Afford Anything - Ask Paula: No, Really, I'm Asking for a Friend! -- How to Crush $500,000 in Debt

Episode Date: July 3, 2017

#84: This week, I tackle your questions with my good friend, recovering financial planner Joe Saul-Sehy. Here's what we answer: 1. I'm asking for a friend -- no, really, I'm asking for a friend! My friends are married and buried. They're a married couple, buried in $500,000 of debt. Some is federal student loans, some is private student loans, and some is credit card debt. They're paying the minimum on their student loans, with the hope that these loans will be forgiven after 25 years. They're also saving money in their retirement accounts. Is this a terrible plan? Should they stop saving for retirement while they wipe out their student loans? If so, how can I convince them? 2. My husband and I are both 30 and live in Ft. Collins, Colorado. We don't plan on having children. We know that long-term care insurance gets more expensive as you age. Should we buy this insurance now? Or can we self-insure for this through adequate retirement/investment funds? 3. I own my home free-and-clear, and I'm buying a second home. Should I take a cash-out refinance on my primary home? Get a conventional loan from the bank? Or something else? 4. My wife, 4 children and I live in the San Francisco Bay Area. We have $5,000 in credit card debt, which we've paid down from $30,000 in the last two years. We owe $20,000 on a minivan and $18,000 on student loans, both of which have 2-3 percent interest rates. We have two IRA's, one Traditional and one Roth. I also have about $20,000 in my company's non-matching 401(k). Should I focus my future investments on Traditional or Roth accounts? What accounts should I use when saving for my children's college funds? 5.  I'm curious about your own investments, Paula. What's under the hood? __ Thank you to everyone who left a comment after last week's show. I'll talk more about these amazing responses at the end of Episode 85 (next week's episode.) For now -- enjoy today's show! Thanks! Show notes can be found at http://affordanything.com/episode84 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything, but not everything. Every decision that you make is a trade-off against something else. If you pay one bill, you're not paying another. If you buy one thing, you're not buying something else. And that's true, by the way, not just of your money, but also your time, focus, energy, attention, and which podcasts you listen to. So thank you for choosing this one. My name's Paula Pant, host of the Afford Anything podcast.

Every other week, I answer questions that you, the listeners, have sent in. And this week, I am back on the air with my buddy Joe Saul Seahy from the Stacking Ben podcast to answer your questions. So let's kick off with this question. Hi, Paula, question for you. I'm asking for a friend. No, really, I'm asking for a friend. I have a friend who's married and combined they have $500,000 worth of debt. Some of it is federal student loans, some of it is private student loans, and some of it is credit card debt. They're convinced that they should still be contributing some money towards retirement while paying the minimums with hopes of the federal, loans, which is most of their loans being forgiven after 25 years of making minimum payments. I'm trying to convince them that they should just pay off the debt as soon as possible and then go to retirement funds and other things like that. But they're not convinced. I'm hoping you can give us a succinct answer that can convince them better than I can.

Thanks. I'm answering this for a friend. A friend wanted to answer? No, really. and I decided that I'd answer instead. You know, how are you, Paula? I'm great, Joe. How are you doing? Fantastic. And this is a great question to start this off with, isn't it?

I'll tell you, I don't think there's a right answer. I think that I can see both sides of this equation. I think on one side, the psychic energy that saps the life out of you over 25 years of paying a student loan. Are you kidding me? You just get rid of the thing, get it out of your mind. On the other side, for doing the math. You and I have had lots of discussions about math. If you're doing the math, the friends are correct because the math says invest money for the long term because that interest rate is so much lower on the student loans, probably.

And if it's not, refinance them to a lower rate. If it's not, then refinance them and keep going. But the math sides with the friends, sorry, but I don't think it's wrong for them to pay it off early either. Yeah, honestly, I side with the friend's decision when it comes to the student loans, particularly. the federal student loans because I'm presuming that those are at a relatively low interest rate, probably around 6.8%. And given that the unpaid balance of those loans will be – you're laughing at me, Joe, probably around 6.8%. Right. Probably around maybe 6.827%. That's when you know you've been podcasting about this stuff for a while.

Yeah, maybe. And so given the fact that those loans, the remaining balance on the loans will be forgiven, I don't think it's a terrible idea for them to proceed with the plan that they have, which is save money for retirement, prioritize making those investments and pay the minimums until the remaining balance can be forgiven. However, the credit card debt is a different issue. That they should wipe out immediately. Yeah. So when it comes to the credit card debt, I would absolutely encourage them to contribute to their retirement accounts only insofar as they get their employer match and then put every freaking penny. into getting those credit cards paid off as quickly as possible.

Credit card debt and student loan debt, I regard into very different umbrellas. There's another issue with the student loans that bothers me, which is if it's a large amount of student loans, you know, the cash flow that goes into paying those loans can make it difficult, can make it really tight on a family. So I don't know what their cash flow situation is, but that would be another reason that I might pay the student loans early. But I'm with you on the credit card debt. Yeah.

And, you know, and in fairness, I will modify my answer. a little bit to say that... Whoa. To say that the answer that I just gave only applies if, and this is the major if, if they would actually take the same amount of money that they would otherwise use for paying off their debt and invest that money instead. So, you know, if the question is pay off debt versus invest, then sure, there's a strong argument for investing.

