Afford Anything - Ask Paula: Should I Take a $30k Paycut for Better Work-Life Balance, or Stick it Out?

Episode Date: August 5, 2019

#207: Matt and his fiance earn $7,500 per month combined. They save more than half of their income. He’d like to take a different job that will decrease his income by $2,000 per month, but improve his quality of life. Should he? Suja wants to take out a loan for business growth. What red flags should she watch for? Anonymous and her husband are thinking about buying half-million-dollar home, purchasing a second car, and having a baby. They’ve saved an emergency fund and a 20 percent downpayment. Are they ready? Trayci wants to quit her 9-to-5 and start working as a 1099 self-employed lifestyle. How should she manage this transition? Daria is curious about the economics of a podcast. What do the income and expenses look like? Jared wants to retire early and then sell off his rental properties, but he’s worried about the depreciation recapture tax rate. How should he plan? Ali wants to set up a long-term giving plan, but most of the advice out there is geared towards wealthy donors. How should middle-class workers set up their charitable giving? Financial planner Sophia Bera (hailed by Investment News as one of the Top 40 Under 40) joins me on today’s episode to answer these seven questions. For more information, visit the show notes at https://affordanything.com/episode207  Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every decision that you make is a trade-off against something else, and that doesn't just apply to your money. It applies to your time, your focus, your energy, your attention. It applies to anything in your life that's a scarce or limited resource that you need to manage. And that leads to two questions. Number one, what do you value most? Number two, how do you align your daily decisions in a way that reflects those values? Answering those two questions is a lifetime practice.

And that is what this podcast is here to explore and facilitate. My name is Paula Pant. I'm the host of the Afford Anything podcast. Every other week, I answer questions that come from you, the community. With me is certified financial planner Sophia Bera, the owner of Gen Y Planning and somebody who has been named by investment news as 40 under 40. Thanks so much for having me, Paula. Hey, Sophia, where are we right now? We are in Mexico City. Yes. So we are sitting in a podcast booth at a co-working space in Mexico City, and we are going to be. to be answering questions from Matt, who wants to know if he should leave his job, Ali, who's interested in creating a long-term giving plan, Suja, who is concerned about fatal frugality and wants to know what her options are in terms of a capital-intensive year that she has in growing her business, Anonymous, who wants to purchase a home and is also planning on having children soon and needs to manage a number of competing goals. Jared, who's curious about how an early

retirement will affect the depreciation recapture when he sells his rental properties, and Tracy, who has a W-2 job with benefits and is transitioning into 1099 income and is wondering how to facilitate that transition. You excited, Sophia? Oh, I can't wait. This will be fun. Our first question comes from Matt. Hey, Paula. A little background before my question. My salary is $50,000 a year, but I get $2,000 a month of non-taxable income for mileage of traveling and food expenses. That being said, I'm in a hotel for nights a week. My fiancé makes $50,000 a year. Together, we bring home close to $7,500 a month and are able to save $4,000 of that,

along with 15% into each of our 401ks. Work-life balance is a bit skewed due to me being in a hotel. for nights a week. If I am to leave and get a different job, I'll only have the salary that I have now about $50,000 a year without the extra expenses due to me being only out of school for a year and having not a lot of experience. So the real question just is, is the pay cut and work-life balance of being home at night worth around a $30,000 decrease in pay?

I know it's a personal decision I have to make. I just really like your opinion. Thanks. Thank you, Matt, for asking that question. First of all, you bring home $7,500 a month and save $4,000 a month. In addition to also making a 15% contribution into your 401K, that's incredible. You have more than a 50% savings rate of your take-home income on top of retirement contributions. So normally at this point, I would say, hey, Steve, can we get a round of applause?

But Steve sent me a note saying, we've been doing that too much. So in honor of the fact that Sophia that you and I are in Mexico? Yeah. I think, Steve, can we get some awesome Latin beats? So Matt, congratulations on crushing it with the money that you're bringing home. Yeah, Matt, you're doing such a fantastic job. One thing to think about is what's the lifestyle that you two want to create in the future? So can you do this job for a little bit longer, knowing that your future goals are even bigger and that this job will help you reach those future goals?

If you were to quit this job, and if you were to go into a different job in which you would be bringing home less money, but yet you would have that higher quality of life, in terms of the difference in cash flow, where would that come from? Would you be saving less? Would you cut down on your living expenses or would it be a combination of the two? And layered on top of that, what are you saving for? You currently have more than a 50% savings rate of your take-home income. Are you shooting for early retirement? Are you shooting for financial independence? Or are you saving in a more amorphous way because there's really nothing more that you want to buy?

Or are you saving for something really specific, like a wedding, a honeymoon, a property. Once you reach that goal, then it might be easier to switch to a different career, transition jobs, once you know that some of those big upfront costs are taking care of. Oftentimes, when we talk about saving, the question is always for what? And you're doing a great job of saving, but why? When I think about the choice that you're facing in terms of job A versus job B, knowing that, taking job B will most likely cut into your savings rate, the follow-up question is, what will be the impact of that reduction in savings rate? Because if you're going for aggressively early retirement and you want to maintain a more than 50% savings rate so that you can retire in 17 years, 15 years,

12 years, then it might be worth embracing the suck right now so that you can retire in 12 years. On the other hand, if that's not the goal, and you would like to have a life well worked, then perhaps switching to a different job that is lower paying and therefore reduces your ability to save might be a good choice in that you plan on being in that job for a longer period of time. If you think of it in terms of sprinting versus marathon running, right, Do you want the pressure of a sprint knowing that it'll be over sooner? Or do you want to run a marathon knowing that you'll be working longer but at a more sustainable pace? Yeah, I think that there's a few different directions that you could go and bringing your fiancé on board to find out where she's at with this as well.

And what sacrifices you two are willing to make as a couple early in your marriage and how that might impact things in the future, making that choice together and figuring out, you know, what's going to be the best. best fit for us as we set up our lives together and what we want that life to look like. My other question is what are your opportunities for advancement in job A versus job B? Because if you have to take a temporary pay cut in order to be in a position in which you have better coworkers, better colleagues, better working conditions, more opportunity for advancement, higher probability that you're going to love your career and therefore excel because you excel at whatever you love the most, that would be a great reason. to take that short-term pay cut because a pay cut is only going to be short-term if it puts you in a position in which you have better chances for growth and more enthusiasm for what you do.

