Afford Anything - Ask Paula: Should I Invest or Pay Off My Mortgage Early?

Episode Date: August 4, 2020

#268: Natasha has $3,300 per month to either invest or use toward an early mortgage payoff. Which option should she choose? An anonymous caller and military member wants to know if she should move money from a USAA brokerage to Vanguard to pay less in fees. Her goal is to retire in 12 years with $3,000/month in passive income from rental properties, which will supplement her military pension. Should she only contribute to her TSP up to the match, and invest the rest in rentals? Chaim and his wife live in the Middle East and have $30,000 in a U.S. bank account. However, they don’t plan to relocate. How can they best use this money? June and her husband are in a sticky situation: they bought their dream house in Michigan last winter, ahead of plans to relocate there. June lives there with their kids, but her husband is unable to find a job despite the numerous contacts he has in the state. He currently works in a job that he dislikes in Southern California, living apart from his family. They’re currently a one-income family, though June has plans to open a firm in Michigan. What should they do? Anonymous in Portland has three questions: is a 75/25 US stock/international stock split aggressive? Is an S&P 500 index a close enough equivalent to a total US stock index? Is Betterment worth it for automatic tax harvesting? My friend and former financial planner Joe Saul-Sehy joins me to answer these questions. Enjoy! For more, go to https://affordanything.com/episode268 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that applies not just to how you spend your money, but how you spend any limited resource, including your time, your focus, your energy, your attention, anything that you have to manage. And that opens up two questions. First, what matters most to you?

Not what does society say is supposed to matter most, but what actually is a value in your own life? And second, how do you align your daily decisions to refurb? that. Answering these two questions is a lifetime practice, and that is what this podcast is here to explore. My name is Paula Pantt. I am the host of the Afford Anything podcast. Every other episode, I answer questions that come from you, the community. And today, my buddy, former financial planner Joe Saul Seahy, joins me to answer these questions. What's up, Joe?

I wish that people knew how much, well, I guess they will now because I'm about to say it, how much people knew that we laugh as we record these. Oh, my goodness. So behind the scenes, Joe and I've been just chatting and laughing for half an hour. And eventually we're like, I guess we should hit record. Maybe we need to get to work. But we're also sharing on the road stories. I am in Cleveland, Ohio for a four-day sojourn between. I've been in Dallas, Texarkana, Texas, Valdasta, Georgia, Cleveland for a few days,

and that I'll be in Vermont for a month. So the Joe Salsi High tour. Well, and I'm on afford anything today. So there is. And you are on the road because your wife is looking for a job and interviewing at various places. Yeah, and the good thing is, is that because of, and this is going to go to some of the questions we've talked about today, because we went from what people would call in the South a hot mess with our money to good financial habits, we don't want to be in a hurry. And initially, we decided to sell our house and sell everything that we owned. We didn't end up selling everything that we owned.

We sold probably 80% of our stuff. And now we're touring, looking for where the heck do we want to land. And on the topic of trying to decide where to live and on the topic of looking for a job, our first question today comes from June. Hi, Paula. It's June from Metro Detroit. Like many families, we're dealing with a pandemic-related job change, forcing us to consider a move from our current high-cost-of-living area in SoCal. We feel stuck, and I'm hoping to get your feedback.

on how you would analyze this. Unlike other families, we had already planned to move back in the good old days when jobs were plentiful. My husband's stock has vested in his current startup he's working for, but we're starting to think that his startup is not going to survive this pandemic. I'm starting my own firm, and I can only work in Michigan currently under my license, which would take some time and money to expand. And my husband worked in Michigan for decades, so I have many contacts there. My husband had leads on a startup fund for his business idea, and I prepped for a new business in Michigan. So we bought a house last winter at a significant discount in the Metro Detroit area with the best schools for our children. Now the kids and I are in Metro Detroit in our dream home, which costs only one time my husband's annual salary.

But he can't find a job here, hates his Southern California job, and we don't know what to do. Here's some stats if it helps. My husband is 50 and I'm 45. We have three kids from 10 to 14. My husband makes $250,000 a year. I haven't worked in 10 years, but as I said, I'm planning to go back to work. We have $500,000 in retirement accounts, $100,000 in the bank and cash in a savings account, interest bearing, and $900,000 in stock from a private company that were locked into with golden handcuffs.

We also have $25,000 in $529 plans, max out our 401k, IRA, and user FSA, and we also have about $5,000. $1,000 in an HSA, and no debt except for our mortgage. We don't want to retire anytime soon, probably 20 to 25 years out, we hope. We both like what we're involved in. And we travel every year for a month or so, probably less now that we have our oldest going to high school, so we don't have any desire to travel all the time. So what do we do here? Do we run out our house? We paid $250,000 for it, and it would rent for about $1,900 a month. I would have never chosen it as a rental and move to wherever he can find a job. Do we have him quit and live up our emergency funds while he's looking? We'd save about $2,500 a month in his living expenses, largely Southern California rent,

but of course we'd give up our income, our only income. My firm is an education, so this next year is going to be a big unknown for my income. We're feeling really stock. Our financial advisor hasn't weighed in yet, and I'd love to hear how you'd analyze this before I talk to him. Thank you so much. June, I feel your pain about where do we go next? What do we do? This, by the way, June is one of my favorite questions because these are the type of life questions I think that money is really about. Money and optimization of money is not the object. The object is to maximize your life. And man, Paula, I can really hear that in June's question. How do I maximize my life here? Exactly. That's what I love about this question, too. This is a question that relates to geography and mobility. It relates to where are we going to live. It relates to career choice. And it relates also to money. So rather than this being a narrow question, this is really a comprehensive life planning question. And ultimately, that's what money management is about. Money management is an entry point for life management. I look at this as frightening and exciting all wrapped together because this could be a great pivot moment for June and her family. And so the way I think about it is this. There's a couple of tools that I used when I was a financial planner that we can tell June about.

First one is financial planner should start off by asking the question, June, what do you really want to do? because when I hear the angst in June's voice, I kind of hear, and I don't want to project this, which is why I need to ask that question. I kind of hear that June doesn't want to move. June kind of wants to stay. And June likes the, you know, when she talked about the best schools for her kids and the house that's affordable. The dream house. Yeah.

Yeah. And the part where I'm projecting is going to be in one of the coolest cities on earth, Detroit, Michigan, where I've lived. a ton of my life. So that part is all me in June, though she gets it. But that's got to be the first question. What do you really want to do? And we know what she doesn't want to do. It sounds like Southern California is not something that she wants her, that her husband wants at all. But that also gives her a lot of opportunities to widen the net. There may be other places in the United States where she and her family would like. If that's the case, I sold my house in Detroit a month ago with great real estate help in a week.

And so by doing the right staging, that market has been talking to realtors in that area has been fairly hot lately. There's not much supply, which means if she decided to move, she could do that. But if she doesn't want to move and they want to go out on their own,

I start the thinking around that. So let's project that onto June's question. What if we decide to stick it out here and look for other opportunities? and do the thing that she said about living off the emergency fund. The first thing I think about is timelining your goals. And what I do is take a piece of paper, put June and her husband as a couple stick figures over on the left, and then draw a line with dates on when they're going to need money, the things coming up.

And the big need that I see is the first need for June and her family is college, right? So now I know how much time we have until they get there. And I look at that college fund and I hear $25,000 in my first thought, not enough. There's going to be a money crunch at that time if they decide to cash flow. And I don't know what their goals are around college or even if that's a goal at all, might not be a goal, which again is, what do you want? So if their kids are looking at doing things with their hands or maybe a technical school or on the job training, that might not be a problem at all.

But that's a potential one that we have to look out for. I would also look at what other things are coming up before that. But if not, she has a few years to be able to figure it out. And she has nice cash reserves to figure it out. I also look then at opportunities. And the first opportunity I look at is that $900,000 in the company that might not survive. And I wonder, is there a way to at least partially get out of that? And I know there's some companies out there.

I don't have any names, unfortunately, for June, but there are groups that will buy closely held stock. Now, they won't pay probably the $900,000 that she thinks it's worth, that the company's telling her it's worth. Because as a closely held company, they may not get that. However, if she sells the right to somebody else to be able to buy that stock and she's able to navigate that, she may be able to have something where that $900,000 might end up being nothing and that might be valuable money that's in her corner to help her start. June, my take on the home that you own, I see some separate questions going on here. There's the question of where do we live?

