Afford Anything - Don't Let One Big Bill Blow Up Your Budget (Here's How)

Episode Date: June 7, 2024

#512: An anonymous caller who received a large inheritance feels paralyzed by all the investment philosophies he’s read about. How does he pick a winning strategy he can stick with? Josh is an expectant dad looking to buy a bigger house but doesn’t know how much everything will cost. Should he save more or invest more? Another anonymous caller worries that large expenditures like buying a new car or replacing her home’s roof will blow up her budget in retirement. How does she plan for unexpected expenses? Former financial planner Joe Saul-Sehy and I tackle these three 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/episode512 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, when you were a financial planner, did you ever have a client who blew up their budget, maybe even blew up their retirement through a couple of big, unexpected bills? I can think of one who really needed to redo a house that she had moved into. And of course, you know this, Paula, because of your work in real estate. When you tear down that wall, you have no idea what's behind it, right? Right, exactly. It quickly doubles, triples. Yeah, and then it costing, to your point, three times what she thought that it was going to cost. And it was really tough because she barely had enough and she didn't want to go back to work.

Well, we are going to answer a call from someone who is wondering about how to prevent a situation like that, someone who's going into retirement but wants to be proactive about making sure that big unexpected bills don't completely throw off her retirement budget. But before we get to that, we've got a few others as well. Welcome to the Afford Anything podcast, the show that understands you can afford anything. But not everything. Every choice is a trade-off. And that applies to your time, your money, your focus, your energy, to any limited resource that you need to manage. This is a show all about how to allocate those limited resources in a way that leads to an optimal life. My name is Paula Pant. I trained in economic reporting at Columbia and I am the host of the show. Every other episode, I answer

questions that come from you and the former financial planner, Joe Saul Seahy. joins me to do so. How's it going, Joe? Paul, it's going great. And as we start, I've just got a couple big thank yous, if you don't mind. Sure. Go ahead. First thank you is for these questions we're about to answer today. As you know, we've got some great ones. But second, big thanks to you and also thanks to the Afford Anything listeners who joined you and I in Boston a few weeks ago. We had this wonderful joint meetup, the Afford Anything community and the Stacking Benjamin's community together. And as I was on the train going to Boston at the train station, I met a listener of this show who works in retail. He and his wife have a $1.4 million net worth. Did he just walk up to you?

He works at this juice place. Yeah. I walked in and I placed my juice order. And the moment that I started talking as soon as he heard my voice, he looked at me and he went, you're Paul. a pant. And I said, yes, I am. And he said, oh, afford anything. And then he told me that he and his wife established and fully funded these 529 plans for their two kids who are ages 13 and 10. So they've got fully funded 529 plans. They have a fully paid off home in Virginia. So they rent their apartment in Queens, but they have a fully paid off home in a lower cultural living area that they're ready to retire into. They are a year and a half away from being coast by. They have a $1.4 million dollar net worth.

This is why we do what we do. This community is so incredible. I just, I cannot get over how much this community inspires me. It's the reason I love having meetups. Right. Exactly. Don't have enough of them. Yeah.

So I posted a video of it at Paula Pant on Instagram, P-A-U-L-A, P-A-N-T. You can see the video, but thank you so much to everyone who came out and participated. Now, with that said, we should get to our first call. Now, our first call comes from an anonymous caller who just received a large inheritance and wants to make sure that he isn't mismanaging it. He wants to be a wise steward of this money. The caller is anonymous, and Joe, we give every anonymous caller a name. Why don't we listen to the call?

And when we're done, let's find out what we're going to name this guy. Hey, Paul and Joe. First, I wanted to thank you for all you do. I've learned an incredible amount over the years of listening to your show. I've listened long enough that I like to guess how you'll answer some of the questions that come in. My batting average is all right, but you consistently add some deeper dimension than I was initially thinking of. That is why I keep listening. So my question, I've been a keep it simple index investor since first finding this community,

increasing my savings rate and investing those savings across my retirement accounts, but I've never had a taxable brokerage. I received an inheritance about a year and a half ago, and in the fog of grief didn't do much with it. I just left it invested as it was when I received it. Now I'm trying to figure out how to align it with my existing investing strategy, but I'm finding that process difficult for several reasons. First, it's a large sum of money relative to my existing portfolio,

so the stakes feel much higher than when I'm dollar cost averaging into the market with smaller sums of money. Second, about half the funds are in a taxable brokerage in individual stocks, and although they've received a step up in basis, they've already accrued a decent sum of capital gains, making changing course more difficult tax-wise. Third, there are so many different investment feces out there and then decisions within those decisions, it makes my headspin.

