Afford Anything - Ask Paula: Should I Stay At My Job For the 401k?

Episode Date: December 21, 2022

#419: Casey isn’t happy at her job. If she leaves before her one-year mark, she’ll lose her 401k contributions. Should she stay or find a new job? Daan resides in a high-cost-of-living area where real estate appreciates rapidly. But there’s no cash flow. How should he evaluate real estate as an investment? Emily already maximizes her 401k contributions. Should she contribute to an after-tax 401k next? Ryan’s investing for his son. If the yield is the same between two mutual funds, can he leave his son with more money if one mutual fund pays dividends more frequently? 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/episode419 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 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. Saying yes to something implicitly carries trade-offs, and that opens up two questions. First, what matters most?

And second, how do you align your decision-making around that which matters most? Answering these two questions is a lifetime practice, And that's what this podcast is here to explore and facilitate. My name is Paula Pant. I am the host of the Afford Anything podcast. Every other episode, we answer questions that come from you. And my buddy, former financial planner, Joe Saul Seahy, joins me to answer these questions. What's up, Joe?

I am buckled in and ready to go, Paula. We have some great ones, as always. A big 401K theme to this episode. It's weird how we have these inadvertent themes, isn't it? And we can already see it. it emerging. And maybe there'll be another one. Who knows? I guess that means a lot of people are thinking about the same thing at the same time. Retiring? Getting the hell out of this workhole. You know what? At the end of the year, this is a time people become very reflective. They think about

their jobs, their careers, what they've done the past year, what they want to do in the upcoming year. So it doesn't surprise me that this is a time of year that people are thinking about retirement. It's good. Let's do it. All right. Big 2023 goals. Absolutely. So we, are going to start with a question from Casey. Casey is unhappy at her job, but if she leaves before the one year mark, she's going to lose her 401k contributions. Let's hear her question. Hi, Paul and Joe. This is Casey from Colorado. I have an interesting situation. I am in a job at a nonprofit where I'm making $48,000 a year. I do. I do. like my job, but management is very stressful and disorganized. I do have a master's degree,

and I know that my earning potential outside of the nonprofit sector is easily $20,000 more, if not more. I have thought about switching jobs, but I have only been there for seven months, and my employer has a policy where they will take out that they have contributed to my 401k if I am there for less than a year. As of right now, it is about $2,000 that they have contributed to my 401k. I don't want to lose that money, but I know that I can be making money and potentially working at a job that I feel more respected at and management is better. I don't know what to do and any advice is greatly appreciated.

Thank you. Casey, thank you so much for that question. Now, as longtime listeners to this podcast know, typically when Joe and I answer questions, we don't like to be prescriptive. We usually give a few different frameworks through which you could look at a question and outline the pros and cons.

of each. But in your case, I'm just going to come right out with an answer because I feel that strongly about it. She can't hold back. Exactly. And that is leave your job, find a better one. If that is what is best for your career, the contributions that you're making to the world, and your happiness. Do not stay in a job that's not right for you for the sake of what ultimately in your life is going to be a rounding error. $2,000. I know it feels like a lot right now, but it is not worth the next five months of your life. If you can leave that job and find a better one, and I don't necessarily even mean a better paying one, maybe you find a job that pays an identical salary, but it's one in which you find more meaning, you develop your career,

you use your skills, you use your talents, you feel as though you are making a positive impact on the world, do that because the downstream net effects of being in the right job, the way that that compounds and accumulates over the span of your life far outweighs a few thousand bucks. I was speaking to a time researcher from Harvard recently, Paula, about this issue. We will often overthink the amount of money something might cost us. And we underthink, though, time. In other words, she was saying we undervalue the amount of time that we have and how valuable time is, where we will often very much look at money, especially money nerds, right?

We will frugal ourselves into sometimes doing the wrong thing. And I've never heard anyone say, man, I wish I would have waited six months longer to quit that job. And when there's $2,000 between you and much less pain, I'd pay that $2,000 very quickly, unless my circumstance was really dire. I mean, I'm thinking of one point in my life when I didn't know where the next paycheck was coming from. Okay, in that case, if somebody's in that case, I will suck it up, Buttercup and do what I've got to do just to make it to the next payday and let things go. But if she's got an emergency fund, she's putting money away, which it sounds like she's worried about just the match. Who cares?