But if it's a lot of times people fool themselves into thinking. that they're choosing between paying off debt versus investing, and they compartmentalize the fact that they're also going to restaurants, going on vacations, leasing cars or buying cars that are newer than they need. And so if your friend's lifestyle is really in any way, I don't want to say in any way luxurious because I don't want to sound like I want to force them into 25 years of a miserly terrible existence. But I think the point that I'm trying to make is a lot of times people, if they have a bill, such as a debt repayment, they force themselves to pay it because mentally they believe that they don't have any other option other than to pay it. But if something is optional, such as investing, then, you know, they put a little bit of money towards the investments. They make a token contribution and then they siphon the rest away into buying a 2015 model car when they could be buying. buying a 2005 instead. 2005, one of those boxers.

Is a boxer a type of car? Is that like a Porsche? A Porsche boxer? Oh, no, I'm thinking of the other one. Never mind. We can't even get rid of that. She doesn't know what the other one is. Yeah, yeah.

Yeah, no, box. Hey, yeah. A 2005 Porsche, how about that? You could buy a 2015 fairly new car or buy a 2005 Porsche. Same amount of money. Or a 2005 Honda Civic. That's what I would recommend. I drive an 08 Honda Civic because I'm a baller.

Of course. Do you know that the D1 song, I Ain't Got No car note? No. Isn't it called Car Note? No, I don't know that song. But there is this amazing song. You know what? I'm going to link to it in the show notes.

It's like I finished paying Sally Mayback, Mayback. That's the same guy. Yeah? It's the same guy. He has another song, I ain't got no car note. Ah, nice. Oh, the finished paying Sally Mayback is great. because then he flows that into rhyming with Maybach, or Mayback, the car.

Yeah. So, all right, making a note to link to that in a show notes. Very important. So I'm sorry, I feel bad because I feel like, you know, if there was a bet on the line, we just helped our amazing afford anything listener lose the bet. Yeah. But I mean, I think the broader point is that there's no one correct way to approach your finances. Like, fundamentally, this is a question of should I repay debt?

or invest, you know, and there are really strong arguments on both sides of this. You know, one of the strongest invest rather than repay debt arguments is that if the payment on a debt is fixed, in other words, if it's a fixed amount, then the payment on that debt will be paid in cheaper and cheaper dollars over time. Paying $1,000 in $2017 versus paying $1,000 in $27, you know, those are two very different things. And so that's one of the, the argument. as to why a person might want to invest rather than repay debt. But that being said, that's not the only reason. You know, I guess the point that I'm trying to make is that there are many factors that you want to consider, including the interest rate, the length of the note, the rate of inflation,

what your goals are, whether or not you're actually going to invest that money. Those are all of the factors that you've got to think about. You know what my mom always says, don't let perfect be the enemy of good. You're right. I mean, either one of those, fantastic. Like, you know, We're talking about doing something that moves the needle forward. Either one of those is fantastic. Absolutely. Awesome. Well, thank you for calling in with that question.

And I hope that was helpful, even though I don't think it was necessarily what you wanted to hear. Our next question comes from Yasha. Hey, Paula. This is Yasha calling from Fort Collins, Colorado. Absolutely love, love, love your show. Thanks for all you do. I have a question about long-term care insurance. So my husband and I are both 30 years old and probably don't plan on having children in the future. And I know that if you're going to get long-term care

insurance, it's usually most beneficial to start when you're younger, as the older you get, the more expensive it gets. So just thinking forward to the future, do you think that this is an essential purchase or that if you plan your retirement right and have a substantial enough amount of funds and retirement funds and investment accounts that you should be okay, I'm just wondering, you know, if there's really a benefit here or if I should just be focusing more on setting aside cash in general. I'd love to hear what you have to say. Thanks so much. Yesha, that's a great question. Long-term care, meaning long-term health care and long-term assistance with activities of daily living can be incredibly expensive, much more expensive

than anybody could reasonably pay for out of retirement savings, unless you're very, very wealthy. So I absolutely think that even if you're doing great in terms of planning for retirement, saving for retirement, there's still a definite benefit to having long-term care insurance just because I think of it almost like medical insurance. It's in that same category. It's something that is so expensive that you cannot reasonably self-insure for it. Joe, I know you've got a lot of thoughts on this. Yeah, and I love this question.

And I can't believe as young as she is that she's thinking about this already. It's phenomenal. Yeah. I did not expect this question. So I want to broaden this out because instead of asking the question, should I buy insurance, the first thing I always want to ask myself is, where's my risk? and how can I cover it? Because insurance agents want you to talk about insurance. That's their goal.

We want to talk about risk management, which means are there, and she gets this in the second part of her question, right? Should I set money aside? Are there other things that I can do? And there definitely are other things that you can do besides insurance. So the first thing that I look at when it comes to anything is, is a long-term care something that we should cover. Paula, you talked about how expensive it is.

let's talk about how many people actually use long-term care coverage. I think the statistic is that about 1 in 600 people will have an accident this year where they use their auto insurance, which is pretty big, where it's almost, I believe, one-third of that number, about 1 in 1,800. And these are off the top of my head, so excuse me, but they're going to be directionally correct, but the numbers might be slightly off. the chance of using your homeowners about one in 1800, meaning that guess which one of those is more important insurance, your car, yet really for most people, which one of those assets is more expensive. Of course, it's your house. But if I had to choose insurances, I would choose car insurance over homeowners insurance any day because of the risk of something happening. So the way that I conceptualize risk is that risk is equal to probability times magnitude.