There's the question of how do we manage both your career and your husband's career. And then there's the question of if we move out, what do we do with our home? My first take was, given that you described it as your dream home, given that it sounds as though you absolutely love this home, I would hold on to it. I would hold onto it and use it as a rental. And I know that you would not have purchased it as a rental. I know it doesn't meet the 1% rule, but that's okay. There is value in holding on to a property that you love so that you have the option of potentially

coming back to it in five years or in 10 years. maybe when all three of your children are in college, maybe that's the time that you might want to come back to it. I think there's total value in holding on to a home that you love. And if it rents for $1,900 a month, I don't know what the operating expenses are, but I'm going to assume that that's going to be cash flow positive. So, you know, will it have amazing returns? Not expressly as an investment, no. But there is a distinction between holding a home as an investment versus holding a home for personal reasons and monetizing that home in order to offset the costs of holding it. Yeah.

And I think, Paula, about worst case scenario all the time, right? What happens? But kind of back to that timeline of your goals. And I thought about this, too, to your point that at the very least, if things go poorly, maybe there's one big incident where, She might have to put a lot of money in the house, but most of the time, at the very least, it's going to be cash flow neutral. Right. Exactly.

And if that allows you to hold on to this home that you love so that you can preserve the option of coming back to it, then do that. And don't think of it as an investment property. Think of it as a personal property that you're monetizing and you're monetizing this personal property for the sake of being able to hold it. And as an extra advantage, she also is going to get any appreciation on the property. and it's a forced savings mechanism, right? I mean, every time that the renter pays your mortgage on your behalf, you own a little more of that property as well. Right, exactly.

Equity growth through principal payoff. So I would, regardless of whether you stay in Michigan or not, I mean, certainly if you stay in Michigan, you'd be holding onto that home. But if you do move out, based on how much you seem to like this home, I would, if I were in your shoes, I would hold it. So, but what does she do?

about the job, Paula? You know, that's a tough one because it sounds as though her husband is unlikely to find a job in Michigan, which means that June and her family may need to move back to Southern California for a little while in order to be with him while he is still at this job. I mean, it does make sense for him to spend perhaps a few more years at this job in Southern California that pays very well so that they can aggressively build up their savings, safe for college, shore up their retirement accounts. I could certainly see going back to SoCal for a few years while you cash up. That's one option.

Another option is to go somewhere entirely new. If you don't like Southern California, if nobody wants to be there, and if your husband could find a job in a different location where you could also. get your license, essentially, if there's an alternate location that would be a good fit for both you and your husband, then maybe you go to that third alternate state. Maybe rather than Michigan, which would be a good career fit for you, but a bad career fit for your husband, or SoCal, which would be a good career fit for your husband, but it sounds like a bad career fit for you, and also it sounds like you don't really want to be there anyway. Maybe there's a third option,

some third alternate state that would be a good fit for both of you, where both of you could work, where both of you could find jobs, and you could live there for a while while renting out the dream home in Michigan. That would be another potential option. And I totally agree, Paula, if they get clarity around what it is they may enjoy doing, opening that door and walking through it and closing the door, let's say in this case, closing the door on Southern California and saying either A, we want to be, in the Detroit area, or B, we want to be in towns of this size, in one of these states, and open that up. All of a sudden, that opens up other doors.

And it focuses your thinking. And what you find is when you start asking those more specific questions of the universe, I mean, not to get all woo-woo, but seriously, the second you put out there, I want to live, and I'll use my own situation, I want to live in a small town in America. there's a few states that I don't want to live in, but for the most part, I really like the idea of small town living. And so the second that we said that, all of a sudden these opportunities in these small towns opened up. And there were some specific states that we like more than others. And it was amazing.

The second we started looking for opportunities in those specific places and spent our time focused instead of on the big picture just in these, this small area, those opportunities also opened up. And for a little behind the scenes, Joe, I mean, you and I have been talking for weeks now, as you and your wife have been traveling to all of these different places while she interviews for jobs and looks for her next job. Yeah, you've been you've been crisscrossing the country, going to a bunch of states, living out of a suitcase. But you can also see it, though, Paula, from afar. I think you can see it go from this big thing that we told the universe to smaller and smaller and smaller, right? and now we're zeroing in because opportunities opened up in different places. We also have learned along the way, you know, what we really want. Like we went to some places that we thought we would like.

There's a town in the area of the country that we really thought that we'd like. And when we got there, we just went, yeah, yeah, we're not feeling it. Just not feeling this place. Even though the opportunity there was good, it wasn't the thing for us. And you think that by closing that door and eliminating that, even though they were saying, we want you, which is flattering, we want you, please come here. Even though you would think that that takes something off the table, by taking that off the table and saying, that's not us, we were able to much more focus on the thing that we really wanted. And I know that the area,

you know, I just moved from Detroit and that city has been hit like a lot of cities had. But I think if you know that you want to be someplace and you know that the opportunities that you're looking for are in that specific location and you spend all your hours there, you uncover the people who know the people who know the opportunity. And so perhaps that is the third alternative option is to find that place that would be a good career fit for both parties. Find that place where both people can work. Sure.

And I'm also wondering about, you know, we heard about him working for startups. So I'm thinking June's husband maybe has a startup mentality. Does he have a business in him? Hmm. Recessions are actually counterintuitively, often very good times to start a business. It's funny that you say that. There was a study done in the first 10 years, maybe 2005-2006 of this century, 2005-2006-ish, talking about the biggest tech startups at that point.

Most of the major startups around 2005-2006 were born out of the collapse of IBM. And IBM didn't completely collapse, but they shed a lot of divisions, and they got laser focused about what they were doing. And as they did that, there were all these people from IBM who had been let go, who all of a sudden created some of the big tech startups of those first 10 years of this century. So you're right, right on. As bad things occur, you see this good stuff emerges. Absolutely. And it makes sense. I mean, this is a time in which, interest rates are at a record low, a generational record low, and a lot of very talented people are looking for work. So it absolutely makes sense that the conditions are right to start a

business, assuming that you have enough of a stable financial position under you to be able to have that runway, which June you do. You have $100,000 in cash. You have the runway for him to be able to start a business if that's something that he wants to do. Yeah, and don't get talked, don't get talked into starting a business by us, by a couple business owners, because it isn't easy and the runway needs to be probably doubly as long as most entrepreneurs think. Like, if you think that your business is off the ground in a year, I will tell you it's going to be two to two to two and a half. I have yet to find a business owner who didn't need a much longer runway than they thought that they did. And I don't know a business owner that didn't go through the valley of

death to get there, these unicorns that hit it right away that you read about are few and far between. And I wouldn't even go in it thinking that. I think if you go into a business thinking it's going to be long and difficult and I'm going to have to work really hard, then only good things happen. Then every time something good happens to you, it's a blessing instead of what you expected out of the gate. I would expect nothing good to happen that you're going to have to fight for every inch. And if you go in with that mentality, great. things can happen. So fundamentally, June, I think what both of us are saying is this is not a financial question.

It's a life question. Where do you want to live? What do you want to do with your careers? What geography would best facilitate the career goals that each of you have? And once you make that determination, then you can fit your finances around that. but don't lead with your finances. Lead with the life that you want to create at the risk of sounding cliche. Lead with the life and the career that you want to create and then make your financial situation fit that.

Don't. And I've made this, I say this because I've made this mistake many times in my life. I have at many points made the choice that is the most financially sound, but that is not the thing that I actually want to do. And ultimately, that has in the long term cost me more because I was ultimately unhappy with the choice that I made and then had to pay for all of the costs associated with unwinding it and getting out of that situation. So don't make choices based on pure spreadsheets because your life can't be reduced to a spreadsheet, nor can your career. The thing about a career is that it's more than just income, a career. is legacy, its meaning, its purpose, it's community. It's the work that you leave behind in this world at a professional level. And so I would never counsel anyone to make a career decision

that revolves purely around the numbers. Yeah, absolutely not. Well, and we see it here, right, with podcasting. I'm in podcasting groups, and the worst question I hear a new podcaster ask is how do I make money podcasting? Right. That's not something that you ask when you're new. That's something that you ask two years into it. Yeah, yeah. Have something to say first for all of us. And I just want to go back again, that tool of timelining, Paula, is far better than I ever thought that it would have been because I noticed so many potential pitfalls when I timeline my goals and I see how things overlap in ways that I didn't expect. I'll give you an example. Some people that had kids maybe a little later, they wanted to retire early. They would tell me their

retirement goal and that they wanted to help their kids with college and they didn't realize that junior was going to go to school on the same day they told me they wanted to retire. And obviously, had they not known that 10 years ahead of time, that could really affect your goal. But with the 10-year runway and the magic of compounding interest, you can navigate that and make something that could have been a, oh, wow, we didn't see that come and turn it into something that wasn't a big deal at all. So thank you for asking that question, June, and best of luck with whatever decision you make. We'll come back to this episode after this word from our sponsors. The holidays are right around the corner, and if you're hosting, you're going to need to get prepared.