Exactly. Yeah. Move on. You know, we could sit here and give a mathematical answer. We could sit here and say, yes, you're making $48,000 now. But if you made a higher salary, then that higher salary divided out over the span of five months, blah, blah, blah, blah, blah. Frankly, the reason that I'm not giving you that answer, the reason that I'm not mapping it out is because I don't care. I suspect that if you get a higher paying job, it probably will math out such that

The crossover points quick. Exactly. Yeah. Quitting now will be a net positive anyway, right? Because if you go from making $48,000 a year to making, let's say, $65,000 a year or $70,000 a year, I mean, you don't have to be in that job for very many months before boom. You've made back that $2,000 and more. but the reason I intentionally did not frame the answer in that way is because I want to emphasize

that even if that was not the case, even if you found a job that paid identically, I would still say, go to that other job. But I think there is one thing we can do to make this a little scientific, which is we often overestimate sunk cost. We overestimate Paula how much money we've invested in this thing and so we stick with it because of the fact we have the money sunk in it. I have a stock right now that I did this with yesterday. I own a very small amount of money in a really crappy insurance company called lemonade.

I like lemonade. They had a ton of debt. I knew they had a ton of debt. I bought the crap anyway. And you know what? I was sitting here yesterday thinking, oh, but you know what? I invested X amount of money in this. It's not that much money.

I need to sell that thing. I just need to sell it. there is no sign except my own brain. This might come up tomorrow. This might be good. And it's only the fact that I sunk this money in it. But we all do it. I mean, listen to this.

Happiness versus $2,000 of sunk cost. And truly, by the way, this isn't even true sunk cost. This is opportunity. That's not her money. This is a gift that the company would give her if she stays around for that amount of time. This is not yet her money. It depends on how you frame it. I mean, there are some people who would argue that this is compensation that she's earned.

I don't know. Depends on how you want to look at it. You could look at it as money that she has not earned yet that she is promised if she stays, or you could look at it as a form of compensation that she has accumulated. I don't know. It doesn't matter. Semantics. No, but we do the same thing with stock.

If I stay for five years, I get the stock options. If I stay for five years, I get the RSUs. We do the same stock. Restricted stock units. Yeah, it's not your money yet. It isn't your money yet. Evaluate the job based on where you were at today. You got paid X amount of money. You're not in a good spot. It would have been, by the way, 20 years ago, I would have told Casey to stick with it just because only being someplace that for seven months on your resume would suck. And future employers would hold that against you. That is no longer the case. That is no longer the case at all. Seven months at one place happens. far more frequently, and I don't think there's any blemish on a resume. She should be ready, though,

with her answer, because it's going to come, why was she only there for seven months? So just be prepared. It'll be an easy question. She'll do a great job at it, but know that question's coming. Yeah. And Casey, when you do answer that question in future job interviews, don't badmouth your current employer, because that looks tacky. You want to frame the answer with diplomacy. it wasn't the right fit, et cetera. Yes. I'd start off by saying it's the amazing Paula Pant who told me that I should probably leave. I would not say that.

That is a recipe for never getting a job again. Are you familiar with the Ford anything? Oh, no. How to botcha job interview in one step. I was going to stay, but Paula said I had to leave. I want to go back to a concept that I think isn't talked about enough, which is the downstream compounding effect of taking a career risk. When you have a job in hand, you know that bird in the hand is worth two in the bush, when you

have a job, you know your salary, you know your benefits, you know your health insurance and your paid time off and your retirement package, it's difficult. to compare that to the unknown. And sometimes the unknown is the ambiguity of, I don't know what other offer I'm going to get, because I haven't started the job search for my next position yet. Casey, in your case, that's the unknown. For others, the unknown is, hey, I've got this side hustle that I've been building out for a while. And I'd like to quit. I'd like to quit my full-time job and develop the side hustle into a full-time gig. but I don't know how much I'm going to make. I've never actually done the math to calculate what is the value of my health insurance. And a lot of people get hung up on this because they just don't put a number to it. So it's this amorphous concept that scares them. But the actual premium is, depending on your age, depending on your location, it might be $400 a month.

Or $500 a month, let's say, right? So we're talking at 500 a month, that's $6,000 a year. So if you can make $6,000 more per year in your own business, then you can at the current job that you have, then all else being equal, boom, that covers the health insurance differential, right? So once you put a number to it, once you quantify it, then it doesn't become this scary, I can't. It becomes this very quantifiable. Here's the number that I have to hit in order to make it happen.

And once you know those numbers, once you know, hey, at my next position, hey, I need to earn $6,000 to cover health insurance costs. I need to earn $2,000 additional dollars to cover what would have been my retirement match. I need to earn my entire salary doing 49 weeks per year worth of work so that I can have the equivalent of three months paid time off, right? Once you quantify that out, it feels more approachable. And Casey, I'm saying this less for you and I think more for people who are thinking about starting their own business or going their own route because many people aren't used to putting a dollar amount on their benefits package. And when you do,

You understand what that cost differential is, and then you see that you can often make that up plus more. And Casey, this would apply to you, too, in the event that you get a job offer that maybe has a higher salary but fewer benefits. If you want to make an apples-to-apples comparison, put a dollar amount on your benefits package. Make an estimate of your current benefits package. What would that be worth? And then you can compare, because ultimately, at the end of the day, total comp is total comp. And if you're in the right role, the one that's the best fit for you, you're more likely to succeed, you're more likely to grow, get promoted, do better things, bigger things.

