Afford Anything - Ask Paula: My Income Is Dropping From $190,000 to $40,000; What Should I Do?

Episode Date: March 16, 2022

#370: Kristen is 32, and she and her husband want to retire in less than 20 years. They make too much to contribute to a Roth IRA. Should they use back door Roth conversions to speed along their path to early retirement? Michelle makes $190,000 and is going to switch to a career that pays $40,000 on average. To prepare for this lower salary, she's selling her current home and buying a different one. Should she pay off her new home with the proceeds from the old one? Or should she invest her profits? Anonymous lives in a high cost-of-living area and is wondering where to keep her down payment and emergency funds. Should she use I-bonds, TIPS, or some combination of these two? In today's episode, former financial planner Joe Saul-Sehy and I tackle these tough situations. Enjoy! Do you have a question on business, money, trade-offs, financial independence strategies, travel, or investing? Leave it at https://affordanything.com/voicemail and we’ll answer them in a future episode. 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 energy, your focus, your attention. Any limited resource that you need to manage. Saying yes to something implicitly means. Turning away all other options, and that opens up two questions. First, what matters most?

Not what does society say ought to matter most, but what truly is a value in your life? That's the first question, and the second is how do you make decisions that reflect that which you value? Answering those two questions is a lifetime practice, and that's what this podcast is here to explore. My name is Paula Pant. I am the host of the Afford Anything podcast. Every other episode, I answer questions that come from you, the community, and my buddy, former financial planner and brand new author, Joe Sal Sihae, joins me to answer these questions. What's up, Joe?

I'll never get used to that. I will never get used to that. It's so wild to see people send me pictures of, like, my book and bookstores or libraries. It's a weird thing, Paula. Oh, but it's great and very well deserved. And you mentioned me on page 13, so it must be great. That's exactly why it's great. Just to be clear, Paula is front and center.

You're actually the first person who gets mentioned in the book. Thank you. You and then our friend Tiffany Aliche, the Budget Nista, after that. And then I think Mori Teherapur, who's a negotiating expert with the NFL Players Association and others, teaches at Wharton. You have a great array of voices whom you learn from. Isn't that the fun of this, though? Yeah. I mean, seriously.

Just for a second before we start. The cool people you get to ask questions to when you do what you and I do, like some of the people that you can just ask all these questions to that you, I don't know, I'd feel comfortable is walking up to them at a restaurant. But because there's microphones hot, we get to ask them lots of questions. And it's a thrill and something that I love. I know. That's what I always tell people. I'm like, wow, my job is to read a book and then have a one-on-one conversation with the author about it. How freaking cool is that? Exactly. Yes. And, you know, just as another side, I was telling my spouse, Cheryl, that in my old career when I was a financial planner. I spent all of my time living in the future. I would set up for meetings. I would prep for

meetings. I would prep people for the future. I would warn them about things that might be coming in the future. Not that I was a weather man, but I knew what weather we might expect, you know, and teach people how to how to manage the rise and falls of markets, taxes, inflation, that stuff. But I never lived in the moment. And now the cool thing about the last decade of doing this, I feel like I'm constantly in the moment. Like right now you and I are having a conversation. There's no place else I'd rather be. We're having fun. We're not talking about the future. We're talking about these three great people we get to talk to now, which is, which is cool. It's a whole different life. So the questions that we are going to be tackling today, Michelle, speaking of career

change, Joe, Michelle is currently in a career where she makes $190,000 a year. And she wants to make a career change in a few years to a new career in which she will most likely be making around $40,000 a year. So she's going to be taking a massive pay cut. We're going to hear her question related to that. Kristen is 32 and she plans on retiring in 19 years when she's 51 and her husband is 53. So ballpark in about two decades, she's planning on having an early retirement. And we're going to answer some questions that she has related to how to plan for that. And finally, Anonymous lives in a high cost of living area, wants to buy a home, and has a significant chunk of money saved up for a down payment. She's wondering how to hold this money in a

manner in which it's liquid and accessible and yet also protected against erosion from inflation. So we're going to tackle these three questions starting with Michelle. Hi, Paula. Hi, Joe. Thanks for taking my call. I really love listening to this show. So my situation is I am 33 years old. I currently make a salary of $190,000. And in three to four years, I'm planning to shift careers into something that I'm more passionate about. But the average salary there is about $40,000. I recently moved my primary. residence and after a short stint as a short-term rental, I am now selling my old primary residence and after the dust settles, I should pocket about $500,000 in cash. My original plan was

to pay off my new primary residence mortgage and then I would have like enough left over for maybe like a 12-month emergency fund and then just bank the next three years of my higher salary in investments and savings until I do make the ship. So I'm currently in school getting a degree in that field. However, now that the decision is here, I'm having second thoughts and just wanted to get an opinion. I'm just wondering if maybe I was overreacting to having a really, really high level of debt. and my like overreaction is now to pay off, you know, like all of my personal debt. Or if I shouldn't be second guessing myself, because maybe I'm now that I have almost,

it's under contract, the $500,000 in hand, I'm like, oh, I could have turned this into even more by investing in the market or an other real estate instead of paying off my house. I do need to supplement my, like before I switch careers, I either need to pay off. off my primary residence mortgage or supplement my income, maybe like 60 to 70,000 in order to afford the house. So it's turning that 500,000 into that level of income plus, you know, the additional salary that I have over the next few years or just pay off the debt and just kind of like be a little more stress free. So maybe that's lost risky. But mathematically, it's on as high of return. I do have two other long-term rentals that cash flow, and they maybe generate about

like $15,000 of income a year after reserves and everything. So just picking up a couple more of those or just paying off my debt. I'm just very conflicted and just wanted to get your thoughts on this decision. Thanks so much. Michelle, first of all, thank you for calling in with that question, and I want to congratulate you and commend you on following your calling. It takes a massive amount of courage and confidence to leave a career in which you're making 190,000 and go into a career in which you're making 40,000. And to go back to school in order to make that transition, to put in the effort in advance of that transition that would allow you to make that jump, I really want to