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ends December 7th. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient, they're also powered by the latest in payments technology, built to evolve with your business. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the fintech hustle that got them named one of America's most innovative companies by Fortune magazine. That's what being a fifth third better is all about. It's about not being just one thing, but many things for our customers. Big bank muscle, fintech hustle. That's your commercial payments a fifth-third better. Our next question comes from Kime.

Hi, Paula. Thanks for the great podcasts. They are inspiration. My wife and I are 40 and 39, respectively, both with steady jobs. We live in the Middle East. I currently have no plans living in the U.S. in the near future. We file a 1040 each year besides the local taxes. We have about $30,000 in a U.S. bank account and are thinking about what to do with it.

Pension plans and spending accounts are all in local non-U.S. banks. So the U.S. account is pretty much isolated. It's mainly tax money, meaning if there are any tax returns in a given year from either country, the money gets put in the U.S. account. We have been considering either a Roth IRA, we don't have one yet, or getting into real estate, and have even gotten pre-approved for a mortgage about a year ago. So we look into it. We're completely new to the real estate market.

although I have been reading and listening for quite a while, and keep hearing warnings about doing out-of-state investing. But cases like Rich Carey make it sound doable. So what ideas do we have for what to do with the money, which we don't need for quite a few years? Thanks, the Rosem. Thanks for calling in. That is a fantastic question.

I think that in choosing between a Roth IRA or out-of-state, out-of-country, real estate investing, the first question that I would want to ask you is, is your objective simplicity and ease, or is your objective your natural interest in diversifying into real estate investing? Because the first thing that I tell anyone who is wondering whether or not they should invest in real estate, the first question that I ask them is, do you truly want to do this? because what separates a successful real estate investor from an unsuccessful one right out the gate is whether or not you want to do it. If a person goes into real estate investing because they think that they quote unquote should be doing it because they go on the internet and it feels like everybody else on the internet is, that's a bad reason to go into it. But if real estate investing is something that truly interests you, if you think that you would enjoy it, if you love the idea of diversifying into it, and if you like the notion of, of embracing this as both a challenge and an opportunity, then go for it. So that more gut question

of do you want to optimize for simplicity, which opening a Roth IRA is quite simple and moving money into it up to $6,000 per year per person is quite simple. Do you want to optimize for that simplicity or do you really want to invest in real estate? If you do really want to invest in real estate, Rich Carey, who you mentioned in your question, is an absolutely fantastic resource. So for the people who are listening to this, who aren't familiar with his story, Rich Carey was a guest on our show in episode 136. You can listen to that at Afford Anything.com slash episode 136. Rich Carrey bought 20 single-family homes, completely debt-free.

He bought them free and clear. and he purchased the majority of those homes from outside of the country. He was in the military. And so he was stationed first in Germany and then later in South Korea. And from his military base in Germany and in South Korea, he bought single-family home rental properties, site unseen in Alabama. And he accrued a very healthy portfolio of 20 single-family homes in Montgomery, Alabama. And so he's a fantastic success.

story of somebody who successfully managed overseas real estate investing. And if you want to reach out to him, he's very accessible. So you could certainly do that. But some of the core lessons from his story is that he consolidated all of his holdings into one location, Montgomery, Alabama, which allowed him to form a very strong team there. So he had an excellent real estate agent, excellent property manager. He had a team that he trusted and that team operated his business physically in location. And fundamentally as an out-of-state real estate investor, that's what you do. You form a team and that team runs your business. And what I love about out-of-state real estate investing, five years ago, I moved 2,000 miles away from all of my rental

properties. And putting that distance between myself and my rentals forced to, you me to really treat it like a business. When I lived in the same city as my rental properties, it was so easy to cut corners in terms of treating it like a business. If something needed to be done, if the batteries in the smoke alarm needed to be changed, it was so easy for me to just drive down there and put some batteries in the smoke alarm and not integrate that into any type of process or system. And once I moved out of state, I was then forced to create processes, to create systems, to build a team, to truly treat it like the business that it is. And so for that reason, I prefer out-of-state real estate investing.

I think that it created a level of accountability and a level of professionalism that I didn't have when it was easy to meddle in a haphazard way. with my properties because my properties were so local. I love the idea, Paula, of treating your investments like a business and making much more business-like, not-emotional decisions. If it is, I get what Richard did, and I don't know Richard, maybe he is mechanically inclined. And I'll tell you why I asked that question here in just a second. but if it's my first real estate investment and I'm halfway across the world, I wouldn't recommend that in a a billion years to somebody. Because finding out if you have the fortitude with your first rental property ever and you're halfway across the world and you decide halfway through that this is a big,

giant pain, man, there's much, much, much simpler ways to make money. And there's also better ways to learn about making money than investing in one that's halfway across the world. And the reason that I say that is my most successful landlord clients were people that knew how to talk to the contractors that they were going to need when they weren't in the same city. And they knew what to look out for and they knew what to beware of. You are, one of my clients put it this way. If somebody tells you that XYZ is broken and you've worked on that yourself before, or you understand how the furnace works or how the hot water heater works and you understand the

discussion and you know it to be a pro at it. But if you fixed a toilet before and the plumber's telling you what's broken on the toilet, you're much more likely to have a conversation that is valuable than just having to take people's word for it when you're halfway across the world. And also that said, you know, there are these companies that will do it for you or syndicates that you can join. I wouldn't do that from halfway across the world. That scares the heck out of me.

There's too many people that are horrible at that. So my gut reaction, regardless of the success story that Mr. Carey has, my gut reaction immediately was, oh, hell no. That was my immediate reaction. See, so here's where I disagree with you, Joe. First, I do agree that being fluent in contractor lingo is important. In my course on rental property investing, we have a whole section. on learning the components of a house, learning the mechanics, learning the functionality, and being able to speak to a contractor with the type of vocabulary that a contractor uses,

because that is important for getting a contractor to take you seriously. And it's also important for being able to have those informed conversations where you can follow what the contractor is saying and you can ask intelligent questions. intelligent follow-up questions. So yes, I absolutely agree that being fluent in the mechanics of a home is very important. But that can be learned. And you don't necessarily have to be physical or hands-on with a home. You know, that can be learned simply by living in a home, no matter where you are, you know, no matter what country you're in. That can be learned by living in a home. And that can be learned not by hands-on experience solely, but also by taking a step back and understanding at a

basic level how a house comes together. What are the components of a roof? What is underneath the roof shingles? What is flashing? And what does that do? What are soffets? How many downspouts should a gutter have? And how far from the foundation should it run? You know, those are are questions that relate to managing the mechanics of a home, and you can gain that familiarity no matter where you are. So again, I think that that goes back to do you have enthusiasm for entering the world of real estate as an asset class? Because your desire and enthusiasm to learn what softets are is dependent on whether or not you're actually into this in the first place. If you're doing it just because you feel like everybody else is, then having a conversation with your contractor

about the relative pros and cons between luxury vinyl plank flooring versus porcelain tile is not going to be something that's interesting to you. But if you kind of nerd out about stuff like that, you can nerd out about stuff like that from anywhere. I would then, because I can understand your point, I would spend a lot of time, nerd. out on it first. I'd spend a lot of time nerding out on it first before I did it. Yeah, that's my feeling. So ultimately, that's the question that I would ask back. Do you want to nerd out on it or do you want simplicity? And that is ultimately what you're choosing between. Here's something I do like, though, for people outside the United States, no matter who it is. If you have money in different

countries, I wouldn't go seek having money in different countries first. But if you're in a situation like they are in the Middle East and they have money in the United States, I like keeping it there. I really do because it gives you another avenue when it comes time to take money to look at. So I had clients all over the world. And I'll give you an example. I had some clients where he was from Ireland and she was from Scotland. They had a money need that they didn't expect. The U.S. dollar was doing fantastic at that point in time versus the economy.

economy in Scotland, in Ireland. And they actually, because they had a decent sum of money in the United States, they could use that money and make their money go a little further because they had not just diversification of asset classes, but of money in different places. Because they'd spent time in the United States, they understood a little more what money was like there. I definitely wouldn't go buy money in the Middle East just so that I have a different asset class or have a different currency, rather. But if he got it, man, I like flexing that advantage. Well, thank you for asking that question.

