Ask Paula: Should I Choose This or That? How to Weigh the Tradeoffs
00:00You can afford anything but not everything.Every decision that you make is a trade-off against something else,and that doesn't just apply to your money.That applies to your time, your focus, your energy, your attention.It applies to anything in your life that's a scarce or limited resource.And that leads to two questions.Number one, what matters most to you?Number two, how do you align your daily decisions in a way that reflects that?
00:33Answering these two questions is a lifetime practice,and that is what this podcast is here to explore.My name is Paula Pan. I'm the host of the Afford Anything podcast.Normally, we are a weekly show.We air every Monday morning, but once a month, on the first Friday of the month,we air a first Friday bonus episode.Welcome to the November 2019, First Friday bonus episode.Here's what we're going to cover today.
00:56Connor is 27, make six figures, debt-free,and wants to reach financial independence so that he can start his own company.His employer doesn't offer a 401k match,so right now he's not contributing to a 401k. Should he be? Meanwhile, Caroline is wondering,should she aggressively pay off her home and her rental properties, or should she use her savingsin other ways? Elizabeth wants to know, how much of your net worth is it okay to keep tied up in equity?Brea wants to take a second mini-retirement and has $100,000 saved up. Where should she keep this money?Anonymous is moving from Southern California to Florida and is wondering,
01:34should she buy a primary residence or should she rent and buy a rental property?Finally, Marie wants to start her own business, but she's living paycheck to paycheck.What are her next steps?We answer all of these questions right now, starting with Connor.Hi, Paula. I love your show and I have some questions about contributing to a 401k.I'm 27 years old and I'm debt-free.I work as a software engineer in Boulder, Colorado, and I make $140,000 a year.I've been saving roughly 60% of my income over the past six months since I discovered
02:09FI, and I recently purchased my first investment property that cash flows about $300 a month.I also invest about $500 a month into S&P 500 index funds or ETFs in Robin Hood.I've contributed to a 401k in the past in order to get the company match.However, my current employer is smaller and does not provide a match, so I no longer contribute.I do max out my HSA, though.My goal is to purchase more rental property within the next few years to cover my own rents and then some, after which I plan on starting my own software company.Part of me doesn't like the idea of locking up my money in a 401k because I know I'll reach FI far before traditional retirement age.I'd rather take that money and buy real estate with it.
02:54What are your thoughts on this strategy?Does real estate provide any tax advantages similar to a 401k?Should I cut back on the real estate savings a bit and contribute a smaller?portion to a 401k. Should I ditch the taxable Robin Hood account and figure out this wholebackdoor Roth conversion thing? Thanks again. Love your show. Connor, first of all,congratulations on being in such a strong position. You're 27, you're debt free, you make $140,000 ayear. You're saving 60% of your income. I mean, wow, you're in a great spot. So congratulationson being in that good spot and on having a plan for how to optimize it and how to make the most
03:31of it. It's one thing to be in a good spot in the present moment, but it's another thing entirelyto be in a good spot and then proactively take steps to secure it. And that's exactly whatyou're doing by saving 60% of your income and putting yourself on the road to financial independence.So congratulations. So to borrow a phrase that my good friend, former financial planner,Joe Saul Seahy, often says, let's start with the end in mind. In your case, the reason that youare pursuing financial independence, and correct me if I'm wrong,But from what I understand, the reason that you're pursuing it is so that you can have a stream of income, a reasonably reliable stream of income that will cover your basic expenses so that you can then start your own software company.And so because that's the goal, I would bias your investments towards the types of investments that will provide cash flow and the types of investments that will provide an income stream because that's specifically your investment.
04:31goal. And let me, for the sake of the whole audience, I'm going to pull back a little andcontextualize what I mean. So when a person invests, there are different types of investmentgoals that they can optimize for. Now, I'm not talking about risk tolerance. I'm talking aboutthe way in which you want your money to make money. So there are some people, for example,whose goal is to grow their net worth and their goal is to reach a particular net worth, a givennumber. And when they reach this number, perhaps nothing in their life will change. They don'tplan on quitting their job. They don't plan on making any drastic changes to their life.But they would feel more secure. They would sleep better at night knowing that they had a
05:14portfolio that reached their particular target goal size, right? That is one variant of thejourney to financial independence. And that particular path, that particular goal and themotivation and the end that you have in mind for a person on that track is totally differentthan Connor, a person on your track who wants to create essentially an income safety netso that you can cover your bills while you're starting a company. So in your case,your aspiration isn't portfolio size. Your aspiration is cash flow and passive income. So let'soptimize for that. And by the way, to that end, I'll note that at the very end of your question,what you asked was, does owning real estate provide tax advantages like a 401K?
06:01Now, the literal face value answer to that question is, yes, owning real estate does offer taxadvantages. They're not the same tax advantages as investing in a 401k, but owning real estate,investment real estate, does offer several tax advantages. Let's contextualize the question a little bit.You've asked about tax advantages. I would offer the suggestion that that's not the question.to be asking for because that's not the goal that you're trying to optimize towards.Your objective is not, let's construct the most tax advantageous portfolio.Your objective is let's construct a portfolio that will give me cash flow in the form of passiveincome as quickly as possible so that I can start my own company.
06:45And so again, when you start with that incredibly clear objective, that specific narrowobjective, then that's the barometer against which all decisions get measured against.By contrast, there are people who try to, well, essentially there are people who don't knowwhat they want, and so they try to optimize for a little bit of everything.They try to optimize for tax advantages, but also for cash flow, but also for appreciation.And what that means is that they don't actually have a strategy.This is a very quick tangent.I often hear people say the following.
07:21phrase, and this phrase is such a red flag, they will say, oh, I'm thinking about buying a house,and I'll live in it for a little while, and then I'll rent it out, and then maybe it'll go up invalue. And what they are communicating in that statement is that they do not have a strategy,because the criteria for a house that is enjoyable as a personal residence is different than thefor a house that has a great cap rate and great cash flow as a rental property, and both ofthose are different from a house that you speculate is best positioned to take optimum advantageof market appreciation, right? Those are three separate types of houses that we're talking about,or three separate criteria for selecting a house. And when a person tries to select one house
08:05with the hope that that house will meet all of those criteria, what ends up happening?The house does none of those well. It's kind of sucky as a personal residence and doesn't really dothat well as a rental, and then they sell it and it doesn't really go up and value that much either.And then they get frustrated and they throw their hands up and they say, eh, real estate isnot for me. Well, of course it's not. You went in without a strategy. So, all right, that tangentaside, when you are designing an investment portfolio, remember that analogy as a cautionarytale and think along those same lines. Yes, in a perfect world, we all want tax advantages andcapital appreciation and an income stream, but which of those factors, which one singular factor
08:54outweighs the others as the decision maker? That is the question. And based on your goal,I would say any type of investment that provides an income stream. So rental properties are greatbecause the structure of a rental investment, the way that returns accumulate within a rentalproperty biased towards that income stream. The cap rate on a property is a measure of theunleveraged dividend that that property pays out. And so if you have a rental property with a5% cap rate, well, then you're holding an investment with a 5% dividend pay out, an unleveraged5% dividend pay out. And so if that property keeps pace with inflation, which historically has been3%, well, then the total return is unleveraged return is 8%. But again, that return biases
09:42towards that dividend.So for that reason, rental properties are great for people who specifically are looking forcash flow or passive income.Now, Connor, in your case, it sounds like you're excited about rental properties.This is something that you want to do.So I would, for you specifically, I would say, yeah, go in that direction.For other people who are listening to this question, who are in a similar situation,but who don't want to invest in rental properties.