applaud you for the courage, the conviction, the vision, the values that underpin the decision that you're making, and for planning it well, for asking the right financial questions four years prior to making this move so that you have enough of a runway that you're able to financially plan and manage for this and to go into this transition from a position of strength. So with that said, here's what strikes me right away. Number one, you are in a much higher tax bracket now than you expect to be for presumably the rest of your life. And so to the extent that you can max out any tax deferred accounts, a traditional 401K, for example, or an HSA, if your health insurance happens to be HSA qualified, any type of tax deferred account that you can max out, max that out and do that for the, entire duration in which you are in this higher salary. Number two, you mentioned that you are currently back in school in order to prepare for this new career that you're going to go into. I don't know if you are cash flowing your way through school or if you have taken on student

debt in order to fund your education. If it's the latter, I would prioritize paying off any student debt that you're currently incurring and or cash flowing your way through school, I would prioritize that over paying down a primary residence, which is going to have much friendlier borrowing terms than a much lower interest rate. Number three, I'm going to assume you have no other debt, like no credit card debt or car loans, based on the tenor of your question, that's how it appears. But in the event that you do, prioritize those first. So to summarize the three points that I've just made, what I've essentially told you is to prioritize tax-deferred investing. and to prioritize all non-mortgage debt payoff to tackle those two first.

And once those two are handled, then I think paying off your primary residence, your current primary residence, so that when you have a lower salary, you can be free from the stress of having to make a mortgage payment out of pocket every month. you can couple that lower salary with a lower cost of living. That makes perfect sense to me. Yeah, I think that there is a fallacy, Paula, that a lot of people have, that the decision about whether to pay off all debt or invest the money has to be a simple either or discussion. And maybe doing a little bit of both.

So I do think the idea of beating inflation, which is pretty rampant right now, and I know we're going to address that again later with another question in the show is a concern and also making sure that now that she still has the ability to save and to get some of that money saved, I think is a good idea. But I think where she's at, the aversion to debt is also a really nice thing. Like starting off with an aversion and then working your way into debt, I think ensures that into accepting debt, I mean, not working way into debt. Working your way into accepting debt. Big difference is a great mind. switch because of the fact that now you know how dangerous debt can be. You're not taking advantage of it.

You've a plan to pay it off. You know that it's a small enough amount of debt that you can handle it easily. So in this case, I think it's time to start running some numbers when it comes to the amount of a mortgage that she may take on. If she took on a small mortgage to maybe get some of the money invested versus paying cash for her goals. But she's currently in a primary residence mortgage. So she's talking about, she knows what that new primary residence mortgage rate is. Yeah. So you're talking about running the numbers in terms of how much would she save? Yeah, she's talking about taking the $500,000 and either invest it or put it into making sure all her debts paid off and she's got a 12-month cash reserve.

Correct. So does she invest it or does she go debt-free? And I'm saying there may be a difference. Maybe she takes out a small mortgage. Why would she take out a mortgage? Why wouldn't she? Because it's a different house. But she's already in that house, so she doesn't need to take out a new mortgage.

No, this is when she's moving. She's already moved. She has a former primary residence, but she's currently in her new home. Really? Hold on a second. I recently moved my primary residence, and after a short stint as a short-term rental, I am now selling my old primary residence, and after the dust settles, I should pocket about $500,000. Yeah, so the question is, she's just. getting ready to sell. So she's going to have $500,000. And then the question is, is does she go debt

free or does she take out a mortgage? You're saying paying down an existing mortgage that she has. Ah, yes. My interpretation of the question was that she is currently in her new primary residence and is wondering if she should take this $500,000 from the sale of her old primary and just pay off that mortgage, as opposed to buying it free and clear. So based on all that clarification, I would definitely pay off the existing mortgage. I would definitely pay it off. You're saying if the mortgage for the home that she is currently living in and will be living in when she makes 40 grand a year. Yes. And here's the assumption that I'm making. Why? Because my assumption might be wrong. My assumption is that it's probably too big of a mortgage for her future salary to support. What I'm talking about is taking the

money and paying that off and maybe then taking out a new mortgage that is much smaller. With the of and the reason I pay the existing mortgage off is that I want a smaller payment. I want a smaller payment. And a bank will loan you a gazillion dollars and a high percentage of what you make. And it always surprises me how much money banks will let you borrow. But I think that if she is a rule of thumb to start off with, as you know, Paul, I'm not a huge fan of rules of thumb, but I think this is a good starting place. If she looks at what she expects to be 20% of what she's bringing home, which is much smaller than what the bank will let you borrow. And start with that and start running some numbers about how much money that would allow her to take out then to keep invested so that she has this investment account that's growing faster with this money that she now has.

Then I think she can do both. And I think what she has those numbers, then you can start to determine if that's going to materially change her situation or not. will it make a difference? Is it worth all the trouble to go through to take that money out to do it again? And I don't know. I don't know. I don't know any of those answers. But I think that that's where I would begin. So what you're saying then is if she can pay off the mortgage of her current slash future home and then take out a new smaller mortgage, which would on that same home, which would have a lower payment. So it would still have the advantage of being a primary residence mortgage. she could simultaneously give herself a lower monthly payment, thus adjusting her obligations to meet her future salary, while also having some greater percentage of that $500,000 chunk that she could put into an alternate investment. And that alternate investment either could be a market investment that would grow and compound over time or could be a down payment on a rental property, perhaps, which could give her some cash flow. And I think, as you know, that those are my two and your two favorite options. The two asset classes that historically have beaten the pants off of inflation are stocks in real estate.

And doing the stock market broadly is a much better way to go than picking a winner. Yeah, I think what she's going to have to ask herself is what's her budget going to be like when she's making $40,000 a year? And it might be interesting to do a couple of test runs of that, like to the extent that she can, at least for a month or two, mimic the experience of living on $40,000 a year and do so now. You know, this is my favorite thing. Exactly. And certainly there are certain ways in which she can't perfectly mimic it, right? She's got certain fixed costs that she's in right now, possibly the cost of school, tuition, the cost of her current mortgage. There are certain fixed costs that she's in right now, but to the extent possible, if she can mimic that budget, I think she'll be able to see how realistic that budget is.