So if the magnitude of something is sufficiently high, then if the probability is anything greater than zero, it is a risk worth considering. And vice versa. If the probability is sufficiently high, then even if the magnitude is smaller, then that's also a risk worth considering. The difference is if the probability is high but the magnitude is small, then it might be something that you can self-insure for, meaning that you can save up an emergency fund that would cover the cost of that thing happening. If, on the other hand, magnitude is high, but

probability is small, then it is not something you can self-insure for, meaning buying insurance would be a reasonable action to take. And the issue here with the car is that obviously a car is inexpensive enough. It's expensive, but it's inexpensive enough that there's probably people listening to the show that say, yeah, you know, I could skip the car insurance. Let's say that you could, right? Right, yeah. Let's say you drive a $4,000 car. Yeah, I'd, I'd, I'd skip the car insurance that I can I can go ahead and buy a different one. The issue is, you know, the other driver, the threat of lawsuit, the, which that brings the magnitude much higher. And then the other piece is the probability is so high that something's going to happen to you there that, that, you know, you just get done buying one car. Maybe it happens again. Yeah. So the chance using, the chance using long term care. Let's just cut to the chase. Okay. Between one and two, one and three. Seriously? Yes. And, dude. Yes. Of the people 65 and older today, it's between one and two and one and three. The issue is it's about $90,000 a year. That is very regional. That number is going to be all over the place. And this is custodial care that's not covered by your health insurance. Wait a minute. Joe, time out. When you say $90,000 a year, you mean that's the average cost of long term care?

That's the average cost of the care that you're getting. Right. Yeah. So magnitude is high. It's not something that you could reasonably plan for within normal or time and savings. And the average person uses it for two and a half years. And by the way, sadly, it's not that they go home, right? It's that they're done. So I'm looking at $225,000 in today's dollars that comes out of your portfolio if you're going to set money aside. So what I have to look at, back when I was a financial planner, I'd have to say, okay, we're going to set $225,000 off to the side. That money I can't use for anything else. That's my self-insurance. And then it has to grow at the same rate as the cost of long-term care costs have been going up. And they've been going up so fast that since I got out of the business of being a financial planner, a ton of insurance companies have gotten out of the

business. And the ones that haven't gotten out of the business have done something that they hadn't done the 16 years that I was in the business, which is raise rates exponentially. Meaning, you're going along. You bought this policy when you're in your 30s like she's talking about doing. And all of a sudden your rate goes up by 60%. And let's say that you're 65 when that happens and now you're on a fixed income and your rate goes up by 60%. You know what's sad, Paul? You know what people do? They cancel it.

And yet the probability is much higher after 65 of using it than it was before and they cancel it because then it's too expensive. The reason it's expensive is because insurance companies think it's going to happen to you. So I definitely think that for the vast majority people listening that they have a plan that includes long-term care insurance. here's some things I like that makes it less expensive. Number one, buy a policy if you are a couple, there's a much higher chance that it will happen to one of you than both of you. So buy a single policy that will cover both. Or we'll cover both.

Let's say that you buy a policy that covers four years. We'll cover both people in the couple. And then if one person uses two and a half years, the other person stills a year and a half left that they can use. Maybe you do something like that. That will reduce the cost. Also, because you can handle three months, six months, nine months, maybe even in a facility, make it so that the deductible period, the elimination period, before it starts paying, is pretty long. Like, you know, self-insure for those short-term times and you might go into rehab or go to a long-term care facility because you broke a hip and just need some help for a while. take all those off the table with your own money, and that will also reduce the cost. Right.

And you can do that with disability insurance as well. Long-term disability insurance versus short-term. You can defray some of the cost of that by extending out the elimination period. So you're self-insuring for short-term and keeping the insurance in place for long-term. I can show her the math that shows that buying it now is probably cheaper than buying it in her 50s. But I would tell her, I probably wouldn't do it. I probably wouldn't do it until she's in her 50s. And the reason is that she said they probably won't have kids.

What if that changes? And now you've got this. And long-term care isn't inexpensive to buy already. The cost even in her 30s is going to be astronomical. So that monthly outlay or yearly outlay of cash versus other things that she can do while she's young, where the probability is she's going to use it far in the future, it's probably going to cost more over her lifetime as she waits until she's in her 50s. But I think I'd do other things with the money now. I don't think I'd prioritize long-term care over other goals.

So where, what other priorities would you recommend? Would it be investing that money in a traditional retirement account? And by traditional, I mean in a conventional. I don't mean literally in a trad. Yeah, or things that she was going to do today, you know, I mean, if she's got, let's say they've got trips that they want to take, they've got expensive travel, they've got, they want to buy a second home, they've got all these other things and instead they're going to buy long-term care insurance.

I mean, I don't know what her goals are. You would prioritize discretion. spending over? Absolutely. Okay. Interesting. I totally would. So that is a strong deferral recommendation.

