's what I.

Okay. Yeah, because, well, because let's say that she puts it toward the mortgage and she doesn't get it completely paid off. You know, if something happens and she can't afford to make a payment and she has it almost all the way paid off, how much of that house of that condo is the bank going to take? It doesn't matter she has one payment left or 40 payments left. They're taking the whole damn thing. Right.

So here's what I would do. And plus, you and I talk all the time about risk premium. This is a better risk premium. Take that money, open up a separate Vanguard S&P 500 fund or total market index fund, but call it your pay the house off fund. That will, over time, it will grow more quickly over time, maybe not tomorrow, but over a 10 year period, it'll grow quicker. And she'll be able to pay off the house. And then make a lump sum payment on the entire thing. Yeah. You know what's funny when I was a financial planner, so I had some clients that got to that point, Paula. And they could pay off the house right now. And guess how many actually did it? Zero? None. Every single one of them was like, nope, I'm content knowing I can do it whenever I want. This is growing faster. I don't really care about actually paying it off. I want to know that I can do it right now if I choose to. Yeah, because you still have the peace of mind of knowing that you can. And mortgages are such a low interest rate. Yeah. But for me, that's number two. I still like putting the cash toward the business to assure that it's going to be a success. Yeah. I I agree. I like that. I like that option. Cool. Is that it? That's it. We've done it again, Joe.

Unbelievable. I can't believe that it's over already. I can't believe it's not butter. I can't believe this is a hot pocket. Oh, my goodness. And those are hot pants. Yeah. Unfortunately, I'm me. They don't really fit that well. Awesome. Well, thanks for coming on the show, Joe. Hey, what's that name of that podcast that you host? Oh, I've got this crazy podcast that Paula pants on every Friday. Speaking of pants. Paul a pan. And we have fun, you know, where Paula is the last word and is very, this is a very, very intelligent show. Our show's meant to be the first word.

We try to bring up like eight different topics and hopefully get you excited about them. So you'll come here to afford anything and then Paula will go deep on it later. So that's it. Every Monday, Wednesday, Friday, stacking Benjamin. Cool. That's our show for today. Hope you enjoyed it. If you want to ask a question, head to Afford Anything.com slash voicemail where you can leave a question for us.

If you enjoyed the show, please don't forget to subscribe and leave a review on iTunes. Also, want to thank everybody who entered the Instagram contest to get a free copy of the book You Are a Badass by Jen Cincereo. It was really hard picking a winner. There were some awesome entries. I was reading through the comments and I was like, what? I want to give everybody a book. This is like Oprah. Like everybody gets a car.

Paula shows, everybody gets a book. But yeah, I really did because like some of you literally just said what's up and left emojis. And I was like, I feel you. Like I know exactly. That's probably exactly what I would do. And that's, yeah, like, that's how I talk. That's how I connect. It's great.

And some of you like wrote stories about yourself or one person wrote. Like, it was just amazing. So thanks to everyone who headed over to the Instagram. page and who left a comment. And there was one person who even said, like, hey, this was a clever way to get people to your Instagram page. And I'm like, guilty. And also, it worked. You're here, aren't you? So cool. That was fun. So yeah, thanks to everyone who entered. I guess here's the part where I plug my social profiles. You can find me on Instagram slash Paula P-A-U-L-A, P-A-N-T. Or if you want to reach out to me on Twitter at Afford Anything or Facebook.

I'm at Facebook.com slash afford anything. Thanks so much for being a listener of the show. I'll catch you next week.