And if as a result of doing that, she's like, wow, my discretionary income is so tight. I would way rather not have a mortgage payment so that I can put more of my paycheck towards clothes and Target and Amazon and hanging out with friends. A couple of months of test running this budget, that might be her conclusion. And the way to do that, Michelle, is if you can direct deposit, this is the easiest way to do it. There's several ways to do it. But general, if you can direct deposit to more than one place, find another money market account, a money market savings account or a high interest savings account and have part of your direct deposit go into this separate account. And that's the part that you're pretending doesn't exist. The cool thing about that is there's no harm, no foul.

If you can't live on it, the money's sitting in a savings account and you can go get it. But the cool thing is, is it gives you this chance like Paula is saying to be able to pretend that the money's not there and see if you can live on it. I think there's another thing too here, the Paula, which is you want to keep in mind what the end goal is when she might want total financial independence because she's going to want to make sure that she's still saving toward that goal. She's still going to have goals when she changes and how much of that money later on is going to go toward. financial independence. And maybe she's reached what a lot of people call CoastFi, where she could shut her down, you know, and not do anything. Maybe not. But I also want to know what that number is. What is my savings need going to be when I change this job to reach a reasonable amount of financial independence and build that in as well? It's exciting. Yeah. How much money does she

continue to save and invest when she's making 40K a year? Does she just frontload as much of that as possible right now so that when she's making 40K a year, she can just live on that without having to worry about savings and investing? And I know there are some people out there who are like, but what about dollar cost averaging? To which my response is, think about the compounding clock. The more that she can front load her savings and investing, do it now rather than do it four years from now. That's a great point. And, for you. For people that are thinking about the current choppy feeling market that we're in, right? Some of the horror de jour that we're experiencing, which Paula, you and I working together

for about a decade, we've been through horror after horror after horror in the market as these things happen. But go look at a chart that starts in the 1920s to today and see that no matter what the problem is, the market over long periods of time goes up. So if you can shut off your brain for, to your point, four or five years and forget about that and just get in, the chance that that's the best move is fantastic. The problem isn't markets wiggling. It's that you will abandon your plan. That's the threat.

The threat is not the market. The threat is you. Exactly. And there are many people who right now are thinking we're in a period of high inflation. there are economic indicators that may point to an upcoming recession, and people generally have one of two responses to that, either enthusiasm around buying the dip or fear around being the bagholder, coupled with a desire to pull their profits off the table in advance of

what they fear might be an upcoming decline. Both of those are examples of market timing, and what we know statistically is that, But historically, in aggregate, those who market time perform worse than those who do not touch their portfolio in response to external macroeconomic stimuli. So, Michelle, to summarize everything we just said, prioritize saving for retirement, particularly in tax-deferred accounts now while you're in this higher tax bracket, prioritize paying off all non-mortgage debt like any student loans or any other debt that you might have, test. drive what it's going to feel like to live on a $40,000 salary by mimicking that experience, to the greatest extent possible, at least for a month or two, consider front-loading a whole bunch of the next several years' worth of investments so that you can get it into the market now,

you can start the compounding clock now, and you can go into CoastFi. And after you've done a test drive of what it's going to feel like to live on $40,000 a year, you'll have a much better sense of the amount of discretionary money that you're going to want to have every month. And based on that, how much do you really want to dedicate to paying for your own mortgage out of pocket or setting money aside for savings and retirement out of pocket? Like how much of that $40,000 paycheck are you going to want to set aside for that versus how much do you want to keep as flexible and discretionary? And based on that, that'll give you a much more. informed answer as to whether you should pay off your house or put your money into investments that are a slow grow strategy, right? If you put your money into investments, that will generate

greater wealth over the long term, but tighter cash flow in the short term. So that's what you're choosing between. I think no matter what, there's such a paid drop-off that learning to live on less today over the short run, I think is going to be a great exercise. Yeah, absolutely. And having that additional savings in place will be a nice cushion. And for me, would make me feel a lot, lot better when I arrive at my dream job that pays less money that I had developed not only that cushion, but also that muscle over the last couple of years. So thanks, Michelle, for asking that question.

And congratulations on your upcoming career change. We'll come back to this episode after this word from our sponsors. The holidays are right around the corner. and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need servware and cookware. And of course, holiday decor, all the stuff to make your home a great place to host during the holidays. You can get up to 70% off during Wayfair's Black Friday sale.

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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 Kristen. Hi, Paula, love your show, and the great advice that you provide. I wish I found your information sooner. My name is Kristen, and I'm 32 years old. And I have some retirement questions. I'm conflicted on what to do with my retirement accounts and was hoping you could help me.

My husband has a pension and will be done working at 53. I plan on retiring as well when he stops working and I will be 51. I am not sure if we'll start different careers or work part time once we hit our retirement age. My husband will roughly be taken home around $95,000 with his pension. So we're hoping to live off of his salary. for some time as our retirement accounts continue to compound until we can withdraw at 59.5. Most likely our contributions will stop into our accounts at 53 and 51. Besides the pension, my husband has a deferred comp that has 119,000 right now and he contributes 14,000 a year. I had several different jobs years ago, and I currently have 106,000 in my rollover traditional IRA. I started to a new job two years ago, and my Roth 401k is roughly $60,000. I max out both accounts yearly in our

traditional IRA and Roth 401k. Our incomes were lower years ago, and I didn't think to put the annual contributions into a Roth IRA. Instead, the traditional rollover has been receiving contributions for at least five years now. However, we are now at the max income limit Roth IRA allows, so we'll have to do a backdoor Roth conversion. My question to you is, should I open up a Roth IRA and start doing backdoor conversions or convert any of the traditional IRA funds over to a Roth since it will grow tax-free? Is my diversification of traditional IRA and Roth for a 1K accounts good enough, or should I be thinking elsewhere? I plan on not touching the accounts for a while due to the pension and withdrawal age limits. Please let me know your thoughts.

on what to do. Thank you. Hey, Kristen, fantastic question. And by the way, congratulations on the saving that you've done and also being able to stop what you're currently doing at 53 and 51. That is absolutely fantastic. The first thing that I don't know is how much money you want to live on. I'm just going to jump in here. She mentioned that when he retires, he's going to a pension of 95,000, I'm just going to assume that they want to live on 95,000 forever. Well, I assume that they want to do that until they can get at their money. But certainly, let's say that you're just going to live on that and then you have this money.

