Afford Anything - Ask Paula: I'm Taking a Mini-Retirement in a Pandemic. What Should I Do?

Episode Date: June 23, 2020

#262: Tyson is taking a year off of work and plans to devote some of his time to domestic travel, volunteer work, and bolstering his rental property portfolio. He originally planned to travel internationally, but won’t due to the pandemic. How does this plan sound? Jace is wondering whether she should take advantage of the low stock market prices or keep a larger emergency fund due to the pandemic. Which is the better option, given her goal of financial independence? Jace also wants to know: where do you park your money after maxing out a 401k and Roth IRA? Venkat had to relocate after living in a condo for one year. He rents out the condo, but he’s in the red. Should he sell this condo? If so, when? TW has $250,000 in cash that he can use to either pay off his rental property or purchase two more properties. Which is the better option? For more information, visit the show notes at https://affordanything.com/episode262 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every decision that you make is a trade-off against something else, and that does not just apply to your money. It applies to your time, your focus, your energy, your attention, anything in your life. That's a scarce or limited resource. That opens up two questions. First, what matters most to you? And second, how do you actually act that out in day-to-day life?

How do you align your daily actions with your priorities? Now, answering those questions is a lifetime practice, And that is what this podcast is here to explore. My name is Paula Pan. I am the host of the Afford Anything podcast. Every other episode, I answer questions that come from you, the community. And today, I'm going to be answering questions related to the pandemic, how to manage money, investments, real estate, retirement savings, how to manage all of that in the context of the pandemic. We're going to start with a question from T.W.

Hey, Paula, this is TW from Kansas City. Great show. I listen every week. the listener questions. You and Joe make a great team on those. I'm a single 39-year-old entrepreneur in a creative field. I was raised without a lot of insights or guidance when it comes to debt and finances and have been playing catch-up since around 2016 when I realized I had no retirement plan. Since 2016, I have paid off 85,000 worth of credit card and student loan debt and invested 100,000 into a few Vanguard target date retirement IRAs. I have a primary home worth around 365,000 that I owe

200,000 on at 3.25, and a single-family rental property worth around 240,000 that I owe 165,000 on at 4.25%. That property currently nets me around 600 a month after paying the note insurance and taxes, but before maintenance or additional expenses. My question is, even though my industry has slowed down a ton, I have still been making some money during this and want to continue working towards my retirement goals. I'd like to be at least partially retired by the time I'm 50, so in about 10 years. In order to do that, I'd like to own at least five doors, probably single family houses with one to two of them completely paid off in the next 10 years. For example, my rental now has a note of around 1,200 a month. I get 1,800 month for the property and would net around 1,500 a month after insurance and taxes, but before additional

expenses if it were completely paid off. The market hasn't slowed down here at all, and I want to buy another single family house, but I'm concerned that we haven't seen the economic impact of corona trickled down to real estate quite yet. So the other part wants to wait to find out what might happen here in the next six to 12 months. I'm asking this question because I have around $250,000 for their cash that is just sitting around. I went a little bit wild with my emergency fund. Part of me wants to use that cash and pay off my rental property. Another part feels like I should use that money as a down payment on two more houses. The numbers work out about the same, right? either I'm profiting around 500 a month on three different houses, or I'm profiting around

$1,500 a month on one paid off house. Three houses is more work and maintenance risk. One house is more risk in regards to possible issues with my tenants. I know both you and Joe own real estate. Any insights into what you might do in this situation or things I haven't considered? To be clear, I will continue investing into my IRAs at the same level. But now that I'm debt-free, I'd like to ramp up my investment in real estate. as well. Thanks for listening. TW, first of all, congratulations on everything that you have built.