Heck, there are more than 10 supposed lazy portfolios. Even within the Vogelhead 3-fund portfolio, you have to decide how much stocks versus bonds, how much international, what's the right bond fund, and the general contours that the three-fund strategy don't appear to fall right on the efficient frontier. Part of the challenge is that some of the advice, such as diversify with international or include small cap value, suggest that you should expect to lag the broad U.S. stock market for potentially long periods of time.

But the key is to stick with it. Otherwise, if you change course, you'll have undone the core premise of how you invested. Maybe I have some commitment phobia. I also understand the value of diversification in planning for scenarios such as the last decade or turnabouts in the U.S. economy. It's just overwhelming. And I feel like with each personal finance book I read, I'm like, yes, I get the irrational behind that approach. But then I read another book with a different approach, and I again find myself saying that approach makes sense. I can't be the only one drifting in this kind of

indecision. Part of me thinks that I'm making perfect the enemy of good enough, keep it simple and whatnot. Can you help me see through this fog? I'd like to reprogram my inherited funds, but I'm trying to avoid making a mistake, costing myself exorbitant taxes, or taking a strategy that I won't stick with long term because I don't consciously or subconsciously believe in it. Thanks again for all you do. Anonymous, thank you so much for the call. And Anonymous, you need a name before we get started. So, Joe, what should we name this guy? I just saw a film and a Netflix series that were created by a wonderful director, Guy Ritchie. And Guy...

Madonna's ex-husband? He's Madonna's ex-husband? He is. Look, I may not watch. movies, but I follow pop culture gossip. Okay. There's a first for everything, everybody. The first time Paula knows some pop culture that I know nothing about, zero about. That's not related to the Royal Crown. Exactly. Exactly.

So, okay, so Guy Ritchie, which is perfect because twice now I have said, what are we going to name this guy? Oh. And we're going to name this guy, guy. Guy. So what do you think this guy, guy should do, Paula? First, guy, I'd like to commend you on the fact that you want to be so wise about this. And I'd also like to commend you on the emotional awareness that is contained within the statement that you made about wanting to make sure that you pick a strategy that you will stick with for the long term.

Because you're aware that if you choose something and you don't truly believe in it, if you're not truly committed to it from the outset, you are likely to change course. midstream, which then throws off the end result. That requires a certain degree of behavioral awareness and emotional awareness that eludes many people. So I want to commend you on that because that's a really important piece of your question. And I hope that that serves as a beacon for the rest of the audience as well. That said, one of the best pieces of advice that I have ever heard when it comes to how to handle an inheritance is that for the first one to two years, do nothing because during the first one to two years, you are likely also experiencing a great deal of grief. And grief can cloud decision making. And so for at least the first year,

if not the first two years, focus on the grieving process rather than the money aspect because a time of grieving should not be a time of making major decisions, major life, potentially life-altering decisions. I've seen too many people, Paula, make a mistake, especially during the first six months. Definitely during the first year, though. And I love the idea of doing nothing about letting it sit. there's so many more important things than money. And I think it's funny.

If people have listened to the show for a long time, they know that this show truly isn't even about money. Right. This is a show about decision making and metacognition thinking about how to think, toward through the lens of money. My thought process, Paula, is that he is much closer than he thinks, which is a great thing. And let me explain what I mean. these things that he sees is so different. The ones that he brought,

but anyway, to me, are actually a continuum. And I'll tell you the lens that I use to figure out for myself of all these different things that I read, what might be the truth and what might not be. If I read something similar in four,

five, six, seven, eight books, that's probably a truth, probably a wider truth about money. If one person says it, it could be neat, it might be a truth, could be cool, could be a little quirky, could be wild, but that might be just that person's take. That might be their offshoot. But I think if you're looking for the super highway versus the dirt road, if you hear four, five, six experts say, you're on your way then.

And what's funny is, is when he brings up the different portfolios he's talking about. And he actually said my favorite two words efficient frontier all the things he mentioned are actually on the efficient frontier paula or they're a pathway toward the efficient frontier so when people start off and they use the vanguard total stock market index that's one fund it isn't on the efficient frontier's nowhere near the efficient frontier but the cool thing paula is the efficient frontier doesn't matter because your portfolio gains and losses don't matter nearly as much as the fact that you are building that muscle in that habit of putting money away and you're putting it into things that will competently and confidently be inflation over long periods of time. You're sticking with