10:11And you know if you want it or you don't.do you get a sinking feeling in your stomach when you think about it or do you get excited when you think about it, right?You know. So for the people who are in a similar position to Connor but who don't want to invest in rental properties but do want to create streams of passive income and cash flow, other options would include dividend index funds. That's probably my next best recommendation.REITs, real estate investment trusts for people who don't want to own their own physical homes.or for people who are close to the timeline for withdrawal and who want an option that has less volatility, fixed income investments, bond investments are, of course, they're not going to provide the same types of returns, but they are a good income play. As the name indicates, they're fixed income investments. The other thing I would say, and I don't mean for this to be heresy in the world of financial independence, but do you need to reach FI before you start your business?or could you save a runway, maybe save like a one year or two year runway that covers both yourpersonal expenses and the operating costs of that business?And then once you have that runway bill, go for it.
11:24FI, financial independence, is a path towards having a sustainable stream of income that, in theory,should last for the rest of your life.But if the objective is to start your own business, you don't need to be a sustainable stream of income that, in theory,a stream of income for the rest of your life, you need enough money to pay your bills whileyou're starting the business, and you need a long enough runway that the business has a goodshot at getting off the ground, which means you need to pay yourself slash cover your ownexpenses, and you need to pay business expenses, which will be higher than you think. So to thequestion of how do I build enough lean FI so that that lean FI can cover my rent so that I can
12:12quit my job? Yeah, to that question, any investment that biases towards income, such as rentalproperties or reeds or dividends stocks, any of those are where you're going to find that.But let's elevate the question up a notch. The question is not, what objective am Ioptimizing my investments for, meaning cash flow, tax advantages, or appreciation? That's one levelof the question, but the next level even above that is, what am I optimizing my money for?And it might be the case that you're optimizing your money so that you can have a runway,quit your job and have a runway. And if it doesn't work out, then you can always get a job again.So thank you for asking that question, Connor. That was a good one. And congratulations again
12:56on being in such a good position already. I'm excited for this software company. I'm excited to seewhat happens with it, what you develop, what grows out of this. Like, that's the cool thing aboutmoney management, right? This isn't just moving decimal points around on a spreadsheet.This is what we do in order to be able to do really big things. The work that you're puttinginto money management today is the reason that you will be able to create some amazing toolsin the future. You're opening doors for yourself. So congrats on that. And I'll say the same toEverybody who's listening, congrats on making it a priority to get the money part of your life dialed in.Because once that's dialed in, you can do anything.
13:42Not everything, but anything.All right.So thank you, Connor, for asking that question.Our next question comes from Caroline.Hi, Paula.This is Caroline.I really enjoy your podcast, and I would love any information or helpful information you could give us.My husband and I make about $10,800 a month.
14:04We have $2,800 in bills.We have $2,800 that we put into various accounts, $450 into a Roth, $584 into an HSA account,$1,000 into an emergency fund with the goal of $20,000.We have about $5,500 right now in a money market account.Once that account gets fully funded, we are going to continue to control.but a smaller rate. Our oldest daughter is in college and she is about to graduate with no debt.She's worked part-time. We have a second daughter that will also be going into college in aboutthree years and it looks like she'll be going the same route. So we are hoping to bankroll her
14:52college and then she'll also work part-time. We have about $5,000 a month extra for investingeither into our real estate or brokerage or a combination.Just want your advice on that.We have about 120,000 in IRAs in Vanguard and Fidelity, S&P 500.And then we have two rentals, one we owe $24,000 on and the other $70,000.If both of those are paid off, we could make about $1,200 a month, and that's after fees.We owe $136,000 on our primary and it's worth $160.If that was paid off and we decided to rent that out, we could probably make about $1,400 to $1,400 a month.
15:44That would be after fees as well.My oldest daughter will be moving to Japan for a few years.My father lives in India and I would like to be able to visit both of them, my husband and I.and we were wondering if we aggressively paid off all three properties, would that make the best sense to be able to have that as income and then be able to travel?Or would it be better to fund our brokerage account?We will have about two years after we finish paying off all the mortgages to fully fund an emergency account as well as putting extra money into a brokerage.account. Any information and thoughts you have would be so appreciated. Thanks for all you do.Caroline, first of all, congratulations on the excellent position that you're in. You own multiple
16:41rental properties. Your kids are graduating from college debt-free. You've got an incrediblesavings rate. You're saving 70% of your income. You're doing a lot of things very, very well,and it shows, and you're getting results, and that's amazing. So big congratulations to you.to your question, what should you do with this $5,000 per month?The first thing that strikes me, as I listen to your numbers, is that one of your rentalproperties has an outstanding mortgage balance of $24,000.I would pay that off because you have the opportunity to pay off a mortgage in less thanfive months.
17:19Take that, take that opportunity, wipe out the $24,000 remaining balance on that rental property.And the reason that I say that is because specifically an improvement in cash flow that comes from paying off a mortgage, that is a all or nothing deal.As long as you are making a monthly mortgage payment, then it doesn't matter if your outstanding balance is $100,000 or $1,000.As long as you're making a monthly mortgage payment, your cash flow is the same.But the minute that you wipe out that monthly mortgage payment, the minute that you are no longer on the hook for the principal and interest portion of what you're paying every month, your cash flow radically changes.Those additional payments that you would make on a mortgage, sure, they'll shorten the life of the loan.You'll pay that loan off faster.And sure, you'll reduce the total amount of interest that you pay on that loan over the life of the loan.
18:20Yeah, absolutely. Making additional payments towards a mortgage has those immediate benefits. But in terms of cash flow, you don't see any cash flow benefit until that mortgage is gone. So despite the fact that your money is working for you invisibly by reducing your lifetime interest expenses, you don't get the visible and tangible benefit of seeing that extra money hit your bank account. You don't get that until thethe mortgage is paid off. And if you can pay off a mortgage in less than five months, I don't see anyreason why you wouldn't. So wipe out that mortgage. And what's going to happen next is, of course,that's going to generate some additional cash flow that comes from that rental property. And for thesake of this thought exercise, I'm not even going to count what you'll do with that. You can putthat towards beefing up your emergency fund. You can put that towards saving money into a travel fundto pay for flights to Japan, flights to India, to pay for some of this travel that is your goal to do.So I'm not going to assign any job to that additional cash flow from that rental property.
19:33That is yours to play with.For the sake of this thought exercise, I'm just going to stick with the original $5,000 that you've asked me about in your question.So in the first five months, you use this $5,000 per month to wipe out that mortgage.After that, I would spend the next three months making contributions to either a traditional IRA or a Roth IRA.In 2019, the annual contribution limit, if you are 50 or older, is $7,000 per year.So between you and your husband, that's $14,000, you'll have that done in three months.And remember, you need to have what the IRS considers to be earned income in order to make contributions to a traditional IRA or a Roth IRA.After you leave your jobs, I don't know whether or not you will have what the IRS considers as earned income.
