Afford Anything - Ask Paula: I Sold All My Stocks Last Year. Now I'm Kicking Myself

Episode Date: August 16, 2023

#457: Angie sold all the stocks in her retirement account last year. And now the market’s climbing. What should she do with her $500,000 cash position? Christina will be graduating with six figures of student debt. Should she refinance out of a federally protected loan to lower her interest rate? An anonymous caller wonders how Paula and Joe handled their primary residences when they moved out of state. Former financial planner Joe Saul-Sehy and I tackle these four questions in today’s episode. Enjoy! P.S. Got a question? Leave it at https://affordanything.com/podcast-questions For more information, visit the show notes at https://affordanything.com/episode457 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Hey, Joe, have you ever panic sold your investments? No, before I had any money, I was teaching other people because I had a lot of great mentors who were telling me that was the best thing. And I saw the science and I was like, okay. Right. So as an advisor, you knew in theory not to panic sell even before you had the money to put it into practice for yourself. And then I saw it work over and over and over. Whenever any of my clients wouldn't take my advice and they panic sell, I would see the destruction. and then the hand ringing, right? The bigger thing is the hand ringing,

because it's not just about selling, Paula. It's about when the hell do I get back in? Yeah. Yeah. Yes. Well, we're about to solve that problem again. Oh, we are about to. So welcome to the Afford Anything podcast,

the show that understands you can afford anything, but not everything. Every choice you make is a trade-off against something else. And that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention to any limited. resource you need to manage. So what matters most? How do you put that into practice? That's what this podcast is here to explore. I'm Paula Pant. I'm the host. This is former financial planner

Joe Sal C-Hi. Hey-yo. We are going to kick off today's episode with a question from Angie. Hi, Paula. This is Angie. I love your show and your philosophy. I have a question regarding my retirement account. I am currently 42 years old, so I have at least 20 years before I need the money. For a few reasons, I ended up liquidating all of my stocks last year in my retirement account, so I have about $500,000 sitting in cash. And as of today, which is July 13th, the market is really, really high. And I am wondering if you think I should go ahead and just reinvest all of that cash into an S&P 500 index. Thank you for your help. Angie, well, first of all, congratulations on having $500,000. You're so young. You're 42 years old. You've got half a million

that is ready to work for you for the rest of your life. You've got half a million. You've got half a million that is ready to compound and grow for at least 20 more years until you even start tapping it, and then another 40 more years after that. Congrats on having saved that amount. And yes, absolutely. You know that one adage, the best time to plant a tree was 30 years ago. The second best time to plant a tree is today. Same thing is true of stock investing or investing in general.

The best time to invest was 30 years ago, but you were 12, so that wouldn't have worked. It could have. And yeah, technically yes. You know, the best time was 30 years ago. The second best time is today. So if you've got that money, it doesn't matter what happened in the past. It doesn't matter why that money is in cash. The reality is, where are you to date?

Let's forget the picture. Look at the pixel. The pixel of today is that you are 42. You have $500,000 in cash. You have 20 years at least. until you even begin to tap it, the first little bit of it, that means put it in the market. Yeah. And if we look statistically, the market goes up 70% of the time.

So if you're investing for one year, that's way too close to 50-50. 70% of the time it works every time. That's way too close to 50-50 for a one-year time frame. So the best way to invest money, though, is to realize that it goes down 30% of the time, Paula. and to not touch it during those times. So to get you through the volatile periods, you stop watching the news, turn off all of the commentators who are on a day-by-day basis

because the only thing that you care about is your own growing season for this money. So think about it like you planted a seed. And what day do you need to harvest? If you don't need to harvest the seed, there is no reason to do anything. And you're probably going to make it worse, which unfortunately it sounds like was was the case here for Angie because now she's lost out on a bunch of market gains.

And by the way, Paula, I bet there's a lot of afford anything listeners going, really, the market's up? Because you're not seeing that in the news. You're hearing people talk about inflation, about the price of groceries, about all the uncertainty, about the upcoming election, about all this other stuff. You know, you and I are on top of this every day. And I'm seeing nothing about the fact the stock market for the past 12 months has been on a tear. Yeah, exactly. So when it comes to financial headlines, negativity sells. The number of people who are going to click on a headline that says,

everything's fine today is significantly less than the number of people who are going to click on a headline that says, the world is going to end five major risks that could completely disrupt your whole life. Number three will make you LOL. Yeah, LOL. L.O.L. No, just, you know, those listed it always says number three. Yeah, exactly, exactly. negativity sells. There is a strong negativity bias, both psychologically in our minds, as well as for headlines generally. Art imitates life. To that extent, the particularly cable television financial news. Yeah. Yeah. In particular. And, you know, ask yourself, as you're consuming financial news, is this aimed at a mass market audience or is this aimed at investors? And if you're

it's not aimed at investors, then it is likely aimed at generating headlines, generating clicks, generating, frankly, ad revenue. You know, they want eyeballs because eyeballs create ad revenue. And you get that from being outlandish and from focusing on the man bites dog anomalies rather than the dog bites man patterns. Well, and the catastrophe of the moment, right? I mean, look at the propensity now versus 15 years ago, news organization to put the words breaking news across the bottom of the screen. Right. Exactly. You know, Bloomberg is a great source of financial news. The Financial Times is a great source. The Economist is a fantastic magazine. These are sources of financial information that I would absolutely recommend. Or, alternatively, you can just tune it out entirely. Pick your strategy, you know, decide that you're going to dollar cost average into the market

and ignore everything and review your accounts once a year and don't even look at it. Don't check your balances other than that one time per year rebalancing. Can we talk about the fallout, though, if you take our advice? Sure. The fallout if you take our advice is that you're going to see your accounts fall again the way that you probably saw them fall before. You're going to see this bouncing around. and there very well might be because the stock market doesn't always go up, you might make

this move to invest half a million dollars right away and it goes down right away. That is fine. That is normal. If you're in broad-based indexes, that's what it does. And so the key for me, Paula, when I was a financial planner, was not worrying about the markets. It was worrying about my client's ability to ride the role. coaster, does my client have the ability to stay on the roller coaster to stay strapped in? Or are they going to jump off at a horrible time?

