Afford Anything - Ask Paula: How to Invest for the Next Five Years

Episode Date: November 11, 2019

#225: Lauren is 26 and earns $48,000 per year after taxes. She saves $12,000 annually in retirement accounts, and an additional $18,000 per year for a downpayment on a home. She wants to buy a home in the next five years. Where should she keep her savings in the meantime? Sawyer has a five-year financial independence plan. She owns two high-end condos in a NYC suburb. She lives in one unit and rents the other, but she’s bothered by the fact that she’s forgoing collecting rent on her home unit. Should she move? Katie’s husband is going to grad school and they want to pull money out of a Vanguard account to fund his tuition. Should they do this? Cassie is in the process of finalizing a divorce. She and her daughter will receive between $80,000 - $116,000. Should they use the funds to buy a home with a 20 percent down payment or pay off their $30,000 debt? Andy is curious: should you re-adjust the 4 percent withdrawal rule if your investment portfolio grows? Joe wants to become self-employed but is concerned about health insurance. What are some affordable options? Laura is ready to retire. She’s also engaged, and her fiance wants to keep working. Should they file taxes jointly or separately? Doug is interested in learning more about equity sharing programs. Are these safe investments? Tania wants to know: can you open and fund a Roth IRA if your only source of income is alimony? Brian took out a 401k loan to buy a car. He regrets his decision. Should he take out a personal loan to pay back the 401k loan? Former financial planner Joe Saul-Sehy and I answer these questions in today’s episode. Enjoy! For more information, visit the show notes at https://affordanything.com/episode225 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every decision that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to your time, your energy, your focus, your attention. It applies to anything in your life that's a limited resource that you have to manage. What is the best way to manage that resource? In order to answer that question, you have to ask yourself two particular follow-up questions. One is, what are your values? And the other is, how do I take daily actions that are aligned with those values?

Answering those two questions is a lifetime practice, and that is what this podcast is here to explore. My name is Paula Pan. I am the host of the Afford Anything podcast. Every other episode, we answer questions that come from you, the community. And today, former financial planner Joe Saul-Sehigh is with me to answer these questions. What's up, Joe? Not much. What's up with you? Well, by the time this episode airs, I'm going to be in Ecuador. In fact, I'll be in Ecuador for basically the full month of November, the first through the 25th. By the time this episode airs, I will be in Detroit, Michigan in my mom's basement. Oh, fancy. I know. I know.

Well, send me a postcard, and I will do the same. From Ecuador. Now, is Ecuador known for great coffee? It is, yes. Excellent coffee, excellent chocolate. This is my fifth trip. It's weird talking about it in the present tense because I'm not there yet. But by the time the episode airs, I'll be there.

So this is slash will be my fifth trip there. and I have an annual tradition of doing a backbend over the equator every year. So by the time this episode airs, I either will have or am about to do a backbend over the equator. Be in both hemispheres at one time. Exactly. Yes, fantastic. I would do the same except I'd just take one leg and put it in one and one in the other. I've always wanted to do a handstand over the equator.

And every year I tell myself, by the time I come back next year, I'll have learned how to do a handstand. and every year is a reminder that I have no follow-through. Failed again. Exactly. Well, every time you raise the bar a little bit, we're answering a lot of questions today. Yes, we have 10 questions that we're answering today. So let's get started. Our first question comes from Lauren.

Hi, Paula. This is Lauren from Los Angeles. I love your blog and podcast. My question is about buying my first home. I'm 26 and I make about $48,000 a year after taxes and everything. and I save about half of that. Currently, I'm putting $6,000 a year pre-tax in my $457B plan with my employer and $6,000 a year after taxes and a rough IRA with Vanguard.

That leaves around $18,000 a year that I'm not sure what to do with. My goal is to buy my first home within the next five years or so. Obviously, I live in a very high cost of living area, but it's where I want to stay. where should I be keeping the rest of my savings for the next five years or so or until I get enough for a down payment? Just FYI, I will be buying this home solo. Any help is appreciated. Thank you. Lauren, first of all, congratulations on saving such a huge percentage of your income. You make $48,000 a year that you take home after taxes and you save half of your money, making $48,000 a year, living in Los Angeles.

Angeles living in one of the most expensive parts of the country. I mean, wow. I actually wanted to lead with your question because of the example that you're setting and the role modeling that you're providing. Congratulations on doing that. And also, thank you for being that role model for everybody else who's listening to this because that is a very, very impressive savings rate. So you know what? You know what? I think this calls for a sound effect. Whoa, whoa, this early in the show. I know, right? Normally we do a round of applause, but Steve, who Joe who edits both of our shows, you know Steve. Hi, Steve.

Steve has recommended that we go with something other than a standard round of applause. So, Steve, I'm going to leave this in your trusted judgment. Give us something awesome. Holy cow, that? Wow. I knew it. I knew he'd deliver. You're pulling out all the stops.

This show is already off the rails. and we've just begun. I know, right. So, I suppose people have probably tuned in because they want to hear some financial wisdom. Oh. So, Lauren, first of all, love the way that you're investing for retirement. As far as the $18,000 a year that you are setting aside for the down payment on a home, because you want to access this money within the next five years, I would not put it into any

type of investment that has a lot of volatility or has a risk. of significant loss because of the fact that you want to draw it down within five years. Basically, when you invest money, you want the risk profile of your investment to be commensurate with the timeline. So if you are investing money for retirement that you're not going to tap for another 30 years, then you can put it into equity index funds. And, you know, if it plummets, that's fine because you have 30 years to recover. In this case, though, because you want to tap that money within the next five years, I would invest it in one of the following options, either a conservative bond fund or treasury inflation protected securities, otherwise

known by the acronym Tips, or a high-yield savings account or a money market account. I would choose one of those four options, knowing that the conservative bond fund is going to have a little bit more risk than a savings account or a money market account, but all of those are within what I would consider to be an acceptable risk range for a five-year timeline. And I put those on a continuum. The closer you are to needing the money now, the more I go with the high-yield savings account and the closer we are to five years. So if you're pretty sure it's going to be five years, I would, depending on your risk tolerance, I would usually ignore the high-yield savings account and go more toward the low-risk bonds. But once you get

to two, two-and-a-half years, that high-yield savings account looks incredibly attrously. because you have no idea what's going to happen. I'll tell you my favorite of these that has served me well over the last 25 years, Paula, and continues to delight me. Delight you. Yes, is a category called Ginny Mays. And I really like, and that's a government national mortgage association. Now, you may know the problems that happen in mortgages with Fannie Mae and Freddie Mac. Those are government-sponsored agencies. Ginny May is close. to the government, which is why none of those bad things happen in the Ginny May arena that happened with Fannie Mae and Freddie Mac.

So the chance of something happening that's really catastrophic and will ruin Lauren's chances of getting her house, incredibly minimal. On the other side, the upside here versus Treasury, which I really also like those, the upside is nice. So far this year as we record this, I'm looking at the Vanguard Ginny May Fund. Most of your favorite fund companies have a good Jenny Mae Fund. Fidelity's got a great one. T-Rill price has a fine one.