Our next question comes from Anonymous, and Joe, you and I give a nickname to every anonymous caller. So what should this person's nickname be? Well, she says that she's in the military, and we said that we always use stars names, right? Yes, celebrities' names. Yes, so I'm thinking military, Molly Ringwald, this is Molly in the military. Molly Ringwald has something to do with the military? No, she doesn't. She's just a star. And it's M. And it's alliteration. Oh, okay. Like Nancy in North Carolina. Who's Molly Ringwald? Who's Molly Ringwald? Oh, my. Well, I can Google that one later. But for the moment, our next question comes from Molly. Hi, Paula. Knowing you are not a tax professional, I wanted to get your opinion on whether or not you had moved money from a USAA brokerage to Vanguard for lower fees. I currently have money in both.

I have 66,000 in a USAA NASDAQ100 fund, ticker symbol USNQX taxable account. I have 44,000 in a USAA Roth IRA consisting of USNQX and USSPX. Since 2014 when I opened these accounts, USNQX has had a pre-tax return of 16% and an expense ratio of 0.48. USPX has had a pre-tax returns of 9% and an expense ratio of 0.27. With Vanguard, I have VTSAX and VGSLX, and their returns since inception are 6.45 and 9% respectively, with a much lower expense ratio of 0.04 and 0.12%. My long-term goal was that when I retire from the military in 12 years, I have enough

passive income to support my lifestyle of roughly 3,000 a month, and I'd like to do that with rental properties. I would love to never work a day again after 41 years old if I don't have to. With that being said, would you, A, keep the USAA brokerage money in place and not use that until I'm older, thus finding other money to bridge the gap between military retirement and 59.5 years old. B, transfer the money from USAA to vanguard, such as rolling over the Roth IRA, and have it continue to accumulate at a slower rate, but with lower Vanguard expenses until I'm 59.5. Or C, pull that money out of USAA, even if in $20,000 chunks at a time, to invest in

three to four rental properties with 10-year loans, so they're paid in full by the time I retire. I currently have two properties now when we'll close on a third one this week, which after PITI, vacancy, CapEx, maintenance, property management fees, will cash flow $400 a month combined, which means I still need over $2,500 a month to keep my current lifestyle. Another thing I'm wondering is if I should invest only up to the government match of 5% into the TSP, which is the military version of 401K, but still max my Roth IRA and use the leftover money for properties. After maxing out my Roth, TSP and IRA, I typically am able to invest in additional $12,000. With only contributing to the match, I would have a lot more money for Reynolds.

Would you max out the TSP or only invest until a government matching? I know you are for entertainment purposes only, and I know I should consult with a tax professional. I just wanted to get your spin on things and hear it from you because you have a gift for breaking down complicated information into layman's terms. Thank you for your podcast, and thank you so much for your insight. Molly, some great questions here. By the way, fantastic job and really nerding out on a lot of the money topics.

I like Apollo when people know what the different levers are, right? I know the differences between USAA and Vanguard. They know the difference in the TSP, buying real estate. And the more you know, by the way, the more fun this gets. So for somebody who's brand new, they heard Molly's question, like, what the hell is she talking? What is she talking about this versus this? but it also is pretty fun. So we're going to go into much deeper Nerdville here.

But here's my first thought process. USAA versus Vanguard. I will say this again. And Paula and I are going to disagree. Nearly 100% irrelevant. Now, before you write to Paula or, and you shouldn't write to Paul at all, just go ahead and write your hate mail to me, Joe at stacking benjamins.com. Before you write to me, so much more of whether you win or lose his behavior.

than what the fees are. And don't get me wrong, egregious fees are something you should fight. But when I hear that you're looking going from a 0.49 to a 0.2 or a 0.02 even, you're not going to get to retirement and go, that's the reason I couldn't retire. It's because I stuck with USAA. It isn't the reason. Now, does that mean you should do it or shouldn't do it? If it's nails on a chalkboard that USAA has maybe close to half a percent higher fee than by all means make that change.

But the interesting thing is I would point to diversification and asset allocation as pretty interesting in this case too because your asset allocation is different with USAA than it is with Vanguard. And when you're pointing out these returns, initially I thought, wow, the USA has much higher returns. Molly used a few terms or used the term from inception. And because she probably started these at different times, we don't have any idea which one of these asset allocations has actually been better. Unless she started them all at the same time. If she started all these at the same time, then USAA, even though they have higher fees, has won the day for her. Vanguard in those same indexes probably would have won the day better, by the way. And so then people will ask, well, then Joe, why you're saying it's irrelevant?

Because it's much more important that she saves and that she has the right asset allocation. In USAA, she has the right asset allocation for that timeframe and is beaten the pants off of Vanguard, even though she had higher fees. Focus on your asset allocation. Focus on the taxes. Focus on your end goal. and then focus on the fees. So, Joe, essentially what I'm hearing you say is like there's the steak and then there's

the side dishes. There's the steak and the peas. The steak is your contributions, your asset allocation, your money management as it relates to your goals and your timeline. And then something like expense ratio are, that's the side dish. That's the peas. You can tweak it, but that's not where the mental focus ought to be. Is that what you're saying?

Yes, and I get where Molly's coming from because, Paula, you and I am financial media now for a decade each. And you just, and you more than a decade, right? I have been in financial media since 2011, so just shy of a decade. It was amazing to me how when I switched over from financial planning world to financial media world in 2012, so a year after you, how there's this myopic focus on fee fee, fee, fee, fee, fee, fee, fee, we're in the financial planning world and don't get me wrong. You know, I mean, these are paid professionals, right? But the focus there among the good financial planners is on performance. How do I get my client to perform better? how does my client optimize their life better? And I think I can see, number one,

why the financial industry wouldn't do that. So the cynical me goes, well, of course, because they need to charge the fee. But on the other side, I look at that world and I look at the fee world, and I think, well, which one's more important? Would I rather have a bunch of crap that doesn't cost me anything,

but it's crap, or would I rather have really good stuff that I have to pay a fee for? And I'm not saying, by the way, those are mutually exclusive. They don't have to be mutually exclusive. But I'm just saying one versus the other, absolutely. And by the way, Molly, everyone listening is hearing my voice go up. It's nothing to do with Molly. It has to do that Joe has a trigger and Paula knows it. Yeah, I know it. Anytime the topic of expense ratios comes up, I know that we're going to have some entertainment from Joe. It's like here, here we go. But to be clear, you're not calling Vanguard crap. Vanguard funds are fantastic. And looking at performance. You know, we know what historic performance has been. We do not know what future performance will be. And that's true for every brokerage and every fund. Well, and if she's in Vanguard, though, and she's in indexes, we do know that Vanguard hangs their hat, Paula, on low fees. And so we can be fairly certain that Vanguard's legacy will always be we're going to keep a low fee approach. On the passive side, on the active side, we're seeing something different. Vanguard, by the way, just said goodbye to a van Gogh, just said goodbye to a van Goghap.

value actively managed mutual fund that they have because it couldn't compete. On the active side, while Vanguard is low fee in a lot of places, they're not that competitive. But if you're going to stick to the indexing game, like a lot of people do, you could make a case that a lot of people should. Vanguard is a better home for that money than USAA currently. USAA, by the way, fantastic insurance company, takes care of their people. Amazing. When it comes to their asset management stuff, I have haven't been as impressed. And if you're an index, really, who cares what the company is? As long as you know, you're comparing an Apple to an Apple.

If you've got the same index in two different places and you know it's the same index, go with the one that's less expensive. By the way, the reason I say know what you're doing is because there are a lot of amateurs who got involved in what are called sector investments with indexes. And back, remember when oil was paying you maybe six or eight weeks ago, Paula? It's all starting to blend together. Right. There was this big thing that oil futures flipped and all of a sudden it was this weirdness.

You didn't have to pay. They were going to pay you. There were so many amateurs that got burned because they didn't know what they were doing. The two top index is there. An amateur would look at the two top indexes and they would say, well, these are oil indexes. They do the same thing. The number two index had a much, much better outcome than the number one index when it came to fees. the number one index far, far lower fees.