And certainly, you don't want to do that. And I think that's a good analogy because the only person that gets hurt is you, right? The roller coaster goes up the next hill. But if you, on strap, you're going to be the one that gets hurt. So you just have to be ready for the ups and downs that might happen. Now, there's a couple tools you can use, by the way, Paula, to look at it. this. If you go to morningstar.com and you look up your fund, there is a cool, a couple of risk indicators. You can click on risk. And then you'll see one, which is standard deviation.

And standard deviation, just to put it very simply, is that, and it's much more technical than this. And people can be yelling at their device, yelling at me. So please don't, because I'm trying to make this easy. And the way to make it easy is most of the time, when you see a standard deviation of 15, that means most of the time it'll be plus 15 from the average or minus 15 from the average. So if you're expecting an 8% rate of return, that could be plus 15, aka 23, or it could be minus 15, which means it could be minus 7. And that's still, Paula, in the realm of normal. And what I liked about showing that, it's almost like you're getting on a plane and the pilot goes, hey, people ahead of us are reported there's going to be turbulence. So there's

going to be turbulence on this ride. Like I've had to fly a lot lately. And that calms me down. It calms me down so much because, oh, the pilot said it was going to be bumpy. And look at this. It's bumpy. No big deal. But the pilot doesn't say that.

And it starts bumping around. Of course, I'm imagining them panicking up there in the cockpit. Nobody is what the hell is going on. And I want to put on a parachute and go. So I really like that as a measure. Another one you can look at is called beta. You take the index. You think it's going to compete again.

So if it's the total market index or the S. B 500, it's going to be based on the stock market in general. If it's a beta of 0.9, that generally means, again, everybody, the Uber nerds that know how this really works knows it's a little bit more scientific than the way I'm presenting it. But generally, for the lay person, that means it's 10% less volatile usually than what the market would give you. If it's a beta of 1.1, that means it's 10% more volatile generally than whatever index

it's competing against. And it will tell you Morningstar exactly what they're comparing it to. So again, even when it comes to an index, if I'm going to try to do one of these strategies where it's like the S&P 500, but it's going to try to tweak out a little bit more. And I see beta of 1.1. I'm like, okay, well, if the stock market goes up, this will go up a little more. Stock market goes down. This should go down a little more. And when it does, that's just like the pilot coming on and telling you what the turbulence is going to be. So for nervous investors, I really like those two metrics to kind of help you before you go in, stay strapped in when things get bumpy. Right. Morningstar is an absolutely fantastic source of information. I mentioned Bloomberg. I mentioned

the Financial Times and I mentioned the economist. Morningstar, I'm going to add that to the list. They are wonderful. Just absolutely brilliant. The one thing Morning Star does is that they will pitch you immediately to buy a premium membership, which they're a business. They should do that. You want to look for the little spot where you can do just a free membership. You do have to log into the site to get a bunch of stuff, but do the free membership. Even when I was a financial planner, Paula, I would use the free stuff a ton. The premium stuff, frankly, for most of us, we don't need. As a financial planner, I rarely needed it. So stick with the free membership. Right. Yeah. You can read Bloomberg without needing a Bloomberg terminal.

Yeah, right. But I have had people write me going, oh, I saw that I got to sign up for this and there's a fee. I'm like, well, you can find the free version. Don't pay the free. Right. Right. And all of that said, you can also just ignore financial headlines completely and keep up with the Kardashians instead. Follow your favorite sports team. Watch movies about koala bears. That's also a perfectly valid way of ignoring the noise and therefore not because. Because, becoming emotionally reactive when there's some short-term turmoil in the markets. Like right now, we are recording this Thursday, August 3rd. This episode is going to air in about two weeks. So by the time this episode airs, it will, let's see, you asked the question, Angie, on July 13. So this episode is going to air about a month after you've asked the question. And in that month, the U.S.'s credit rating has been downgraded. this is a big news as of yesterday, as of the time that we're recording, this is the big news

as the beginning of August. The U.S. credit rating got downgraded just by one notch. Fitch downgraded us from AAA to AA plus. What did that do? It caused a little bit of turmoil in the markets. It caused everything to get struck slightly. By the time this episode airs, my guess, and of course I don't like predicting the future. But my guess is what's happening today is just the market repricing in that new information. By the time this episode airs, things will probably be back to normal. That's at least never predict the future, but that's probably my guess. Well, and if it is, Impala, we'll just, it won't be this crisis.

It'll be a different crisis. Yeah, exactly. You know what? And what we know when we zoom out and we look at the market over the long term is that long term, things go up. You could have dumped all your money into the market in December of 2006, near the peak of that bubble, right before the 2007 downturn, which led to the 2008 Great Recession. You could have put all your money in the market at the end of 2006, and if you just left it there, you would still today have a pretty good return.

even after suffering through the downturn of the Great Recession. The key, though, is not selling in March of 2009, which was the bottom of the market, because that's how you lock in your losses and then you miss the upside. One thing, Joe, I want to talk about the comment that you made. What happens if Angie puts her money into the market? And Angie, you should put the entire $500,000 in it in one lump sum. Do not pace it out. put it all in in one big go.

And the reason for that is dollar cost averaging is a strategy for your future paychecks because necessarily you cannot invest money that you have not earned yet. So that's a great strategy from dollar cost averaging is great for money you haven't earned yet. But if you've already earned that money, you already have it sitting in cash. Then by pacing it out, you're just staying in cash longer. You're more heavily allocated towards cash for a longer period of time. You don't want that. So dump everything in in one big go.

But what happens if you do that and then let's say tomorrow the market crashes? What do you do? You ignore the news, plug your ears, and keep your money in. The reason that's so difficult, and I talked to my rental property investing course about this, I'm going to use an analogy that comes from the world of rental property investing. Let's say that in the span of your career as an investor, you have 100 tenants that come in and out of your properties, right? Of those 100 tenants, 90 are great. Five are exceptionally wonderful, but then five are absolute nightmares, right?