So you're a successful entrepreneur in a creative field. You've paid off your credit card debt, your student loan debt. You've got Vanguard IRAs with a six-figure balance. You've got two properties. So big congratulations on everything that you've built. I literally laughed out loud when you made that comment about how you went a little wild with your emergency fund. You've got 250,000. in cash sitting around, that is an excellent problem to have. You have the problem that everybody dreams of having so much cash. What do I do with it? So let's talk about what to do with that cash. Now, you've asked two questions. One was, you mentioned that you want to buy real estate, but you're concerned that you haven't seen the economic impact of COVID-19 trickle down to

the real estate market. In other words, home prices in your area have not been affected. So there's a part you, as you mentioned in your voicemail, that wants to wait and see what's going to happen in the next six to 12 months. I'm going to address that portion of your question first. The notion, let's wait and see what happens in the next six to 12 months. Let's see if prices go lower in the next six to 12 months. That inherently is market timing. Anytime that you're making a guess about what may or may not happen in the future, you are inherently speculating. Now, is there a chance that real estate prices in your area might go down, of course, there's always a chance that that might happen. Also a chance that it might be stagnant and remain exactly at the same valuation it is now.

Or there's a chance that prices might rise. If you want to get a feel for what your local real estate market is doing, you could take a look at some of the stats around it, like take a look at the average number of days on market to see how quickly homes are selling. What's the current average days on market in the given zip code in which you might want to buy and how does that compare to average days on market a year ago at this time? How many renovation permits or new construction permits have been pulled in the zip code in which you might buy and how does that compare to a year ago at this time? What's the median price point of houses

in the zip code in which you might buy? How does that compare? I mean, if you want to, you can gather that data and try to make a more informed projection about specifically what real estate in the area that you're looking in will do because remember all real estate is local. There is no such thing as the national real estate market. There are only many, many, many local markets. So sure, if you, if you really wanted to, you could pull data about the zip code in which you're looking and get a clear idea about what the circumstances in that zip code are. What does the inventory glut look like? Are there more buyers? Are there more sellers? But even if you were to do that, ultimately, any time that you are making a projection about price points in the future, you are inherently market timing.

What I think may be a more sound strategy is to look at each deal individually in a vacuum and ask yourself, is this an attractive deal right now as it currently stands? Does this particular deal give me a good cap rate relative to the risk profile of the neighborhood and the condition of the property? If so, buy it, and if not, don't. But evaluate what is today rather than what might be tomorrow. Think of the Warren Buffett strategy of investing in terms of stock investments. Warren Buffett and many of the other legendary investors, Philip Fisher, Benjamin Graham, they were not concerned with buying at the very bottom of the market or selling at the very top.

what they were concerned with was when they purchased a stock, they were concerned with a question, is this a good deal as it currently stands right now? If I were to buy right now, would that make sense? And likewise, whenever they sold, if I were to sell right now, would that make sense? And as they looked at each deal in the present moment, they were able to clearly see whether or not buying or selling at that given. moment in time would be a good decision. And by executing a series of those trades, it really didn't matter if they captured the very bottom or the very top. It really didn't matter. Oh, darn, I might have saved some money if only I had waited. They weren't caught up in spinning their wheels with all

of the what ifs. If all you do is think about what ifs, what if I just waited? You'll just stay stuck. You'll live in a world of hypotheticals. If the numbers make sense, then the number is numbers make sense. And if they don't, they don't. So I would encourage you to look at the current market and make your decisions based on what is rather than what might be. Now, to the second part of your question, you asked if you should use this cash to pay off your rental property or to buy two other properties. What I think is interesting about your question is that you also stated that your goal is to own five doors, probably five single-family homes, with one or two of them paid off within the next 10 years.

If your goal is to own five, then own five. You're not going to own five by using a giant chunk of your cash to pay off a $165,000 loan that's at a 4.25% interest rate, an interest rate that is only a little bit higher than historic inflation. paying off an ultra-low-interest rate rental property, that's a fantastic strategy if your goal is to be debt-free or if your goal is to have only one or two rental properties with maximum cash flow from those properties. But given that your goal is five properties, and so far you only have one out of those five, I say buy two more properties. You mentioned that the numbers work out the same right now, but we're not only looking it right now. We're looking long term.