So a lot of amateurs flooded that. You look at the number of assets they have. The number one index really got burned, got burned big time in that. And that's a case where an amateur didn't know what the difference was between the two. But if you're sticking with the S&P 500, if you're sticking with one of these broad-based indexes, we know what they're doing. And we know that Vanguard has a lower fee than USAA. it's thing 37 on the list, but go ahead, once you've done everything else correctly,

go ahead and change to the less expensive option. Well, and so of her questions, you know, the first two questions was keep that money in the USAAA brokerage and maintain it until she's 59 and a half or transfer the money to Vanguard and keep it until she's 59 and a half. And I think the root answer is ultimately it doesn't really matter. You can do either one. ultimately the decision that you make on that is not going to make or break you. No. And if she has extra time, go ahead and move it to Vanguard.

If that makes you happy, because it is cheaper. And it will have a slight, slight difference. Compared to the bigger difference, she has different asset allocations in both of these funds. Decide which asset allocation really is which diversified approach is going to get you to your goal, move it to Vanguard and have that approach. And of those two things, having it at Vanguard versus USAA and getting her asset allocation correct is going to be the winner. That's the one that's going to rock no matter where she has it. And then her next question was around, do I leave that money and do I build new money for my early retirement? So I kind of backfill or do I use this money first?

Right. So the money that, Molly, the money that you currently have invested, if it were me, I would keep that money invested and let it sit until your 59 and a half. And the reason for that is when I think about retirement, early retirement, I think of it in two chunks. there's the retirement that you will have from the age of 41 until the age of 59 and a half, and then there's the retirement that you'll have from the age of 59 and a half onward. And it makes sense to me to create two different buckets of money for each of those situations. I like the idea of preserving money, regardless of whether you hoarded USAA or Vanguard, I like the idea of preserving a bucket of money for the age 59 and a half and all.

on a word time frame. And that's money that you know you're not going to touch. You'll let the investments grow. You'll let the investments compound. It will be there for you when you are 59.5. The writer Morgan Housel, who I know I quote often on this podcast because he is so insightful, he recently tweeted that for the average American, not somebody in the fire community, not somebody who self-selects a person who listens to personal finance podcasts, for the average American, their personal home, their owner-occupied personal residence, is their biggest, quote-unquote, investment. The reason for that is not because it is actually a good investment, but simply because it's the one thing they have that they don't tinker with. They don't sell in and out of. They don't toy with it.

They just let it sit and let it grow for many, many years. And that's the reason why that has turned out to work out so well for the average American. Now, of course, I am not stating that your personal residence is a good investment. I'm not stating that by any stretch of the imagination. But his point was that if you are able to let something sit and grow and compound for decades, you will see, historically speaking, you are likely to see strong results from that. And so that's the reason why I would recommend keeping this money in the post-59-half bucket by keeping it inside your brokerage accounts. I also like the fact, Paula, that you know how when you're at a nice restaurant and they bring out dessert and you get all excited about the dessert? But the dessert

comes after the meal. And the meal you need for sustenance, right? I like when I look at a financial plan getting my security in order first. It doesn't work out that way best for everybody. But Just one way of thinking about it, I think that works for a lot of people, is let's make sure security is locked in. And I look at the money she's already saved as the security money. So I start with her end of life and work backwards. And then every time I put in new money, instead of being frustrated, oh, man, I got to save more money.

I'm saving more money. The more I save, the more it becomes like dessert. I'm now piling on ice cream and cheesecake. I flip and love cheesecake. I'm piling this stuff on that's the early stuff, that's the fun stuff at the end, knowing that my base is covered though. I've got the foundation done. I know that I'm going to live.

And now let's put whipped cream and a cherry on a Sunday. Okay. So far, Molly, in our answer, we've talked about steak and side dishes as the analog to how to think about investment choices. And then we've also talked about main course and dessert as the analog for the 59. and a half an over bucket versus the 41 through 59 and a half bucket. All I can say, Molly, is you're welcome. You're welcome.

So to the, Molly, to the question that you asked about, should you invest only up to the match and then use the remainder of your money to continue buying rental properties, it seems to me as though rental properties will be a big piece of how you cover your costs from the age of 41 to the age of 59 and a half. Now, you don't need this money for another 12 years, and so I know the cash flow right now is not robust, but if the current homes that you own were to be paid off within 12 years or within 10 years, what would the cash flow look like at that time? That's the first question that I would ask.

And then the second question I would ask is how many more properties with what type of cash flow would you need in order to have the $2,500 a month or whatever sum of money you need at the age of 41. So essentially, we're starting with that plan. We're starting with, all right, here's what I currently have and here's how much money they will cash flow by the time I am 41. Here's how much more I need in order to get to the goal that I have by the age of 41. And then once we, know how many more properties you need to acquire, then we can calculate, all right, how much money do I need in order to buy those properties? And if I were to invest only up to the match and use the difference to acquire more rental properties, how many more rental properties could I acquire?

When would I acquire them? Based on when I acquire them, when would those be paid off? and does that plan get me to the goal? Joe, you mentioned earlier, timelining your goals. So taking a big sheet of paper, drawing yourself as a stick figure on the left, drawing a line, and then visually timelining all of this out.

Molly, I think that that would be a great exercise for you in terms of thinking through your rental property acquisition strategy for the next 12 years. And it's the fact that I do that in my head now whenever anybody asks you and I questions on these shows, Paula, that my initial gut answer would be if real estate is going to be the cornerstone of your approach, then yes, putting less in the thrift savings plan, which by the way, awesome plan, fantastic for long-term savings, talking about fees, Molly, very, very responsible fee structure on the thrift savings plan through the government. But that said, that money's locked up. You can get at it, but it's going to be pretty onerous trying to get at your money and get into this tech shelter. So having more liquidity for these properties to me make sense. But I like Paula then. Then you go through the math that you're talking about. And I think, but I think timelining it was what led me to very much

the answer that you're going over, which is, yeah, probably. Molly, I'd also like you to go back and listen to episode 266 in which a caller asked about whether he should build an Airbnb or a short-term rental unit on his property or invest in a Roth IRA or buy an out-of-state rental property. And I talked through some of the factors in terms of making a decision, including reward, risk, liquidity, leverage. I talked through how to think about some of those factors as he arrives at his decision. Listen to that episode, specifically that question, because I see my answer there also applying to your situation insofar as it touches on this broader question of forming a rental property strategy, how many properties do you need, buy when. And as I outlined in my answer to him, needing cash flow today versus needing cash flow in 10 years could lead a person to make very

different decisions about the rental properties that they acquire. If you are acquiring rental properties with the goal of immediate cash flow today, then you may buy a different number of properties with a lower amount of leverage or no leverage at all if cash flow today is what you need. But if cash flow in 10 years is what you need, that changes the game. And so as you draw out that timeline, think about that as well. The goal is cash flow at age 41. What needs to be set up in order to hit that goal? So thank you, Molly, for asking that question. We'll return to the show in just a moment. Our next question comes from Natasha. Hi, Paula. This is Natasha. My question has to do with how I should be investing $3,300 a month to give you a little bit of background about me.

I am 43 years old, and I have been maxing out my 401K contributions for the last 15 years. Currently, I have about $760,000 in retirement accounts, and I'm confident that if I never put another cent into those accounts, that with a minus 7% return, that portfolio would grow to close to $2 million over the next 15 years. I'm comfortable using the 40% rule that I would only need $80,000 a year to live off of once I'm 59.5. My question has to do with more, what do I do in the interim? We currently live in New York City and have a special needs son. It's the best place for him to be, so I don't foresee us being able to be in a position to move away to reduce her tax obligations. and so I currently have about 15 years until I can really access my retirement accounts.

I still do invest in a Roth 401k up to my company match, but in the next five years, I really want to walk away from full-time work. And as I said, I have $3,300 a month to invest, which is what I'm currently doing and putting it in a brokerage account. My question is, should I be considering redirecting that money towards our mortgage, which is, $380,000 to pay that off thereby reducing our expenses in total in five years, or should I continue on the path of investing the $3,300 a month over the next five years and using the projections of 7%, you know, that portfolio should grow to about $400,000. So thank you again for your advice, and I really appreciate your podcast and all the work that

you put into it. I'm a relatively new listener and I can tell from the thoughtful answers that you give that you put a lot of work into it. So thank you for that in all your efforts. Natasha, thank you for that question. And congratulations on everything that you have built. You have $760,000 in your retirement accounts. You've already set yourself up in such a way that if you, as you said, if you never put another penny into your retirement accounts, you will have enough in those accounts, most likely, that you can reasonably project. You will have enough in those accounts that you'll be set for retirement starting at 59 and a half. And that is a impressive feat by the age of 43. So huge congratulations to you for building that. Now, to your question, so you have $3,300 a month.