So let's say that's of the 100, 90 are just kind of in the middle and they're unremarkable. five are absolutely wonderful, and then five are absolute nightmares. Let's say that's the distribution. That distribution across 100 tenants can happen in any order. And so if you buy a rental property and you get that nightmare tenant first or second, right, if that is one of your first experiences, then even though over the span of 100, tenants, that experience is significantly unlikely. The fact that you experienced it first is going to have a disproportionate psychological effect on how you feel about being a rental property

investor. And so that, let's use that analogy and apply it to if you put a big lump sum of money into the market, we know, statistically speaking, based on historical trends, that over time that money is going to grow. The first thing that happens, is that money drops in value, then that's going to have a disproportionate psychological effect on how you feel about what just happened. I remember when I was a newest advisor, a manager was helping me work on a client's case and they had a fun that was a good fund. And the market had gone down, Paula.

And their portfolio, the client's portfolio had actually held up very well versus the market, but it had gone down. and the manager said, okay, we need to pick which one of these things to sell and we have to, we have to sell something. And I said, why? We're doing better than the market there on course for their goals. He goes, well, I know that and you know that. But when the client sees down stuff right away, either you need to sell something or they're

going to fire you. And it was just a horrible, the only reason we're going to sell something was for marketing purposes, right? to say that I'm a valuable asset. So I think we should get rid of this thing that's valuable. And that's just to prove your point that if things go down, you're much more likely to see it in a negative aspect. And so what this manager wanted to do at this big firm I was at,

wanted to just do a little smoke and mirrors routine to make it feel better when the truth is far closer to what you said, right? And hey, we got it out of the way. Yeah. We got the bad stuff out of the way. What? Never a great thing you want to hear for your viz. Hey, we suck less than the market.

But sometimes that's great. That's great. Yeah, exactly. Exactly. Angie, I want you to listen to the interview that we did with Peter Atwater. That episode was episode 452, afford anything.com slash episode 452. One thing that he talks about is how people are not financially rational, but rather people rationalize. So when people feel either a lack of certainty or a lack of control or both,

and certainly when there's a stock market collapse, we feel both, right? We can't control what the stock market does and we are uncertain of what the stock market will do. We have neither control nor certainty. That means we're vulnerable. When we're vulnerable, we're afraid, and when we're afraid we tend to react emotionally, but we then rationalize that. So, It was a good discussion that kind of shed some light on how the less confident we feel, the more prone we are to rationalizing our choices. And so I say that because I want you to be aware of the tendency that we all have, myself included, especially during the pandemic.

I made some of my worst financial choices during the pandemic. It was an isolating and vulnerable time. When you're alone all day, every day, which humans are just not meant to be, you've got a lot of time on your hands. You've got nobody around. And, man, that is just a recipe for Amazon. Yeah, for Amazon, for just for some developing bad habits, including bad financial habits. Overthinking trades. Yeah.

Exactly. But what I'm saying, Angie, is I fully relate to this. Like, I've done it myself. It's easy to rationalize bad choices in the moment, which is why what I'd like to see you do is when you are feeling good, when your confidence is high, that's the time to sit down, write out a plan, and then make that plan your, you know, hold rigidly to that plan, right? So if the plan is invest this $500,000 is a lump sum, dollar cost average all your future income, and don't touch it other than rebalancing months a year. If that's your plan,

then write that down, put it on a sheet of paper, tape it to your wall. Because it's written down, now it is a plan that you cannot deviate from. I love the idea of putting it in writing, because even if you don't look at it, which I do like your idea of putting it in a place where you're going to see it. Just that the tactile act of writing it out has been shown in what, scientific study after study to make it much more permanent in your brain. Exactly. So Angie, thank you so much for asking that question. Enjoy entering the market. Enjoy watching this half million dollars grow over the span of the next 60 years, really, right? 20 before you even start tapping it for retirement and then another 40 after that. So enjoy

watching this half a million grow and compound over the next 60 years. Enjoy the ride. There will be turbulence. Yes. We are your pilots telling you ahead of time before the ride there will be turbulence. Yes, absolutely. Enjoy the turbulence. We'll come back to this episode after this word from our sponsors.

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or a heartfelt gift for a family member. Say more this holiday season with Pandora. Shop now at ca.pandora.net or visit your closest Pandora store. Joe, did you have student loans? I did have student loans. Do you, you don't still? You've got those paid off. No, I managed to get that done.

How long did it take you to pay them off? It took far longer than it should have because during my money disaster of the 90s, you know, I was constantly in let's defer this mode. I was in let's defer everything mode pretty much. So it took a long time. I didn't have a ton of student loans. I mean, not compared to people now, I had maybe $20,000 in student loans. And it still took me until I was 40. Well, we're about to answer a question from someone with an order of magnitude more. Christina is about to graduate with $275,000 in student loans. Let's hear. from Christina. Hi, Paula and Joe. I love your podcast and find your advice is always practical and and actionable, which I really appreciate. My question for you today requires a little background on my financial situation. I am a current physician assistant student getting ready to graduate this December.

I will be coming out of school with about $275,000 in student debt. About $175,000 of these loans have high interests from 7.5% to 8.05%. My question for you both today is whether or not you think refinancing my high interest loans would be a good idea. I have been cautioned in the past to stick with federal loans in order to maintain benefits such as payment pauses and forgiveness. However, I will be entering a very stable job market starting in 2024, and I'm hoping to make at least $100,000 annually to start. Additionally, I've never felt forgiveness was a good option for me because of the high tax rate that I would have to pay on whatever loans are forgiven since I have borrowed so much. My goal is to minimize the total that I pay towards student loan repayment, but also be as debt-free as possible.