20:32Which means that after you leave your jobs, you might, and you should talk to a CPA about this because I don't know the specifics of your jobs, any businesses that you own, any,other streams of income that you have. I don't know those specifics in your situation,but it might be the case that once you leave your work, you are no longer eligible tocontribute to a traditional IRA or a Roth IRA. And if that's the case, then you want to makethose contributions now while you still can. So first five months pay off the rental propertywith the $24,000 balance. The next three months max out your IRAs.for each of you, that brings you to the eight-month mark. At that eight-month mark, I would reassess,but my inclination from where I sit right now, my inclination is to then devote the next 14 months
21:27to paying off the other rental property. You mentioned that the outstanding mortgage balance on thatis currently $70,000. It'll be a little bit lower eight months from now, but not significantly so.Given that it will have approximately a $70,000 remaining mortgage balance, you'll be able towipe that one out in 14 months. And depending on when you start all of this and depending oncontribution deadlines for IRAs, somewhere within that 14 month time span, the 14 months thatyou dedicate towards paying off that second rental property, somewhere within that time spanin order to meet the deadline for the second cycle of IRA contributions, you mighthit pause on paying off that second rental property, max out your contributions to IRAs again for
22:21the next three months, and then hit the restart button. And you would do that because the IRAcontribution window is use it or lose it. So if you don't make contributions by the deadline,you don't get the opportunity to put that money into an IRA again. It doesn't roll over. SoSo in order to meet the deadline, because we're talking about a two-year plan, and twice inside of this two-year plan, you will spend three months each maxing out your IRA contributions, right?So five months for the first rental property, then three months to max out your IRA contributions for the current eligibility period.And then 14 months interrupted by three months inside of there somewhere, depending on contribution deadlines.So this is a 25-month plan, and at the end of those 25 months, you will have made a total of $28,000 in contributions to IRAs.And I'm not counting any gains or growth or appreciation purely based on contributions alone.
23:30You'll have made $28,000 in IRA contributions and you will have two fully paid off rental properties.That's an amazing position to be in two years from now.I mean, think about that. Two fully paid off rental properties and an extra $28,000 in your portfolio within two years, not counting what you do with the cash flow from rental property number one, which will also be yours to play with for 20 out of these 25 months. So that puts you in a great spot. I mean, you're already in a great spot, but that puts you in an even better spot 25 months from now. And once you reach that point,25 months from now with both rentals paid off and a beefed-up emergency fund and an extra 28K in your IRA.Once you reach that point, I don't see any compelling reason to pay off your primary residence mortgage.The reason that I say that is because if you were to go full steam at paying off that mortgage,you would significantly delay your travel plans.The current balance on your primary residence mortgage is $136,000.
24:42For the sake of example, we'll assume that two years from now you have an outstanding balance of $132,000 on your primary residence mortgage.Let's also assume that at that point in time, you are ready and comfortable to apply $6,200 per month towards this mortgage, right?which is the original $5,000 plus the $1,200 in net cash flow that is coming from the combination of the two properties, effective 25 months from now.At that point in the future, you'll have a mortgage balance of, we'll say, approximately $132,000 divided by $6,200 per month.It's going to take you another 22 months to pay off your primary residence mortgage.do you want to delay traveling by an additional two years?We're already talking about a two-year delay between when this plan startsand when you are ready to set off on your big adventures, right?
25:40We're already talking about a 25-month plan.Do you really want to add an additional 22 months to the end of itand turn a two-year plan into a four-year plan?And to an extent, that's a question only you can answer.It might be that you're listening to this and you're thinking, yeah, actually, yeah, I do want to travel in four years rather than two years.Or perhaps you're thinking, you know, I feel lukewarm. It doesn't really make a difference to me.Two years, four years, who cares?And if that's the way that you feel about it, then, okay, cool.
26:12Make it a four-year plan.Pay off the primary residence mortgage.But I could hear in your voice the enthusiasm for having the freedom to go visit your father in India and visit your daughter in India.and visit your daughter in Japan,if that's something that you would like to start doing sooner rather than later,then I would challenge you to ask yourself,all right, how can we supplement our income while we travelin such a way that we don't have to wait for another two years for this mortgage to be paid off?
26:45We can live on the 1,200 net cash flow that we are collecting from the two paid off rental properties,plus the supplemental income that we are creating in some other way.You don't have to live entirely on net cash flow from rental properties alone.If you can combine that $1,200 plus some other form of supplemental income,you can shave two years off of this plan.And when you travel, you'll still be renting out your primary residence.And given the fact that you mentioned that if it were paid off,it could net between $1,200 to $1,400 per month after expenses, given the fact that it would net that
27:29outside of a mortgage, what that tells me is that even with the mortgage, it's still going to becash flow positive. So you can rent out your primary residence, have that be cash flow positive,save that positive cash flow into an additional emergency fund that you can pull fromwhenever there's, say, a prolonged vacancy or an unexpected repair. You know, you can set asidecash reserves for your primary residence based on the cash flow that it's generating itself,that will be self-sustaining, that will take care of itself, your tenant will be paying offyour mortgage for you, and in the meantime, you'll be living on the proceeds from your two other rentalproperties plus some other form of income and traveling two years from now instead of four
28:12years from now. So that's my inclination. But again, a lot changes over the span of two years. So at everystep along this journey, keep stopping to reassess. Keep stopping to ask yourself, did the plan that weformed at the beginning of this journey, does that still make sense? As job conditions change,as health conditions change, as market conditions change, as family members end up moving todifferent countries than where they were planning on moving to, as everything in life changes,continually stop and reassess the plan as you go along it to make sure that it continues to make sense, given the updated contexts that you will certainly be living in as you go through this. So that is the final thing that I'll say. Thank you so much for asking that question, Caroline. And congratulations on saving such a high percentage of your income and putting yourself in this great situation. I mean,You're two years away from having two fully paid off rental properties.That's incredible.
29:21So huge congratulations to you.We'll come back to this episode after this word from our sponsors.So let me tell you about my experience taking an ancestry DNA test.I was born in Kathmandu, Nepal.I come from a family that has a long tradition of arranged marriage,so everyone in my family, for as far back as we can trace, are all from Nepal.And so I took this ancestry DNA test thinking,all right, cool, well, you know, the results are going to be pretty obvious.
29:52And for the most part, they were, but there was still some detail in there that I thought was interesting.So I got the results back, and I looked at what they call my ethnicity estimate.There's a 69% ethnicity estimate that comes from the northern and western region of India or the Indian subcontinent.No surprise there.Being from Nepal, being born in Kathmandu, that was exactly what I expected.There was also a 28% ethnicity estimate from southern and eastern India, which is an area that includes Sri Lanka and Bangladesh.And in fairness, that area actually because of migration also includes portions of Nepal.But that I wasn't expecting to see, that connection there.
