Afford Anything - Ask Paula - The Future of Index Fund Investing

Episode Date: November 26, 2018

#163: Does my employer match count against my 401k contribution limits? Should I invest in a Traditional or Roth TSP? Should I invest more aggressively in stocks right now, or should I hold cash and bonds until the next downturn? Should I get a mortgage or keep renting until I can buy a home in cash? Do you think index investing will dramatically change in the coming decades? Former financial planner Joe Saul-Sehy and I answer these four questions in today’s episode. For more information, visit the show notes at https://affordanything.com/episode163 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. And so the questions become twofold. Number one, what do you value more than anything else? And number two, how do you make daily decisions in accordance?

Answering these two questions is a lifetime practice. And that is what this podcast is here to explore. My name is Paula Pant. I'm the host of the Afford Anything podcast and the founder of Afford Anything.com. Every other week, we answer questions that come from you, the community. And today, former financial planner Joe Saul Seahy is with me to answer these questions. What's up, Joe? Paula, you're up. I am. I'm awake. That is 100% accurate.

Well, thank goodness. You're going to save these people's bacon because you're awake. That's good. Excellent. Our first question comes from Sydney. Hi, Paula. My name is Sydney. and I am my first-time caller, long-time listener. They've listened to every single one of your podcasts and have learned a great deal along the way.

So thank you so much for that. I had a quick question about retirement savings. I am trying to maximize my retirement savings this year and max out my contribution limits for that 18,500. I've done the math to figure out how I can hit that based on a percentage of my salary for the remaining pay periods for the year, but also realize that I have a 3% safe harbor contribution that is 3% of my salary.

That's a safe harbor contribution by my employer. And I want to know if that counts towards that $18,500 limit. And thus do I need to subtract that out of what I need to take out of my paychecks for the next pay periods? Or do I actually get that in addition to the $18,500 limit? Thanks for any and all information you can provide. Good question, Sidney. And congratulations, by the way, on trying to max.

that out and I think that is incredible. So often we see people try to get in the 6% or even 4% or whatever the match is and the fact that you're on the high end is great for your future. And I'll tell you, this is really easy. While there is a cap, that cap has nothing to do with the amount you can put in. So when you look at the cap, that actually only is your part. Your employer has another cap. And I'll tell you, I have yet in all. of my time, which is longer than I care to admit doing this or financial planning or anything, to meet a company that was aggressively hitting the cap that they can put in on top of what you put in. So there is a cap, but you're not going to hit it. So the employer has a cap,

essentially. But that safe harbor, 3%, that's not going to count against your 18-5 contribution. By the way, where the employer cap does make a difference is for those of you who are listening who are self-employed and you have a solo 401k, which is also sometimes known as an individual 401k, you can make contributions both as the employee and as the employer. And so what that means is that you can make a contribution of 18,500 as the employee and then acting in the role of employer, because you are your own. employer, you can also make an employer contribution. And that's where you, if you want to, can contribute up to that cap. You can contribute up to that maximum. And that's going to, what that number is is going to depend on the income that you've earned from your company in that year. There also, a lot of people might have been tripped up by the word safe harbor. Safe harbor are just some rules around 401Ks for smaller companies. Big companies, when they manage 401Ks,

it can be pretty tough. There's a lot of record keeping. And so, Safe Harbor 401ks are rules specifically for much, much smaller companies so that they can offer their workers 401Ks just like the big boys do. By the way, I've got good news. Are you ready, Joe? Did you save some money in your car insurance? Wait a minute. You stayed at a holiday.

I'm switching to a bike. Perfect. So frugal. The good news is that in 2019, the contribution limits to both a 401k and an IRA are going up. It's time for a big nerd party. You know what? I posted this on Twitter and I swear it got like 250 likes. There was a mentor mine early in my career that told me that over the life of my career, I would attract people who were like me and I would repel people who weren't.

And you know you're a money nerd who tracks other money nerds when everybody's liking the fact that the IRA limit went up 500 bucks. Exactly. It was like my most popular tweet. So that's the great news for everybody listening. An extra 500 in your IRA and an extra 500 in your 401K starting next year. We're going to throw a party. And for those of you with a 403B or 457, we're not leaving you out. You get it too. Wow.

And you get 500. Well, you have to put in and yourself. You get a contribution limit raise. And you get a contribution limit raise. This is like Oprah. Yes. I've been told, by the way, that's not all 457s. but most 457.

So if you have a 457 plan, probably 9 out of 10 chance that you're included in that deal. 457 is kind of wonky. But for most of you, congratulations. You can now save more money. And for those of you who are age 50 and better, the catch-up contribution limit remains unchanged. So that is still $6,000 for your 401K and an extra $1,000 into your IRA. And that's why, Paula, I have my pitchfork. out and for all of us over 50, we're headed to Washington. How dare they? Not increase it.

Everybody gets one but us. Well, I mean, you still get the rising contribution limit raises all ships. You still get that money on top of the additional 500. No, I want some age discrimination. I want some. All right. Thank you, Sydney, for asking that question. And congratulations on being on track to max out your 401k. That's awesome. Steve, can we get a round of applause? Our next question comes from Lisa from Miami. Hi, Paula. This is Lisa from Miami. I love your podcast.

So when it comes to buy my first home, it's a wiser for me to get a mortgage or rent and save to purchase the home in cash. In the past four months, I saved up $6,000. The only debt I have is a $20,000 car note. So my monthly payments are $460. My salary is $72,000 a year, and I'm currently living with family until July 2019. Also, I'm 24 years old. So my goal is to reach financial independence by the time I'm 30. So which will be the wiser decision for me to make when it comes for me to branch out on my own?

