Afford Anything - Ask Paula: I Tripled My Income. Now What?

Episode Date: May 24, 2023

#442: An anonymous caller is struggling with a tempting offer from her family to buy her first house. Chris recently tripled his income. How should he manage this unexpected surplus? Tyson is wondering if it's a good time to convert his bonds into treasuries. “Jaula” wants to know if she should count her side hustle income as part of her retirement money. Former financial planner Joe Saul-Sehy and I tackle these four questions in today’s episode. Enjoy! P.S. Got a question? Leave it here. Learn more about your ad choices. Visit podcastchoices.com/adchoices

Hey, Paula, I know this is probably a bad time to bring this up, but you remember that time that I loaned you five bucks? Man, you, you dangle that over my head. You want me to Venmo you? You'll me to Venmo you $4.99? No, the full five bucks would be great because I don't have to be coming after you for that last penny. You know, inflation adjusted, I mean, buddy, you're losing out. Well, it could be with the 10% interest I've been charging for the past like six years since. What?

I bought you that drink at FinCon six years ago. Remember that? What for 99 cents? Speaking of people who loan people money but then hold it over their heads, we're going to be talking about that. Are we? Foreshadowing. We're going to be talking about that as well as many other questions on today's episode.

Welcome to the Afford Anything podcast. The show that understands you can afford anything, but not everything. Every choice that you make carries a trade-off. And that applies to your money, to your time, to your energy, to any limited resource that you need to manage. Now, every other episode we answer questions that come from you, the community. My name is Paula Pant. I'm the host, and my buddy, Joe Saul-Sehi, joins me to answer these questions. You're a former financial planner, Joe. I am, and I'm apparently a loan shark. Right. And speaking of awkward loan situations that might impact the relationship between two people,

our first caller has this to say. This is Anonymous. I live in Jacksonville, Florida. I'm 26. I make about 77 grand. And right now I am renting an apartment with my roommate. We've had just really insane increases in our rent costs like 17% last year and it's going to be 7% this year. And it's just insane. And my dad is talking about lending me not just a downpay. but actually lending, like standing in the place of a conventional mortgage and providing cash for me to purchase a home that is way outside of what I would be able to afford right now with interest rates as they are. I've kind of crunched the numbers. I could afford something in the like a $190,000 range with the 6% interest rate. If I could save up, you know, like a 7% down payment over the next couple years, that would be reasonable for me. He's pointing out houses that are $350,000 that are just after we talk about insurance, which is really expensive in Florida, homeowners insurance,

and all of the other costs, we're looking at, you know, a monthly payment that's more than half my take home. So he's talking about like, oh, well, we could just lend you the money for the home on a 4% instead of a 6% interest rate. And I don't know what to do with that information. Is this something that people have done before? Should I even lend serious credence to this? And if I do, if he's serious, he's talked about it a couple times or either giving me a down payment out of my future inheritance. And this is the first time he's talked about actually lending me the entire balance of the cost of the home. what should I consider putting in place before I do that? Because it sounds like it's right for, like, awkward Thanksgiving dinner conversations if my dad owns my home and I'm his tenant.

Background of this conversation is that, like, this has been a longstanding issue in our family where, you know, he gave me my first car when I turned 16. And any time he got mad, he would threaten to take it away. And it's like, I don't want to have that hanging over my head. but also having the security of knowing my housing cost is not going to go up would just alleviate a lot of stress from my mind. So how can I think about this? Is there anything contractually that I should put in place for both of us before we do this? I don't have any other friends or any other people that I've heard of who have done something like this.

So I just would love your advice and thoughts. Thank you. Wow, what a question, Paula. And before we answer that, we have to give her a name. We do have to give her a name. Yeah, she's anonymous. As you record this, I saw you in a bunch of robes recently. What's that all about?

Like standing in this place with some robes on and a weird looking flat hat? What is that? That's true. I, on Wednesday the 17th, I graduated from Columbia University with a master's in business and economics journalism. Thank you. We do need to give. this woman a name now that you've graduated. Right, right.

Well, I mean, because golden handcuffs is kind of the situation she's describing. She's describing a golden handcuffed situation where she accepts money, but is tethered to an awkward situation as a result. So first, we give her a name because she's anonymous. And the name that I would like to give her is Minouche in honor of Minouche Shefique, a leading economist who is the incoming president. of Columbia University. Oh, sweet.

So, Manus, this answer is for you. I have so many thoughts. First of all, the most important thing that you've said in your question is that your father in the past has loaned you money or helped you out financially, but then has used it as a method of control, right? He helped you buy a car, but then threatened to take it away. That, to me, is a way. a massive red flag. If someone is going to loan you money, but then use it to try to pull the

puppet strings, in my opinion, it's best to just walk away. And that's for two reasons. One is you don't want him to be able to control you through the purse strings. The second is that you yourself are going to feel significantly greater pride, joy, confidence when you are able to do this on your own without getting support with strings attached. Now, you mentioned a couple of other things that also triggered some red flags for me. One is that you would be perfectly happy purchasing a home for $190,000. And it sounds like there are homes in your area at that price point. You'd be perfectly happy at that lower price point.