I'm going to get hate mail on that. But, well, you know, when I see the big gurus out there, the Susie Ormond's and those people, they all say to buy it in your 50s. And I'm down with that. When you get into your 60s, sometimes you'll have health concerns that pop up. I'll give an example. My father-in-law was one of my best friends when he was alive. He did not want to talk about long-term. care, wanted nothing to do with it. I was his financial planner. He wanted nothing to do with it at all.

When he was diagnosed with Parkinson's, one of the very first calls he made. Because Parkinson's just disables you. You can live a long time with Parkinson's, but the chance that you're going to need help is much bigger. And he called me and he said, hey, that long-term care. No, you can't get it now. Wow. It's going to be very cost prohibitive to try to get it later. So that's why you do it in your 50s. versus doing it later. And, you know, some people are going to write to you, Paula, and say, yeah, but I could get, have problems in my 30s, my 40s, my 50s. Yeah, maybe. At some point, you're rolling the dice with insurance, right? I would roll the dice into your 50s. All right. Well, we will leave it at that. Thank you for asking that question, Yesha. I'm really glad that you're thinking about this and that

you're bringing this conversation to light because insurance is one of those topics that people don't often like to discuss, but it's so critical to planning a healthy financial future. It's amazing. And for me, that's the ugliest one of all. That is the ugliest one by far. We'll return to the show in just a second, but I want to chat about food waste. First of all, you know that thing where you need to cook a meal, like let's say you want to try a new recipe, and it requires white vinegar or it requires butter. And you don't have any. So you go to the store to grab some, but then you end up with this entire freaking bottle of vinegar. that you're never going to use again or you're rarely going to use, and then it just sits in your fridge forever and ever and ever and you eventually throw it away. Or ditto with the butter. It's like if you normally used it, you'd have it.

The fact that you're specifically buying all of this just for one meal, that's an indicator that you're probably going to end up throwing the rest of it away. That sucks. And that's one of the things that I like about Blue Apron. Blue Apron, they're a sponsor of this show, and they're a service that sends ingredients and recipes to your home so that you can make home-cooked meals, and they send the exact quantities that you need so that you don't end up with any additional waste. You don't buy an entire jar of yellow curry just so you can make a yellow curry dish one night,

and then six months later you end up throwing the rest of the jar of curry paste away. you get to avoid all of that food waste by virtue of using a service like Blue Apron that sends only the amount that you need and nothing more. And so that's one of the things that I like about it. Other things I like about Blue Apron include the fact that it kind of turns into a little bit of a cooking class because you get to try all of these different recipes that you normally wouldn't. And it makes home cooking more accessible because you don't have to spend all of this time going to, to the grocery store, inventorying your pantry. You don't have to spend all of this time thinking about what to make and then planning out

those meals and then shopping for those meals. You get to cut to the chase and just start cooking those meals at home. They have partnerships with over 150 local farms and fisheries. Their seafood is sustainably sourced. Their meat comes from responsibly raised animals. The produce is sourced from farms that practice regenerative farming. Some of the upcoming meals that they've got include a smoked trout and asparagus salad, zucchini enchiladas, vegetable toastadas with summer squash. So they send you really healthy, responsibly sourced, sustainable ingredients.

If you want to give them a try, you can get three meals free, including free shipping by going to blue apron.com slash afford. That's three free meals. including free shipping by going to blue apron.com slash afford a F-F-O-R-D. My inbox gets really overloaded. I get a lot of emails. And no matter how much time I spend there, number one, I can never keep up. Like, no matter how much I try to sort through my inbox, new stuff comes in faster than I can make sense of it. And number two, the emails that are actually important end up getting lost under all of the clutter and noise of the stuff that's not important. And that's why I was really happy to bring SaneBox on as one of the new sponsors of

this show. SaneBox is a service that prioritizes your inbox. It sorts things into inbox, which are the emails that you have to actually look at now versus Sane later, the emails that can wait. It basically makes sense of your inbox for you. It's almost like having an assistant who does a first pass of your inbox. The basic plan for SaneBox starts at only seven bucks a month. But if you want to give them a try for free, you get a free trial. And on top of that, you also get a $25 credit if you go to Sanebox.com slash Paula. That's Sanebox.com slash P-A-U-L-A.

Give them a try. I mean, what do you have to lose? Go check them out for free. Get the free $25 credit. And then see if they offer the value that you need. See if they are making your email experience more pleasant. So sanebox, s-a-n-b-o-x.com slash p-a-u-l-a. Our next question comes from Dustin. Hi, Paula. This is Dustin calling from the San Francisco Bay Area where it is impossibly expensive to live. But it is home and we don't plan on changing that anytime soon. By we, I mean me, my wife, and my four kids, a seven-year-old, a five-year-old, and twin daughters that are almost two.

My wife and I have an adjusted gross income of about $165,000 that does have the potential to increase either by her going back to work full-time, in which case it'll increase by $40K. and my income seems to increase $10,000 to $30,000 per year because I'm in sales, and part of my compensation is residual commissions. So I'm looking to maximize that so I can accelerate my savings. In terms of debts, we have about $5,000 in credit card debt, that our number one priority is to get that paid off. We've paid it down from 30 over the last two years, so hopefully that will be paid off pretty soon.

