Afford Anything - Ask Paula: What to Do with a Six-Figure Windfall?

Episode Date: February 21, 2024

#489: Cara made $100,000 in commissions this year, her biggest bonus ever. What should she do with the money if she wants to retire early? An anonymous caller is upset that the 401k plan he sold his boss on is charging him an Assets Under Management (AUM) fee. Should he keep the 401k at all? Remy and her husband need to come up with $30,000 for IVF treatments. How do they build their family without breaking the family finances in the process? Another anonymous caller and his partner have lived in an RV for years. They’re ready to settle. Should they sell most of his investments to purchase raw land and build an off-grid home? Former financial planner Joe Saul-Sehy and I tackle these four questions in today’s episode. Enjoy! P.S. Got a question? Leave it at https://affordanything.com/voicemail For more information, visit the show notes at https://affordanything.com/episode489 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, have you ever gotten just a huge check, like a six-figure bonus or a six-figure commission? Not six figures, not at one time. But if somebody wants to volunteer to send me one, I'd love to experiment. That would be great. Well, we are going to tackle a question from a woman who has a six-figure check coming her way. We're also going to be tackling a question from someone who wants to buy raw land and build an off-grid home doing most of the labor. himself, with himself and his partner. We're also going to be answering the question from an organic farmer who suddenly has to pay some

higher fees and we're going to be talking to someone who is trying to pay for IVF. All that? Right. All of that. All of that is coming up. Wow. It's a big day. Welcome to the Afford Anything podcast, the show that understands you can afford anything

but not everything. Every choice that you make is a tradeoff against something else. And that doesn't just apply to your money. That applies to any limited resource that you need to manage, like your time, your focus, your energy, your attention. So what matters most and how do you make decisions accordingly? Answering these two questions is a lifetime practice. And that's what this podcast is here to explore. My name is Paula Pan.

I'm the host of the show. Every other episode, we answer questions from you, the community, and my buddy, the former financial planner, Joe Saul C-high, joins me. What's up, Joe? I am ready to serve, Paula. Oh, amazing. Amazing. Let's hop right into it. Our first question today comes from Kara. Hi, Paula and Joe. My name is Kara. I'm a first time caller, but I've listened since the first episode when I took a long road trip with my now husband. I love the thoughtful approach who both have to personal finance. Here's my situation. I'm in technical sales and received commission

on top of my base salary. In March 24, I'm expecting a commission check around 100K, my biggest ever, trying to figure out how to best allocate the money. For some background on our situation, I'm 30 and my partner is 31. Our base salaries are 160K combined. We net about 30K on rentals, and then I also have my commission check, which is typically 30 to 60K. We have steady jobs with a three-month emergency fund and a separate six-month emergency fund on the rental properties. We have 457,000 total in investments with 29,000 in an HSA, 344,000 in 401ks, 75,000 in Roth IRAs, and 9K in brokerage accounts. My husband currently contributes 4% to his 401k with a 4% match, and I contribute 4% with an 8% match to my 401K. We purchased our primary residence with my last big commission check in April of 2023.

We closed up $576,000 and put 15% down at a 6.875% interest rate. We currently owe $486,000 on this. Our total net worth is about $826,000. So with that check, the $100K should net about $65K after taxes. We plan to use about $15K of that to add a package. patio and hot tub to our new home, which is a dream since we live in the Midwest with long winters. What should we do with the remaining 50K? Should we invest it?

Should we contribute extra to principal on our primary home since the interest rate is almost 7%? Or some combination of the two? How do we decide? For context, I looked up our amortization schedule, and if we pay 30K in a lump sum, we can save 160K in interest. If we pay 50K in a lump sum, we can save 239K in interest. We're not sure having kids are in the future for us, but we're happy in our careers. Our long-term goals would be to retire a little early, maybe age 50 to 60, which seems like we're on track for with the 4% rule and our annual expenses of about $100,000.

Please help. I really appreciate all your interests on how to approach this big decision. Thank you. Kara, first of all, congratulations on the big commission check and more importantly on all of the the practices, the habits, the lifestyle that you've built leading up to this that has allowed you and your husband to build such a great net worth to have so many investments. You're doing so, I mean, at the ages of 30 and 31, you are in such an amazing place. So huge congratulations to you on everything that you've done over the last decade to get here.

And also, thank you for being part of this community since the very first episode. I'm honored. So that was eight years ago. We launched this podcast eight years ago. So you've really truly been a longtime listener. You see our friend Steve Stewart just posted about that too. Yeah. About from the credibility that.

that you have, Paula, that launched his career, he said, in the area of podcast editing. And now he's like the grandfather of podcast editors. And the guy people look up to runs a whole podcast editing group. And so, cheers to you and to the show. It's amazing how much can change in eight years, right? Everything. Everything can be unrecognizable. But let's get to your, uh, Carol.

other than your amazing taste in podcasts, let's get to your question. Now, let's focus on that. I'll spend a few more minutes on how brilliant this show is. No, on how brilliant Kara's taste in podcasts. Oh, yes, yes, how brilliant Kara is for recognizing greatness. That's what I meant to say. So to your question, here are a few thoughts right off the bat. Now, if you were to use this money as a payment against your mortgage balance, there are a couple of things to keep in mind.

Number one, it's not, that payment against your mortgage balance is not going to impact your monthly cash flow. It would be one thing if you only had $50,000 left on the mortgage, right? And you could make one lump sum payment, be done with the mortgage. And boom, all of a sudden, this giant monthly bill that you have goes away, which therefore improved. your monthly cash flow. But that's not the case. If you were to make this payment, there would be no change to your monthly expenses. You still have the same bill every month. On top of that, the total amount that you would save on the loan holds true only if you hold this mortgage to maturity. You would hold this house until it's paid off. And we, I mean, maybe you're planning on doing that. Maybe you're not. I'm not sure. But even if you're Even if you are planning on doing that, life can change. Even the best laid plans can change, right? As new career opportunities come up or as elderly parents become sick and need help, you know, all of those things cause plans to change.