And that means that over the span of your life, there's this compounding effect in which by virtue of being in a role that's a good fit for you, you will achieve greater success, which means that your compensation will only grow further in ways that you can't foresee. because of the fact that you're in the role that's right for you instead of one that's a jarring fit. Our next question comes from Ryan. Hi, Paula, this is Ryan. I'm a listener from Oahu, Hawaii. I have a question for you.

I haven't been able to figure out the answer. I invest currently in a custodial account for my son in the mutual fund SWTSX. That's Charles Schwab's total stock market. mutual fund. My question is based on frequency of dividends. So in the SWTSX, it pays one dividend a year annually. However, in VTSAX, which is the common Vanguard total stock market index fund, it pays four times a year. I know the yield is virtually the same, but I'm curious if the frequency of the dividends paid, even though vanguard might pay less because it's quarterly as opposed to annually, I'm curious if that makes a difference on return because of the frequency of dividend. My hunch is that the compound

interest is more frequent. So I'm trying to figure out mathematically if VTSAX will make a difference long term 18 years to 20 years from now as opposed to SWTSX, which only plays a dividend once a year. If you could please shed some light on that, that would be extremely helpful. Thank you so much, Paula. Appreciate you. Ryan, thanks so much for the question. This is one, Paula, that when I was a financial planner, I would get fairly often. You got two two dividends that are about the same. You got two products look about the same. Feed looks about the same. Which one do you choose? If the dividend pays more often, you want to take that one of the two because of, and Ryan, you nailed it because of the compounding effect of that dividend. And really, Paula,

what we're doing is we're comparing two measurements and we'll give everyone these here. A lot of people when they look at an account, like a checking account or a savings account at the bank, they'll see APR, which is the annual percentage rate that you get from the bank. That's what the bank gives you. But there's another measurement that sometimes is given that's even more helpful. And this is to Ryan's point. It's APY. This is the annual percentage yield, which is what am I getting. So APR is what the bank is giving. APY is what I'm getting. Now, how are those different? Because of what Ryan's. said if I took that initial dividend check early in the year and I invested it and then I got a dividend on my return plus dividend, well now I've got even more. An APY will give you the sum of all those parts. So APY is really what you're looking for. Now the good news, Ryan, I looked at these two. Even without looking at APY, the Vanguard index currently has an effective yield of 1.51. and the Schwab product that you mentioned is 1.37. So it's already higher. Vanguard already pays higher and it declares dividends more often makes Vanguard the better choice between the two.

If everything else is equal, right? And I'm just going to assume for this discussion, everything else is equal. If everything else is equal, Vanguard would be the winner. That distinction between APR and APY applies not just to the interest that you receive. receive on a bank account as the example that you made, Joe, but also to what you pay. So for example, with a car loan, when you look at the interest rate on a car loan, you'll see that expressed as APR and APY. And using APY will help you make an apples-to-apples comparison between different car loan offers. So it works both ways when you're borrowing as well as when you're receiving. So thank you, Ryan, for asking that question.

We're going to take a quick break for a word from our sponsors. When we come back, we'll answer a question from Emily, who maxes out her 401K contributions and is wondering where else she should contribute, as well as a question from Dan, who lives in a high cost of living area where real estate appreciates rapidly. But if he were to buy a rental property, there would be very little cash flow. So how should he evaluate properties in his area?

He lives in Asia. We're going to answer both of those questions after this break. 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.

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And we're back. Before we get to our next question, we need a third mic. Yeah. As you've probably heard, my cat is determined to be on this podcast. She's got something to say. Yeah, she was really chiming in. I live in Manhattan, so I live in the 600 square foot apartment. It's not like I can go put her in another room.

So for those of you who are wondering why there's an animal in the background of your finance podcast, it's because Tazzy is clearly a podcaster. Just needs a microphone. That's it. Loud enough, really, without a microphone. She really is. I know some people like that. I'm like, do not give them a microphone.

They are loud enough. Let's go to our next question, which comes from Emily. Hi, Paula and Joe. This is Emily calling with a question about mega Roths. On a recent episode, you were talking about the benefits of backdoor Roth IRAs and also some of the logistical issues that can arise. with Roth conversions, and I wasn't sure whether that applied to this type of account as well. Here are the details. My company recently began offering what they're calling a new after-tax option

to our 401k plan for those who max out their 401k contributions, which I do. Our maximum deferral rate is 5% of our 401k eligible earnings. The advantage is that employees can opt to convert their after-tax account to Roth, making their earnings non-taxable. The after-tax option is not part of the IRS limit of $20,500 or $27,000 for those who are 50-year-older. The after-tax option is not, quote, Roth, unquote, and is not eligible for employer-match by our company. All employees who elect the after-tax option must actively contact the broker and choose the automated conversion option to reduce the tax liability and receive the tax advantages. A few other details that may be helpful.