And over time, owning more properties will result in additional growth. Some of that growth is going to be equity growth through principal payoff since the rent that comes from your tenants pays off the principal portion of a PITI mortgage. Some of that growth will come from additional cash flow over time as the rent rises while your fixed rate mortgage stays the same. So over time, if you're paying exactly the same amount per month in terms of your fixed rate mortgage, but let's say you increase the rent, even just at the rate of inflation, you increase the rent 3% a year, over the span of 10 years, that adds up. And as time progresses, your PITI mortgage gets paid off in cheaper and cheaper dollars while your rent continues to rise. And ultimately, once those properties are paid off, you will have even more cash flow.

Plus, as you said, owning more doors decreases the vacancy risk and the tenant risk that you have. With only one rental property, your occupancy rate is either 100% or 0% from your aggregate rental portfolio. Once you've got three doors, even if one of those is vacant or if one of those the tenant doesn't pay, you still have rental income coming in from the other two. So there's that income diversification component as well. And particularly given the fact that you hope to retire or partially retire on rental income, income diversification is especially important for an early retirement circumstance. So for all of those reasons, I lean towards the option of buying two more properties. The final thing that I'll say is if at any point in the future, if you decide that you want to pay off one or some of your property,

The property to not pay off is your primary residence. The reason for that is because your primary residence is going to, in almost every circumstance, going to have the lowest interest rate and the best financing terms because it is a primary resident mortgage. And those are the mortgages that have the friendliest terms. So right now, your primary home, as you said, it's worth $365,000, you owe $200,000 on it at a 3.25% interest rate. That's a super low interest rate. That interest rate is basically the rate of inflation. I absolutely would not be making extra payments towards that primary home. Bias, if you're going to hold loans, bias those loans towards your primary residence so that that way you can reduce the amount of loans that you hold on investment

properties since investment loans are going to have a higher interest rate. Now, that's more of a tip for down the road. But I find especially when you're balancing multiple mortgages, I find that helpful in terms of thinking about, all right, which of these mortgages do I want to pay off and which ones am I intentionally holding. Don't worry about market timing. Buy two more properties.

And ultimately, when you do start paying down your mortgages, pay off your primary residence last. Thank you so much for calling in with that question. And again, congratulations on everything that you've built on the IRA that you have built up in Vanguard, on the fact that you own two properties, on the $250,000 emergency fund, on paying off all of your debt,

you've done some really incredible things. So big congratulations on that. Thanks, TW. 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. They're also powered by the latest in payments technology, built to evolve with your business.

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I was planning to travel, but I'm not sure how much travel is going to be possible due to COVID. My side hustle is real estate, and I have seven rentals in addition to my primary residence. I plan to spend some time improving my properties and securing some better rates for a couple of mortgages. During my leave, I also plan to travel Canada in the fall and do some volunteering, but if I can't, travel internationally, I was thinking of focusing on real estate investment, perhaps even picking up some more properties and some short-term work contracts, and potentially preparing to take an additional year off, a year in which I could actually travel outside of Canada. I'd love to hear all your thoughts on this. Thank you. Tyson, first of all, congratulations,

that deferred salary leave, essentially a one-year mini-retirement. That sounds amazing. So congratulations for setting that up. That's very cool that your employer is willing to do that. And I think your plans sound fantastic. In the immediate term, the short term, summer and fall 2020, traveling around Canada, doing volunteer work, renovating some rental properties, potentially buying some more rental properties, that sounds like a great way to spend the summer and fall. In many areas, we are currently in a buyer's market.

There are not a whole lot of people who are buying right now. So this is a good time to make offers on rental properties. Often, you know, rather than getting into a competitive bidding situation, you know, you might be the only person making an offer. At least that's what we're seeing in the current market. The current market right now in many places, of course, there's, like I said, in the previous answer, there's no such thing as a national market. There's only many local markets.

But right now, many local markets are seeing. a scarcity of buyers. So the idea that you would be buying at a time in which few other people are can be very advantageous. And likewise, with improving your properties, this is a time where there is record unemployment and more people want work than are able to find it. So if this is a time for you to hire contractors or manage a small team, this is a time when people would be very happy to have that work.

