Afford Anything - Ask Paula: Marriage and Money: What Are the Right Conversations?

Episode Date: December 12, 2022

#417: Our first anonymous caller is getting married. What are the financial considerations the couple should be thinking through since there is a large income gap between them? Our second anonymous caller is concerned about her ability to continue working due to major depression. Should she consider disability insurance? Carly is an accidental landlord and would love to keep her rental property. The problem? It’s losing money right now and she’d probably take a loss if she sold it. What should she do? Shelby has an amazing opportunity to relocate to Tokyo for work, but she’ll have to take a pay cut. How should she think about her investment options? 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 For more information, visit the show notes at https://affordanything.com/episode417 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to your time, your focus, your attention, your energy, to any limited resource that you need to manage. Saying yes to something implicitly carries trade-offs, and that opens up two questions. First, what matters most? And second, how do you align your decision-making around that which matters most?

Answering these two questions is a lifetime practice. And that's what this podcast is here to explore and facilitate. My name is Paula Pant. I'm the host of the Afford Anything podcast. Every other episode, we answer questions that come from you. And my buddy, Joe Saul-Chi, is here to help me with those. Former Financial Planner, Joe, what's up? Paula, how are you?

I am exhausted, so behind the scenes, it is 9.30 p.m. right now. I don't think we've ever recorded this late. I don't think we've ever recorded this late. Yeah, it's going to be probably between 11. to 11.30 by the time we stop, I'm going to take a cab home after that. I'll get to sleep for like maybe six hours and then I need to be up and back at it again. So yeah, I'm a little tired. You know, it's grueling, but it's worth it. That's what I was going to ask. Who created that schedule, Paula? I know. I did, right? Right? Who's the person that made that? It is worth it,

though. You don't do things that are easy. What's desirable is not necessarily what. what's easy. If it is easy, sometimes its only benefit is ease. That's not to say the ease and desirability are mutually exclusive, but it is to say don't be afraid of running headfirst into hard things. And while the day-to-day might suck, the bigger picture of it is worthwhile. I totally agree. This year, I decided, as you know, better than most, to go to 40 different cities. And people were saying, why would you do that? I don't know how often I'm going to do this, Paula. How often am I going to get this opportunity? Let's go see as many people as we possibly can. So let's do it because it's hard, specifically because it's hard. And you're right, there's times when it suck, but now I look

back on it that it's finished and I'm so proud of it. Just like I'm so proud of my friend Paula going through the monster program that you're going through. Because every time we talk, you are juggling like 85 things. And I'm like, you are juggling like 85 things. And I'm going to I think, holy cow. Yeah. But let's get to today's questions. We've got four that we're going to tackle. We've got good ones.

We've got great ones, as always. Our first question today comes from a caller who is about to get married and is wondering how to handle finances in the event where he and his future spouse make very different incomes. Let's hear his question. Hi, Paul and Joe. Anonymous here. Really grateful for all the information you guys provide. Please, please keep it up. My question relates to financial considerations in a new marriage, particularly when there's a wide income gap between partners. I'm getting married soon. My annual salary is currently $71,000 per year. My fiancé recently started a job making about $250,000, so quite a bit more than me.

Our only debt is federal student loans, which we expect to have forgiven under the public student loan forgiveness program in the next three years or so. I max out my Roth IRA and contribute about 10% of my salary to a 403B. My fiancé is maxing out her 403B at about 20,000 per year. I've saved about 83,000 in retirement thus far, although we'll likely be lapped by my fiancé in a few years just giving the income discrepancy. We're saving to buy our first home, hopefully in the next year or two, and have decided that we'd like to try to start in family,

shooting to have about two kids if possible. We decided against a prenuptial agreement, but are still deciding how to combine finances and plan a life together. What sorts of models would you consider if you were in our situation when it comes to finances? Can you help us weigh the pros and cons of completely combining all of our income into a single checking savings account versus having a joint account for joint expenses but still retaining our individual accounts? When it comes to filing taxes, is it a given that married filing jointly probably makes most sense or might the income discrepancy change that calculation? At one point, my fiancé suggested that I too should consider maxing out my 403B contribution to ensure that we're able to retire at about the same time.

I'm personally skeptical that that's a good idea, but wanted to float it past you to get your thoughts. Any opinions, thoughts, considerations you could provide would be greatly appreciated. Thanks so much. Thank you for asking that question, and I just realized this is an anonymous caller, and we did not give him a name before we did. cute up his question. So Joe, I think we need to give this guy a name. For a while, we were picking actors that I'd seen in movies because I watch a lot of movies and a lot of TV series. But lately, because we're celebrating the fact, Paula, that you're in this amazing program, we've been talking

about journalists. So we need a journalist, Paula. We do. There is a famous Indian journalist who recently spoke at Columbia, his name is Ravish Kumar, and he's renowned in Indian journalism, and he shocked everyone by announcing his exit from the broadcast network for which he works. He just announced that within the past week. And so in honor of him and the work that he's done, we're going to call this guy Ravish. This is a great question, Ravish. I will dive him. I will dive because I've had long conversations, Paula, with a mutual friend of ours, Farnush Tarabi, about this. And Farnush actually wrote a book about this very topic called When She Makes More. And so Ravish being in a relationship where she makes more.