I currently have a 401K with this company. I have a traditional IRA, which are rollovers from past employers, and a separate Roth IRA as well. Does the existence of these accounts interfere with the mega-Roth? Is it worth contributing to? I'm looking forward to your thoughts on whether I should contribute towards this account and any other insights you guys can offer on the risks or downsides that I should be aware of going forward. The representative that I spoke with at the Brookridge firm and another financial firm

did not seem to know much about the ins and outs. Thank you so much for your help. Emily, thank you so much for your question. And first of all, congratulations on being so on top of your retirement planning that you are not only maxing out all of your accounts, but you're also looking for every available opportunity and you're really peering in every nook and cranny, making, you know, leaving no stone unturned, like insert cliche here, you are on your game about trying to max out your retirement. I applaud that. Let's talk about two possibilities. You mentioned that the money that you put into this after-tax account can be moved into a Roth. The question that I have for you is, does that mean that this would be moved into a Roth 401k?

In other words, is this a pathway to a mega backdoor Roth 401k? Or is this money that you would otherwise move to a Roth IRA? The approach that you would take and then the answer that I would give would be different depending on if this is money that would fuel a mega backer or Roth 401k versus money that would fuel a Roth IRA. So let's talk about both. And Paul, even before we get to that, if you are going to use this, you do not want to leave money in the aftertax portion of your 401K. I know that longtime listeners have heard us, Paula, talk about this before, but do not put money in an after tax 401K. Have it be pre-tax, have it be Roth. The after-tax money that accumulates,

you have to keep track of for IRS purposes this money. Now, custodians don't see this very often and they mess it up all the time. Many of them don't track it. And if you roll it over to an IRA, they usually don't tell the new IRA custodian that part of its after tax and part of its pre-tax and the tax treatment is a mess. So just to avoid the entire mess from the beginning, don't do it. There are so many advantages to the Roth and the pre-tax. and it's just one more step to get it to the Roth that you don't want to leave it in the after tax where there truly is no benefit. So if you have an aftertax option and you're thinking about it, go take a nap.

Just something's wrong in your thinking and then wake up fresh and go, oh yeah, I'm not going to do that. And then make it a Roth or keep a pretext. Exactly. Exactly, exactly. So if you make it a Roth, you might make it a Roth 401k or you might make it a Roth IRA. Well, let's talk about both. So if you make it into a Roth 401k, so here's how it works. In this year, in 2022, you can contribute up to $40,500 as an after-tax contribution to a 401k. And that's in addition to your $20,500 that you can put in pre-tax. You can contribute a top. total of $61,000 into a 401k, and you can then take that $40,500 that you put in as the aftertax contributions and convert it to a Roth 401k. If, Emily, this is what your plan allows, if you can convert this money from an aftertax

401k into a Roth 401k, thus creating a mega backdoor Roth 401k. that's fantastic. Roth 401ks are great. If not, if you would have to put this money into a Roth IRA, then I don't understand why you wouldn't just use the normal channel of making a contribution to a non-deductible traditional IRA and then executing a backdoor Roth conversion from that.

Well, and I can answer that question. For a lot of people, especially people that are not just natural savers, having that ability to have it just deducted from the paycheck and go to the right place is fantastic. Now, if your employer will have multiple places that they will send money and they will send money directly to a Roth IRA account, then great. Then let's set it up that way. But that automatic contribution, I think, is the reason why the automatic deduction from the paycheck is so nice. It's so nice. It is. But with a few clicks of the mouse, you can emulate that same effect. And I know that behaviorally, getting people to a few clicks of the mouse is a behavioral challenge, especially in the aggregate. But for Emily, who seems very proactive and very pardon the pun invested in this, I'm confident that Emily is perfectly capable of those few clicks of the mouse that it takes to move money from a checking account into a non-decentive. deductible traditional IRA and then from that trat IRA into a back to a Roth conversion. I mean, it's a five-minute maneuver and it's very simple to execute. So that was my first thought. You know, Emily, if this money is going to be in a Roth account, and that's, I guess, my question about everything that you've read aloud, the after-tax 401K contributions

can be converted to a Roth. Does that mean Roth 401K or does that mean Roth IRA? If the answer is that it can be converted into a Roth IRA by virtue of a few maneuvers, then why not just go the traditional, the normative backdoor Roth route? Because it's not going to increase your total IRA contribution limits. It's not as though you get to double contribute. If you're already maxing out your backdoor Roth IRA, then having money in an after-tax 401k is not going to give you double that allocation.