And that's fine. That's great. Like, that's why we have a society with mobility. But just know that if you were to pay this amount off, the total savings that you've quoted might not necessarily actually be your total savings depending on how long you hold the home. So for both of those reasons, I lean towards, actually, you know what, I'm not even going to say I lean towards. I advocate.

I'm going to take a position here. Oh, hey. Yeah. Strong coffee. I know. I usually like to be a little bit more gentle. I usually like to pull back and say, here's how you think about things. Rip that bandaid off, Paula.

Right. No, no. You know, I'm going to actually take a statement. stance here, I advocate for putting that into a taxable brokerage account or investing it in some manner. The reason for that is because by doing so, you have flexibility. You can always let that money grow inside of a brokerage account. And then if you five years from now, 10 years from now, decide that you want to tap it, you can always access that money. In the meantime, if you invest in broad market index funds, it'll grow at the rate of the market. But it gives you flexibility

that you would not have if you were to tie this money up into your home. You know, since you're leading that way, I'm going to take a strong stand too. Ooh. You ready? Yeah. Listen to this. Listen to this, Kara. I don't know.

I don't know what you should do. And I actually mean that strongly because I think this all flows from what do you want to achieve and where are the holes in that plan. So the first thing that I would like you to do is take out a sheet of paper and I'd like you to timeline out your goals. And the reason I like timelining them versus writing them down is I like seeing them A in relation to each other, B, then I can see how far they are away. I can also then think about what do I have to do today to reach each of these different goals? What we as humans tend to do is we tend to look at the next goal straight in front of us and we

don't look at the goal behind that and the goal behind that. So we don't use this wonderful power of compounding to help us get there. So my issue is, I don't know what you want. I don't have any idea what to do with 50 grand because I have no idea what you want. The upside of putting the $50,000 in the house is freedom from worry about that mortgage. But to Paula's point, you could easily avoid that worry and certainly know that more of your house is paid off and will be paid off quicker and be very comfortable never reaching any of the goals in that timeline because you put the money in the house instead of where it should have gone. So I need to know exactly what the goal is. Are you behind or ahead on those goals? I don't know. I don't have any idea. See, I disagree

that it would give her freedom from worry about the house because of of the fact that there would still be an existing mortgage on the house. Again, if this were a situation where she's only got 50 grand left on the mortgage and in one lump sum, she can eradicate that mortgage, then I would have a different answer. Then I would say, get rid of that mortgage because it's going to free up her cash flow. But she will, in this case, have effectively done the equivalent of made a larger down payment, right? She will have more equity in the home, but that equity is tied up. It doesn't affect her.

Actually, you know, it's worse than making a bigger down payment because if you make a bigger down payment, that at least has a knock on effect for the size of your monthly mortgage payments, right? Now she'd have to refinance to take advantage of that and pay whatever fees there are to refinance. Right, exactly, which she doesn't want to do and which I don't think there's any good reason to do, right? unless the interest rates drop, and that's not going to happen for a while. So she's not going to have any advantage, either in cash flow, in monthly payment,

in, she's not going to have any advantage from paying, locking up more money into this home. Not today. She couldn't, right, exactly. Not today. She wished she made down the road if everything goes perfectly, according to the plan, she stays there for the next X number of years that that paid off. Exactly.

Whereas if she put this money in a taxable brokerage account and then mentally earmarked that money as mortgage payoff money, then it could grow inside of the taxable brokerage account. And then when she's ready to make a giant payment towards that mortgage, boom, this money that's in a brokerage account, which is mentally classified as mortgage money, then she can just move that over and wipe out that mortgage in a big stroke of the check. There it is. If you do that great, if there's other goals that need the money, do the same earmarking, but earmarking for that.

Yeah, exactly. But I really want to know what the earmark is. That's what we're looking for, Kara. What's the earmark? But Paul, and I'm 100% with you. I'm taking a stand to put it in the brokerage account. Wow, Joey, we agree then. Well, I do, but once you said put it in the brokerage account and

Mentally earmark it. Earmark it toward the house if that's what you want to do. That's fine. But before I earmark it to the house, I got to know what's on that timeline. Right. Well, and what's nice about mentally earmarking it for the house is that if some type of emergency were to come up in the future, right? We're going to answer a question later in this episode from a couple that's trying to do IVF, right?

Let's say that, you know, Kara said we're not sure if kids are in the future or not. Let's say five years from now they decide that they want to have children and that requires IVF. Wouldn't it be great to have excess money in a taxable brokerage account that they could tap for something unexpected like that? But you could do that if it's your mark towards some other goal anyway. Yeah, exactly, exactly. Right. That's the beauty of mentally earmarking towards a goal is it's all inside of your head. You can just move the classification in your head to any other goal. It's beautiful. So you preserve that flexibility. And looking at the way her money is allocated now with 344,000, the 401k, 75,000 in the Roth, 29,000, the HSA, only nine in the brokerage. That gives her a lot more flexibility by putting the 50 in the brokerage. Right. Exactly. And to your point, who the heck knows what's going to happen in the next 10 years?

We're both in agreement. Put it into the brokerage account because that's going to give you returns and flexibility. Whereas tying it up in the home, sure, it'll help you save some interest if you hold the home until mortgage maturity. I mean, it'll help you save interest either way, but you'll save the interest that you quoted if you hold the home to mortgage maturity. That's cool. But in the process of doing that, you get. You give up a lot of flexibility. So thank you, Kara, for the question. And thank you for listening since episode one. Back when this was called The Money Show. The Money Show. Yeah, for the first 36 episodes, this was called The Money Show. With our good friend Jay Money.