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31:12That's ancestry.com slash Paula for 20% off your AncestryDNA kid.Ancestry.com slash Paula.If you run a small business, it's the end of the year.And there are deadlines that happen at the end of the year when it comes to payroll, taxes, all of that icky stuff that you have to deal with when you're an entrepreneur or a solopreneur or when you run your own business.Filing and paperwork and all that stuff that's necessary, but it's a health.headache. Check out Gusto. Gusto makes payroll taxes in HR easy for small businesses. So what they'll do is they'llautomatically pay and file your federal, state, and local taxes, so that you don't have to worry about it. They take care of thatautomatically. They also, if you have a team, they make it easy to hire people, to add on health benefits,
32:06to offer 401K benefits so that you can provide your team with benefits that will make them happy.And if you have any question, they have certified HR experts that you can call intalk to. Deadlines for the new year creep up faster than you think. So get started now and as a bonus,try it for free for three months when you run your first payroll. So try a free demo and see foryourself by going to gusto.com slash Paula. That's g-U-st-o.com slash Paula. Our next question comesfrom Elizabeth. Hi, Paula. My name's Elizabeth and I'm abig fan of your podcast. I've only been listening for a couple of months now. I just love everything that Ihear. I think you're a great voice for people our age, you know, these quote unquote elder millennials,
33:11if you will. Anyway, my question today has to do with net worth. My husband and I have a net worth ofapproximately $580,000, which I'm super proud of. However, the number isn't quite what I feel it shouldbe because the majority of that, about 68% is equity in both our primary residents and our rentalproperty. And that number feels really high. Like, I just don't know if it's appropriate or notthat so much of our net worth is wrapped up in real estate. So I'm curious as to your thoughts,what is appropriate for a net worth breakdown? Like, how much should be cash? How much should beretirement accounts or mutual funds or other investments and how much is okay to be equity.Anyway, thanks a lot.
34:05I really appreciate your opinion.Elizabeth, first of all, thank you and congratulations on building such an amazing net worth.You mentioned elder millennial.There's so much, I'm amazed at how much negative press there is around millennials.And you and I both being the generation that grew up playing Oregon Trail, we've seen,I've seen firsthand, not just myself and not just you, but so many people in our generationwho are doing really well, working really hard, building amazing lives, who are absolutelynothing like the media portrayal of millennials. So thank you for being an example of a millennial
34:47who's being proactive about our life and building investments and doing great things.We're a great generation.And we're the last generation that remembers what life was like before the internet.Now, to your question, what should a net worth breakdown look like?There is no should in terms of appropriate allocation of net worth.To give an extreme example, if you think about the richest people in the world,their net worths are incredibly lopsided in terms of one given asset class taking upthe bulk of their net worth. So, for example, Sarah Blakely, the founder of Spanx, her net worth,
35:31and granted, this is a very extreme example, her net worth is primarily this one company. It's thecompany that she founded. And so anything else that she holds, real estate, stocks, partial ownershipof other companies, if she has any, anything else that she does is going to be proportionatelyan incredibly small, almost rounding error-sized fraction of her overall net worth.And I give that example to illustrate that net worth is not something that needs to be thought of with the lens of asset allocation.When you're investing your 401K portfolio, yes, you want to asset allocate that because that is a single bucket of money that has a purpose and a timeline.your 401k is money that you have set aside to spend during your traditional retirement years for most people.And because it has a specific timeline to withdrawal, that means that you then have the opportunity to asset allocate amongst equities and bonds and cash and cash equivalents in a way that's appropriate for both your risk tolerance and your timeline.
36:41So asset allocation is highly useful in that type of a context, in the context where you have,a specific designated bucket of money that has a particular timeline and you're trying tomatch the way that that money is invested with your timeline, with your risk tolerance.On the flip side, when you look at overall net worth, net worth in and of itself doesn't havea goal. It's a marker, it's an indicator of how well you are doing financially overall.It's like a health marker for your finances. But your net worth is not something thatyou start drawing down from at the age of 65. And as such, the same rules of asset allocation don'tapply. And that's why it's normal and appropriate for somebody like Sarah Blakely to have
37:32such a lopsided proportion of her net worth concentrated in Spanx. Now, with that said,what I hear within your question is discomfort in your perception of how, you're a lot ofmuch money you have in different buckets, right? So you said you have a net worth of $580,000,and about 68% of that is in equity, right? So that's about $395,000 worth of equity that youhold, which means that the remaining $185,000 is split between, I'm guessing, some combinationof an emergency fund, maybe some additional cash savings for long-term goals, your retirementportfolio, and maybe a taxable brokerage account. I'm guessing that's where the othertheir $185,000 is. The way that I would reframe the question is not what should the proper
38:24allocation of my net worth be. The way that I would reframe this question is, am I comfortablewith the fact that these buckets of money that I have, my retirement accounts, my taxablebrokerage accounts, my emergency fund, am I comfortable with the balance in them? Do I thinkthat these buckets of money are large enough or sufficient enough to, you know, to,keep me on track to get where I want to go. And that's essentially another way of asking,am I on track to reach my goals? So let's just say for the sake of example, right, we know thatyou have about $185,000 in some combination of market investments and your emergency fund.Let's just assume that $35,000 is your emergency fund, and the remaining $150,000 is in a
39:11retirement account, we'll say a 401k, or combination of 401K and IRAs. Starting with the assumption that you have$150,000 in retirement accounts, the questions to then ask include, how much money do I thinkthat I will need in my portfolio in order to retire? When do I want to retire? What assumptionsam I going to make about the long-term annual average aggregate returns on this portfolio,which is kind of a fancy way of saying, how much risk am I willing to take while I try to grow thispot of money? And how much am I contributing?every month to this retirement portfolio.And based on those four pieces of data, based on the answers to those four questions,
39:54you'll be able to see whether or not you're on track.So if you have a retirement account of $150,000 and, for example, you assume a long-termannualized 7% rate of return and you're currently contributing $2,000 a month into thisaccount between yourself and your husband combined, then, well, how much money is that going to be in20 years or in 30 years or whenever it is that you want to retire. And is that going to beenough, right? That's the operative question to ask because that is a goal-based question thataligns the goal with the timeline and then shows you whether or not you're progressing in a waythat will allow you to meet that goal, right? Similarly, for the emergency fund, right, let's just assume,
40:39again, with this $185,000 component of your net worth that's outside of equity, let's just assumethat $35,000 of that is your emergency fund, how much runway does that buy you? How many months ofbasic living expenses does that cover? And is that enough? Like, based on what helps you sleepeasiest at night, based on how secure your jobs are, is there a likelihood that, you know,one of you works for a small company that might fold or collapse? Is there a likelihood thatone of you has some latent health problems that might flare up that would call you?cause you to have to take one of you to have to take an extended leave of absence from work.Are one of the two of you or both of you, freelancers or self-employed, which means that you
41:25have income volatility, right? Based on all of those, you'll figure out what a good emergencyfund for you would be, how much runway you want to build for yourself. Do we have that muchsaved or not? And the proportion of your net worth that that emergency fund occupies isessentially irrelevant. So don't worry about the breakdown of your net worth. And if you are stillconcerned about it, because again, what I'm hearing you ask is maybe, and I might just be puttingthese, I don't want to put words in your mouth, but one possible interpretation of what you've askedis, should I be worried about the fact that so much of my net worth is tied up in equity?Is that going to be a problem if there's another housing crash? The issue, the issue. The issue,
42:14here is the relationship between your exposure to real estate equity and your investment goals.Here's an interesting thought exercise. Imagine, since you have so much equity,imagine that you were to borrow against that equity. Imagine that you were to take a homeequity line of credit or you were to do a cash out refinance and take that loan and then put it in thestock market. Put it in index funds. Put it in VTSAX, right? I'm not recommending that you do that.But imagine doing that as a thought exercise.It would certainly reallocate your net worth.But is that something that you want to do?