You won't be able to go from $6,000 a year to $12,000 a year. You're capped at $6, no matter what. And also assuming that Emily is not just capable, but invested, and by the way, no need to apologize for that pun. That was a good one. I also like the idea, Paula, of love. looking a little bit more analytically about the 401k and where the strengths are and where the weaknesses are because if she goes to a third party custodian she can then choose funds that will

help her beef up that portion of her allocation like let's say their international funds aren't that good well she can then find the right custodian that has some fantastic international options and just invest in the international piece and then she can back off the international piece in the 401k. So having it outside could also give her some advantages and some opportunities to look at weaknesses in the plan that she already has. Right. Exactly. Oh, and by the way, I know I used 6,000 as the example. Six thousand is the contribution limit in 2022 for people who are under the age of 50. Starting in 2023, that contribution limit is raised to 6,500. Yes. Thank you, inflation. That one I was not going to crack.

I was like, that is the reason for it, we shouldn't be applauding. However, like mom says. Right. With the contribution of 6,500, it is and an 8% inflation rate. It is effectively exactly the same. It's funny because it's true. And it's also funny because it's painful. It is so painful. You have to laugh so you don't cry.

Exactly. There's a very thin line between comedy and tragedy. Although, I guess tragedy is maybe an overblown descriptor. In this occasion. Of this level of inflation. Yeah. So thank you, Emily, for asking that question. I hope that this is a pathway to a mega backdoor Roth 401K.

We'll come back to the show in just a second. But first, we have one final question today, and it comes from Dan. Hey, Paula and Joe. My name is Dan, and I've got a question about real estate. but I first want to say thank you for all the work that you guys do in helping others. Thank you so much. I live in Asia, and here many people invest because of the appreciation of assets. The rental income here is very, very low compared to the housing prices to buy.

And so I was wondering if you've got any advice or how do I compare if the main way of making back your money is through appreciation, which happens over years. It rises quite quickly, but I find it very difficult to evaluate these properties. I hope you can help. I love the Invest Anywhere series, and so keep up the good work. Thank you. Dan, thank you so much for your question, and I'm so glad that you're enjoying the Invest Anywhere series. We will return to that series later in in 2023. But for now, let's talk about your question. And there is a lot of context that I'm going to set up here because the first thing I'll say is that as a rule, I get somewhat uncomfortable with appreciation, market-based appreciation, being the primary strategy in a real estate deal.

And here's why. In order to explain this, let me first back up and talk about how assets make money generally and how that applies to real estate. So any asset, whether it's a stock or a piece of real estate, any income producing asset earns money in two ways. There is capital appreciation, and then there is the dividend or the income stream that it pays. So if you are buying a share of Coca-Cola or Nike or Tesla or any publicly traded stock, that stock share would pay a dividend and it would also hopefully rise in value over time. And the combination of those two factors, the appreciation plus the dividend, creates your total return. And this is true, regardless of whether or not you borrow money to buy that. stock. So if you pay cash for that share of Nike or Coca-Cola or Tesla, you're not thinking

about a leverage spread because you haven't leveraged in. You're paying cash for that stock and you're evaluating the stock based entirely on its appreciation and its income stream. When it comes to the world of stock investing, everyone intuitively seems to get that. So that's commonly accepted understanding. When it comes to the world of real estate, however, a lot of people stop thinking in those terms, which I think is a mistake. So if you evaluate a property, that property is going to make money in a few different ways. One is the market-based capital appreciation. When I say market-based, I mean it comes from broad macroeconomic factors that are outside

of your control. And I'm making that specific because market appreciation is different from forced appreciation forced appreciation comes from value that you yourself add to the property. You buy it a stressed fixer-upper, you hire contractors, you fix it up, and you yourself, through your own efforts, cause that property to rise in value. That's forced appreciation. That's different. But market-based appreciation, that is one form of appreciation, one form of return on a property. The other form of return is the income stream or the dividend that it pays out. And when we start talking about properties, because most people have to mortgage into a property, people often also then start

to conflate what's known as their cash on cash return, the returns that they make on the property relative to the amount of money that they put into the deal, people often over-emphasize that return, despite the fact that that return. turn is loaded with quite a bit of leverage risk. And then that's a whole different. I can go on about that for hours. So I won't go down that rabbit hole right now. But that property ultimately earns money in the same way that that stock does, a combination of market appreciation and income stream. Now, market appreciation is outside of your control. There is absolutely nothing that you can do to influence it. And that makes it distinct from forced appreciation,

