Afford Anything - Ask Paula: "Should I Put My Dreams on Hold … and Buy a House Instead?"

Episode Date: February 7, 2024

#487: Luis’s wife is killing it at her side hustle. The unexpected income has led Luis to YouTube for hacks to capitalize on their surplus. Can a 529 plan double as long-term care savings? Elizabeth is frustrated with the housing market. She’s been saving for years but isn’t anywhere near her goal. Should she give up and spend it on a dream pottery course instead? Steve has a dilemma. He doesn’t borrow money on principle. And his wife doesn’t want to sell their current house until they’ve closed on the next one. How is he going to make this work? Greta wants to “reverse” rollover an IRA into a 401k to avoid the pro-rata rule. Is that a thing? Former financial planner Joe Saul-Sehy and I tackle these four questions in today’s episode. Enjoy! P.S. Got a question? Leave it at https://affordanything.com/voicemail For more information, visit the show notes at https://affordanything.com/episode487 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Hey, Joe, it's the start of a new year. Have you set any big financial goals for this year? Yes, I'm going to buy a dog. Buy a dog? I want to get a dog that does magic tricks. You know what you call a dog that does magic tricks? What's that? A labra-cadabridor. Oh.

Joe, this is the open. We want people to stay with the episode. Sorry. Cut right to the intro. Welcome to the Afford Anything podcast. The show that understands you can afford anything, but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention, to any limited resource that you need to manage. What matters most?

And how do you make decisions accordingly? Those are the two questions this podcast is here to explore. I'm your host. My name is Paula Pant. Every other episode, we answer questions that come from you. And I do so with my buddy, the former financial planner, Joe. Sal C. Hi. What's up, Joe? You want me to buy a new joke book, don't you? Yes. That is a good financial goal for 2024. Give better material.

Maybe enroll in a course on comedy writing. You've done a few of those. We have done some of those. I should have actually paid attention, apparently. Well, speaking of enrolling in courses, our first question today, I know, right? Do you like the segue? Ninja. Our first question today comes from a woman who is wondering if she should enroll in her dream course, which is learning pottery, or if she should use that money for a big long-term goal like a down payment on a home. Here's Elizabeth. Hi, Paula and Joe. I'm a longtime listener since 2017 and really love your show.

We are a recently married couple. We've been living together for seven years in Ottawa, Canada. We've been renting the same one-bedroom apartment for those years. It was intended to be our student apartment while my husband finished law school, but that was years ago now. We like it, but it's small, and we might want to start a family in about five years and would want more space. The housing market in Canada is wild,

and to semi-comfortably be able to pay a mortgage, we'd want to put down a down payment of over $100,000. My job gets me a government pension and decent salary, but I don't feel fulfilled at work. I have a dream of taking four months off work unpaid to do an intensive pottery course at a college in my province. However, it would require me to save and then spend about $20,000. At this stage, I feel a little hopeless about homeownership, so I just want to throw it all away, save for the dream course and take it in the fall of 2025. But I also feel like the housing market is going to keep going up, so delaying homeownership will just push that goal.

further and further away. We can't live in this apartment forever, but renting another bigger place would also cost an arm and a leg. We owe 103,000 in student loans. In terms of savings, I have 30K and an RSP that I could access through the first-time homebuyers program to put toward a down payment. I also have 18K and a TFSA. Both those accounts are robo-advised on a low-to-medium-risk plan. We also have 15K and high-interest savings accounts to put toward a down payment and about 10K in emergency funds in high interest savings accounts. On the one hand, I feel that life is too short. I want to take the course, even though it wouldn't be a good financial decision. On the other hand, I feel like I might be letting my husband down because he wants to buy a house and I would be saving for almost two years just to spend it all.

Do I go on the dream course or continue saving for the home? Thank you, Paula and Joe. Elizabeth, first of all, I love your question. It's a beautiful question because it truly is about conflicting priorities, which is the heart of all money management. Money management is having limited resources and needing to choose between multiple things that are important. So your question gets to the root of what really every money management and time management and energy management question is. So let's talk through some of the details. First, you mentioned that in order to comfortably pay a mortgage, you would want to have a down payment of $100,000. While I get that, and I think it's admirable that you want to keep your monthly mortgage costs low by virtue of having a higher down payment, it also strikes me that this premise of the down payment's got to be so high that everything else, including my dreams, need to be on hold, could be, interfering with the way that you're framing this question. When I heard the $100,000 price tag, that is such a high barrier when it comes to a down payment that the first thing I did, I went to Canada.ca, which for all the listeners out there, that is the official government of Canada website. I went to canada.ca. I looked up how much you need for a down payment. This is from the financial

consumer agency of Canada. And in Canada, Elizabeth, I'm sure you already know this, but I'm just stating it for the sake of the entire community that's listening. In Canada, if the home that you're buying is less than $500,000, then you need a minimum down payment of 5% of the purchase price, which is $25,000. If your purchase price is between $500,000 to a dollar shy of a million, $999,000, then your minimum down payment is going to be that $25,000 plus 10% of the portion of the purchase above $500K. And then if you're buying a home that's a million or more, you need 20% of the purchase price. So assuming that the property that you're looking to buy is less than a million, right, assuming the property that you're looking to buy is closer to the $500,000 range,

you wouldn't need $100,000 down payment. Now, the way that you phrased it in your question, you said that you want the $100,000 down payment because it would make the ongoing mortgage payments more reasonable. And again, I totally respect wanting those ongoing monthly payments to be a more reasonable amount. But I would invite you to question the premise of whether or not opting for this higher down payment is worth it, given what you would have to sacrifice in order to get there. You also said, and I thought this was interesting, that you want to pursue your dream, but you would be worried that you're letting your husband down. And I'd like to gently challenge that because it's clear from your question that this pottery course is your dream.