stocks. So the Vanguard Total Stock Market Index is a great way to think, you know what? I've got lots of stuff to worry about. The one I'm not going to worry about is perfect asset allocation because Everybody freaks out about that when they start, and it doesn't matter nearly as much as getting the money invested. But then when he talks about the three fund portfolio, why do people use a three fund portfolio instead of a one or two fund portfolio? And it is to become more efficient to get closer to that efficient frontier and actually drive your assets more skillfully. We should pause here and maybe quickly define the efficient frontier for any listeners who are not aware of it. Sure. The Efficient Frontier won a Nobel Prize. And the reason that it is was his gentleman, Dr. Harry Markowitz. And Markowitz actually, I believe, was looking at troop movement and working with the Army on how best to move troops from point A to point B and then actually figured out, Paula, that this works equally as well for asset allocation, for any type of asset that you're trying to put in place. And he noticed that for any time frame and tax consideration, there is a most efficient way historically, that you would have reached point B if you already knew the time frame again and the in the tax

consideration. Now, he didn't look at every individual stocks. So it wasn't looking at, wow, we put it all on video. You probably got there quick. Right? Didn't do that. If you put it in GameStop on this particular day, bam, and took it out then. He didn't look at that at all. He looked at asset classes, types of investment. So large company stocks, small company stocks, international stocks. And he put these on this grid where one axes shows gains from zero up to infinite gains. And the other axes is you get higher returns. Guess what else comes with return?

Unfortunately, risk. Sometimes. I like risk-free, gains. Sometimes, sometimes. So he shows standard deviation, aka risk, going from left to right, and then north-south. he shows gains in your portfolio. And as an example, cash them will be in the far lower left. If you go all cash, you're not going to make any money, but you're not going to lose any money.

That's far, far left. Large company stocks are going to be over quite a ways to the right because the standard deviation, the motion going up and down is going to be much, much more, but also you can expect a much higher return. Advisors will tell you 7 to 8% are good things to look at, but somewhere in the 10.2, 10.3 range, long periods of time is what it's really done. So you'll have that. But if you take international stocks, which guy mentioned, you take small company stocks, those are also going to be on that continuum. And a three fund portfolio gets you closer to being efficient than VTSAX does. So that's your, that's like a first step. And then you look at a five fund portfolio. Paul Merriman

uses an eight fund portfolio. Why? Because as he's shown, an eight fund portfolio. And beats the pants off of ETSAX over long periods of time. It doesn't take a long time. I would also then say the next step from that eight fun portfolios, forget all these lazy three-fund fun, a little less lazy five fun, not that lazy eight fun, and go just a little bit less lazy

and figure out what your own time frame is and put yourself on the efficient frontier. That's what I believe it is a lot more efficient and frankly not that much more work. It's a little more work to know how it works because the tool that is widely available to individual investors is a little bit difficult to use. It's play with it a little bit.

It's called Portfolio Visualizer. I haven't found another. You can get it on Morning Star. Yeah, I haven't found many, many tools that are open to the public that I absolutely love. Those are two great places to go to begin looking at, the efficient frontier. These are all a continuum, Paula.

They actually are all talking about easy hacks to make your life a little bit easier to get to your goal without having to spend a ton of time on it. They truly aren't, I believe, different philosophies. They're same spots on the same line of one philosophy, which we call modern portfolio theory. A couple of things jump out at me right away. One is that earlier when I said that adding more funds comes with more risk sometimes. What I meant by that is that what the efficient frontier demonstrates is that there are times in which adding more asset classes to a portfolio can improve returns without increasing risk, the reason being that the increased diversification can offset some of the

volatility in your portfolio and lead to higher returns without increasing your standard deviation. Yeah, yeah, exactly. Yeah, this is what blew me away was when I started just playing around with efficient frontier tools. and I would add asset classes to a portfolio. Like as an example, I remember messing around with this, and I already had five or six great, great positions,

and I added a 2% exposure to gold. Gold on a daily basis is about eight times more volatile than the stock market. And also, gold makes me roll my eyes because gold is a great store of value. I think it's a rotten place to put money for long, periods of time unless I don't think that money's going to be around. Then I know that gold was around 500 BC. Gold was around 1,000 AD. Gold's around now. If I don't know if the dollar's going to be

around and I'm getting on a time machine and I want to make sure that I have a store of value, that's it. Gold doesn't move a lot. But on a daily basis, Paula, it does. But what's cool is if I had like a chili pepper, just a little bit of gold to a portfolio, which is incredibly volatile, it actually calms down a portfolio, which blew me away. I'm like, well, how does something that's so volatile on a daily basis come down a portfolio? And it's simply because it's moving along a different set of waves than the other assets are. So if I take, to Guy's point, international and small companies, which are more volatile than large U.S. stocks, I calm the portfolio down. How do I add these things that are actually, quote, riskier and the portfolio over long

periods of time is better? And it's because they're all marching to different drummers, which is really neat. Right. Which is important because I think one thing that a lot of people have learned in the hard way in 2024 and 2023 is that stocks and bonds are not inversely correlated, which many people assumed that they were. Bond prices and bond yields are inversely correlated, but stocks and bonds are not. Yeah, that's a hard lesson that persists, and I have no idea why it persists. Right, but many people believed that until we saw the 2024 come around. And that's when everybody who once thought that started scratching their heads going,

wait a second, how are these moving in lockstep? Well, sometimes they can. And so that's an example of how increasing diversification, through limited exposure to certain asset classes, even if those asset classes are in and of themselves more volatile can decrease the overall volatility of the portfolio. Now, all of that being said, if we take a step back and take a 30,000 foot view here again, the continuum, Joe, that I think you're talking about is the simplicity through optimization continuum, right? If you think about J.L. Collins, who wrote The Simple Path to Wealth.