And Cheryl and I have, in different stages of our lives, have had one person who made significantly more than the other. And by the way, Paula, that's bounced back and forth our entire career. So I think first of all, and this is difficult, and I get where Ravish is coming from with the difficulty in how do we combine finances, because there is a gradual shift that has to be made over time where it goes from her money and his money to our money. and even though it's going into her 403B and not his 403B, this is also his retirement. Now, depending on what state you live in, let's talk about the ugliness because we always hope for the best, but we always plan for the worst. Even though Ravish and his spouse decided not to get a pre-nup, if they live in a community property state, Paula, then any money from the time that they are, together is going to be divided evenly. So because of that, whether it's in her 403B or his 403B,

it doesn't matter. It is both of their retirement. And obviously, there will be lawyers that will sort that out and maybe it doesn't come out exactly equal. But I think for planning purposes, if I were their financial planner back in the day, I would have advised them to consider all of the money, both of their money. Now, that's only if they live in a community property state. There are other states that are equitable distribution states, and they have a completely different set of laws. You mentioned that you and your fiance decided not to customize your own pre-up. What I would hope you understand is that the fact that you're not customizing your own pre-up doesn't mean that you don't have a pre-up. Everybody has a pre-up, everyone. And your pre-up, and your pre-up

are the laws of the state in which you reside, or the laws of the state that has jurisdiction over a divorce proceeding were it to happen. So the laws of the state are your pre-up. So you have a pre-up. You have a default pre-up that was handed to you by your state government. And if you want to customize your own and not take the default that was handed to you by the government, you're welcome to do so. Otherwise, you still have a pre-up, and it's the one that was assigned to you. I would add a minimum, be familiar with what your pre-up is by reading your state laws and then make a decision as to whether or not you want to make any modifications to the one that was handed to you.

Great idea. I would first take a look and see how much money they need to retire at the date that they want to retire and base the amount they put in the combined 403Bs on that number. And at the very least, if you are not in a community property state, then I would put whatever the minimum is for you to make sure that you have enough for your retirement into either of the plans. Still, even an equitable distribution state, I've been through enough divorces, sadly, with clients that during your time together, I can't think of a case where we didn't look at all of the retirement funds that were put away for both of them as both of their money. I can't think of a time. Doesn't mean it hasn't happened. I'm sure there's going to be an attorney that writes in and says, yes, it's a possibility. I just have never seen it. The bigger issue for me is how you manage money on a daily basis, which was the other part of this question. And I think, Paula, truly

the piece, which is, you know, this is what people fight about all the time. Do we have one checkbook or do we have two checkbooks? And here's something interesting. There was just a piece in the Wall Street Journal written by Julia Carpenter on December 5th. And the piece is called Couples who combine finances are happier, so why don't more people do it? And it comes down to a few things. On one hand, couples that are very busy will often have a joint checking account that they both use, but because they're very busy and they're just spending money and don't have as much time to communicate as they'd hoped. One partner operates their checking account. The other partner operates their checking account and then they have a combined account that they both contribute to somehow.

That, by the way, in my discussion with Farnoche is the way both Farnuch and I operate in our relationships. I have an account that my money goes into. Some of my money goes into the joint account, we use that to pay our combined bills. But when it comes to the rest of it, we actually talk about the money, Paula, as if it's one pot of money. We have a weekly meeting where we go through all the checkbooks and talk about all the expenses we made. And we also chat about what we're going to spend the next week. It has nothing to do with trust as much as it, even though I have my own checking account, I see it as our money. And there are times when Cheryl will take money. And from her checking account and put it in the joint account because it needs more money or I do or

I will make the contribution to some investment out of my account or show out of hers and those will often be combined. I don't see it as just my money that's in my account. It's just ease of use. Some people and the number in this Wall Street Journal article is 23% of couples keep their finances entirely separate. These are people that while they are married, it's a marriage. It's a marriage, much more about everything but money. When it comes to financial stability, these are two people that have come together with an agreement that while we are together, we are together. However, I'm going to have half the bills. You're going to have half the bills and we're just going to break it down, down the middle. Frankly, what's interesting, and Paul, if you don't mind,

you can link to this piece. You do have to have a Wall Street Journal subscription to read the entire thing. But the point here is this. It really comes down to you. I have no animosity toward people who want to keep their finances entirely separate. That's a choice that they made going in. And if it works for you, then that's fine. For Farnush and I in our relationships, we manage our money as if it's one pot, but because we're moving very quickly, we don't get to communicate as much as we want to to make sure that stuff doesn't bounce. We have these separate checking accounts just to make sure. In fact, Cheryl and I tried to have one checking account at first. And it was a disaster just because of how busy we are.

What is fascinating, though, 43% of couples say they have only joint bank accounts. And this is according to a 2022 survey from credit cards.com. And listen to this, Paula. Married couples hold four times as much wealth as unmarried couples who live together. And researchers point to combining finances is one of the main reasons why. And so this piece goes on to say, why don't. more couples join finances, which is exactly what we, we just covered. But that's a big number. I don't know if- Is that due to consolidated overhead? I mean, why would that be? What would be the-

Well, and that's exactly what I was about to say. What is that? Correlation doesn't mean causation. Right, exactly. So I'm always skeptical when I read a stat like that. However, a big thing that this points to is not that. It's that if you're in a marriage and you're both bringing in money, you are using resources most effectively that each person brings to the table versus two people that are unmarried living together. You're really managing money a little more suboptimally because of the fact that you can't take advantage of your partner's biggest strengths and your biggest strengths and cover up for each other's weaknesses as much when it comes to your financial acumen, maybe things

that are out there. As an example, in this gentleman's case, let's say that he has something in his 403B that's a phenomenal investment that she doesn't have. You may be able to use a lot of that investment. If somebody just looks at his 403B, it'll look like it's really on balance, Paula. But if you look at his and hers together, she will take the asset class and not use it at all and instead kind of build around the fact that he's got this strength that she doesn't have. And now you look at the two 403Bs combined and it's a well-balanced portfolio.