And if you sacrifice your dream for the sake of satisfying someone else, that can all. often lead to ongoing resentment, even quiet resentment, which then poisons a relationship subtly, slowly, but it does. I'm sure that he wouldn't want to let you down. And if he doesn't want to let you down, then your dreams matter. and his role is to help support your dreams, just as your role is to support his. You know, I think this, Elizabeth is calling in with a question which are two, these two decisions. And often, Paula, the truth could be in the middle.

There could be a place to meet partway, smaller down payment and get the course. Maybe the course is not the actual same exact course. Maybe she comes down on that goal. Maybe there's a different way to take it. Maybe there's a way to pursue that in a manner that doesn't cost as much so she can do a bit of each. And I'll give you an example of what I'm talking about. And this is one of the most exciting things of my career when I was a financial planner. I had a client who wanted to live along the shore of Lake Michigan, the western shore, just gorgeous along the Michigan coast.

A lot of beautiful houses, a lot of beautiful beachfront. And of course, every night you see the sun going down for people that have never been to the Great Lakes. It looks like you're looking out over the ocean. So she really wanted that. But she did not have enough money, Paula, to get that. She was also very much an extroverts. And she wanted to work with people. She ended up buying a house across the street from the homes along Lake Michigan that were super

expensive, this old Victorian home, that she was able to get an SBA loan to fix. Also, because of the zoning in the area, she was able to turn it into a bed and breakfast. And even though in her retirement, she was going to, quote, have to work. And some people hate that. Julie, being a complete extrovert, love that. Like, that was fabulous. Waking up and making breakfast for a bunch of people were awesome. And guess what? She got to sit every night. while the people that were staying at her bed and breakfast did whatever they did on her beautiful front porch looking out across a bunch of other houses, but she still could see Lake Michigan. She had this beautiful view.

So sometimes, and I think it's also a good metaphor, sometimes you've got to look across the street, right? Is there an across the street moment here that we could embrace where we do get what we want, but maybe in a different way that we'd originally asked? Possibly. I think there's, you know, and this is up to Elizabeth. But sometimes there is one specific program that you want. Like you want that program. And I'm thinking about when I wanted to study journalism,

I didn't want to go anywhere other than Columbia. That was the only institution from which I wanted to study journalism because it's the best J-school in the country. And so I wasn't willing to consider anywhere else. Now, I happened to get a fellowship that paid for the whole thing. But even if I hadn't gotten that, I would have only gone there regardless. So I understand I'm very empathetic to sometimes there's one particular program taught by one particular institution. And that is the one and the only one that you want. And so if that's the case, don't compromise on that.

If that's the case, be a bit more flexible with how much of a down payment you save, which would have spillover effects to the purchase price of the home that you buy. And also, this is a pottery class, and those are going to be four unpaid months. Could you sell some pottery? Could you start an Etsy store? Could you go to weekend fairs or weekend festivals? Can you monetize this love of pottery? And it doesn't have to be so big that this becomes your full-time job.

but if you can make an extra $1,000 a month, right? A thousand a month is a significant amount. We can broaden that out even further, Paula. You ask the question, can pottery create an income stream? It even broader question is, with her income stream she has now, is there a way to improve those? Or are there other income streams that she's not taking advantage of that she could have? Just a completely open-ended question to ask the universe,

is there a raise that either of you are maybe eligible for? Study after study shows that your boss wants to give you a raise and you haven't asked. Your boss often has other priorities and certainly in a lot of companies is not just going to go, hey, you know what? We want to throw more money at you. We always hope that's the case. But I think putting it out there is something that you may be able to do. And beyond pottery, are there other side hustle opportunities that you're not taking advantage of?

That's on the income side. on the budget side, also looking at the rest of your budget, is there anything that you don't value that much that you're spending money on? Something that could easily go away, if something as important as pottery or the house, are higher on the value list that you would sacrifice for these goals. So I think we could even go broader. It also strikes me, Elizabeth. It sounds as though you are not really in love with your full-time work. And that, in the long term, you know, that doesn't necessarily affect what you do in the short term with this pottery class. But in the long term, over the span of the next 20, 30 years, that's something that you might

want to think about because if you're already not really that jazzed about what it is you do, and that's the impression that I get from the way that you phrase your description of your work, is that where you want to spend the bulk of your career for the next several decades? aids to come. Sure, it has a good pension, but a pension is living for the future. I feel like this is a refrain that you and I have often, Paula, that we in our community overvalue the money decision and undervalue the time decision. And when you decide to go with a job that's 70% for a pension. A job that's 70% joy, you mean. Yeah, sorry. Or 70% meaning. Yes, you're mortgaging your time.

Right. One other thing I notice, Elizabeth, is you mentioned that your investments are in low to medium risk funds. It sounds to me, I don't know how old you are, but it sounds like you're relatively young. And of course, everyone's risk tolerance is personal. But I would invite you to see whether or not you're comfortable with bumping up the risk profile on those investments a little bit, particularly given that you've got time on your side. You've got decades and decades ahead of you. But in summary, you know, as soon as I heard your question, my immediate thought was take the pottery class, right? Take the pottery class because life is precious. And the whole point of all of this resource management and resource allocation, right, that's what money management is. The point of that is to be able to direct our resources at the things that we most value, the things that bring us the greatest level. of satisfaction. And that's what this pottery class is.

Right. This is your dream. That's funny. That was my first thought too. Yeah. The second I heard that, you could hear it in her voice. Yeah, exactly. You got to solve for the pottery.

