Afford Anything - Ask Paula: My Parents Are Drowning In Credit Card Debt. What Should I Do?

Episode Date: March 1, 2023

#430: D is worried that she’s going to suffer from her parents’ poor financial choices. Is it time to confront them about it? An anonymous caller and her fiance both own a house. Which one do they move into after the wedding? In a world of rising inflation, Nick wants to know if it’s time to change the way he saves for his future. Another anonymous caller wants to buy a second home within a decade. How does she start planning now? 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/episode430 Learn more about your ad choices. Visit podcastchoices.com/adchoices

If someone in your family runs up credit card debt, could you be on the hook? Where should you put your savings when there's a ton of inflation? If you're a couple and you both own homes, whose house do you move into? And if you want to buy a second home, how do you start planning? We're going to answer those four questions in today's episode. Welcome to the Afford Anything podcast, the podcast that understands that you can afford anything, but not everything. Every choice you make is a tradeoff against something else. So what matters most to you? That's what we're here to answer. My name is Paula Pant. I am the host of the Afford Anything podcast. Every other episode, we answer questions that come from you. And we do so with my buddy, former financial planner Joe Sal C-high. What's up, Joe?

I got the mailbag right here, Paula, and it is brimming. Brimming. Brimming. With good stuff. Exactly. Joe, what do you think of our new intro? I think it's amazing. I had goosebumps.

Oh. I just, oh, so good. Well, glad you like it. We're playing with the format. So if any of you long-time listeners have any thoughts, feedback, drop me a line on Insta. Let me know what you think. We're going to die right in. Let's start with this question from Dee. Hi, Paula. I'm a huge fan of your show. I'm a 35-year-old working mom who doesn't have a ton of time for podcasts. So when I do listen, I want to get a lot out of it. And so I'm a huge fan of the way you explain things and your just overall demeanor and relatability. So just thank you for you. for your podcast and for all your work. I'm calling because I have a concern. You know, I have a next of kin, in this case, a mother-in-law and a dad, my actual dad, my biological father, both have a lot of credit card debt.

And not that I expect them to, you know, move on to the next life anytime soon, but, you know, they're in their mid-60s and, you know, over the next 10, 20 years, you know, their finances are just becoming more and more in view for me, especially as it relates to the credit card debt? You know, is it something that I'm going to be, me and my partner are going to be saddled with when they pass, when our parents pass? And, you know, is that actually true? And then also, you know, what are conversations we should be having with parents next to kin who we need to help them prepare their finances for when they do move on and what they leave behind, whether it's good stuff or bad stuff? So really two questions, you know, is it true that I could very well be paying off

credit card debt for a parent or a parent-in-law when they pass. And two, what are conversations we should be having with parents and next-of-kin whose legal affairs can deeply affect our lives, you know, after they pass? Thanks again. Dee, I have great news for you. Unless you are a co-signer on that debt, meaning unless your name is actually on those debt accounts, those credit card accounts, you are not going to be on the hook. Now, their estate, your dad's estate and your mother-in-law's estate, the estate will be on the hook,

which means that if they're planning on leaving something to you, maybe they want to leave a legacy, they want to leave you an inheritance, well, that estate, the money that they're leaving behind for their heirs, that will first be mined to pay off their debts before heirs and beneficiaries are paid off, or at least that could happen. So you and yourself won't directly be on the hook for paying those debts back, but any inheritance money that you are expecting might get tangled up in the debt issues that they leave behind. So that's the main thing to know. But otherwise, as long as you are not a co-signer, you have nothing to worry about. I should say for the sake of everyone else who's listening in case you have a similar concern, the one difference to what I've just said is if it is your spouse.

A person could be held liable for their spouse's debts, but they are not liable for a mother-in-law's debt, a father-in-law's debt, a dad's debt, a dad's debt, a mom's debt. I think there's a wider conversation here, too, not just for D, but I think for all of us that have people that are getting older, Paula, and our families. And these conversations, as the relationship changes with older family members, is difficult. Like the transition from maybe these people taking care of you at one point to you're all adults in the room to now you taking care of them. It's difficult for you. It's difficult for older family members.

And that might be something we might want to talk about for a moment. Absolutely. Because many people feel uncomfortable with that switch in behavior patterns, right? When you go from being the child to sometimes being the parent of your parents, right? Sometimes you have to parent your parents. I love what Cameron Huddleston, our mutual friend Cameron said. She wrote a book about this topic. A technique she's used is to just bring up money in a non-threatening way,

maybe something that you messed up or something that you noticed about your own money. Whatever it is, try to just make the relationship a little more open. And once again, this is not to D. This is to anyone. Just don't go, hey, mom, let's talk about money. Right. I want everybody to feel comfortable. so let's talk about money when we never had before.