That book is perfectly titled because he is outlining the simplest possible path. He's not outlining the most optimal path. He didn't name it the most optimal path to wealth. He called it the simple because he found the simplest possible way to invest, which is essentially put everything in VTSAX. So that is the flagpole in the sand at one end of the spectrum. You could even call it at the extreme simple end. And then, Guy, to your point, as you talk about how there are 10 different Bogelhead lazy investor portfolios, all right, why is there such a variety of lazy

investor portfolios within the Bogelhead universe? It's because people want different compositions of simplicity through optimization. I think it's definitely a time saver for people that are just beginning. are struggling with the efficient frontier, which I get it, can be big and ugly and seem very hard. There's this concept of efficacy. How great is a training if you're never going to use it? If I teach you something that feels complex, you can go, oh, you know, that's neat, that's great. And you're like, I don't love you use it.

Well, you know what? Still, don't make, to use guys phrase, do not make perfect the enemy have done. Let's go three instead of one, and you're better off. If you go five, I think you're better off. I think you go eight, you're even better off. Yeah. You know how many times I've designed the perfect workout from the comfort of my couch? Right.

You never actually picked up a weight. Bag of Cheetos. Right. Exactly. Exactly. Yeah. Don't make perfect the enemy of done. Can we spend a moment on bias?

Do it. Because I think bias is also really important here to Guy's question. Guy shines a light on international funds and on small cap value funds. And I can tell this is all based on his reading. He's like, everybody says I should invest in this stuff. But I look at the last several years and these have been horrible places to be because of large company stocks. That is because we have a recency bias. And the recency bias that we have is that large cap growth stocks have, have, for lack of a better term, kicked everything else's ass.

If you looked between 2000 to 2009, if Guy had called in and Paula, this show was around in 2006, he would have said, why should I be invested in large company stocks? When small company stocks are clearly the winner, small cap value for the last several years has been so much better than large company stock. It is easy to have a short-term and obvious bias, and I think we need to remember that we're looking long-term and not so obvious. If your goal is long-term, you have to look long-term at what these different funds have done, and you have to look at how they work together. I see so many people fall prey to a bias of what happened yesterday is going to happen tomorrow, and that is not true. Okay, I have so much. For those of you watching on YouTube, you can see me get antsy as Joe's talking, because I've got so much to. say about this. So first of all, yes, recency bias is one of the most common cognitive biases that

anecdotally I hear from the questions that I receive from this audience. And I don't think it's specific to this audience. I think this is just a reflection of the general population. To define recency bias for those who've never heard of it, it is our tendency. It's a cognitive bias in which we tend to overweight the probability that something that happened in recent history will happen again. So, for example, in 2011, 2012, 2013, people really overweighted the probability of another housing crash because we had just had one in 2008. In 2019, this doesn't just apply to finance, this applies to any event in life. In 2019, if you had surveyed people and said, what do you think is the probability that we're going to be facing a pandemic at any point in the near future? Because of the fact that one had not happened recently, the most recent pandemic had been in 1917 in the U.S., because there was none in recent memory, most people in 2019 would have said the probability of one happening is low.

right? If you were to give that same survey to people today, there would be, I'm sure, a much higher percentage today than in 2019 who would assign that same probabilistic weight. And that would not be based on any type of epidemiological data. That would be based purely on a gut feeling that comes from the cognitive bias known as recency bias. recency bias also ties in with what is known as the availability heuristic, which is if something can easily come to mind, if something is salient, and so you can easily reach for that memory, you are also more likely to give it disproportionate weight. So the examples, the availability heuristic, it's not the same thing as recency bias, but you can see how they're aligned. The more easily something comes to mind, the more likely you are to predict that it will happen again, the more weight that you give it. In the year 2002, a lot of people were worried about another terrorist attack because one had happened so recently. Today, in 2024, I think fewer people now worry about that than they did in 2002, simply because there's a whole generation. right now of people who are legally able to drink who were not even born yet. Which makes it, frankly, all the more scary.

Right. Because reversion to the mean is a real thing. Yeah, whether it's asset classes, whether it is chance of rainfall versus the mean, tears to text, whatever it might be. Right, right. I think this all leads Paula to one other point, which is that I feel some guilt, I hear some guilt, guy saying that, hey, I sat because I was so full of grief and I let things sit. And again, should not feel bad about that.