Right. And she's got these scripts that are telling her, no, you know, do the quote unquote right thing. Do the responsible thing. Don't let other people down. This is your dream. Right. If you don't pursue your dream, you will regret it. You will resent the people around you for it.

You know, one day your hands may have arthritis and you might not be able to throw pots anymore. If that day comes, you will either look back and say, man, I'm glad that I was so immersed in the world of pottery when I still had the health to be able to do so. Or you'll look back and say, man, I really regret that I didn't pursue that because I was so worried about keeping everybody. around me satisfied. So take the class. Well, thank you, Elizabeth, for that question. The holidays are right around the corner, and if you're hosting, you're going to need to get

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And I just want to, before we play this question, point out to everyone that oftentimes we have these limiting ideas or limiting beliefs, these scripts in our head, invisible scripts. And oftentimes when we hear side hustle, many of us immediately think gig economy, driving for Uber, I would. work an extra 25 hours a week and I make pennies. A lot of us think about scraping the bottom of the barrel and it sounds like a lot of work for not a lot of payoff. That's not what we're ever talking about when we say side hustle. When we say side hustle, we mean you are building a business that is all your own and you're starting that business on the side, but it'll grow and it can become far more lucrative than you ever imagined. And so that's the situation our next caller has. His wife started a side hustle. And now his question is fundamentally, what do we do with all of

this extra money? We have way more money than we know what to do with. Like that, that's the root of his question. So, with the- Louise calling in with the flex, is what we're saying. Yeah, exactly. Before we even play his question, I want to preamble that because I want to impress on everyone who's listening, that a side hustle can blow your expectations out of the water. I think a lot of people would be shocked at how much money you can make as an entrepreneur, how much potential is out there. So with that said, our next question comes from Luis. Hi, Paul and Joe. This is Luis from Maryland. I'm calling with an update to my question from episode 328 and a follow-up question. My wife's 1099 side work has been more successful than we could have

imagined. After we paid off some consumer debt and 30K in student loans, we are looking at what's next as there's no shortage of work for her. We have 529 set up for our young children, but I've recently watched a couple of YouTube videos about using 529s as wealth management tools. Specifically, the speakers were talking about using 529s for ourselves as a way to pay for long-term care. Once we reach an age where we are not able to care for ourselves, then the penalty for using funds for non-educational purposes is waived because we would qualify as disabled. We would still be taxed on the gains in the account. A second benefit that I had read about is that the money in a 529 does not count as part of one's estate, and it makes for an efficient way to transfer wealth while avoiding the estate tax. Are you familiar with these two uses for 529s?

The video authors were financial advisors, one from the largest U.S. Bank, so I don't think this is some type of obscure strategy from the corners of the Internet. For further context, my wife and I are maxing our employer's sponsored retirement accounts, putting money into backdoor Roths, and we have a taxable brokerage account. We have owned occupation, disability insurance and sufficient life and unrual insurance. Am I overthinking long-term care, and would it be simpler and more cost-efficient, to buy disability insurance once we reach our 50s or 60s? 60s, thank you for all you do for the community. Luis, congratulations on all of your wife's success. And, you know, so I went back and I looked at episode 3-28. By the way, for anyone who's listening, afford-anything.com slash episode 3-2-8 to take you directly there.

And that was when you called in and said that your wife, she wants to start a side hustle, and she is thinking about moonlighting in her field. actually quite similar to Elizabeth. She works for the federal government, and now she wants to moonlight in her field as a 1099 contractor. And it's so incredible that aired in July of 2021. So, you know, fast forward a couple of years, and it's so incredible to hear about all of the amazing success. So a huge congrats to both of you for that. And Louise, everything you said is 100% right, right on. The issue really, I think the scope of your question is more around should we wait on saving for long-term care or is this a good strategy? Here's the issue.

And we spoke about this a couple weeks ago. So people want to talk about the whole long-term care issue, Paul, I'm not going to dive into it as deeply as I did. They can go back to episode 484 to hear me rant about how challenging long-term care can be. This is an issue that is very difficult to solve. It's incredibly expensive. It will suck so much money out of any family's quest to have intergenerational wealth. It is super frustrating, this idea of a catastrophic illness. in the family. Now, the best way to solve any insurance question is to not answer it like an

insurance question, to answer it like a risk management question. So the best way also to handle it, if you're able to then, is to manage it yourself without the help of an insurance company. If I can avoid an insurance premium, that's exactly what I want to do. And that's why I like thinking about risk management versus buying insurance. Insurance companies want you to think about, hey, is this insurance good or not? Let's widen the lens a little and go, what risks am I susceptible to? And then how do I solve those? Clearly, Luis, you already know that long-term care, catastrophic illness is a big, big, big risk. The difficulty that you're going to want to solve for with this is if I lock this money away and I set it aside to manage the risk myself,

how does that compare to what I would have done with a long-term care policy? And I'll tell you what you're trying to solve for. Medicaid will pay for your skilled care and a portion of your custodial care for maybe the first quarter. The problem is, is that you have to continually reapply, and then have add-on. So we want to assume that Medicare is difficult to get longer than that and is also something that we can't necessarily plan on. So because of that, I want to look at starting after, let's say, 100 days, 120 days,

somewhere in that region. After that, the average long-term care stay is about two and a half years. so I want to plan on maybe three years. And then I would just look at rates because much like Paula, you talk about the real estate market. It's a local market, not a national market. It's the same with long-term care, unfortunately. The cost of long-term care stays can be incredibly regional.