This is why I thought refinancing for lower interest would be a good option for me. However, I'm not sure if this is the best way to view my debt for my financial future in the long term. I would love to hear your thoughts on my situation and how best to move forward with student loan repayment as I enter my career as a physician assistant. Thanks in advance. Christina, first of all, congratulations on being so close to graduation. You'll be graduating in one more semester, a few months. So huge congrats to you on that. And on the journey that got you here, it requires an enormous amount of work to become a PA. Congratulations on the next chapter that you are about to embark on and on the high income that you will be earning from this

point forward, starting in 24. Regarding your student loans, well, the first question that comes to my mind is if you were to refinance your loans, what interest rate would you have on those refinanced loans? There are often two benefits to refinancing. One is the consolidated dashboard, right? You can pay one check rather than having to pay many, many smaller bills. And so that consolidation can simplify things that can simplify management. The other benefit is the lowering of an interest rate by how much, I don't know. It's actually a third one, too. For some people, not necessarily for Christina, but for some people, it's also a lower

payment possibly. So I can consolidate these. And if my cash flow isn't great here, you know, a lot of times you can create a strategy where you just make the payment smaller. Right. But Christina, it sounds as though the impression that I get from the way that you ask that question is that you want to very aggressively pay those off. The fact that you mentioned that you'll be making $100,000 or more, I can tell from the way that you said that, that you are going to maintain a large gap between what you earn and what you spend and that you're going to devote a big chunk of that gap to aggressively paying off those student loans.

And so you are absolutely correct in that putting yourself into one of these like an income-driven repayment program where you're paying for 20 years with forgiveness at the end. Nope. That is not the strategy for you. Instead, what you're going to do is rather than going into one of those programs, you're just going to aggressively pay that effort down, right? Just shovel money at it until it's gone as fast as possible. And I fully support that decision. The dominant question is, what would the interest rate be if you were to refi? Well, the exciting thing for me, Paul, about this question is we think about the thinking often, and this is, you know, my favorite part of you and I doing this is we brought.

this out and and and to broaden christina's question out i think the real question is not whether she does this or not it's how do i find the strategy where i don't get blindsided by something in the future right so if i'm the cfo of my personal company i'm not always going to make the optimal decision because the future may change things might pop out but if that happens did I know what the downsides were of my decision ahead of time? Were there any things that could pop up later that would make me go, oh, my goodness, I'm in this horrible spot. So those are really the demons and the plan that I'm looking for.

So if she does consolidate, I want to know about early payment penalties. I want to know, can I change the interest rate again later? Is there any problem there? Because different consolidation places are going to have different terms on that contract. I agree, income repayment's probably off the table. Yeah. Because let's look at this. Let's say she gets in a situation later where income-based repayment plan would be back on the table.

She's making this decision with her eyes open knowing that this is going away. So I have no problem going, yes, I'm going to base this on income-based repayment or no, I'm not. As long as you know that once you make that decision that you just took it off the table. I think that that makes you a more powerful person to deal with when you know, yes, I'm going this route and the other one's no longer open to me. But it's when you don't know, when you don't know when you get blindsided. So for me, that is the thing I would do. It's about so, Paula, your question about what is the interest rate? Super important.

My question would be, what's the fine print going to be if I want to change my game plan again later? Am I overly locked in with this consolidation plan? or what moves can I make that will further accelerate this in the future or can help me back it down if things change for the worse? The other thing I would want Christina to do, I agree with all of that, Joe, and I would add one more thing. Christina, create for yourself a sample budget of how much you think you are going to spend. Basically, what's your budget going to look like once you start working? Do that with, let's say, a projected $100,000 salary.

If that's what you make, do a sample budget. Here's what my rent's going to be. Here's my groceries. Make it realistic. You know, I do want to spend more money on travel or on entertainment because I've been deferring that while I've been in school. I'm going to look at what I currently spend in those areas. And I'm going to bump it up a bit because I'm going to want to go to brunch a few more

extra times. I'm going to want to take that trip that I typically. say no to every year because I don't have the cash for it. Make a realistic budget that gives you some breathing room, but that also shows you in very clear terms exactly how much money in dollars and cents you plan on devoting every month to student loan payoff. And once you have that sample budget, and you can make a couple, make one with a projected $100,000 salary, Make one with a projected 120,000. Make, you know, whatever range you think you're going to be starting in.

Make a couple of sample budgets based on that range. Basically make that timeline so that you have a solid idea of how soon you think you can pay off these student loans. And once you have that number, you're like, hey, I've made a plan. I think I can pay off these student loans in six years or in seven years, right? Once you make that plan, that's going to give you a lot of information about how you want to proceed between now and then. He gives you information too about the rest of your life because once you've made that commitment, now you can build your other commitments like where am I going to live, what car am I going to drive, like some of the other expensive things that happen in your life. It's easier to make those decisions around that as well. Right.

Exactly. With the lack of a specific plan, it's easy to be general. to say, I plan on paying off my student loans as fast as I can, but without having a very specific number in mind. It's easy to say, I want to keep my rent low, but without having a particular rental range in mind, right? The more specific you can make your plan, the better. There is a distinction between precision and accuracy, right? Specificity is a form of precision. that doesn't necessarily mean it's going to be accurate. The real world deviates from the best laid plans.

So go in fully expecting that reality will differ from expectation. Reality will differ from the plans that you laid out. But the practice of laying out those plans and the practice of forming a very specific goal around I want to pay this much towards my loans every month, and I want to have them based on that monthly payoff completely paid off in this many number of years. The more specificity you give that, the closer reality will eventually approximate that. That's super. I love the idea of modeling.

And I think what modeling also does for us, I think there's something even more physiological, you know, scientific going on. I think it's training our brain ahead of time to see potential outcomes. And the more that you do modeling, the more than when you get into situations, whether it's this situation or you're asking your boss for a raise or you're doing whatever it might be. Modeling is just, it's such a great, I hate the term hack, but it's such a great practice or tool. Yeah.

Because then you get in the real situation. and you feel like you've been here before. Right. And it goes back to Peter Atwater again, confidence. Right. Also, it's funny. I had to laugh when you were talking about $100,000 or maybe $120, and then on the low end, you know, maybe 80.