A married couple that combines finances can look at their money that way. So you're talking, in that particular example, you're talking about asset allocation through the lens of asset location, meaning asset allocation through the lens of keeping a given asset in the most optimally tax advantaged account. And the premise or the assumption is that an unmarried couple might not do that, whereas a married couple would. The comment that I would have to that is that that kind of makes some assumptions as to why couples stay unmarried? Is it a temporary, we're not married yet because we're still trying to

figure out if we want to be together, or is it a, hey, we're life partners, but we've made the decision not to formalize it through the legal process? And I think those are very different groups. I think probably the more accurate statement, and I know this is not how the Wall Street Journal wrote it, but might be committed life partners versus people who live together, but they're not quite sure they want to be together for life yet. Maybe. It's why I was very suspect of that number. Right. Yeah. Yeah. I've got some, I haven't looked at the article, but I've got some doubts about the way that it was done. I had a mentor early in my career who said beware charts and

graphs. And I think this applies to statistics as well. But when somebody uses a chart or a graph to show you something, as you know, Paula, you can manipulate a chart, a graph, a stat to shine a light on a piece of an argument that you really are hoping to make and avoid the part that you're not hoping to make. Right. Exactly. So I wouldn't put too much stock into that specific claim, but zooming out bigger picture, I think the wisdom or the lesson that it's trying to impart is that when you know that you are committed to someone and you've chosen to be life partners with somebody, it opens the door not just to decisions about budgeting and spending, which is what we tend to think of initially, but also to decisions about investing,

debt, asset protection. And two people may have very different views on that. Investing, for example, one person might be a very aggressive investor, the other person might be a more conservative investor. Asset protection, same idea. One person might be incredibly concerned about that and willing to marshal resources in that direction, whereas the other person thinks, that that's a suboptimal use of effort and money. And so outside of the day-to-day budgeting, outside of the groceries and furniture and all of those mundane things of life

that we tend to think of first, I think perhaps the bigger, more important questions surround the things that we rarely discuss, including insurance, investing, charitable giving, and other such non-daily non-quotidian decisions. And what's interesting is it's often some of the day-to-day things as well that make merry couples who merge accounts more likely to get ahead.

This is directly from the piece. There's some advantages to merging accounts, according to research from Emily Garbinski, Associate Professor Marketing Behavioral Scientist at Cornell University and Joe Gladstone, assistant professor of marketing and studies consumer decisions at the University of Colorado at Boulder. Their research shows couples who share money also boast greater relationship satisfaction. There's a link, meaning there's a link to another piece that talks about that. In addition to the benefits of having access to a larger pool of assets, combining finances leads to a greater feeling of accountability, Paula, since each half of the couple can observe the other spending and

saving habits more closely they found. And then they go on to say that you are less likely to make, quote, hedonistic purchases with shared money because of the fact that you know somebody else is watching. So the fact that you combine money can sometimes help a spender keep their financial house in order. Possibly. Certainly in the book when she makes more, Farnush Chirabi makes the argument that sometimes one of the benefits of having a joint account, but also separate accounts is that a person inside of a marriage can feel free to spend a certain amount of money without that bucket of money feeling micromanaged or, you know, a person feels a certain degree of autonomy in that they don't need to get their spouses, quote unquote,

permission before they make a given purchase. Plus for giving gifts, things like that, having independent buckets in addition to a joint bucket can facilitate that as well. So there are arguments in all directions, right? There are arguments in favor of complete commingling. There are arguments in favor of a joint account and also separate accounts. There are, as the Wall Street Journal points out, 23% of married couples have entirely separate accounts. So there are many structures that married couples tend to use and pros and cons to each of them. Yeah, which is why I'll go back to my opening statement, which is I think you begin with you and your relationship. I wouldn't begin with these statistics. I wouldn't begin with how

some people get ahead. I would start with you. This is about you and your fiance and really living your life together. Cheryl and I began by trying to merge everything. It didn't work, Paula. It didn't work for us, which is how we came up with this separate accounts plus a joint account. it's going to be different for all of us. Great question, especially since, can I get on my stepstool for a little bit? Sure. I can't stand how many money nerds and how many money nerds with microphones have an opinion that one of these is definitively correct.

I think that is such a load of crap. It is such a load of crap. And what? I've been podcasting for 11 years in this community, I think, for 13 now, ever since I've moved over from the financial planner. and it drives me crazy. How many times people go, no, this definitively is how you should do it. Are you kidding me?

Really? I feel like we want life to be bad or good, but so often there's this gray area, right, that is the truth. And man, it doesn't make sense to me to try to pigeonhole somebody else's ethics or, I don't know what it is, somebody's ideas about, well, so-and-so-sense. I need to do it this way, then I have to do it. No, you don't have to do it. Precisely. The more assured someone is, likely the less they know. Because often, when you learn about a topic, you become aware of how many questions there are.

So thank you for asking that question, Ravish. And congratulations on your upcoming marriage. Yeah, fantastic. We'll come back to this episode after this word from our sponsor. 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 serveware and cookware. And of course, holiday decor, all the stuff to make your home a great place to host during the holidays.