He's trying to direct you towards homes that are $350,000, which means if you were to buy a house at that price point, you would be indebted for a lot longer, which means he could control you for a lot longer or make things awkward at the dinner table for a lot longer. You don't want to be on the hook. And yes, I know there are plenty of people who are probably shouting into their radios right now saying, you know what, you can always refinance. But if someone has a history like what you've described, it's best not to do a deal with them in the first place. And if you would be happy in a home that costs 190, then there's no reason to buy a home that costs 350, given that the 190 home is available in your area. For you to be able to buy that $190,000 home, you mentioned

you need a 7% down payment. I'm curious as to where you got the 7% figure from. It's very specific, so I trust you got it from somewhere. An FHA loan requires a minimum of 3.5% down, so you could come to the table with as little as 3.5. But let's just, let's take 7%. Running with that number, 7% of 190,000 is $13,300. So your aim is to save up a down payment of $13,000. Now, you can do that in one to one and a half years. With a savings of a thousand a month, you'll have that in about a year, a year and a month. With the savings of $738 a month, you'll have it in a year and a half. And pulling together those savings, yeah, that's going to require some sacrifice. Fewer dinners out, fewer trips. Maybe you develop a side hustle on the weekends. You start tutoring kindergartners and how to tie their

shoes or you walk dogs or pet sit or help sixth graders with their math homework. But a year from now or a year and a half from now, when you've saved that down payment on your own, you'll be able to buy that house with no strings attached. And that's going to feel a lot better. You know, staying away from the awkward Thanksgiving piece of this question for a moment, what I really like, no matter which path she decides to choose, is doing the one that she can financially afford to do without help, the payment she can afford to do without help. And it's not always dad doing this. It's friends, you know, pressuring you to go out to an expensive

restaurant when you don't have the money or take this vacation with them that everybody else is gilting you into and you know personally you can't afford, but you don't want to be the odd person out. So you agree to go on this expensive vacation. Like you're going to get this pressure all the time and being able to stick to what you. value and do the thing that is right for your financial situation is always the winning move. Because you'll feel so much power. You will feel so much more confident when you're living inside of a house. Like even if she takes dads, let's say she decides to go to the bank of dad against your

vice, Paula. It's going to be much easier for her in that room. If she has a mortgage, she knows she can afford and she's able to get out of it at any point like how great would it be if dad goes well I'm taking the house away and she's like whatever I'm going to a bank now I took you for the extra three percentage points that I couldn't get from a bank and so let's do this I'll go ahead and move move the money over to bank she's in control then you know so she decides if she decides to not go through a bank and take an interest rate through dad that's a lot cheaper but she can go to the bank anytime she wants now she's not

under dad's thumb, which I think is the position that she wants to be in. Yeah. Manush, no matter what, you don't want to be in a position where approximately half of your take home pay is going towards your housing costs, which is what you would be in if you got that more expensive home. You want to be buying the cheaper home and then living there with a roommate to help you offset some of those costs. The conventional rule of thumb is you want to keep that number under 30% of your take

home pay. And by the way, we have a lot of people listening to this who, Paula, you and I, we've heard these people. They are much more aggressive savers. For those people, 30% is even way too high. Like 15% might be a better number. So the lower you make that number, the easier it's going to be to get your other goals more quickly. Exactly. The three biggest expenses that the average American pays are housing, transportation, and food. If you can focus on the big three, then you don't have to worry about the small stuff. And of those three, sorry? What did you say, Joe?

Beer's not in there. I think that's... Food housing and micklebe. I think beer's a form of food. A form of food. That's right. Hops and barley. Okay.

Exactly. It's sustenance. Now, Manus, if you've been listening to this show for a while, you know, I typically don't come out hardline and say, do this, don't do that, right? I typically say, let's take a look at the options. here's the pros and cons. I am pretty hardline about don't take this loan from dad. Because for the cost of an extra two or three percentage points,

you get to preserve your autonomy and your independence. And when you think back on how you got into this home, you'll also have the confidence that comes from knowing that you did it on your own, that you spent your Saturday afternoons walking dogs and tutoring sixth graders in order to save up money, a hundred bucks at a time, to accumulate that down payment. And, you know, the control thing, that's what my mind keeps going back to. That history of threatening to take your car away

whenever he didn't like how you were acting. Sure, that can fly when you're 16, but you're 26. And if he starts up with stuff like that now, I mean, what are you going to do when you want to live with a partner and he doesn't want that person there, right? What are you going to do when you want to take in some roommates, but he might not approve of your choice of roommate? Or when you turn 30 and you want to throw a giant house party and maybe he doesn't approve of that? I don't know, Paula. I do think that it's about, I hear everything that you're saying.

And I do think it's about the ability to maintain a lot of. autonomy and control. If I can get a loan through a bank, I'm going to get it at nearly double the interest rate that dad's offering. Worth it. See, I don't think so. I think if she can get the loan through the bank, but dad will give her the interest rate at a lower number, I think I take it through dad.