What's the money for? Is it going to the kids? Is it going to relatives? Is it coming to their favorite podcaster? Like, what are they doing with the rest of the money? So I know that there's a lifestyle beyond that that they may be looking for. Because I think if I start with the tax strategy, I don't think that's, really the place to start. I think the first place to start is when do I need the money and then I

look at that time frame what's my best strategy to get there which will include the tax strategy. So my first thing is if they never need the money, well then we should look at very long term aggressive investments and get as much of it into a Roth position as possible so we don't have to deal with age 72 rules. So we just wipe that all off the map. We call it in financial planning we called it Gladbag money because, you know, the Gladyscichin garbage bag. Right. You're taking all your money. You're putting it in the kitchen garbage bag.

You tie it up. And instead of taking it to the trash, you're putting it in a place for your kids. So we're worried about estate planning or for your beneficiaries, whoever that is. And we would call it glad bag money. You're handing it off to somebody else. I don't know that that's the case. Right. So I really want to get a clearer sense of that.

But in terms of, in terms of Roth versus traditional. Roth beats traditional. With the market in the shaky state that we were talking about with Michelle, I also like doing Roth conversions. Assuming that when this comes out, the market's shaking kind of the way it is when we're recording this because of the fact that you're going to move over a little less money, which means that you're going to pay a little less tax. A big question that I have that we also don't know the answer to is how much money she has sitting on the sidelines that she can use to pay that. at tax, Paula. So what's the strategy there? How much money do we have? I like Roth over traditional, but I also, you know, the tax triangle, flexible money. If she's going at 51, I do like having money in a Roth position that I might be able to get pre-59 and a half. I like that.

But I think, Joe, to harken back to how you started this answer? Harken. Harken. Did you say harken? Harken. Harkin. Yeah, we're harkening back. Herewith and here two four. You made, like zooming out big picture, you made the point that her question is about tax strategy, Roth versus traditional. But what we don't know is what's the goal? What's the objective? And that's most clearly expressed in not knowing how much money she wants to live on. Assuming her husband gets this $95,000 pension in perpetuity.

you know, when I heard her question, my initial assumption was, cool, they just want to live on that. But now that I'm thinking about that more, you're correct, if they only wanted to live on that and they never wanted to tap this money, then what's the point of the question in the first place? So clearly they want to tap these funds at some point, when is that point, and how much do they want to tap it? i.e. how much do they want to live on at what various stages of their life? And part of that might be tied to whether or not his pension is inflation adjusted. Is he going to be getting a fixed $95,000 forever? Or will there be a cost of living adjustment to that pension? And do they need a plan for that? So all of that ties back to how much money do they want to live on, starting when, and then, as you said, reverse engineering from that so that the tax tail isn't wagging the decision dog.

Yeah, because that fuels the next question, which is how much money at what date and how much, I can't think of the word like spillage. Spillage. How much? Yeah, each year is going to spill out of the portfolio and into their consumption, right? So, yeah, how much and at what rate? I think that's called a drawdown. I like spillage. I like spillage better.

Yeah, I like spill. Let's keep that. I do. Let's get rid of all these fancy Wall Streety terms. Yeah, withdrawal, drawdown. Yes. Distributions. I know.

Distributions. Spillage. Spillage. Yes. Glad bag. Spillage out of your glad bag. I know, right? And life is messier.

So I think those are good. But yeah, how often at what rate and starting at what time? Good questions to begin with. And then that sets up the asset allocation. Is it more important to get more pre-tax money in today? and realize that this is going to be a joint account with Uncle Sam when it comes to the interest on that money. In other words, we're going to pay tax on it when it comes out. And that's generally better if you have a short time frame or is it way, way, way longer time frame.

And if so, the longer, more time you have, the more the Roth makes much better sense. And just based on her age alone, I mean, she's 32. Yeah, what's your gut? Mine is more Roth. More Roth. Yeah, that's exactly. my gut as well. Because just by virtue of being 32, you know that we're talking about a time frame of decades, many, many decades, two decades, three decades, four decades. You know, she's talking

about retiring from their current careers in two decades, and then they may or may not have a second act. So I think there's a pretty good chance that this money is not going to get tapped. That spillage won't happen for at least three to four decades, in which case the opportunity to have tax-exempt growth that lasts for that crazy amount of time. With no taxes on any of the growth, not even the capital gains, not the dividends, nothing. The more that you can collect that tax-exempt growth over time, as I see it, the better. Agreed.

Joe, do you want to explain the concept and the logic behind the tax triangle for anyone who... Sure. The tax triangle emphasizes tax flexibility versus tax optimization, meaning we don't know what tax rates are going to be. We don't know what our income situation will be for certain. It acknowledges that things change so that we're set up for every situation. And so if you draw in your mind a triangle with little circles on each of the pointy parts, we'll start off on the lower right. And by the way, around the outside of the triangle is pre-financial independence. and then inside is you drawing down the money.

So generally it's before retirement, outside, and then inside is after retirement when we spend it. But you have to pass through one of those three pointy sides to get to spend the money. We had this conversation. I like pointy sides. We had this conversation in a previous episode. It's a vertex. Pointy sides and spillage and glad bags, Paula. All righty.

The pointy side of the triangle. I was the pro for a long time in this business. and it's pointy sides. So you, I love, for people that can't see her, which is all of you, I can see the nails on Paula's chalkboard. I'm just going, I thought you were going to say you could see my like wily coyote mischievous grin. That too, but I think I'm more I'm fingernails on your chalkboard. I think you really don't like calling it the poignant. All right.