I don't think there's going to be a lot of appeal for one or another when you get to the top fund families. But year to date, as we record this, they're up five and a quarter percent. Now, 2018, you were better off in one year, which is why I like a high-yield bond, which is why I like a high-yield savings account better for the short term, because these fluctuate a little bit. You only did 0.87, which beat the heck out of a high-yield. a brick and mortar bank, but got beaten up a little bit by high yield savings accounts. 2017, when high yield savings accounts were paying around one or less than one, they were at 1.87, 1.85 below this. I'm looking at the last 10 years, Paula. The best return was 7.68

in 2011. The worst return was negative 2.23 in 2013. So the chance of you, if you have five years, you're going to wipe out that negative two year that will happen maybe once a decade with a year or two that will give you a nice, fairly consistent rate of return with not a lot of risk. All right. So vote for Ginny Mays. And I agree with you, Joe, as we talk about that five-year goal, right now when you are five years away from needing to tap that money, one of the higher risk options like the conservative bond fund, or a Ginnie Mae is appropriate for a five-year time horizon. And then in the same way that you would rebalance a retirement portfolio as you get closer and closer to your retirement date to reflect the shortened timeline to withdrawal, you do the same thing for this. It's basically the same thing as retirement portfolio management, but on a compressed time scale. So as you move from the goal being five years away to the goal being three years away to the goal being three years away,

to the goal being one year away, you ratchet down the level of risk. But I like what you said about Jenny Mays. That's not an option that we hear a lot about. And it's funny when you and I were talking before we started today, I said, I usually am not specific about an asset class, but for this particular goal, I really, really, Jenny Mays have served me so well, and the risk is so low in that asset class as you learn about how that works and how. close it is to being a U.S. government bond itself, that I really like that asset.

What do you think of laddered CDs? I like it, but not in this market. I mean, you know, I look at what CDs pay currently versus what a high-yield savings account pays right now. Yep. You don't get paid to lock your money up. I mean, if I lock my money up, I need to get paid for that, and I don't. Yep, that's exactly the reason that I didn't suggest laddered CDs. So normally, for people who are wondering what on earth we're talking about, a laddered CD, is where you have a pile of money. You go to a bank or a financial institution

and you buy CDs, certificates of deposit, but instead of putting all of your money into just one CD, like let's say that you've got a pile of money and you could, theoretically, you could put all of it into a CD that has a 12-month maturity. But instead of doing that, when you ladder a CD, what you do is you put a little bit of that money into a CD that has a three-month maturity,

a little bit into a CD that has a six-month maturity, maturity, a little bit into a CD with a 12 month, a little into an 18 month, a little into a 24 month. And then as the CD with the shortest maturity expires, you take that money and you put it into the one with the longest date to maturity. And by doing so, you get the benefit of the higher interest rate that you get paid from the CDs that have a longer date to maturity, combined with the liquidity that you get from the CDs that have the shorter date to maturity. So a laddered CD is a way to balance both the desire for a higher return with liquidity. So normally, you know, if you'd ask me this question 10 years ago, that's what I would have suggested.

But I'm with you, Joe, CDs, the payouts just suck these days. There's just no point. Don't waste your life. No, it's so frustrating. And I go back because that's obviously something you and I was having our tool belt. So I go back there, I don't know, two or three times a year and go, oh, let's look at CDs. This might be, no. Exactly.

So, Lauren, thank you for asking that question. And best of luck with buying a house. And I'm excited for you and for all of your goals. You're doing an amazing job of saving and investing. So congratulations. Our next question comes from Sawyer. Hi, Paula. My name is Sawyer.

I discovered your podcast a few months ago, and I absolutely love it. I love your approach and style, and you're the primary fireperson I listen to. I so appreciate what you put out there, and I thank you so much. So I'd love to get your input on my five-year plan, and I'm wondering if I can turn this into a two-to-three-year plan instead. Basically, about one and a half years ago, I inherited some money. With that money, I paid off all my debt, so I have no credit card, no school loans, and no mortgage debt. I bought $1.5 years. I bought two high-end condominiums, each of them two-bedroom, two-bath, totaling $1.4 million in a New York City suburb with great schools located about 30 minutes out of Manhattan, with the plan of holding on to them long-term and renting them out for a nice side income stream. But currently, I live in one of

the condos and rent out the other. The rental brings in $5,200 a month. About three months ago, I started a part-time job as a nurse practitioner in the city, and I make about $76,000 a year gross income. According to a real estate broker, the unit I live in now could bring in $5,600 a month. If I move out of the unit I live in, I could make about $200,000 annual gross income. If I stay in the condo, I make about $138,000 annual gross income. I'm 47 years old, single with no kids, and I try to keep my personal annual expenses to $40,000 a year. I'd like to save $400,000 cash for a down payment for my dream home. It's been my dream to move to Boulder, Colorado, buy some acreage in the Rocky Mountain foothills,

and design and build a small house to live in for the rest of my life. My thought is to continue to earn rental income, get a part-time job as an NP in Boulder, or even open my own practice, which is something I've wanted to do. I'm wondering whether I should move out of the condo, rent a place locally, rent out the two condos, and save for the down payment while in New York. Or should I continue to live in the condo for a while, then rent a small place in Boulder, and save for the down payment in Colorado. It seems moving twice, once locally, then again to Colorado later, might be a waste of money. But the longer I live in the condo, the more rental income I'm missing

out on. And I think I might make more money for 20 hours a week of work in New York City than I would make in Colorado. Do you think I should move once or twice? And how quickly do you think I can achieve my goal of moving out to Boulder? There's nothing really keeping me here except the part-time job I just started three months ago that I like and could stay out for a few years, but I don't love it. And I can't get out to the mountains on a daily basis the way I could in Boulder. I would love to hear what you think. As always, thank you so much for your input, Paula. Sawyer, first of all, I love the choice of Boulder, Colorado.

I went to college there. It's a beautiful place. And like you said, you can get out to the mountains on a daily basis. A hike in the mountains is a lunch break there, which is amazing. an absolutely fantastic place to live. So let's talk about the numbers. Now, the two condo units that you own, hypothetically, if you moved out of your, hypothetically, if you moved out of your current unit and you rented out both, you could potentially collect gross income of $129,600 per year at full occupancy, $5,200 per month for one of the units, plus $5,600 per month for the other unit,

multiplied by 12. That's the 129,600 figure. But that's gross income and that's full occupancy. So none of that's going to happen because gross is not net and occupancy is never 100%. So we need to subtract some amount to calculate your operating overhead, repairs, maintenance, capital expenditures, utilities, property taxes, homeowners insurance, all of the operating expenses associated with owning those properties, as well as we also need to subtract for vacancies. I ran the numbers making an extremely generous assumption that we would only subtract 35% for that combination of operating overhead and vacancies. And to the people who are experienced real estate investors who are listening to this, I'm sure you're like raising your eyebrows incredulously right now, because

that's a very generous subtraction to make a lot of real estate investors find. that their operating overhead consumes 40% or 50% of their gross income. But let's just be generous. And let's say that you operate this very, very efficiently. And that operating overhead only consumes 35% of your gross income. Under that situation, you would pocket a total of 84,240 per year from these rental properties. Now, that amount is before taxes, but taxes might be offset by depreciation. So again, let's just be generous and roughly assume that this portion of your income is lightly taxed, right?