I'm like, we're back to standard deviation again. It's funny. Funny out one question after another, we end up with very similar, similar answer. Whole different use case. Yeah. So, Christina, I think. There's your answer. Model out the payment strategy. And once you've done that, then make a refinancing

decision based on the terms of the deal. And I think, Joe, you make a very good point. Is there an early payment penalty is going to be one of the most important things you want to look for? So make it based on the terms of the deal, the new interest rate, and how much that would potentially save you or not. because if you pay it off very, very quickly, then the juice might not be worth the squeeze. And if a centralized dashboard is important to you, then that can factor into it as well. But based on your question,

I don't pick up the impression that that's going to be a major influential factor. And Joe and I have both made this assumption, but I want you to say it out loud, at least to yourself. It doesn't have to be to us. but, you know, say it out loud to yourself, write it down for yourself. If you are certain that you do not want to participate in an income-driven repayment plan

or in any of those programs that are designed for a 20-year to 25-year payoff term with forgiveness at the end, if you're certain that you don't want that, then write that down and make that part of your plan so that you can decide definitively once and for all, no, that is not for me. We'll come back to this episode in just a minute. But first, Joe, how long have you lived in Texarkana? Well, that's a loaded question, isn't it? Oh, yeah, because you live there and then you left and then you came back.

Yes, so 12 and a half years now, but 10 years. Off and on, yeah. And then I was away for two and then back for two and a half. Maybe the better question is how many times have you moved states? How many states have you lived in? Let's just say that. States of consciousness? States consciousness that we're talking about.

States of denial. I've been there. States of these United States. States of pure euphoria because I'm in on the afford-anything show. States, how many states? Oh, no, just to Michigan and Texas. Michigan and Texas. That is it.

I mean, I went to college in South Carolina, but yeah, that's it. Nice. All right. Well, the next question that we are going to answer comes from a caller who wants to know about what we do with, property, what she should do with property upon moving. Hmm. Interesting. Yes.

So we're about to play this question. It comes from a listener. And she's anonymous, and we give every anonymous caller a name. So I would like to name her after the first woman to receive a Nobel Prize in Economics. Wow. So there have been two women who have won the Nobel Prize in Economics, Eleanor Ostrom and Esther Duffalo, which means there have been a total. Total of 92 Nobel Prize in Economics awarded, two of which, so or 2.17% have gone to a woman. What years? Is it getting better?

Oh, let's see. Esther was relatively recently. Let's find out about Eleanor. Eleanor Ostrom was born in 1933, died in 2012. Oh, she conducted field studies on the management of irrigation systems in Western Nepal. Look at that. How about that? She received the Nobel Prize in Economics in 2009. Okay. Wow.

And two years after that, she was diagnosed with pancreatic cancer. Oh, wow. So, in honor of Eleanor Ostrom, the first woman to receive a Nobel Prize in economics in 2009, our next caller will be named Eleanor. Hi, Paula and Joe. This is anonymous from Massachusetts. I'm a longtime listener since the days of the day. money show, but first-time caller. My question has to do with the decisions you've both made regarding your primary residences when deciding to embark on a big move. Paula, I know you

recently moved from Nevada to New York City. And Joe, I remember you had left Texarkana to travel internationally with your wife before returning to Texarkana. I'm wondering how you both thought about your primary residences, what to do with them, whether to keep them, whether to sell them, whether to rent them out, before embarking on these great adventures, and whether you would do anything differently, given hindsight. A little bit about me, I am in my mid-30s. I lived with my husband and two little kids, ages three and one, just outside of Boston. I'm a lawyer who has always had an eye towards real estate and would like to someday diversify our personal wealth, maybe with a goal of reaching five, although I don't

know that I'll ever want to RE. I do love my job. My husband's in higher ed, and that creates an interesting opportunity for us. He might have the ability later in his career to live on a college campus for free with all of us, and that might give us the chance to either sell our home and pocket the equity or rent out our home as an income property. That decision is not before us today, but it could be someday in our future. It could create a chance for an adventure. But I'm curious as to how you went about thinking about what to do with your primary residences, which came first, the decision to the move versus the money and the finances, and just any recommendations you might have for a family who would like to explore this option in the future. Thanks so much.

Eleanor, thank you for the question. Thank you for being part of this community and a listener of this show since the days before this was called the Afford Anything podcast. The majority of people who are listening might not remember this or have been around at this time. But when this show started, it was called The Money Show. And wow, thank you for being around back then, back when this was the Money Show. an OG. Yeah. And by the way, a very creative name, Paula, the money show. I mean, that's, yes. What are we going to talk about? Well, you know, I like for titles to be completely to the point. Like my course, your first rental property. It's unmistakable what that is.

Yeah. And who it's for. No exactly where you're going. Yes. So, how did we think about primary residences at the time of move. When I left Las Vegas, there's the financial component, there's the emotional component. As a general principle, I often hesitate to sell properties because there is such a steep transaction cost associated with selling. If you imagine a mutual fund, there are sometimes big fees with an actively managed mutual fund. There are sometimes big fees on the front end and the back end, which is just a fancy way of saying when you buy it and when you sell it. And these fees can be incredibly steep. And that has softened a bit now. But there have been funds in the past that have had some pretty egregious fees associated with

them. When that happens in a mutual fund, everyone protests and there are lawsuits and there's a big backlash. mesh, but in a house, it's standard practice. It's completely standard that you would pay a 6% haircut as a seller to your real estate agents on the both buyer and seller side, plus a share of other closing costs as well. Given how steep the transaction costs are when transacting a piece of property, I very much hesitate to sell unless there is a compelling reason to do so. If I need the cash from a property, I would rather just take out a cash out refinance than I would sell. But I say that coming from the perspective of someone who likes rental properties and has a desire to hold a portfolio of properties.

So that answer is going to be different if that condition wasn't there. So all of that is to say when I left Las Vegas, I decided to hold knowing that if I ever want to be. wanted to tap the equity, I could always do a cash out refi on that property, which I haven't done, but it's nice to know that that's an option. You're pretty clear about what you were doing in Manhattan, too, that you were going to rent, right? Yes. So you also knew you didn't need that equity for another property? Correct.