Similarly, with volunteering, this is a time when nonprofits have a lot of demand. There's a huge amount of demand on food banks right now. There's a huge amount of demand on domestic violence shelters. There's very high unemployment and a lot of people need help. And so the fact that you're able to volunteer, I mean, everything that you've named, this sounds like a perfect time for it. So I love the plans that you've made. You also have mentioned, you mentioned them all.

multiple times in your voicemail, a desire to travel abroad. And given that your leave is going to go on until August of 2021, it seems to me as though you will probably get a chance to go abroad. Of course, we don't know what the coronavirus situation, both in Canada and internationally, we don't know what it's going to be. We don't know what's going to happen this fall. We don't know what will happen this winter. We don't know when there will be a vaccine. Of course, everything is up in the air, but many countries are reopening, reopening to tourism. Many countries, like New Zealand, have managed COVID very well and have gotten the number of new infections down to zero or near zero. So I think there's a good chance that you may be able to travel outside of Canada

during this year that you take off. And depending on which country you choose to go to, or countries you choose to go to, you may in those locations be at a reduced risk for COVID exposure. At least while you're in those countries, of course, air travel comes with its own set of risks. But again, we're talking about a time period that's going to stretch until August of 2021. And I think there is a reasonable chance that many of these risks, including the risks associated with air travel, particularly for people who are not in high-risk categories, maybe, and we never know the future, but may be well-managed as we head into the winter and the spring. So I think your plan sounds great. I think that there's probably a decent chance you are going to be able to travel overseas during this year off. The only recommendation that I would make is, in terms of buying another rental property, double check that you would still qualify for a mortgage.

Just chat with a lender. Talk to a lender about the fact that you're on this leave for a year. Explain to the lender exactly how your pay situation will be set up during this time. You know, double-check your assumptions to make sure that there aren't going to be any issues with regard to qualifying for a mortgage. That's the only thing that I would say. Other than that, your plan sounds great. So have fun. Congratulations. Enjoy this mini retirement. I'm excited to hear what you build out of this.

So it sounds as though you're going to improve your rental property portfolio. You're going to travel. You're going to volunteer. I think a lot of good is going to come from this. So enjoy it. Our next question comes from Venkat. Hi, Paula. Been a long-time follower of your blog and your podcast.

I really love your work. My question is about a condo I bought last year. I end up paying $420K for the condo. It's a one-bed, one-bath in a Midrise building in downtown Austin. right around 7th Street. I bought it after going through a rough time in my life and it was kind of an impulse buy. It's a brand new building. I love living there.

I lived there for a year and then I had to relocate for a job and then I ended up renting the unit out. And that's where the dilemma comes in because the cash flow from the rent doesn't cover all the expenses that I have with the property. I bought the condo for 420K. My HOA is around 450 and my property taxes. around $10,000 a year close to it, $9,600, but rounding up $10,000. My overall payment, including my mortgage, my property tax, and my HO is around $3,500. The rent that I generate is around $2,100. So it is good rent for the size of the unit, but it's not covering my expenses.

I have a negative cash flow for about $1,400 a month. I do make a good income. I'm around $200,000, but I did move to California, so it is higher cost of living here. I am trying to manage it by cutting down on my rent here. I am paying the same amount as my tenant is paying in Austin for a one-bed, one-bad, one-bad. But I do feel like I'm losing out on opportunity cost just because I feel like having a negative cash flow is affecting how I want to plan, if I want to invest, further ahead and something else. I did talk to my realtor and he mentioned that we could list the same property now for 440, which means I might break even or even lose a little bit of the money that put into the condo. But is it worth waiting another year? Because I might be losing around $18,000, anyways if I wait an extra year and I don't see if how a one-bedroom condo can appreciate about $20,000 another year.