We have a new minivan that we bought when we found out we have, having twins and we owe about 20k on that at 3% interest. We have $18,000 student loan at about 2% interest. So don't mind having those around, given the low interest rate in regards to starting to build up our savings. In terms of savings, I have two IRAs, one traditional, one Roth, both of which hold variable annuities in them. I regret owning those because of the high fees, but I bought them out of a state of fear during the last financial crisis because they were guaranteed not to lose money.

I also have a Vanguard traditional IRA with about $5,000 in it and about $20,000 in my company's 401K. My company does not match in their 401K. And in reading in your last newsletter, I should prioritize contributing to Roth IRAs rather than not getting a match for my current 401K. But my 401k does offer the option to contribute via a Roth or traditional pretext. So I'm wondering what the advantages are in doing all Roth or keeping the current traditional contributions. I'm reading that Ross are a lot more flexible and I can use part of that for college, which is one of our savings goals. So if you were me, would you contribute all towards a Roth 401K as well as my Roth IRAs? or should I leverage that income tax deduction?

Also, my wife and I would love to have rental income to supplement our retirement. Please advise on where you think we should be financially before we even think about buying rental property. Thanks so much, Paula. Looking forward to hearing your reply. Take care. Keep up the good work. All right, Dustin, first of all, congratulations on paying off that credit card debt down from $30,000 to $5,000 in two years. Bam!

Dude, that is unbelievable. Fist bump. Yeah. Yeah. Come on. Yeah. I'm high-fiving you across the airwaves right now. That's so exciting.

Yeah. So awesome job. You're doing great on that. My number one priority, the number one thing that I want to see you do is knock out that the rest of that. Just knock out the other $5,000, get the credit cards down to zero. And I'm with Dustin, those, you know, the minivan loan, which I'm going to want to address the minivan here in a second. As a from one dad with twins to another, Dustin, because I did the minivan. And you have twins, Joe, right?

Yeah. Tell the world what you have. I have 21-year-old twins, and I drove the minivan. And I heard from a lot of people that driving a minivan when you're a dude proves to women that you are a guy that can reproduce. Joe, that's what I think of every time I think of you. He seems like a guy who shouldn't reproduce. That, Joe, he sure is fertile. Yeah, fertile dude.

But yeah, women, guys, if you're listening to this and you're worried about driving the minivan, women love it. Just FYI. Just keep that in your head. Joe, I always knew you were a ladies magnet. That's exactly it. Luckily, at least for one, for one woman. That's all I needed. That was good.

Yes. And she loves me, so that's good for me. But anyway, you know what I'm talking about the minivan. You know what I'd like to, and I know that he wants us to address other stuff. Here's what I would do, Dustin. Based on what I think your cash flow has to be with four kids and the debt, the student loan, the minivan, living in San Francisco like you were talking about the Bay Area, cash flow has got to be a little tight. So I'm worried, Paula, about the next minivan. And what I'd like to see him do is to create a next minivan fun so that he gets out in front of his cars.

And instead of buying new cars, he's able to pay cash for, you. used cars from here on out. If he's always building a fund to himself, it's like an extra payment that's this car fund, now he's going to get rid of paying 3% to anybody and the money stays in his pocket. Exactly. So I refer to that as making a car payment to yourself. What you do is you estimate how far into the future am I most likely going to want to buy my next vehicle? Like let's say it's five years from now or 10 years from now. Let's say it's 10 years. All right, that's 120 months. and you want to spend, say, $12,000 on your next vehicle, 120 months from now, boom, you know you've got to save $100 a month.

And you open a savings account or since it's 10 years out, you could actually put this in a bond fund or some kind of very conservative index fund. And you just shovel $100 a month a month in there. And you treat it like a bill. You make a car payment to yourself. So I think that's excellent advice. But I'm also with you, Dustin, on when you mentioned that both the three, 3% loan on the minivan and the 2% loan on the student loans are not huge concerns of yours.

I completely agree with that. Those are interest rates that are at or below historic inflation rates. So, you know, make the minimum payment, but don't spin your wheels. No pun intended. About, oh, come on. You so should have intended that one. Okay. Sure.

Pun intended. Don't stress yourself out about trying to pay those off. You've got a great interest rate on those and there are other priorities like building up bigger cash reserves, building up an emergency fund, saving for future major purchases. Those are some of the things that I would prioritize. I don't like using the Roth IRA. Listen to how old guy mad I sound when I say that. I don't like using the Roth IRA as a college savings fund. And I understand I get, Dustin, that you can take it out for college if you want to.

But here's the thing it always happens. You commingle your retirement money with your college money. This is kind of like my brother. My brother was always the kid growing up, Paula, that didn't like any of his different things on the plate to touch, right? He didn't like his vegetable to touch the meat to touch the potatoes. There had to be clear lines. If one P got over there in the potatoes, my brother was done. Wow.

He would have starved if he was Nepalese. I mean, Nepali's food is all, you mash it all together. Yeah. See, but that's more me, but not with your investments because what happens is

that Junior decides to go to a better college than you had expected. You think, it's just a little bit more money for college and you end up making the biggest mistake that people make, which is they prioritize college

over retirement, and they take too much money out of the Roth for college, which you could have done 50 other things to get a kid through college, and you've got too little money for yourself for retirement. So if you're going to do Roth IRA for college, I would have it be a separate fund. But, you know, 529 plan, baby. Yeah. That's where I'm in.