Let's make it really formal and very rigid. And I'm going to stare at you a lot and it's going to make you sweat. We don't need any of that. Right, right. In fact, Cameron, one of her tips, which I thought was great, was you could always share something as though it's the story of a friend. Hey, one of my friends is going through XYZ problem. And that can be a really good way to naturally bring up the. these financial conversations.

Oh, my friend is going through X, Y, Z problem, which makes me wonder, how are you planning your estate? It's a very natural lead-in. You know, a close personal friend is going through this, and luckily, he told me... Look at you doing that right now. Yes. A friend told me... Actually, this is not me.

Sadly, this is a friend. Thank goodness he had a close personal relationship with his mom about her money, because she came to him, Paula, before she was getting ready to send a check for about $25,000 to a scammer. Ooh, out. She's experiencing, like, many older people, some cognitive decline and thought that there was an emergency, and she needed to help take care of it. But she called my friend just to make sure ahead of time. Good.

But the deposits, so to speak, for that phone call, right? the groundwork that was laid for her to think to call him and for her to have the relationship such that she would call him and she would vet it with him before mailing off that check, right? Yeah. That happened in tiny increments over months or years. And they were casual conversations. Right. Very casual conversations.

Think about Dee. I don't know what kind of relationship you have with your father or with your mother-in-law, but what are the things that that you talk about frequently. And particularly what are meaningful things. You know, do you talk about health? Do you talk about food? Do you talk about exercise? You know, what other conversations do you guys have that are important, but it might not even necessarily cross your mind that these are serious or important topics? I mean, certainly health, exercise, food, these are all very important topics. But because they don't have, for some people, they don't have as much emotional weight or because we've just, for many people have gotten normalized to those conversations, they don't feel heavy, right?

So my question to you is, what are the conversations you're already having? Think about that. Think about how those get brought up and use that as a model for how to style your money conversations. Primary topics that you do want to be addressing, you'll want to find out whether or not they have a plan for the possibility that they one day might not be able to live independently. So what happens if they need help with activities of daily living? Do they have a plan for that? Do they have a preferred way in which they want to age? That's one thing to find out. And that's not just one conversation. That's a series of conversations over time. Do they have a medical power of attorney? Where do they

they keep important documents? Or at the very least, does their person that holds contingent power of attorney, does that person know where those documents are? Right. Do they have an estate plan? And who are their important advisors if they have them? Because often also, Paula, the advisors may know of some plans that they've made that if things get difficult, they may be able to help a concerned family member as well. Right. And those are heavy topics, which is why the conversations around money need to start happening and happen frequently because you don't get to such heavy topics right out of the gate, right? You don't propose marriage on the first date. So you'll want to start with these lighter topics. It could be as light as talking about

something that's on sale, you know, those are the easier money conversation. to have, hey, check out this great deal that I got on a jacket. That's how you can broach the topic of money in an approachable everyday type of a way and then start getting a little deeper in every subsequent conversation. Not easy, but so, so important. There's a book that I recommend. We both mentioned Cameron Huddleston. She wrote a book called Mom and Dad, We Need to Talk.

It has a list of questions that people should ask their parents, a list of topics. You know, it's got a lot of great recommendations. It's got checklist vibes. I don't think there's an actual checklist in there. I don't remember offhand. But it can certainly be used as one. So the book, again, Mom and Dad, We Need to Talk by Cameron Huddleston. She was also a guest on this show.

You can search our archives for that episode. We'll drop a link to it in the show notes as well. afford anything.com slash show notes. So, Dee, thank you for that question. Good luck with the conversations and rest easy knowing that you're not going to be on the hook for that credit card debt. Our next question comes from Nick.

Hi, Paula. This is Nick from Central Kentucky. I'm a money nerd, a loyal listener, and a graduate of your first rental property course. I have a question about saving for a rental property in the current inflationary environment. In the past, I followed the advice that I should not put money into riskier investments, such as a stock market, that I plan to use in the short term. However, I feel like the current inflation rate is a game changer. I want to save for a rental property over the next year, but putting my savings into a savings account, even a high yield, is chasing an upward moving target.

I have information that says home prices in my market will appreciate 5% over the next year, and I think the best I can achieve, in a high-yield savings account is 3%. If I assume inflation remains at around 8% over the next year, what are my best options to hedge inflation while I save for my next rental property? Nick, thank you for your question so awesome to hear from a graduate, an alumni, of your first rental property. And I am so jazzed that you are saving up for a rental property. That is amazing.