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who has just gotten hit with some pretty big fees and Joe, he's anonymous. Anonymous. You know what this means? So we always give every anonymous caller a name and I want to name this particular anonymous caller after James Wilson, who was the founder of a magazine called The Economist,

which if you don't read it, I highly recommend it. The Economist is an amazing thought leadership. Yeah, exactly. The Economist really possesses both breadth and depth of global economic. So if you want a really good sense of what is happening in our world from an economic lens, this is not an ad or anything. I really have been getting into following economics. And I want to give a hat tip to James Wilson, who is a Scottish businessman who founded the economist.

So our next caller will be named James. I wonder if James ever wanted to be an organic farmer before he started the economist. Probably. Maybe. Possibly. Yes. Hi, Paul and Joe. My wife and I are organic farmers. We're the only two employees of a small farm business. We made $145,000 this year. Two years ago, we asked our boss to use a free-to-the-employed

service called Save Day. We were jazzed on the idea because we were already maxing out our traditional IRAs and had no other tax-advantaged option. We don't think the HSA is right for us. Right now, we have about $40K in there. Saveday recently announced a fee hike to 90 basis points. I initially thought that their fees were a one-time percentage taken off the contribution, but it turns out this is a, quote, annualized fee charged to each employee's 401K account on a monthly basis, assessed to the overall total assets held within the account, end quote. This sounds a lot like the 1% AOM schemes we've been warned about on every FI podcast,

ever. Can you help me weigh the decision of terminating this account and losing the tax advantage versus keeping it and eating these fees? I think we're headed for the latter, but it's an emotional blow, especially because our whole strategy to date is buying equities through index funds. Is the tax tail wagging the dog? I know you'll give it to me straight. Thanks for your time. We appreciate you. Well, James, first of all, thank you for the question. And, you know, I can tell from the way that you ask, you pay very close attention to your finances. You, you and your wife both are highly financially literate, very aware of good money management principles. And, you know, you're part of the fire community, which I love. And you're doing great work. So I just want to commend you for all of that. I have been also getting into Michael Pollan's class on Masterclass, Paula, about better eating and been studying the difference in terms, and James already knows this.

When you say organic, organic can mean a lot more than you think that it means. And I'd be getting into some of the organic farms in our area and buying from those farms. And I feel better. I'm supporting the local economy. There's so many wins by supporting what you do. So thank you so much for for for for what you do. I don't know when industry standard became a scheme. And and James, this isn't you.

This is a huge number of people that drive me crazy for a variety of reasons. But what hits me first is that anything that's free to the employer, let's just back. Let's just back away. Anything that is free to the employer means the cost is going to go to the employee. And also, when something is brand new and small, which this was when you got in, they are going to have much lower fees. A sponsor of the Stacking Benjamin Show is Betterment. And if you look at Betterment or Wealthfront and you look at their development and go look at the fees they had when they started versus the fees they had now, once they realized they became a big boy company and they realized what it takes, run the business, that they couldn't sustain that number.

So are you saying their fees went up over time? Their fees did go up over time. Yes. There is a reason why 1% is an industry standard. And it's because that fee works when it comes to running a business. It doesn't mean, by the way, that you should always pay 1%. The first thing you need to ask is what am I getting for the 1%? And if I'm getting nothing for the 1%, then let's lose it.

Let's get rid of that fee. But this idea that the fee comes first and if somebody charges a fee, that's a big, fat, red flag. The number one flag that I look at is I'm not getting any help. If I'm not getting any help and I'm not moving my personal financial wagon faster or further because of that 1% fee, then I need to get rid of it. But there's too many people out there. There are way, way, way too many people out there that have heard this feed garbage that avoid getting any help at all.

And they end up never getting anywhere because they don't have good people in their corner. And they screw themselves. And James, I'm not ranting at you. I'm ranting at this stupid, stupid thing that I see in in the fire community, especially. over and over and over and over. We are never going to get anywhere if we don't find good help. If you just go into forums on the internet and Earl in Peoria, who doesn't even know how to zip up his pants,

goes on a rant about how you're paying excess fees, you need to ask yourself, why the hell can Earl stay at home and spend all day on the internet? And why the F am I listening to Earl instead of people who know me have my back and are freaking amazing at what they do. We had this problem. Let me tell you about an industry that had this problem way before our community had this problem. And that is charitable giving.

We went through this entire period with charitable giving where, you know what? These jackals are taking a bunch of money. They're taking a ton of money. So you know what? I'm going to support organizations that have the lowest, lowest, lowest, lowest fee ever. And the overhead is so freaking low that everything ends up. going to the place that I really want to support. Guess what that industry found out over time.

When you have zero overhead, you end up with crappy people running those organizations who will live on nothing and no money goes out and gets adequately deployed anywhere. So the new thinking and charitable giving is not at all. what's the lowest common freaking denominator possible? How do I go to the waste bin of paying nothing and getting nothing and my life is garbage? Instead, how do I run this teeter-totter of I need to get the best people possible and I need them to do a hell of a great job? And they're going to get paid for it, but so am I.

We're all going to get paid because I got great people. That's right. In charitable giving, the metric of which chair. has the lowest overhead, that pales in comparison to the new metric of reach of how do you maximize lives saved per dollar. The metric used in effect of altruism is maximum number of lives saved per dollar. Now, to be fair, when the metric is lives saved, that necessarily means that they're prioritizing certain types of giving over other types. So they're prioritizing the saving of human life over, let's say, the saving of animal life or the saving of art, right?