which is within your circle of influence. When it comes to buying a stock, people protect themselves from the uncertainty of market appreciation in two ways. One is by having done their due diligence with regard to that stock. So if you're buying a share of Coca-Cola, I hope that means, that you're reading their quarterly earning statements, you are reading their letters to shareholders, that you are very, very well versed in your due diligence about that company. And based on that, you've decided to buy that stock. That is the appropriate way to do it. And that level of due diligence is one of two ways that people defray some of the risk

of market-based appreciation and stock investing. The other way that people defray some of that risk is that most people don't borrow money to invest in stocks. Most average individual mom and pop investors are not making margin calls. And so because you are using cash to buy stocks, your cash on cash returns aren't there in the way that they would be for a leveraged investment, but the leverage risk isn't there either. That's another way of defraying risk. In real estate, you carry a significant. amount of leverage risk, assuming you're not buying this property free and clear. And if the only way to justify that leverage risk is by hoping, hoping that the property

will rise in value, that doesn't seem to me to be a sound method for approaching an investment, particularly if there's no other exit strategy. Now, if you were to say, hey, this property is at a minimum cash flow neutral in a worst-case scenario. It's cash flow positive in a best case or even a medium-case scenario. In a worst-case scenario, it would be cash flow neutral. Okay, cool. Then at least you're not bleeding money every month in order to hold it. That would be more acceptable. And if you were to say, hey, I actually have a few different ways that I plan on capitalizing this investment. I'm hoping for market appreciation, but I'm also going to buy a distressed property where I have the capacity to add value. I'm going to buy a

fixer-upper or I'm going to buy something at auction. I'm going to buy a short sale. I'm going to buy a foreclosure, right? You're going to buy a property with at least one, if not multiple forms of distress so that you can then create a degree of forced appreciation. All right, cool. Excellent. Now we're talking. Or if you were to say, hey, I have multiple methods of monetizing this property, ideally I would like to just rent it out on a long-term 12-month lease, but in the event that it runs the risk of becoming cash flow negative, I could make it a medium-term rental. I turn it into a corporate rental.

Okay, great. Now, now we're talking multiple exit strategies. Now we've got multiple paths. But if all you're doing is relying on one single source, market-based appreciation, which you cannot influence. And if you have no other exit strategy and if you're leveraging into that, I mean, I don't want to tell you what to do, but I'll say I would never do that. I would never want any member of my family to do that. Well, I'm so glad you answered that one, Paula, because generally at this juncture, I would say something brilliant to just put a point on your awesome statement. However,

how to evaluate a property outside of the conditions with which we usually evaluate property, not something I know anything about. So I think I'll say, yeah, me too. Great. Ditto. Yes, that. What she said. Well, I mean, I do want to be clear that I am editorializing. You know, these Q&A episodes are episodes in which we give our takes, we give our opinions, based on the reading that we've done, the conversations we've had, the personal experience that we've had, based on everything that we've learned to this point in our lives, these Q&A episodes by definition are where we editorialize and where we offer what we hope to be educated opinion. That said, educated people will disagree. and there are plenty of people who love market-based appreciation, who have formed entire strategies based on it.

I knew these people who in 2005, 2006, they had a strategy that was entirely based on market appreciation, and they were buying loads of houses with huge leverage. And they were both smart and lucky in that they were naturally very debt-averse. So they used leverage to buy a huge number of properties, watched them rapidly go up in value, sold half of their holdings,

used the proceeds from that sale to pay off the other half. And so then going into 2007, they had a whole bunch of properties that they just held free and clear. Yeah. They survived 2007, 2008. They were doing really well, because, yeah, sure, the value of their properties went down on paper, but they held them free and clear, so they were fine. In hindsight, that sounds like a great strategy.

But at the time, think about doing something like that in 2006. To sell half of your holdings and use it to pay off the other half in 2006, when everything is going up like bonkers, right? Everything's rising rapidly. Everyone was telling them that that was a dumb move. And plus to sell half of their holdings and not use a 1031 exchange, right? Instead, to pay the capital gains tax and then use the after-tax money to pay off the other half of their holdings in an environment where everybody is 10-31ing everything and making huge leveraged returns, everyone told them that they were nuts. everyone was asking them, what do you enjoy being mediocre? You know, that was the 2006 mantra.

But their conservative approach ended up paying off. Well, and this is a great case study, Paula. The case study of when is it enough, when do I have enough? So I know where I'm going and I know I have enough to get there. And now, instead of growing the empire, I can now solidify. my base, which is what they did. Like regardless of what's going on in the market, I can start with what's going on with me and I have enough. So I'm going to solidify what I have by selling it off and paying this and making the conservative move. Like I find that phenomenal. That's fantastic.