Thank you. Lisa, first of all, congratulations on being so young and having such a good salary, especially for your age, $72,000 a year is an impressive amount of money to make. And given the fact that you're living with family, that gives you an opportunity to save very, very aggressively because you're earning a high amount and yet your living expenses are low because you're living with a family. You mentioned that you have a $20,000 car note with a payment of $460 a month. The first thing that I would suggest is do you need – this is a suggestive question. do you need a car that costs that much? Or you've stated that your goal is to reach financial independence very quickly by the age of 30, which is an ambitious goal.

In furtherance of that, would you be able to drive a $5,000 car that you could own in cash? Your question was about borrowing money for a home versus paying cash for a home. But before we get there, let's talk about borrowing money for a car versus paying cash for a car. It seems to me that that is the first lever that you could pull. I think a lot of people, especially people that are on that Uber early retirement scenario, very early financial independence. This idea of riding a bike is a fantastic idea. I know our mutual friend Scott Trench over at Bigger Pockets bought a house specifically close to work so that he could ride his bike and that he wouldn't have to worry about having a car. The two biggest expenses you have are your house and your car.

And so focusing on minimizing those is great. I will say this, though, when it comes to buying a house, let's get rid of everything else. I want to go over to buy a house if you're all right. Yeah, absolutely. Let's do it. When it comes to buying a house, there's this concept, Lisa, that you hear a lot. And it's OPM, other people's money. And when do you use your money?

When do you use other people's money? Generally speaking, the whole concept of OPM, you can take it and you can find a trash can and you can throw that concept in there because it's super dangerous. You'll get in a lot of trouble. Don't worry about other people's money. I'm only saying that because you're 24 and you're going to hear this concept over and over about this is how you win. Maybe.

It's also how you really, really lose. But when it comes to a house, it's a little bit different with a house because you look at that house that you buy is going to appreciate in value, generally speaking, over time, whether you own most of it or the bank owns most of it.

So we can buy a house with very, very inexpensive money. And if we can do that and you're sure you can afford the house over a long period of time and you know you're going to stay there and we can get into all that and why owning a house might not even be a great idea. But assuming all those things, using somebody else's money for a house, having the mortgage versus waiting to build up $100,000, $150,000, $200,000 million. She's in Miami, right?

Let's say she's in South Beach. Go look at that property. So no matter how much money it is. is saving up that money is going to take forever. Well, I might disagree with you a little bit here, Joe. Oh, bring it. Yeah. You know, the missing piece of the equation is how expensive of a house are you looking at?

Because I don't specifically know the Miami market. And we also haven't established if she plans on buying a home in Miami or if she plans on living in maybe some less expensive part of Florida or Georgia or Alabama, somewhere that might be a little cheaper. But there are absolutely single family homes. for $50,000 in many parts of the South and the Midwest that you could buy and you can live in. So are we talking about saving up enough money to buy a $50,000 home in cash? Or are we talking about saving up enough money to buy a $200,000 home in cash?

Because that's going to make a difference in terms of how long it's going to take you to buy that home. The numbers that we need to solve for, if you want to put this on a spreadsheet, are how much money can you save per month, how much money would you be paying in rent per month since that is all money that would evaporate? And how long will it take you to be able to save enough money that you could buy a home in cash? If the answer is that you could do it pretty quickly because you're only buying a $50,000 home and you make $72 a year and you can save 70% of your income, then cool. Do it. I think there's another question, though, that throws the wrench in that. There's an even bigger question, which is why I even brought up this concept of other people.

people's money. It's because of the fact that she said she wants to have financial independence by the time she's 30. And you know what? You're going to have to be really super, you're going to have to take some risks. You're going to have to be a little more aggressive. And I think that even with a $50,000 house, spending that money with six years to go, with six years to go, you're going to have to be more aggressive than putting money in a savings account to get the other 44,000 bucks together. Yeah, that's the question mark that popped into my head. Lisa, you mentioned that you mentioned that You've saved $6,000, but you earn $72,000 a year and you live at home with your family. So is it that you just started working and the $6,000 is your first month's paycheck?

Why have you only saved $6,000? Why isn't that bucket of savings more? And I understand you're 24. It might genuinely be that you just graduated or maybe you've been aggressively paying off all of your student loans and that's where all that money is gone. But that was the first question that popped into my head. when I heard your voicemail was if you make a high income and you don't have a housing payment, then where are your savings? Hopefully, being 24 years old, she's just starting out and she's asking all the right

questions right at the beginning, which would be awesome. Yeah. Yeah, it's the age 30 financial independence thing that bothers me because I think, Paula, you need $5 million. Wow, Joe, you're the second person who's come on this show. who said that. Sorry, I couldn't help it. I don't want to keep doing callbacks to that, but I had to. Yeah. And if you don't know what I'm talking about, just go back and listen to some past episodes of the Afford Anything podcast. That's all you got to do. We'll leave it there. Great, though. Great questions for

somebody just starting out. Absolutely. Our next question comes from Audrey. Hi, Paula. My name is Audrey. I love your podcast. Since we started listening, my husband and I have decided to invest in VTSAX, increases TSP contributions, start 529 plans for our boys, and automate everything to help us reach our goals, all because you inspired me to learn more about affording what we want, not everything. Since I'm still learning, I have some questions for you, and hopefully Joe. My husband is in the military, and his TSP contributions are Roth. Can we withdraw the principle without penalty at any time, or does the TSP function differently in this regard? Also, I recently started a civilian job, with the option to contribute to a TSP as well.