Or we're going to use that equity for another property. Correct. If I was, well, you know, a lot of people sell, they'll make offers that are contingent on the sale of their current home because they need that as part of their financing. If I was going to buy another property, I would do one of two things. I would either wait and save up the down payment for that next property or I would cash out refi the home, the primary residence that I was leaving and use that cash out refi money as down payment money for the next property.

and then take out a 80 to 90% loan secured by the next property as a mortgage, an FHA loan or a conventional loan, and then the remainder of the bulk of that down payment would then come from the cash out refi from the previous property. It's then allowing you to still hold it. Correct. Yeah. The premise behind that statement is that the debt incurred from the cash out refurb, plus the additional debt from the purchase of the new property, when added together, would be small enough that it would not disqualify me from a new loan.

That is to say, when you're taking out a loan on a new purchase, a lender is going to look at, again, your front-end ratio and your back-end ratio. Those terms keep coming up. front-end ratio is the proportion of your income that you spend on this particular home that you're buying, like the proportion, you know, how much the mortgage represents as a proportion of your overall income. So a conservative lender might say, I want a front-end ratio of no more than 28%, meaning I want your principal interest taxes and insurance to represent no more than 28% of your income. And a conservative lender might say, I want your back-end ratio, meaning your, you're,

total debt payments, including the mortgage on this property, to be no more than 36%. So if I could maintain a back-end ratio of 36% by taking out a mortgage on my next property plus cash out refying from my previous property, I would do that. It's funny how our thought processes were completely different. Joe's not afraid of transaction costs. Well, I love real estate investing, and I'm actually going to be getting back into more real estate investing here in the future. It's never been my lead and frankly never a core part of my portfolio. So when we left, we actually moved not internationally.

We've had friends, mutual friends like Chad Carson, who went and lived overseas for a while. I just went back to Michigan, which some people may call overseas, depending on where you live, very close to Canada. but we moved back because Cheryl had some family that was ill and there were a variety of reasons to move to Michigan. And frankly, because we didn't have any family in Texarkana. All of our family was in Michigan. Our kids were grown. And so we decided it was the time to move back. So when we originally moved back, that was the goal.

The more exciting story, though, is when conditions changed and a bunch of stuff changed that's irrelevant for this and we decided what the next move was, we were going to be nomads. And our goal then was to sell everything, which by the way is something I would never have done, even during my time as a financial planner, it was really much more being around the inspirational people that I've met the past 14 years who do these exciting things with their life

and normalized it for me. You know what I mean? Where these things that I would have never, you're not going to have a house? What hell are you talking about? not going to have a house. When Cheryl said that she was going to take a position that could move around for what she did, I said, well, why don't we just sell everything? And I'll just move wherever you are. And as long as we have internet, I can do that. And by the way, when you're deciding what

your next thing is, or if you want to do anything at all, we will go to Portugal for a month or we'll go to Bali for a month or we'll go and we'll do this. And I actually, Paul, at one point, I rented a place in Bali for a month. Didn't get to use it because this thing called COVID. hit. So that went away. So we go ahead. That's going to be the plan. We're going to sell all our stuff. And we are going to be digital nomads. And that was my, it was this exciting thing. I was so, because that's really what I wanted to do during my quote retirement too, was just go see the world. And I don't need stuff. It's just stuff. And it was really cool. The first day then, so the pandemic hits, but then the first day that we are able to put our house on the market, we do.

of six offers and we get an agreement very quickly and I think within three days my house was the agreement was done everything was done there then we had an estate sale where it was funny the horrible amount of stuff I got for all of my worldly possessions was so minuscule and so depressed it makes you realize that your your net worth and your self-worth really truly do need to be two different things I didn't care about the money I just wanted the psychic energy of owning that stuff to go by-bye. And so everything we had, with the exception of a few things that were really family treasures, that were really a part of us, we got rid of.

And then we're just waiting for this one license that Cheryl needed to do her thing. And we have the car packed. Everything's ready to go. House is sold. Stuff is gone. We get this call. And because of COVID, there's no job. And so the whole plan then policy, the whole plan changed in one day.

But the cool thing was, this is the great thing. When you don't have a house and you don't have any possessions and you've done a good job building toward financial independence, we just looked at each other and said, where do you want to go? Because we don't have to be anywhere. As long as there's internet, I can still podcast. So we moved to Vermont for a month. We lived in Palm Springs for a month. We went and took care of my co-host on Stacky Benjamin's house. O.G., well, he went to Northern Michigan.

We took care of their house. We spent some time. We did all these cool outdoor things. because you couldn't do anything inside and you couldn't see a ton of people during COVID. But the cool thing was, because I play tested this, I realized I flippin hated it. That I did not want to be a digital nomad. Right. You know what?

I do love slow travel still. And if I could go just spend a month in Vermont again, I'm going to do that. I love the idea of having a house in Bali for a month. I love those ideas. I just need a home. I need a home. I'm a home body who needs a home base. Yeah.

And so when you and I have talked before about play testing your goals, this was my opportunity to actually do that, to play test it and go, oh, flawed, huge flaw, right, in this whole thing. So when we made the decision to come back to Texarkana, we then, once again, blue sky, we can move anywhere. We realize that you have two families. You've the family you're born into and you've the family you develop. And we realize the family we developed was in this little town in northeast Texas.

right on the Arkansas border and we came back. I actually gave a talk a few weeks ago to the Kiwanis club here locally, Paula, because they're like, you came back? What are you talking about? You came back. It's funny, though, Paula, you know, between the two of us still, I also think, though, you thought at the time, because I remember at the time, you thought you were probably,

there's a chance you could go back to Vegas and you'd still also still on the property then. Yeah. I'm not going back to Vegas, though. No, but originally when you went, that door was open. Yeah, and that made me feel more confident about the move. You know, decisions that are irreversible certainly require significantly more thought than decisions that are reversible. Yeah. And for me, I had closed the, when we had the estate sale, that was mentally closed.

I couldn't go back. There was no, there was no going back. Right. Exactly. Whereas for me, I left the door open. I made the decision reversible. It would be easy to go back if I wanted to. And now that I'm here, I'm like, this is, this is amazing.