Nope. Dad then becomes pain in the ass. Then I just go to the bank. Hard no. I know I've got my out. I can save so much money and I have my out. Hmm. Hard no for me.

hard, hard no. I think it depends on how bad dad truly is at this stuff. I mean, I think we're not, we're not in this household. I mean, if it is abusive behavior, that's one thing. If it's dad is a nitpicky dude, you know. But the influence, just think about what's going to happen when dad's like, your partner can't move in unless you're engaged. Well, then you go to the bank. Then you go to the bank. Right. But that influence is still there. That influence still permeates your mind. And it influences your decisions in ways that are both direct and subconscious. But you're assuming that dad's not going to do that if he doesn't own part of the house. Dad's going to do that either way.

Dad's going to do that whether he owns the house or not. Like he's not going to stop being the parent that he's been for better or worse, whether he owns a piece of the house or not. And it's still going to bother you. But the more distance you create, the better. It's one thing if like you and your partner are living in a different state and your dad's on the phone being like, you guys have to get engaged.

But it's another thing, if you live in the same city and he owns your house and he's like, partner can't move in unless you're engaged, right? Like it's a different form. I don't. The level of influence, the way that it permeates your mind, the pressure that it puts on you, the way that influences your decisions, what if you count out? What if you do end up getting engaged? And then 10 years later, you look back and you're like,

that was a wrong choice. You know, it just, it can set you off on a trajectory that just robs you of years of your 20s and 30s. I don't think there's going to be any difference. I think there's going to be no difference whether he owns a piece of that house or not. But the more control you give, the more control and influence that you give. But that's my point, Paul. I don't think you're giving him any control.

If you can go to a bank, whatever the hell you want and flip that, all you're doing him is taking him for the free bucks. That's all you're doing. No. Stay clear. Life lesson, folks. The way that it, it permeates your mind and impacts your decision making, even at the subconscious level. I think he's going to do that either way. If he's going to do it, he's going to do it. Why give somebody like that a greater degree of influence over your life, you know? I don't think it, that's my point. I don't think it is a greater degree. I think it's the same degree either way. It's the same degree. Agree, Joe. I think, I think. Yeah.

Well, and I think that, I think if you think there's a difference, I think it's in your head. Like, I think you're in a state, you talk about being in a different state. I think you're in a state of delusion if you think that it's a different, it's a different amount of influence. If I can do it wherever the hell I want, well, then that, I can control that. I can control how much influence I'm giving him, how much mental space I'm giving him. No, like you don't have that degree of complete control over your mind. Even the Dalai Lama, even the most Zen Buddhist monk doesn't have that. that degree of control over their mind, your mind is subject to...

I think you're still going to feel the emotion either way. I don't think there's going to be a different. Is there going to be a degree of difference? Is there truly going to be a degree of difference? Absolutely. I don't think there is. When someone controls the purse strings, they have a greater degree of influence. But that's the point.

He doesn't control the purse strings. You control the purse strings. Then control it from the beginning by just not doing the deal in the first place. If she wants to save money, there are better ways to save money than to do a deal with somebody who is going to hold it over her head. She wants to save money. She can get an additional roommate, partition off part of the living room and make it an additional bedroom and get in a third roommate, right? That would be a better way to save money. She can swear off travel for the next.

couple of years. She can give up alcohol and no longer have a bar tab. Or she could go the other route. She could side hustle it up. She can learn how to be a graphic designer and do freelance graphic design projects in the evenings. Like there are so many better ways in which she will be able to recoup any additional money that she might have to pay to a bank and do it on her own terms. Well, I think she heard. She knows where she's feeling right now. Yeah. Manush, I guess if you are going to do it, you asked about like what agreements you should draw up.

If you are going to do it, then what I want you to Google is private lender or hard money lender. There are plenty of templates online of agreements drawn up between private lenders who are lending money for real estate transactions. you'll want to use a similar type of agreement because fundamentally, if you forget about the fact that this is your dad, fundamentally, you are doing the equivalent of taking out a private loan that is secured by a piece of real estate. And so in terms of the paperwork, the promissory note, you'll want to go through those same paces. and most definitely hire a lawyer. Don't let your dad talk you out of that. You 100% want to spend the money to get a lawyer to do it right. And the lawyer should be representing you, not representing, you know,

you and your dad are two distinct parties. You have your lawyer yourself, who you pay for, who represents you and only you in putting this together. So if you are going to do it, then use the model of private lending or the model of hard-reliending, or the model of hard money lending and do not skimp on hiring an attorney. That is money well spent. But I maintain that it's a terrible idea. Minouche, remember that you'll make, sometimes you'll make the wrong decision. And so I also think

about if I go one way versus the other, what's the fallout going to be if I make the worst decision? We used to Paula play this game a lot when I was a financial planner. This is a tough decision. If I go the wrong way, what's the fallout? And I would do almost like, you know, they had that Ben Franklin thing where you put the positives and negatives, but I would take the two different decisions and I'd do the negatives from one versus the negative from the other. Like so, what's my, what's my worst case scenario? And no matter which one you choose, just remember that there are times that I'm sure that you knew when you bit off, you know, more than you could chew. But through it all, when there was doubt, remember that you ate it up and spit it out.

You faced it all. And you stood tall. And you did it your way. What? Joe, for a moment, I thought you were quoting Dr. Seuss, but clearly not. Quoting Frank Sinatra. I was holding back on that. I wasn't going to do that.

But when you said, you said, do it your way. I immediately thought, I did it my way. All right. All right. Well, with that, Minouche, thank you for the question. And best of luck with whichever you decide. We'll come back to this episode after this word from our sponsors. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient.