Especially early in your career. Like you said you're a year out of college and we're just so impressed that you're able to accomplish so much in such a short period of time. This could be a good way to even take a sideways step in a lot of ways if it offers all of these other things that Paula mentioned as well. Absolutely. It's a great question, and thank you for asking it. I don't think that this is purely a financial question because the layers that we're considering are finances, current quality of life, and future prospects. And really, of those finances might be the smallest piece of the puzzle. Right. I would totally agree. I think that this is a really wonderfully complex question and a really good one to be thinking about, to be asking, and weighing those tradeoffs that aren't just financial, but are also overall happiness levels. and career path and connecting that to those bigger life decisions that you're making. Right. This question is, when you talk about work life, this question lives in the hyphen. Exactly. So thank you, Matt, for asking that question. Best of luck with whatever you decide.

Our next question comes from Allie. Hi, Paula. My name's Allie, and I'm a newly minted registered nurse, and your podcast helped me get on track to pay off all of my credit card debt by the end of summer. I was wondering if you had any direction for someone with a median income looking to build a long-term giving plan. I'm tired of giving a little bit here and there, and I'd like to someday have a fund or some other vehicle that can sustainably contribute money annually to some causes I really care about. However, most of the resources I've come across are for people with substantial wealth. that's not me and probably won't be for a couple of years. I'm 32 and I am in a second career. I've done a deep dive into my values and I've come up with two causes I feel really passionate about. There's one organization that I'd like to donate to and I'm interested in starting a scholarship.

I'm already an active community member and I make time for volunteering. Now I'd like some guidance on what I can do my money. Any suggestions? Thank you. Allie, first of all, congratulations on becoming a registered nurse. That's super exciting. One of my best friends as a nurse. There are a lot of different ways that you could approach this situation, but a few that I think people often overlook are donating appreciated stock. So if you do have some investments that have done really well financially for you, let's say that you bought a stock for $10 a share and now it's worth $50 a share. If you were to donate that stock directly to the charity, the charity would get the benefit of that current value of that investment and you would actually get to write off the full current value

and not have to pay capital gains taxes on any of the appreciated stock gains, which is pretty great. If that's not your situation, don't worry. There are lots of great ways that you can approach this. So another thing to consider is I love this idea of setting up a scholarship. Oftentimes when you do something like that, you can make a pledge to that charity over a certain number of years. Then you can give in a variety of different ways. You might give a one-time contribution. You might give monthly to that charity. There's a lot of different ways to set that up. Another thing to think about in the future as you're giving increases is starting what's known as a donor advised fund.

And the really cool thing about donor advised funds is it's a great way to track your charitable giving as well. First of all, you get an upfront tax deduction in the year that you gift either cash or securities into the donor advised fund. and then you can gift out of the donor advised fund to charities over several years. For example, let's say that you want to start a donor advised fund with $10,000, but you want the scholarship to be set up as $1,000 a year. You can actually donate $10,000 to the donor advised fund, get a tax deduction if you itemize your taxes in that current tax year, but then have that money set aside for the charity.

to be able to gift over a decade, basically. You could continue to add more money to it, and you can also invest the assets that are in the donor advised fund, which is really cool as well. There's a lot of different ways to go about this. You could also look at itemizing your taxes every other year to have your donations make an even bigger impact. So, for example, let's say you know you're going to be giving, let's say it's five years in the future and you know you want to give $10,000, a year. What you could do is you could give $20,000 to the donor advised fund in one year, deduct that full amount on your taxes, give that money over several years, but you would also the next year take the standard deduction, which would be for a single person, $12,000,

and then the following year you might itemize your taxes again when you make a big donation to that donor advised fund. So that's one way that some people are able to, get more tax benefits out of their charitable deductions than they've been able to get previously. Those are all different ways to give, different ways to think about giving. I think one thing that's really helpful as well is to come up with a mission statement for your giving. Figure out what is really important to you. You already have a couple organizations that resonate with you and figure out what are those organizations have in common so that as your giving strategy grows in the future that you kind of figure out what other charities might align with my values and might be a

great way to give back as well. What's wonderful about a donor advised fund is that if you have a year in which you think that you are going to have higher income that year than you will in other years, perhaps there's a year in which you work a lot of overtime. In that year, when your income is high and your tax liabilities are high, you can create that donor advised fund contribute a big lump sum of money into that donor advised fund in that year, which you will have because it will be a higher income year for you. And then you can continue to give that money over time getting the maximum tax benefit in the year in which your tax liability is the highest. So the donor advised fund is a great way to offset some of your tax liability in high tax years while maintaining steady giving across the years. Yeah, and it's also a great way to track your giving as well. So if you end up giving to a lot of charities throughout the year, but you're only gifting from your donor advised fund, it's really easy to look back on that when you do your taxes and see here are the charities that I gave to. This was the impact that I made this year. So that's another nice benefit of it as well is you don't have to go back and figure out, okay, I know I gave $100 to this organization or $100 to that organization, that I have monthly giving to these ones, that I have an annual gift.

to those ones. And then it becomes a record-keeping mess. Exactly. And so donor-advised funds really help with that as well, especially when you're first getting started and there might be a lot of organizations that you want to give small amounts to. And that may add up to a bigger number, but that can be kind of a tracking conundrum. Yeah. I have a Google spreadsheet and it's a disaster. It's a spreadsheet where I'm like, this place, $50. This place, $75. You know, and it's really, it is a record-keeping hassle. So then at the end of the year, I have to create a subfolder in Dropbox that I send to my CPA with all of these receipts. And then a Google spreadsheet that I've downloaded and attached with it. It's really a very rudimentary way of tracking giving.