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That's what being a fifth-third better is all about. It's about not being just one thing, but many things for our customers. Big Bank Muscle, FinTech Hustle. That's your commercial payments of fifth-third better. Our next question comes from another anonymous caller. And Joe, I named the last anonymous caller, so you've got to name this one. Oh, no. I see what you're doing here. You know, I'm getting afraid, Paula, that two anonymous colors in a row, do you think people don't want to be seen with us? Is that the deal?

Is this something we said? Is it our breath? Like, who knows? I showered. Come on. They don't have to all be anonymous. Yeah, we can smell it over the airwaves, Joe. Comes through the phone. I've been like a lot of people, binging on these absolutely horrible holiday movies lately. and there's an old one that I watched last night that stars Reese Witherspoon and Vince Vaughn called Four Christmases. And it is very funny. It's incredibly stupid. Have you seen it? I have not. Big surprise there. I'm not a movie watcher. Paula, there are so many stars in this in this movie. And it's so funny. It is not going, you know, it was never considered for an Academy Award. Let's put it that way. But nice holiday fun. So this is Reese. This will be Reese Witherspoon. Reese.

Reese. All right. Well, then our next question comes from Reese. Hey, Paul and Joe. I am an anonymous caller with a question. I am 25 years old. I make about 70 grand a year. I live in North Florida.

And I am wondering if I should consider short-term or long-term disability insurance. I don't have any kids. no spouse, no dependents. I rent my home. I don't have any debt. I even own my car outright. And I have about $18,000 in investments that spread across Roth IRAs, Roth 401Ks, and then brokerage accounts. I have a five-month emergency fund. And I am afraid what happens if I get in a car crash and I can't work? What happens if I have a disease or an illness? And just to give some context, when I have major depression and it was undiagnosed and unmedicated up until I get out of college. And after college, I had to move back in with my parents and I couldn't work for a full year.

And the only way that I was not in a box under a bridge is because I was able to live with my parents. And I've brought this up with my dad before. And he's like, oh, no, you don't need your 25. You don't need disability insurance. but I have an uncomfortable relationship with them, accepting money or support from them just because of, you know, some childhood issues. Like, that doesn't feel like something I want to have as my backup plan is to rely on their help. Accepting gifts from them is not a good, it's not a good family relationship.

So is this something I should consider? Am I being a worry ward? Like, I know you can't tell me what to do, but what are the questions I should ask? like in what circumstances should a young person have this. If I am going to get a policy, I just looked at my HR portal. There's one provided through my workplace. That's 100% employee paid. Like what should I be looking for in a policy like that?

Any of those, any tips or guidance or things to think about would be really helpful. Thanks so much, guys. Reese, first of all, congratulations on the financial position that you're in. You have no debt. you own your car outright, you have retirement savings in multiple Roth accounts, you have an emergency fund, huge congratulations to you for setting yourself up on this foundation of financial stability. Now, to your question, and first, I'm very sorry to hear about the major depression, I'm sorry to hear that it was undiagnosed for so long. I'm glad that it sounds as though

you're getting the help and the support and the medical supervision that you need. Joe, I'm curious to hear what you think, but my take is I am a huge fan of getting disability insurance, particularly long-term disability insurance. To differentiate between short-term and long-term, as the names imply, short-term covers a very short period of time, usually a few months, whereas long-term will give you the coverage that you need after a certain period of time has passed. So, for example, long-term disability insurance might kick in one year after the disabling incident.

So if there was a reason that you couldn't work, there would be essentially a one-year gap or a two-year gap, depending on the type of long-term disability insurance that you have. and then after that gap has been crossed, that's when the long-term disability insurance kicks in. The reason I'm particularly a fan of that one is because you are trying to cover a low probability but high magnitude event, and there is very little that is more high magnitude

than being unable to work for a prolonged period of time. That can ruin you. And so I like both short-term and long-term disability, but between the two, if you had to choose, short-term can at least, in theory, be covered by an emergency fund or by rating some investments in a taxable brokerage account, whereas long-term, that covers a period of time that is so long, it could not reasonably be covered by any other assets that you have. And so long-term disability insurance, I believe, is a type of insurance that many people should have because it covers precisely what insurance in an optimal case ought to cover, which are

events that are of such high magnitude that it would permanently throw you under. This is why I am often frustrated when well-meaning relatives give advice because the reasons, Paula, that Reese's dad said that she probably does not need disability insurance. I think apply to her not needing life insurance. She passes away. She is no beneficiaries. She is nobody who needs her money. So she should make sure that it goes to the people, the charities, organizations, whatever, that, that. want her money, but her need for life insurance is zero.

The worst thing that could happen to Reese is that she gets disabled and she can no longer work. And the bad news about the best long-term disability coverage is Paula is they still drop you off at age 65. You're done at 65 with long-term disability coverage. So if you haven't been able to save as much money for retirement as you want, well, now you go from disability to social security. And that's it.

And who wants that? So I think that what I would definitely, definitely do is exactly, Paula, what you're saying. Long-term disability, definitely. Now, the cool thing, and this is a great thing that Reese has done, is that she's established that emergency fund. And to your point, Paula, that's a great thing because that makes me say that her need for short-term disability coverage is probably really low. Because with short-term, you're just trying to get through either the first six months,

the first nine months, whatever the long-term doesn't cover. It's all you're trying to get through is that piece. So she's an emergency fund that covers that, which it sounds like it probably covers a good portion of that. She's good. And the cool thing about that, the chance that a short-term disability is going to happen is much greater than a long-term disability. So she avoids some really expensive insurance by cutting down.

on that short-term disability. She's self-insuring, which is incredible. Exactly. Yeah, the long-term disability coverage. So I'm with you. This is the number one type of insurance that most of us should have that nobody wants to get. This was the discussion, Paula, that nobody wanted to have when I was a financial

planner. And it was usually, well, I'm a safe, I'm a safe driver. I'm a good skier. People would never say that. I'm a good ski. That would be horrible. I'm a really good ski. I'm fine.