So that's 84,000 that you're making net from the rentals plus the $76,000 from your job for a total income of $160,000 per year if you stay in New York City and you move out of your current condo. So you'd be making $160,000 per year. That's very different from the $200,000 that you projected in your voicemail. And so that's my first comment would be as you're running these numbers, Make sure that as you're running the rental numbers, you're adjusting for those operating expenses and those vacancies because gross rental income is not an accurate reflection of what you're actually netting. And the way that I run the numbers, even assuming best case scenarios, from what I'm seeing, you're pulling in $160,000 per year in total between your job and both of the rentals. And that's pre-tax. So let's just say that you stay in New York.

and after taxes you end up bringing home, we'll say 120,000, right? You spend 40,000 of that. You save the other 80,000. Actually, that makes it spot on a five-year plan because if you can save $80,000 a year for five years, that's exactly the $400,000 that you're aiming for before you move to Boulder. But, alternately, if you were to move to Boulder, and if after moving to Boulder, you'd also net $84,000 pre-taxed from these rentals, then the wild card here is how much you'll be earning from your job, your part-time job, if you move there. Because if you can earn a comparable amount, then you may as well live where you want to. You clearly want to live in Boulder. You want the enjoyment of being able to go out to the mountains every day, which is great. You want the enjoyment of the fact that Boulder has more than 300 days of sunshine a year. I don't have to sell Boulder on you. It's a great place. And so there's no reason to spend five additional years in a location that you don't want to live in. If you can make a comparable amount as an NP in Boulder as you could in New York, then you might as well

live in the place that you want. But I did want to go through those numbers because, because as I see it, you'll probably be bringing home, even under the most generous set of circumstances, about $120,000 after taxes. And again, and spending 40 and saving 80. And that puts you right at that five-year plan. My first thought, either way, I had two thoughts very quickly. We got partway through her question. And the first thing I thought was, it sounds like these are beautiful places to live. But if it doesn't mean anything to her either way where she lives, rent it, right? Because if it's a beautiful place and she'd get a high rent and she doesn't care about her aesthetic of where she lives, like it's not adding to her daily life, then by all means rent it to bring in more money.

The condo, you mean? Yes, absolutely. Run out the condo. But the second thing, when she started talking about Boulder, and I would see this when I was a financial planner, Paula, I could see the look at her eye, the visual terminology she used, the way she seemed like she was leaning into the microphone. Like people would start talking about their dream and you knew it was a good one when people would lean across the table and they'd start telling you, you know, I could see the mountains every day. I want this place, this house, I design and build by myself. Are you kidding me? My only question was this.

Forget everything else. Forget everything else. Let's start there. And with the question then being, how do we get to there now? If the future's not promised to us, how do we make that a reality? It was funny because I was doing the same math. I just went backwards and arrived at the same thing, which is if you can find the income stream in Boulder over the short run to duct tape it and live in the place that you like, why wouldn't you do that?

Yeah. There is no downside. So the idea of moving twice, I'm not in love with. But here is one other thing that I would consider. If you moved, if you took the chance, I always like having the same thought process that an engineer would have. And that is what could possibly go wrong. And if something did go wrong and you weren't able to earn it there, let's say you did

and your job fell through, this job that you have now that you don't love, but you like, could you come back to it? Because if you have that as a plan B, then that makes me even more confident that it's a great idea. Because I know that once you're out there, you will try not to use that plan B. If you're in the place that you love and the place that you want to be, knowing you have that in your back pocket is great, but I think that'll give you the confidence to look even harder to stay there. It's funny that you and I arrived at exactly the same conclusion coming at it from different frameworks and different angles. You started with what's the goal? And it's clear from the way that she asked that question that the thing she really wants to do is live in Boulder. You and I both heard that.

There's no doubt. Yeah. I think we all could hear it in her voice. I love that. And this is why I love Stephen Covey so much, the idea of beginning with the end in mind. Like when you make the goal that concrete and you can see the goal. The more you can see the goal, you know, people would come into my office and they'd say, well, I want to retire when I'm 62. Okay, what do you want to do during retirement? Now I want to travel and play golf. Well, let's do some math. 62 to maybe 110 years old. We need more than that. But when somebody told me all the things they want to do, the new business they wanted to start or the volunteering they wanted to do in their community, and if it was a specific group they wanted to join that they didn't have time for today or family they wanted to be around,

more. Like, the more specific it was, the more there was something to hang on to, the easier it was than to plan for that goal. Thank you, Sawyer, for that question. Have fun renting out your condo and living in Boulder. Send us a postcard. Our next question comes from Cassie. Hi, Paula. My name is Cassie, and I'm from the New England area. I have a dilemma. I'm a I'm in the process of finalizing a divorce where based on equitable division of assets, I'm bound to get at minimum 80 at maximum $1,16,000. So I have a daughter. My number one priority is to purchase a home for the safety and security of my daughter and I.

However, I do have $30,000 in debt that comprises of student loans, car loan, credit cards as well as personal loans. So I'm a little confused as to what the best approaches for me. My thoughts are I can either, one, go straight into putting a 20% down payment for a home in the area in which I'd like to purchase, the 20% and closing costs would total to about $80,000, but that would mean that I'd still have my debt and then I'd have a mortgage as well. My other option is to hold out on purchasing a home for about a year or two, and hopefully just a year, but should I get a minimum 80 and pay off all of my loans, which would comprise to about 30,000, and then take 10,000 of that and put it in an emergency fund, and then the remaining 40 put in in a bank account

and start adding onto that with a goal towards a 20% down payment. Again, I'm a little bit confused as to what's the best approach here because I'm battling the need for me to purchase something that I feel I can call my own for myself and my daughter. And then on the other hand, taking the money, paying off all of my death, and then starting from scratch. So I would really like your opinion here. I listen to you every day.

I really look forward to hearing what your thoughts are on this. Thank you. Cassie, thank you so much for the compliment and for valuing my opinion. I'm honored. I'm flattered. In your situation, I would, you know, you mentioned that you are, that your motivation for wanting to buy a home is the safety and the security of your daughter. What I would encourage you to do is think about,

how much you could ensure the safety and security of both yourself and your daughter if you were completely debt-free. So your proposal of paying off all of the loans that you have with that $30,000 and then saving a $10,000 emergency fund, I mean, that application of $40,000, that the $30K to wipe out all of your debt and then the $10K for an emergency fund, that will bring so much financial safety and financial stability to your lives. I would do that first and foremost. And then, once you've done that, all of the monthly payments that you're currently making towards your debt, all of those monthly payments can then go into a savings account for a down payment fund. So once you've got that debt wiped off, then keep quote unquote making those same monthly payments. But this time, just make those monthly payments to your own savings account. And by doing that, coupled with any additional money that you have from the divorce settlement, that put together will probably get you the down payment that you need within about a year. So you have a great opportunity to be completely debt-free, have an emergency fund, and still have that home within a year or two. I get super excited about that. And I totally feel the same way that if you have the opportunity to pay off that debt, that that is so exciting. I'll say this, though, this is a little bit

of Joe's mom coming through instead of Joe, which is if you pay off all that debt, but the reason that debt accumulated in the first place, and I have no idea how it accumulated, for some people, it was student loans, for some people, they had to have a car at the time. For some people, they just don't manage money well. But if you don't walk through those. things that created that debt and make sure that it doesn't come back again, then paying off your debt is a futile exercise. And I saw it with client after client after client that would come to me in their 50s, Paula, sometimes. And they've been paying off debt since their 20s. And they pay it off and they get debt again. They pay it off. They get debt again. And they pay it off. And they get debt again.

You don't want to go through that cycle. You want to actually move forward. And the only way to forward is to set up good money management systems so that you're able to move. And some things that Paula talked about that I really want to reiterate is if you pay off that debt, take the amount of those payments and make sure that that automatically, don't trust yourself to write a check. Don't trust yourself to deposit it once a month. Don't put something on your calendar. Make it automatic.