And a donor-advised fund would solve that. And I have a donor-advised fund. Show off. Show off. So do that because in addition to all of the tax benefits, the record-keeping is going to be so much easier. Thank you, Allie, for asking that question. Our next question comes from Suja. Hi, Paula. My name is Suja, and this year I'm growing my business. It's a real estate hospitality business. This is a very capital intensive year for me, and I have a couple of options for handling those capital expenditures. One is I have a HELOC on equity line of credit, which is quite substantial, but it's a 6% interest rate. And then I also have the option of

opening credit cards with a 0% APR for 12 to 15 months. The downside of using the credit cards appears to be that my credit utilization rate is higher, and so my credit score is lower. But I'm paying less interest, and I'm wondering about how that will affect my ability to get loans, like a small business loan or a solar loan for one of my properties. When I'm applying for those loans, the main issue is my debt income because I am in a growth.

phase. And so I do have, I guess, some, a substantial amount of mortgage payments that I'm making. So I don't know if my credit score is really what's getting in the way. I think it's more my debt-to-income ratio. But I just wanted to get your thoughts on a home equity credit versus credit cards. You know, I listened to you, talk about fatal frugality. And I'm wondering if like not wanting to pay interest is an example of that and also what to do about a debt to income ratio that's preventing me from getting other loans. Thank you very much. Have a great day. Suja, congratulations on starting your own business. I love the fact that you are an entrepreneur. I totally understand that this is a capital intensive year in growing your business.

I am concerned about the use of debt in the growth of this business. My general philadelphia, is to use loans for capital improvements, but not for operations. For example, if you have a business in which you secure a contract and in order to execute on that contract, you need to purchase a forklift. And that contract gives you, say, a 25% upfront payment, 50% paid in installments throughout the project and the final 25% at the end. All right, you've got a contract and you're taking out a temporary short-term loan to buy a major piece of equipment, in this example, a forklift, so that you can fulfill the obligations of that contract. I'm amenable to a loan under those circumstances. Likewise, if you have a rental property and you need to take out a loan

in order to do a remodel of the rental property so that it can be rented out at a higher rate, I'm amenable to a loan under those circumstances because it's going to be used to make capital improvements and you have assets to show for what you have done with this money. If, on the other hand, you're using loans in order to operate the business at a daily level, that to me is a huge red flag. So my concern when I heard your voicemail is that debt should be the last resort, not the first. Ideally, the question to ask is, how do I fund the operations of this business through

its cash flow using as little debt as possible. That is the key question rather than how do I access this debt in a way in which I pay the lowest interest rate. Yeah, I totally agree, Paula. My concern when I heard your question initially was, is this a profitable business? Do we have enough money to even be paying off these loans in a regular and timely manner? I would really hesitate towards taking out zero percent interest credit cards because if you aren't able to pay back those loans in a timely manner, you could get hit with a ton of interest charges. Absolutely. That zero percent is a teaser introductory rate. They call it a teaser for a reason. So unless you're taking out a very specific amount of debt for a very specific project like

Paula was saying, I don't think that the zero percent interest card is the way to go. Some things that I would consider would be seeing if there are small business grants or loans geared towards women-owned businesses in your area and that might offer some sort of mentorship and could also help you look at some of your business schools that you have and take a look at your business plan and see some ideas that they would have to maybe make your business more profitable and then maybe you would not need to take out as much debt to fund this project. There is also an entity called Clear Bank, Bank with a C. In full disclosure, they are going to be a future sponsor of this podcast. They are not one yet, but we are in talks. They do something that's kind of unusual because what they offer is not alone, nor is it a request for equity in your company. So you keep all of the ownership of your company. You don't give them equity. And they give you money that is not alone. But, essentially they front you some upfront cash and then you pay them out a percentage of revenue

over time. It's not a loan. It's no recourse, but that is an arrangement that they make with businesses. And so that might be a thing to look into because that way you don't have to give up any of the ownership and you're not taking out a loan. One other thing that I want to address, you mentioned a HELOC with a 6% interest rate. Now, I have zero objection to a 6% interest rate. To be perfectly frank, the interest rates that you're talking about are not the things I'm worried about. I'm worried at a much more big picture. I totally agree, Paula. It's a slippery slope with helox, especially if you aren't using it to fund a specific project and you are using it to make up for cash flow that your business is lacking right now.

Like Paula was saying, when people take out hellocks and slowly use up more and more and more of that helock, it can put your business in a business in a lot. really cash flow tight situation in a really dangerous situation. And you're putting your personal assets in a precarious situation. I mean, do you want to be in a position in which you lose your business and your house? Right. And have your credit score significantly affected by these choices as well. Right. Exactly. So the HELOC is a slippery slope. And frankly, I think that using loans to fund the operations of a business, that's something that would give me quite a bit of pause. Again, with the forklift analogy, I could see a case for it in a very specific circumstance like that. But if these loans are going to be used to pay the wages for an employee or a

contractor of the business, or if these loans are going to be used to pay for any other daily operations, that's a sign that the business isn't cash flowing enough to be able to sustain its own growth. Exactly. I couldn't agree more. I think that Paula is bringing up some really important points, really consider do we need to completely revamp the business rather than look at taking out another loan? Yeah. So thank you, Suja, for asking that question and best of luck with whatever steps you take next. We'll come back to this episode after this word from our sponsors.

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Our next question comes from Anonymous. Hi, Paula. My husband and I are in our 30s. We both have 95 jobs in the greater D.C. area and currently are renting a small apartment. We've paid off all our debt, including the one car we currently own. We maxed out our 401ks each year and have finally saved up enough for a 20% down payment on a house, a six-month emergency fund, and some change in our savings. Even though we're in good shape right now, we have a lot of new costs coming up. In addition to buying a house in the next six months, we want to have kids soon and we have to budget for daycare costs, which are around 20K in our area per child. We'll also need to get a second car as we likely won't be able to afford a house near public transportation. We're currently looking at single family homes in the 450 to 550 range in the outskirts, but it also adds commute times to our jobs and the need for a second car. Our current plan is to continue maxing out our 401ks, put a 20% down the house, keep the six-month emergency fund, and buy a second car either straight-out cash or do monthly payments if we find a 0% APY deal

and pay it off before the interest rises. My question for you is, is this the best way to allocate our funds and what will be the best way to direct our monthly savings now that we're no longer saving up for a down payment? Instead of looking in the outskirts, should we pay more for a house that's closer to work and public transportation instead? The trade-off would be a higher mortgage in the 550 to 650,000 range, and would likely be a smaller townhouse. This might make it possible for us to forgo or at least delay buying a second car and more importantly reduce our commute time. I should also mention that if you use public