But go on, the pointy sides of the triangle. Yes, let's take the lower right. And it can actually be any of them, but the lower right, this is where money goes in pre-tax when you're saving it. And then when you pull it out in retirement in the middle, you pass through this portal to spend it. You pay tax on it and you pay tax on it as if it's income later on. So the great news is you get a tax break today. There's going to be no tax along the way as long as you follow some rules. And when you pull it out, it's going to be tax.

at that rate, which may be lower, right, than you're living today. This would be a traditional 401k, where you're writing it off today if it's an IRA or it just goes in pre-tax if it's a 401k. By the way, that includes in the United States a 403B or a 457 or in Canada, hello Canadians, it's an RRSP. I don't want to leave you out. So that's the lower right. For a lot of people, especially older people, what you'll find is that because they had

their savings habit started well before the Roth IRA, I would show them their tax triangle, Paula, and that little circle would be most of their money. And now they have a big problem in retirement, which is, I got all this great tax treatment on the way in. I've got no tax treatment on the way out. I have two choices of all my money is here. I can eat and pay the tax or I don't eat. Those are my decisions, which means we want to counter that with the top of the triangle, which is money doesn't get any tax break when you put it in, but when you pull the money out, you're going to pay no tax.

And along the way, depending on the type of tax shelter you have here, you may also pay no tax along the way. So in varying degrees doing different things, this would be things like the Roth IRA is the big one. Permanent life insurance, which you and I have talked about, can have some of these benefits,

but comes with some horrible down. sides and municipal bonds to some extent, right? But of those three, we're talking about the Roth IRA. That's a fantastic place to be because of the fact, because even though you're not getting any tax break today, especially if you have a long time, all the gains are your money. You don't have to split it with any uncle, Uncle Sam, uncle anybody. It is all your money. But there are problems with all of those investments too, Paula, because I mentioned for the lower right and for the top that you have to follow some certain rules. Well, you and I have handled plenty of calls from people where they're like, hey, I got all this money optimized and my situation's changed.

Right. So I always want to have some money in a flexible spot. So as an example, let's say that Kristen wants to get money. She's leaving market 51. She decides she wants a higher lifestyle before 59 and a half, right? She may have some impediments to get at this money. or she might not want to get it, take the money out of these tax shelters. Having some money that is in the lower left, which is money that gets no tax treatment on the way in. You're going to pay capital gains tax when you sell. And in a mutual fund, you'll pay capital gains tax. If you're manager sells or if they change the allocations and things inside, you're going to pay tax on the dividends.

You go, so there's going to be some tax friction. However, there's no boundaries, no rules to when you can take it out. You just take it out whenever you want. That gives you flexibility. So we've got great tax treatment today on the lower right, phenomenal tax treatment later on the top. And on the lower left, no great tax treatment, but supreme flexibility. And I really want to try to have some in each, if I possibly can, especially the top

and the lower left, the top and the lower left, the two that I really want. And for older people, the goal for me when I was a financial planner and still, when we talk to people today is to make sure that we've diversified out of that lower right some of the money so that we do have some flexibility later. I think you said it well at the beginning of the answer, hearkening back to it. Four score and seven minutes ago. Exactly. When you describe the tax triangle as the triumph of flexibility over optimization.

Yeah, there's so many times that our optimization strategy gets bit by, this situation changing. And the thing that we fail to plan for is the fact that life is messy and there is spillage. Essentially, excessive optimization presupposes rigidity

or relies upon rigidity. Yeah. Which can I, can we turn this around for a minute? Sure. In an area that's not related to Kristen's question. This is why

in a budget, it is better to normalize your expenses as much as you can. And I'll give you an example. Some of the little things out there, like your utility bill, it doesn't actually save you money to take the payment plan where it's normalized every month so you can pay the same thing every month versus the ups and downs of a normal utility. Right. But what happens is because of the gyrations in our spending,

we end up leaving too much money on the sidelines. and not investing more because our spending is unpredictable. Right. So the more predictable on a daily basis, we can make our spending by doing that, by using a shopping budget so that we have the same grocery bill every two weeks and we know what that's going to be. The more we can normalize those things, the easier it is to automate a larger number into our long-term growth areas.

And that's why, even though I've had people fight with me, they're like, you don't save any money doing the, utility plan. No, you don't. But it's not about that. It's about making sure it's the same so that I can do this other thing over here. It's the same thing, actually, even with your insurance policies, right? People talk about not having an emergency fund because it's not optimal. The ROI of your emergency fund is not on the rate of return. It's on the fact that I can jack up to use another key Wall Street phrase is jack up. I can jack up the deductible. so that my cost goes down on my insurances.

I'm not getting the return on my investment from my bank account. I'm getting it from a discount on Allstate. Follow me? And another ROI is in a shaky market, I'm much more likely to stick with my strategy and not abandon it because I know that I have an adequate emergency fund. Because I know that I can walk through it. So I can be more aggressive on my investments.

So I get the return on not buying insurances. I get the return on staying aggressive in my investments. It isn't about whether your savings account pays a low interest rate or not. It's about all these other ROIs that you have out there. And that, to me, that flexibility is better optimization than foregoing the emergency fund. Two unrelated areas to this question, but still, I think border around the same concept that we're talking about. Exactly. Exactly. Yeah. If you have a heavy cash allocation, it gives you the flexibility to take greater risks in other elements of your portfolio.

And so to the people who call in and say, hey, I'm really sick of the fact that my cash is sitting there earning nothing. This actually foreshadows our final question. Sure, you might be sick of the fact that your cash is sitting around earning nothing, losing purchasing power to inflation. But the fact that you have that cash allows you to be more aggressive in other elements of your life and in your investments. And as a result, your aggregate performance is better than it otherwise would be. And by the way, if we really want to zoom out and speak broadly, you can also look at your career or any side hustle or business that you start as part of your what I will broadly call portfolio.