it's a real bind so I was hoping you could give some insight into what are the kind of things that I need to be looking for if it makes sense to cut my losses and get out of this at this point. Do let me know. Ben Kat, well, first of all, congratulations on your new job in California. Congratulations on the $200,000 salary. Like, you're getting a lot of things right. You've got a lot of good stuff that's going for you. All right, let's talk about this condo because that is a tough situation. There are two factors that I want to talk about. One is your cash flow, but the other is

overall wealth creation. Now, the cash flow problem is obvious, and you stated it very well in the voicemail that you left. The rent is $2,100. The mortgage is $3,500. So you are negative $1,400 per month, and that's not counting repairs maintenance vacancy. Fortunately, it's a brand new building, brand new construction, so repairs and maintenance will probably be nothing, at least for a few years. And you're certainly not going to hold this past a few years. So repairs and maintenance are probably going to be nothing for you. So as long as you keep it occupied, as long as there's no vacancy, then the hit to your cash flow is going to be about $1,400 a month. But that doesn't necessarily mean, and this is the good news, that doesn't

necessarily mean that you're losing $1,400 a month. Because a portion of that PITI mortgage is going to principal. The first question that I would ask you is how much of that monthly payment is going towards principal payoff? The numbers that you cited, $3,500 per month as a monthly mortgage payment, that sounds pretty high for a property that you bought for $420,000. And I get that property taxes in Texas are among the highest in the country and that that by itself is almost a thousand a month. It's 800 a month and then you add on the HOA and now we're

talking $1,200 per month for just the taxes in the HOA. But still, $3,500 per month sounds assuming that you made a 20% down payment, $3,500 a month sounds high for something that you bought for $420,000. And so I'm curious as to whether this is on a 15-year mortgage or a 30-year mortgage. The reason that I ask is because so $420,000, assuming a 20% down payment, that means the mortgage amount would be $336,000. At a 4% interest rate, the principal and interest portion of that mortgage would be $600 per month. So you take that $1,600 P&I, add in another 1,000, well, really another $1,200 for the taxes and the HOA. That brings us up to $2,800 per month. and the only remaining part that we haven't factored for is the homeowners insurance, and that's

certainly not going to be $700 a month. So calculating the numbers, assuming a 20% down payment, calculating the numbers on a 30-year mortgage, I can't quite figure out how we're getting to $3,500 a month. So that's the reason that I ask, is it on a 15-year? Because if it were a 15-year mortgage, that would certainly explain it. But the good news is if it is a 15-year mortgage, then a pretty significant chunk of every monthly payment is going to be going towards principle. And so the loss that you are taking each month, in the context of wealth building or equity building, that loss that you're taking

each month may not be as bad as you think it is. Certainly from a cash flow perspective, yeah, cash flow you're losing $1,400 a month. But in terms of its impact on your overall net worth, I'm guessing it's probably still a loss, but the good news is it's probably not as bad of a loss as you think it is. Now, in a situation like this, in a negatively geared holding, the ideal situation is that the amount that the tenant is paying will at a minimum cover the interest, the property taxes, the insurance, and the HOA. If the tenant's rent covers those costs and you out of pause, are essentially covering the principle, then from a wealth-building perspective, you're not losing money. You're losing cash flow, but you're simply transferring cash flow into equity.

So if the tenant's rent covers the ITI portion of a PITI mortgage plus the HOA, don't get me wrong. That's not a situation that anyone who's listening would want to put themselves into. but if that is the case, then it's not as bad as you think it is. It's still bad, but it's less bad. And if that is the case, if the rent is covering all of those expenses and your out-of-pocket is the equivalent to principle, then that does give you the leeway to hold on to the property

for a longer period of time if you were to choose to do so, if you could afford the cash flow hit, since it means that you're not actually losing money in terms of your overall balance sheet. That said, I don't think that there's going to be much of an advantage to holding onto it for another year. Of course, nobody knows what the market's going to do. Nobody knows how real estate values will be affected in the span of the next year. Will they stay the same?

Will they go down? Will they come up? Nobody knows. If the condo is currently valued at $440,000 and if it appreciates 3% in the next year, the rate of inflation, Then that means by next year, by this time next year, it would be worth, under that set of assumptions, it would be worth about $453,000. As you said, you bought it for $420, so, you know, if you were to list it for $453, and then after you factor for agent fees, closing costs, negotiating with the buyers, you're right, you'll probably break even. And frankly, you might even break even now. Like if you listed at 440, again, I don't know how many buyers there currently are.