I know you're going to do a great job. So to your question, a couple of things jump out at me right away that I'll address before we get to where to stash your money. One thing that jumped out at me from your question, if home prices in your area rise 5%, and inflation is 8%, that means real home values would fall by 3%. So are you talking about home prices in your area are expected to rise inflation plus 5? or that's one thing that you want to keep in mind. When you're looking at projections for home prices, how do those relate to projections for inflation rates? And are we talking about real returns or nominal returns?

So that's just one thing that you want to take note of as you're looking at projections. But that said, that's a different topic for a different day. that's a whole separate conversation about how to assess the housing market, which is, that's its own episode. So to your question, where should you stash your money? He wants to play with fire, Paula. He wants to touch the stove. I know, right? It won't hurt that much.

He wants to put his hand in the cookie jar. I'm just going to get a little stock market. It won't be bad. Everything will work this time. So rule number one, and I think the last year was a good reminder of this, the stock market is not a high yield savings account. And Nick, we're not making fun of you, by the way. Everybody does this. Everybody does this.

It might work out fine for you. But when you look at the law of large numbers, the number of times that this blows up metaphorically is big enough that there's no financial planner on earth that would ever tell you. to take that risk, to put it in anything other than a high-yield savings account. So I guess, Paula, what do you think about him then just taking on more debt and buying the property more quickly? I like the I raise. Paula gave me an I raise. He could certainly do that depending on whether or not he's eligible for that.

Like, let's make the assumption. If he's buying something that's going to be an owner-occupied mortgage, that he's buying as a primary residence, he'll live in it for a year. year, then yeah, he can go down to FHA 3.5%. But if he's buying something on an investor loan, he might have to save some minimum amount of money, some high minimum amount of money, in order to get that investor loan. So I'm going to accept the premise that he's not able to purchase this home right now. I'm going to accept the premise that he's going to need a minimum amount of time, at least another year, before he has the down payment for this. The stock

market is definitely not a good idea, but Treasury inflation protected securities, also known as tips, is one option. It's, as the name states, it is quite literally designed to protect your money from inflation. CD's certificates of deposit, those fell out of fashion for the last decade while we were living in an ultra low rate environment. Those are back in style now. And a CD is essentially a time-limited savings account in a sense. It's not technically a savings account, but it is a time-limited asset, a time-limited vehicle in which you park your money and get a much higher rate of return in exchange for that lack of liquidity. And that's a great place to store savings that you want to tap in 12 months. Another option for at least part of that down payment,

But I bonds. You can buy iBonds on TreasuryDirect.gov. You can also buy tips there as well. There's a maximum. The problem with iBonds is that there's a maximum of $10,000 that you can invest in any calendar year. But you get a payout that is indexed to inflation. I bonds are indexed to the semi-annual inflation rate based on C.P. changes that are announced in May and November. And you can redeem an eye bond after 12 months,

which means it is a great place to stash money that you're going to need in a year. Now, if you do redeem an eye bond after 12 months, you will have to pay a three-month interest penalty. There is no penalty if you hold it for five years. But even with that three-month penalty, the money that you earn through an eye bond is still sufficiently awesome enough, compared to keeping your money in a savings account, you certainly come out ahead in an inflationary environment. The only issue that I would have with the I-Bond, obviously, is that you have that money locked up them for a year. So if he wants to have it before a one-year period, then that's not a solution that's viable. Otherwise, I think that's much, much better than playing the

stock market casino game with a short time frame. Don't do it. Joe, what are your thoughts on tips and CDs? Fan of both? I like both of those. Again, you know, the issue is that you're going to have a lockup period, right? So you're going to have a period of time. I mean, if you go with a tip mutual fund, then with interest rates changing because the manager is buying them at different points, you may see some loss of principle.

I've talked about Ginny Mays on this show before and on mine. And, you know, Ginny Mays had a one-time decimation over a 12-month period ending last year. So any asset class where you're putting principal at risk can have a downturn. I still love Ginny Mays when we talked about Ginny Mays before. You know, bad things can happen when you put money in a spot where you may be able to lose some money. Now, if he's buying an individual tip, if he's putting money into into an individual bomb polo, that's something completely different. But then you also may be selling on the open market if you decide to sell early so you have a maturity date. Right. And he would certainly want to sell his tips prior to

maturity if he wants this as a down payment. The lifespan of tips is five years, ten years, 10 years, and 30 years. And traditionally, there's not much volatility in any of these assets we talked about, right? But look at the Ginny May market, though, as an indicator of what can, what can happen will. You know, what's cool about CDs is that you can take a ladder strategy so you can have some of your money in a 12-month CD, some in nine months, some in six months. The issue, though, Paul, is if he wants the money all at one time, then the latter becomes really difficult. Right, yeah. The latter would make sense if he has his down payment money subdivided into a couple of buckets, with one bucket being the cash reserves that he wants for after the close of the sale. So he buys this home, but he's going to want cash reserves so that he can.