If you think of the way that I like to define fire at like FI-R-E financial psychology investing real estate entrepreneurship, if you think of that e-entrepreneurship and broaden that out to how you make money, whether that's progressing in your career or becoming an entrepreneur or some combination of both, your ability to do that, your ability to take risks, your ability to negotiate harder when you get a job offer because you're less attached to the outcome or take a risk by starting your own business or any other career risk that you might want to take, that is enhanced when you create safety in other elements of your portfolio. And sometimes that safety might look like paying off your home so that you are mortgage-free,

like Michelle asked in the first question. Sometimes that de-leveraging, that de-risking, in isolation, will lead others to say, well, you know, you could invest that money in arbitrage the difference. Sure, because they're only looking at that singular line item in isolation and not taking it into the context of your entire portfolio, and I'm including career inside of what I'm calling the portfolio. Once you take that into consideration, de-risking certain elements of your portfolio allows you to take greater risks in other areas. So, Kristen, we've strayed far from your original question, which was about tax strategy, but given that your question is premised on an early

retirement goal, a goal of retiring at age 51 and 53, respectively, I think everything we've discussed from the tax triangle to the unsung praises of de-leveraging or derisking, all of the discussion that your question has prompted helps everyone who's listening develop a better framework for how to achieve an early retirement if they want one, or how to achieve financial independence if that is their goal. So thank you, Kristen, for asking that question. We'll return to the show in just a moment. Our final question today comes from Anonymous.

Joe, we give every anonymous caller a nickname. What book are you reading? What movie are you watching? Television series? Give us a name. Oh, I'm absolutely loving this right now because I saw the most fantastic movie. I watched Encanto. Have you seen Encanto?

No, I haven't. You know, nobody talks about Bruno. Have you heard people say that line yet? No, also no. Nobody talks about Bruno, no. Yeah, we don't talk about Bruno, Paula. I have literally no idea what you're talking about. I know, we don't talk about Bruno.

It's just, I mean, you shouldn't know because we don't talk about it. But anyway, it's a fantastic Disney movie. It is written by Lynn Manuel Miranda. And because of that, I will tell you, a lot of people that have given this movie reviews have said, I stuck with it the first time, but if you're familiar with Lynn Manuel Miranda, he likes to move quickly in his dialogue very quickly and have this pitter, patter back and forth. Cheryl and I found that if we watched it with the subtitles on, not that you can't understand people, but there's just so much going on that we loved it the first time we watched it. So I'll tell people that in Canto was amazing. So either watch it twice or watch it with subtitles the first time and I think you're going to love it.

But the main character who learns a lot about herself, her name is Mirabelle. And she is amazing. Mirabelle, that's a beautiful name. This is an amazing question. So how about if this is Mirabelle? Okay, perfect. Well, then our final question today comes from Mirabelle. Hi, Paula.

This call is from Anonymous. We're holding a large amount of cash and a high-yield savings account for an emergency fund and for a down payment on a house. we live in a high cost of living area, so the down payment is probably going to be well over $100,000. And as everyone knows, inventory is extremely low right now. So we don't know when we'll actually find something that comes on the market that we want to buy. And we don't want to rush into buying something that's not suitable for us. So what I'm thinking about is possibly putting at least some of this money in eye bonds or tips or both. And what we're looking to do is preserved capital as well as protect

against erosion by inflation. I don't want to put this money in the stock market because we already have significant money in retirement and non-retirement accounts. And also, we don't know when that house is going to come up. And we obviously need to keep some liquid for emergencies. So what I would like help with is how should we think through deciding between iBonds or tips and how we allocate between the two. Thank you. Mirabelle, thank you for the question. The direct question that you asked is a product question. Should I choose product A or product B? In this case, I bonds or tips. We're going to answer that, but I also want to zoom out and observe that the indirect question, the spirit of the question that you asked, is how should I manage money when the primary goal is liquidity and the secondary goal is mitigating the rate of inflationary erosion? So we're going to answer both of those questions, but we'll start with the specific and direct question, iBonds versus Tips.

And Joe and I actually discussed this behind the scenes, and we disagree. Which means I'm correct, by the way. My take is you want to avoid eye bonds because of the fact that you're not going to be able to access that money for the first year. Or if you try to, there are stiff penalties for doing so. Yeah, so you want to make sure that you don't. But you're only allowed to put in 10,000 each. So if they put in 10,000 each, she's got $20,000 then. And if she is spending all of that money, that,

$20,000 as well, and it's all gone before the end of the first year, then I think she's cutting it too close. So I would go with a guaranteed 7.x percent on $20,000. I would easily, that's the first move I'd make. See, I disagree. The way I see it, this down payment is going to be approximately $100,000. That's what they've got saved. They don't want to be in a position in which 20% of that is locked up for a year. Now they've got 80,000 as a down payment, and that might shut them out of some house that they want to try to buy.

20,000 is not insignificant. Well, okay, let's go to my problem on the other side. Tips, treasury inflation protected securities, the I shares, Treasury inflation protected security, so you're buying a bundle of them, is currently year to date. You would think, you would think that Treasury inflation protect securities are through the roof, right?

Because they're phenomenal. All we're hearing about is inflation. Inflage, so let's buy tips. The I shares Tips Fund is down 3.74% as we record this this year. And now people are going, what? Wait a minute. That can't be right. Of course it's right.

You know why it's right? It's because inflation protected securities, when you don't do the guaranteed version that we're talking about with I bonds are sold at auction. Tips get sold at auction. And what does everybody want right now? Everybody wants tips. So if you're holding on to tips and selling them on the open market before the maturity date, which most people do, that's why you're down. It's because everybody is flooding that market. And what's the risk, Paula?

I mean, if I'm looking at a one-year date, I have a problem with tips too because it might be. And normally, I would say tips are not volatile places to be. I think now that the tips market might be a little volatile place to be with inflation all over the place and questions about the stock market. And yeah, that one year timeframe gives me fits. Yeah, that's why I would stick with the tried and true high-yield savings account. Just get the nicest savings account that you can find. Stick your money there. Call it good.