I don't have any intention to go back. I love New York. I want to be here for the foreseeable forever. But in the initial move, it was nice to know that that option was there. So, yeah, so I think that highlights how different people kind of have different approaches. Do you burn the boats or do you hang on to a dingy? Yeah. But, you know, half of this question is, would I do anything different?

it's wild all the stuff that we sold there's only a couple things this is what's so sad about accumulating stuff is it there's only a couple things where i'm like oh maybe i shouldn't have sold that you know but the vast majority i don't even remember it you know like i don't remember what i had and you look at these you got these closets full of stuff you got this house full of stuff and then you have an estate and they can't you remember what you owned that's not important so i don't know that i would do it different paula probably erased the whole pandemic part of it. But in terms of like the decision making that we made to go test drive it and and do it, would I still hang on to that house? So this is funny. We lived in the house for two years.

We got a lot of upside. Detroit was going through this nice resurgence and we got a lot of upside. So we made a bunch of money on the house. The people we sold it to also, by the way, sold it within about a two year time frame. The money they made killed the money I made. Like that neighborhood continued going up. And it may be. me go, oh, maybe I should have held onto that house. But you know what? I don't regret it because of what we have said in previous questions, which is, once you know, what a potential downside is, is that it will continue to go up after I got rid of it. Once I was comfortable getting rid of it and I divorced myself from that property, then if it went out, good for them, you know, that it went up.

Could that have been another? I can't Monday morning quarterback that. I can't go back and redo it. So there's no sense playing that game. So I don't know that I would have done. much differently. Would you've done anything differently? You know, it's funny, because we're giving the opposite answers. You sold the house and sold your stuff and you wouldn't do anything differently. I held on to the home, held on to my stuff, and I wouldn't have done anything differently. Yeah.

So we have just given the least helpful answer in the history of answers. You're welcome. You're so welcome. Yeah, no, I wouldn't do anything differently. If repeating the same decisions, I would continue. Well, and I am, right? In real time, I am continuing to hold on to my primary home, my primary resident, former primary residents in Las Vegas.

If I ever wanted to change that, I could always sell it, but I'm continuing to hold it. I'm a guy who feels a lot of fear, and I will, I will say this, the one place where you and I intersect Paula in these two stories of, you. You moving across the country, me going on this adventure of where am I going to live? What am I going to do? Is exactly that word adventure is treating life like it's an adventure. And that's something that I was always afraid of. I was afraid to do because of all the things that can go wrong on an adventure.

But once you realize that crap going wrong is actually part of the fun of the adventure and becomes as long as you live through it, there's a great story there about how you messed it up. It ends up being a part of the lore of the whole adventure. So treating life like it's an adventure, I think, is our intersection. And that is exactly what I would encourage Eleanor to do. Go do it. Go try it out. Our friend, Paula, you know Heidi Ducek?

Do you know Heidi Ducek? I don't think I do, no. She's a podcast called Ordinary Sherpa. Heidi did something that I would have never done with my kids. She lives in Wisconsin. She took her kids out of school completely. And she and her husband and her three boys are taking a sabbatten. year. While the kids are elementary, middle school, maybe early high school age, like right in

the formative years, everybody is gone. They took time off their jobs. They're not financially independent yet. They're in a van. They just got back from the Arctic Circle. It's just exciting watching Heidi and her family live an adventure together at a time when most people will say you shouldn't do that. Screw them. Like, go do it. And it's so exciting to watch. Yeah. These people do it. And you know what?

Watching them is great. Doing it myself is even better. Yeah. Yeah. Some of my most formative experiences were it was international travel when I was a kid, right? Going to Nepal when I was three, when I was six, when I was nine, I'd go every three years. Huh. That's weird.

I didn't get that from those numbers at all. Thank you. And I would spend three months there. I would spend the entire summer. So I would go a few days after school let out. And I would come back just a few days. before the school year started. I'd spend the full summer there every third summer. And honestly, sometimes I look around New York, New York, I look around Manhattan, and it reminds me of

Catmandu. That's funny. Like a cleaner, a much cleaner, nicer, more well-organized, more well-run Catmandu. And there are times when I wonder, do I love New York so much because it is the closest thing I can find to Catmandu in America? That's funny. That's cool. That's cool. Cool. Yeah. So I hope, Eleanor, that answered, that answered the question. If your husband can live on a college campus and you can get rid of, you know, getting rid of those cost is cool. You know what's even cooler? Just the adventure that you guys did that together. Yeah. Yeah, that sounds amazing in so many regards. So neat. When we first moved. And the community on a college campus. It's just, yeah, it's so nice. Absolutely. I mean, that time, if it lasts six months, if it last two years, whatever it lasts. is so neat and just the change up. So I lived in a, you know, you can buy a lot of house in Texarkana, Texas for not a lot of money. So I lived in a nice sized house. Our house, when we moved back to Michigan, sold much quicker than I thought it would. I thought it either sell quicker, or it would take a long time because it was kind of architecturally significant house,

very quirky house. When we sold it, it sold very quickly. And so we were going to be here for another six months. So Paula, we moved into a 400 square. foot apartment, there was a tiny kitchen, a bedroom, and a living room on the second floor over a friend of mine's dad's garage. Had I not lived in that house, I would have never had the aha when we lived in Michigan that this is just stuff. You know what I mean? How big is your place right now? 600 square feet. Yeah. Yeah. So in a 400, 600 square, you can have a lot of stuff there. I feel like I have a ton of stuff. I like, it's amazing how much stuff you. You can fit in 600 square feet if you are extremely efficient.

If you try. Yeah. Yeah. If you try. Well, because I have my bedroom, my kitchen, my home, my home office is here. Yeah. Right. So, which means I have camera equipment.

I have lighting equipment. I have a big step and repeat. You know those like, you know when you see people on the red carpet, the big banners? I have a big afford anything step and repeat. Like, I have work stuff here in addition to home stuff. Well, we had nothing and all of our stuff was in storage, which by the way, when all of your stuff is in storage for a few months, you realize how little you actually need that stuff. Like I remember packing it, we got to Michigan and I'm like, I didn't need any. Do I really need this anymore?