Right. But too often, you're right. The world is looking at the opportunity that they're passing up and to save the opportunity, that's fine, but it's not for me. And to make this contrarian move. Exactly. So my point in telling that story is that market-based appreciation does work as a strategy for limited periods of time. And if you can capture that limited window of time, milk the appreciation while it's there, but then have an exit strategy, exit out of it before the market. Yeah. Yeah. I mean, heck, that can work. But you have to have a clear strategy as they did. you know and i guess if i can lend anything to the discussion at all it's that i like the way dan is thinking which is how should i evaluate this because i feel like often we don't ask ourselves

that and when i was a financial planner paul i spent a lot of time letting people know that they were evaluating it wrong and we see this online all the time let me give you an example people that will compare an investment that has nothing to do with the s mp 500 or beating the S&P 500 and comparing it to the S&P 500. We are not defining this investment by the right standard. If we're like, well, no, these bonds don't keep up with the S&P 500, so I should invest in the S&P 500. Like, that is ridiculous. But we have to learn, you know, you're laughing and I laugh at that, but we have to learn

that that's ridiculous, right? So for Dan to actually ask the question, what should my thinking be around this investment an opportunity is absolutely 100% the right question to be asking first. Yeah, I agree. I agree. Dan, I love the way you're thinking. I love that you're evaluating what's around you. You're aware of where the opportunities are and are not. And you're asking, hey, how do I approach this? How do I deal with this market? And Dan, I will also say, if you can buy a property free and clear, or if you can buy a property, mostly free and clear. Maybe you have to borrow 50%, but you can put down the other 50%. I think that is much more justifiable in a case in which your only exit strategy, your only path is market

appreciation. The thing is, the more you are heavily reliant on just one way to make money in an investment, and that one way is outside of your control, the more you. The more you are heavily reliant on just one way to make money in an investment, the more you're reliant on that, the less leverage risk you want to carry. And I'll also add, for the sake of everyone else listening, I'm stating this answer in the context of, Dan, you're buying this property only as an investment. I'm sure there are plenty of people listening who are thinking, hey, but I want a home for me or for my mom, for my kids, and I'm hoping that over time it'll go up. Okay, cool. Awesome. Whether that's your primary residence or your second home, whatever it is, if you're buying it for personal use, then you're making a consumer

purchase. You're making an emotional decision to make a consumer purchase, and you hope that that consumer purchase ultimately might be net positive. That'd be great. We rarely have consumer purchases that are net positive. So if that's the case, cool, I support it, but that's very different than buying an investment. So Dan, thank you for asking that question. And to end on a positive note, I'll reiterate, if there are other ways that you can make money with this property, if you can buy a foreclosure or a short sale, or something at auction, if you can get a distressed property, a fixer-upper, if you can convert it into a short-term or medium-term rental, if you can buy it with a reduced amount of leverage, there are a lot of different approaches that you can

take in order to make appreciation a bigger piece of the pie. And you know, you don't have to be making a bunch of money from cash flow. In fact, cash flow is typically not how people make money. People make money from the cap rate, but the cap rate is not the cash flow unless it's free and clear. The cap rate is where real estate investors make their money, the bulk of it. So it's fine if you're not making a ton from cash flow, but you want to, at a minimum, be cash flow neutral or slightly positive. You never want to be paying out of pocket every month. Those are my parting thoughts. Thank you for that question.

Joe, we've done it again. Already. With some help from the cat, it's not often we have help from the cat. Hey, Joe, I have some news. Oh? For the first. First time in maybe six months, I watched a movie. Oh, who are you?

I don't know who you are. It's true. You know what? The only movie that I have seen in, I think at least six months is my own, the Netflix documentary that I was in. So I've seen my own movie. I have not seen a movie prior to yesterday. And?

I finally did it. It was ridiculous. It was a violent night. It's like this... Oh my God, did you? There's so many movies you could see. There's so many decent choices out there. It's this incredibly gory, violent...

Why? Santa Claus movie. Why? Well, you know, the holiday spirit. I wanted to see some kind of a Christmas movie. You saw red all over. Blood all over. But it's still the best movie you've seen in the last six months.

Best fiction movie. Exactly. Exactly. Have you seen anything lately, Joe? What have I seen? I watched, I've been watching a lot of these ridiculous Christmas movies on TV. I started watching Wednesday, which is about Wednesday from the Adams family. She's the daughter in the Adams family.

And in this new Netflix series, they're dropping off her at kind of a Harry Potter-style place for misfits where, you know, werewolves and vampires and all kinds of people with special powers go. Ooh, that sounds cool. I watched the first episode last night. It was, it was really neat. I didn't like it at first. I thought this girl Wednesday was. was just horrible.