make the first couple of months of mortgage payments so that he can do some minor repairs needed before the first tenant comes in, you know, any renovations required to make it rent ready for that first tenant, right? So what could be called quote unquote down payment money might be a blanket term used to represent money that is both literally for the down payment as well as the cash reserves that he wants to hold after closing on the property. And if that's the case, and I think that's a very wise idea, because you don't want to buy the property and then have nothing in the bank, you know, as we teach you in your first rental property, you are going to want to have some cash reserves. If that's the case, then the latter strategy could work really well for that because

there are multiple timelines within those short-term savings. And for other people, not just for Nick, it's good that we can finally recommend a latter strategy again. There was a long period of time where CDs just were not paying enough to make this worth talking about. But they're back. They're back. But Nick, I want to leave you with this note. Don't do it.

Don't. Don't. You're referencing the stock market. I know what you're thinking, Nick. I know. I've been there. I know. I know.

It looks so juicy. It's so good. don't do it. Well, Joe, I think we provided him with enough options that he no longer needs to put that money in the stock market. Fantastic. There are many things to do besides let it sit in just a savings account. Absolutely. So, Nick, thank you for the question. And congrats on that house that you are soon to buy. We'll come back to this episode after this word from our sponsors. Fifth Third Bank's commercial payments are fast and efficient, but there are

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and a political commentator in a time when there weren't women sitting at that table. There were not women sitting at the political table who were discussing what was going on in American politics on television, except this woman. And I remember as a teenager, I thought she was brilliant. She sadly passed away back in 2019. But I was always a fan of Koki Roberts. I thought Koki Roberts was such a badass. The way she would just go toe to toe with. anybody and was usually Paula the smartest person in the room.

And at the time, by the way, it was always expressed the smartest man in the room, right? And there would be four men around that table and Koki Roberts going head to head with them and coming out on top. So I'm a big fan, not just as a journalist. She had great journalism chops as well, but as a commentator, Koki Roberts might be a great choice. Wow. That was a beautiful homage, Joe.

All right, well, in honor of her, our next caller will be Koki. Hi, Paula and Joe, anonymous here. My fiancé, age 34, and I 29 are getting married next year and are seeking guidance on where to live afterward. We both own our houses. I bought my house in 2021 for $172,000 at an interest rate of $1.375, with mortgage payment of $755. The current principal is $163,000.

and the value has risen to 244,000. My fiancé bought his house in 2020 for 168,000 at an interest rate of 3.8% with mortgage payment of $1,000. The current principal is $150,000 and the value has risen to $280,000. We'd like to know which house would make the most economical sense to move into after the wedding, or if we should look for a new house, keeping in mind. that we'd like to start trying for kids shortly after the wedding, and I have two bedrooms while he has three, and we both work from home. We would love to keep both houses, but I obtained my house through a program that stipulates that this must be my primary residence until I sell or pay off the mortgage, or else they could put a $25,000 lien on my house. Looking forward to your thoughts.

Koki, thank you for the question, and congrats on your home purchase. and your upcoming wedding. So a couple of things strike me right away. Now, first of all, when you said that your interest rate is 1.375%. I instantly, my first reaction was that can't possibly be right because the lowest interest rate in 2021 was 2.65%. But then when you said that you bought your home through a program that has certain restrictions, that's when it all made sense because my assumption is, is that the program through which you bought your home is a program that got you an interest rate that was even lower than the lowest one that was being offered on the open market in 2021. And the tradeoff for that low interest rate are certain restrictions around how you can use your home. So here's my question back to you. You said that the consequence of you not living in this as your primary residence, the consequences that they would put a $25,000 lien on your home. Does that mean, and this is where you want to look through your documents and see exactly what the restrictions are and what the consequences are, hypothetically, let's just entertain this as a thought exercise. If you were to pay off that $25,000 lien, would that then free you up to keep this as a rental property?

and keep that same interest rate. Phrased another way, is there effectively a $25,000 charge to be able to keep the same mortgage interest rate that you have and essentially convert this into a rental property? If that's the case, and I don't know the details of the program that you used, I don't know what the rules are, what the restrictions are, so you're going to want to read through the paperwork very, very carefully. But if that's the case, then it could be well worth paying that $25,000 fee to be able to convert that into a rental property and keep that 1.3% mortgage. Do you had a reaction to that, Joe? I did. I didn't see that coming. Oh. I did not see that coming. That's nice. A $25,000 fee over another 25 years could be a very small penalty to pay.