And then turn your attention to that search for a house. If you're going to do one of the two, if you're going to do one of the two, remember, 10,000th the most you can put in. Per person. If you're not going to spend all that money, I would not put it in tips first. I would put it in I bonds first because of the guaranteed nature of that investment. But if it's all going into the house and it might be before a year, I'm with you. I do neither. Yeah.

I just don't like the idea of locking that money up in I bonds where she might have to struggle to take that out or pay some massive penalties to take that out. Yeah, well, this is the cool thing I think about planning is that it's doing something that may seem suboptimal if we're looking at a different goal and doing it anyway, knowing what the downside is, but knowing that it reflects our personal goal much, much better. the things that Maribel brings bring up are definitely optimal if the goal is different. But the goal being what it is, I think, you know, we both brought up suboptimal nature of either side to that equation. Right. There's no reason for Mirabel to get distracted. The goal is to buy a home. So keep the money in a high-yield savings account and then turn your attention towards looking through listings every single day.

making offers, understanding the market in which you're bidding and buying. But Maribel, if you know, if you get to the point where you go, you know,

I know it's going to be longer than 12 months. The I bond. Yeah, only if you're not going to need it for 12 months. Because again, the goal is liquidity

and I bonds are the opposite of liquidity in a 12-month time span. So zooming out, the broader question for everyone who's listening is how should anyone slash everyone listening manage money when the primary goal is liquidity and then the

secondary goal is inflation protection? And my answer to that, if the primary goal really is liquidity, that's the purpose of a savings account. I know no one likes hearing that answer because yes, your money is going to lose purchasing power to inflation, but that's the tradeoff for liquidity and flexibility. It's frustrating on one hand, but you know it's more frustrating? What's that? Not having the money in a place where it's where it should be when you want it. Right.

And remember, people often look at one specific bucket of money and isolate on that particular line item. Sure, you might have a whole bunch of cash that's in a savings account right now, but think holistically about your entire portfolio. The fact that you have that cash sitting in a savings account enables. you to have other money in other elements of your portfolio that are aggressively in stocks, in index funds, in cryptocurrency, in rental real estate. Not necessarily you, Mirabelle, I don't know what your other investments are, but speaking to everyone listening, the fact that

you do hold cash and you do hold liquidity allows you to have greater equities exposure. So the return on that cash comes from not just to the return specifically on that, singular line item in isolation, but rather the performance of your portfolio as an aggregate, and holding cash plays a supporting role in that overall performance. And Mirabelle specifically for you, because the goal is to use this money for a down payment, assuming that you're pretty sure you're going to need the entire amount that you have saved, assuming that you're not sitting there thinking, you know, we've saved too much. If that's the case, then preserve the flexibility of that money so that it can be used for its purpose.

It is amazing, Paula, how vastly different questions but come down to the same concepts, which is why I think it's so important to learn the concepts, and then you can continually wrap the current situation around a few flagpoles. liquidity, flexibility, rigidity, security, optimization, learning how these concepts interface with one another. That's the metacognition, the thinking about how to think. Yeah. And that's truly what I hope this show is about. This is a show about how to think, not what to think, but how to think, how to improve your skill set as a thinker.

It's a show about metacognition disguised as a money show. And your show, Joe, first of all, Mirabelle, thank you for asking that question. Thanks, Mirabelle. Yes, absolutely. And good luck with the home purchase. And good luck with your family in that valley in the movie. In the movie. I don't know this movie.

Paul has no idea. I do not know this movie. Good luck with Bruno. Yes. I thought nobody talked about Bruno. Well, you don't, but Mirabelle has a special relationship. You would like this movie. I'm telling you, you would like it.

Duly noted. Subtitles on, though. All right. But Joe, so your show, because of course I'm going to ask you, hey, where can people find you if they want to hear more of you? But your show is very much not about metacognition. Tell us what your show is about. No, and that's interesting. And if people come to the Stacking Benjamin show, it isn't going to be the Afford Anything show, part two.

It isn't. What I'm after largely is surround sound. My goal when I started Stacky Benjamin's was I was listening to the show called Car Talk, which is a show that a lot of your listeners might know. It's these two brothers click and clack. In fact, what's awesome and sad and funny at the same time is that one of the brothers died a couple of years ago, Paula, but the shows are so evergreen. You can still go back and listen and have a great time, which shows what a great show

car talk was. But when I came up with the idea for stacking Benjamins, I realized I was having a lot of fun in car land with car people discussing car stuff. And I wasn't learning anything about a car. On car talk, I learned nothing. And it really wasn't about learning anything. It wasn't about efficiency. It wasn't about tips. It wasn't about it was having a playful time where we were bathed, I guess is the right word, in car culture. And I wanted to have the same thing for a money show, where you are just bathed in money

culture. And I feel honored that smart people like you, and as you know, some of the biggest people in our industry chat with us, Gene Chatsky from the Today Show, Jill Schlesinger, from CBS, Rick Edelman, who's one of the top financial planners in the United States. David Bach's been on, of course, Susie Orman's been on your show and our show. But all the big finance people come down to my mom's basement, which once I say you come down to my mom's basement, you know you're not on the Ford anything show anymore. Right. Because it's a whole different thing.

And my mom's neighbor Doug, who is our announcer guy, who really, his job is kind of the court jester. If you really listen closely, Paula, you know we're making a lot of points. There are a lot of points. But we are much more interested in getting you excited and interested in the space. so that you come to shows like afford anything and dive in deeper. So if you're looking for surround sound, having fun with a bunch of money nerds on a lot of financially adjacent topics, the Stacky Benjamin show will be for you. If you're looking for deep dives efficiently into financial topics, you're going to hate us.

Joe, do you think it would be accurate to say that your show is slapstick comedy variety show disguised as a money show? I don't know how slapstick it is. You know, I've heard that term, and I really don't know that it's that slapstick, but it certainly is an incredibly relaxed, as you know, highly constructed show. We spend five weeks prepping for episodes that come out three times a week. So it definitely has pacing and... Yeah, your production schedule is nuts.