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That's your commercial payments, a fifth-third better. The holidays are right around the corner, and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need servware and cookware. And of course, holiday decor, all the stuff to make your home a great place to host during the holidays. You can get up to 70% off during Wayfair's Black Friday sale. Wayfair has Can't Miss Black Friday deals all month long.

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Terms apply. Don't miss out on early Black Friday deals. Head to Wayfair.com now to shop Wayfair's Black Friday deals for up to 70% off. That's W. W. F-A-I-R-com. Sale ends December 7th. Our next question comes from Tyson. Hey, Paula. Hey, Joe. I've been trying to wrap my head around bonds and treasuries, but the more I read, the more confused I get.

I currently park 20% of my investments in B&D through Vanguard, but I'm wondering if I would get a better return if I put that money in treasuries through a Vanguard fund like BMFX or V-U-S-XX. Thank you for all the amazing advice you've given me and the community. I'm on my way to becoming less broke from tuning in each week. Heck, one day I might even be able to buy Joe a new card table for the basement. Keep up the fantastic work from Tyson, a confused listener. Tyson, thank you for the question. So you are currently in a bond fund,

and you are wondering if you would do better in a treasury fund. So you want to know, first of all, what's the difference between bonds and treasuries? And you know what? Even more important than that, Tyson, I waited for that card table for a long time. And I finally, literally, Paula, bought one last week. Did you? I bought a new one. I did. Wow. I bought a new one. The old one was getting pretty beat up where we sit in mom's basement. And so we got, we got another one. Plus, we were having a big game night, a big board game night at the house and I needed another table. Picks or it didn't happen. Just what people want. Hey, these are the nerds taken together for board game night. I'm a picks of the card table. Oh, of the,

It's like, who cares about the games and the nerds? I want to see the table. I'll take a picture of the table and I'll send it to you. But Tyson, this one actually is really easy. It doesn't seem easy at first, right? Because bonds are such a different animal than stocks are or real estate. But the way to think about bonds is just to remember what the activity is that you are taking part in. You are loaning money to companies.

And whenever you think about loaning money, you think about two things. You think about their credit and then you think about the duration of low. How long am I loaning it out for? So if I'm loaning money to somebody for a short period of time or I loan it to them for a long period of time, I'm going to charge a higher interest rate for a long period of time because I don't know what my own financial situation could be like 10 years from now. So there's a little bit more risk there on my end, having that money out of my pocket for 10 years.

And there's more money if I loan it to you. If I loan the money to you for 10 years, I also don't know what your financial situation is going to be like. So the longer the duration it's called, the longer I loan it out to you for, the more interest I can demand. And with a bond, you're loaning that money either to companies or to governments. And that's something that's in the news a lot right now because as the U.S. is debating the debt ceiling and teetering towards a decision that's going to happen on June 1st, there is some turmoil in the bond market right now. All that means, in simple terms, is there are plenty of people who have purchased U.S. government bonds, meaning they've loaned money to the United States.

And now they're weighing how risky that loan is. And as different people have different opinions about the level of risk, there is currently, at the moment, some added volatility in the bond market. That is why looking at somebody's credit is all. was going to be important. What's the chance are going to repay the loan? And several weeks ago, US debt, safest debt on earth. Today, not as much as it was then. And we will see what happens there. But you're going to look at somebody's credit. Somebody's got a poor credit history. You'll jack up the interest rate even more. If they have a better credit history, well,

then it's going to be a pretty safe bet. So they can actually demand from you that you lowered the interest rate. You're going, I'm going to borrow from somebody else. You don't give me a lower rate. Oh, yeah, okay. I'd much rather have you take it from me. So what you're asking is this. In a normal market, let's get rid of the gyrations going on in treasuries right now.

Let's take a longer term view. U.S. government super safe. That's what treasuries are versus loaning money to companies, which is a general bond fund. Over a long, long period of time, loaning money to a company is going to to be a little more aggressive than loaning money to a government, which means that that government bond fund over longer periods of time will pay a lower interest rate back to you than if you loan money to a company. Loaning money to companies will give you a higher rate, expected rate of return

over longer periods. When we get to super long periods, I start to wonder why you're in bonds. Because over a 10-year period, assuming that you can stomach the volatility, being an owner of a company, over 10 years in almost nearly every market has been better than being somebody that just loan money to them. 15 years, even better bet. 20 years, forget about bonds completely, put the money in stocks. Once again, the problem there is not stocks. Over 20 years, I'll take stocks over bonds.

The problem is, Paula, I then have to look at the investor and their ability to stomach the roller coaster ride, which is the stock market versus a much more docile. bond market. So if you don't think you're going to be able to stick with it, then putting bonds in that portfolio and accepting a lower rate of return might be a better way to go. Tyson, you mentioned that you are in the Vanguard total bond market ETF. I'm looking at the portfolio composition right now. 67% of that money is in U.S. government bonds, meaning it's money being lent to the U.S. government. The remainder of it is in bonds that are given to a wide of variety of companies. Everything from American Express to Amazon. You can tell this list is an

alphabetical order because I just named two A companies. To Apple. Oh, you know what? I don't see Apple on here. Oh, but maybe I just haven't gotten to the peas yet. Amgen. Oh, the African Development Bank. Allied Bank. There we go. Allied Financial. Etna. Alibaba. Altria. I heard that company's smoking. Oh. Wow, I still haven't gotten to the P's. Alphabet, parent company of Google. How am I?