Automatically every month, lock in that gain by having it go to that. that account. Secondly, make sure you have a big enough control over your budget that you don't have to then raid that account to pay off a credit card bill. And once again, I'm not talking to you, Cassie. I'm talking to everybody listening. That whenever somebody's going to pay off debt, you don't want to have to do that again and again and again and again and again. Right. Absolutely. Yeah, I'm with you 100%. The payments that you are currently making towards those debts, those monthly payments, automatically transfer that money as if it's a bill that's on autopay, automatically transfer it into a savings account. And one good way of hiding

your savings from yourself, and I did this years ago when I wanted to hide my emergency fund from myself, I actually opened a savings account at a particular brick-and-mortar bank, And then I cut up the debit card, I ripped up the checks, and I purposely lost my online login information. And so the only way that I could access that money in that savings account is if I physically got in my car and drove to that brick and mortar bank location. And by purposely creating that level of friction, I never touched the money. I knew that in an emergency it would be there if I needed it. If there was truly an emergency, I'd put on some pants and get in my car. But I also knew that by creating that barrier to getting the money, I was not going to do it on a whim.

I was only going to do it if I absolutely had to. So you did that personally. I did the same thing with clients professionally. there was a bank in Minneapolis that I had an affiliation with, didn't get a commission, but I did send money there all the time because I could call on my client's behalf. And because of that, we would send money from the Detroit area to Minneapolis, to a bank of Minneapolis. I would make sure that my client, the only way that they could get their money out was to have it either,

number one, come to them via ACH, which, you know, ACH may take two or three days. or if it was a big emergency, they'd have to wire it to themselves. And there was, I don't know, remember the number. It was like a $12 wire fee. Yeah. But it was so amazing how a $12 fee made sure it was an emergency because people that could never trust themselves with a dollar, if you put $12 between them and their money, which in the big scheme of things, you know, Paul is nothing.

Right. You put $2.2 between them, they won't touch it. And it's amazing. It was so cool to watch people that could never save go, oh, there's a $12. fee or I can't get it for three days, yeah, I think I'll find a different way. And your brain is amazing. Your brain will almost always find a different way to solve a problem. But if the money sitting there in your sock drawer or with an ATM card, your brain's going to take the easy way up. Yeah, exactly. It's for exactly that reason that I'm a big fan of keeping your checking account

and your savings account at separate banks. Because when you log into that bank account, you don't want to see a big pile of savings. If you see a big pile of savings, your brain is going to think, oh, cool. This is just like checkings. Yeah, I can just a couple keystrokes and it is in my checking account. Exactly. So keep your checking and your savings at different banks so that when you log into one, you are not seeing the balance of the other. That's so fun. This is a big point, Cassie. I mean, you've got this huge inflection point in front of you. This could be a great future that you're opening up. Yeah, I'm very excited for you to have the ability to become totally debt-free with an emergency fund and be building savings towards a down payment. Like, that's a great spot to be in.

So thank you, Cassie, for asking that question. We'll come back to this episode after this word from our sponsors. Let's talk about holiday gift giving. I give gifts to a lot of the people who are involved with Afford Anything, including Joe, Joe Sal C-high, who's a guest on today's show. He actually started. He started sending me holiday gifts before the creation of the Afford Anything podcast back when I was a regular on his show. And so now I send him stuff because he sends me stuff. And you know, the difficult thing about workplace gift giving is that I want to give a gift that signals that I know this person. I want to give something personal, something that shows that as I'm giving you this gift, it shows that I'm thinking about you and there's

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And you can get 30% off and free shipping when you use my code Paula at S6.co slash Paula. That's S6.com slash Paula. promo code Paula to get 30% off and free shipping. Society 6. Design your every day with art you love. S6.6.c.o slash Paula. So if you've been listening to this show for a while, you probably heard me mention a few weeks ago that I received my Everly Well at-home lab test. I tested myself for food sensitivities. I've never tested myself for food sensitivities before,

and I got the results a few weeks ago. And it turns out that there are three foods that I have high reactivity to, which means that the strongest immune response in my blood sample. Those are egg whites, cows milk, and yogurt. And so now that I have these results, I have information that I can use to make better, more informed choices about my health, like rather than just guessing, Now I can try to phase out, pick one of these. I actually don't really drink a whole lot of cow's milk anyway. I make my own almond milk. But I do drink half and half.

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Our next question comes from Andy. Hi, Paula. Hope all as well. My name is Andy, and I have a question regarding the 4% rule. After doing a lot of reading about the Trinity study and the 4% rule in general, it seems like your initial nest egg at which the 4% rules based on can grow significantly over time. especially if you pick up a part-time job or geo-arbitrage and take out less than the 4% for a few years. My question is at what point would you readjust the 4% rule for a new nest egg?

For example, I can't imagine that if you start out with a million dollars and your portfolio grows to 1.5 or even 2 million, that you're still taking out 4% based on the initial million dollars. Thank you. Andy, thank you for asking that question. The idea is that 4% is the approximate rate of real growth after inflation. So if you have a portfolio that is 50% equities, 50% bonds, and it's invested over a 30-year time span, then over that long-time horizon as a long-term aggregate average, that portfolio might grow by a total of about 7%. but that 7% represents a 3% inflationary increase and then a 4% rate of real growth after inflation. If you can draw down on your growth while essentially keeping your principal preserved,

your inflation-adjusted principle preserved, then hopefully you won't run out of money. I'm going to leave a few asterisks here. In what I've just described, the 4% rule was originally calculated by finance professors at Trinity University, who are looking at historic 30-year time periods. So what I've just described is not the way that the 4% rule was originally developed, but what I've described, when we talk about the 4% rule in the context of an early retirement, we are misapplying the 4% rule, right? The 4% rule was never meant to apply to an early retirement timeframe because it was developed

in the context of people trying to manage a 30-year retirement. there has never been a conclusive study on safe withdrawal rates over a 60 or 70 year time period, which is what early retirees are aiming for. And so anytime you talk about the 4% rule in the context of early retirement, you have to start with the understanding that it is a misapplication of the rule. And we've all socially kind of agreed that we're fine with that. We're fine with misapplying the rule, but we do need to at least establish that. So to the extent that you can keep the principal portion of your portfolio adjusted for inflation preserved and draw down only the growth, that seems like a reasonable way to approximate safety in the context of a rule that isn't actually meant for this use case in the first place. You know my feeling, Paula? I'm going to guess, Joe.

only take out what you actually need and want and throw out the 4% rule entirely. Goal-based planning is so much easier than people think it is. Why wouldn't I start with my goal and then make sure that I hopefully have enough for my goal and then change my goal based on the amount that I have and just chuck the academic stuff completely? And, you know, when we look earlier at Sawyer's question about how do I get to design my own house, then I can look at how much money does that take? What does it take for her to design it?

What does it take for her to build it? How much money does she need to bring in during that five years? Then I can apply the conominiums. Take all of that. Take what you have and what you're building and work it toward a goal. And then like anything, as markets and goals change, revisit the goal and retarget, it is so much more fulfilling and so much less onerous. and you don't lay awake at night wondering if this misapplied rule is actually going to hit the mark or not.

Like, there's none of that anymore. It's gone. Yeah. I knew you were going to say that. So I saved the start with the end in mind talking point for you because. It's for me. Thank you. Yeah.