Is there a benefit to me choosing traditional versus Roth since my husband already has Roth? And my final question is, where can we look for a financial guide or coach who is military friendly, can follow us through our moves, and will also help us look at our plan from a tax perspective, which we have very little knowledge about. Thanks for all you do. Audrey, first of all, congratulations on making such amazing moves for your finances, for your life, for your family. The praise belongs to you. You did this. I am a voice over some digital airwaves, but you're the one who took action. You're the one who made it happen. So

congratulations on everything that you've done. I'm super happy for you. I love the emphasis there, too. Anybody can listen to a podcast. Actually, doing something is where the rubber meets the road. Yeah, exactly. So congratulations on taking action. Like, it's It's one thing to be inspired and to learn. And that's great. I can do that, but I cannot take action for you. You're the one who did that. So you're the one who made it happen.

So great. And we've got a lot of great stuff for you. I'll start off if you don't mind, Paula, with the rule about taking money out of the Roth TSP. Yes. The question is, can a Roth TSP, can you withdraw the principal contributions, penalty free? The rules around Roth 401Ks and TSP's. If you have a Roth 401k versus a regular 401K, a traditional. traditional 401k, the money goes in after tax in a Roth, just like it does a Roth IRA.

Roth 401ks have different provisions for putting money in. You can generally put a lot more money into a Roth 401k for most people than you can a Roth IRA. So for a lot of people, they want to start there. But this idea of when can you take money out of the Roth, TSP or Roth 401K, how does that work? Well, here's what's cool about it. It works very, very close to the same rules of the Roth IRA. The money that you put into it is going to be the first money you take out. And because that money hasn't been taxed, you can take that money out whenever you want. So that's the same. When it comes to qualified distributions, these are distributions of the money that's the interest in your account, the money that the money made. That follows the same rules as a 401k

follow. So if it's a disability, if it's a home purchase, you might be able to get that money with some of those loopholes ahead of time. But generally speaking, the money's got to be in there five years or 59.5, whichever's later. So let me give you an example. Let's say that you're putting money in at age 35. At age 35, the money that you put into the Roth 401k or the Roth TSP, you can take out at 35. That'll be the first money that comes out. The money that that money earned can't be taken out until 59.5. But let's say that you're age 57 and you put money in. The money you put in, that money can come out immediately at 57, but the interest on the money that you put in has to stay in there five years,

which means that money you can't get at until 62. So some cool charts on this. The oblivious investor has some neat charts kind of explaining what I just said. Also the IRS website has that investopedia. I think just generally speaking, Paula, if you think about distributions the same way you'd think about them for Roth IRA, you're largely good. Oblivious Investor, by the way, part of your question asked about resources.

When it comes to learning about the nuances of how various accounts work, there is probably no blog out there that is better than Oblivious Investor. He's amazing. I've invited him to come on the show, but he doesn't do podcast interviews, so he declined. But his blog is absolutely fantastic and he knows his stuff. Yeah, he prefers writing. He was a fun guy to get to know at FinCon's. Nice, nice guy. Let's talk about other resources, though.

She asked about military resources. I don't know any specific coaches that I should refer her to because a lot of that's based on personality, but I'll tell you some great resources that people forget about. The credit unions and organizations that so. support a lot of military members. People don't know what a huge number of resources they have. Companies like USAA, their blog is amazing for people in the military. And they have a lot of contributors who are people who are friends of mine, responsible financial planners, responsible financial coaches, work directly with that group of people who have already been vetted by USAA in terms

of allowing them to appear on USAA sites. Also, PennFed is another one that's fantastic for people in government and Navy Federal, and not even if you're specifically in the Navy, Navy Federal also has fantastic resource. Navy Federal is the biggest credit union in the country. And as a lot of credit unions do for their members, if you're a member of a credit union and you don't use your credit union resources, your local credit union usually has a ton of educational resources you can dig into. And so for people in the military, I'd look at USAA, PennFed, and Navy Federal first.

And then from there, you're going to find a lot of different coaches who work specifically with military people. And we will link to all of those in the show notes. We'll also link to Oblivious Investor and the IRS page on TSP's in the show notes as well. So all of that will be available at Afford Anything.com slash episode 163. That's Affordanithing.com slash episode 163. Also, there are a lot of bloggers who specifically write about money from a military perspective. Certainly in the FI community, there are a lot of military FI bloggers. By the way, for people who are new to this, FI stands for financial independence.

So if you are interested in that at all, there's a huge number of bloggers that you can read. Rich Carey, Doug Nordman, Ryan Gennay, military dollar. I mean, there are so many that you can. choose from. And we will link to several of those in the show notes as well. Lacey Langford is another good one. She also has a podcast. Also Bethany Bayliss and L.E.K., their Money Millhouse. They go around the country speaking at military bases. So that's a good one. But those are great introductions to what is a really, really excitingly big world. And it's sad that more people don't know how many military writers there are, military podcasters.