But people would say, well, you know, it just isn't going to happen to me. It isn't going to happen. We don't want to think that it is going to happen. And by the way, with any insurance, let's be clear, the biggest thing I want to have happen with my insurance coverages is that I waste it all. Like that is what I want to have happen. I'm not like out there running right at trees with my car to make sure that long-term disability policy pays up because it costs a lot of money.

I'm not doing that. I really truly want to have good coverage. and I want to make sure that I, hopefully, that I don't have to use it. But it's not cheap. It's still, Paula, is not cheap. And being able to get it through work, a lot of the time, even though, even though Rees said that this is 100% employer purchased, because of the fact that it's a group policy, most companies, the HR departments, are able to negotiate a group discount.

Exactly. Yeah. This is going to be a lot cheaper than if she was trying to buy it on. her own. Disability, people in that business tell me the reason why individual disability policies cost so much is because so few people want to buy this insurance that the people who do want to buy it, Paula, are seen as suspicious. Yes. Right. Yeah. So your money goes into this pool with all of these other people and it is a very dirty pool when you apply for disability coverage. Because an inordinate number of people who apply for disability coverage are people that know something's up

ahead of time. They know something's up. Or they're ready to file a fraudulent claim. Yeah, exactly. So if you get it through an employer, unfortunately, the way the system works is you are seen as lower risk and therefore you get a cheaper premium. It's horrendously unfair to people who are self-employed, absolutely horrendously unfair, but that's how it works. So, Reese, given the fact that you are employed, given the fact that this is offered to you by your employer, even if it is employee paid, it's offered to you by your employer, and that means you're going to get it at a much better rate than a self-employed person who was trying to do the same thing. That, by the way, was the reason that I made my earlier comment about liking long-term better than short-term. It's because I, as a self-employed person, looked at disability insurance, saw the preterm. premiums that I was going to be charged for short-term disability and for long-term disability,

both of them were high. Short-term was so enormously high that the moment I saw it, I immediately said, well, forget this. Better to just have an emergency fund or money in a taxable brokerage account that you could rate in a worst-case scenario, right? Better to do that than it is to have short-term disability at the rates that they charge individuals or the rates that they charge self-employed people. And so that notion of self-insuring, which is the notion of using insurance only to cover the things, the bills that are so large that you could not possibly cover them yourself out of pocket. That came about through shopping for disability insurance outside of the context of a group rate. This is the number one ROI of your emergency fund. Like often,

when people would fight me about having an emergency fund, they say, are you kidding me, Joe? Do you know what? A checking account pays no interest. A savings account, even a high yield savings account pays very little interest. I don't want to sit money there. The return on investment is not the rotten interest rate. The return on investment is I can avoid short term disability insurance and all these premiums. How much money does that save you? I can raise the deductible on my homeowners and my car insurance. Now, those deductibles are money that you're, You're now going to be responsible for if something bad happens. So be clear, you're taking on more risk, but you can take on more risk if you have that

emergency fund. When I look at this rotten interest rate that a high yield savings account pays, even though they're much higher than they were a year ago, Paula, that interest rate is not the true interest rate you're getting. It's all this reduction in premiums I pay if I'm going to make sure that I'm covered effectively. Mm-hmm. Exactly. So, Reese, I hope that helps answer your questions. I think Joe and I are in agreement on this one. Get the disability insurance, particularly the long-term disability. Maybe the short-term too, but definitely the long-term. Yeah. We'll come back to this episode in just a minute. But first, Black Friday is here at IKEA, and the clock is taking on savings you won't want to miss.

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are you. I'm the voice for the next ad, car commercial, but I noticed that show-stopping roast and... Help yourself. Mm, designed for indulgence. Precision crafted to navigate every corner of my mouth, all for just $18. Okay, okay. Try the season's hottest flavors from the PC Holiday Insiders Report. Please feast responsibly. Our next question comes from Carly. Hi, Paula and Joe. This is Carly. I have a question for you about fall. into a rental situation. We were living in a condo that I had bought in 2017 for around $195,000, and two years ago we had to move across the country for our military posting. We tried to sell it, and we would have taken quite a big loss, so we decided to rent it out. The mortgage is now

at $154,000, and we're taking a loss of about $5 to $600 per month. So I know we're still building equity, but it's definitely not cash flowing any money. Other information, I do have professional student loans. It's a line of credit to $98,000. It did start out at $211,000 about six years ago, so we are chipping away at it. And I have $3,000 for retirement in a tax-deferred account, $4,000 in a tax-advantage account, and we have $25,000 in a taxable account that we were earmarking for a down payment for a house, but now we're seriously considering renting.

And I also have $5,000 in an emergency fund. So my question for you is the condo market in that city is really not great, but we're losing money right now. So would you recommend hanging on to that? and then selling when the market seems better or maybe just keeping it as a rental. I would love to turn it into a rental that has profit, but looking for your advice on everything. Thank you so much. Bye.

Carly, fantastic question and so frustrating when you have to move. And by the way, thank you to your family for your service. But it's so frustrating. You have to move and you can't sell a property. The cool thing is, is this gives you some experience in the real estate market, which I really like, Paula. I like this idea of learning about investing because you kind of had to. A question that I have for you, Paula, and my only thought on this, which is that I think a lot of people who are landlords just think about one method of collecting rent, that I'm going to rent this out one way. I'm wondering if there might be an opportunity for her some arbitrage just to change the type of rental it is.