Exactly, right? To keep a mortgage rate. like that, I would, I'd happily pay $25,000 to keep a 1.375 mortgage rate locked in. Now, if for some reason that's not on the table, she's not able to do it, the economic choice here, Paula, assuming that they can work out the work from home issue, the economic choice is still the lower mortgage, but I don't know that that's the right choice, which gives me pause because that seems to be the nature of Koki's question. Because when you look at everything that she said, there's no doubt in my mind that she thought that's the economic one, right?

It seems to be a no-brainer. It's so easy. So I don't think that's the real question. It feels more like Koki asking us permission if it's okay to go to the one with the higher mortgage, the higher mortgage payment and the higher interest rate, if that's okay. and certainly I think it is. It still is a phenomenal interest rate. If we get rid of the unbelievable holiday gift from miraculously low interest rate times in this wonderful program she's in, just get rid of that.

Her fiance's interest rate is still amazing. It still is absolutely fabulous. Right. And the mortgage payment, $1,000 is quite low, particularly given that if she moved, moves in, they'll be splitting that between both of them. Yeah, and I don't know what their budget is. She didn't mention what their budget is. And certainly, you know, another $250 a month is in a small number. And I don't know if that. If she sold, you know, she's paying $750 for her mortgage right now. If she sold her home, right, so the two of them combined are currently spending a total of

$17.55. He's spending $1,000. She's spending $750. So the two of them combined are currently spending 1755 between them. Your math skills are ninja. I know, right? Exactly. I'm here all week, folks. So if they got rid of either one of their mortgages, it doesn't matter whose. Instant savings.

Instant savings, exactly. So even if she were to sell her house and move in with him, right, now they've got a thousand dollar mortgage payment split between the two of them. I mean, boom. Their combined budget just went down. Not to mention if she were to sell her home, the remaining principal balance is $163,000. It's worth $244,000. So even after paying real estate agent fees and closing costs, things like that, she's still going to be walking away with...

Good sum of money. A massive sum of money. And because it's her primary residence, there aren't going to be capital gains taxes on that. So she's going to have a huge chunk of money if she sells her home. Either of them will if either of them choose to sell. This is a great problem to have. Right. So given all of those conditions, Koki, there is no reason why you couldn't or wouldn't want to move into the house that you and your future family can grow into.

If you want the larger house with the additional bedroom because it's going to, you're going to, you're going to be a future family. because it's going to be big enough that it will fit two people who are both working from home plus hopefully kids. If you want that larger home, I mean, you certainly have space in your budget to be able to accommodate that because your bills, your joint bills, are about to fall either way. And sometimes the most economic choice is not the choice that provides the cheapest costs in the short term. Sometimes the most economic choice is the choice that you can hang on to for the long term. And what I mean by that is if you were to sell his house, move into years, you know, live there for two, three, four, five years, but then decide that it feels too crammed.

And then you sold your house and the two of you bought a different other house. That's a lot of transaction cost. So sometimes choosing the home that is the lower price point in the short term ends up being more expensive in the long term because of the high cost of switching. Now that said, the only variable that we're talking about right now are the number of bedrooms in the home. I don't know what other differences your homes have. For example, location, school district, right? Those are other factors that would play into the question of.

of which of the two homes is better for the long term. And that question, what's best for the long term, is based on more than just the number of bedrooms and based on more than just the out-of-pocket mortgage costs. So another thing you could do, and actually I really like this option, the two of you could move into your place initially, live there for a year or two, rent his house, out in the meantime because he has no restrictions on renting his place. So move into your place initially, stay there for a year or two. And when you have a child or when you feel like that place is too small, at that time, you can then shift into his place. Because even if you are planning on having children, you're probably not going to have one nine months from now. There's probably going to be at least a year, maybe a year and a half, maybe two years.

You know, who knows how long it's going to be. So it gives you an opportunity to rent out his place, test drive whether or not you enjoy being rental owners, spend an extra couple of years in the place that is advantageous to you as your primary residence, and trade up only when you need to, not when you anticipate needing to. So that's another option. Yeah, the part that worries me is both of them working from home with the smaller house because if you need a quiet space, that means renting maybe a co-working space, which means I'm out Paula, so I might as well stop and buy a coffee on the way. And I pay the rent on the co-working space. And then I end up with these ancillary expenses that are tied to the fact that I just got to get out of the house

because we're working in such a confined area. There would be a tendency, I would think, to have these side expenses that might be higher because of the fact that they both work from home, especially when kids come. Maybe over the short run, to your point, it might be great, but kids come, and you only have a two-bedroom home and two of you working from home. But short-term economically, the 1.375 is easily the winner. Yeah, it would be hard to give up a mortgage rate like that. What about adding on to that house?