So certainly there are challenges with that metric as well, but it is still the case that when the metric is lives saved per dollar, you're prioritizing outcome rather than overhead. It works because it's simple. It works because it's easy to understand. What I mean by works, I mean this garbage of, hey, just cut all your fees. It's really interesting. Jack Bogle, the Jack Bogle, originally railed against low-cost exchange traded funds. He thought they were ridiculous.

It's well documented. And then he found out, guess what, a lot of people like buying these funds. And all of a sudden, Jack Bogle started saying, hey, I got an easy win for you. Cut out the middleman and just lower your fees. It's an automatic win. And I'm not saying that's not right. If you're not getting anything, like seriously, there's too many people out there with

these garbage advisors that are just accumulating assets. They're not doing anything. They're not helping you at all. And they're charging a 1% fee. For those people, yeah, get rid of it. Let me get off my little pedestal here and let's answer the exact question, which is there's a lot of room between disqualifying the 401k and ripping the 401k and ripping the money out and paying all these tax penalties and where you're at now. You can look for other 401k

providers that charge a lower fee. You can talk to the farmer about maybe a fund where they pay. The farmer pays a small fee. This, by the way, is a great negotiating tool for your next raise. Instead of the next raise, I would like you to pay the 401k fee, not me. That would be great. Change to one of those type of 401K programs. I don't want to. want to disqualify the money. And I don't want to stop putting, I don't want to stop putting money into a tax advantage place. And when you say is the tax tail wagging the dog, in your case, you're going to let the fee tail wag the dog, which I think for most of us is, is, is, is worse. I've seen a lot of people pay crappy fees that I would never pay in a million years still

reach their goals. I've never seen people not put money away and not effectively. use tax shelters and reach their goal. So keep using tax shelters. The fee's not egregious. The fee's not great. It isn't great. But it's not horrible. There's a lot of people paying a lot more than you are in 401K plans, unfortunately. You know, and it strikes me, he and his wife work for such a small business. They are the only two employees of this business. And as a small business, you don't have the resources to pay for a huge HR department, right? You don't have the resources to pay the level of overhead and for the level of services that a Fortune 500 company could afford. So I certainly understand from an employer's, a small business perspective, why, you know, as a small business,

if you want to offer benefits, the providers of that, you know, there are certain providers who specialize in working with small businesses to provide small business benefits. But because the amount of work that they have to do to manage each account is high, but the number of participants in a given account is low, it just makes sense that that fee is going to be higher because there's more account management per employee. It is frustrating. Yeah. It is frustrating to me that a big company, my dad spent his whole career at General Motors, the fees

that GM pays per person in that organization, I will bet is way, way, way lower than this organic farm. And the reason is also because Goldman Sachs or any Wall Street firm wants to manage the big bucks. And when you come across with, hey, we've got a few hundred thousand dollars in this fund or $50,000 or whatever it is, every money management firm goes, yeah, no thanks. Pass. Right. Yeah. Yeah, it's simply a matter of scale, right?

The bigger you are, the better your negotiating power. So larger businesses just have an advantage. And small businesses do get saddled with with bigger fees. And that's part of the tradeoff that comes with running a small business or working for a small business. The administrative cost is still there. It is simply divided among a much smaller pool of employees. And therefore, every employee has to share a higher burden. Now, what you get in exchange for that are all of the advantages that come from working for a small business, right, which there are many, but the costs are also higher. Yeah, there is the whole argument,

which in every small business owner I think is going to agree with me. Why is this a small business owner problem in the first place. Like, we've talked about the average person now changes jobs. I think the latest number I saw was seven times during their career. Why don't we just have a portable plan that everybody gets and you can just take and do your own thing? You know what I mean? You can decide between the different people out there.

Why is this the employer's job to do this? It'd be cool if I could just plug my thing into my employer when I start. I get direct deposit already. The fact that this is unfair is just a product of the type of system. that we have, which is grossly and efficient for a small business person and for the company trying to service the small business person, which is why the fees went up for your 401k, because they saw how hard it is to run these small 401K plans. Right.

There's this quote from Oscar Wilde that a cynic is a man who knows the price of everything and the value of nothing. in this case, the value that you're getting is that as a small business employee, you have access to a tax advantage 401K. And that is not something that a lot of small business employees have. A lot of small businesses don't offer retirement plans at all. Again, because the fee structure associated with offering benefits to your employees is so onerous. And not just the fee structure, but the paperwork, the administration.

I mean, the owner of a small business has to spend a lot of their time just handling admin. And that's time that they could otherwise be spending growing the business. So there's certainly a lot of opportunity cost when as the owner of a small business, you are focused on what I call death by 1,000 paper cuts. You're focused on admin rather than on growth, right? There's opportunity cost that happens there. And that affects everybody. It affects the employees because now, you know, if the company were to grow,

the employees... More money for raises. Right? Exactly. Or you could hire more employees to help reduce or share the workload among the existing employees. So it's in everybody's interest for a small business to grow. And yet that gets curtailed when the owner of a small business has to spend a lot of their time on admin. And that's what happens when a small business offers benefits.

But at the same time, a good small business owner still chooses to offer benefits to their employees. Right? Which is probably why the owner of the farm said yes when James recommended it. Yeah. Or asked for it. Yeah. Yeah. A good small business offers benefits to their employees, despite the fact that it's a giant pain in the butt to manage and administer.