transportation, our employers reimburse those costs, but not gas and tolls if we choose to drive. With the incoming monthly savings, should we make extra payments on our mortgage or should we open at 529 under my name and start a college fund that we can later transfer to our kids when they're born? Or should we contribute to an HSA that does not have an employer match, I don't think, or to an IRA? Or should we keep these savings liquid so that we have money saved up for a daycare and general child care costs when they come up in the next year or two? Thank you for your advice. Anonymous. There's a lot going on here. So first, let me quickly recap your question. So you have saved a 20% down payment and a six-month emergency fund. You're looking at moving into a home that you

would purchase that home, the one that you're considering right now would cost between 450 to 550K, but if you were to buy that home, you would then need to buy a second car, which there's going to be some significant cash outlays, buying a home, closing costs, the costs related to moving, plus the cost of buying a new car. So despite the fact that you do have that 20% down payment, which is great, there's going to be some tight cash going on if you were to make this move. Plus, you would have a longer commute time and all of the expenses. associated with being a two-car family. Now, you do have the option of paying about $100,000 more

for a home that would be closer to work that would allow you to defer buying that second car, that would allow you to take public transportation to work, the fees of which would be reimbursed by your employer. So just from the way that I am recapping this, you might be able to already guess which way I'm leaning, since there seem to be a lot of advantages to living close to where you work, even if that means paying a little bit more for that home. But before we go there, part of your question also was, in terms of excess funds or future savings, how should you direct that? HSA, IRA, liquid savings, 529, making extra payments towards the mortgage. What should you do, given the fact that you plan on having kids? And that means

that you're going to have a lot of additional expenses, one of which is daycare, which is going to cost 20 grand a year, but there are going to be more as well. There's going to be doctors' visits and clothes and food and all of the Amazon.com packages associated with having that child or those children. So what should you do given all of these options in front of you and all of these moving pieces? Yeah, I have lots of ideas in terms of what to do with the excess funds. First, I would agree with Paula to continue saving for a down payment on a little bit more expensive home, but in an area that you absolutely love and that's closer to work. There's a lot of studies having to do with commute time being a big indicator of happiness levels

by staying in an area that you love, by being close to your work, by being able to take public transportation, you will stay in your community that you love, you will be able to enjoy your space a lot more because you will have a home that is convenient. That's worth a lot. Right. The fact that in a home that's closer to work, you can defer by. a second car, that's going to have some significant financial ramifications. You will be able to have your commuting costs covered by your employer, because your employer will cover public

transportation commuting costs. So your commuting costs are going to fall to zero. The number of cars you support goes down to one rather than two. And frankly, you're probably likely to stay in that home longer, which means that over the long term, you have a greater likelihood of of not paying as many transaction costs, because buying and selling homes carry enormous transaction costs. So the more that you can reduce that turnover, the better. Yeah. And in terms of using the excess funds, I have lots of ideas. The first is max out that HSA. Start doing that ASAP, especially if you're thinking about having a baby, because if you have out-of-pocket health care costs and want to use pre-tax dollars to pay for those labor, delivery,

and whatnot, HSA is a great way to do that. You can also invest the funds. in your HSA, use that in the future. In addition to that, I love this idea of starting a 529 plan now. For D.C. residents who want to contribute to a 529 plan, they can deduct up to $8,000 if they are married filing jointly on their taxes. That's a great tax benefit for DC residents. So definitely something to think about to use that excess cash for. I don't know how much you make. I'm guessing that you may make too much money to contribute to a Roth IRA, but you do always have the option of contributing to what's known as a backdoor Roth IRA. So in order to do that, you would make a contribution to a non-deductible traditional IRA and then convert a pro-rate-up portion of that

relative to your other IRA assets into a Roth IRA. But that being said, I realize that what we have just told you are a variety of options for the use of those excesses. funds, right? There's the 529 plan, there's the backdoor Roth IRA, there's the HSA, and so how do you prioritize those? I would, first and foremost, it sounds as though you're going to need a higher down payment for this home if you buy that more expensive home, and I think there's a strong argument to doing so. Saving up additional money for a higher down payment on this home seems like a good first step. On top of that, don't underestimate the costs associated with moving. Because when you move, everything ranging from moving trucks to needing new furniture, window treatments, not having your pots and pans accessible.

And so needing to eat at restaurants or order takeout more often during that couple weeks of transition. I mean, there are so many costs associated with moving that you'll want excess money to be able to handle those. Yeah. And because of that, I would even consider delaying a move a little bit longer until you actually need more space. This gives you more time to save. This gives you more time to reach other financial goals. And also really think about what do you want your lives to look like? Do you want to take an extended maternity leave? Do you want to work part time for a while? These are all things that could be possible if you stay in that little apartment a little bit longer. So really think about what those tradeoffs are that you're making by buying a house sooner. I do think that there's a lot of value in how you're setting up your lives currently in terms of saving cash, having that flexibility, having one car, having that car paid off. And you're entering this time where you might have a lot of increased payments very, very quickly. And so I would just be cautious about taking out a mortgage at the same time as having a baby at the same time as

having a long commute, because each of one of those things are a big stressor for a couple. One thing, I often tell people who are thinking about buying a primary residence. and who are unsure of whether or not they have the financial capacity to take on that mortgage payment is start doing a dress rehearsal right now. Start making a quote unquote payment to yourself in the amount of the difference between your current housing costs and your projected future housing costs. Lop that out of your checking account and put it aside. That way you practice making a higher mortgage payment, plus you end up with extra savings from that practice. So for example, and I'm just making up numbers here, but let's say that your current rent payment

is $2,000 a month, but if you were to take on this new mortgage, your mortgage payment would be $3,000 a month, right? Take that $1,000 monthly difference and make that your quote-unquote additional payment that you make to yourself every single month. And now you get to review your budget and see, hey, is this higher payment stressing us out? If so, then you know that now. And that will inform your decision about the type of mortgage that you decide to take on. Love that idea. Couldn't agree more. I think that that's a great way to practice getting used to some of these bigger monthly costs that are going to be happening in the future. And the final thing that I'll say is, when I first heard your

question, one of the first things that popped into my mind was, why do you want to buy a house now? And I think, Sophia, you alluded to that earlier when you talked about maybe not making this transition right away. What's the rush in buying a home? You have a lot of big changes coming up on the horizon. You don't have to buy a home the moment that you save a 20% down payment. You can sit on that down payment for a while, allow it to grow, allow yourself to accumulate a stronger cash position, before you start taking on multiple big new expenses, including, in your case, a mortgage and child. children, both of which will dramatically affect your financial life. It's, I think, far better to move

slowly and know that you have a substantial cash cushion for those moves than it is to move too quickly and find yourself in a tight spot. I totally agree. I think that one thing when I work with clients that have young kids, it can be stressful if they buy more home than they can afford. And so with those additional daycare costs, that's really something to keep in mind as you're thinking about how big of a mortgage do we want to take on, what does our monthly payment look like, and what are our daycare costs going to be in the future. Actually, you can do a practice run of that right now. You said daycare will be 20 grand a year. So let's round up, call it 24,000 a year, $2,000 a month. Why not do a practice run right now where out of your current paychecks, you set aside