42:50For the vast majority of people, I'm guessing probably not.But there are some people out there who would say, yeah, that's totally something I'd want to do.And their position would be, I would do that because I have a level of risk tolerance that makes me very comfortable with arbitraging the difference between what I expect,the stock market will provide over the long run against the interest rate on that refi.So those people would do that.Those people would take out a cash out refi and put it in an index fund.And so again, all of that goes to the alignment of your goals, your risk tolerance, your timeline, and the investments that you choose as a result.And so if you are having doubts about the amount of equity exposure that you have, I would encourage you not to think of it as a net worth question, but rather as a question of,
43:40does that level of exposure to the physical real estate market align with your investment goals and your risk tolerance?I hope that answered your question. I hope that wasn't too, I don't know if esoteric is the right word, but I tried to make that conceptual.And I hope that by discussing this at a more conceptual framework, it helps set you up with a better refining of the question or the source.of discomfort. And that source of discomfort is almost always a misalignment of goals and risktolerance. So thank you for asking that question. And again, congratulations on having a networth of almost $600,000 as a millennial. That's a great example for everybody who'slistening, particularly people in their 20s and 30s. So congratulations on that. We'll return tothe show in just a moment. Did you know that 70% of the
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46:20That's grove.com slash afford-anything.Remember, it's not a dot-com, it's a dot-co.Grove.com.Are you sick of getting nickel and dined by your bank?And do you want a checking account that has a great interest rate?According to the FDIC, as of August 2019, the national average interest rate is 0.06% APY on checking accounts.That's not great.Check out Radius Bank.
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47:32So this is a bank that is not going to clobber you with fees.they're not going to nickel and dime you, and you can open an account with them at radiusbank.comslash Paula.That's radiusbank.com slash Paula, R-A-D-I-U-S-Bank.com slash Paula.Our next question comes from Anonymous.Hi, Paula.Thank you for your podcast and providing your knowledge in a digestible and succinct format for people like myself.I really enjoy all the content you put out.
48:10I was hoping you can help me with a question that I have.I'm relocating from Southern California to Florida where my company will pay for two months of temporary housing.I do not know the area very well, so I'm trying to decide the best path forward for me.My options are, one, renting an apartment and purchasing a rental property in Florida,or be purchasing a home that I would use as my primary residence.Some background about me is that I am a single female in my early 30s and make about 200,000 per year.I currently max out my 401k and save about 5,000 per month,out of my 10,000 per month take home pay. I have about 70,000 in a Vanguard index fund,
48:48money for a six-month emergency fund, and about $150,000 in a high-yield savings account that I'msaving for either a home or rental property. Things that will be important to me in my new homeis being in a desirable area with walkable bars, restaurants, and outdoor activities. Unfortunately,the properties for purchase in this area really only include townhomes or condos with really highHOA fees and I'm hesitant to commit to this. I also worry about the resale value of these propertiescompared to a single family home in a good school district. Due to this, I'm thinking about rentingan apartment in this desirable area while also looking to purchase a rental property in Floridathat is nearby. I'm also considering another option to purchase a single family home in a nice
49:33suburb as my primary residence. However, I worry that this would be a tough match for me since I am asingle female in my early 30s and these neighborhoods tend to be occupied by families. Families arewonderful, but I'm just not in that stage of my life at this point. I do hope to stay in this area inFlorida for the longer term, as this is a great career move for me, and people tend to stay in these jobsfor a while. However, if after a few years I'm not happy there, then I would have to prioritize myhappiness and move to a place that is more aligned with my interests. I also worry that the realestate market will be a buyer's market and not a seller's market in a few years, which may put me in adifficult position. Can you share your perspective? Are there any options I have not considered that you
50:16would recommend looking into? Are there any tax consequences for purchasing a first property as aprimary residence versus a rental property? And will I miss out on any first-time home buyer deals ifmy first purchase is a rental property? Thank you for all that you do, and I look forward to hearing from you.anonymous first of all congratulations on the job transfer and on having such a great income a very high income by i mean by the standards of any age and particularly to have that type of an income in your early 30s is remarkable and then add to that the fact that rather than squandering that income you're investing it and you're thinking about the best ways to manage it that's very commendable so congratulations on all of that a couple of things strike me as i hear your question first of all within your question ihear a lot of speculation as to what the market might do in the future, particularly withregard to your primary residence. So you've talked about, you know, if you bought a condo or a townhome in an area that you would enjoy living in more, you're not sure if that would have thesame type of resale value as a single family home. That's a guess or a projection about what
51:27might or might not happen in the future. And yes, it's true that generally speaking, condostend to be the last horizon the first of all.There is historical data around that, but at a certain point, you've got to ask yourself,are you buying a personal residence or are you buying something for the sake of selling it later?Because if you're buying a personal residence, then the primary objective of that personalresidence is personal satisfaction.So lugging yourself out to a suburb that you're not excited about so that maybe five years in the future,you might be able to sell it for an extra 30 grand more than what you would have resold your condo for?
52:09I mean, why would you live where you don't want to live for the sake of resale value?If you're buying an investment property, then buy an investment property.And if you're buying a personal residence, buy a personal residence, buy something that is optimized for what you want.It's optimized for your personal enjoyment.But if you try to do both, it often ends up.doing neither well. You also mentioned the high HOA fees associated with the primary residents,the condos and the townhomes in the neighborhood that you're looking at. I mean, HOA fees suck.You know, they do. And there is that feeling of like, wow, I'm just throwing money away.
52:48Or, you know, this is part of a monthly payment that doesn't build equity. Like, I get that.I would also ask the questions, what's the total payment? Like, is that total payment within the budget that you want to set for a person?personal residence, and what level of enjoyment will you get from it? And the reason that I keep sayingthis is because you are so specific and clear about what you are looking for in a neighborhood.You know, you want to be walking distance to these really fun things. Like, that's, it's a veryclear vision of exactly the type of lifestyle that you want. And I would hate to see you miss outon that lifestyle because you think that you might be able to save a few hundred dollars a monthon HOA fees and you hope that maybe if you live in the suburbs, your home might appreciate
53:37at an extra 2 or 3 percent more than the rate at which townhomes are appreciating in adifferent zip code.Buy the place that makes you happy and invest the money that you've set aside to investand don't try to mix the two buckets because you'll probably be disappointed with both.Now, that being said, I realize that the answer I've given you so far.points towards buying a personal residence, but let me be clear, I'm not advocating that. So everythingthat I've said up to this point is a thought exercise in what qualities to consider when you arebuying a personal residence. But that does not necessarily indicate that I'm an advocate of you
54:20buying a personal residence. And here are a couple of hesitations that I have. Number one,it doesn't sound like you're excited about it. I realize that I'm jumping to conclusions ina two-minute or three-minute voicemail. So maybe you are. But I didn't hear a strong sense from youthat you really wanted to buy a residence and customize that space in the way in which you wantand put down roots and live there and make it your home. I just didn't pick up that vibe.If you're not excited to buy a primary residence, and also it sounds as though you're nottotally sure if you're even going to be there long term. You've said that you think you probablywill. You're very open to being there long term, but if something better comes along and you have
55:09the opportunity to increase your happiness by moving elsewhere, you would. So it sounds as thoughyou're not really even sure that you're going to be there for all that long. Those are both twoarguments against buying a primary residence right now, or at least maybe renting for a year,and then reconsidering after a year.Because perhaps after a year of living there,you might have a better idea of, at a minimum,of whether or not you think you'll stay there for the long haul.And by long haul, I mean at least five to seven years.