Yeah, points in meeting. We have two writing meetings a week. Like it is, we are very, very serious. But we're very serious, Paul, about making it playful. And we want that tone to come through, which is you will see for some people, that's not what they want at all in a money show. But a lot of people don't know which people to follow, which ideas to follow. And my feeling about stacking Benjamins is if I can introduce you to the right people

who go deeper on those topics, you know, I feel like there's a lot of people in our space who are the last word in finance or want to be the last word in finance. I want to be the last word. I want to be the first word. I want to be like the airport and there's a bunch of different planes you can get on. And I go, Paula, there's this plane and there's that plane. And here's another plane. Oh, look at this plane.

And every time you come to the show, we're introducing you to another plane that we've already, we've already largely vetted and we've curated so that we take you on a ride that you maybe didn't expect. And, you know, my friend, and you and I have talked about show construction a lot and have gone to podcasting conferences together and gone deep into podcast Nerdville. But, you know, a mentor of mine, a woman named Katana told me a long time ago, she said, find a show that you would want to listen to yourself and make it. And hope like, heck, there's people that are like you.

And generally, when we get reviews from people that love our show, it's because we We found those people. When I get reviews from people that don't like stacking benjamins, it's because they didn't realize that it's a circus. It's the greatest money show on Earth. It's incredibly chatty. We are making points, but we're covering it up in a lot of playfulness. And, yeah, it's a lot of fun.

But certainly not the same experiences afford anything. Yeah, we have massive stylistic differences, which is in part, Joe, why I like collaborating with you behind the scenes. Well, which is also fun, by the way, because when people hear me on this show, what you're going to find is a different me over there, as you know, I'm far more the ringmaster, far more. You don't hear me giving money advice. I'm dishing out questions to all my guests for money advice. You never hear me give money advice over there. Right. And when I'm on your show, I speak in sound bites and... Far more playful. Exactly. I'm much more playful. I'm often cracking jokes back and forth with everyone, which is super fun. Those are our Friday shows, by the way. I do manage to land some, like, wise colonels in there. I got to pat myself on the back for that one.

Well, no, and I have to tell you, I mean, that's the thing about the show that I love having you on because we do land some big points. I think everybody who's on, I just look at the one we recorded last week, and I won't get specific about that. But I love that roundtable because it was playful. It was light. But then, man, we would go just hammer deep for about two seconds. You know, somebody would make it, you would make a great point or one of the other two people on the show would make these wonderful points that you can take home with you and then we go back and it's light.

And I really like that. I like it because it's surprising. I like it because you don't know when it's going to happen. And I like it because I think it makes it easy for a new person that knows nothing about money to hopefully join us. Right. Which I think is my mission. Your mission is teaching people how to think. my mission is hopefully to widen the number of people who are thinking at all about this topic.

And if we can do that, that's fantastic. Your breath and I'm depth. Yes, absolutely. And not that we won't go deep because, you know, we will have some shows where we will go, well, we'll introduce you to the deep topics. We may not go deep on the topic, but we certainly don't shy away from the deep controversial topics, but we will touch on them and send you in the right way. Yeah. But it makes it really fun to your point. For people that haven't been listening to the two of us together for a long time, you and I often interview the same person. We both interviewed Robin Rigglesworth, which you had a great interview with him. I had a great interview with him. We both just interviewed Spencer Jacob. And I listened to your interview and I listen to my interview. And if you put those two interviews together, you get this cool composite thing and they're definitely not the same. Definitely not the same. We're after different things.

Right. But you end up with this cool, holistic look. But definitely not. Like if stackers come here, they're not going to hear Stacking Benjamin's Part 2, which might be sandpaper if they expect it. And I think if you come from afford anything to stacking Benjamin's, I think it's going to be something completely different, you know? Special and unique.

Yes. Absolutely. So the Stacking Benjamin's podcast. That's where people can find you. And on tour. And on tour. I'm on tour. Come see us. Stackingbenjamins.com's Live stacked coming to 40 cities, hopefully near you.

And you can find more of me, Joe, on the Stacking Benjamin's podcast, most Friday episodes. Almost all of them. Yeah, exactly, but like three out of four, ish. And we do that on purpose too, because every week gets to be a grind. So Paula gets some well-deserved time off. And on our end, you know, based on the conversation we just had, it also gives us an opportunity to introduce you to a voice that you wouldn't have heard of. Exactly.

So good for everybody. Yeah, exactly. So thanks, Joe, for being part of this show. Well, thanks for having me. And this is always a highlight. And if people knew how much fun we have for recording these. Well, thank you so much for tuning in. This is the Afford Anything podcast.

If you enjoyed today's episode, please do three things. Number one, share it with a friend or a family member. That's a single most important thing that you can do to spread the message of financial independence. Number two, open up whatever app you're using to listen to this show and hit the follow button so that you don't miss any of our amazing upcoming shows. And number three, while you're there, please leave us a review. You can subscribe to the show notes by going to afford anything.com slash show notes.

And if you want to chat about this with other members of the community, go to afford anything.com slash community. Thanks again for tuning in. My name is Paula Pan. This is the Afford Anything podcast, and I will catch you in this. 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 is never a substitute for professional advice. That means anytime you make a financial decision or a tax decision or a business decision, anytime you make any type of decision, you should be consulting with licensed credential experts, including but not limited to attorneys, Tax professionals, certified financial planners or certified financial advisors, always, always,

always consult with them before you make any decision. Never use anything in the financial media, and that includes this show, and that includes everything that I say and do, never use the financial media as a substitute for actual professional advice. All right, there's your disclaimer. Have a great day. Let me take a two-minute break and then we'll do the last one. Cold one?

Yeah, cold kombucha, yes. A foamy beverage, no? Is kombucha foamy? It's, well, it's kind of, it's sparkling. I'm going to grab a sparkling beverage. Sparkly beverage. All right. I've got a kombucha, a protein shake, and exactly one ounce of cheddar cheese.

Exactly. And I've got, I've got coffee and water and a candle. But I'm not, I'm not eating or drink. drinking the candle, just to be clear. Depends on how crazy our last question gets. Joe, what are you doing?