If there's ever a reason to hold on to the property, it wouldn't be because you think that the value might rise in the future. It would be because the pool of buyers is small right now. In other words, if there is a reason to hold on to the property, don't do it because of speculation about what may or may not happen in the future. do it because of current sale conditions in the present moment. But I don't know the local Austin market. I don't know what the buyer situation there is. If there are still people who are buying, if the average days on market is not that much

and a lot of places are selling for list price or close to list price, then heck, you may as well sell if the current market conditions are favorable towards sellers, or if not favorable, at least not. unfavorable. But if current market conditions are actively unfavorable towards sellers, that would be the reason to hold. So I'll give you, you know, the same recommendation that I gave to TW, who called in at the beginning of this show, don't make decisions based on assumptions about future value, make decisions based on a snapshot of the current moment. If you can sell

right now and break even, that's great. If you can sell right now but you wouldn't break even, then the follow-up question is, how much of a loss is that? And how does that compare to the amount that you're actually losing each month in terms of overall net worth? Once you adjust for the portion of the payment that goes towards principle, how much are you actually losing per month and how many losses, how many months of losses will you have to incur before your actual losses outweigh the loss that you would take as a result of selling now. That's why I say that the ideal situation is if the tenant is covering ITI plus HOA, because then you're not actually losing.

You're just paying off the principle. And that gives you the green light to hold for as long as you want and or as long as your cash flow situation allows. But it sounds like your cash flow situation is good. you yourself are paying $2,100 in rent, and given the fact that this thing is negatively geared by $1,400, that means that your total out-of-pocket expenses are $3,500, which is exactly the same as what you were paying out-of-pocket when you lived in that condo in Austin. So you've done a really good job in choosing a rental situation for yourself that allows

for your total out-of-pocket to remain unchanged. and props to you for making that decision because, again, that helps build your runway. That helps you. It gives you that time to be able to wait it out if you decide that that's what's best. So I would take a look at the breakdown of the PITI plus HOA. Take a look at where those dollars are going, how much is going to principal, and make your decision based on that. Thank you for calling in with that question. and best of luck with whichever decision that you make.

We'll return to the show in just a moment. Our next question comes from Jace. Hey, Paula. My name's Jase, and I have an optimization question for you. I'm in five, and I'd like to know if it's better to focus on investing when you're young or saving into an emergency fund, especially in the current climate with an emergency, as you've been pointing out with COVID recently.

because of the fact that saving for an emergency fund can take away from some of the time I might be investing, and I know that we're not trying to time the market, but things are down, and I'm confident that by the time I hit retirement, things will come back up. To give you a couple of details about myself, I'm 24, going on 25 at the end of this year, I'm single with no dependents, and I've amassed about a year's salary, which is, my net worth at 60K. My monthly expenses are about $2,500. I have out of the 60K, 16K in cash, which is more than I usually keep on hand as I try to keep an emergency fund of only $10,000. I know that things are weird with like everything because COVID has pretty much shut the country down, but I'm wondering if it's better to keep the extra money in an emergency fund, which is currently up to about six months, or should I reduce it back to about three months and invest the extra money?

A secondary question? I'm trying to save my goal of $67,000, so I'll have a million dollars for retirement and can further work on FI. I'm wondering if there's any way other than investing money in a 401k, which has a yearly cap of about $20,000, or a traditional Roth, which, or traditional IRA, which I've already maxed out my Roth as a way to park money until I'm retired. I'd love to hear your opinions and thanks so much for everything you do. First of all, huge congratulations on what you've done. So you are 24 years old and you've already amassed a net worth that is equal to one year salary. You've done that by 24.

That's unbelievable. In fact, Steve, I think this calls for a round of applause. Huge, huge, huge congratulations. I mean, to save a year salary by the age of 24, yeah, and I imagine you haven't even been in the workforce for that long. I mean, part-time jobs, sure, but in terms of working full-time, I would assume that you haven't been working full-time for that many years. And so the fact that you've already saved a year's salary, that is incredibly impressive. Keep it up. You clearly have some great savings habits.