That was the right move. I think actually that's the right thing to do. That is absolutely 100% the right move. A byproduct of that, which is a thank God byproduct of that is that the person who passed away gifted you these individual stocks. and they've actually appreciated it. And nothing bad happen, which is also going to be in the stock market most of the time. If you let it sit, even though it might not be perfect for your goals,

you know, about roughly 70% of the time, the financial markets, the stock market will go up. So I hear now this conundrum in his brain where, frankly, Paula, I think three words, you're overthinking this. Those are my three words. You're overthinking that. That might be four words because there's a contraction there. You are overthinking this. I think you're overthinking how many words are in.

I'm now overthinking the whole thing. Yes. But regardless, this is not the right position for you or maybe it is. I think you look at this the way Marie Kondo cleans out a closet. Do these stock spark joy. Marie Kondo says does this spark joy? I think you look at these. these positions and go, does this help me reach my goal? It's a different question, but it's just

like cleaning the closet. Does this help me reach my goal? If the answer is no, then it goes. Don't, don't let the tax tail wag the gold dog. Do not do that. Do not worry about the tax ramifications of getting your portfolio in the right place. Because while in this case, it worked in your favor, the longer you wait, the more difficult it's going to, be to part with the position that is not the right position and the chance of you not reaching your goal becomes better. So if you determine that this does not help you reach your goal, then remove it now. That being said, I mean, work with a tax professional as you are planning major moves in your portfolio because certainly in terms of timing, you may be able to have

certain passive losses that offset passive gains. So there's a lot of value to working with a tax professional in timing out, you know, the difference between selling something in December versus in January, that's the type of thing that you would get advice from from a tax pro. That's a timing decision rather than a strategy decision. I do think there's a part of it that is strategy decision, which is when I make this move, what is the tax outcome? How is this going to affect the rest of my tax portfolio. As an example, there are times during retirement when what you do in your portfolio and how you would draw funds from an IRA can affect the taxation of other benefits. Like it may change your Medicare outcome. You may see your Social Security subject to taxation.

Like one thing does affect another. And if I know at the very least, A, this is what the tax is going to be when I sell these. then I know that I can set that money aside expecting that next year. But even bigger than that, Paula, a tax professional might be able to go, if you do this right now, this, this might hurt these other things. We didn't hear any other benefits, but we didn't ask Guy for his entire situation. So I do like the tax advisor from that perspective as well. So, Guy, go to Morningstar. We're going to put a link in the show notes. go to portfolio visualizer, play with the efficient frontier, think about the spectrum of

simplicity through optimization, work with a tax professional around strategy and timing, and intentionally hold off on making any major moves for a minimum of one year, and perhaps even two years, so that you don't let the cloud of grief impact your decision making. there is an important reason why there are many cultures around the world and many religions that have behavioral restrictions, traditional behavioral restrictions on what people do in the first year after a person passes away. In the Hindu tradition, for example, there are certain foods that you can't eat for the first year, depending on how strictly you observe.

There are even some clothing fibers that you can't wear or you are expected to shave your head. At a big picture level, I think what they're trying to impart is that your behavior, which is a reflection of your feelings and thoughts, will be different when you are going through the grieving process. traditions that that say, all right, don't eat these foods or don't wear these fibers for a given period of time are symbolically acknowledging the fact that behavior changes. So let yourself go through the grieving process first before you make any portfolio changes.

We talked about portfolio predictability, Paula. The most difficult thing when I was a financial planner was not portfolio volatility. It was when something happens and a person is grieving and they become unpredictable. It wasn't the asset that became unpredictable. When people were grieving, some people buried themselves in their work and had tons of income, just tons and tons and tons of money coming in. Couldn't predict that because other people wanted nothing to do with the workplace,

wanted to be alone, needed a sabbatical, needed time off, needed time away. I could not predict which one you were. Like there were so many times where we could predict out, okay, we think that you might be getting this raise, you look like you're on this management track, we could predict all these things. We could model those things. The one thing I could not model was grief. It's not the asset that becomes unpredictable. It's the person. Well, thank you, Guy, for asking that question. Next, we're going to hear from Josh, he and his wife are expecting their first baby in November, they have some questions about how that's going to change their budget.