55:40So with that said, I see a strong argument for renting a place that you would love living in.And that's the key.You've got to love living there.Rent the place that you love.And then use the rest of your money.you've got this $150,000 to invest, use that to buy a rental property that is purely chosenfor its investment potential. Because when you are buying a property that is purely an investment,your personal preferences don't enter the picture. And when you can filter out those personal
56:18preferences, you're then able to screen properties for their investment potential and onlytheir investment potential. And that level of tightening the filter allows you to choose better investmentproperties. That's why I say that it's hard to find a property that's really awesome as both apersonal residence and as an investment property. Imagine a Venn diagram. There are two circles.One is like what you enjoy and the other is what makes a good investment. And yeah, there's a littlebit of an overlap between the two, but that overlap is a pretty narrow sliver. So based on what I've heard fromyour question, my inclination is that it might make sense for you to rent a place you loveand then buy a property that is purely an investment property. And then after a year,
57:04and you've had some time to be there for a while, you've had some time to figure out if you want tostay there, you've had some time to save up some more money. At that point, then if you want tobuy a personal residence, buy one, but don't worry about the resale value when you buy it,because you're not buying it for the sake of selling it. You're buying it for the sake of living in it.Thank you anonymous for that question and congratulations on the new job transfer in Florida.Our next question comes from Brea.Hi, Paula. My name is Brea and I live in the Boston area.I've been thinking a lot about taking a second mini-retirement.
57:43The first time I did this was about 10 years ago, fresh out of college with some savings that I had around 25,000 at the time.This time around, I have about $100,000 in mostly liquid cash that I have set aside for, you know, the uncertainty of traveling for a year or at least not working for a year to two years.I have around $55,000 in a traditional IRA, which was already a rollover from a 401k.I have a brokerage account. I have a Roth account and a 403B account.with some of those retirement monies.I know that I should probably have these two numbers reversed,but I've kept a lot of these savings that I am able to amassfrom having really cheap rent in liquid cash
58:35because of the desire that I have for a mini-retirement.I have some very specific goals that I want to work on during a mini-retirement.My expenses are very low.I live off of under $40,000.I haven't even really lived off of 40,000 yet. And I budget like really closely. $500 is how much my rent is.So it's really not much to be able to sustain that, even if I'm not currently living in the location.I'm not looking to buy a house or get married or have children anytime soon.So my main goal is really just taking the many retirement and traveling.
59:15My main question is, what should I do with that money while I am traveling?Should I take much of it or a portion of it and put it into my brokerage account and continue to invest in VTSAX and that kind of stuff?Or should I just leave it in liquid cash and maximize my mini retirement?I'm not really sure what to do on that front.I am debt-free and I have been planning on this for at least three years.So just curious to hear what you think would be the wisest decision.for somebody over the age of 20, leaving the workforce for a period of time to work on some goalsthat I am hoping will further my career when I do reenter the workforce.
01:00:01I would like to come back with, you know, a cushion to reenter the workforce with, and I certainlywould like to continue having a retirement account. So thank you so much for everything that you doand take care.Brea, first of all, I totally relate to everything that you just said.I also took a two-year mini-retirement relatively shortly after college.It was three years after I graduated from college.But I took a two-year mini-retirement.And at the time that I did that, I had $25,000 saved when I quit my job.
01:00:34So when you mentioned that your first mini-retirement was one that you took after college with $25,000 saved, wow.You're speaking my bio.I get it.I've been there.And it was a great experience.I can honestly say afford anything would not exist.had it not been for that. So there was a lot of good that came out of it that positively affected therest of my life. Huge fan of many retirements for that reason. Before I answer your question,
01:01:01I want to make one other note, which is you mentioned that you have between $50,000 to $55,000in a traditional IRA. And in addition to that, you also have some money in a Roth account and a403B account and a brokerage account. And when you said that in your voicemail, you almost soundeda little apologetic. Like, you immediately followed that up with the disclaimer of, I know I shouldhave these reversed. I know I should have the liquid savings and the retirement amounts reversed.But what I heard is that you are presumably somewhere around 32 because you said that youfinished college 10 years ago. So assuming that you finished college at 22, assuming that you wentstraight from high school and to college, you'd be around 32 right now. You also said that you spend
01:01:48around $40,000 a year. You live fairly frugally. And so what that tells me is that by the age ofyour early 30s, you have between one to one and a half years worth of your expenses saved in aretirement account. And there are not a lot of people who have done that or who can say that oryou know, who have accomplished that, right?Like to save one to one to one and a half years of expenses in retirement accounts by your early 30s in addition to what you've saved for this mini retirement, that is nothing to be apologetic for.That's a huge accomplishment and it puts you ahead of a lot of other people.Now, to your question, what should you do with this $100,000 that you currently have in liquid cash?where should you put it during the next two years while you're on this mini-retirement?
01:02:44I'll give you the short answer and the long answer.The short answer, I'll tell you what I would do.If it were me, I would keep it in cash.Find a high-yield savings account, something that pays a decent amount.Stick it there, and don't worry about it.Because for the next two years, number one, you want to be able to access that money whenever you need to.And of course, you're going to be budgeting it, you're going to be managing it well.but you still don't want to expose it to market risk.
01:03:11You don't want to expose it to the risk of loss because if you invest it and that investment drops, you don't get to wait it out.Your timeline to withdrawal is within the next two years.And with a timeline to withdrawal that's that short, you want to protect your money from downside risk.You want to protect yourself from the possibility of having to convert paper losses into real losses.So if it were me, I would simplify things by just putting everything in a high-yield savings account, calling it a day, and then focusing on the personal goals that you have that you want to accomplish during this mini retirement.Because you mentioned those twice in the span of a three-minute voicemail, that you have goals, you want to focus on those, you want to work on those.So keep your attention there rather than distracting yourself with worries about moving bits of money around between accounts so that you can eke out a slightly higher return on.on a fraction of that money, right?