Yeah, absolutely. Gwen, of course, Gwen Mertz from fiery millennials and the fire drill podcast. She doesn't only write about military, but that is part of her experience. There are a lot of, there's a lot of bloggers out there, a lot of resources. Of course, OG on our show was a Marine or is a Marine. You're never not a Marine, so OG is a Marine. Does he write about it ever or talk about it? When we talk about it generally, I'm going to say a couple times a month, well, if somebody on talking specifically about military stuff, but not directly, usually, which is why I didn't mention it until we started talking about people that are in the service or have been in the

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Our next question comes from Nick. Hi, Paula. First off, thank for the amazing podcast. I'm currently 29 living the fire teaching is the best of my ability to make sure you have the full picture. Here's the good, the bad, and the ugly. Here's the good.

I'm living frugly in about 20% of my income and to help grow the gap. I am lucky enough that my employer offers a Roth 401k, which I'm maxing out. I'm also maxing out of backdoor Roth IRA and HSA and a portion of what's left over. I'm putting into a taxable account with Vanguard. Here's the bad. Before I found the fire movement, I was following with Tony Robbins book, Money Master the Game for my Roth 401k, which he explains an all-weather plan from Ray Dalio and has a very conservative distribution of investments. When you read the book, it's very convincing on the upside and the lack of downside over the long term. But six percent bonds seems like a lot for a 29-year-old that plans to buy and hold.

After I found the fire movement, it became a little more aggressive in other accounts at about 80% stocks and 20% bonds, shorts, and gold. Here's the ugly I'm speculating. I am worried to become more aggressive in my 401k because the market may have a correction, which may be upsetting since I've been holding out for a few years already. After my investments, I'm putting a few thousand dollars each month into a high-interest savings account at about 1.9%. My reasoning is I want liquid cash to invest at a moment's notice when the market turns.

I will also distribute money more aggressively from bonds, shorts, and gold to stock. I also want to invest in multifamily's properties where I live, but I'm facing some problems. The first one is the market is crazy my city over the past couple years. Nothing is close to the 1% rule. The closest I've found is made the 0.4% rule. The other problem is my job has me on call literally 24-7-365, so I can't travel to look at or manage properties. While there may be cheaper properties just outside the city, the rental income is extremely

low and doesn't close to the 1% rule either. So here are my questions. Should I become more aggressive in my 401k investing? If so, should I do it gradually or all at once? What allocation would you recommend between stocks, bonds, and international stocks? Number two, should I continue to wait and save cash for a correction to buy multifamilies? The housing market I am in has extremely high peaks and extremely low valleys over time. When I do buy multifamily, should I make a 20% payment just to avoid PMI or buy as many as I can?

Or should I buy less properties with larger payments? When the market correction does happen, at what rate should I put money into the market? I'm also planning to get married next summer and she makes a lower income than I do. that would bring her income bracket up and might don't mind changing much. Is there anything we can do to become more tax efficient? Is there anything financially we should think about? Thanks. Wow, Nick.

Okay, that's a lot going on there. So let's tackle these one at a time. First of all, you mentioned that you once had a 60% bond allocation in your 20s. Ouch. I'm glad that you are not doing that anymore. And please don't ever do that again until you are significantly a lot older. Well, unless, unless he's like, what was a woman's name earlier that wanted to have financial independence at 30? If he wants financial independence at 30, I guess that's a double-edged sword, isn't it?

On one end, he's going to have, he would have the volatility of the stock market if he moved that over towards stocks. But on the other end, yeah, yeah, never mind. It depends on what he's using the income off those bonds for at that point. But I'm totally with you. I think for most people, number one, we start with the end. of mine, when do you see yourself spending the money? But if it's more than 10 years from now, I would say that allocation should probably be zero. In bonds? Squirrel at zero. Yes. And if it's 15, I'll double down on that. If it's 20, then I'll triple down on that. You mean in terms of 15

years when he wants to spend the money or 20 years when he wants to spend the money? Yes. I will say even more. If it's a 10 year goal, yeah, zero. If it's 15 years, oh yeah. If it's 20 years, don't go to your bond, please. Please, please, please, do not. You know that the general rule of thumb, your age in bonds with the remainder in stocks. And that is a very conservative rule of thumb. But still, even if you took your age minus 10 and made that your bond allocation for him, that would be about an 80-20 split, right? 80% stocks, 20% bonds. That seems rather reasonable to me. And you're giving away returns. It's reasonable and you're giving money away. So, but you know what? It's more about you than it is about the market.

at that point. It's about behavior. And when people have 100% stock allocation, they do the wrong thing by touching it at the wrong time. And you don't want to do that. So it has more to do with you. But if you can withstand the highs and lows that 100% stock-based portfolio gives you, there's no reason to have bonds. There is. I will say, so in full disclosure, I have basically in all equities portfolio. I might have a few legacy bond holdings from like an old Target date account somewhere in there, but for the most part, I aim for a 100% equity's portfolio personally. However, and this is a huge asterisk, I don't think that that is a viable strategy for the majority of people. For exactly the reason that you gave, Joe, there's a huge behavioral

component to investing, and the volatility that comes from an all-equities portfolio is not something that I think a lot of people would desire. And also, I hedge my all equities portfolio by the fact that I have a bunch of rental properties that give me cash flow. So I know that I have that cash flow coming in. And that changes the equation. In all of those regards, I have a bit of a barbell allocation, even with the all equities piece. No, there's actually many financial planners that will tell you to go that way, have a larger cash allocation to get you through those lows so that you're able to sleep at night and go cash and stocks and still avoid bonds. And there have been studies that have shown that that very smart people talk about that. I think though that all depends on when

you're going to need the money. So I would start off with that. When do you need the money? And the further out that is the more aggressively towards stocks you should lean at that point. So he asked about not only how aggressive should he be, which I think that we've answered that, but if he is to transition more of his portfolio into stocks, should he do it all in one lump sum, or should he try to time the market and pace it out and wait? I'm just going to jump in and answer that question, and then Joe, I'd like to see whether or not you agree.