So, yeah, there is going to be a fee for that because there's a workload for that. Yeah. The first thing that I may do if you don't like this is just look around and see other providers, if there's a different provider. Don't stop putting money into a 401K. Yeah. And to boil this down to what does it mean for you and your wallet, in just sheer mathematical terms, the tax advantage that you get from having money inside of a 401k is significantly greater than the disadvantage that you suffer from having to pay this 1% fee. So just if you were to spreadsheet it out, the math is quite clear. the compounding effect of that tax advantage over decades of your life is going to be much,

much greater than the compounding effect of that fee over those same decades. Well, Joe, James said, I know you'll give it to me straight, and I think he got it. He might have. James, thank you for the call. Thank you for organic farming. I would love to visit your organic farm because, oh my goodness, eating local, so good. So, so good. Our next question comes from Remy.

Hey, Paula. My name's Remy, and I've really enjoyed listening to your podcast, especially hearing what you and Joe have to say about other people's financial questions. My husband and I have been trying to grow our family for the past two years, and it's looking, more and more likely that we're going to need to do IVF. We don't have any insurance coverage for it, and it's about $30,000. We have close to $20,000 saved up in cash, and we need to figure out where the other $10,000 is going to come from. We bought an I bond last year for $10,000 when the rates were really high, and we also have about $60,000 in a brokerage account. Do you think we should take the money out of the brokerage account, or should we get the money out of the I bond

before the full maturity date? Thank you. Remy, thank you so much for the question. And Paula, $30,000 that is so expensive. It's so expensive and so, so, so, so, so, so, worth it and also such an emotional time. I know for a lot of people going through that, that period right now. This, this is probably from the financial end, maybe the easiest part of everything you're going to go through because, number one, if you're not beyond the 12 month mark, I would not do what would happen if you took out the I bond and forego all the interest. So the good news is no penalty. The bad news is you're going to lose all your interest. I wouldn't do that.

especially since you grabbed onto a nice interest rate during that fleeting moment when we had a very phenomenal rate. If you're still in the early period, though, you're still going to lose three months of interest. So my question would be, I would look at the things that you are investing in inside of that brokerage account and see if there is something there with no penalty that you could use over the short term in your head. we talked earlier in the show, Paula, about creating these buckets in your mind, you are going to borrow that money from that bucket and you're going to then replace it with the I bond. When the I bond matures, it'll go into that bucket and replace that money. And then what happens is if you grabbed it the right time, you got about 10%, which is phenomenal. And knowing the equities do about 10% over long periods of time, there's going to be really no harm, no foul in keeping.

all of your interest. Again, I want to look at what you've got in those positions and what that money in the brokerage accounts already allocated for. But if there's a likely suspect where you're not going to lose out on any interest by taking it, I like that strategy, Paula. I like a replacement strategy. So let's just simplify this. If the money in the I bond has been there for less than 12 months, keep the money inside of the eye bond, right? You don't want to, you don't want to give that up. She said she bought the eye bond last year. So we don't know if she said last year, was that 10 months ago? Was it 11 months ago or was it 13 months ago, right? Was it 10 months ago or was it 14 months ago? That's going to make a huge difference. Remy, if you have held on to that

eye bond for less than 12 months, keep the eye bond. Don't give that up. If you have held the eye bond for more than 12 months, more than 12 months, but obviously, less than five years, then, yeah, there's an argument to be made for, as long as you've held the eye bond for a minimum of 12 months, then I'm not opposed to cashing in the eye bond after that point. Because if you surrender the eye bond after 12 months, but prior to five years, then you'll lose the last three months of interest, but you'll still get the rest. But yeah, I mean, I'm with you, Joe, if you've got some money in a taxable brokerage account that you could also tap, and that money in the taxable brokerage account is being invested in something that isn't paying as well as the I bond is,

might as well tap that money and then just later down the road, cash in the I bond and put it into the taxable brokerage. If my default expectation on a stock-based mutual fund is 10% anyway. Right. And she scored the 9 point XX on the I bond at her near the top. Then we're getting that rate of return. Yeah. But I mean, with an I bond, there's less volatility, right, than there would be with investing in equities. That's what I'm saying.

That's what I like about it. Yeah, exactly. What I like about it is she locks that in. And there is, there is the point that the stock-based mutual fund could continue to go up. right and could beat that number but but but we can't play that game because the second we start playing that game then we get into speculating about where the markets had and we're always wrong and even if we are right it's pretty pretty lucky that we're right so instead i got to go with what's the rate of return i need this i bond for this little tiny moment is achieving what you need

for the long-term goal anybody who's looking at more than a nine percent rate of return they need from their investments is asking for failure. So I like the fact that, hey, I can stay in the eye bond, have less volatility with this piece of my portfolio. It will perform near the long-term average of equities. And I don't have to worry about it. And I get to keep that three months interest. Right. Actually, the more we talk through it, the more I like the idea of just holding on to the eye bond and pulling the money out of the taxable brokerage.

because if you're going to get relatively equal returns from both, or at least if you're going to assume relatively equal returns from both, but the I bond has less risk and less volatility, then pull the money out of the taxable brokerage, right? Because the I bond has better risk-adjusted return. Yeah, yeah. So, yeah, the more we talk through this, the more I say, you know what, pull the money out of the taxable brokerage. No, that's why I like this replacement strategy. What I don't, what I want to caution, Remy on is that this is not free of any penalty. If your stock-based fund, let's say, has done pretty well, you're still going to pay a capital gains tax on that money. So calculate what that would be versus the three months interest that you would lose before you make the move. So know what the cost is going to be.

And the cost could be, there could be a back-end fee on the end of the fund, probably not investing in one of those. but I would still ask the question. There could be trading fees, although those have long gone away for 99.9% of investments out there that you'd use in a taxable brokerage. And the third is the tax ramifications of selling. So I would add up how much money that is compared to the three months. And then I'm betting, though, that that's going to be a lower fee than that three month interest penalty. There's something else that I want to talk about as well, though, and that is one round of IVF may or may not cut it. I have been through six rounds of egg freezing, and several of those rounds have not gone well.