So I would just look at your region, multiply by three years, take out one quarter, then take that money that's in the 529 plan, use whatever. inflation number you want on both the cost of long-term care and the amount of money that you're going to have and just see that you're going to have a good, good model there. That's on the long-term care side. If you can do that, fantastic, never worry about long-term care again. The issue that a lot of people have, though, you're going to see, Luis, that's a ton of money. This is why insurance companies are having problems with this is because it is so much money that you have to set aside. What I worry about is by doing this, you are going to, you are going to

mortgage some of your goals. I use the word mortgage a lot when it's come to goals lately. We did it with Elizabeth too. Compromise some of your goals. You're going to compromise some of your goals. You're going to set this money aside and hopefully not use it, right? Now, the good news is this way it stays in the family. If you pay a long-term care insurance premium, it doesn't stay in the family. Hopefully you don't use it. You wasted all the money. Like, that's what we're all hoping for. It's for that to happen. I don't wish a long-term care stay on anybody if they don't need to. This way, though, it does stay with your family, but you don't get to use the money.

Because if you ever touch that money, you just destroyed your whole plan around long-term care. So I want to make sure that the other goals are fully funded before I explore some hybrid strategy, which is what you're talking about, about waiting until, you know, you're in your 50s and then exploring strategies. Long-term care experts, by the way, will tell you that you get a better rate of return on your long-term care premium if you buy it sooner. I will agree with them. However, Paula, the average family has so many other priorities besides long-term care that while it might be a little less expensive in your 40s or even 30s, it may cost you a lot more goal-wise to look at early. You know what I

mean? Right. I would be prepared to pay it. Yeah, I'd be prepared to pay a higher premium later, knowing that I'm losing a few bucks by waiting on this until I'm in my 50s. So to reiterate, I would first look at by creating your own long-term care insurance here, what does that actually look like? How does that model out when I look at it? Let's say spending it when I'm 80 years old. I don't know what it's going to happen, but that's probably a good age to look at. Then if that is enough money, I would look at all my other goals and make sure, okay, I'm very

comfortable setting this money aside and not using it for something else. if I'm not, maybe then I take part of the money then out of the 529 to use or allocate it toward other goals. And then I do some type of hybrid strategy later like we talked about on episode 484. You know, we had a caller that talked about a life insurance policy that had long-term care inside of it. Maybe I do something like that. I don't know. But what I do know is if you can do this and hopefully you don't use it. And this becomes intergenerational wealth for your family, which is a fabulous place to be.

And Joe, I want to go back to something that you said earlier about any time that you are looking at an insurance question, ask yourself about risk management, not about insurance. I just want to elaborate on that for the sake of everyone who's listening. The reason for that is because you want to start not with product, but with strategy. Insurance is a product. but the goal is to manage risk. And so if the goal is to manage risk, then you start with, all right, what is the strategy that I'm going to use to achieve that goal? Insurance can be a tool, it's a product, so it can be a tool that you use to execute your strategy that helps you reach that goal. But you want to start with first goal, risk management, and then strategy, and then only look at what tools are available. And the reason for that is insurance salespeople are never

going to say that, right? Insurance salespeople will have you lead with product. Never lead with product, lead with strategy. So much, so much better, especially in that insurance realm. You know, Paula, I also want to reiterate something before we get a bunch of emails from people to be very official. Even when I said this, I went, you know, I probably need to explain this more. Medicare does not officially cover any long-term care. Let me tell you the reason why I say that you might get a quarter. My dad, as an example, had to have some rehab after recent surgery, Paula. So he went to a nursing home for that.

He had coverage not because of the long-term care issue, but as a rehab as part of his necessary skilled care. So he did get coverage. But that's the way that's every time I've seen a long-term care situation, it starts off as a rehab. It starts off as, I mean, nobody just, I don't see people busting down the door going, hey, you know, I want to get into a long-term care facility. Maybe, maybe it is an Alzheimer's issue as an example. That could be, that could be a reason to go to a nursing home. Maybe you don't have anybody close to you, no relatives close that can help you.

so you end up at a nursing home. So there are reasons why Medicare won't cover any of it. Medicaid will cover long-term care stays in a long-term care facility that they approve. So you'll have to ask about Medicaid. Private insurance will probably cover anywhere. You want to look at the stipulations of your policy, but every policy I've seen will cover the place where you want to go. They'll just limit the amount that they pay.

They won't limit the facility as long as they, check some boxes for being truly a skilled, accredited place for you to stay. So I just want to work through the definitions there because we may have Paula, some people in the industry going, nope, Medicare won't pay for that. Totally agree. But going back to the root of Luis's question, the fact that this is now, the question on his mind, long-term financial planning, is all based on the fact that his wife, side hustle has been so wildly successful that they've been able to pay off all their student

loans, pay off their consumer debt, get themselves to a place where they're like, wow, what do we do now? How do we use more sophisticated strategies to manage our money? That's a question fundamentally that comes from a place of abundance and that abundance comes from having a very, very successful side hustle. So again, Luis, big, big congratulations to you and to your wife for going for it. Well, thank you, Luis, for that question. And by the way, I've been here at Afford Anything. We are planning on rolling out potentially, if there is interest in it,

we're going to be rolling out a Kickstarter to see whether or not people are interested in a course on how to start a side hustle, how to start a business. We've got the draft page already set up in Kickstarter. We're putting some of the finishing touches on it, but we're going to be looking for the first round of beta testers. We're going to be looking for the first round of people who will help shape and guide what that offering will be. So if that's something you're interested in, please sign up for our show notes because we're going to be emailing our email subscribers,

With people who are subscribed to the show notes, you're going to be the ones who hear about it first. So afford anything.com slash show notes to be the first to hear about this. Turning our attention away from side hustles and towards homeownership. Our next question comes from a voice that may sound familiar. Here's Steve. Hey, Paula and Joe, it's Steve. Long, long time listener. First time caller, though.