$2,000 a month, in addition to the cost difference of that mortgage, just start setting that aside now so that you can do a practice run of paying those bills. Love that idea. So thank you, Anonymous, for asking that question. Our next question comes from Tracy. Hi, Paula. My name is Tracy. I called you a few months back asking some questions regarding investing. Thank you for getting back to me on that. It was very helpful. However, I have another question. I am starting my journey into investing and I decided to start with becoming a real estate agent. I figured it would make it easier for me to purchase my properties. However, I'm currently in payroll. I like my job and I make good money and I have benefits. So my question is, how do you

recommend that I transition into the real estate world? I do know that I would go from a W-2 employee to a 1099 employee, which means that I won't have any benefits and I'll be based off commission, but I still have bills. So I'm wondering, should I go part-time at my day job? And then I was thinking maybe go full-time real estate, maybe 11 a.m. to 7 p.m. Or do I just go full-time real estate and go get an evening job as a server? That way, I'm still working on my real estate business, but I still have some income coming in to stay afloat. Any advice you could give will be really, really helpful.

Again, my name is Tracy, and thank you so much for everything. Tracy, congratulations on what is ahead for you. It sounds like you've got some great things in store. Now, what strikes me when I hear your question is that if we remove the real estate component of it, fundamentally what your question is, is you have a W2 job with benefits and you are transitioning into a 1099 lifestyle, which is great. How do you make this transition? How do you transition from W2 to 1099? Tracy, such a great question. I think that entrepreneurship is the new job security of our generation and more people.

people are really wanting to transition into 1099 careers. Ooh, entrepreneurship is the new job security. I like that. Thanks, Paula. I think one thing to be cautious about is, is this real estate career really what you had envisioned initially? So sometimes we get really excited about this new job prospect, but sometimes it takes a while to find the right company to be at, that we need some time to ramp up our clientele. So give yourself some time to explain. floor, get your feet wet, maybe join a real estate group where you can do that on the weekends. A lot of homes are sold on the weekends. And if you can keep your full-time day job a little longer and give

yourself, you know, the three-month trial period of working weekends for a while and then going down to part-time, like you had suggested, you know, work your day job part-time, work real estate part-time. That could be a really good way to transition cash flow-wise because you mentioned you have some monthly bills and you just want to make sure that you keep up on your monthly bills and whatnot. When you do those things gradually, then you're able to not have such a big hit to your cash flow, not have to dip into your emergency savings during these times. What I would like to see, Tracy, is some proof of concept before you make this transition. So essentially, you are taking a side hustle and growing it into your full-time income.

In order to do that, I want you to not quit your day job until your side hustle already has grown. I want your new 1099 career to be big enough that you've got solid proof of concept and you know that your day job is the only thing that's holding you back from expanding it to being even bigger. So I would like to see you have clients, have sales, have a long list of very warm leads. I would like to see that proof of concept within your 1099 activity before you leave the comfort of a W2. And that can take a while. Just naturally, that's inherent to developing out a 1099 career. It can be volatile. It can take time.

And you will have to work your W2 job. and then give everything to your 1099 during the evenings and weekends or whatever time you have off. And for a while, that's a lot. It's a lot to handle. Sophia, you and I have both been through it. Yeah. And especially when you're working in something like real estate, which can be more seasonal, it can be really easy to distract yourself with a couple sales and think that every month is going to be like this.

And so giving yourself, like Paula said, proof of concept, making sure this works, making sure that you have some consistent warm leads coming in and that the real estate group you're a part of is a great fit. Yeah, the brokerage. That you're with. All of those things kind of go into designing that career. And so giving yourself some time to work through the kinks and work out the bumps before you dive head first into this.

I love your gumption. I love your ambition. You can definitely tell you're highly motivated. I think that what Paula and I are saying is pause for just a moment before you jump in head first and quit your day job. I like the word gumption. That was a nice one. Thanks. So thank you, Tracy, for asking that question. And best of luck with your new career. We'll come back to the show in just a second. But first, do you run a business or do you know someone who does? If so, as you know, when you run a small business, you have to fill a lot of different roles.

And one of those roles is filing taxes, running payroll. You are your own age. HR support. And that is not the reason that you're in business. And it's time that you're taking away from time that you otherwise could be growing your business, getting new clients, selling. That's where Gusto comes in. Gusto makes payroll taxes and HR easy for small businesses. They offer fast, simple payroll processing, benefits, and expert HR support all in one place. Gusto will automatically pay and file your federal, state, and local taxes so that you don't have to worry about it,

and they make it easy to add health benefits and 401Ks for your team. Gusto is built for modern small businesses, so let them handle the payroll, the taxes, and the HR support, because you've got better things to do. Listeners get three months free when they run their first payroll if you use my link. So go to gusto.com slash paula. That's g-U-S-T-O-com. slash Paula to try a demo and see for yourself. Again, three months free, gusto.com slash Paula. Do you work in the medical or the healthcare field, or do you know somebody who does? If so, I'm sure you can agree, that people who work in healthcare probably want to wear scrubs that are comfortable.

So I'm excited to bring on board a new sponsor called Figgs. Figs is an amazing company that is making scrubs stylish and functional for nurses, doctors, dentists, and other medical professionals. Every set of figs is antimicrobial. They're soft, they're moisture wicking, they're made with yoga waistbands. They come in a variety of colors and styles. And figs is quite generous. Every time you shop at figs, they give scrubs to health care providers in need around the world through an initiative called Threads for Threads. Figs has donated to this date hundreds of thousands of sets in over 35 countries.