Yeah, exactly. Because I agree with you completely. And that is the approach that I would take. But I also know that there are many of us in the fire community who like the thought exercise of wondering. how to adjust the 4% rule to early retirement conditions. And so to the extent that that's an interesting thought exercise, you know, my response would be keep your inflation adjusted principle intact. Well, and to your point, I mean, come on.

If you asked me, have I used the 4% rule to calculate how much I could get right now? Daily. Really? Do you? Maybe not daily, but at least like once a week. I'm like, oh, yeah, okay. All right, I like that number. Oh, it changed to that.

Oh, that's cool. So I will do that just in a that's cool kind of way. Just like when I was younger, I'd always use a rule of 72. I'm like, hey, I've saved $10,000. Now let's put 9% on that and let's spin it and see how far that got me, you know? If I put $200 more in here, what's that going to be worth 40 years from now? If I do $200 a week, what's that going to give me? Just, yeah, I'm with you.

Yeah. I'll play those games constantly. But fun, yes. Useful. No. Yeah. I went through a phase in my like mid to late 20s where I was playing with retirement calculators every single day.

I mean, and so many different ones. Because they all have different variables that you can put in and different assumptions and they all spit out something a little bit different. And so I would just hog. from one to the other to the other. I would do that instead of doing actual work that earned me more money that I could then invest. It's so fantastic.

I feel like we have our community of nerds here. I remember the first time I went to a FinCon, which was the second conference, is conference FinCon that Paul and I go to all the time, which is where money media meet. I meet a couple people I'd only met online. And within 15 minutes of being at my first FinCon, we're talking about the difference between

Termin Whole Life Insurance. That's one of my least favorite conversations. But a conversation I could have with nobody except at a FinCon. So wonderful. Yes, 4% rule. Same thing. Yeah, yeah, exactly. So, Andy, those are your two answers.

One is nerd thought exercise and the other is how to actually apply it to your life. And in terms of your actual life, start with the end in mind, as Joe says. Thanks a lot, Andy, for that question. Our next question comes to us, not from me, but from the other Joe. Hey, Paula. My name is Joe. I've been a longtime listener of yours. I actually had emailed you back in 2014 when I started my journey to financial independence.

And voila, all the years later, I am on the doorstep of being financially independent. So my question today was about health insurance. health insurance continues to get more expensive and I am considering being self-employed so I need to think about what my health insurance plan is going to be. I currently have a HSA with a high deductible, but I wasn't sure if that was the best approach. I've considered recently looking at flying out of country to do medical procedures. Obviously, if you get hit by a bus or something, that's something that's very urgent and you need to be taken care of locally. But looking at other countries, they're a lot cheaper and their medical care is surprisingly, sometimes better

than the U.S. So I wasn't sure what your thoughts were on that. If you had had that done before, look forward to hearing from you. Thanks. Joe, first of all, congratulations on being on the doorstep of financial independence. That's fantastic. And thank you for being part of this community for such a long time. 2014 was the early days of me blogging. And that was before I started this podcast, two years before I started this podcast. So thank you for being part of this for so long. Now, in your question, I actually hear two different topics. I hear health insurance. And I also hear. health care costs, right? So your initial stated question was about health insurance, but then you immediately went on to talk about medical tourism. Medical tourism is an option that can help offset some of your health care costs, but it is not a replacement for health insurance. So first, I want to separate out these two concepts and make sure that we're not conflating them. In terms of health insurance, you're just going to have to buy some.

Just think of it like groceries or electricity or paying the sewer and trash bill. It's just a bill that you're going to have to pay. Healthcare.gov has, of course, ACA plans, Affordable Care Act plans. Policy Genius, which is a sponsor of this show, also has a list of plans. You mentioned that you might be self-employed. Now, depending on where you live, there is a potential option. that you might be able to hire yourself, if you start an S-Corp or if you start an LLC with S-Corp taxation and you hire yourself as a W-2 employee of your own company, then technically you would be

the owner of a company that has one employee, that employee being you. And Gusto, which is also a sponsor of this show, Gusto has health benefit plans for small businesses in which small businesses with as few as one full-time employee may qualify. Now, whether or not that includes you as the employee of your own business is going to depend on a huge variety of factors. And the state that you live in, among other things, is also going to play a role in that. But that is another option. I bring that up because that's actually something that I was looking into this morning for exactly that reason. But I'll just say, I myself have purchased health insurance on the open market. I've purchased an individual

health insurance plan since 2008. People often like to talk about individual health insurance as if it suddenly formed when the ACA was passed. But that's not the case. Like the mandate came when the ACA was passed, but self-employed people have been buying individual health insurance. for decades beforehand. So I've been buying individual health insurance since 2008, and it's just a cost of living. It's just something you've got to get used to. Just think of it like groceries. The one other thing that I'll say is that there are faith-based cost-sharing health plans that some people use as an alternative to insurance. However, these types of plans don't offer the same legal protections that you get when you purchase insurance itself, because insurance itself is a

highly regulated industry and faith-based cost-sharing plans. While many people have anecdotally reported being satisfied with them, they are legally not insurance. Yeah, I've seen the same thing, Paula. I've seen people anecdotally have great experiences with those. But the reason why I never recommend them is because you go to any of their sites and it says right across, the top or somewhere near the top, not actuarially sound, which they're required to say, which means that there could be a catastrophic health care crisis and it wipes them out. So insurance is called insurance for a reason because it's there when you need it. And I can't in good faith recommend it to anybody, but certainly you can look that way.

I totally agree. In fact, what I would do is if you are interested in a faith-based cost-sharing plan, I would use it as a supplement. So I might get the cheapest possible bronze ACA plan. Go to the ACA, go to healthcare.gov or go to policy genius where you'll get real insurance with all of the protections that that offers, get the cheapest possible plan. And then you can go to a faith-based cost-sharing platform and buy a policy from them with greater coverage and use those to to supplement or complement one another. I think that would be an acceptable way to do that, but it might not be cost effective once you're paying both premiums. That's something that you'll have to run a spreadsheet on based on what you think your costs are going to be.

And again, that's where I want to separate out the concept of health insurance with health care costs. Because when we talk about health care costs, you know, we talk about medical tourism, We talk about concierge care. And even in this context, using faith-based cost sharing plans as a supplement, you know, these are all options for reducing the cost of treatment and medication. These are options that might help you reduce the cost of the actual care that you receive. And they're all avenues to explore, but don't conflate them with insurance. You need insurance, and insurance is regulated and there's just no substitute for it. Something else I've heard a lot from people lately, including from my co-host at Stacky and

Benjamin's, the other guy, OG. If you have an emergency fund, ask the place about cash because of the fact that so many people have had to use cash lately because of issues with health care, he was very surprised on a procedure for his son when they asked about cash. The hospital said, no, no, no, you probably don't want to pay cash because it's a lot of money. And he said, well, you know, hit me. How much money do you think it's going to cost? And they said, well, you're going to need to have $450. And he said, $450 for my son's broken arm. Wow. Correct. I will do it. And then to be clear, then he asked the question, what other charges are there? You know, there's got to be, are there hospital fees on top of that, but you know, whatever fees? And they said, well, no, it's $450.

But that's a lot of money. You don't want to do that. You should go through your insurance. It's like, No, no, no, I will do that right now. So sometimes, depending on the procedure, and I haven't just heard it from him. He's the person closest to me. Ask about cash if you're an entrepreneur. Maybe that's an option. There are also a lot of concierge care type of setups where you'll pay $100 a month to get curated access to a general practitioner. Those should never, ever, ever be used as a substitute for insurance.