Ooh. Well, then you're going to take out either other debt. There's some outside of the box thinking. I like that. And you're welcome. Right. Because she certainly has the equity that she could borrow against for that. Use money from the sale of his house if they sold his.

Right. And I don't know if they have a yard, if either of them have a yard and if so how large it is. But perhaps the construction, depending on what the zoning and coding is in your area. Perhaps there is the construction of an ADU, an accessory dwelling unit, that could be an independent standalone. That can provide a quiet place for one or both of you to work, especially when kids arrive, and also be used for supplemental rental income when you're not working there. So maybe. And because we don't know which of their two houses, is if either has a yard or has the zoning that would allow for something like that, an ADU or a freestanding garage with a bedroom built above it or anything, you know, a casita that could form an in-law apartment, so to speak, right? We don't know which of their homes is best suited for that. Those are all of the variables that play into the bigger question of which of these is suitable for us to grow into and which of these provides that versatility.

you know, along with questions like school district. The economics here are so good either way. The first question I would ask is, which one do you want to do? That may be the better question for me. Because we've gone through this both ways and assuming that they could add on to her property to make it match or even maybe better. You know, then we get into those questions about best place to raise children, best school district, neighborhood you want to live in, how close are other amenities,

shopping, whatever it might be. That wasn't the question she asked, she asked about economics, and I think we answered that one. But I'm not sure that's where I'd start. Well, and to your earlier point, Joe, that's the question she asked. I'm not sure if that's the question she meant to ask, because the economic question itself is on its face straightforward. Hers is the home with...

Yeah, that's an easy one. You know, it's the home with the lower monthly payment and the lower interest rate. So why would she ask which one is the better economic choice when on the surface, it seems like a simple greater than or less than question? Super easy. But the reason that she's asking that question. question is because it is not a greater than or less than question. And for people who are new to afford anything that are wondering where Paul and I are working

from, your three biggest expenses, three biggest expenses are your housing cost, your auto, and your grocery. So if housing is number one with a bullet, and you can make that as low as it possibly can be, economically that's number one. And so that is the prime way to build savings faster is by keeping housing costs low. A lot of people spend a lot of time cutting small costs, cutting little things out of their budget. And for somebody on a really fixed budget, that can help. It can be nice. But if you really want to make a dent, if you really want to change things, you pay attention to those three. And that's what Paul and I are working from from this question. But Koki, either way you win, I mean, either way your joint mortgage costs are about to

plummet, no matter which house you choose. She just wins because we named her Koki. That's a great name. Love that name. Good choice, Joe. Well, Koki, thank you so much for the question and congrats. We'll return to the show in just a moment. All right, we've got one more. Only one.

Question that we're going to tackle today. Only one. One more. I know, right? This one also comes from an anonymous caller. Another. Another. Joe, I'm I am tossing this football to you. What are we going to call her? This anonymous caller needs a name.

You can tell the Columbia program's getting difficult. I know. When I'm not coming up with a journalist and you are what? One floor below or above the Pulitzer floor or whatever or the something? I'm sitting in the Pulitzer building right now. You are in the home of journalism and let the record show. But I do have a good one, Paula. I do have another really good one.

All right. Tell me about it, Joe. What I was a financial planner in Detroit, and I did a lot of media, and I was working with American Express. I often would have the pleasure of interacting with a phenomenal journalist and columnist with the Detroit Free Press, Susan Tompore. Susan Tompore is tough as nails. I've been in the room with her when somebody tried to BS her, and it's hilarious how that

does not make it. And she was a financial journalist. She is a financial journalist. She's a working financial journalist in Detroit. I love Susan Toppor. I actually had the pleasure of having her on the Stack & Benjamin show a couple years ago speaking exactly about what you and I talked about earlier with D, which is scams that were happening across the nation and especially in the Detroit area and older people getting scammed. So she's a phenomenal journalist. So let's name her Susan. All right. Perfect. Well, then our final question today,

comes from Susan. Hi, Paula and Joe. My husband and I are in our mid to late 30s and we have a toddler with a new baby on the way. We just bought our first home in 2021, a townhouse worth about $500,000 in or around the D.C. area. We got a great interest rate of about 2.5%. We will likely eventually need to move out of this home, but not for a while. We can wait as long as needed. But when we do move, we'd like to be able to keep the home and rent it out. The thing is, the thing is, is we're not sure how to get our financial ducks in a row to ensure this is feasible. What would our situation need to look like in seven to ten years to make this a possibility? And what would the mechanics be? Do we need to save a separate 20% down payment in cash for the next home? Or is there a way to leverage our first house for the next down payment without being completely underwater in mortgage debt? Additionally, how much do we need to be making an income to make it reasonable to float two mortgages and how much should we plan to having cash in addition to the down payment to ensure that we can safely cover both mortgages in the event that we can't find a renter.