So I have spent probably around $80,000 egg freezing, right? When it comes to fertility, you need to be prepared to go through multiple rounds because there are rounds that just fail. there are or there are rounds that really underperform. So in the best case scenario, one round of IVF will work. But there's very much the possibility that you might need two, three, four rounds of IVF. And I think you need to start asking the question, where is that money going to come from? Plan for the worst hope for the best. Yeah.

Yeah. I've been through rounds. I mean, that have been complete failures. So, and you still have to outlay the money. You still have to pay for all of the medications, all of the drugs, all of the ultrasounds. And then you just have to kind of scrape it and start over and do it again. Hope for the best, but plan for the worst. Be prepared to have to lay out some serious cash more than just the initial 30,000 that you're thinking.

right be prepared for needing to do a few rounds uh i think it's worth it you know it's absolutely worth it and if if having a family is something that you want if you don't do it now then you may regret that when you're 50 so i absolutely think it's worth it money cannot compare to the joy of having a family but kids are expensive yes they are yeah i figure whenever i have kids if they ask for money for college, I'll be like, dude, your college fund was that you exist, all right? I gave you money for living. Yeah. We front-loaded that college fund by bringing you into the world.

You're sending yourself to school. I paid for living expenses. Yeah, exactly. Precisely. You're lucky, kid. Yeah, brings a whole new meaning to cost of living. So, Remy, thank you for the question. And please feel free to call back as you go through the IVF process.

Call back, leave a follow-up. I hope that one round does it. But start to think about how you're going to pay for round two. And please call us back and let us know how it turns out. So thank you for the question. All right. Our final caller today is anonymous. And Joe, I named the last anonymous caller.

So why don't you name this next one? Oh, I just got done watching a great series on Amazon Prime called Reacher, season two. Highly recommend it. And the star is a guy named Alan Richson. And he is a beast of a man, Paula. Just a beast of a man. Ellen Richardson is just huge.

but wonderful series highly recommend Reacher. So let's call him Allen. All right. Well, then our final question today comes from Alan. Hey, Paula and Joe. Anonymous calling from New Mexico. My partner and I have been living on the road in an RV for the past several years. We enjoy the lifestyle, but are wanting to lay down our roots and establish a home base where we can reside for part of the year.

We're looking to purchase raw land and build a small off-grid home. We both have hands-on experience with building and are fully confident this living situation, suits our desires. Some additional background. I'm 30 years old and my salary job brings in $180,000 a year. I have $300,000 in various investment accounts, mostly positioned in broad-based, passive index funds. I contribute the maximum to these accounts each year. I also have around $125,000 in essentially cash positions in other non-retirement accounts, not including my emergency fund. My partner is finishing up university and expects to bring in around $60,000 a year when she enters the workforce. Several years ago, she acquired a lump sum of $80,000, which she invested into a taxable brokerage account.

It's now valued around $130,000. We have no debt. Our goal requires making two large purchases. First is the raw land. Second is everything else needed for building the off-grid home. We expect to perform a fair bit of the labor. ourselves, so the majority of the cost will be for materials and equipment. We're aiming to spend around $300,000 in total. I will be using my cash positioned to fund as much as possible,

but I'd like to know your thoughts on leveraging the money in the taxable brokerage account. I'm well aware of the debate between paying outright for a large purchase versus taking a loan and investing the rest. Assuming the average rate of return of the taxable brokerage account exceeds the interest of the loan, I can see the argument for that. for taking the loan and letting the money grow. But we are very debt-averse and like the idea of being able to take many retirements from time to time. It seems that having a loan would make that situation harder to achieve. Also, it's worth pointing out that we don't have to buy the raw land and develop it out at the same time.

Our timeline is flexible. Assuming that leveraging the money in the taxable brokerage account is the preferred option, what implications do we need to be aware of? Conversely, if we want to take a loan, what kind of loan? should we look into. I suspect that a traditional mortgage will not apply in this situation. Anything else come to mind that we've overlooked? Lastly, and unrelated to our situation, I'm curious about your thoughts on raw land as a conservative investment option. Thanks so much for any recommendations you can offer. I love the show.

Keep on, keep on. Anonymous Allen. Thank you for your question. A couple of things come to mind right away. Number one, with a new question you touched on the debate between paying cash for a large purchase, such as a home, versus taking out a mortgage and arbitraging the difference. I think that that debate is absolutely overplayed on the internet and that people who sit there on Twitter or on blogs and finger wag about, oh, why are you paying off a home? You could be investing that money. it's incredibly reductive reasoning. Sure, everyone with half a brain cell understands that if you take out a mortgage at

3%, let's just say back in the old days, right, if you take out a mortgage at 3% and you invest money in the markets at 8%, then you arbitrage the difference and you end up with an extra 5% in your pocket. Everyone gets that, right? A fourth grader could get that. but what that does not take into account is the rest of your life. What that does not take into account is the level of security or risk that you have in your occupation, right? Because some people are tenured professors who have a huge amount of job security,

while other people are traveling musicians who have a very low amount of job security. So that doesn't take that into account. it doesn't take into account the level of risk in your other investments. Some people have fairly conservative other investments within their portfolio. Other people do not. Other people have a huge amount of risk in their other investments. Maybe they're not even in public markets. Maybe they are investing in private businesses entirely, which is incredibly risky. I'm not advocating that. But what I'm stating is that the whole picture of your life, the level of risk in your other investments, the level of job security that you have or income