But again, it's a nice compliment. to have on top of it if, again, if you want to use insurance to cover a low premium, high deductible plan and then get something like concierge care on top of it, in which you're paying an additional monthly cash premium, but you're also getting something additionally for it. So thank you, Joe, for asking that question. We'll come back to the show in just a second, but first, do you run your own business or do you have a side hustle. Are you an entrepreneur or a solopreneur? Well, if so, as you know, invoicing clients and chasing them down for payments and trying to collect a deposit in advance, it's a huge pain.

And fortunately, FreshBooks is made for small businesses and entrepreneurs. So FreshBooks is invoicing and accounting software designed specifically for small business owners. It's simple, it's intuitive. It lets you create and send professional-looking invoices in 30 seconds. If your client is late on paying, it automatically sends a late payment reminder so that you don't have to send an awkward email. You can collect deposits from your clients up front. You can automatically create and send invoices on a recurring schedule so that you don't have to waste time making the same invoice over and over again. So it's made for small businesses and entrepreneurs and you can try it for free for 30 days. There's no catch, no credit or debit card required,

so there's no gotcha at the end. Just give it a try for free. Go to freshbooks.com slash Paula. And when they ask, how did you hear about us? Type in, afford anything. Again, that's freshbooks.com slash Paula. Freshbooks.com slash Paula. If you sleep eight hours a night, then you spend a third of your life in bed. So you want it to be comfortable. You might spend more time in bed than that.

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and she wrote about this company called Brooklyn, that was founded in 2014 by a husband and wife team, Vicki and Rich Fullop, and they wanted to bring really comfortable stuff into people's homes at affordable prices. So they became the first direct-to-consumer betting company, which means they work directly with manufacturers and directly with customers. There's no middlemen, just great product and service at a super affordable price. And when I read about that and how mission-driven they were and how quality-focused they were, I was really inspired by the story of how they started and what they're trying to create. And so that was when I got my first set of Brooklyn Incheats. And then a few months later, I got a second set. So that should really

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Brooklyn, everything you need to live your most comfortable life. Our next question comes from Katie. Hey, Paula, this is Katie. I had a question about my Vanguard account. I'm currently invested in the Vanguard 500 Index Fund, the Admiral Shares. It's the VFIAX. And I've been putting money in there and probably in the next year. So I'll have to start pulling out some money and my husband's going to start going to grad school.

But my question is, how much am I able to pull out? Because I notice whenever it has the funds available to withdraw, it's only about a third of the amount of the funds that I actually have in the account. If you could just kind of explain this or if there's another Vanguard account that would be better for more short-term investments, I'd really love to know more about it. Love your show. Thanks. Hey, Katie, this is a great question, and it's one that newer investors ask all the time. If you go back and actually what we told Laura Paula is really what we're going to tell Katie is that different investments have different timeframes.

If you think about it like you're a farmer, like you put seeds in the ground and then there's a certain time when you want to harvest those seeds. So for short term, very short term needs, you want to have your money in a high interest savings account. then you go through bonds from very safe bonds like the ones we were talking about with Lauren earlier up to higher risk bonds and then to very low risk stocks like utility stocks and stocks that pay a big dividend that don't grow very quickly up to the most speculative little tiny stocks on the top end or you know maybe buying artwork or beanie babies or speculative stuff like on the very top you had me until you said beanie babies Joe well that's at the top of the risk pyramid, I'm saying.

I would say maybe small cap index funds might be top of the risk pyramid or frontier market index funds. I would say Beattie Babies are riskier. I'm talking about the reasonable things to invest in spectrum. Yes. If this is where our lawyers come in and say, don't invest in Beattie Babies, that would be too speculative. This is also where our common sense comes in. Yes, which actually, Katie, the stock market, the place you're invested in by investing in the S&P 500, you're invested in stocks of the biggest 500 companies in the United States.

And what that means is your money's going to go on aggregate where those companies go. We've had a very nice run. And if you've had your money there in the last few years, you have been very lucky because usually in shorter time frames than we've had over the last expansion, you have a year or two where things don't go according to plan, where your investments go south. and sometimes South by a lot. So if you need money in a spot where you can get to it today, tomorrow, next week, six months from now, the stock market is a horrible place,

not even a little bit bad, but a horrible place to have money. It's almost like a roulette wheel in a one-year time frame, a little bit better than a roulette wheel, but not buy a lot. But over 10 years and over 20 years, historically, the market's been a fantastic, place. The stock market has been a fantastic place to have money. On the converse, a high yield savings account, phenomenal place for one year. We know you're not going to lose money. If you have it in a high yield account, hopefully you can get close to what inflation is, maybe equal inflation in some years. But at the very least, you're not going to lose money. The bad news is, I just mentioned

the I word inflation over a 10-year period, even though you don't lose money, you lose purchasing power over the long term. So you need to invest in things that has historically have beaten inflation. And there are two asset classes that have done that very well over long periods of time and their stocks and real estate. So I like those for long term, short term. I would move your money out of the S&P 500 into a high yield savings account if you think you might need it this year. Yeah, exactly. It echoes what we said to Lauren in the first question. The risk profile of your investments has to be commensurate with the timeline to when you needed. Now, to the other part of your question, which is that you asked why, when you log into

your Vanguard account, you see that the funds available to withdraw don't reflect the total amount of what you have invested there. Now, I don't know specifically what type of account you have and what restrictions are placed on the specific type of account you have. Bottom line is, the money in your account is yours. So you have the right to access your own money whenever you want to. And if you have any questions about it, just call Vanguard. Their people are awesome. So anytime you have a question about like, hey, can I pull my money out? Give them a call. You can get a real human on the phone very, very quickly. That's one of the many things I like about Vanguard. So give them a call. You'll get to a real human and they'll be able to look at specifically your

account and tell you how you can get your money out if that's what you want to do. And in your situation, that is, given how soon you need to tap this money, it makes sense to not keep it invested in equities, because equities are great for a 10-year time frame, not so great for a one-year time frame. So thank you for asking that question, Katie. Our next question comes from Laura. Hi, Paula. Thanks for answering my question on the air. I hope it resonates with other podcast listeners. Our fire community talks a lot about strategies. for families or couples achieving fire together, my fiance and I are in a unique situation. We've both been high-income earners for several years, and we've essentially reached FI,

but only I am looking forward to pulling the fire alarm and actually going to a $0 income in the next year. We'd like to get married beforehand, but we'd also like to understand what considerations and changes there will be if we're married and filing jointly versus separately in the scenario where he continues to be a high-income earner for several years to come. And I want to make sure I can leverage those strategies that we've discussed, same as I would if I remained single. Any advice you have would be greatly appreciated. Thanks again.

Laura, thank you for asking that question. Very simple approach here. I hope you're working with a CPA. If you're not, start working with a CPA. Then have your CPA run two different scenarios, one in which you're married filing jointly and the other in which you're married filing separately. That way, you can compare MFJ versus MFS and see what the difference would be. And your CPA can do this every year.

And I can also tell you how that's going to come out. Because around the year 2000-ish, they really changed the rules. it was a paperwork reduction act. They made it very difficult for married filing separately to work out for people. You can always run the scenarios. Sometimes the difference between the two is not great. So Will and I actually just did this for the year 2018. We were separated for that entire year. We were broken up. We lived separately, but we hadn't officially gotten a divorce yet. So we had the option of either married filing jointly since we were technically still married or married filing separately since we were living separate lives. So we had our CPA run both scenarios to show us what the tax consequences of both would be.