In other words, if they allow Airbnb, can she maybe get more of a premium because of where it is? Obviously, we don't know where it is so we can't look at this. But some areas that are great for tourism are horrible for long-term renters. Some areas are near places where people want medium-term rentals, right? And sometimes medium-term can be a great place to be because you can adjust the rentals. rent more often because people are only staying 30, 60, maybe 90 days. Sometimes you're dealing with traveling nurses or traveling professors. And so a lot of people I know that do medium-term rentals think that that's a great place to be. But I'm wondering if maybe Carly's first

option before she decides whether to sell or not, which I'm sure we'll get into, might be to look more broadly at how she might be able to increase the amount of income coming in every month. That's certainly a route that she could pursue. I'm hearing a couple of things within Carly's question. I mean, first of all, I don't get a sense, to your point, Joe, that, and Carly, I'm making assumptions here, so I may be wrong, but I don't get a sense that you've studied the market in the way that a person would study that market if they were considering purchasing an investment there. And that's because you didn't purchase this as an investment. You purchased it as a primary residence, and it became an accidental holding.

But to that end, if you are going to seriously consider holding it, I certainly think there's value in what Joe has suggested, which is see whether or not short-term or medium-term is feasible in that market. Is it allowed based on municipal law? Do you need certain licenses for it? What kind of market currently exists? What's the competition like? How saturated are those markets?

Who are the management agencies that cater to those types of income streams? Because, of course, there are going to be many more turnovers and more furnishing requirements for that kind of an income stream. So who are the companies out there that are doing that? That's certainly a route that you could pursue. And to widen this for people, Paula, who are not real estate investors, this is – my comment there was not real estate specific. This is something that every investor should have in their toolbox, which is, and this is based on Nobel Prize winning research, that our brain has two different decision-making functions that are, by the way, completely separate from each other, which is really interesting to me. That's for another episode. But one is this, I'm looking at things very focused and I'm making a decision fairly quickly.

but there's a second system, which is where we sit back, we widen the scope and we evaluate many other opportunities, some of which initially Paula might seem dumb. They might seem like the worst possible option, but the more time that we give it, the more that we get clarity around some of these, what might seem at first to be an esoteric option. And it ends up being a great way out of what initially, seemed to be a problem. And I'll give you an example. There was a client that I worked with who wanted to own a home along Lake Michigan when she retired. She didn't have anywhere near

enough money. Like the properties along Lake Michigan, incredibly expensive on the Michigan side. I'm sure the same on the Wisconsin side. But what she was able to do, she was very much a people person. She ended up buying a property on a hill across the street because of the way the zoning worked. She was able to make it an Airbnb. She loved people. She wanted to keep working. And she wakes up now every day looking at this beautiful view across the street of Lake Michigan. And she has income coming in because she hadn't been able to save enough. She used this second system to widen the lens and to look at this as a different problem than she had originally. Just so people know the decision making process that we're using here, Paula. That was why I suggested that at the beginning.

Are there things that she could do to increase the income on the property? Right. Exactly. So what your suggestion is brainstorm multiple solutions. Don't force it to become a binary yes, no hold cell when there are a bevy of possible solutions. And don't discard the ones that seem dumb immediately. Do not discard them.

See if there's something there. Your brain brought it up for some reason. There may be something there, Paula, that originally. see, no, no thanks, pass. There actually might be something there. Now, that said, Carly, I'm not a fan of the current situation in which you're losing between 500 to 600 per month. The first rule of a rental property that is intentionally purchased is that it must be cash flow positive. And it might only be a little bit cash flow positive. That's fine. But you want to hold assets that are putting money in your pocket every month.

not assets that are taking money out of your pocket each month. Because if an asset is removing money from your pocket each month, then you're limited in how many of those you can hold. Whereas if an asset is putting some money in your pocket, even if it's just a tiny amount, the amount actually matters less than directionally, is it positive or negative? The amount is notable, largely for the buffer that it gives in how positive or negative it is. But in a rental property, the majority of your gains are not from cash flow, the majority of your gains come in other ways. The cash flow is notable simply because it's the demarcation of, is this sustainable and repeatable?

All of that said, I don't like the fact that this is cash flow negative. I like Joe's suggestion of brainstorm ways to make it cash flow positive. Talk to other investors in this market. Talk to other landlords, other. property owners, what kind of returns are they getting? How long ago did they buy their properties? What are they renting it for? Those conversations that you have with other people who are in the game doing what you're doing, that can be incredibly insightful, particularly in learning about the nuances of the local market that it's in because all real estate is local. Now, all of that said,

after you do that level of due diligence, I would then sit back and ask yourself, would you buy this now? And that's great to widen this out again beyond real estate for everyone who's listening. When you're evaluating an asset, it's useful to ask the question, would I buy this today? And if you wouldn't buy it, that doesn't necessarily mean sell it. You know, there's some people who apply just a singular question and say, well, if you wouldn't buy it today, then don't hold it. That's too one-dimensional. There's more to it than that.

But it's at least a question, among others, that can inform the broader decision. But Carly, I don't think you're even ready to ask yourself that question yet, the question of, would you buy this today, until you first really dug into this local market. What's the competition doing? How are they making money? What is on the horizon for the coming year, the coming two years? what major factors are going to drive demand, are going to drive supply. What's on the horizon for this particular real estate market?