01:04:07That doesn't seem like a very good use of your time.It seems like a distraction at a very special time in your lifewhen you're going to taking this time to focus on these goals that you have.So that's the short answer.That's what I would do.Just to give you a few other options.What you could do is take a small portion of it,like somewhere between 20% to 30%, so $20,000 to $30,000,
01:04:35and you can put that smaller portion of it into some type of low volatility conservative investment.You could put a small portion of it there and then keep the rest in cash.So in this example, you'd hold $70,000 in cash, $30,000 in some conservative investments.That way, the slice of that money that's being exposed to some level of risk is the slice that you wouldn't have to access untiltwo years from now. And then as, you know, your mini retirement progresses and as that timeline towithdraw nears, you could then start shifting that money towards cash as you get closer and closerto needing to tap that money. So that is another option. And an other other option is that you could,if you wanted to, you could take an even smaller portion, like maybe $10,000 or 10% of these
01:05:32liquid cash savings that you have, take that small portion, put it into an index fund, such as atotal stock market index fund. You do that with 10% of the portfolio and then keep the rest in cash.Or you could do maybe a hybrid approach, like 10% in a stock market index fund, 20% in someconservative bond funds, and then the other 70% in cash. And then you can start to reallocate that,again, as you move down the timeline and as you get closer and closer,to needing to tap the portion of that bucket of money that you have essentially earmarked asthe last dollars that you will pull out. So as time progresses, you would then reallocate moreconservatively along the way. That's an option. You could do that. Is it worth your time and
01:06:19energy? I don't know. I mean, I don't know if it is. If you're the personality type that would bedistracted by the idea that all of your money is in cash, then in that case, sure, maybe it'sworth your time and energy to not be haunted or distracted by this like lingering discomfort withall of your money being in cash. But chopping it up into all of those different bits andputting $10,000 in an index fund and another 10 or 20 in some bond funds, again, there'snothing wrong with the idea. I just don't know if the actual payoff will be worth it. Yeah, and part of that'sgoing to depend on what you want to do during your mini retirement. But know that if you decide toincrease the complexity within your life, then you're deciding, you're committing to increasing
01:07:15the complexity within your life. And there is a tradeoff associated with that. So the operative question is,would the financial benefits or the potential financial benefits of investing a small portion of this money, would those potential benefits outweigh the cost of having to manage that?Plus, the risk of improperly managing it, the risk of not rebalancing as you move along the time frame and thus being over exposed to market risk in a way that is not.congruent with your timeline to withdraw, right? Like, it just seems to me like there's way too muchtoo much distraction and complexity for not enough of a payout. That's how I would see it.But I wanted to walk you through all of those examples because I'm sure there are people out therewho would not see that as a distraction or as complexity. They would see that as a game or as likepart of the fun. And if that's the way that you would approach it, then do it. But if you think
01:08:15it's going to be a burden, then don't bother. So thank you, Briah, for asking that question.and enjoy your mini retirement.Our final question today comes from Marie.Hi, Paula. My name is Marie.I recently moved to Los Angeles, California, from Detroit, Michigan in August of 2018.Since I've been here, I've had a couple of jobs.But right now, I'm an account executive at a PR marketing distribution center.I am still living paycheck to paycheck, regardless of how fancy the title is.
01:08:46I'm really trying to get ahead, but I feel like I,can't because literally my two-week paycheck goes directly to my rent. I have dreams and aspirationsof investing and starting my own business and doing the whole 10 miles. I do my research. I listento your podcasts. I do my homework. I am just not exactly sure what I should do next. I want to get outof this rut, but I don't really know how to start a business or invest when the only viable optionfor that is developing more credit card debt, you know, for startup costs, for example, for anonline business. So could you please help me out? I literally have zero savings. I just want to find away that I can make my dreams a reality. Thank you. Marie, first of all, huge congratulations
01:09:38to you for being so proactive. Like you said, you're doing the homework. You're doing the research.You're learning about it. You're listening to this podcast.You're calling into this podcast.You are actively taking charge of putting yourself in a better financial place.And you should be commended and congratulated for that.So I want to take a moment before I go into the answer.I want to take a moment to applaud you for all of the work that you're putting in,all of the learning that you're doing, all of the effort that you're putting in.
01:10:04And I also want to tell you that that will show results.So let's talk about what to do next.First and foremost, you mentioned that a two-week paycheck goes to,towards the cost of your rent. So what that tells me is that your rent is approximately 50% ofyour income. Spending 50% of your income on housing is, as you are experiencing, it's notsustainable, which means that the first thing that I want you to do is find cheaper housing.Now, I know you live in L.A. and I know it's expensive, but let's run through a handful of options.Could you move further away from where you currently are? That means your commute is going to be
01:10:46longer, yes, and in LA traffic that sucks, I know, but could you move somewhere further awayinto a neighborhood or an area in which you can rent something at a lower price point? Or could youstay where you're at, but take in a roommate or rent out a portion of where you're living onAirbnb? Or could you stay in approximately the same neighborhood that you're in, but findsomething significantly cheaper, even if it's much more run down, much smaller, find a placewith roommates if you need to. It's like, what are the cheapest places to live within a 20-mile radius of you?Start your search there and find something cheaper. Or is there a roommate that you can bring in? Is there a one bedroom in which one person can live in the bedroom and the other roommate can live in the living room in like a studio apartment style, blocked off with a little room divider? Could you do that just for six months? I know. I know.it's not ideal and I know it's not what you want, but spending 50% of your income on rent is a one-way ticket to disaster. And I do not want you to experience some type of catastrophe in which you're already living paycheck to paycheck, which means you are one emergency away from being in a lot of trouble. And so even though living in a tiny apartment in a not desirable neighborhood, I can't. I
01:12:15know that's not ideal, but it's better than the alternative. That's number one. Find any meansnecessary to lower the cost of your housing. Get it down to 30% of your income instead of 50%. And then,if you do that, that frees up 20% of your income that you can then start to apply towardsother goals. So next, let's talk about what some of those other goals are. The first thing that Iwant you to build as an emergency fund. Two ways to do that. One is reduce the cost of housingand apply the difference. The other way to do that is by getting some additional work on the sidein your time off, whether that's evenings, weekends, early mornings, get some additional work. Youtalked about starting a business. We'll discuss that in a minute. But right now, your objective
01:13:06is not to be an entrepreneur. Your objective is to stabilize. So before we go down the path ofstarting a business, let's get you an emergency fund, right? Can you babysit? Can you pet sit? Can youdrive for Uber or lift? Can you drive for Uber for an hour in the morning before you go to work?And then after work, can you babysit for a family that's got kids that need some child care in theevenings? I know that's not the type of business that you want to start, and I'm not saying that youneed to be doing this five years from now. But this is the next stepping stone to get you to aplace of stability, because if you're not in a place of stability, then nothing else matters.You need to stabilize first. Let's get you into cheaper housing. Let's get you gigs, not a business,
01:13:53but gigs that will immediately pay you money and then take all of that money and put it towardsbuilding an emergency fund. I want to see you build an emergency fund at a minimum of at least $1,000or one month's worth of expenses. Pick one of those two, whichever one you prefer, and build an emergencyfund of at least that much money. After you do that, you mentioned something in your voicemailthat concerned me. When you talked about credit card debt, you used the word more. You said morecredit card debt. That implies that you have credit card debt, which is extremely expensive highinterest debt. And if you can wipe that out, you will do two things for yourself. One is thatyou won't have to pay all of the interest in financing charges that are waiting for you in the
01:14:40future. And the other is that that's one less bill you have to pay. So after you build thatemergency fund, I want you to then take all of this money that you're making from babysitting gigs,from delivering pizzas, from driving for Uber, from walking dogs, take all the money that you'remaking from that and throw it at your credit card debt. And keep doing that until the credit carddebt is wiped out. I realize that what I have just said is not easy. Like, not a lot ofof this is easy. It sucks. It does. It sucks to hate where you live and to live with a wholebunch of people in this tiny place that's falling apart. I've done it and I know it and I know howmuch it sucks. But you can't get through to the next step if you don't embrace the suck
01:15:31for a little while. The living with roommates and the working gig jobs that pay maybe $15 an hourand you're sitting there thinking, aren't I at the point in my life in which I shouldn't have to work for $15 an hour anymore?But you know what? At the moment, that matters. That money matters.10 hours a week, that's $150. That's an extra $150, which, I mean, after taxes, that goes to, what, 130, that you get to apply to paying off your credit cards or building that emergency fund or putting yourself in a place in which you're more stable.So do that.after you have done those three things and it might take six months, it might take a year,it can take a while so you need to be patient through this journey.Once you do that, then if you do want to start a business, the first thing that I would say is
01:16:21I'm very concerned about what you said about you use the words, the only option for starting abusiness is to put it on a credit card.Putting startup business costs on a credit card is a no, never, ever, ever, everever deal. Please don't even consider it. Now, if you do want to start a business, first, let's talkabout that business itself. What kind of business do you want to start? And how do you make thisbusiness as lean as possible? Because if you have a business idea that has not yet been tested,well, you don't want to invest a bunch of money in an untested idea. So your first step in whateverbusiness you want to create is to make a low-cost, bare-bones version of this idea and then
01:17:08test this idea to see if you get customers. An excellent resource for this is a book calledThe $100 Startup written by Chris Gillibow and get that from a library. Don't buy it.Another great resource from this is a podcast called The Side Hustle Show. It's made by a guy namedNick Loper. Nick is a former guest on this show. We interviewed him in episodeSo if you want to listen to that, you can find that at afford anything.com slash episode85.But one idea that Nick, that actually that that interview, that episode 85 really clarified for me is that oftentimes when we talk about side hustles or starting a business, there are many variants of that.And when we use the phrase side hustle, we tend to lump all of those together.