And speaking of savings, that leads to your question, which is how big of an emergency fund is too big, essentially is what you're asking. At what point is your emergency fund sufficient and you can then start transitioning your additional savings into investments? You mentioned that your monthly expenses are about $2,500. That means a six-month emergency fund would be $1,500. So let's start the conversation there. Let's start with the anchor point that $1,500 represents a six-month emergency fund for you. Now, stepping back, the first question that we'd want to ask ourselves is, how many months' worth of expenses should your emergency fund be? Like, what is right for you? The general guideline is that if you are in a low vulnerability group, meaning it's unlikely that you might lose your job and your dual income or have other income diversification. In that circumstance, between three to six months is the general guideline. If you're in a higher vulnerability group, meaning you are more likely to lose your job

or you're single, as you are, or single income, and therefore don't have that income diversification, six to nine months is the general guideline. So the meeting point, you know, in your case, I don't know what you do for a living, so I don't know the likelihood of you losing your job. I also don't know in terms of the career that you have how many job opportunities exist within your career, your industry, your geographic location. All of that is going to play into how quickly you could get a different job if you were to become unemployed. but assuming that your job is relatively stable and assuming that you are in the type of industry or career in which you think you could reasonably get another job in three or four months, even assuming that fairly upbeat set of circumstances, I think you would still want at least six months' worth of an emergency fund saved for the very fact that, as you said, you're single, you don't have another source of household income. your income as a single person, and I'm single as well, that means that there's nobody else in the household who will be able to float any of the bills. There's nobody else who can help out with paying the mortgage or keeping the lights on.

It's completely, if you're single or your single income, it is 100% up to you. No one else can help relieve that pressure. The impression, and I may be wrong, but the impression that I got from hearing your question is that, I'm guessing that the bulk of your income comes from one single source. I'm guessing that the majority of your income comes from one employer, one paycheck. You didn't mention anything about having a side hustle. So again, I'm just making that assumption. I might be wrong. But assuming that that is the case, then again, that increases your vulnerability because, again, lack of income diversification. If you were to lose your job, your income would drop from 60,000 down to zero.

And yes, there's unemployment, but that takes a long time. I know people who applied for unemployment two, three months ago and only now have started getting checks. And particularly in the current climate, unemployment is pretty backed up. And depending on what state you live in, for some people, it may happen sooner, but for other people, they're waiting for a very long time. So you definitely don't want to be in a situation in which you've lost your job. Your unemployment hasn't come in yet. You're just, you're in the queue and you're waiting for the unemployment checks, but they haven't shown up. And meanwhile, you don't have any cash. Like, that's the worst case scenario. You definitely want to avoid that. That's why I, if I were in your shoes, I would hug to the six-month emergency

fund mark, which in your case, since you spend $2,500 a month, that means, say $5, $5,000,000, $15,000 and invest, feel free to invest anything above that. You mentioned that you have $16,000 that's in your emergency fund. So that extra thousand, put that extra thousand into investments. And as you continue to save, the good news is you have an emergency fund that's already built up. So as you continue to make money and as you continue to save money, you now no longer have the need to direct savings from current and future paychecks towards an emergency fund. Like that's done, check.

You can cross that need to save an emergency fund off the list. And that means that from your current paychecks, from your future paychecks, bigger and bigger chunks of those can go into the market. And that is how you can ramp up your investments. You didn't mention having any debt. So I'm just going to make the assumption that you are debt-free, which means everything that you save from this point forward can all go into investments. There's no need to raid your emergency fund for it.

Just save aggressively from this point forward, which I know you already are doing because you've already built such substantial savings. And that leads to the second part of your question. You said that you want to save aggressively and you're wondering where to put your money after you've maxed out your 401k and your Roth IRA. First of all, in the year 2020, the 401K contribution limit for people your age is $19,500. The IRA contribution limit is $6,000. So collectively, $25,500 is the total amount that you can put into these two tax-advantaged accounts.