If you continue to invest this money into a taxable brokerage account, which I love that you're doing that because it gives you liquidity, it gives you flexibility. It gives you flexi. If you continue to invest this money in a brokerage account, it is projected to grow to about $400,000 over the total account balance of about $400,000 over the next five years, assuming a 7% return. Your question is, should you continue to invest this $3,300 into a brokerage account, or should you start applying it to your mortgage? And your mortgage balance is $380,000.

What I would do is continue to invest this in a brokerage account, let it, grow to $400,000, and five years from now, when you walk away from your full-time job, you can then take a look at that $400,000 balance and ask yourself, do I want to now pay off my mortgage in one giant lump sum? Or do I want to continue to have this mortgage and also have this $400,000 that I can tap at any time? Five years from now, if you have a balance of $400,000 in a taxable brokerage account, you have that option, you have that choice. And if you do decide to make a giant lump sum payment towards your mortgage and write

a $380,000, or by that point it might be $360 or $350 or I don't know where you are on your amortization schedule, but let's say you write a $350,000 check to pay off your mortgage in one fell swoop, that's going to be an extremely satisfying check. but by virtue of building that $400,000 balance first, by virtue of waiting until you are ready to quit your full-time job, you preserve options. You give yourself maximum flexibility. I play this game in real life, Paula, and there's actually a third option. The third option, one that you didn't mention, is the one that most people did. And that is, I leave the 400, so I've built up this 400,000 that can now pay the mortgage in one fell swoop. They actually, most people kept the mortgage. Well, I'm not going to say most people. Everybody, I can't think anybody that didn't do this third option, left the mortgage there and instead hooked up their automatic payment to the brokerage account and had the

brokerage account paid the mortgage every month. And that way, they continued to do this interest rate arbitrage with a good sum of the money. They converted a piece of cash to cash from time to time to make sure they had enough to just make the payment. and then they continued to have the flexibility to use that money however they wanted and still had this pile of cash. Full well knowing that if they wanted to write that big, huge check, they could do that

at any point later. What I found is it's the feeling of being able to write the check that is much more powerful than actually writing the check. In the case in which a person hooks up their mortgage payment to the brokerage account, how does that work with regard to asset allocation? Well, you keep the asset allocation very similar to what it was before. I think, frankly, as you get closer to that mortgage being paid off, you can continue to back it down and lock it in. You've already got the money sitting there.

As long as the interest rate expectation of those assets over whatever the period of time is, is expected to be higher than what the interest rate on the mortgages, then keep it there. Do they have a portion of their brokerage account that's kept in cash? Absolutely. And besides that, nothing really changes. You have a little more money in cash so that you're able to have cash make the payment. And then the rest of your asset allocation stays exactly like it was. Wouldn't your asset allocation need to change because your timeline to withdrawal would be different since the timeline to withdrawal is now more immediate? Well, it's funny because we're about to, you know, the last question we're going to answer is about this whole barbell approach to investing the next question.

So this is going to be there. But the answer is no. You know, the bigger question around asset allocation and using stocks versus bonds and keeping a stock heavy portfolio like you would probably use for what Natasha is talking about, the bigger problem is not the asset allocation. The bigger problem is you and your ability to stick with it. So the answer is, yes, you will keep more money in cash because you're going to be accessing it. So maybe instead of having a tiny amount in cash and staying fully invested. maybe you have the next two years payments in cash and the rest of it is invested. So with a two years, and if you want to be really conservative, three years of money in cash

historically, and I'm thinking through a lot of the modeling that we did or that I've seen other people do, three years money in cash. And by the way, to some people are like, wow, that's a lot of money. Well, if you look at the fact that you got $400,000 sitting there in the account three years of cash on the payment only, not really, not really a ton of money in cash. So the answer is yes, it changes. That will also lower your rate of return expectation, but it also makes sure that you can weather a three-year storm before you have to go back to the well with your assets. So Natasha, effectively, the three options are redirect that money towards paying off your mortgage

or continue funding your brokerage account for the next five years and then at the five-year mark, decide whether or not you want to make a lump sum payment towards your mortgage or not. That's option number two. And then option number three is what Joe described, which is continue funding your brokerage for the next five years. And then at the five-year mark, if you choose not to make a lump sum payment, use that money to pay off the mortgage.

Make the payment. Right. You suggest to make the payment. And so I think Joe and I are both in agreement that option number one, redirecting the 3,300 a month to paying off your mortgage, that is the option that neither of us are in favor of. And to elaborate on that a little bit, a large piece of what I'm thinking about is flexibility. When you make an additional payment towards your home, that money is locked up, that money is gone. You can't access that if plans or life doesn't go the way that you expected it to.

And if a mortgage is not fully paid, then the bank can repossess the property. if you owe even $1 of debt on your mortgage, then the bank can repossess the property. So it makes sense to me to keep your money in the type of account that preserves flexibility

until you can put yourself in a situation in which the bank is no longer involved because the whole thing has been wiped out. I want to caution people, though, who aren't Natasha, who are not already saving that money

because the big problem I've seen here, Paula, are with what I call broke professors, people that know everything. They know all the math. They know everything we just went through. But they're broke because they don't actually do anything. Paying extra to your mortgage for somebody who can't have this pile of cash sitting in a brokerage account without using it to go to Vegas or go to the mall or do something today, people who won't actually save the money, locking yourself in.

into a savings plan where you can't get at the money while maybe suboptimal is optimal for you. So I think you have to start with know yourself. And the reason I answered the question the way that I did is because of the fact that Natasha said she's already doing this. She's already saving the money, right? And if she's already saving that money, then yeah, keep going with that and then pay it off later. But if somebody's not saving yet and they're like, ooh, I was going to put extra money toward my mortgage, but I don't think I'm going to do that. doing something that's 90% right is way better than what the broke professor does, knows all the math and hasn't done a thing.

Right. And that goes back to what we were chatting about earlier, the distinction between the average American with the average American savings rate and people who are in the fire community or people who self-select as those who listen to personal finance podcasts. I mean, you could be listening to the life story of Kim Kardashian right now. now, but you're listening to this instead. Why does that to be either or Paula? That's true.

You could play them concurrently and listen to our voices as they overlap. So thank you, Natasha, for asking that question. Our final question today comes from another anonymous caller, and Joe, since we give every anonymous caller a nickname, what should this person's nickname be? Boy, he's in Portland and... I guess we want it to be a lot of... I guess we want it to be alliterative and we want it to reference a celebrity. Oh, you know a celebrity I just heard of recently?

I was talking to a friend of mine and she actually knows. Remember the comedian Polly Shore? What happened to Polly Shore? Oh, yeah, Polly Shore. You know what? Yeah. Hey, dude. Hey, dude.

This one time in Las Vegas, I saw this ad that said that Polly D was going to be DJing at some party. And I was like, I was thinking it was Polly Shore. So I was like, no way, Polly Shore is going to be there? And all of my friends just laughed at me. Imagine that Paula doesn't know who Pauley D is versus Pauly Shore or Molly Weringwald for that matter. Exactly. Exactly. So the running joke, and you hear this often on Joe's podcast, Dacking Benjamins, and it's a joke because it's true, is that I utterly lack pop culture knowledge. But in fairness to you, it started with a joke. Jack Benny reference. That's so obscure.

How am I supposed to know who Jack Benny is? 99% of people have no idea who Jack Benny is. And that's how it began. But that's how we found out that Paula knows nobody. Because it went from there to Star Wars and Star Trek. Neither of which I've ever seen. And then it went to like Bob Hope. I mean, who are these people you expect me to know?

Yeah, and Molly Ringwald or the Foo Fighters. I've heard of them. They were a band in the 90s. I know, I'm just kidding. Or to Michael Jackson. No idea who that was. heard of Michael Jackson too. There was this one time, I actually unknowingly, I met somebody who was part of Wu-Tang Clan. And at the time, I was wearing earrings in the shape of bumblebees. And he was like, oh, I like your earrings. It's like Wu-Tang's bees. And I just gave him a completely blank look. Like I still have no idea what he's talking about. To this day, I still have not looked up whatever song he's referencing. But yeah, I just gave him this blank look and kind of smiled awkwardly. And I was, like, I'm not familiar. Like you there. And he just cracked up.