01:17:54So in one overly generalized term, we tend to lump together anything ranging from being a freelance graphic designer to being an expert witness who goes to courtrooms and testifies as an expert witness to being a babysitter or mowing lawns, right?All of those fall under this incredibly broad umbrella that we call side hustle.And I think that's a mistake in the way that we talk about it because it leaves people with the impression that the only way to develop a side hustle is to do all of the work of testing and iterating and growing and developing a business.Developing a business, meaning you create some type of product or service and then you sell it to customers.That's a fantastic long-term strategy, but it will not solve the immediate issue of getting money in the door.today. So if your goal is to get money in the door today, then the type of side hustle that you needat this moment is not developing your own graphic design company. That can come later. What youneed right now are gigs. So find cheaper housing even if it's going to suck. Sometimes you just
01:19:12have to live in places that suck for a while. Get gigs and use the combination of those twoto put yourself in a place of stability.And once you do that, the level of stress that I heard in your voice, as you describedyourself living paycheck to paycheck, that stress will start to disappear.And I know it will, and I know that you're going to do it because of the fact that you'reputting in so much effort already.You're someone who's being proactive, so you've got what it takes to get yourself out of this.One more place that you, I think, might find a lot of inspiration.
01:19:42There is a big community of people out there who share stories of how they got out ofdebt. They are some of the most hardworking, resourceful, determined people with some of the beststories, like the most inspiring stories that I've ever heard. I love the getting out of debt community,particularly the people who are still in it, the people who have this outstanding credit cardbalance of $14,000 and it seems so huge and they don't know how they're going to pay that off.And then they go online and they share these stories of waiting tables or becoming a mystery shopper or going on Craigslist or Facebook marketplace and offering to help people with their Saturday chores for $20 an hour or $25 an hour.And some of the gigs that they pursue work out well and some don't, but they just keep at it and like piece by piece.You watch their debt fall away and it's so beautiful to watch it.
01:20:44It's so inspiring.So as you're going along this journey, tune into those stories, read those stories onlinebecause getting to a place of financial stability can be a very long road.And it's those stories.It's knowing that you're not alone.And there's this community of people out there who are doing the same thing.They're also paying off their credit cards.They're also building their emergency fund to $1,000 for the first time in their life.
01:21:11and they're doing it in $10 increments, right?When you find that community of people, that's what gets you through.Thank you for asking that question, and good luck with what I know will be great success down the road,because you're putting in the effort, you're calling in, you're asking the questions,you've got this.So go get it.That is our show for today.Thank you for tuning in.
01:21:40And speaking of community,Afford Anything has a free community open to everybody, and you can join for free at Affordanithing.com slash community.That's affordanything.com slash community.This is a new platform that we're using that allows you to connect with each other based on shared interest.So if you're in the middle of your debt payoff journey, you can connect with other people who are doing exactly that.Or if you're in the middle of trying to put your kids through college, you can connect with other people who are doing.doing exactly that. If you've never opened a retirement account before and you want to connect withother people who are new to retirement investing, you can make a group and have a group inside of
01:22:23there of people in the Afford Anything community who want to share exactly that experience.So this community platform, very excited about it because it lets you connect based on whateverit is you're interested in or whatever it is that's on your mind. Or maybe you just want to meetsomebody who lives in your same city. You can do all of that in this platform. Again, affordanything.com slash community. It's a wonderful place and I'll see you in there. Afford anything.com slash community. Thank you for sticking with us to the end of this episode. Each and every one ofyou, you are so awesome. And I've heard stories from many of you about the successes that you've had,the struggles that have happened along the way. And I am constantly amazed and constantly inspired by
01:23:08everyone who reaches out and who shares something of themselves. Because we're all in this together.Figuring out how to live a good life, a life that is meaningful and joyous, and that contributes tothe world in a way that matches your talents and skills. I mean, that question is big enough.And then to do that in a way in which you've also got the money side of your life dialed in,it's an ambitious undertaking.As I say in the intro to this podcast, it is a lifetime practice.There's no point ever at which you're just done managing money.And there's no point ever at which you're done managing and curating and cultivating your life
01:23:52and your health and your relationships.Like this is a practice.And so thank you for being part of this community as we together explore how to be better at this practice.This is the Afford Anything podcast.My name is Paula Pant.Please subscribe so that you don't miss any upcoming episodes.Just hit the subscribe button in whatever app you're using to listen to this show.Please share this show with a friend or a family member.
01:24:15And please join our community at afford anything.com slash community.Thanks so much for tuning in.I'll catch you next week.By the way, my lawyer says that I need a disclaimer.So here we go.This is purely for entertainment purposes.Basically, imagine that this is the least funny comedy show that you've ever listened to.We are not professional.
01:24:44We barely can brush our teeth in the morning.And so we don't hold ourselves out to be experts or really for that matter even adults.Give us the same amount of respect that you would give, say, a goldfish.And always, always consult with a real grown-up before you make any decisions.That means consult with a tax advisor, consult with a lawyer, consult with a financial planner,consult with people who actually have credentials and who know what they're talking about because that is definitely not us.All right, you've been warned.
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