I'm on page 28 and I still haven't gotten to AP. I'm still in A.M. That shows how diversified this portfolio is. Yeah. Yes. But the point is one is going to be 100% treasuries and the other you said is 60% government's 40% companies. It's 67% U.S. government.

If you're in a fund, that's all you need to know. This fund will be more volatile and it will have a higher expected long-term rate of return than one that's all treasuries, period, just based on a function of what it invests in. And that with bonds is really truly, if you're investing in bond funds, what you need to know about the expected return. Now, if you've got two bond funds that have similar type companies, then we get into, what are they charging for that? you know, what are the fees associated with that fund? And then we go with a fund that has the lower fees and one that operates much more like an index than active. There's more reasons to maybe choose an active investor. I still like the indexes. Cool. So Tyson, thank you for the question. And whether you go with slightly higher risk but higher potential reward bonds or slightly safer

treasuries, that's totally a choice of what kind of characteristics you want to hold in your portfolio. So either way, best of luck growing your wealth and buying Joe his next card table. Our next question comes from Jolla. Hi, Paula and Joe. I know you like to name all your anonymous callers. So I'd like you to combine Paula and Joe. and let's call me Jala. Here's my question. We all know the 4% rule of thumb or 25 times your expenditures.

I'm trying to think through the impact of a side hustle. I retired at 58 and my husband will work for two more years. If I make a modest $20,000 per year for the next five years, how does that affect the numbers? Do I multiply by 25 and consider as if we have an extra 500K in the portfolio? looking forward to a frame of reference a way to think about this. Some of our numbers in case you need for reference, our current net worth after the 15% market decline is $2.5 million

in various IRAs, Ross, cash, and brokerage. Period. Thanks so much and looking forward to your answer. Jolla. First of all, I love your name. I like the first part better than the second half. Oh, ouch. And second of all, congratulations on retiring. It's fantastic.

Yeah. That's amazing. I hope you're enjoying it. Now, to answer your question, I would not think of your $20,000 in the context of the 4% rule. Bam! Instead, what I would do. The crowd goes crazy. It's like, I wonder where she's going to go with this.

Right? Right. You could cut the tension like a knife. What I would do is I would think of the 2.5 million that you have. I would think of that within the context of the 4% rule for planning purposes. Nope. And I'll put an asterisk there and we'll come back to that because the 4% rule is a starting point, not a definitive end post. But anyway, I would take that 2.5 million that you have in your various IRA accounts, brokerage accounts, etc.

think of that in the framework of the 4% rule, or more broadly speaking, in the framework of a withdrawal strategy. And then separately, this $20,000 per year that you're making, a side hustle income, I would think of that with a completely different framework. I would not use a withdrawal strategy framework as I thought about it. I would simply think of that as a supplemental form of income. For budgeting purposes, hypothetically, let's say that your expenses are $120,000 a year. $100,000 a year comes from drawing down at a 4% rate from the $2.5 million portfolio. The other $20,000 a year comes from the side hustle income. but I would think of those in separate buckets.

And to that end, I would think of the 100,000 being there in perpetuity, but the 20,000 disappearing five years from now when you stop earning it as side hustle income. Now, if you don't plan on spending it, let's say that your living costs are 100,000 a year, and this entire 20,000 that you're making a side hustle income is money that you are just continuing to save. Well, if that's the case, then there's no reason to draw down the full 4% of $250,000. If that's the case, then you would draw down 3.2% of $2.5 million. That's $80,000 a year. You'd supplement it with the $20,000 that you're earning. And boom, now you still don't have to consider the $20,000 within the framework. You still consider the $20,000 just as money that you're

making at the moment, but you're only drawing down 3.2% of that $2.5 million portfolio for the five years in which you make this supplemental 20 grand. All of that is spot on. But here's what I would do with the 4% rule. I would take it and I would throw it in the trash. That's exactly what I do. I think planning is so much stickier when it is specific, when it has to do exactly with what you're going to do. So thinking in terms of the 4% rule at all, I think leads to pretty sloppy planning when the real planning is not that further afield. You just go up over that little hill over there and there's a much better plan. So in my answer, when I say 4% rule, I'm really using that as a stand-in for thinking of it in the framework of a withdrawal strategy versus thinking of it

in the framework of temporary supplemental income. Yeah, I'm completely on board with that, thinking about what your withdrawal strategy is. And clearly, that money for as long as she has it is going to affect the withdrawal strategy. And what does that mean? That means that she's going to be able to take that money she already has invested, Paula, and just keep it invested longer, which means her potential rate of return than is higher. Exactly. Which is awesome.

Yeah, I completely 100% agree. Exactly. So yeah, I wouldn't think of the $20,000 with the framework of a withdrawal strategy. It's simply money that reduces the amount that you need to withdraw. Yeah. And that's it. And of course, all that money is not going to be profit. This was the other thing I thought about.