And I remember taking a lot of stuff to goodwill and having less stuff. But I don't think I would have made the big move had I not made that move to a much different existence for a few. few months. So this idea of this one little adventure we had for a few months, it was kind of an accident because our house sold too quickly, created the huge adventure we had later. And I was more brave because I did that. And I bet, you know, the first time you go to Nepal, well, you were three. So maybe not. But if you go as an adult, the first time you go, you're like, I don't know, the second time you go, I bet you're, you're, you know, you're like, oh, I know in this neighborhood. I know this area. I know that restaurant. There's more confidence. The third time you do it, it gets even easier.

So I think adventure kind of begets more adventure. Right. But I think maybe part of the question that she was asking is, to speak to the financial side of things, if you, you know, financially either way you're good. I feel like if you sell, you can invest that money. You can use it as a down payment on your next place. You can put it into index funds. You can use it to start a business.

There's so many things you can do with it to invest it and use it wisely. And likewise, if you hold, you have an owner-occupant mortgage, a primary residence mortgage, which is the most competitive mortgage rate of all loan products out there. Fabulous. And you're not paying the transaction costs on selling. So, cool. All right, great. And you're very acquainted with the property.

So you're going to be able to anticipate any major repairs that that property is going to likely need. Well, and that's what I like about her owning this, if this is going to be her first rental property. I really like that. I like the familiarity of it. It's going to be much more comfortable than a different property. You're going to know all of the things. It's going to be more difficult for a handy person to come in after you've moved away and try to rip you off because something's broken. You're like, no, no, no. I know that basement. Yeah. I know that water heater. Yeah. Yeah. There's no way that's a problem or I know a better way to do that. So I love the familiarity as a way to get your feet wet if she wants to buy more real estate in the future.

Yeah, exactly. Thank you for asking that question. I hope that gave you some perspective in thinking about what to do with your primary residence when eventually you move. Speaking of home, we have a very special call that we want to share. Hey there, this is Islambek from Uzbekistan. It's my first time listening to your podcast. The episode was 448. And at the very end for the third question there was a woman talking about trying to visit Uzbekistan sometime in the future. That is absolutely beautiful how life made us come to this point when this is my first episode and they are already talking about Uzbekistan like my home country and this is amazing. Just wanted to say this. Very interesting point.

Yeah, you have a great day. Keep up to good work and thank you so much. Thank you so much. Thank you for that note. Welcome. Welcome to the Afford Anything community. I'm so glad you're here. Thank you so much for that note.

How beautiful is that? So awesome. First time listening. Right? It's a sign. And all of a sudden, halfway around the world and you go, what? You want to visit where? It's a sign.

And as you'll recall, the question that we answered that related to Uzbekistan came from a woman who had received an inheritance. She was a teacher, so she didn't make very much money. And what she really wanted to do with this money was travel. She wanted to pace it out. And so she thought, once every two years, I want to do a really special trip. And the first trip that she wanted to take was she wanted to go to Uzbekistan. So that was the question that we answered. And how beautiful that our first-time listener, Islambek, from Uzbekistan, was tuning in right at that moment.

I think it's a sign. The Afford Anything community is meant to be together. I think so. Well, Joe, we've done it. I can't believe it. Joe, how can people find you if they want to hear more of you? You can find me and the amazing Paula Pant every Friday on the Stacky and Benjamin show. You'll hear me every Monday, Wednesday, Friday.

You'll hear Paula on Fridays. And some exciting developments going on on Paula's appearances on Fridays. We've changed our, if you haven't listened to our, Friday round tables in a while. We've made them a little bit more technical lately. We're talking about some things that are a little bit more on the nerdy side. I don't know what it is, Paula. You know, you go through things that interest you.

Sometimes philosophy really interest you. A lot of times that interests me too. Right now what really interests me about these conversations is like, how do I do a 401k rollover and what could possibly go wrong? So we put together three people like you and OG and a guest and talk about all the things that they've seen go wrong. wrong with 401k rollovers or like one we just recorded as of this recording. We had Christine Benz on with us from Morningstar and talked about, you know, what if you're

paying a bunch of taxes in your taxable account? How do you lower that tax bill? That's what I'm interested in right now. So that's what you're hearing on a roundtable discussions every Friday. And Christine Benz is brilliant. So that was a great discussion. It was pretty heavy duty. Doug, our announcer guy, mom's neighbor Doug, usually comes up with some, you know, baloney takeover.

And he's like, there's so much here. Joe, I need help. So it was really good. It was a great discussion. Can't wait for people to hear it. Nice. And that is on the stacking Benjamin's podcast, which you can listen to wherever you get your podcasts. Yes.

Here on the, I always call it the Westwood One radio network, but maybe it's a cumulus. I don't like the name Cumulus. You've said that before. No. Let's call it Westwood One. Thank you so much for tuning in. My name is Paula Pant. This is the Afford Anything Podcast.

If you enjoyed this episode, please subscribe to our show notes. Affordanything.com slash show notes. Our rental property course, your first rental property, is reopening for enrollment on September 5th, September 5. If you are interested in learning about how to invest in rental properties, be there or B-square. You can get lots of information on our VIP list. It's totally free. afford anything.com slash VIP list. And I will see you in class again. If you want to learn more about rental property investing, that class is our flagship course. We spent three years developing it.

We went through multiple rounds of beta. We gathered tens of thousands of data points. It is incredibly robust. It takes you A to Z through what you need to know in order to become a confident, well-informed rental property investor. So your first rental property, get more information afforded anything.com slash VIP list. Doors open September 5. Thank you so much for tuning in. I'm Paula Pant. I'm Joe Sol C-Hi.

We will catch you in the next episode. Here is an important disclaimer. There's a distinction between financial media and financial advice. Financial media includes everything that you read on the internet here on a podcast, see on social media that relates to finance. All of this is financial media. That includes the Afford Anything podcast, this podcast, as well as everything afford anything produces. And financial media is not a regulated industry. There are no licensure requirements. There are no mandatory credentials. There's no oversight board or review board.

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

day. Hey, do you leave me on screen for the full thing? Yeah. Like in the video? Well, it's up to Steve because he will sometimes zoom in on one of us or the other. Good, because Steve, I want to eat a sandwich that Cheryl just brought me. So I'm just going to tell Steve, Tell me eating a sandwich. Or do. I'm on camera eating gummy bears.