Now, you mentioned that your cost of living is about $2,500 a month, which is $30,000 a year. So after spending $30,000 a year and then putting away another $25,500 into your 401k and IRA, that adds up to a total of $55,500. You mentioned that your salary was $60,000 or around $60,000. I'm going, I guess I'm just adding up these numbers. I'm going to assume that you mean that that's maybe after tax. because if your salary is $60,000 pre-tax, then after, then basically I can't get the numbers to add up. If your salary is $60 pre-tax, then with a $30,000 cost of living plus $25,500 in retirement accounts,

that puts us over what your take-home would be. In any event, the reason that I'm running the numbers like this is because I'm trying to figure out exactly how much money we're talking about here. in terms of that question of where do you invest it? If we're talking about just a few thousand dollars, then one possibility is to put it into an HSA if your employer offers health insurance plans that are HSA compatible. The beauty of investing in an HSA is that that money goes in tax deferred. And if you spend it on qualified medical expenses, it's tax exempt. But what you can do is rather than spending it on medical expenses, you can just pay out of pocket for your medical expenses and then continue allowing that money to grow tax exempt inside of that account.

Because why would you, assuming that you have the cash to be able to pay for medical expenses out of pocket, why would you pay using tax advantaged money when you don't have to? Why not let that tax advantaged money continue to grow? So the beauty of investing in an HSA is that you have the benefit of a traditional IRA insofar as you get the tax deduction up front when the money goes into the account combined with the benefit of a Roth IRA insofar as that money, the money that is offset by the qualified medical expenses that you have made and saved the receipts for but have not drawn out of the HSA. That money grows tax exempt. and you have the flexibility to then remove that money, withdraw that money, any time that you might need it, the money that can be offset by a qualified medical expense. You have the flexibility and the liquidity of having the option to withdraw against that money,

but you aren't obligated to. In other words, if you incur $1,000 in a qualified medical expense, but you pay that $1,000 out of pocket, and then you save the receipt, just put it in a Dropbox folder, put it in Google Drive, to save the receipt, and two years later, there's some kind of an emergency and you need the money, well, then you can withdraw that thousand dollars from your HSA at that time because you are now reimbursing yourself for that qualified medical expense that happened two years prior

after your HSA was already set up. So that's the beauty of an HSA. It's a bunch of tax advantages combined with a lot of flexibility, but the maximum contribution amount is $3,550. And that's the reason that I was trying to do the math on how much money we're talking about. Because if you're maxing out your 401K, you're maxing out your IRA, and then if you also max out the HSA, that's a total savings of $29,050.

You mentioned in your voicemail that your goal is to save $67,000, but you also said that a year salary is $60,000. So I'm making the assumption that your goal is to save $67,000 over time. And just by using these three tax advantaged accounts, the 401k IRAHSA, you'll get there. If you were to max out all of those accounts, you'd get there in a little over two years. Now, if you are able, maybe you have a side hustle, maybe you have some other sources of income. If you are able to save even more than $29,000 per year, then I would recommend putting that money in a taxable brokerage account,

a good old-fashioned taxable brokerage account, which is the unsung hero of the brokerage world. Many people don't like taxable brokerage accounts because there's no tax advantage and isn't it great to have some type of a tax advantage? But the type of tax advantages that you get in a 401K and IRA and HSA, those tax advantages come with a cost. And that cost are the restrictions on how,

you can spend that money. The beauty of a taxable brokerage account is true. You don't get tax advantages, but you also preserve flexibility. There are no restrictions with regard to how much money you can put in, how much money you can take out, when you can take that money out, like you can move money in and out of that as you please. And so a taxable brokerage account is a fantastic option that allows you to grow your investments in an account that also is flexible. So if there's money that you can't put into an HSA or if maybe your employer doesn't offer HSA compatible plans, go for the taxable brokerage account. At Vanguard, Schwab or Fidelity, those are the big three discount brokerages.

Vanguard is a co-op, so if I had to choose one out of those three, Vanguard is the one I would pick. But you can't go wrong with any of those three. Well, thank you for asking that question. And again, huge congratulations on everything that you've built. I'm very, very impressed by the fact that you have managed to already save a year's worth of income at the age of 24. That is amazing. So congratulations on your ultra-high savings rate.

And on all of the progress that you are making towards financial independence, it's very clear that you're going to reach FI soon. I mean, you're going to reach FI quickly, you're dedicated, you've got a high savings rate, you're asking the right questions. So big congratulations on all the progress and on everything that lays in store for you ahead. That is our show for today. Thank you so much for tuning in.

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