There might be cost of doing business. There also will be taxes on that money. So I definitely would not think about that unless she was giving us the after tax number that she's just bringing home and that's being added to the bottom line. But, you know, you bring home $20,000 to tax. income Paula on top of whatever they have coming in, she's not going to get to keep all that. So just remember that too. Right.

Exactly. Well, Jala, there's your answer. Simple enough. Congratulations again on retiring. Trying to think of some like Jala Hala reference and I'm just, it's right there and I can't think of one. But holla out to Jala. How about that? Oh, boy.

No? Okay. No, probably not. Wow. Hey, I tried. I'm in here working. Get a job, Joe. Statt.

All right. Thank you for the question. Congrats on retiring. I'm very excited for everything that comes in this next chapter for you. We'll come back to the show in just a second. But first, our final question today comes from Chris. Hi, Paula and Joe. This is Chris doing a follow-work from episode.

358. Thank you for all you do. A couple questions. My assets currently are 225,000 in retirement account, 18,000 in emergency funds, 14,000 in cash that I use to a dollar cost average. I currently have a mortgage now. I bought my house at 265. I bought in October of last year and I owe $210,000 as of March. My liabilities are I went, instead of my sinking fund for my car, I splurged a little bit and bought the car that I want. The car now is valued at $38,000, but I owe $27,000 on it. No credit card debt, no loans. I do have a water filter in my home now that I owe about $6,000, which I can pay off to more if I wanted to. But I don't see the point because it is a very low interest rate.

I contribute about 23% on my income. I changed careers just before moving to taxes, which gave me the opportunity to three times my income right now. But all of my expenses now are on one income of about $95,000. So I have an extra $6 to $7,000 after taxes, extra that I can do whatever I want with. So my questions to you are because I pay an extra $600,000, for my mortgage, which is, it is a 30-year loan, but I pay as if it's just 15 years. Should I continue that path? And for how long?

And two, I pay about $200 a week into my total market fund that a dollar cost average for this year. Is it wise for me to continue doing so? Can I increase that amount or diversify into other types of accounts? and if so, what would those accounts be? Joe, you mentioned last episode to look into efficient frontiers. How can I get into that? Three, because of my old income, my old employer, sorry, I have about $60,000 in my 401k sitting. Should I convert that money into my Roth?

And if I were to convert it today, it would still be into total market. So should I take the tax hit or just keep it there? for you to continue growing. Four, because of my abundance right now, would you advise I get a financial advisor with assets on the management fee structure? Why or why not? And my last question is, I do want a second home to improve my lifestyle and be closer to downtown.

Should I use my current equity for my home or wait a little longer to save? I inquired a little bit, and currently I would have to be. have to pay current market rate for interest rates. And because it would be considered an investment property, I would pay more. So I would have to wait a year to do so. Should I wait or can I take equity and pay for the second home? The current home that I live in, if I were to do that, I will rent it out for cash flow. And my last question is, how can I really take advantage of my opportunities right now

with abundance of money that I initially did not plan for, but I have now, but I really want to do my best to manage it and enjoy life and to be able to give to family when in need, but also understand that I have my future to plan for. I still plan to have a family. I still plan to get married. So thank you all so much for your support and for your advice. Thank you. Chris, first of all, congratulations on tripling your income. That's incredible. You switched careers, you tripled your income. You have $225,000 saved in your retirement accounts. You've got a healthy emergency fund. You've got a bunch of cash. You have already pretty decent equity in your home. You've got more than $50,000 of equity in your home, even though you only bought it in October

of last year. You've got decent equity in your car as well. So congratulations on tripling your income and on using that money to put yourself into a better financial place, on building equity, on growing your net worth. That's incredible. So first thing I got to say is congrats on all of that. Now, to answer your questions, I love the fact that you are paying your 30-year mortgage as if it's a 15-year. You're pretending that it's a 15-year. You're paying an extra 600 a month to it, that is wonderful. But, but, and here's the but, you also said that you're interested in buying a second home and converting your first home into a rental property. If that is something that you want to do, then you're going to need to save a down payment. So if you are serious about that,

then I would take that extra 600 a month that you are currently using to pay down your mortgage and put it into a fund that you can use to save for a down payment on your next property. Second, you mentioned that you are contributing $200 a week into a total market fund and you asked if you should increase that amount. Again, it depends on your goals. Would you rather focus on index fund investing or would you rather, say, for a down payment and diversify into real estate? And a lot of that is going to depend on what do you want your ideal portfolio composition to be? What mix of index funds versus real estate? do you want your total net worth to feature?

Start with that decision. What mix of assets do you want, index funds versus real estate? That's going to inform whether or not you should increase your contributions into index funds generally. If you decide that, yes, you do want to increase your contributions to index funds generally, then you can look at your asset allocation in terms of total market fund versus other types of funds. And that leads to your question about efficient frontier investing. There's a ton of information online that allows you to deep dive into the efficient frontier. I would suggest episode 357 and episode 380, which you have, I believe, already listened to.

But the place he's looking for if he wants to play around with one, there's a free spot called Portfolio Visualizer. just do a Bing search on Portfolio Visualizer and you'll be good. A Bing search. My goodness. Get paid, Paula. Get paid. Portfolio Visualizer is a great way to play around with the efficient frontier. Yeah.