I say, throw it all in right now. And the reason for that is because they've actually done studies in which they, well, it's not exactly a study on this question specifically, but there is a group of researchers who looked at, if you have a lump sum of cash, is it better to put that entire lump sum in the market on any given day? Or is it better to hold on to that and dollar cost average that lump sum into the market over time? And they actually found out quite counterintuitively that that dollar cost averaging strategy is not ideal if you already have that cash. Right. So if you've got that lump sum, then by virtue of trying to dollar cost average it over a period of time, what you're actually doing is holding a disproportionately high cash. allocation for a period of money months, and that adversely affects your likelihood of returns that would beat the alternate scenario, that alternate scenario being that you put the entire lump

sum into stocks on any one given day. Now, a dollar cost averaging is great when we're talking about income that comes from your job because you can't invest money that you haven't earned yet. So in the context of investing money from every paycheck, you can't invest it until you get that paycheck. So dollar cost averaging in that context is wonderful. But in your case, you've got a big chunk of money put it into stocks or specifically put it into equities index funds. But this is a very similar question to the last one, Paul, and you're coming down on the opposite side. So the last question it was about it was about behavior. This question actually is about behavior also because, to your point, 70% of the time, roughly, the stock market goes up. And if that's the case, the right thing to do is to

put it in now and play the 70-30 game. But the problem once again is behavior. Here's what happens. You put it in right now. The worst case scenario happens and the market goes down immediately and you have this wave of regret and then you make a bunch of bad moves because of the fact that you didn't time the market correctly, which nobody can do, but you blame yourself. You blame the markets. You blame your education. You blame all kinds of different things. And then you have this huge, huge regret. making suboptimal choices after that. So the reason why you would actually dollar cost average in is exactly the same reason why you would hold 20% of your money in bonds versus 100% stock. It's because you're hedging your bet a little bit. You know full well when you're 80, 20 stocks and

bonds if you've done the research, that it's suboptimal and you're okay with that. If you're going to dollar cost average in, you know it's suboptimal and you're okay with that. Because you can't stand the downside of what happens if the market turns tomorrow and gets ugly on you right as you went from 40% stocks, 60% bonds to 100% stocks or whatever you're going to do. So I think zooming out a little bit, the broader lesson from what we've just talked about is that making these types of decisions is part math and part behavior. Yeah. Know thyself. Yeah, exactly.

There is what is statistically more likely to occur? And then that's one question. And then the other question is the emotional management of processing how you yourself will respond to what occurs. This is what I used to ask my clients in this situation. I would give them that statistic, 70% of the time it goes up, 30% of the time it goes down, which one makes you more upset? We put all the money in now and the market goes down 30%. And I wouldn't say 30%. I would take the amount of money that you have.

I would take away 30%, and I would say you lose X amount of money. Or you don't do that and you dollar cost average and you, instead of gaining Y amount of money by earning, you know, whatever the big return is that we assume, you only earn a little bit of that. Which one makes you more angry? And what's funny is every single person I asked that question to, Paula, would say, oh, that's obvious. What was funny was the answers were all over the board. I mean, there's only two ways they can do it. And I don't remember if it was 50-50, but everybody said, oh, that's obvious.

It's X. It's obvious to you which one that is. And I can't really answer that. So in some ways, I guess we're throwing this question back in your court. From a mathematical vantage point, statistically speaking, based on how the market has performed historically, going all equities immediately gives you the highest likelihood of success. However, we also know that you are your own worst enemy. Not you, but everyone, thy is thy own worst enemy. Now, to the second half of your question, which was about, number one, should you or should you

not buy a multifamily? Number two, if you do, should you put a 20% down payment on it, or should you put a smaller down payment on it and then try to leverage as much as possible into buying as many properties as possible. And number three, how do you deal with the situation that you have a job that puts you on call 24-7, which means that you cannot travel to properties that are outside of a narrow geographic area? That's a really big three-part question inside of what is already a three-part question. And as you know, I answer real estate related questions specifically on episodes that are about real estate. So what we're going to do is we're going to take that portion of your question and we're going to table that and I will answer it in an episode in which we talk specifically

about real estate because there are thousands of people who are listening to this who have zero interest in real estate. And for that reason, I keep these Ask Paula episodes separate. And what you could do is I invite you to call back and leave that question, that real estate portion of your question as another voicemail so that we can answer it, specifically on the Ask Paula real estate questions. What I'm trying to do to the greatest extent possible is have separate episodes so that people who are interested in real estate can get that information in one out of every four shows. And people who are not interested in real estate don't have to endure listening to a whole bunch of me talking about that

despite the fact that they're not into it, right? That's the thing about real estate investing. Like, you're either into it or you're not. And if you're into it, you're probably super into it and if you're not, you're just super not. So I don't commingle the two topics on the same episode, or at least I try not to, to the greatest extent possible. That sounds like his questions are going to be one whole episode. Yeah, it really does. I mean, everything that you've asked has a lot of nuance behind it. There's no like five second sound bite that I can give. So please call back and ask that question and we'll tackle it in depth in one of our real estate episodes. Now, you had a third question as well. And your third question is that.

that you are marrying somebody who has a lower income than you do, which means that once you get married, her tax rate will increase when the two of you become married filing jointly. And yours will remain relatively unchanged. So your question was, what should you be thinking about, how should you be planning with regard to marriage and tax planning? I think that depends on a couple things. It depends on how much you're making now. It also depends on your expectation for the future. Just in your voice, it sounds like there's some frustration, a little bit of frustration that you're working 24-7, it sounds like right now. So if you expect that to change in the future and you're doing a great job of saving a lot of money,

how and when is that going to change? I think that is a great question. That's the type of question where you start bringing in the pros that work specifically with you because tax planning becomes very individualized at that point. Thank you, Nick, for asking that question. We'll come back to this episode in just a minute, but first, do you have a small business? If so, you probably have experienced the challenge of managing payroll and benefits. It can be complicated.