My wife and I have plans to move out of it. state. We know the town have been patiently looking for the house, quote unquote, the house since 2019, but we feel like we're getting really close. To make the math easy for this question, I'm going to use round numbers to create the scenario. The purchase price of the house will be $500,000. Our down payment will be $100,000, which we already have put in cash on the side. Our current home is worth about $350,000 and there's no mortgage on it. It's paid off. The challenge, my wife doesn't want to sell our current house until we've closed on a new one. By my finger in the air calculations, a mortgage of $400,000, the $500,000 purchase price minus the downpayment of $100, plus the insurance and property taxes will be paying.

It's going to cost about $3,000 to $3,500 bucks a month. I'm estimating on that on like a 30-year at 7.5% blah, blah, blah. We have additional savings put aside to help us make that payment for a few months, but my income can't support that $3,500 monthly payment for too long. knowing that our house will probably sell quickly once we do put it on the market, I anticipate we can knock on a huge chunk of that mortgage balance. However, it seems silly to refinance a mortgage has only been in existence for a few months in order to get the remaining balance down to a manageable payment that we can actually afford. To complicate things even further, I don't borrow money for anything other than a mortgage. And I was actually hoping not to have that either, but here we

are. So I will not borrow money from family, credit cards, banks, or even my own retirement accounts. A helock maybe since that's kind of like having a mortgage on our current house. That just seems kind of silly too. I do have an idea, which I'll share with you next, but my real question is, if you were me, how would you go about this? I was thinking about doing an 80-20 type loan, which many people have done to avoid PMI. The 80% would be paid off with the sale of our house, and the 20% mortgage would then become our one and only mortgage

that I can work on paying off as fast as I can. I'd love to know if you have a better solution. Signed with Love, Steve and Vicky Stewart. P.S., if you answer this question on the show before we sign the contract, I'll buy you both a spin drift. He outed himself. I was about to say, hypothetically, if your spouse's name was Vicky, but he beat me to it. Steve, he beat us to it. Man, Steve really is longtime listener.

I believe since episode, since prior to episode. one. That is for people that... For people that don't know, that's the amazing Steve Stewart to edit both the Afford Anything show and the Stacking Benjamin show. He knows our voices very, very well. I have one thought, Paula, about just Steve's math. Okay.

Which is always great to say to Steve, because Steve always has great math, by the way. So to be able to catch Steve in a math assumption makes me a little giddy. I'm pretty excited. but I caught something. All right. Let's hear it. Well, he says it's $3,000 to $3,500 a month, and that's the cash flow. But Paula, that's not the true cost.

The true cost, if he does this strategy, is just going to be the interest on the loan during the time that he holds the two houses, right? So he's going to have this one loan and he'll have just the interest payment because the principal payment's going toward the, the value of the property plus the cost of the insurance and property taxes on the first house. So based on the size properties he's talking about, I think that while the cash flow is going to be $3,500, really the cost of Vicki's desire to have more certainty in her life is going to be well shy of $3,500. Interesting. It's interesting. You picked up on the monthly payment piece because that was not the piece that was in my head at all. The piece that was in my head. So thinking about the big numbers, right? They want a home that's $500,000. They have $100,000 in cash, just sitting there waiting to be deployed on a home. Right. So that gap that they need to plug is $400,000. Now, the value of their current property is $350,000 after, let's say, a 8% haircut. So they're going to pay 6% for a realtor fees and then maybe another 2% for a bunch of other miscellaneous. So times 0.08 will say $28,000 is going to be the haircut, which

means that after paying realtor fees and other expenses associated with selling their home, they will probably be left with ballpark around 320,000. Let's just say 320,000 for the sake of round numbers, right? 320,000 after they sell their home. So here's what I'm imagining. They make an offer on this $500,000 home with a home sale contingency, right? So in the contract, they put in a home sale contingency that's, you know, for, we'll say 60 days, right? They then, once they're under contract for this home, they now have 60 days to sell their current. home, get that $320,000, that plus the $100,000 that they've got, now they've got $420,000. The amount that they need to borrow is only $80,000.

Yeah, they'll pay a 7% interest rate on an $80,000 mortgage. But like, at that point, you know, with an $80,000 mortgage, that monthly payment on that mortgage is going to be so small that they wouldn't even ever have to refi that. They can just shovel money towards that and have that paid off pretty quickly. very first note that I took when I first heard Steve's question was contingency loan. That was my very first note, Paula. So I'm definitely on board with that. Obviously, the only issue with a contingency loan is that if there's two competing offers,

one's contingency, one's not. You know, that makes it a little more difficult if it's a super competitive market. But with markets may be cooling down a little bit, contingency won't be looked at. so as harshly as maybe two years ago. I mean, I think home sale contingencies are so common, right? So many people are only able to buy a home if they sell their current home. So I think it's incredibly common for a buyer to receive a contract that has both a financing. He would want to have two contingencies in there.

He would want to have both a financing contingency as well as a home sale contingency. The financing contingency would be the financing that he gets. gets from the bank for that $80,000 gap. And then the home sale contingency would be, of course, for the sale of his own. Sure. He just wanted to know the downside. And I think that's potentially in the Achilles seal. To your point, I think it is very common.

I don't think it's something I'd stay up at night worrying about. But I do know that contingency offers get beat by cash offers. Yeah, that's true. If this were the year 2020 or 2021, remember at that time, the housing market was incredibly competitive. And homes that were listed would often get multiple offers on the day that they were listed. People foregoing inspections. Right.

Exactly. People were foregoing inspections. People were foregoing all contingencies. If you want quantitative data around this, there's a metric called average days on market. And in some markets like Boise, Idaho, the average days on market was eight. Eight. It is historically never in the single digits, right? But eight days on market from the time of property is listed to the time that it is under contract.