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Try the season's hottest flavors from the PC Holiday Insiders report. Please feast responsibly. Welcome back. Our next call comes from Josh. Hi, Paul and Joe. First of, thank you for the time in helping with our situation. I always appreciate the way you and Joe answer questions so thoroughly. My wife and I are struggling with how to bucket our savings and investments, as I feel like

many people do in their early 30s. A bit more background. We are expecting our first child in November and would also like to move in the next one and a half to two and a half years. When we move, we would likely move into a larger house either in our current area or a higher cost of living area while keeping our current house as a rental. With our future fixed costs going up, but by an unknown amount, how should we be currently balancing our excess cash each month between savings and a taxable brokerage. We currently save about 3,000 a month and split that 50-50 between the savings and the investments. Should this change once we have a kid? Finally, we don't have a true goal for our investments at this point besides assuming we'll need it for ourselves

as we grow older and our kids grow older. Is that okay? Thanks again for the time and help. Josh, thank you for the question and congratulations on the baby that you're expecting in November. To your question, you say right now, you're saving $3,000 a month, split 50-50 between cash savings, savings in a savings account versus investments. And there's no particular goal that you're saving for. There's just a general sense of, hey, we know savings is a good idea. Given that there is no goal, my assumption is that the 50-50 split is also just sort of

something that you pulled out of thin air. Hey, it's a good idea to have a mix of long-term investments and short-term savings. So let's just do this at a 50-50 split. It's fantastic that you're doing that, that has given you a solid foundation. But from this point forward, the approach is going to start with some specific goals. And the most short-term change to your finances is going to be expenses related to the newest member of your family. Now, how much that's going to cost is going to differ wildly. What's cool is that there are a lot of websites where people have actually tracked baby-related

expenses. So, I mean, you can look at broad aggregate averages, but you can also look at specific case studies. Jay Money, my former co-host, who writes a blog called Budgets Are Sexy. He had a baby budget tracker that was on his website, Budgetshersexy.com, where, he tracked specifically to the dollar how much he spent on baby-related expenses. And of course, there were one-time startup costs, a crib, a stroller. And then, of course, there were these ongoing expenses, everything from diapers to increased health insurance bills.

The FI couple, the FI couple, they also, I don't think they've done it quite to the dollar, but they have written publicly about the change in their budget after their daughter Zoe was born. The biggest change being that they upgraded to a more expensive home. And so there was a large change in their housing-related costs because they wanted more space. You can find these examples all over the Internet of people who have publicly shared precisely what those numbers are. and you can use that to try to model out a budget based on your lifestyle, your geographic location, and other factors. So that in terms of short-term savings is the first thing that I would start to draw out a budget for and then start when it comes to specific goals, start setting ultra-specific goals for that short-term bucket of savings around how you're planning for. for these new costs?

Yeah, I think the through line of our answers today is going to be the concept of modeling. And while Josh says that he doesn't know what the higher cost of his new house is going to be, it doesn't mean that it's not findable or it's not modelable. He can certainly look at different costs and say, okay, I think my new mortgage is going to be X, my property taxes are going to be why I can estimate my my homeowner's insurance as Z. I think the home improvement cost just based on what I am spending now and common numbers for that neighborhood are not unfindable. I think all of these things can be modeled.

And certainly they're not going to be perfect, Paula, but what they'll do is give Josh and his spouse, this idea directionally of where we need to be. And when Josh says, there are no goals and is that okay? It is way okay. It's 100% okay. But the more specific that you can be, the more efficient you can be with your funds. We tend to hold money back in reserve and we're not sure if we're going to need it now. Or we might, if we're risk takers, which is a percentage of the population in general. We may take too much risk because we feel like nothing's going to come up today. And then, oops, my bad.

All of a sudden I needed today, the market's down and I'm taking money from a position that I shouldn't have taken it from. So the more specific that you can be, the more efficient your money will be. But it's okay to say, you know what? I just long term, I kind of want to retire around this time. I think I want to use the same. Again, I would still model it. Even though they're kind of nebulous, I would still begin to model what does the future look like if I just keep my lifestyle the same. If I do nothing different, how will I need to plan for this future?

How do I make sure I'm putting away at least enough money to get a future that looks murky? And you're not alone there. That is a ton of people. In fact, Paula, so many people freak out about this idea. you know, you hear these people online talk about legacy and about leaving your mark and you're like, oh, man, how do I, just the future looks so big. And I feel this big sense of responsibility. It's much easier to do what a gentleman named John Acuff talks about in his new book, which is to, he was a guest on this show. Yeah, which is to look backward. Don't look into that murky fog and say,

how do I leave a legacy? That's going to mess you up. But if I look backward and go, you know what, What are the things that I really love doing and what are the things that spark joy? Again, there's another through line. How do I get more of that in my life? That helps you lead to buckets that are fulfilling, that seem attainable, that seem much more manageable in your headspace. So I like when I'm looking at those long-term goals to look backward instead of forward, works much, much better. You'll freak out less. But to your point, we already know a few big ones.