That's it. Thank you so much. Susan, thank you for the call. And I love that you are planning long term. You're planning on living in this home for as long as you can. And in seven to ten years, you want to buy another home. and so you're thinking long term. You're like, all right, what are my financial needs or wants going to be in a decade?

And what do I need to do now in order to set myself up for success in a decade? I love that. I love that long-term thinking. So to tackle your questions, you asked whether or not you need to save a separate 20% cash-down payment for your next home, assuming that you keep the home that you currently have and keep it as a rental. The good news is no you do. You don't need to save a separate 20% down payment. You can do what is called a cash out refinance.

What that means is that you refinance your mortgage and pull out the equity that your current house has gained. And over the span of 10 years, your current home will likely, if the future is similar to the past, your current home will likely have gained quite a bit of equity. Now, the obvious downside is that by refinancing your mortgage, you lose that amazing 2.5% interest rate. Exactly what I was thinking. Yeah, exactly. So that opens up the question, what are mortgage interest rates going to be 10 years from now? Nobody knows, right? There's no way to accurately predict mortgage interest rates in the year 2033.

Will they be 8%? Will they be 2%? will they be five or six percent? Who knows? If you want to dodge that possibility, if your goal for keeping this house is that you want to keep your current interest rate, if that's part of the reason that you're doing this, then yeah, you'll want to save up another down payment. But I wouldn't keep a house purely for the sake of keeping an interest rate. Like, keep the house if you want to keep the house, but don't keep it only for the interest rate alone. And the other thing that worries me, Paula, that people often do here is they don't widen the

lens enough because putting together enough money for a down payment, a lot of times people wonder, where is that money going to come from? So they reduce the money that they're putting toward their financial independence to get that. Now, you could say that this is a piece of a financially independent move. It could get you there. But I would try not to lower savings. toward financial independence. I wouldn't lower 4-1-K. I mean, unless you've got that tackled, so I would go to any of the various websites

and run some scenarios, living at least a current lifestyle where you are now. How would that look at the date that you want to retire? Do you have enough? Are you projected to have enough? If you're going to lower that to create more money to be able to afford the second down payment, I would want to feel really comfortable that I still have financial independence handled.

Joe, by that, do you mean make sure you're contributing enough to a 401K to IRAs? Yeah, the traditional places where most people are contributing. I'm sure they probably are now contributing somewhere toward those. I would keep that motor running. But you see people that will often mortgage the long term to get the things that they want in the short term. And that is often a big, big, big mistake. because that long-term money will work so much more efficiently if it's left to its own devices, it will work on your behalf.

I like the analogy that Robert Kiyosaki uses in Rich Dad, Poor Dad, which is that you go to work every day with your lunch pail and you're accumulating these dollar bills that take their lunch pail and they go to work every day too. And I love that analogy because of the fact that as, a lot of people struggle to save, realizing that every time I save, I'm sending that money to work every day for me so I don't have to, is this really freeing feeling that someday my money is going to go to work and make more money than I possibly can on my own. How great is that? It's a wonderful feeling to have. And the only way to do that is to have a big enough pile of money sitting there

that it's able to do that to make sure that you can be financially independent and not have to work anymore. If changing a primary residence will mortgage that future, then I don't know. And certainly, like I said, then this house does become part of that equation. But I don't know that I would count on the strategy of a single property solving my retirement dilemma. I thought of some other things that she may need. Obviously, her emergency fund is going to need to be in place. Because like she mentioned, if she doesn't have, and you mentioned, if she doesn't have a renter for a few months, I think landlords, you've talked about this before, Paula, have to have a fairly large emergency fund in place, cash reserve.