And, you know, Joe, as you said, married filing jointly did improve our tax situation, but not by much. the difference was actually less than I would have anticipated. I have nothing to add there, Paula, but what I do have is a bunch of other things that Laura brought up and didn't ask about specifically, but things that as a former financial planner, I kind of wonder about and also things that she may want to consider and other people listening might want to consider. And that's when you're married and you're close to financial independence. Congratulations, by the way. That means you both have assets. And when you come to a marriage with assets, we've all seen plenty of headlines about people who get married that have assets.

You really want to make sure that you have a pre-up. And I know that sometimes seems difficult to bring up, but you definitely want to have a prenuptial agreement in place if you have assets. The second thing that I thought of is if you plan on then combining those assets and both of you living on them, I'll tell you that when one person, to use Laura, your phrase about pulling the fire escape. I love that phrase, but the other one not doing it, when the income stream changes, it's difficult for the family dynamic not to change. It just does. And I'll tell you this, I know this personally because it's changed three times in my career with Sherrill. and I. Early on, I was making a bunch of money while Cheryl was going through training for her job. And then there was a point when I had then left financial planning, sold my company, and then Cheryl was still making money.

And then it's gone the other way again. And I'll tell you that every time that changes, they're just, there's this little, if one person's still earning money and the other person is living from the nest egg and is partly being supported by that money, you really, really want to have great discussions around that dynamic together because it's a point that could become contentious later on unless you see it coming ahead and prevent it. And there's something to be said. Laura, I know your question was not specifically about how couples combine finances. There is something to be said for maintaining separate finances. And maybe she's already doing that. Yeah.

But particularly when a couple gets together, not in their early 20s, when a couple gets together later in life when both of them already have assets, there's something to be said for just being like, look, you be you, I'll be me, we can maybe have a joint account from which we pay a few shared bills, but you're still you and I'm still me, and we are going to maintain our own money that each of us control autonomously. Sure, what we share we share, but at the end of the day, you're you and I'm me. I like that. And to some degree, that's actually what Cheryl and I do, and I don't want to belabor that. But what I will say is this is I do like some of the apps that are out there now that if you want to keep separate accounts but manage your money jointly, like everybody helps each other out, two that we like.

The Zeta app is a very good one. And the HoneyFie app is also a very good one. Those are two great apps that help couples manage money together, even if they have separate accounts. Awesome. So thank you, Laura, for asking that question. Our next question comes from Doug. Hi, Paula. This is Doug in Richmond, Virginia.

I had a question about equity sharing programs, specifically one I found online is called Quantum RE. It's a tokenized blockchain investment platform where, people essentially give them money, but then what they do is they work with homeowners to pay them a portion of their equity in the home in exchange for future profits when the home sells. Want to know if you had heard anything about this or looked into it at all. Thank you. Doug, because I work with fintech so often, I will take this one. There are companies out there that work with people who are interested in buying houses where they help you purchase a house, they buy it with you, and then they keep a part of the equity,

which when you sell the house, then they get a piece of the pie later on. It's their way to accumulate real estate. They think because you're going to take care of that real estate because you live in it personally. Studies show that if you live in a house yourself versus having it be a rental house, you're more likely to do standard maintenance. It becomes an attractive real estate investment for them. So there are companies that do that. I don't know anything about the blockchain piece of that, about buying tokens. I still think there are so many things that are going to happen with blockchain across the board, especially when it comes to government intervention in blockchain, that that still is the Wild West. Even once we get past, which blockchain

is going to succeed and which blockchain is not going to succeed, which there's so many players out there that field will narrow over time. And I'll give you an example here, Paula. The Securities and Exchange Commission has already ruled that blockchain is not a security, which is good for blockchain because of the fact that they don't want all of that SEC intervention. And I think the SEC is a little afraid of it also. On the other side, the IRS has ruled that it's not a currency, which is kind of what the SEC was saying it was when they said that it. it's not an investment. So you have two divisions of the same government. Reading about what the hell it is, you know when you've got that on the table that there's

more to come. That's basically another way of saying anytime you hear the word blockchain, remember that this is synonymous with speculative because there is so much that is unknown. So much. It is the Wild West. So thank you, Doug, for asking that question. Our next question comes from Tonner. I have a question about putting money into a retirement account. I'm 58 years old. I make $180,000 in alimony. I do not have a job and have not had a job for 27 years.

Is there any way I can start saving some money for retirement in an IRA or a Roth IRA or something like that if I do not have a job, my sole income is my alimony. I would really like to know. Thank you very much. Thanks for that question, Tanya. And I have to start off by saying that neither Paula nor I are CPAs. And this is a text question. You should ask one. However, for the purposes of your entertainment, we'll tell you what we found on the internet. And actually, it actually part of this, I thought I knew and it turned out that I was right. So little pet, on the back to me there. But I did verify this, and that is, and I'm going to read you right from a place, a website that a lot of financial advisors use called fairmark.com. Fairmark writes for

alimony income for purposes of making an IRA contribution taxable. The keyword here is taxable. Alimony income counts as qualifying income. So if your alimony is taxable, then it does count as qualifying income. It says this is a special rule that permits you to build retirement savings in an IRA, even if you rely on alimony income for your support. The rule applies only, again, to taxable alimony income, though. You can't include non-taxable items like child support or non-taxable alimony received pursuant to a settlement or decree entered into after 2018. So that is specifically from Fairmark, which is a site, Paula, that I would use all the time when I was digging in for entertainment purposes into my client tax questions.

Well, that's very entertaining, Joe. Wasn't that? Nothing better than reading from Fairmark.com. Yeah, I have nothing to add. I do not know anything about the alimony landscape. So thanks for the quick question, Tanya. Our final question today and comment comes from Brian. Hi, Paula.

My name is Brian. I'm calling from Minnesota. I just wanted to comment on a discussion you and Joe Salc, I had regarding Andrew calling in about the possibility of doing a 401k loan as an emergency fund. And I want to share, and I hope Andrew is listening, what I did. So if you remember, the December market was so down. And at that time, in fact, on the winter solstice, my car would not start. So I decided to purchase a new car. I only have a 2.9 mile commute, so I did not want to have full coverage.

I want to have liability only, so I did not want to have a car loan. I wanted to have it paid off. So I took out a $25,000 401k loan at the end of December when the market was down. Since then, the market has done nothing but shoot exactly straight up, the worst case scenario that Joe Salcihi was talking about in you guys' discussion. So now to my question, because I still owe like, $22,000 on this 401k loan, and I'm paying myself back at like 6% whoop-do-do and the market's done 20 in the last six months and I'm just kicking myself. Should I take out a different loan on a shorter

term because I could pay it back quicker from a bank in order to pay this 401k loan back? The other thing that was not addressed in you guys' discussion with Andrew is a very, very, very common emergency is losing your job. And so if your strategy is to take out a 401k loan, if you lose your job, you can't do that. And if you lose your job with an active 401k loan out, you have 60 days to get it back in. Otherwise, you got to pay your tax rate plus the 10% penalty. And that is the stuff of nightmares as well. So should I take out a different loan from my own personal bank, my actual bank just started doing personal loans and I could get it as low as probably 6, 7% with my income and my credit score and my debt-to-c-c ratio, which this 401k loan other than a mortgage on a