2020 and 2021, when interest rates were rock bottom low, those were eras in which homebuyers flooded into the market and you had a hyper, hyper competitive home buying atmosphere. Today, with interest rates high, we have the opposite issue. Today, home buying is at its lowest point since 1996, which means if you are a buyer, you are in an incredibly strong position today because you're not facing much competition. So if there was ever a time to be buying a home with multiple contingencies, a financing contingency and a home sale contingency, this is the time to do it because this is the time in which you are not squaring off against a whole bunch of other buyers. Just wait until interest rates drop, right? Just wait until we are back to,

we'll say, 5% mortgage interest rates. What do you think is going to happen to the home buying market? It's likely going to get a heck of a lot more competitive, which means that you'll be squaring off against very aggressive buyers who are making very aggressive offers. Definitely a better time to make a contingency offer now than two years ago. Yeah. Yeah, exactly. That's why so time and time again, and I cannot say this enough, when people say, oh, interest rates are high, therefore I don't want to buy a home.

Are you freaking kidding me? What do you think is going to happen when interest rates drop? If you are waiting to buy a home while rates are high, guess what? You're waiting along with everybody else. And that means that when interest rates decline, you are competing against all of those other people who have also waited. And if you can afford the house at 7.5% or whatever the prevailing interest rate is on the day that you buy it and interest rates drop, you already own the home that you bought less competitively, which meant you were probably able to negotiate a better. price tag on the house and you've got this cool little tool you can use called a refinance. Yep, ding, ding, ding, ding, ding, ding, ding.

And then the house just becomes more affordable. Right. Exactly. And then you can put that money toward the mortgage, toward other goals, toward whatever you, whatever you want. So if you can afford it at seven and a half. Yeah. Then you'll be sitting pretty when you refy into five.

Although, Steve, Steve, in your case, I wouldn't bother refying. I would take out the smallest mortgage possible. Get or done. Yeah, exactly. Get your dream house under contract with a financing contingency and a home sale contingency. Once it's under contract, sell your home, use the proceeds from the sale of that home plus the 100K that you've saved to make a gigantic payment. We'll say you're making a $420,000 payment on this $500,000 property. And then the only mortgage that you need to take out is going to be,

80 grand, maybe 100 grand. It's going to be such a small mortgage that you'll never have to think about refying it, because why would you? It's such a tiny mortgage that you can just shovel money towards it and pay it off super fast. But yeah, for everyone else who's listening, if you are thinking about waiting until interest rates decline, don't. Obviously, don't spread yourself too thin, don't be house poor. Like all the basic personal finance classic principles don't go away. Those are always there no matter what.

But if you have the means to buy a home and you're thinking to yourself, I'm just going to sit on the sidelines until rates come down, man, when that happens, likely you are going to be competing with a heck of a lot of other people who also share that same pent up demand. Let's widen that a little bit, Paula. Yeah. 16 years as a financial planner, 15 years doing this financial media stuff. stuff, the phrase I hear more often every year that has persisted, never goes away is timing. Timing. And the thing that kicks people's ass over and over and over is timing. Like I hear so many negative stories later about people trying to time.

Well, it's not a good time to buy a house. It's not a good time to buy the stock. It's not a good time to buy. It's whenever we try to time, we get in trouble. doesn't go away. I'll see it on three different, different pieces on popular websites today. Yeah. Either the realest good timing isn't good. The crypto timing isn't good. Like some reason, some author is telling you that you need to wait. And this is one area where I think people get in trouble trying to time it out. And Steve's like, what does this have to do with me? It doesn't,

Steve. I'm just going. Okay. Well, you know, timing only applies in one context, which is the timing in your personal life. Yes. Yes. But the authors are never talking about that when they're talking about timing. They're always talking about, well, you know what the Fed might do. You know what's going to happen with the election. Prices are at all time highs or whatever the goofy thing is that they're talking about. This idea of timing that you read, you just got to. put on the blinders and block that off. Right. Exactly. Timing matters when it comes to your life, your budget, your income, your debts, your competing priorities.

That's where it matters. What matters is, does this fit into your personal budget? But if it does, man, never hesitate based on macro factors. because you know what two asset classes reliably go up over the long term, stocks and real estate. But Steve, one other suggestion. So let's, let me float an alternative plan, all right? Because the drawback with this home sale contingency idea is that it then forces you to have to sell your home rapidly. And if you're in a position where you have to sell your home rapidly, then there's the risk that you might be forced to accept a lower offer than you otherwise would have been able to get if you had held out for another couple of months.

So let me propose an alternative idea. And that alternative idea is you make an offer on this $500,000 home. You put the $100,000 that you've saved towards that home. You take out a mortgage for $400,000. So you make an offer with only one contingency, which is a financing contingency, right? You finance that $400,000 gap. Close on the home. Once you have closed on the home, then you sell your current home.

And then when you sell that current home and you've got the $320,000, which theoretically is going to take only a few months, maybe three months, four months. Like, let's say that rather than having the, you know, if you have a home sale contingency, you've got the time pressure to do this in 60 days-ish, maybe even less, right? If you don't have a home sale contingency, maybe you take longer and you hold out for the right buyer. So maybe selling your home takes three months or four months or heck, five, six months. Let's go crazy. Let's say it takes six months. Even if it takes six months, once that home is sold, you'll have ballpark $320,000 that you would then use to make a gigantic lump sum payment against this mortgage. And then with that huge lump sum payment made, the remaining balance on that mortgage is still going to be so small that, again, I don't think

there's any point in refying it. You're on the amortization table, you are way out there, right? On the amortization table of that originally $400,000 mortgage, you have now paid off so much principle that most of your remaining payments are going to go primarily to principal. So again, the monthly payment is going to be high, but it's almost all going to be principal payment because you've made a big lump sum that's like carried you into the far, far latter half of the amortization chart. What I love about it is that the monthly payment is based on a higher number, which just forces you to get it done. Yeah. Yeah. And most of that's going to go to principal. Yeah. And if you make it, if you make it a, that that lump sum principal payment,

your monthly payment obligation stays high. It gives you this force savings, which I dig. So, yeah. Yeah. Yeah. Now, the drawback to this second plan, the one that I've just outlined, is that your loan origination fees are going to be higher because you're borrowing a higher amount. So you're going to have to pay an extra few thousand there. But the trade-off for paying an extra few thousand in those loan origination fees is that you get the benefit of time to sell your current home in the optimal way rather than being time pressured to sell your current home in between going under contract and waiting for the closing.