Exactly. A 529 plan or a Coverdell ESA, I would do one of those two and have that clear delineation. And the reason, by the way, for anybody who's wondering why Joe and I both agree that retirement should take a higher priority than college savings is because, frankly, Your kids can take out student loans. You cannot take out a retirement loan. Which is such a bummer. There's got to be a law. And so, you know, to state it simply and to be brutally, frank, your kids have time on their side.

You know, when somebody is 18, 19, 20, 21, 22 years old, like they've got the rest of their lives ahead of them. You at the age of retirement do not, unfortunately. I hate to be so blunt about it. but they have more options and they have more time on their side. You as a 65-year-old, when you are that age, you won't. And so that's why retirement needs to take higher priority. And think of it this way. One of the greatest gifts that you can give to your kids is the reassurance of knowing

that they're not going to have to take care of mom and dad when they're adults. You know what I mean? Like imagine the stress that an adult child in their 20s or 30s, 30s or 40s feels when they realize that their parent has no retirement plan or not enough of a retirement plan. And then the kid is thinking about how am I going to not only support a family, how am I not only going to support my children, but how am I also going to support my parents? You know, when the adult is sandwiched in between taking care of two generations that they have to support. That's so funny you say that. That goes back to the long-term care question.

The thing that always drove me nuts. And by the way, you won't. believe how many people tell you this when you're a financial planner. They say, well, I understand what you're saying about the cost of long-term care of me, but I think that my kids will just take care of me. My kids will take care of me when I'm older. And that was always my first thought. I'm like, maybe they will. And I would certainly take care of my mom, right? I'm certainly going to do it. She lets this podcast out of the basement, so I better. But I also think, do you want to force your kids to do that? Like, really? Isn't that kind of selfish to force your kids? No, I'm staying at your house, oh, crap. It's just not, I don't know, it just seems very selfish.

Yeah, you know, one thing, about a year ago, we had a podcast interview with a woman named Evelyn Connors. One of the things that we discussed was she thought that she was doing well financially because she always paid her bills on time. And it wasn't until she reached her 30s that she realized paying your bills on time does not necessarily mean that you're doing well. You know, because she had credit card debt. She did not have any retirement savings. And it wasn't until she reached her 30s that she realized, oh, that is actually part of the bigger picture of financial health. And I asked her during the interview. I was like, well, didn't you ever imagine yourself at the age of 70? How did you think that you would support yourself?

Her answer really stuck with me. She said, you know, honestly. I always kind of figured that I would get married and my husband would take care of that. She was like, I'm sorry, but that's just my honest answer. And in the way, and so what I told her, I was like, oh, have you ever heard the expression, a man is not a plan? Which is true. You know, a man is not a plan. And that's what I'm flashing back to now with this whole, I guess we're going off on a little bit of a tangent, but this whole idea of, oh, my kids will take care of me when I'm old. whether it's retirement or long-term care or whatever, your kids are also not a plan.

It doesn't have the same rhyme. But, you know, it's true. It's equally true. Kids are not a skids. I don't know. Kids are not a, I got to find something rhymes with kids. Yeah. Children or not children. You can't rhyme with children.

No, nothing rhymes with children. Who can rhyme with children? Maybe if you have a kid whose name rhymes with man, like if you have a kid named Sam. Or Dan or Dan, Dan, Dan, yeah, Dan is not a plan. Dan's Dan, Stan's not a plan. Stan's not a, yeah. Right. There it is. Name your kid Stan and you're good. That's the lesson here that we all need to take away from this amazing afford-any thing episode.

All right. So you want to address the elephant in the room, though? The other portion of Dustin's question, which is essentially it boils down to should I save money in Roth accounts versus pre-tax traditional accounts. There it is. Dustin, I say because you're young and you've got time on your side and your goal doesn't appear to be imminent early retirement. From what I'm understanding of your situation, I imagine that you'll be in the workforce for a number of decades into the future. I would prioritize Roth accounts. However, I agree with Joe. I would not use those Roth accounts for any purpose other than retirement. So I wouldn't plan on withdrawing the principal from the Roth accounts in order to spend it on. college or any other purpose. Leave the principal intact, keep the money in there, and use it for its intended purpose, which is retirement. And if you think, and here's where the behavioral aspect comes in, if you think that having money in a Roth IRA might tempt you to withdraw the principal portion of it, because of course you can do that without penalty, if you think that you'll be, you might succumb to that temptation, then there's an argument for putting it into a

trad IRA account just so you won't have that temptation. In other words, to protect yourself from yourself. To-da. Joe, do you agree? I totally agree. That was amazing. Thank you. You can't see me right now, but I'm taking a bow. And you should. Very well put. Thanks for the question, Dustin. And remember, many vans are awesome. Us guys with twins, we got to stick together, Paula. Yeah. Joe, I think I knew you for years before I ever knew that you had twins. How about that? And I keep it hidden. Well, your body has bounced back. I don't see it at all.

You would never know. I would never have guessed. Miracle of science right there. Right. And my daughter just graduated from the University of Arkansas. And she has a job, Paula. What's that all about? Oh, congratulations.