There's a whole piece of this that you know much bigger than I do. You need money for big expenses. So you have to have that built in because this house will, you'll need to replace a roof at some point. You may need to do some big major repairs, some updates. So I think you need to have that built into your equation as well. Yeah, the broad generalized rule is three months of gross rent is the minimum amount that you would want set aside as a cash reserve. Susan, one of your questions was how much additional cash should you keep on hand. If you've got three months of gross rent per property, if that's your baseline as a cash reserve for every property that you hold, then that should be, you know, as a very value.

then that should be, you know, as a very generalized rule, that'll be enough to cover about six months' worth of expenses. But I mean, Susan, you're not planning on buying this home for the next seven to ten years. So you are far, far away from needing to worry about building an emergency fund for a rental property that you're not going to own until 2030 at the earliest. So rather than jump the gun on the details about how to handle a rental business, the only piece that you need to worry about right now is how do I want to pay for this next property. And if you're willing to do a cash out refi, or if you're willing to at least wait seven to 10 years, see what the interest rate environment is, and make a decision at that time. and if you're okay with not buying that next property if mortgage rates are still high, right? If that's the strategy that you want to take, then there's really nothing that you would need to do right now. By contrast, if you know that you definitely want to do this in the next seven to ten years

and you want the option of not having to cash out refi, then you reconfigure your budget so that you have some down payment money getting set aside. And the silver lining to doing that now is that because this goal is so far into the future, you can set aside a relatively small amount of money and time is on your side for it to grow. Plus, given that this goal is so far into the future, you can also invest that money a little bit more aggressively right now, right? You're not like Nick our earlier caller. you know, you don't have to put this money in tips or in Ginny Mays or very conservative investments. You can put a portion of this into the stock market. Not all of it, but, you know, the part that you're not planning on tapping for 10 years, yeah, you could do that.

That brings up something interesting, Paula, because that money, if it isn't used in a different house, then can become money that you put toward financial independence. Oh, you're saying, she could save for a down payment, and then 10 years from now, if she decides that she wants to take the cash out refi approach, she still has that money saved anyway. It gives her great flexibility. It gives her fantastic flexibility. And different than we talked about with Nick, she's in something that historically over that longer time frame beats inflation. So she may, with the stock market having been horrible, and once again, we don't want to look into a crystal ball. But I think whenever the market is down and it was floundering and there's a

it's a great time to start this stuff. That's a wonderful approach. So she may be able to make the down payment. And if somehow there ends up being excess money, it gives her more flexibility. How great is that? Yeah. I didn't think about the fact that she could put that money in the stock market. See where I told Nick, don't do it.

Nick, I know you're hearing this and you're like, I'm going to, Nick, do not. This is for Susan only. Sit back down, Nick. Well, and in fairness, Susan will, you know, the money that she's planning on tapping in 10 years she can put into the stock market, but she's going to be on this graduated curve, right, this declining curve where she invests the money that she's saving today most aggressively, but then money that she sets aside will gradually be invested in more and more conservative investments over time, which again goes back to that bucket approach, right? Yeah. She'll have this down payment broken into. different buckets that are invested aggressively, semi-aggressively, moderately, semi-conservatively, and then very conservatively as we approach the 2030s.

So, Susan, that's your strategy. And again, I love that you're thinking about this right now. Long-term planning. That's how it happens. Magical. Well, thank you to everyone who's tuned in. Joe, we have done it again. I can't believe it's over already. That was some serious fun.

Serious fun. It was very fun. Joe, where can people find you if they want to hear more of your ideas? You will find me. I don't know about ideas. Let's not get to go too far. But you could find me at the Stacking Benjamin Show every Monday, Wednesday, Friday. And we have a great lineup of guests, Paula, coming up. We are talking to Kara Goucher, who's one of the top female distance runners who ran for Nike for a long time. She's talking. about professional sports and money. And you don't think about running, by the way. You think about, you know, tennis or football or golf. And she's going to talk about her, frankly, horrible experience

running for Nike. And we also have the former editor-in-chief of USA Today, Joanne Lipman, coming on the show. And we have Sean Hayes. Sean is a gentleman, Paula, who nearly, nearly had enough money to buy a professional hockey team. And then during the 2007-2008 crisis, everything collapsed around him. He didn't want to declare that he was a failure and that things had gone wrong. So he began cutting corners, which ultimately landed him in prison. And we talk about going from flying high to cutting corners to prison and what he learned during that entire debacle.

And he shares a lot of his mistakes so that people don't make the same mistakes. So that's all at the stacking Benjamin show coming up. Wow. What a lineup. Wow. Well, thank you so much, Joe. And thank you to everyone who tuned in. If you want the show notes, we've got timestamps of all the questions.

We've got resources that we've mentioned. You can subscribe for free. It's at afford anything.com slash show notes. If you want to chat about this episode with other members of the community, head to Afford Anything.com slash community. And as always, feel free to hit me up. I'm on Instagram at Paula P-A-U-L-A-P-A-N-T. Thank you so much for tuning in.

My name's Paula Pant. And I'm Joe Sal C-Hai. And we will catch you in the next episode. Don't do it, Nick. 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,

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