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run your first payroll. Just go to gustow.com slash paula. That's g-u-t-o.com slash paula. As I'm sure you know, I don't like clutter. I don't like physical clutter. I don't like things cluttering up my schedule. I don't like mental clutter.

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Again, that's litote.com. Enter your code, afford, a ff, ORD, to get 20% off your first month. Our next question comes from Cameron. Hi, Paula. I think it's good to occasionally question your beliefs to kind of reassess where you are and the path you want to be on. With that, I have a question about, index investing. I've kind of been thinking about recently and I'm curious to hear your opinion on it.

My question is if index investing will continue to work the way that it has since, you know, 20 or 30 years ago. Basically, there's been a couple things that I've seen that I'm wondering whether or not they will affect how index investing works. Things like trading optimization that we've seen in the past decade or so. There's ultimately fewer companies that are being traded on in public markets, more and more going private. and then the huge surge of index investing as an investing opportunity, not just tracking the markets generally, could those and other reasons be why John Bogle is predicting a 4% analyzed return over the next decade compared to the 10% that we've seen up until recently? If that is the case, where would you see possible other opportunity? Thank you.

Hey, Cameron, great question. It's funny because I also think that, and, And talking to, you know, some of the smartest people in the field like Paul and I are lucky to do. I think that the market will change. I don't think it's going to happen for a long time, though. I think if everybody indexes, I think you end up with some issues. By the way, I don't think that's why Jack Bogle thinks that the market's only going to do 4%. He basically takes the dividend rate.

He takes the amount that company owners are going to need to make a profit. He knocks a couple points off of those because of the high market valuations, the way he sees it and says that we should be looking at 4%. By the way, somebody like a Warren Buffett looks at closer to a 7% return. I don't get in any of that, though. What I like focusing on, and I'll get back to this, is what assumption am I going to use in my plan? And if you feel strongly that 4% is going to be the number, then factor that into your plan that returns are going to be low. I'm going to get back to that in a second, but I want to go back to indexing for a minute. So your first question really is, is indexing the way the market's going to go in the future?

And my answer is, yes, but whenever more and more people do one thing, that means there's opportunities in another area. I think active investing the way it's traditionally been done is dead. Maybe not completely dead yet, but it should be. somebody that goes out to lunch and has an idea reading a paper comes back by some shares in it is not nearly analytical enough to keep up with a random walk down Wall Street. But when you take a look at the algorithmic nature of a machine learning that's happening in the active investing space, there's some super exciting stuff happening on the active management side. And I do think there will be active management solutions in the future.

that will be wildly available, that people will be able to take advantage of. We're seeing some early signs of that, but I want to see a full market cycle before that happens. But I want to get back to that again, everything I just said, complete speculation between Jack Bogle, Warren Buffett, me, you, we're all speculating. What your financial plan comes down to is this. It's a really simple equation. You need to save X amount of money times Y return to equal your goal. So if you know what your goal is and you're saying that you think you believe Jack Bogle and returns are going to be low, that means you have to either change the goal or you have to save more money to reach the goal than you did if you expected returns to be high.

So the cool thing with your financial plan, you get to set what that number is. And I love, by the way, being really conservative. Because if I'm super conservative and I agree with Jack Bogle that it's going to be 4%. and I get to high-five myself later that I earned eight, I can then either change the goal and either move it up or supersize it or I can decide to stop saving toward the goal early and have more fun today. That brings up a lot of flexibility in my plan later. So I'd say that regardless of what we think about where the market's going to head,

I'd be very conservative with those numbers. For the sake of people listening who are wondering, Jack Bogle is the founder of Vanguard and the inventive, of index funds. And so it is notable when he comments on index funds. It's particularly notable because he's the guy who created them. He also helped create the internet. Maybe not. Hashtag he didn't do that. Yeah, one of those two facts might be wrong. So that's all I have on that. What do you think, though, Paula? You're an indexer, but do you think, do you agree that there's some exciting stuff coming in the active space that might be a little bit down the line?

we're already seeing the proliferation of robo advisors. And I think that in the future as AI becomes a bigger and bigger part of our everyday lives, I think AI-driven active management and AI-driven active advising, not just in investment planning, but in full financial advising will be the thing that we experience even at one decade into the future. Right now, you have. AI-driven robo advisors who can make recommendations about your portfolio allocation, but you don't have AI making recommendations about if I should put money in a 529 plan versus a 401k versus spend it on a family trip to Greece. I think the next thing that we're going to be seeing is that

full holistic financial planning that's driven by Siri and Alexa. I think maybe, maybe. I am much more bullish, though, on strategies that are way better than what robo advisors are giving us right now. The other thing that I think is interesting is, as you mentioned, Cameron, the popularity of index fund investing. The fact that the guy who created index funds is still alive today is an indicator of how new these things are. Like, what a new invention they are in the market. In the last 20 years, we've seen index funds. go from a niche little toy to a widely known, widely used type of fund. Yeah, the tool that so many people have in their back pocket.