security that you have, the level of obligations that you have to other people, right? Some people are immigrants who have to send money home to Bangladesh to support their family. All of those factors are going to play a role in whether or not you choose to embrace leverage risk in a home. And so I think that the people on Twitter and elsewhere on the internet who say that it doesn't make sense to pay cash for a home or to own a home free and clear, and they put forth this leverage argument, are willfully ignoring the fact that a decision is not made in a vacuum and that the choice that you make about how you pay for your home needs to be contextualized within the wider picture of your life. And so in your case, as you've stated, you're very debt-averse. You want to take a bunch of mini-retirements. There are a huge number of reasons why based on your lifestyle, it makes sense to own something in cash or to own something outright. It makes sense to not have debt if you can avoid it, if that is financially feasible for you, which it sounds like it is. And so don't listen to the voices on Twitter who make the arbitrage argument because, frankly, I think a lot of them, learned the word arbitrage last week and now feel all high and mighty about themselves. And so they want to show off online to prove that, oh, I've just figured this thing out. But there's the other side, which is there's there's no free lunch, which was, which was what I was thinking, Paula.

It's okay to be debt adverse. And I totally agree with everything you said. But the other way is not free either. If you devote a bunch of money to this, you know, you talk about taking. he talks about taking mini vacations. If you take so much money and put it toward this property, that's less money for other stuff. That also is not in a vacuum, meaning that you may need to catch up if you have these

goals that you're trying to reach. And instead of taking the mini vacation, because you decided to dedicate so much money toward the certainty of owning the property instead of using leverage, well, then we also still have an issue. So I'm with you in the fact that. that they paint this idea that it's just, oh, it's magic. We just use leverage. You use other people's money.

OPM, baby. Yeah. Right? There is a price to every move that you make. And the true key to a great financial plan isn't finding the utopia where there is no price, because that's ludicrous. The key to a great plan is knowing what the Achilles heel is in your plan and minimizing it because there always is one.

There never, there never is not a risk. When you make a move, there's ultimately always going to be the other end of that stick. Right, right, exactly. Yeah, it's true. By virtue of tying money up into this property, he's necessarily not going to be contributing as much to equities. He's not going to be likely developing out his own business or other various business ideas. He's not going to be investing money into commodities or into private startup ventures.

He's not going to be using the money for any number of. of alternative purposes. But it also sounds as though he doesn't want to, right? He wants to have the security of a home, and he wants to travel and take mini-retirements. And so assuming that he can float both of those, and there may need to be some trade-off in the types of mini-retirements that he takes, maybe he can only go to countries where the dollar exchange rate really works in his favor. So France is out, Cambodia is in.

That's probably a piece of it. Cambodia is the new France. I should say Lao because the French, they speak French in Lao. But part of that equation is knowing, hey, you've got less money for travel or you've got less money for many retirements. And so, therefore, we're going to choose where we go with the economics of the dollar exchange rate being top of mind, with geo-arbitrage being top of mind. Or we're going to just stick around domestically and continue to travel in the RV. So his two questions. I think we can handle the raw land first. What do you think about raw land as an investment? It's speculative. So if you think of any investment, right, any investment makes money in one of two ways. There is the appreciation of the asset and then there is the dividend or the income stream that it pays out. When you have an asset like a company, that company makes money and therefore pays a dividend. If you have a rental property, that rental property collects money, it collects rent, and therefore it pays the equivalent.

of a dividend. It pays an income stream, right? When you have, however, something that does not produce income, like a piece of art or Bitcoin, right, something that inherently does not produce income, then its value is speculative. And so when it comes to raw land, there are two types of raw land. There's raw land that does produce income, such as raw land that has trees where you can harvest some percentage of those trees and sell that to a lumber mill, sure, that's one form of raw land investing. But if you're buying a bare piece of land that does not have any method of income production, then it is purely a speculative investment.

And you have the, yeah, you've got the holding cost. Yeah, exactly. That's the first thing I think of is can you afford the holding costs? Exactly. You're paying these holding costs and you don't know if that thing will ever appreciate. A speculative investment by definition means that it's worth whatever other people are willing to pay. And this idea that like, well, they're not making any more land is bogus. That's not how.

They are making more land? Well, technically, yes, that is also true. Just look at Dubai, right? Look at the artificial islands that they're building. So yes, they are making more land. I'm going to go buy the seafloor. That's what I'm going to buy. But in addition to that, the land is not so scarce.

Our human population is not so great that we are clamoring over underlying square footage. There's lots of raw land that has decreased in value over time. or failed to appreciate. Look at huge swaths of Northern Ohio. The value of that underlying land in some parts of Northern Ohio has collapsed, right? Compare that to a place like Manhattan. The value of every square inch of underlying land is so great that what do they do? They build on top of it, right?

So when you're not making more land in a case like Manhattan, it's an island, when you can't scale outwards, what do you do? You scale upwards. So this whole, like they're not making more land, again, is reductive, it's simplistic, and it ignores the reality of how the economics of land acquisition actually works. Some places are desirable, and if a place is desirable, then the value of the underlying land grows. Some places lose their desirability, and when that happens, the value of the underlying land recedes. Kabul, Afghanistan, used to be the Paris of the Middle East. It used to be a vacation destination.

Tourists who went backpacking would go to Kabul for the food and the nightlife and the music, right? What do you think has happened to the value, to land values there between when it was the Paris of of its region versus today. And obvious, I'm not suggesting that the place where you're buying land is comparable to Kabul, but I'm illustrating the point that just because they are quote unquote not making any more land does not mean that the value of that particular geographic location is going to rise. I think that answers his first question.

Yeah. I think it does. I mean, obviously, there are pieces of land that go up in value. But I think you clearly define what the, we talked about Achilles heel of that speculation might be, which brings up the second question, which is loans, if he's looking at loans. There are a handful of loans out there for like a building loan. Yeah, building loans and new construction loans. But what's going to be challenging is, you know, you're going to need, you mentioned that you want to do a lot of this work yourself.