So this is Polly in Portland then. Okay, yes. That's what we were talking about. This is Polly in Portland. Hi, Paula. This is anonymous from Portland. I'm 30 with a $150,000 portfolio, a six-month emergency fund,

and a 60% savings rate. I have three questions at research but struggle to find concrete answers to and would love for your perspective. First one, I'm mostly invested in target date funds, but want to switch that over to a more aggressive bar bill approach as it matches my personality. I want my portfolio to be 75% total U.S. stock, 25% total international. To me, that covers the aggressive side of the barbell, but I don't know what the other side should look like. Should I increase my emergency fund to 12 months,

24 months? Is my 75-25 stock split misinformed and that's not actually aggressive? My second question, my employer's 401K doesn't offer a total U.S. stock index. Is an S&P 500 index a close enough equivalent, or should I get exposure to small and mid-cap funds as well? I plan on holding his assets for a long time, so I want to make sure I'm not losing out on growth potential. My third question is around tax loss harvesting. Because of maxing out my yearly tax advantage limits, over half of my portfolio is in a taxable brokerage account. It is currently with Vanguard, but I'm considering moving it over to Betterment because they offer automatic tax loss harvesting. Is it worth it? Or am I just over optimizing? Your podcast has

truly changed my life since I discovered two years ago and your input is greatly appreciated. Thank you so much for everything you've done for this community. Polly, great question. First of all, congratulations on everything that you've built so far. You have a $150,000 portfolio. You have a six-month emergency fund and you're saving 60% of your income. You're doing a lot of things right. You're on a great track. So congratulations on. and everything that you've built. To your questions, first, I totally support your desire to switch to that more aggressive barbell allocation.

I myself have the same. I have a barbell allocation with an all-equities portfolio and a heavy cash allocation. I would recommend keeping an emergency fund of at least 12 months' worth of expenses if you have this barbell allocation. So I'm assuming that you are a W-2 employee who works for an employer. For myself, because I'm a business owner, I maintain an emergency fund slash cash reserves of ideally at least 12 months, sometimes I have to dip into it, but ideally 12 months of emergency fund for my business, and that includes the money that I pay myself.

So I maintain a 12-month emergency fund for my business, owner compensation included, and I also have a three-month personal emergency fund as well as a six-month cash reserve for each of my rental properties. So I have a lot of cash. And because I have that much cash, I'm comfortable being in all equities. So for you, assuming that you're a W-2 employee, I would recommend keeping an emergency fund of at least 12 months. And I think that should give you a sufficient cushion to be able to sleep easily at

night as you have this all-equities portfolio. In terms of 75% U.S. stock, 25% international, that sounds great to me. I have no objection to that. If that's what you want to do, I would not characterize that as misinformed at all. I'd be really interested to see, though, Paula, because historically, if we look at asset classes together, being negatively correlated to make an optimal mix, I would love to see if he had maybe peeled off from that 75% US stock, just 15% straight small cap or small cap value specifically allocation so that he went with three instead of two. Right. So something that's closer to 60, 25, 15, I think, my gut tells me haven't looked it up today, that that's going to be a better allocation. Number one, your returns

historically are better, but number two, the amount of negative correlation you'll have by adding an asset class, by the way, and this is really cool, adding an asset class that is actually more risky than the other two that already has, I think will also calm down the portfolio, which makes my head go just explodes, because how do you add more risky stuff? And it makes a portfolio calmer, it's because of the fact that it acts differently under different economic conditions than the other two asset classes he already has. So he gets not only a higher return, but a smaller roller coaster ride getting there. Pretty exciting to me on both sides. So I'd look at small cap or small cap value to add to that. Right, right. And I was actually about to address that next because

in my mind, U.S. stock and international stock are broad umbrella categories, but under each of those categories, there is the diversification, and that was part of what he asked about in his second piece of his question in terms of small cap or midcap, like under the purview of U.S. stock, under the purview of U.S. stocks, there is small cap U.S. stocks, midcap U.S. stocks, and then, of course, large cap U.S. stocks. So under the umbrella of U.S. stocks, there are different market capitalizations. And then, of course, there are also funds with different styles, such as value investing or growth investing. And so under that umbrella of 75% U.S. stocks, further diversification based on

market cap or style, I think would be, to your point, show, a great way to add a little more diversification into that portfolio. You know, I brought that up specifically because Polly talked about that adding, him being comfortable with a more aggressive approach, even though I think it actually doesn't make it more aggressive, which is neat. Something that does make it more aggressive, though, Pauley, that I also like when it comes to international stocks, if we look at you've got a fairly long time horizon with this money, a broad emerging markets index. I look at places like India and Southeast Asia as some just absolutely exciting economies, it's going to be an incredibly bumpy ride getting there. But with a long horizon until you need that money,

emerging markets is a specific, more specific place of international investing that I think is exciting. Absolutely. Absolutely. So yeah, under that purview of international investing, there are developed markets, there's emerging markets, there's frontier markets, which I don't know if you necessarily want to get into. There are certainly ways to diversify the composition of that 25% of your portfolio that is international. It doesn't all have to be a total international fund. Now, the reason that sometimes people talk about a smaller number of funds, total stock market, total international market, you're done, is because of the simplicity. And oftentimes when you're talking particularly to beginners or to people who are overwhelmed with all of this personal

finance knowledge, one of my best friends, she just texted me the other day. And she was like, what was that thing at Vanguard that you were telling me to invest in? And I was like, an index fund. And she was like, yeah, that's what it was called. You know, so when you're talking to a total beginner and you don't want to overwhelm them, keeping it simple by saying, hey, just stick with Target Date or, hey, just stick with a two fund portfolio, that's great. And likewise, if you're talking to somebody who isn't necessarily a beginner, but value simplicity and wants to reduce clutter in their life, they want to reduce the number of funds that they may have to rebalance, then sure, a two-fund portfolio

is great. But the impression that I get from the question that you asked is that you're the type of person who likes nuance, who likes looking at your portfolio. And so I think that you're a perfect candidate for having a more diversified portfolio that's split along all of these different subcomponents. Especially when he's talking about moving away from a target date fund. where it's all done for you into an approach where he does it himself. I mean, that's job one. I want to address that too because I've also been on record of not being a fan of Target Date funds.

And I think this is something that's important, Paula, for everybody that owns a Target Date Fund to know that whether it's a great Target Date Fund, like a Vanguard Target Date Fund, Fidelity Target Fund, T.R.R. Price, Target Date Fund, it's going to be pretty good. or one of the many horrible ones, which actually is the number one reason I don't like Target Date funds because the vast majority are garbage. That's not really the reason I don't like Target Date funds. The main reason I don't like Target Date funds, and this encompasses all Target Date funds, is they land the plane too early, meaning as you get closer to your goal, the Target Date Fund is going to get conservative. And the good news is most Target Day funds

have what are called a target through approach, not a target to approach. So let's say it's a target date, 2025 fund would be a great example. We're right around the corner. That fund has already begun going from more aggressive assets to more conservative assets so that by the time you get to 2025, a portion of the portfolio is ready to be taken out. But if you look at the way that they manage these funds, Paula, you end up losing something that is hugely important to your overall win condition to get where you want to go for most of us. See, most of us rely on compound interest to get where we want to go. There's this rule called the

rule of 72. And if you divide the interest rate, you think you're going to get into 72. It tells you how long it takes your money to double. So let's say you're going to get 8% on your money. Eight divided into 72 means your money's going to double every nine years. The important doubling isn't the first one of the second one. It's the last one, right? You have a million. and you wanted to get to $2 million, it's that last doubling. You got $2 million, it can make it four, whatever the number, you got $500,000,

going to make it a million. It's that last one that's important. A target date fund makes it far less likely you're going to get that last double. I don't want that plane to land as aggressively as the target date fund wants it to land. I think most asset management companies, and in my opinion, doing it so you don't sue them,

make sure it's a safe ride and land plane a little early because most people, most people don't understand how this stuff works. They just want to make sure that, hey, I don't lose money as I'm getting close to this retirement date. But you and I in the afford anything community know, you're not going to spend all your money the day you retire. If you do, I want to be at that party. Please invite me. I want that.