We know at some point you will want to retire. So if you just keep things the same, how can we model that? You can easily model that at any of the websites for the big asset managers, Fidelity, Vanguard. They all have very simple tools to help you model that so you know that you're putting away at least enough to reach that goal. then second we know the new house we know uh approximately what the cost will be and and the neighborhood you're going to live in we can do some modeling there again not going to be right but we'll be directionally so we know how much to put away for improvements for the house we also know what it's going to do to our cash flow ish a thing that i like doing by the way paula to model

cash flow is that once I have this estimate of how much more expensive my lifestyle is going to be, set up an automatic deduction from your paycheck for the additional amount, for the additional strain of the baby and the house, and have that money just go into a savings account so that you can feel this money leaving your budget. The cool thing is, is if your budget is exceedingly tight, it's in a savings account and you just get the money back, right? But for you, it's almost like astronauts before they go into space. You know, they model weightlessness.

They get the feel of how things are. They know what the turbulence is going to be on the way out. They try to make it as predictable as possible. We had an astronaut on the show too back in November, Mike Masimino. You can do the same thing here. So I'm a big fan of modeling as much as you possibly can to get a feel of what it might be like. In fact, Cheryl and I just recently did this, Paula. you know, I'm on the other side where Paul is talking about when she finishes her vocation,

what does she want to do next? And, you know, we're talking about slow travel. And we were just at a place that we really liked. And we said, hey, what if we rented a house here for a month? What would that cost? I don't know what it's going to cost 10 years from now. We're looking at doing that. But I can model inflation. By looking back, I can also look at what pricing is now. So I can start to put that into my budget. And we had a lot of fun doing that because it also helps you dream. You know, oh, what if we spent a month at that house? What if we spent a month there?

That would be fun. So love the idea of modeling. And the thing is with essentially test driving a budget, don't conflate precision with accuracy. When you create a budget or when you test drive a given idea, a prediction about the future, right? You are planning this out in a way that feels precise because you've modeled this out on a spreadsheet. And you've allocated X dollars to housing and Y dollars to food. And I say this to the students in my rental property investing course all the time. This is actually one of the major lessons is never conflate precision with accuracy.

When you're modeling things out on a spreadsheet, those numbers, particularly if they're modeled to decimal points, will feel unduly precise. That doesn't mean that they're accurate, but that's okay because, as Joe says, what you're aiming for is to be directionally correct and to model something that is within a reasonable range. And in order to avoid the conflation of precision with accuracy, what I often tell my students is model out a couple of different scenarios, test drive a few different scenarios, in which you're testing a worst case, a best case, and then you have a better sense of what some of those midpoint cases in between, which are more likely to happen, will be. When you're thinking about probabilistic future outcomes, think in ranges rather than in I agree to Scott Galloway. And as the dad of twins, I'll say that kids will mess up your money and I would rather do nothing else. It is an expense that I don't regret. It was very expensive. But by the same token, again, we're not trying to be precise. We are just trying to model. And so if we're putting our budget in a spot, we have all kinds of different numbers that we can work from. The numbers are out there. My point was actually getting to 529s.

I don't know if putting money in the 529 plan makes sense before the baby is born. I will tell you this. It makes more sense now that it's easier to move that money to a Roth IRA. And it's always been easy to change beneficiary and make the beneficiary yourself. So if you have any education plans for yourself in the future, regardless of the new rules around moving the money to a Roth IRA, you can make yourself the beneficiary or make a family. member, a different family member of the beneficiary, and then use it for your own higher education in the future. You can change the beneficiary to the baby later. So there is some flexibility, but I think depending on what your aspirations and goals are around education in general, the faster

you start saving for higher education, the better. And that's another bucket. But it also, again, depends on your thoughts around that goal. So I just want to bring up the 529 aspect of this. Well, with the 529, you have to have a social security number that's tied to that 529 in order to open it up. Right. So if you were to open one prior to the child getting a social security number, you would have to open it for yourself and then later do a...

As I mentioned, you changed the beneficiary later. And changing the beneficiary later is not a problem. It is not hard. And I know people that have done that and they really like it. And it was great that they started early because then that money compounds for a longer period of time. But it really depends on your own aspirations around education because without the, even with the Roth rules, I think if you have a bent toward education yourself or your spouse has been toward more education in the future, then the risk of putting this money in a bucket with some barriers to get at it. is much less. Well, thank you, Josh, for the question. Our last question today comes from an anonymous caller, and this anonymous caller requested a name she would like to be either Po or Jolla.

Which one do you like better? Poe or Jolla? Oh, I think Po Jala. Po Jolla. Po Jolla. All right. Well, then our final question today comes from Po Jolla. It doesn't have to be either or Paula. It can be both. That's true. That's true. Think big. Hey, Paul and Joe. Since this is anonymous, can I be called Poe or Jolla? My question is about how to think about large expenditures in retirement. What happens when a large expense comes up like a new roof, septic system, or car purchase? Does this count as part of that year's 4% withdrawal?