You're going to need detailed architectural plans. You're going to need an engineer stamp of approval on these plans. You know, you're going to be going through some very rigorous permitting processes. And the approval of the loan is going to be tied up in a lot of that. So you're going to have to work with a loan officer who is very, very well versed in this because this is, highly non-traditional. The other thing that I also wanted to say on that same front, you have a job that pays you $180,000. When are you going to have time to build a house? Because building a home, first of all, the work required is very full time, very, very full time.

And this is not the type of work where you can dip in for an hour or two. There are very long, long eight to ten hour days where you and a crew, because frankly a lot of the work required is going to necessarily require multiple hands, if you're laying a foundation, if you are framing, if you're insulating, if you're laying subfloor and then flooring, right, That, all of that requires a lot of setup, a lot of cleanup, multiple hands on deck, right? A crew that you manage, multiple days of waiting for inspection, right? Because there's, the inspector is going to have to come throughout the process to sign off on each step of the way. I know that there are people who are like, well, I'm just going to do this under the table and I'm not going to get the proper permitting.

And good luck with a loan if you do it that way. Right. Yeah. That was my thought. Yeah. Right. That's not going to fly if you borrow the money. This is where doing it yourself really is the downside, Paula, because you walk a new bank

and say, hey, I'm comfortable building most of this myself. I'd like a loan to do it. The loan officer to be responsible to their bank is going to say, so what are your qualifications? What do you do? How much of you build? What's your licensing? What are the things you've done?

Exactly. Are you bonded and insured? Because they're trying to protect their investment. No loan officer is going to want to cover that. So certainly if you're taking out a loan, this has to be done with proper permitting and all of the proper channels. And even if you are paying for it in cash, just wait until you get your first stop work order. Because the inspectors, they drive around. Their job is to slap stop work orders.

onto homes, the moment that they see a porta potty out in the yard, or the moment that they see that toilet that you haven't had time to install and so it's sitting at the edge of the property, you're going to need a dumpster. The moment they see a dumpster, they're going to slap a stop work order on that. I'm just thinking of a neighbor that was remodeling his basement. On day two, there was a knock on the door. Yeah. It was the tax assessor. Yeah. We got a stop work order once. We weren't even doing any work, but we had an old dishwasher and we took it out. We put it at the edge of the driveway and boom, the next day we got a stop work order. And we're like, we're not doing any work. We just literally all we did was just swap out a dishwasher. But they saw that and that was for them sufficient evidence that there might be work going on. And so. Then it became up to us to have to deal with that. You know, and you're going to be dealing with, well, you said this is off-grid, so you won't necessarily be dealing with an electrical box.

But, you know, even if this is a straw bale house, there's a lot of equipment. There's a lot of supplies. There's no way that this will fly under the radar of county inspectors. So you're going to need plans drawn up. You're going to need a stamp from an engineer, right? You're going to need all of that to get the approvals to get this started. If your job is going to give you the time to do that, great. Maybe you work a four-day week and then you can spend three days a week on this,

but then you're working seven days a week and it's going to go very slowly. The progress is going to be incredibly incremental. And meanwhile, the holding costs will continue to accrue. I'm not saying that to discourage you from doing it, but speaking as somebody who has tried to do the work myself on rental properties and has tried to do that while also working full time and has seen all of the challenges there, I have very much learned the hard way, what it truly means to attempt to do the work yourself. What the true cost is? Yeah, exactly what the true cost is. But I don't know, maybe he's a GC.

But even if he is, I mean, even if he is a GC, it's actually relatively easy to get a GC license, right? It's not that hard to pass the exam or to meet the qualifications for the licensure. it's another thing entirely to manage a crew on a day-to-day basis, particularly if you're also balancing that with a full-time job. If you weren't working full-time, right, if your work allows you to take a one-year sabbatical,

that's a different story entirely, right? If this is your full-time job, all right, cool. If it's your full-time job, man, go ahead. But if you're balancing this with working full-time, that's a whole different story yeah and Alan by the way I know that the what the unstated question was was would we come out and have a look when you're finished and and maybe you know I love New Mexico Mexico so beautiful so yes yeah yeah we'll come well absolutely I'll get Paula to bring the show stuff and we'll we'll we'll do an off-site

episode. I mean, we have to. That would be fun. And the good news is Paula told me ahead of time she would pay for the whole thing. So what? Which is great. I'm just going to keep throwing this stuff out there. But overall, Alan, I also, I just want to congratulate you on the intentionality of your lifestyle, right? You're living in an RV. You're in a beautiful part of the country. New Mexico is just gorgeous. You know what you want, this off-grid home. You have a great job that pays you a ton of money. You want to take mini-retirements. You have an incredible lifestyle.

So congratulations on building all of that. And I can't wait to see what you do next. Well, Joe, we've done it again. I can't believe we're done already. It goes by so fast. Joe, where can people find you? they would like to hear more of you. You will find me every Monday, Wednesday, and Friday at the Stacking Benjamin Show,

where I often appear alongside the Paula Pant on our Friday episodes and interesting mentors on Monday, Wednesday, join OG and my mom's neighbor Doug and mom's basement for some riveting discussions of all things, from productivity to money management to legacy building across the board. We talk about a lot of stuff. And that is at the Stacking Benjamin's podcast, available wherever the finer. Finer. The finest of all podcasts can be found.

Exquisite. Yes. And so speaking of where you find great podcasts, open up, please, your favorite podcast playing app, Spotify, Pandora, Apple Podcasts. Open up that app. Make sure that you are following this show. And while you're there, please leave it. us a review. But most importantly, tell your friends and family about this show and join our

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