Experiment with it. You asked about whether or not you should convert your 401k into a Roth account. I'm generally a big fan of Roth accounts, but that is going to have some tax implications. And that really leads perfectly to your final. question, should you get a financial advisor? I think clearly yes, because there's a lot that you are trying to manage and having an advisor who can guide you through, who can speak to very specific things, such as the tax implications of converting your 401k into a Roth, and who can offer custom tailored, personalized guidance, I think there's a lot of value in that. I would recommend

two things. Number one, I personally am not a fan of the assets under management fee structure. I am personally a fan of a financial advisor who charges at an hourly rate. And it's going to be a high hourly rate, but they're worth it, right? A good advisor is worth a high hourly rate. But I think that the hourly rate structure is, for me personally, something that I like better than assets under management. So look for someone with an hourly rate structure and look for someone, of course, who has a fiduciary duty to you at all times. So the question to ask is two questions. Number one, do you have a fiduciary duty to me at all times? Question number two, are you duly registered? I think when it comes to the hourly rate versus assets under management, because I wanted to

dive into that too, it truly is much more about you. You're going to pay a ton more money over time for assets under management, which I think there's a fair number of people listening to the show that don't need to pay that additional fee. But being a guy who's been there before, and I've worked with people, I will tell you the problem isn't 85% of the stuff we talk about on the show. The problem is the average investor blows himself up by doing stupid crap with their money. So we can focus on the fees that you're going to pay with the asset under management model, or we can focus on the fact that you will actually leave your money invested and do the right thing over time. You're going to pay a good amount for that. However, I'll tell you, Paula,

there's a lot of people out there far more than I think the people in financial media want to admit that would do way, way, way better if they had somebody else manage that money. Who cares about the fees? We blow ourselves up. If you can stay away from that, then I am 100% on board with Paula, but you know you. What have you done in the past? Are you going to find a way to not ruin your own financial plan by touching the money at the worst time, by placing silly bets instead of keeping a long-term approach, by getting very panicked when the market goes down and withdrawing money at the wrong time

or deciding that I don't want to put new money in at the right time? I think that those are the questions that I think only you can, answer. With regard to the rest of Chris, the rest of your questions, the issue I had for the duration of your questions was, what are you trying to do? And I know you have these short-term things you're trying to do, like buying the second house, maybe pay off the mortgage. But paying off the mortgage truly isn't a goal, Paula. I mean, that is a, that's a way to eliminate a speed bump, which is this debt payment that you have so that you can achieve something else. I mean, for me, when people tell me that they're trying to pay off debt, pay off debt truly to me is not a goal.

It's a hurdle I want to eliminate. And so if I pay off the debt, what am I going to do then? What's that longer term stuff that you want to do? Because I don't know any of those things, I have no idea what the answer to those questions are. Because as an example, putting more money toward the mortgage, paying off the mortgage quickly, for some people, that's the worst thing for you to do. for other people, that is a fantastic option. But I got to know what's behind that. You know, what's the next thing?

And how conservative can we afford to be? If we can afford to be more conservative, then definitely let's pay off the mortgage. But you and I know, Paula, that's a very conservative strategy. And for people that need a higher return on their money because they're not reaching the aggressive goals they have, then paying off the mortgage should be the last priority because generally that's at a very very low interest rate and we can beat that by focusing on the long-term goals and just knowing that there's going to be a little friction with the mortgage instead. So I don't know, which is why I agree with you, the financial planner and somebody you can talk to that will

answer, how do these things all dovetail? Because one's going to affect the other one. One goal is going to affect another goal. So yeah, I don't know. Yeah, it's a perfect illustration of tradeoffs, the $600 a month that he's paying towards an accelerated paydown of his mortgage on his primary residence is necessarily money that is not being used as additional investments into a total market fund or as savings towards a down payment. And I've given people advice on either side of that, depending on what is beyond that goal. Right. That's also going to fuel his asset allocation goals.

because as an example, while he's looking at the efficient frontier and proper asset allocation, what's that based on? It's based on what's the rate of return he's trying to achieve? Because efficient frontier doesn't work in a vacuum. It works in a, I need an 8% return. So historically, what's the mix of assets that gets me there with the least amount of risk? Well, the way to do that is to find out what rate of return he needs to safely reach his goal at his current investing. rate. What is what is that number? So then we're going to determine what the portfolio expectations are based on that. Frankly, Chris, playing around with the efficient frontier is going to be nothing to you until you know what that rate of return is that you're trying to achieve, which is why

I would begin at the end and say, okay, how much money do I want to try to live on? Just a base number. I know for some people listening to this that are in their 20s and we're talking about maybe in your, That's a long ways away. So just pick a number that's like your lifestyle today to start with. You're going to want to reexamine this plan as you go and then work backward. And you're going to come up with a function that is just two numbers. I need to save X and I need to get Y return. That's what I need.

Once I have that return number, then I plug that number into the efficient frontier and go, okay, this is how I should structure my investments. And I would even, you know, I know you've had. Nick Majuli on the show. I've also talked to Nick on stacking Benjamins. I totally agree with Nick that getting granular around your asset allocation matters a lot more, a lot, lot more, once the daily movements of your portfolio mean more than the amount you're putting in. I like using the total market index until you get to that point. Like I forget who cares about your asset allocation. When putting $100 a month means more.

than whether you get $100 in your return, just keep buying. Just buy more, buy more, buy more, buy more. And when you get to the point that now, oh, if I put it $100, it doesn't matter nearly as much as the fluctuation of the funds, then I get much more granular because you're going to have a big impact on going from a total market index to a much more analytical approach at that point. Right. Exactly.