Talk to agents, talk to property managers, read business journals, read industry publications, talk to other investors, learn the market. And once you do that, I think you'll be able to make a more clear assessment as to whether or not, this is a good holding for the specific circumstances of that local market. The good news here, though, Paula, it sounds like, you know, difference in some situations where she might be looking at three or four different criteria. At this point in the game, she's looking at one, one. Can I make this cash flow neutral?

Right. But if the answer's no, then we have our answer. Right. Make it pretty and sell it. Well, thank you, Carly, for asking that question. Our final question today. No, not final. I know, right?

Paula. It happened so fast. Come on. Seriously. Please. So fast. But the final question comes from Shelby. Hi, Paula.

First off, I want to say thank you for all that you do. I started listening to your podcast a few years ago, and I owe so much of my financial success to you. I have a big change coming up, and I'm hoping you can provide some insight. I studied abroad in college. and that experience sparked a desire to work internationally someday. After six years with my company, I am being given the opportunity to relocate to Tokyo, Japan.

While I'm super excited about this, I have struggled a little with the fact that I will be taking a bit of a pay cut because of the current exchange rate. I know this will be an incredible experience and I'm not doing it for the money. However, I want to ensure I am making the smartest financial decisions I can while I'm there. Here is a quick snapshot of a very snapshot of,

my finances. I am 28 years old and debt-free. I have 200k in taxable brokerage accounts, 90K between my 401k and Roth IRA, and a 15K emergency fund. My current U.S. salary is 145K, and my salary when I moved to Japan will be 15.2 million yen. Additionally, I will have about 80k of RSUs festing each year over the next two years. My first first first question is around retirement contributions, since I will no longer be eligible to contribute to my 401K. Instead, I have to contribute to a pension through the Japanese government, though it is my understanding that I can apply to have that return to me when I leave Japan. I recently opened a traditional IRA to move money through for a backdoor Roth conversion. Should I continue to

contribute this way despite the poor 4x rate? Or would I be better off saving this money in yen until Forex rates improve. My next question, should I exchange my yen to U.S. dollars and continue investing in my Vanguard taxable brokerage account? Or should I look at foreign investment opportunities? If I go the foreign investment route, do you have any resource recommendations? And finally, my company did provide a tax consultation with the provider who will support my tax returns while I'm abroad.

And I think I understand things on that front. But since I don't know what I don't know, are there any questions you suggest I ask in our next discussion? Thanks again for everything you do. Shelby, thank you for the question and congratulations on your new job in Tokyo. Yeah, isn't that great? Yeah, exactly. That sounds like an incredible adventure.

And getting this experience, Paula, early on, if I had anything that I wish I would have done more, and it would have been to be a little more adventurous earlier in my career. I feel like I got more adventurous as I got older. And I should have, the opposite of most people, I think. But man, if I had done some of these things, this move, I believe will pay huge dividends, career-wise, worldview-wise. Personal growth-wise.

Just so many advantages, so many great advantages. Go explore a culture that is different than the world. one that you're comfortable with. And I think it will, oh, you'll win in so many ways. I'm excited. So, Shelby, as to your questions, the impression that I get from the way that you have asked your questions and the way that you've described this opportunity, I'm getting the impression that you're not going to be in Tokyo for a big chunk of your life. I'm getting the impression that you'll be there for a few years, two years, three years, five years maybe. And after that, The impression that I get is that you're going to come back to the United States and live

the majority of your life here and retire here. Now, I'm making that assumption, so I might be wrong, but I'm going to base the answer that I give off of that assumption. If you plan on living the bulk of your life in the U.S. and retiring in the U.S., then you'll want to keep your investments, your retirement funds, your financial life. will want to keep that U.S.-based. And what that means in terms of contributing to a traditional IRA, for example, for a backdoor Roth conversion,

yes, the dollar's strong right now. Yes, it sucks to have to convert from yen into a strong dollar. But the alternative is keeping your money in cash in yen, in A, what could be an inflationary environment, and B, what certainly will be a circumstance in which that money is not going to compound and grow because it's going to just sit on the sidelines out of the market for longer than it otherwise would have. Your goal is, if you're going to be putting money away for retirement, you want to put that money away as soon as you can so that it has time to be in the market, to grow, to compound. And yet, the realities of the exchange rate

suck for doing that, but the exchange rate is only one of many considerations. And the tradeoff of not having that money invested, missing out on potential market gains, and just the mental overhead of having that money sit in limbo for a while while you're waiting to see, will it, won't it, oh, it's improved, the exchange rate's improved a little. Should I do it now or should I wait to see if it improves even more? Like, you don't want to be doing that mentally. Just move it into your retirement account, move it into your IRA, make it a backdoor Roth, and move on. And same thing with your taxable brokerage account. If you plan on returning to the U.S., living in the U.S., retiring in the U.S., then continue investing in your taxable brokerage account,

and continue behaving in the same way that you would have, were you living and working in the U.S.? Because if my assumption is correct in that this is just a short-term thing for a few years and then you'll be back, then you'll want to keep the same investment strategy that you otherwise would have had had you been based in the U.S. the entire time. Now, if you're planning on moving to Japan forever, that's different. That's a whole different conversation. But that's just not the impression that I get. No, me neither.