So actually, now that I'm saying this out loud, I like the second. second plan better. No, I do. Now that I've heard myself say both of those out loud, because when I originally heard his question, both of those plans popped into my head at once. And now that I hear myself speaking the words out loud, I do like the second plan better. Certainly there will be higher loan origination fees to pay, but I think that that is a worthwhile fee for having the leeway to hold out for the right buyer.

What's interesting is I like it better too for me. I've known Steve for a long time. I think he likes it worse because of his aversion to larger amounts of debt. Yeah. And to be clear, I mean, again, both of those plans popped into my head at once. I think they are both perfectly fine, viable plans. But we've outlined what the pros and cons are in terms of in terms of the contingencies versus the loan origination, you know, the size of the mortgage that you take out. That's what you wanted, Steve. There it is. Send me my spin drift. Well, thank you, Steve, for the question and for editing both of our shows for so many years. Steve Stewart is the engine that makes both of our shows possible. The little engine that could often.

And the guy that has heard so much Paula talk between the pieces that actually make it to the show. Yeah. Yeah, he's got so much on the cutting room floor. Steve's got some dirt. Yeah. That's tip number three. You could just blackmail us with all the dirt that's on the cutting room floor. That'll plug the gap.

Oh, make sure you cut that part, Steve. Steve, cut that part. I do not like that. I don't like strategy number three. Very bad. Do you want him to actually cut that? No. Well, our final question today comes from Greta.

Hi, Paula. My question is whether it makes sense to roll money from an IRA into a 401K. So a bit of background, I have a Vanguard IRA that has both Roth and traditional IRAs at Vanguard. this IRA money is money that I rolled from old 401ks into an IRA. However, I now have a 401k with fidelity that has good, low-cost options. And I'm wondering if it would make sense to roll my traditional IRA at Vanguard into my traditional 401k at Fidelity in order to potentially in the future be able to do a backdoor Roth at Vanguard. Currently with my current employer, I can do a mega backdoor Roth at Fidelity, so I'm not

currently needing to do a backdoor wrath at Vanguard, but I'm wondering if in the future, if I wanted to do a backdoor Roth if it would make sense to get rid of the traditional IRA money there in order to avoid the pro-Rata rule. Seems like mostly people are rolling 401ks into IRAs, but wondering if in this case it might ever make sense to roll an IRA back into a 401K, given that my 401K right now has great investment options. Thanks for your advice and everything you do. Greta, thank you so much for that question.

And by the way, congratulations on it sounds like the new 401K is a pretty great place to be. And Paula, I think I have a short answer for Greta and I have a longer answer for Greta. Which one do you want first? Ooh, okay, let's start with the short answer. Yeah, the short answer is never, ever, ever do this. Don't swim upstream. And we're done, unless you want the longer answer. Yes, let's hear the longer answer.

Why is that? The longer answer is because of two things. Number one is management changes at any company often come with cost-cutting measures and things that sometimes aren't great for employees. And a great place for a management team that is in cost-cutting mode to cut is those favorable conditions on the 401k. It's expensive to manage a 401k, and while fees have definitely dipped over the past 30 years, have gotten smaller and smaller, that doesn't mean they'll always be that way. That also doesn't mean that you'll always have great options. And if you roll it to a 401k now, you're going

to have to roll it back later. Now, the cool thing is, is that 401Ks, even with good options, often cap those options so that there's maybe 10 or 20 or 20 or 30 so they don't confuse people. And even if they have 30, they don't have the same number that Schwab has or Fidelity has or Vanguard has where you've got everything available. So no matter how great your 401k is, use the IRA as an opportunity to diversify around it. So what I'm talking about is this. Let's say you've got a 401k that's very strong in large companies and small companies and you want those funds in your portfolio. But you also, let's say, want some internet. And your 401k has horrible international options, but Vanguard has a good one.

Use Vanguard to get that better international exposure that you want. Use the 401K to do the small company and large company funds. And if somebody from the outside looks at your stuff, they'll go, well, this isn't diversify. Why are you all international? But when they look at the entire picture, all the things that you're trying to do, Greta, you've got better diversification because of the fact that you controlled your fees, you gave yourself better upside by having the best of whatever was available. So I always like the two-table option with that IRA and whatever your 401K is.

And I generally have a mistrust of maybe not this current management team you work for, but that your company will always continue to do the right thing because you often see that the company doesn't do the right thing in the future. The other pieces, even for people that think that they have a very low cost 401K, often they don't, but you don't see it. Companies are very good at hiding fees, and I'll show you how they do this. If you look at the fund that you have and you go to morningstar.com, you'll see on Morningstar that when you invest through Vanguard or through Fidelity or through Schwab in a mutual fund,

you'll often use an investment that is, let's say it's the Vanguard S&P 500 investment class. They may use a different class of the same fund inside your 401K that has higher expenses that allows the management team to pass the cost of administering the 401K onto you, in a hidden way because the internal cost of the fund is different than what you may look up. Often, I would meet with people and they would go look up their fund. They're like, oh, this is decent. And I would say, no, you don't have that class fund. You have this class.