They also make great gifts. I got a pair that I gave to a friend of mine who's a PA. She loved it. I think she was surprised to get it, but she absolutely loves it and told me that she wears it all the time and finds it comfortable. And I felt great giving it to her as a gift. And speaking of gifting, Figgs gift cards are available as well if you want to give this as a gift to somebody that you know. So whether you are one of the awesome humans that works in healthcare or someone who wants to say thanks to these deserving folks, Figgs is going to make that easy by providing you with 15% off your first purchase by using my code, Paula.

Get ready to love your scrubs. head to wearfigs.com, W-E-A-R-F-I-G-S-D-com, and enter my code Paula, P-A-U-L-A at checkout. Our next question comes from Jared. Hi, Paula. Thanks for your podcast, which is incredibly inspiring. I have been working towards FI for the past decade, and just like you, a fraction of my strategy has been real estate investing. I'm concerned that real estate is an awesome investment for people working with full

salaries, but maybe less great for early retired folks. Let me explain why. The IRS rules make me depreciate about $10,000 of my building value each year. Today, that gives me a sweet tax deduction because I'm in the 24% tax bracket. So a $10,000 depreciation expense saves $2,400 of tax obligation. someday I might retire early, but then I'm going to drop to the 12% tax bracket because I can take some of my income from Roth accounts and capital gains in a tax-free way. I don't know when, but someday even further in the future, I'll probably sell my real estate, and the IRS will take back the depreciation deduction with depreciation recapture. I've read that recaptured depreciation is treated like ordinary income.

up to a 25% rate. Maybe you already see the concern. Real estate depreciation deductions are great for earners in high-income tax brackets, but not so great for FI-style early retirees with big Roth accounts and lots of tax-free capital gains. We might be saving 12% on our depreciation deductions each year, but when we sell the real estate, they could get recaptured at a 25% rate. Is that an argument for fire people not? to own real estate when they quit their job.

Thank you so much for your perspective. Jared, great question. Now, first of all, yes, when you recapture that depreciation on a rental property, you have a strong likelihood of having to repay that at the recapture rate of 25%. Let's walk through an example of what this might actually look like. Now, first of all, when you buy a property, the property that you pay for is a combination of the land plus the building, which is sometimes also referred to as the improvements. The land itself does not depreciate.

The building does. So let's say that your cost basis in your rental properties is $2 million for the buildings that you own, not counting the underlying land. That would be a fairly large rental property portfolio for an individual investor, because that means that your total rental property portfolio cost basis would be maybe depending on the cost of the underlying land, maybe $3 million, $4 million, right? So let's say you've got $2 million as a cost basis for the building that you own and that after a number of years you've taken $500,000 worth of depreciation deductions.

We're going to play with some really big numbers just to illustrate really how, honestly, spoiler alert, how small of a thing we're talking about here. So you take $500,000 worth of depreciation deductions on your $2 million cost basis in buildings. So that means that now your new cost basis in those buildings is only $1.5 million after the depreciation deductions that you've taken. Now, let's say that you then sell the buildings for $5 million. We'll just put the land aside, right? You sell the buildings for $5 million. You realize a gain of $3.5 million on those buildings because that's the $5 million minus the $1.5 million in cost basis.

Of this $3.5 million, only the depreciation recapture component of $500,000, will be the portion of it that's taxed at the recapture rate of 25%. The rest would be taxed at the capital gains rate. So in this example, that $500,000 of depreciation recapture would be subject to a tax that assuming you're in the 20% capital gains rate tax bracket, that additional tax is 5% higher than what you would pay for capital gains tax. And in this case, that additional 5% on that 500,000, We're talking about $25,000.

So at the end of the day, assuming a massive rental property portfolio that would be worth $3 or $4 million, we're talking about an additional tax burden of $25,000, which in the grand scheme of things, $25,000 is the difference of a few additional months of vacancy over the course of your decades-long real estate career. $25,000 in additional taxes, which is that $5,000. percent on that 500,000 in this example, is a pretty tiny fraction when we're talking about the difference between that 25 percent recapture rate and the 20 percent capital gains tax rate. Heck, even if you're in the 15 percent capital gains tax bracket and we're talking about a 10 percent difference, remember, this example that I just illustrated assumes that you've got a really freaking big rental property portfolio. You mentioned in your voicemail that you're saving right now $10,000 a year in depreciation

deductions. So that means that over the course of 20 years, you'll save, assuming exactly the same rate, $200,000. So now we're talking about 5% of $200,000, or heck, let's be generous and say 10% of $200,000. We're talking about somewhere between $10,000 to $20,000. So if you're going to let between $10,000 to $20,000 of additional taxes drive your investment choices, that's really tail wagging dog here. I really think it's important to keep in mind what your total net worth is and the very small amount that this would be in comparison to your overall net worth. So keep in mind that your tax rates might change slightly from year to year. It might change significantly when you retire early. And that gives you opportunities to make other tax decisions during this time as well.

You mentioned taking money out of Roths when you're in early retirement. I would actually encourage you to do Roth conversions during that time and also keeping those rental properties if they're cash flowing properly and being able to live off of that income while you're in early retirement. I also think that a difference in sale price could easily make up for this small amount of, you know, additional recapture rate that you're talking about. So when we get into those numbers of $5,000, $10,000, $20,000, you might end up hanging on to the properties for a little bit longer than you thought and selling them for significantly more than you anticipated. Right. That's a really good point. When we talk about what you've said is that you are now saving $10,000 a year in depreciation deduction. So over the course of 20 years, assuming we're just going to ignore inflation, let's just assume $10,000 a year for 20 years. We're talking $200,000. As I said, at a $5,000. percent differential, we're talking, 10 grand. When you're negotiating on the sale of the property, $10,000 is a concession that you make to the buyer or a concession that the buyer makes to you. $10,000 gets negotiated away in real estate very quickly. So does $20,000. That's the difference

between using an agent versus doing a for sale by owner. Quite frankly, it's the difference between, in terms of state taxes moving to Nevada or paying state taxes in Pennsylvania? Absolutely. For one year. Yeah, stay focused on the big picture things and what's really important. And what are the things that you can do to grow your net worth over the long term and working with a CPA who can help navigate you through these tax choices on a yearly basis so that you can be making decisions that make sense for your tax situation in the current