Yeah, I think that is the crux of this argument, Paula, is whether this is a short-term or a long-term move. And if it is, if it is short-term, I would not get involved in all of this complexity. Because if you start dealing with 4x exchange rates and just currency, fluctuations, you're going to add so much. There's already going to be complexity, Paula, because of the fact that she will have to, she will have to, and she's right on that she can apply to get this money back and invested that will go into the Japanese retirement system. She can do that. She will be able to do that. So she's correct there. But besides that,

keep it, keep it simple. There's no reason to create a lot of complexity that she'll just have to unravel later. If she begins investing in foreign currencies, in foreign investments that she can't get in the U.S., I don't get it. What I do think she's already investing in is more knowledge about Japan and about that culture. And I think she'll be able to use that knowledge as she grows her entire portfolio. I certainly wouldn't. The part of Shelby's question that gave me the most pause, Paula was when she asked about having much more of an international approach. I would keep her approach based on her goals long term, which means for most U.S.-based investors, I would keep her asset allocation close to the same.

There is a bias that we have as investors, Paula, that we all have to worry about, which is as we get more knowledge about something, we think it's better. It's an objectively better investment. Just because we know more about that than another investment does not make it a better opportunity. It does mean we know more and we might be able to see the nuance better, which could make us a better investor in that area. But it doesn't make the investment better. And that's a very good distinction. Yeah. I mean, the Japanese economy has really struggled for a long. long, long time. And the Japanese equivalent of the Federal Reserve really has been hamstrung by some

decisions they made a long time ago to take interest rates very, very, very, very low. And so their ability to combat interest rates still here in 2022, not, not phenomenal. And that doesn't make Japan a bad place. It doesn't necessarily make it a horrible investment. It's just I think there's a lot to know before you go from 25% of your portfolio to international to 25% of your portfolio is Japan only because you're in Japan. So, Shelby, while your questions might feel complex, I feel like Joe and I are in agreement that the answers are relatively simple in that the framework that we both encourage you to use is a planning framework, the same planning framework that you would have, if you, you were working this job in the United States, assuming, of course, that you plan on returning

to the United States and spending the majority of your life here. If that's the case, then don't change strategies and don't try to gamify the exchange rate, just keep investing, and enjoy your time. Enjoy Tokyo. It's a wonderful city. Tokyo was one of the last places that I went to right before the pandemic. I was there in the fall of 2019. And that was my second visit to Tokyo. And it was there for two weeks. It was absolutely wonderful. It's such a great place. You're going to have so much fun. So enjoy it. Have a great time. And experience as much as you can. Learn as much as you can. You know, this is a very unique and precious opportunity. So make the most of it. Well, Joe, we've done it again.

Unbelievable. I said we're probably going to be finished by 11 p.m. And it is 10.56. Called it within four minutes. On the nose. Nice work. Wow. Well, Joe, tell everyone in this community where they can find you if they want to hear more of you.

We got a great year-end planned, including Paula, a couple of what should we have learned from all the events in 2022. The last two weeks of the year, we'll have Katie Gadion from, Morning Brew, of course, her podcast is Money with Katie. And that same week, we'll have our roundtable discuss the same topic. So lots of reviewing the events of 2022 and what should we have learned. And then the last week of the year, we are going to replay our most inspired guests, the guest that inspired us the most in 2022. And we had some very inspiring people.

I'll give you one of them, Daniel Lamar from Cirque de Soleil. really inspired me. That was my favorite interview. I shouldn't have a favorite, but that was my favorite interview of 2022. I absolutely loved talking about creativity in your workplace, in your financial plan. It was so interesting to hear stories of him negotiating with the Beatles, having the creator of Cirque de Soleil assigned a clown to him to follow him around to board meetings and meetings to make the meetings more fun. I want an assigned clown. I know. Wouldn't that be great to have a clown assigned to? He said it was annoying and it was fun and he learned a lot about the value of entertainment but anyway the last week of the year we are going all out we'll have five episodes that week of our most

inspiring interviews and then of course we have our roundtable episode paula coming up to kick off twenty twenty three every year len penzo brings out a walmart purchased magic eight ball and we ask questions about the upcoming year, and then a year later we see if it's right. And in the early days, as you know, it was always right. It was so right. I remember that. And then it went through a little dry spell,

and we'll see this year if it got its mojo back or not. So lots of fun coming up at stacking benjamins. Joe, I just have one quam with what you said. You said this Cirque de Soleil person, Daniel Lamar, was your favorite interview. in 2022. But Joe, I have to point out, you interviewed me in 2022. Oh, crap. It was my second. It was number two. What am I doing? Rewind the tape, Steve. Rewind the tape.

No, I haven't listened to your interview with Daniel Lamar, but if there is talk of assigned clowns, I guarantee you that's a good one. It is. It was great. I love, I love being there. Well, Joe, we love having you on this show. So thank you for being a part of it. And thank you to this community for being part of the Afford Anything family. Thank you for tuning in. Thank you for listening. If you enjoyed today's show, please open up whatever app you're using to listen to this show and leave us a review.

We read all the reviews. These are super helpful in allowing us to book amazing guests and put on a fantastic show for you. So please open up that app. leave us a review. Make sure that you're following us in your favorite podcast playing app so that you don't miss any of our amazing upcoming episodes. Subscribe to the show notes, afford anything.com slash show notes. We in today's show notes, we will put a link to the article that Joe was talking about so you can tear it apart for yourselves. So that'll be in the show notes, afford anything.com slash show notes to subscribe. It's free. And you can chat with other members of the community at afford anything.com

slash community. Thanks again for tuning in. My name is Paula Pant. And I'm Joe Salci. And we will catch you in the next episode. Here is an important disclaimer. There's a distinction between financial media and financial advice. Financial media includes everything that you read on the internet, 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

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