Then we go look up that one. And surprise, surprise, management team has hidden fees behind your back. So maybe that's the case. Maybe not. We're also seeing that shell game happening in fewer companies. We see it more in small companies than in large companies. Small companies are less likely to get pushback on the 401K options and frankly also are more strapped for cash. So on both sides of the equation, small companies are much more likely to pass on the fee than a big company is.

And also large companies have economies of scale where investment companies that run 401Ks are much more likely to go, oh, you've got a big company. billion dollars, we'd love to manage that and we'll cut our fees by a lot where they won't do that for a small employer. So I would, for all those reasons, I would not ever, ever, ever swim the opposite way. I would always leave my IRA money in an IRA. And when I leave an employer, I'm much more likely to not pay attention to what's going on at that company anymore. and I would always roll that into this parent IRA. So I've got this IRA from all of my different jobs that I've had, and I'm constantly adding to it when I change jobs.

So this master IRA, and then I have the 401K where I'm working now. And that's the way I like to run it. That makes sense. And frankly, simplifying your structure generally, this is a tip really for everyone who's listening, simplifying your investment structures makes you more likely to do well in the long run. I think one pitfall that many people in this community often face is the temptation to over-optimize and sometimes over-optimization can actually be counterproductive.

We've been talking about that even internally here to afford anything. we have some processes that we have over optimized. And it's actually in the big picture, I think, been to our detriment. So, for example, within our newsletter, right? We have all of these various segments. You know, we've got 78,000 people on our newsletter who subscribe to our newsletter. Flex. But we have a specific segment for people who are interested in.

learning about side hustles in small business. We have a specific segment for people who are interested in learning about real estate. We have a specific segment for people who want the podcast show notes. We have all these various specific segments. Then we've got the overall newsletter, right? And what this means is that we have to create and manage separate content for the people who want specifically side hustle content, the people who want specifically real estate content, the people who want specifically just general personal finance, right? So we're creating more and more. And what we're creating is seen by fewer and fewer, right?

So rather than investing our time into creating just one thing for everyone, we're creating four things for one fourth of the people. And that has a severe limitation on how much we can actually create. And it results in sometimes people end up getting emails from our archives. that are older, they're like, hey, I got this email, but it was written four years ago, you know, and I'm like, sorry, that's from one of our many, many segment, you know, like, so anyway, the point of all of that is that sometimes over-optimizing and trying to over-deliver and trying to over-perfect everything actually leads to a worse end result. And that happens in business. It happens in investing. It happens in almost any facet, at least any facet, at least any facet, of financial and professional life. It's funny because you think about delivery and systems. And as I hear that, the aha that business owners have that it sounds like you're having

right now, Paula, is that if we stop a lot of that, we could even offer 50% more content, 50% better or more often, whatever the definition of better is. And because you're decreasing things by 75%, you can give this one greater whole a bigger thing. It's easier for you to deliver. People get more value out of it. Everybody wins by de-segmenting. Exactly. And so think of your investments like that.

Think of your investments in terms of the overall portfolio, that that greater whole, right? the wholeness of it. That's what you're aiming to create. And the more complexity that you add into that portfolio, the more distraction there is from nurturing the overall basket, that big, big picture. Thank you, Greta, for the question. And I'm glad we were able to give a, we gave a clear and unambiguous answer. Don't do it. All right. Well, Joe, we have done it. We've done it again. I can't believe it.

The time goes so fast. It does. It flies. It really does. Joe, where can people find you if they want to hear more of you? Oh, three days a week at the Stack & Benjamin Show, the greatest money personal finance show on earth. We call it that because of our segments and it's a little bit of a circus. What's coming to the circus, by the way, Paula, is our mutual friend, Shannon McLeigh.

She's the owner of the financial gym. Shannon loves to talk about as a long-time financial advisor, the dirty underbelly of financial advising. What truly happens on the other side of those tables? And Shannon and I are going to discuss hiring better financial help. So for people that want better financial advisors, you will hear. And Paula, you know Shannon, she doesn't mince words. She will tell you exactly. the ugliness.

But she also believes, like a lot of people do, that, man, if you can find the right professional for people that truly need one, that could be great. It could be horrible and it can be great. So Shannon joins us for what's going to be a pretty wild discussion. Excellent. Well, that is at the Stacking Benjamin's podcast,

where finer podcasts can be found. Finer. Only the finest. And we are going, so you guys are three days a week. We, here to afford anything, are going to move to twice a week. after, yes. It's true. It's true. And Joe, you're going to be joining us on a weekly basis. What? It's true. The good news is, everybody, I get time and a half now.

Ah, nice. Excellent. What is 1.5 times zero? Damn it. But yes, that change is going to go into effect after episode 500. And episode 500 is going to air on 42424. April 24th, 2020. So we're going to have a big party extravaganza for episode 500. It's going to be an amazing show. And then after episode 500, starting with episode 501, we are going to go to a two day per week schedule. So that is what is happening here at Afford Anything. So make sure that you are signed up for our show notes. I've talked about that a few times on this episode, but I cannot emphasize it enough. Sign up for our show notes. Afford Anything.com. slash show notes. You will get updates of every episode that we produce. You will get our special newsletter, which we are going to be producing more often now that we're reducing our sub-segments and really focusing on serving our overall newsletter audience. Sign up for our show notes. You're going to hear all about episode 500 and the twice a week episodes that are to come. That's afford anything.com slash show notes.

Well, thank you so much for tuning in. I'm Paula Pan. I'm Joe Sal Siha. And we will catch you in the next episode.