I know. My son, everybody's wondering. They're like, okay, why is he not talking about his son? So I'll talk about my son too. He is in engineering. So we finally talked him into slowing down because the grade point average, you know, engineering is tough. I don't know if you know that. But the grade point average was, eh, okay.

And just slow down and get focused. So December he'll be graduating from UT. Nice. We're getting two pay raises. We got one just now and we'll get another one in December. I'm most excited about that. Nice. That's awesome.

Yes. So if anybody's looking for an engineer to work for their company, Joe at stacking benjamins.com, please. Please, my son needs job. Yes. And for that matter, so do I. All right. Our next question comes from Adalia.

Hey, Paula, this is Adelia. I had a quick question. I'm not sure if you feel comfortable sharing this, but I'm curious about your investments, like in stocks and index funds, if you would mind sharing your allocation. And I know you said you were 100% equities or very close to that, but I'm curious as to, is it just a total U.S. stock market? Do you have an international index in there? Thanks. That's an awesome question.

I would be happy to share that. So first of all, yes, I did move recently. I moved to an all equities portfolio. However, that totally falls into the bucket of things that I myself do that I would not necessarily recommend for other people. I move to all equities for a couple of reasons. Number one, I'm 33 years old. I have what I know to be a fairly high risk tolerance. And I know that because we've like the rest of us, we've all survived the Great Recession. So I was able to observe my behavior when the market's dropped in half. And I can tell you from experience that when the market's dropped in half, I was like, yeah, why don't I make more money so I could buy more? My biggest frustration was that in 2009, I couldn't just go on a buying spree because I didn't have the cash. So I know from past behavior that I can withstand those downfalls. Also, I'm lazy and I don't really check my balances very much, which makes volatility easier to withstand because you don't panic about volatility when you don't see it.

And you don't see it if you just ostrich out of sight, out of mind, which is great for me because that's one less thing I've got to do. So my point is I'm young, I have a high risk tolerance, and I have kind of a barbell strategy, really, in the sense that I have huge cash reserves. I've got bigger, I've got more cash than I need. I know I've got more cash than Joe or probably any other financial advisor or recovering financial advisor would ever recommend. So because I keep so much cash laying around, I feel very comfortable putting anything that I've invested. into all equities. Now, that being said, to directly answer your question, I have approximately a one-third, one-third, one-third split with Vanguard, Vanguard, Total Stock Market Index Fund, Vanguard Smallcaps, and Vanguard International. So total U.S. stock market, total international, and the total world of small caps, U.S. small caps. And I say approximately one-third because, you know, I rebalance once a year-ish, really when I get around to it. I don't hold myself to a major rebalancing schedule.

And part of the way that I rebalance is just through additional contributions. So rather than sell off some holdings in order to buy others, if I notice that I'm going low in one of those three buckets, new contributions will just fall into the lower bucket. My plan is more art than science, I suppose you should say, in the regard that I don't treat it. with the strictness that an accountant would, I just kind of generally make sure that my three buckets are approximately in line, and I'm happy with that. Nice. Yeah. Oh, and I should also add that I hold some of my money in Schwab, mostly just because I opened the Schwab account a long time ago, and its fees are as low as vanguards, and I'm

too lazy to consolidate them all into one brokerage. So, you know, the Schwab holdings are roughly the same as the Vanguard ones in terms of asset allocation. And I've used the Schwab-branded ETSs in order to approximate what I have with Vanguard. Yeah, my portfolio also is more aggressive than it would be for the average person. And I know she didn't ask me. That's fine. Whatever. But I'm going to answer partially anyway.

And I'll keep it short. But my portfolio is also more aggressive than I would have recommended for somebody my age. But it's partly because I look at it all the time, number one, and number two. two, when I do look at it, I have the opposite reaction that the average client I had had. Mine is always to leave it alone. But when the market goes down, I'm like you. I want to add more and I want it to be aggressive. You know, and I've done the science on high beta and also high standard deviation.

And I like to live there. So my international portion of my portfolio skewed more toward emerging markets. And I have skewed them toward emerging markets that I like, like countries that I like. like, I do that and I tell other people not to do that. What countries? You know, I really, I'm a big fan of Southeast Asia. I think that for my time frame, like Southeast Asia, the amount of growth that we're going to see there is phenomenal. I'm very geek.

So when you get my portfolio, you're going to see a major skew in my international stuff, which is Southeast Asian markets. The other thing I do more of than a lot of people is individual stocks. you know, even though it's probably only about 10% of my portfolio. Once again, I'm in there. I look at it individual stocks, I think you have to weed a little bit. And you have to be willing to sell your losers fairly quickly if you're going to be in individual stocks. Like, I think that buy and hold is a great thing to do.

But if a company's got horrible management, you can't sit around because you don't have a manager to fire them. You don't have an index. You've got to be willing to fire those people. And I've become better at that over the years. I found that because I started doing that fairly young, like my portfolio strategy gets more and more tweaked and better and better. And I'm much more disciplined than I was when I was younger. So that's me.

It amazes me that up to 10% of your portfolio is individual stocks, that sounds high to me. Yeah. No, that's high for a lot of people. I probably wouldn't even told my clients to do 10% of visual stocks. But it's what I do. And I have a rental house. So I didn't know that. I don't think I knew that you had a rental house.