rental property and a primary residence is my only debt. So I'd love to hear your thoughts. I'd love to hear Joe's thoughts. Thank you very much. Also, I love your show. You are making people's lives better and we appreciate it. Thank you. Brian, first of all, thank you so much for sharing that cautionary tale. I'm sorry that you had to learn that the hard way, that you had to pay tuition in the School of Hard Knocks, but thank you for spreading the knowledge and the wisdom that comes from that for the benefit of everybody else in this community who's listening, because that is a perfect illustration of exactly why you should not use your 401K as a substitute for an emergency fund, and why 401K loans are loans of last, last, last resort. To your question about how to pay off the

car. My question back to you is, why have a car that's valued at 25,000 or 22,000, right? You've got 22,000 remaining on the loan. You spent $25,000 on this car. That's a very expensive car. Why not sell the car? And yes, you're going to take a loss. You're going to take the depreciation hit. You know, cars lose a lot of money when they're that new and when they're worth that much money. Like, the more they're worth, the more they lose, the faster they lose. Sell the car. Replace it. with something that you can buy for $5,000, and that $5,000 car is going to get you to work and back. It's only a less than three-mile commute. So get a $5,000 car that's reliable and that runs and use that rather than taking out an additional loan to pay off this incredibly expensive vehicle. Even if he decides to keep the car, by the way, Brian, thank you for being the living proof of the nightmare that I explained. and anyone who has the phrase on the winter solstice, my car would not start in their story is a friend of mine. I love that detail about the winter solstice. Just saying.

So on the spring equinox, you can sell your car. But the damage is arched done, Brian. I mean, at this point, here's the deal. You're going to pay, and you said 6% on your loans, what's going to go with that? You're going to pay interest and you're going to pay it to yourself, right? which is one of the things that makes me roll my eyes, but makes proponents of 401K loans go, no, it's a great deal.

You pay yourself back. At this point, now that all the implications are done, all the stock market implications, the loss of that money in the market, now that that's out of the way, now we're really left with an interest rate decision. Would you rather pay 6% back to yourself,

or would you rather pay, as you said, a loan of 6% back to somebody else? I'm voting for 6% back to you. I think 6% back to you at this point, much better than paying that same interest rate to someone else. So I would not take out a loan from someone else. The damage is done the moment you took out the loan. It's done.

And now at this point, it's an apple to an apple. What's the interest rate on the loan? Can I get a better interest rate somewhere else? Interest rate to you versus to somebody else is better. You get that money working either way. I'm going to disagree with you here, Joe. Well, for two reasons. First of all, I stand by my original comment that,

I think that he should sell the car, which is going to suck. Like when you sell that car for a lot less than you paid for it, you know, you bought that car less than a year ago. So when you sell it for a lot less than you paid for it within a one year timeframe and you see how big of a depreciation hit you took, how much value that car lost in the span of just one year, yes, that's absolutely going to suck. But sell the car because you don't need a car that's that expensive. I stand by that comment, but in a hypothetical world in which he did keep the car, as much as I hate the idea of taking out a loan to pay off a loan, Brian is right in that losing your job is a common emergency. And if he loses his job and at that point tries to apply for a loan, guess who's not going to get approved for a loan? Because unemployed people don't get loans. Well, and here's the other piece on that, though.

depending on the company that you work for and how, I don't know if it's, the word is vindictive or how whatever, they may not require you to pay it back right away. So I may have some clarity around that too, but I like that. There actually is another point toward using somebody else's money, which is you can get all of the rest of that money working for you again right now in a place that could have a higher upside.

At this point in the game, I'm not that, I don't know. I think that the horse is already out of the barn. I thought that's where you were going to go, by the way, was that, well, if he takes 6% from somebody else and the market continues to do what it's done, then he's got that opportunity cost back with his funds. Yeah, I mean, sure, that's an argument, but that's, that echoes the argument of should I pay off my mortgage or invest, you know? Right. And stepping away from 401K loans and going towards the opportunity cost of just. generally paying off a debt versus investing, there are very strong arguments on both sides. And depending on your personal priorities, either or both of those are good decisions. Paying off your mortgage is a perfectly fine decision. There are people who will object that you are paying the opportunity cost of not investing

at a higher return, but you get something in exchange for paying that opportunity cost. and to the extent that you do get something for it, you are exchanging money for value, or in this particular case, you're exchanging opportunity cost for value. So if you judge that to be a fair transaction, then that's a fair transaction. And so to take that model and then apply it to this question, sure, yeah, there's an opportunity cost to not having that money back in the 401K, but that would not be my compelling reason for advocating for, for a bank loan. Another loan. Yeah. My compelling reason for advocating for a bank loan is simply that it simplifies things,

that if he loses his job, he's not then going to have to worry about the possibility of having to make a big balloon payment back to his 401K. The loan belongs in the origin source that loans are supposed to belong to, which is a financial institution. and his 401k money belongs in the origin source where it's supposed to be, which is his 401k, and everything belongs in its proper bucket. But that said, sell the car. I saw the car in this whole thing which just becomes a moot point. There it is. So that is our show for today.

This was a long one, but we got 10 questions into today's episode. Joe, where can people find you if they would like to hear more of you? Well, I'll tell people another place you can find me. I do show six days a week that's headlines only. There's so many things that come out in the financial media and our friend Bobby Rebell and I and thought leaders from across the internet. We comment on these different stories. So everything from the founder of Under Armour stepping down to schools,

taking part in more hands-on financial literacy things. If we find a compelling financial story, we try to comment on it within the next few days. So if you like keeping up with financial, nerd headlines, you'll find me at Money with Friends. Excellent. Well, thank you so much, Joe, for being on the show, and I will be doing a backbend over the equator. That's where you'll find me.

And I will go back to my basement. Big thanks to our sponsors for today's episode, Fresh Books, Everly Well, Society 6, and Brook Linen. And also big thanks to two sponsors that we have who didn't specifically sponsor today's episode, but we mentioned them, Gusto and Policy Genius. for a total list of all of our sponsors, plus all of the deals and discounts that they offer, because almost all of our sponsors have some type of a special deal or a discount or a free trial that they offer to our listeners with a specific promo code. And if you want a list of all of those, just head to afford anything.com slash sponsor.

That's affordanything.com slash sponsor. You can get a link to the show notes for this episode at afford anything.com slash sponsor. episode 225. And as a reminder, we have a brand new community that we have just rolled out. It's free. It's open to everybody. It's a new community platform. So it's a platform where all of you can interact with each other. You can discuss today's show, discuss feedback comments, ideas, questions that originated from anything that we talked about today. We've got this great platform where you can connect about any topic that interests you, whether it's side hustles or real estate or 401K investing. or asset allocation, anything at all. You can connect with people. You can connect with people locally. You can connect with people who share your profession. All of that is free and it's open to everybody.

And you can find that at Affordainthing.com slash community. That's afford anything.com slash community. Thank you so much for tuning in. My name is Paula Pant. This is the Afford Anything podcast. I'll catch you next week. By the way, my lawyer says that I need a disclaimer. So here we go.

This is purely for entertainment purposes. Basically, imagine that this is the least funny comedy show that you've ever listened to. We are not professionals. We barely can brush our teeth in the morning. And so we don't hold ourselves out to be experts or really, for that matter, even adults. Give us the same amount of respect that you would give, say, a goldfish. And always, always consult with a real grown-up before you make any decisions. That means consult with a tax advisor, consult with a tax advisor, consult with a

lawyer, consult with a financial planner, consult with people who actually have credentials and who know what they're talking about, because that is definitely not us. All right, you've been warned.