And I don't like, I really don't like shows that just focus on horrible people doing horrible things. Like the character was, yeah. Oh yeah. She was telling everybody off.

She was smarter than everybody. But it was cool during the first episode, she becomes an empathetic character. Because halfway through the episode, I wanted to turn it off because I was like, I have no empathy for this. I don't care.

I hope she gets run over by a truck. Like, I truly did not like her. But by the end, And I thought, okay, this is, this might be an interesting show. But a lot of people were talking about it. A lot of my, my social media feed was talking about it. I just finished Andor, which is the latest Star Wars thing on Disney Plus. And if you like Star Wars, Andor is Primo. Fantastic. Cool. Well, Joe, for people who want a different type of media, where can they find you? You can find me at the Stacking Benjamin Show, where we are ending the year on a high

know, the interviews that inspired us the most. You pointed out last time, Paula, that we missed one. It's an era on our end. Right. You interviewed me this year. Yes. And it was four other interviews that inspired us that we had. So Professor Scott Galloway, David Gergen, who served four U.S. presidents, Zoe Chance, who's a Yale professor who talks about using your influence, just a phenomenal interview. One of the most difficult classes to get into at Yale. And I can see why, because it was, she inspired me by the end of that discussion. And also my favorite interview of the year, of course, besides talking to Paula, was Daniel Lamar from Cirque de Soleil, the longtime head of Cirque de Soleil, just talking about creativity. And I don't think we talk about finance. We don't think

about creativity enough. I think we could be way more creative in our planning. But that's at the Stacky Benjamin show every Monday, Wednesday, Friday, where you're listening to us now. Awesome. Well, thank you for spending this time with us, Joe. And thank you to everyone who's listening. If you enjoyed today's episode, please do three things. Number one, leave us a review in whatever app you're using to listen to this show. Just open up that app.

And tell us what you think. Number two, share this episode with your friends and family. Tell them to download it in their favorite podcast playing app. Tell them to hit the follow button so that they don't miss any of our also. upcoming shows. And number three, subscribe to the show notes. They're free. Affordanything.com slash show notes so that you can get a synopsis of every episode complete with timestamps so that you can quickly reference any question or any part of an interview. Thanks again for tuning in. My name is Paula Pant. And I'm Joe Sal C-Hi.

Have a great end of the year. I will catch you in the next episode. Here is an important disclaimer. There's a distinction between financial media and financial advice. Financial media includes everything that you read on the internet, hear on a podcast, see on social media that relates to finance. All of this is financial media. That includes the Afford Anything podcast, this podcast, as well as everything Afford Anything produces. And financial media is not a regulated industry. There are no licensure requirements.

there are no mandatory credentials, there's no oversight board or review board. The financial media, including this show, is fundamentally part of the media. And the media is never a substitute for professional advice. That means any time you make a financial decision or a tax decision or a business decision, anytime you make any type of decision, you should be consulting with licensed credential experts, including but not limited to attorneys, tax professionals, certified financial planners, or certified financial advisors, always, always, always consult with them before you make any decision.

Never use anything in the financial media, and that includes this show, and that includes everything that I say and do, never use the financial media as a substitute for actual professional advice. All right, there's your disclaimer. Have a great day. Okay, so we saw a preview for a movie called Cocaine Bear. Of course. Which is exactly what you would imagine it to be.

It's the whole premise is that there was an airplane flying overhead. Someone dropped a bunch of bags of cocaine from the airplane. A bear ingested one of these bags of cocaine. And now you've got this coked up bear. Tucked really fast, posse about everything. So the whole preview is just this coaked up bear that's like mauling everyone. And then the name of the movie is cocaine bear. Apparently comes out in February.

Well, because cocaine cat was already taken. Can you imagine, like how? Imagine the table read for that. Right? Imagine all the actors. No, imagine telling your mom you got that role. Hey, mom, I got good news. bad news. Remember how I've been here working my butt off in Hollywood for the last five years?

I finally landed a roll. Oh, great. What is it? Got the lead part in cocaine bear. It's wonderful. I voiced the bear. Yes. Yes. Right. So because it's method acting, I've been strung out all week. It's just horrible. Just horrible. I swear, these movies are like, it's like they're intentionally bad. I don't know what's going on. Yeah, I can't believe you saw a movie called Violent Night and there was a preview for Cocaine Bear. Like, I don't know how those two go together.

What made you think that one of those, like, wow? You see why I only watch like one movie every six months? Yeah, because you pick the crappy one. You're like, these movies all suck. Paul is reading about the Oscars. How come, how come Violet Night wasn't up for an Oscar? It's the only movie I saw. I think the screenplay won a Pulitzer.

Based on the bestselling novel by the same day. Oh, you know how you cried through the help? I just couldn't get through Violet Night. Oh, so much subtext.