year that are going to also benefit you over the long term and not getting caught up on how the recapture rate of 25% may affect your future. Right. Yeah. It's like, okay, I'm paying 20% capital gains versus 25% recapture rate. What impact is this additional 5% on this small amount of money going to have on my life? Exactly. Yeah. And also, zooming out, why would you sell your rentals. I mean, I know that's a different conversation, but in the context of an early retirement, why not pay off your rental properties, live on the cash flow, and then you don't have to take money out of your Roth accounts. You can let that money stay in and enjoy even more tax-exempt growth, right? So living on the cash flow from your rental properties allows you to keep money

invested in your portfolio instead of losing out on the compounding interest that happens when you withdraw that money. If you need to raise cash, you can always borrow against your rental properties. And if you do want to sell those particular properties, you can run it through a 1031 exchange, which means that you would be indefinitely deferring the capital gains taxes. So, I mean, zooming out, I don't really see any reason why you would sell your rentals in the first place. But assuming that for some reason that you did, maybe you're moving to another country and you just don't want to have rental properties in the United States anymore. Again, we're talking about between a 5% to 10% difference on what is ultimately a fairly

small amount of money. Yeah, and this comes back to one of my core values that I tell my clients quite a bit, which is simple first, sexy later. And right now I feel like you are worried about the sexy things. And like Paula mentioned earlier, worrying about the simple things, like how can I pay off my mortgage before I retire early? How can I get in a financial position where I don't need to take money out of my Roth accounts when I retire. Those are the things to worry about rather than these very small tax things that may or may not affect you in the future. First of all, I've got to make a note, Sophia, that you just described depreciation recapture as sexy. Don't tell anyone. Secondly, the other thing that we don't know is what tax policy is going to be like in 15 to 20 years.

What's the capital gains tax rate going to be 20 years from now? What's the depreciation recapture rate going to be 20 years from now. I mean, it's good to do this planning based on what we know about today, but all the rules of the game could change and have changed many times. Right. And when we look at how much earned income tax rates have fluctuated just over each administration, it can really affect people's tax planning from year to year, which is why I think that we're kind of in the weeds here when it comes to thinking about worrying about this recapture rate. Right. Yeah. What's my recapture rate going to be in 20 years. Yeah, exactly. But if you really want to save taxes, move to Nevada. Or taxes. Oh, yeah, or. Yeah, totally. Move to one of those states without state

income tax. That's pro tip of the day. Thank you, Jared, for asking that question. Our final question today comes from Daria. Hi, Paula. This is Daria. I wanted to ask you about the podcast itself. How are you able to make money through that? Is it just advertising or there is. Is there something else? Do you reach out to brands yourself or vice versa? And on the flip side, what are expenses they're incurring? We'd love to hear what you have to say. Thank you.

Darya, it sounds like somebody wants to start a side hustle. All right. So with the podcast itself, so what's difficult is to separate out the income and the expenses from the podcast with the income and the expenses associated with afford anything as a whole. because afford anything as a whole, afford anything LLC, includes the website, the podcast, the YouTube channel, the social media accounts, the going to conferences, right? So, for example, if I go to a conference, if I go to Camp FI or Camp Mustache or FinCon, I mean, I guess not that those are like Camp FI isn't actually a conference, but you know what I mean? If I go to an event, is that something I'm doing as part of the podcast or is it something that I'm doing as part of the website or is it something I'm doing as part of the YouTube channel? Like it all ties in under the afford anything umbrella.

These platforms, blog, podcast, YouTube, they all tie together in such a way that it's impossible to really tease out what's what. And so all of it kind of lumps under the afford anything umbrella. And so to answer your questions, I guess I'll start with expenses since that's always kind of at the forefront. front of my mind. Erin has worked on the Afford Anything team. She's been an integral part of the team for many, many, many years. I call her my chief sanity officer. She handles all of the operations. I mean, everything from, like, for example, when I say, hey, you can download a particular PDF at afford anything.com slash cap rate. I write the material that's in the PDF, but somebody has to then design it, but give it a good layout, upload it into,

software that allows it to be downloaded. They have to build a webpage for it. They have to integrate that web page with the website. They have to connect it to an email list. There are all of these steps that go into having that downloadable PDF. Likewise, even this episode, answering questions, right? Somebody has to go through that whole volume of questions that we receive, listen to all of them, and then label each question for which episode it's going to go towards. Like, is this question going to go to episode 197 or episode 203? And let's listen to all of them because we don't want to put too many questions about entrepreneurship in the same episode, because that's going to feel a little bit too heavy on that one topic. So let's listen to

the questions and space them out in such a way that we can make sure that we're getting a good representative sample of different types of topics in each Q&A episode. Right? Somebody's got to do that. When students in the course email and say, hey, I used my chase Sapphire rewards card in order to sign up. But you know, it turns out that I can actually get more miles if I use my Capital One 360 card. I was wondering if I could just change that out, right? Somebody's got to then be the person who goes to a chat window with Stripe, our payment processor, and asks them how we can do that, right? There are all of these details. I kind of refer to it as death by a thousand paper cuts. All of those details that need to be managed. And anyway,

Aaron has been part of the team for about maybe four years at this point and doing a lot of that behind the scenes. I have been thinking a lot lately about just designing a really good workplace environment and making sure that she's happy and that we're a team and we're a team that can continue to grow. Okay, so beyond that, of course, we've got Steve, who is the editor and producer of this podcast. Say hi, Steve. Hi, Paula. Yes, it's Steve, that guy who does stuff for Paula. Hey, everybody. So Steve is a huge, great.

critical part of this show. I would be lost without him. Steve is amazing. On the website, we have a design team named Greg and Hannah. They do all of our design. They redesigned the website. They redesigned our logo. They designed the entire interior of the course. We have a developer by the name of Zach. Zach built out the code behind everything. So the course, we custom built it. We custom coded it. Because my feeling was that I felt like, you know, if I used one of those plug and play platforms like teachable, I don't know, it just seemed to cheapen the experience. And I wanted the students to have the best possible experience. And that meant hiring a developer to custom code it. We have worksheets and spreadsheets and personality assessments and all of these other various

downloadables. And I'm very, very grateful to him for monitoring and managing all of the technical aspects of making sure that that all stays online. And being there, you know, we had this incident a couple of months ago where one of our social media management, plugins got corrupted and it allowed hackers to redirect the website to some random other site. And when that happened, myself, Aaron, and Zach were all on top of it, right? Aaron was interfacing with our web host, WP Engine. WP. Engine, by the way, they're expensive. They're $290 a month.