How about that, huh? Wow. Cool. Oh, you know, one other thing that I will add about myself is that I have a small portion of my portfolio. I haven't calculated it, but I would estimate it's certainly less than 5%, probably less than 3%, that I've just put in whatever the F. It's just so that's my fun money. That's like if I get a wild hair and I really want to invest in, for example, an emerging markets fund or a country-specific fund or individual stocks, I have a very, very small portion of my portfolio that literally is money that I look at and I'm like, well, I could throw this into a flaming trash fire or I could invest it in a couple individual stocks. I actually am doing that with some of the cool new ETFs that are out there.

I've got on record across the board that the buzz index is something I invest in. Like if you listen to the Money Tree podcast that I am a part of, like I have to disclose that all the time. So people know that. I mean, it's a crazy fun thing. It is very short-term track record. We don't know, you know, what's going to happen with that type of ETF. But I find it fascinating. So I put a little money where my mouth is.

And that's totally what you're talking about. just crazy, crazy fun and good stuff. I kind of think of it as, you know, if you're on a diet or some type of a eating plan, I kind of think of that as having it a cheat day. So, you know, I'm able to contain the majority of my portfolio by having a little cheat day flaming trash fire contingent of it. But you know, I do like having themes. If I know what I'm looking at, I like having themes that I believe in.

Like, you know, international being skewed to Southeast Asia. It's an investment. There's a little emotion there, but it's backed by a ton of data that says to me that if you're super aggressive, that's a great place to be if you're international. So I like having a portfolio that when I turn it on are things that make me, make me smile and want to invest more money in them. That when you turn it on, it turns you on? Yeah, baby.

That's so bad. Because did I tell you about the minivan? I don't know if I said that. Yes. And on that note, we'll head to our final question, which comes from Anonymous. Hi, Paula. This is Anonymous again from Orlando, Florida. Thank you for having my question on the air.

Really appreciate the insight. we are going to be moving forward with purchasing a home, and in thinking about how to finance it, I was wondering if you think it's a good idea to do a cash out refinance or a home equity loan on my current property that's already all paid off versus taking out a traditional mortgage. I was trying to research and find out the difference

between the two or really the three, but it's not entirely clear for me, and I feel like this would be a great question to have some insight on. Thank you so much. Bye. Well, my first question is, where are you going to get the better interest rate? Are you going to get a better rate with a cash out refi or are you going to get a better rate with whatever type of conventional financing a bank would give you?

And the better interest rate she gets, Paula, is the house that she's going to live in. And I don't think I was in on the last discussion that you had about moving. But if Anonymous is going to live in the new house, then do the loan on that house. If you're going to live in the old house, and this is a rental property, do the loan through the existing house that you're going to continue to live in because banks will give you a lower interest rate on the house that you're going to live in versus a rental property or second home. Exactly, exactly.

If you cash out refi your primary residence, then you'll most likely get a better interest rate on the cash out refi of a primary residence as compared to the interest rate that you would get on an investment property or even on a second home? I don't think that I do the home equity line of credit because it encourages bad, bad, horrible habits. Home equity line of credit, the way that you pay those is different than the way that you pay your mortgage. You can make much smaller payments if you want to.

So I found when I was a financial planner that people would keep balances on their home equity line of credit because, hey, it's tax deductible. But it still is debt and it becomes debt without a plan. If you do a refinance that has a 30-year time frame, you've got a plan, you can then create a plan to pay that down quicker if you want to. I like having a march toward the exit. Home equity line of credit doesn't have to have a march toward the exit. So I just wouldn't go that way. Yeah.

Yeah, I'm not a huge fan of Helox either. I mean, regardless of whether you cash out refi a property versus take out a loan on a property, either way, that loan is secured by the property. I mean, six of one, half a dozen of the other, I don't think there's a big difference between the two. And it would just all boil down to which one is going to get you the better interest rate. And a conversation with a banker can pretty much answer that one pretty quickly. Yeah. Did we do it? Did we just do it?

I think we did, Joe. Holy cow. That was so fun. We made it another week. The audience survived. Cool. Thanks for listening to the show. Thanks for sticking around to the end.

So I'm recording this outro section the day before the episode airs. I'm in a McDonald's parking lot somewhere in Pennsylvania. I'm not totally sure where I am. I think I'm in the part of Pennsylvania that's like close to Maryland or maybe West Virginia. I have no clue where I am right now. So I just won an eBay bid for a camper. I wasn't really expecting to win it because it was like a low ball bid. But I won it.

And so all of a sudden with like an hours advance notice, I made the drive from Nevada. out to West Virginia and back, because hashtag things you do when you don't have a job. If you want to check out the pictures, Instagram.com slash Paula Pan, where you can see the absolute, like, nuttiness of my life. So, anyway, thank you so much for sticking around to the end. And thank you to all of you who sent comments after the last episode, after episode 83. I got so many thoughtful, like, intelligent, positive, just really amazing comments. from comments on the show notes and through Instagram and Facebook and just I was overwhelmed by the outpouring.

So I'm going to talk about that in more depth in the outro to next week's episode. So at the end of episode 85, I will read many of the comments that I received and I'll just talk about it more in depth. So that's ahead in episode 80, at the end of episode 85. For now, I just wanted to say thank you to all of you. I'll catch you next week. Thank you.