But knowing that you're not going to do that, and you're going to be responsible with your money, keep more money in a spot where it has the opportunity to double again so you can assure your the retirement that you really want. I did have one more thing, too, Paula, which was around, he asked about small cap and midcap. An interesting thing, when it comes to small cap and midcap and you look at their characteristics over the last, let's say, 30 years, small caps and midcaps, while they are different asset classes, they tend to move in tandem a lot, which is why a lot of financial planners will tell you, if you put small cap and midcap in a portfolio, you're largely wasting your time.

just pick one or the other and do that. So you don't really get the bang for your buck that you get diversification-wise by having both small and mid in your portfolio that you would with, let's say, you know, emerging markets versus large-cap international or the total U.S. market and then also add more small-cap in. You'll get much more with that than you will with a small-cap and a mid-cap. And since we're talking so much about managing asset allocation yourself and, and particularly about managing the type of asset allocation that would give you a variety of funds. It wouldn't be as simple as a two-fund portfolio. You might layer in some small cap or some emerging markets.

One good tool that can help you manage that, and this is an affiliate link, it's afford anything.com slash personal capital. It's free. And it's a tool that allows you to look at your asset allocation from all of your accounts in one place. So it can be hard to understand what type of asset allocation you have when you have multiple accounts. You may have a Roth IRA, a 401K, taxable brokerage accounts. And sure, you can easily see the allocation inside anyone given account, but what's the total aggregate allocation across your entire portfolio? Personal Capital is a free, excellent tool for that.

So afford anything.com slash personal capital. It's an affiliate link, so we may get a slice of money if you sign up, and thank you for supporting our show. But it's totally no cost to you. It's just a fantastic tool for being able to know how to rebalance your portfolio, being able to know what your asset allocation is, particularly when you have more than one investment account. So thank you, Polly, for asking that question. And again, congratulations on everything that you've built. And best of luck with switching to a barbell allocation. Those are our questions for today, but before we sign off, I want to discuss a comment that we received about a previous answer that we gave that Joe, it's the answer that you and I gave on the most recent Ask Paula and Joe episode, which was episode number 264.

One of our callers asked about M1 finance, and someone wrote in and said, hey, you know, you didn't answer the question in the way it was asked. You know, you didn't answer the question with regard to what are the fees associated with M1 finance and are those worthwhile. You know, you didn't actually recommend or not recommend M1 specifically. You instead said, here's how to evaluate broadly any platform that you're looking at. And so when I saw that comment, I thought that that would be a good opportunity to take a moment to articulate precisely what the Afford Anything podcast does. How do we think of questions when we hear them? Our goal, my goal, is to get to the root of a question. Because if all I do is answer the surface

level question as it's given, if all I do is level a decision about one particular platform, then ultimately that teaches you nothing. Ultimately, that does not teach you the skill of knowing how to evaluate any app, any brokerage, any platform, any tool that you come across. And if I can help you learn how to develop that skill, if I can give you a framework that helps you understand how to develop that skill, if I can give you a framework that helps you understand how to think about these types of questions, then I have given you a skill for life. And that is much more valuable than answering one narrow specific question that will only apply at one

narrow specific point in time. This is a podcast that is very much geared towards thinking about how to think. How do we think about how to evaluate a new tool, a new platform, a new service that appears in front of us. How do we think about decisions like, do I spend my money on X or on Y? Do I allocate my investments towards A or towards B? This is a podcast that tries to give you a framework for understanding what factors to consider and how to weigh those factors. It's very much a podcast around thinking about how to think and learning how to learn.

And that, I find, to be much more valuable than a podcast that stays only on the surface level. I just think about it this way. If Paula were hit by a bus, are you better off after she's passed away knowing how to choose a brokerage account or knowing how M1 Finance works? you're much better off if you have the tools to learn all about brokerage accounts. And how I think what we did specifically answer though is how M1 is different than other brokerage accounts. And if you're this type of investor, do this, this type of investor to do that. And Paul, I hope you don't get hit by a bus.

I love that that started with. If Paula got hit by a bus, would you be better off? Paul's like, no, you wouldn't. Absolutely not. But the second piece of that is something I believe for a long time, which is, are you asking the right questions? What I love about the show, and I love that I get to do with you here from time to time, Paula, is that we get to question the question. Is this the question that we really should be asking? Because I would say almost every time that I'm on here, you and I say, no, we're not asking the right question.

There may be a different way to look at this. And without even passing judgment on the question, is there a different question that you're not asking? Maybe not better or worse, but different. Is there another question here? And often there is. It's a lot of the time in our blind spots that we miss the important stuff. Right. It's almost like, is there another angle to be looking at this?

Like if you imagine this as a jewel, how do we turn this and look at it from multiple angles so that the light is reflecting on it in different ways? And we see something different each time that we turn it, each time that we look at it from another end. angle. Yeah. What are the angles that we're not exploring? Yeah. And that, frankly, for me, is the fun of the show. Right.

Question the question. Think about how to think, learn how to learn. This is a podcast that goes deep. And by contrast, Joe, your podcast, Stacking Benjamins, is the opposite. It does not go deep. Stacking Benjamins is the car talk or the Saturday Night Live of personal finance. Tell us about your show. And look at that segue.

way. You are a ninja today. Who are you? Yes. But you still make me proud because you don't know who Molly Ringwald is. So there is still some consistency in Paula. Now, our goal on stacking Benjamin's is to introduce you to many different concepts in different ways that people manage their money or think about things. As an example, a gentleman Bill Perkins who was just on talks about once you get past being able to feed yourself. If you die with a dollar in your wallet, Paula, you did it wrong. So let's. try to die broke. And it's a whole different way of thinking about your life and the experiences that you have and the money that you have. And then we had Ken Rusk on this week, a gentleman who said,

maybe collegeism for everybody. He was a ditch digger at one point and learned that, you know what, even though he didn't go to college, that his pathway to becoming a millionaire or multimillionaire, in his case, was a different path, but certainly one that we hear often probably isn't attainable, that he says very much is. I saw that, the blue-collar millionaire. Yeah. Yeah, we just try to, we try to make it a circus, as you said. And we complete the circus by having pull a pant on nearly every Friday.

Yes. Where we play a trivia game. That's the point where you really don't learn anything right there. Yes. But we do have fun. Right. The ongoing joke is that Joe Show is the show in which you don't learn anything. And this show is rather the opposite.

This show is the show that is all about learning how to learn. Yes. And if you have learned anything, listening to Stacking Benjamins, keep it to yourself because you'll ruin our reputation. Oh, Joe, thank you for spending this time with us. Other than Stacking Benjamins, is there any other way that people can find you? Yeah, write to me all of your hate mail about my stance on fees at Joe at stacking benjamins.com. Well, I'm often telling bad dad jokes on Twitter that's average Joe money.

We have some fun there, too. Excellent. Well, thank you, Joe. Thanks a ton to you and to the community. Great questions, as always. And that is our show for today. Thank you so much for tuning in. My name is Paula Pant.

This is the Afford Anything podcast. If you enjoyed today's episode, please do three things. Number one, share it with a friend or a family member. That is the single most important way that you can support the show. Number two, make sure that you hit subscribe or follow. in whatever app you're using to listen to this show so that you don't miss any of our awesome upcoming episodes. And number three, leave us a review in whatever app you're using to listen to this show.

You could also go to Afford Anything.com slash iTunes. That's a page that will redirect you to the page on the Apple podcast website where you can leave us a review. And those reviews are super helpful in allowing us to bring on excellent, excellent guests. So share it with a friend or a family member. subscribe to the show and leave us a review. Those are three things that you can do to show your support for this show. Thank you again for tuning in. My name is Paula Pant. This is the Afford Anything podcast and I will catch you in the next episode. So my lawyer says I'm supposed to give you a

disclaimer. So here we go. This is for entertainment purposes only. This is not intended to be advice. And please do not consider me to be an expert or a grown-up. or in any way worthy of even really being considered an adult. I'm just some random person who has access to the internet. So anything I say is purely for the sake of entertainment, you can just think of this as the least funny comedy show that you've ever heard. This is the Afford Anything Unfunny Comedy Hour. Before you make any financial moves,

please check with a real grown-up and a real expert. That means check with a financial planner, check with a tax advisor, check with an attorney, check with somebody who actually has credentials and who knows what they're talking about, because that's not me. So please, give me the same level of respect that you would give, maybe a house cat? And please regard this entire show as nothing more than your source of entertainment. All right, you've been warned. We didn't end up selling everything that we owned. We sold probably 80% of our stuff. And now we're touring, looking for where the heck do we want to land?

And on the topic of trying to decide where to live and on the topic of looking for a job, our first question today comes from June. Look at that segue. Wow. I was just about to, I was tearing up. That may be the best segue I've recorded in however many years of podcasting. Three, four, I don't know. I saw your eyes light up.

I got one. Ha ha ha ha ha ha.