So they're great once you have a level of traffic that requires them. But I would not recommend that beginners start out on them because they're $290 a month. But yeah, those are some of the other costs. Almost $300 a month that we pay for hosting, the probably another $200 or $300 a month that we pay for the email list, just the software that manages it, all of the money that we pay for the software that allows us to host giveaways and offer our students' quizzes and personality assessments. I mean, even down to just having premium Zoom calls that a large number of students can be on at the same time, it's, you know, in terms of the subscription. services that we have. I mean, it's significant. I hired an attorney recently to trademark the term afford anything in five different trademark classes. So that costs several thousand dollars. So yeah, there's a lot going on. But I think that the reason, I suspect that the reason you're asking is

because you are interested in starting a podcast yourself, at least I'm guessing. You might just be curious. And if that's the case, then don't let this scare you because these expenses that I am talking about, these are not necessary at the beginner level. These are expenses that you incur when you decide that you want to grow. You know, when I first started, I didn't hire a custom design team, nor did I hire a developer. I just used like an out-of-the-box plug-and-play website, and I wrote a blog on that for years. Hosting at the beginner level, an account with Bluehost is like $3 a month. I think their sticker price is $8 a month, but if you go through my link, it's a

afford anything.com slash blue host. There's a discount on it that'll give it to you for $3 a month, right? It's super cheap. So you can get started for cheap and then as money starts coming in, then you reinvest that money back into growth. And so for Afford Anything, our money comes largely from three different sources. Number one, the biggest source of our income is enrollment in the course. Number two, the second biggest source of our income is sponsorship spots on the podcast. And by the way you asked how we find them. We use a broker. That broker takes a 25% cut. We get the other 75%. But that is our number two source of income. And then our number three, much, much smaller source of income are affiliate links from the blog. I don't do any display advertising on the blog.

I think that's ugly. I think it cheapens the user experience. And so I forego what could be thousands of dollars of income because I want to create a good user experience to people who are visiting the website. afford anything.com. So I don't do display ads on there. I do have some affiliate links on there. And basically the cost of maintaining the site, it breaks even with the revenue from the affiliate links. That's not a big moneymaker. But the things that really keep us going and that allow us to reinvest in additional growth are enrollment in the course and these ads, these sponsorship spots that you hear on this podcast. And so on that topic, I actually want to take a moment to just thank

everybody who's listening for accepting the fact that we have these sponsored spots on the podcast because these sponsorship spots are crucial for allowing us to have a developer, allowing us to have an editor. The fact that I can do that is thanks to you because you have supported the show despite the fact that we do have to interrupt the show from time to time in order to have this word from our sponsors on the show, right? The fact that you listen to these ad breaks is why I could hire Erin. So thank you, thank you, thank you, thank you, thank you, thank you for understanding that and understanding how crucial that is for allowing us to grow and allowing us to reach new heights

and to spread the message further. So thank you, Darya, for asking that question. Sophia, you just learned a lot about podcasting, didn't you? That was great. Thanks, Paula. You think you'd ever start a podcast? I like being on everyone else's. Noot.

Let's work. That's true. True. You're efficient with your time. You know it. Thank you, Sophia, for joining us on today's show. Thank you so much for having me, Paula. This was so much fun.

And thank you for visiting me in Mexico City. This has been awesome. This co-working space that we're working out of, by the way, beautiful. If you go on my Instagram, Instagram at Paula P-A-U-L-A, P-A-N-T, you can see a photo that I posted from this podcast booth. It's gorgeous. Sixth-story, um, At the very top of this beautiful co-working space, we're surrounded by acoustic panels on all sides.

Unfortunately, there's a big hole in one of the walls, which kind of defeats the purpose of the acoustic panels. But we'll let that go. And then bamboo and glass and I can't even open air. It's beautiful. This is one of the most beautiful spaces I've ever worked out of. I'm so glad you could join me. Yeah, this has been a ton of fun. So let's go get some food.

Yeah, tacos? Totally. Thank you so much for tuning in. My name is Paula Pant and this is the Afford Anything podcast. If you enjoyed today's episode, please do three things. Number one, most importantly, please share this with a friend or a family member. That's the single most important thing that you can do to grow financial independence, personal development, personal finance, all of these ideas that we are trying to promote through Afford Anything. And it's the single best way that you can share financial knowledge and knowledge about how.

how to design a lifestyle that you love with the people in your life. So number one, please share this with a friend or a family member. Number two, please hit subscribe or follow in whatever app you're using to listen to this podcast. And number three, please leave us a review. You can go to Afford Anything.com slash iTunes to be redirected to the page on the Apple Podcast website where you can leave us a review. If you want to hang out with other people in the Afford Anything community, you can go to Afford Anything.com slash Facebook.

that'll send you to the Facebook page that has our group. As I mentioned, if you want to get a hold of me directly, you can send me a message on Instagram at Paula P-A-U-L-A, P-A-A-P-A-N-T. We also have a free e-book called Seven Expensive Rental Property Investing Mistakes to Avoid. You can download that for free at Afford-A-N-A-R-A-R-E-A-R-A-R-A-R-R-A-R-R-A-R-R-A-R-R-A-R-R-R-A-R-R-A-R-R-E-R-L-E-L-S-E. who talks about how to discuss difficult issues with aging parents. So if you've ever had the thought of mom and dad, we need to talk about your money, you don't want to miss next week's episode.

Remember to hit subscribe in whatever app you're using to listen to this podcast so that you catch that very important conversation. Thanks again for tuning in, and I will catch you next week. By the way, my lawyer says that I need a disclaimer, so here we go. This is purely for entertainment purposes. Basically, imagine that this is the least funny comedy show that you've ever listened to. We are not professionals. We barely can brush our teeth in the morning.

And so we don't hold ourselves out to be experts or really, for that matter, even adults. Give us the same amount of respect that you would give, say, a goldfish. And always, always consult with a real grown-up before you make any decisions. That means consult with a tax advisor, consult with a tax advisor, consult with a lawyer, consult with a financial planner, consult with people who actually have credentials and who know what they're talking about, because that is definitely not us. All right, you've been warned.