At the beginning of your journey, your contributions matter far more than your asset allocation. Yeah. So to quote Nick, just keep buying. Mm-hmm. It's the title of this book. Well, thank you, Chris, for asking that question. Congratulations again on tripling your income. Joe, we've done it. We're seriously done already. Time flies. I think I checked all the boxes. I got my name partially in the name of a caller. Check. Yeah. I got to quote Frank Sinatra. You got a Bing reference in there once again? I did. I did.

The bingo players that bet on me today, man, they are happy. Bingo. You're welcome. Bingo. I didn't even mean that one. See, that's when you know you're a ninja, Paula, when they're just. Bing can go. They just roll off the tongue and you've no idea.

You're welcome. I mistook Frank Sinatra for Dr. Seuss. That happened today. Of course. Who's binging Frank Sinatra? Like you got some of our audience. I don't know idea who that is.

Well, Joe, where can people find you if they want to hear more of your wacky ideas? Yes. And not so wacky all the time. Although we do have fun. It's called The Stacky Benjamin Show. It's every Monday, Wednesday fall. Monday Wednesday fall? Where did the fall come from?

We will be here in the fall, I think. I have it on good record. We're already starting to line up interviews for the fall. But the big news right now is that one, Paula Pant is coming back to the Friday roundtable. The other interesting piece of that is we have a Friday, we have a trivia question every show. Our Monday, Wednesday trivia is lots of fun, and you can guess those. But on Friday, Paula and frequent contributor, Len Penzo and OG, my co-host, have this year-long battle going on about some trivia that nobody will ever get the answer to.

But Paula's usually in the last place. She's coming back to the game and she's not in last place. Wow. Let's see if I can blow the lead. See if she could immediately descend. And OG's behind her, which is also very good. Wow. He's like the reigning champ. Like many, what, two years in a row, three years in a row? Two years in a row. And Len won the two years before that. So Paula has a four year losing streak that she's trying to make up for. And you can hear all the drama, all the big time drama on the Stacking Benjamin show. Oh, I'm excited to be back in the game. Well, thank you so much, Cho.

And thank you to everyone who is part of the Afford Anything community. If you enjoyed today's episode, please do three things. First, and most importantly, share this episode with a friend, a family member, a neighbor, a coworker, your dog walker, that random person at the grocery store, the next person you see using Bing. The members of your Frank Sinatra fan club. Yeah, your Acapella group. Share this episode with them. That's the most important way to spread the message of good financial health. Number two, subscribe to our show notes by going to afford anything.com slash show notes.

And number three, please open up whatever app you're using to listen to this. Make sure you hit the follow button. And while you're there, please leave us a review. Thank you again for tuning in. I'm Paula Pan. I'm Joe Salci. And we will catch you in the next episode. Caught me again every time.

It's like, I won't fuck that up 12 times in a row. Here is an important disclaimer. There's a distinction between financial media and financial advice. Financial media includes everything that you read on the internet, hear on a podcast, see on social media that relates to finance. All of this is financial media. That includes the Afford Anything podcast, this podcast, as well as everything Afford Anything produces. And financial media is not a regulated. industry. There are no licensure requirements. There are no mandatory credentials. There's no

oversight board or review board. The financial media, including this show, is fundamentally part of the media. And the media is never a substitute for professional advice. That means 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, 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. Wow, what a question, Paula. And before we answer that, we have to give her a name. We do have to give her a name. Yeah, she's anonymous. As we record this, I saw you in a bunch of robes recently. What's that all about? Like standing in this place with some robes on and a weird looking flat hat? What is that? That's true. I, on Wednesday the 17th, I graduated from Columbia University with a master's in business and economics journalism. Oh, hold on. Wait, wait.

Actually, wait, can I request a different sound effect? What? No, seriously. Because I don't want to... No? No. Pomp and circumstance. You know that?

Oh. Yeah. Pomp and circumstance. I'm pretty sure that's royalty-free. We got to go to the editor. for that one though. Steve's got that one. That's beyond my capability.

Trying to find one. How about this one, Steve? Nope, not that one. Nope. Nope. Oh, here we go. You can do this. Seriously, I just graduated from Columbia.

They gave me a degree. Actually, they gave me the third degree. For you, it was the second degree. second degree, that wasn't it? Well, I mean, unless you kept my high school degree or my kindergarten degree. I got one of those. It's great graduation. You have one of those?

They were threatening to hold it from me to not let me walk because I was unable to tie my shoes until like graduation day. Your kindergarten graduation, you couldn't. My kindergarten graduation. Kind of. Exactly. Speaking of foreshadowing. In my defense, tying your shoes is an incredibly complicated task.

You got to do that whole looping maneuver. Yeah, exactly. Exactly. They bribed me with a Snickers bar, a full-sized Snickers bar. That was how they got me. That's good you every time. Yeah, the chocolate handcuffs, man. You know.