Absolutely. And that trend, I think, is only going to increase. Oh, absolutely. Just a Grandpa Joe story. When I started off as a financial planner, half of my job was to pick the active managers that were going to be best in their portfolio. By the time I sold my business, most of the funds in my portfolio, were passive. And a lot of iShares at that time, power shares. You had a few Vanguard

indexes in there, but not like today. You didn't have the huge proliferation. I had maybe a couple hundred to choose from way back, way back in the day after I drove my horse and buggy all the way to the office. Up hill both ways, Joe. It was amazing. It was kids today that have no idea what it was like back then. It's horrible. Thanks for the question, though. It's interesting to speculate. But I got to tell you, Cameron, too, though, when clients would come into my office and they wanted to speculate, I would always immediately say, so how do we ground this?

Like, what do we do with this? Because I can worry myself silly that, you know what, indexing, I'm putting all my money in an index fund. And someday, this isn't going to be the optimal way to go. And you're probably correct. But I got to have a strategy. I have to work from a strategy. Professionals call it an investment policy statement, an IPS. You can ask if you work with a pro what their IPS is, and if they don't have one,

flip and run. Just say thank you very much. Because your investment policy statement is directly how you're going to respond to varying market conditions, what you're going to do in XYZ. It's almost like you remember Paula back in elementary school, you always had the fire drill, and it was exactly what happened if a fire happened or a tornado drill or whatever it might be, wherever you live, this is what happens in how a financial planner is going to recommend that you respond to all these different things. And I don't think just financial planners should have these.

I think we should all have an investment policy statement. What am I going to do ahead of time? I see too many people ask questions while bad things are happening in the market. What do you think I should do now? You should have already come up with your investment policy and know how you're going to respond to this. And you know what? Maybe you don't respond. correctly the first time. But just like any smart business, you respond the way your policy says that you're going to respond. And then what do you do? You review it. You tweak it to be better next time. And then you go forth and conquer. That makes sense. So it's almost like an operations manual or procedure manual. And you look at it and say, all right, well, in the event that this

situation unfolds, what does the manual say that we should do? And then you follow what's in the manual. And that way you know that you sat down and you wrote those procedures at a time when cooler heads were prevailing. Yeah, because think about how emotional we get. I mean, specifically to what you're saying, how emotional we are when the market's bouncing all over like it has the last couple months. But you see so much more emotion in forums on Facebook. I've seen so much more emotion. You don't want to let emotions make your decisions for you. And it's funny because the markets have actually not been that crazy.

I mean, they've been not on a 9.5. year bull tear for like a couple of months, you know? Right. They've been they've been jiggly. Delightfully jiggly. That's probably not the way we describe it. That is our show for today. If you want to follow up with Joe, you can find him on the Stacking Benjamin's podcast or stacking benjamin's.com. If you have any questions that you would like answered on this podcast, go to affordanithing.com slash voicemail to leave your question. That's afford anything.com slash voicemail to leave your question. I also invite people to call in to the voicemail with success stories about anything that you've done, whether it's pay off debt or increase your contributions in a retirement account or boost your

savings rate by an extra 1% whatever accomplishment you have. Celebrate it. Share it with us. I'd like to play a voicemail right now. From a listener who achieved fire financial independence retire early a long time ago. Here he is. Hi, Paula, long time listener. Your last podcast sparked my interest in leaving your recording. I'm older than most of your listeners and followers. I'm 48 years old and my wife is 50. And we've been on this fire path since we were 28 years old. And shortly after she came out of college and I came out of the Army. At this time, you know, there was no internet, really. and there wasn't a such thing as a fire movement.

But there were people who were printing and publishing books, and we had read them of this idea that if you invested or saved 50% of your income for a consistent period of time, my goal was a decade, that you would accumulate enough assets that would create and pay you income that would fund the rest of your life. And that's been our goal. Now it always makes me laugh because it seems like the younger generation feel like they may be invented it, and they've now called it fire movement.

It's been around a lot longer, probably as long as human beings have been alive. We haven't had jobs in 22 years. We've continually passively off our assets living below our means. We have worked during that time where we saw meaning or something we wanted to do. And we do spend a fair amount of time working and managing those assets that we're invested in now, primarily rental properties and dividend stocks. And so that takes up quite a bit of our time. but it's been rewarding and working on my own assets and investments to me is fun.

I enjoy it and I don't consider it work. Good luck to your podcasts and your followers and it's completely, it's completely attainable by anyone who pursues the path. I believe that that anyone at any age, race or financial situation can become financially independent in seven to 10 years if they use the 50% principle. Thanks. That is fantastic. Congratulations on achieving fire. Congratulations on living a life that's led by meaning and purpose and doing things that are important to you rather than needing to punch a clock for the sake of keeping the electricity on. And thank you for encouraging the people who are listening to know that if fire is your goal, if you want to reach financial independence, you can do it. This is within your locus of control. Now, there is one thing that I want to. to elaborate on. You mentioned at the very end of your voicemail the 50% principle. And for the listeners

who are wondering, what does that mean? Here's what it is. The 50% principle, also known as save half, is the notion of a living on half of your income and saving the other half. Now, a few things here. Number one, when I say save, I'm referring to anything that improves your net worth. So it could be retirement contributions. It could be making a down payment on a rental property. It could be making extra payments towards a mortgage, whether it's your personal residence or a rental property, making extra principal payments in order to increase your equity and decrease your debt. Or it could be literal cash in a savings account. Absolutely anything that improves your net worth is what I mean when I say save 50%. So sometimes I get comments from people who say,

oh, you know, I would have had a higher savings rate except that I used my money to pay off all of this debt instead. And I'm like, well, you do have a high savings rate then. That's amazing. It may not be savings in a savings account, but it is an improvement to your net worth. And that's what we mean when we talk about savings. We're really talking about that gap between what you earn and what you spend. If that gap can be 50% or greater such that what you save is always equal to or greater than what you spend, that is the formula for breaking the shackles of nine to five pages. paycheck dependence. Now, a few more comments about this. Number one, some people have asked, hey, when you talk about saving half of your income, are you referring to pre-tax or after-tax? Everyone has a different take on this. For me, personally, when I refer to saving half, I'm referring to after-tax income. So you earn X, you get taxed, Y. The amount that's left over is the amount that is within your control that you have to play with. And so if you live on half of that,

and then you save the other half. That's what I'm referencing. Another question that I've commonly heard is, how would you consider a mortgage payment? Is that spending or is it savings? A mortgage payment is broken into four parts. There's principal interest taxes and insurance. The interest, property taxes, and homeowners insurance component of it is spending. That is money that you're never going to see again. the principal portion of your mortgage payment, this is a little bit controversial. If you had asked me this question two years ago or three years ago, I would have said,

you know, I would consider that to be spending because it's a monthly recurring bill that you have. Anytime that you have to pay a bill, then that means you're spending. I've heard a lot of other voices, including Joe's, Joe Salci-Hies, who argue that the principal portion of your mortgage payment should be considered savings because that specific portion of your mortgage payment goes to your equity. So essentially, you are converting it from cash to equity, but it still remains on your balance sheet. It still remains part of your net worth. Two or three years ago, I would have disagreed, but now I've come around. So now I would consider the principal portion of your mortgage payment to be counted as part of that savings. And what that means for a lot of you is that your savings rate is higher than you think it is.

With that being said, I'm going to zoom out here and make the observation that what we're really talking about is the fuzzy definition of the word savings. Because the question of, does the principal portion of your mortgage payment count towards your overall savings rate? Like that specific question is nestled under the broader umbrella question of how do you define savings. For example, if you spend four years saving up money so that you can buy your next car in cash rather than having to take out a car loan, and then in year four, you use that cash to purchase a car, well, is that purchase an expense because you've spent the money? Or should that not be counted because you've spent the accumulation of many years of savings?

In other words, if you purchase a car in year four, what does that say about your spending and saving rate in year four? Does it mean your spending rate in year four is higher, or does it mean that that particular purchase is not applicable? So you see where I'm going with this. There are a lot of different perspectives that a person can take on the nature of what would be considered spending versus what would be considered savings. If you decide that five years from now, you want to go to grad school, and for the next five years, you save up money so that you can pay for your first year of tuition, in cash, well, then in year five, did your spending rate go up because you're paying that tuition bill in cash or not because you're converting your long-term savings into an actualized or realized expense? There are an infinite number of ways that you can answer this question. Like, this is the

type of stuff that financial independent nerds like to deliberate about overbears. All of these questions surround the somewhat subjective nature of how we define what is savings, what is spending. And what does it actually mean to live on half of your income and save the other half? What I would suggest to anybody who wants to pursue this path is to think through these questions, decide which answers feel right to you, and then do it. Like rather than endlessly debating the minutia of what it means to save, just pick a definition and go for it. Because at the end of the day, your net worth is not going to be improved by theory.

your net worth is going to be improved by action. And if you take the action of saving half of your income and living on the other half, then as you track your net worth, you will find, for the most part, that it will continually go up. Your contributions are the single biggest determinant of the success of your investments. So just keep shoveling money into those contributions, whether that's a retirement account or an emergency fund or downpayments on rental properties. Keep putting your effort there. By the way, two very popular tactics that people use in order to reach a 50% savings rate,

if you're part of a dual-income couple, you can take the tactic of living on one income while saving the other income. So essentially, you are a dual-income couple that is mimicking the experience of being a one-income couple. And you can start this by living on the higher income and saving the lower one, and then eventually one baby step at a time, adjust your lifestyle such that this can flip and you live on the lower income and save the higher one. So that's one popular tactic.

The other tactic, and this works very well for people who are single or who are part of a couple with separate finances, is to live on every other paycheck. Clark Howard mentioned this a few podcast episodes ago when he talked about how he saved half of his income during his 20s and 30s during a single years. He took the strategy of living on every other paycheck. And that's how he was able to retire at 31.

Well, that is our show for today. If you enjoyed today's episode, please do three things. Number one, share this with a friend or family member. That's the single most important thing that you can do. Number two, make sure that you hit subscribe in whatever podcast playing app you're using to listen to this episode. And number three, please leave us a rating and a review within a podcast. your podcast playing app. As of right now, as of the time that I'm recording this, we have 1067 ratings on iTunes, Apple Podcasts. So huge thank you to everybody who has rated us or left

us a review. And if you haven't yet, you can go to Afford Anything.com slash iTunes. That'll take you to the page where you can leave us a rating or review, or you could also do it directly in the app. Thanks again for tuning in. My name is Paula Pant. I am the host of the Afford Anything podcast. I'll catch you next week. Thank you.