Or do you create some kind of sinking fund for such items ahead of time? If our withdrawal is 125K per year, a 25,000. $5,000 roof is a substantial piece of that budget. Thanks for your guidance and how to wrap our heads around this important piece of the retirement puzzle. I think based on Paula, our answers for the first two questions, our answer here for Po Jolla is going to be very straightforward. I think modeling this out again is going to be the key to success.

So, Joe, then my question back to you. And I have my own answer to this, but I'm curious how you would answer. How would you model for the unexpected? I think I have to look at what those unexpected things would be. As an example, there are some easy ones, right? At some point, my refrigerator is going to die. At some point, my muffler is going to be dragging behind my car. I'm going to need a new vehicle.

At some point, I will need a new roof. So if I take those expenses and then I take the, average lifespan of that thing, then I think there's, there is an ability to create this sinking fund for the thing, not knowing the specific year, but knowing that in this time frame, I'm going to need this big bucket of money. It's almost like when we look at insurances, Paula, like an actuary. An actuary does not know when the problem is going to happen. but they know the average magnitude and they know the probability risk, right? We're trying to do the same thing.

And it's going to be harder in a case of one versus what an actuary does over a large population. But still, how great is it for Pogala to be able to be, I just love that name, to be able to know and have this certainty or to a certain degree, certainty. that even if the worst happens, I have modeled this in and I at the very least have a plan. My answer is quite similar. What I would do is I would separate those big ticket items into two different categories. There are major expenses that you know with certainty that you will pay, you simply don't know when. So, for example, you know that at some point your roof is going to need to be replaced,

that at some point all of your appliances, your dishwasher, your stove, your refrigerator are going to need to be replaced, your air conditioning unit, right? You know that at some point all of those things are going to need to be replaced. Same with your car. Same with meeting the deductible on your medical insurance, right? You know that at some point these things are going to happen. You don't know when, but you can state with near certainty that at some point it will happen. And so I would set aside specific money just for the those things. You know, when you're entering into retirement, I mean, you can set aside money. You can even earmark if you wanted to use sub accounts, earmark different buckets of money that are specific to each of those things because you know that eventually you're going to have to make a bunch of repairs on your car. And then at some point after that, your car is going to need so many repairs that you'll decide that you may as well just replace it, right? You know that both of those are going to happen. So a car repair fund and then a car replacement fund,

you don't know when it's going to happen, but you know it will happen. And so setting aside specific money earmarked for those particular items, I think is a wise way to plan for that, for those types of big ticket expenses that will happen, but you don't know when. Now, that's one category of big ticket items. The second category of big ticket items are the ones that you don't necessarily anticipate will happen. So this is different from car repairs and replacement. It's different from appliance replacement or major home repairs, right?

Those things you know they will happen. But there are other expenses that you never thought would happen. Maybe you get hit with a lawsuit. Maybe you have a family member who lives in another country and there is some medical emergency associated with that family member. And so all of a sudden, you have to buy last minute airfare overseas to go visit a sick family member in another country, right? Those are the types of expenses that you never anticipated, even across the span of your lifetime. Maybe you live in a condo building and the HOA does a reassessment. And every owner now has a special assessment of $20,000 that they have to pay the HOA.

And you didn't plan for that. So I would also, in addition to having funds set aside for your car, for your home, for your health insurance deductibles, I would also have a fund set aside for the unexpected, the literal expect the unexpected. And there is your emergency fund, which is all about the unexpected. You know,

I'm thinking back to people I worked with when I was a financial planner, and I remember when people wanted to purchase an RV, you know, in a big, expensive $100,000 RV more. than that or they wanted a second home like some of some of these big expenses the more that we can set that and this really goes back to josh's question too the more we can set that money aside in a separate bucket and plan for that differently so i can model my retirement income expenses as as a

continuum and take these outside the budget it's actually the same thing paula as when we're working with people who are saving for retirement or for financial independence. And that is that, you know, grocery bills are going to go up and down. But the more that we can make our bills the same or make that budget the same every month, the more confident we're going to be putting a larger percentage of our wage aside every month. if I have a lot of discrepancy in my income stream all the time and my expenses, I'm going to have a lot of trouble putting money aside every month because in the back of my mind, I'm thinking, well, if I put this away and I put it in a 401K, a 403B, a Roth IRA,

it's going to be a little more difficult to get to. So I should probably put away a little less in case something happens. Don't like doing that. So if I can make as many of these bumps, whether it's early in my life the same or later the same, and model out a consistent expense stream and take the big huge rocks and make that a different bucket, that now that's something I'm saving into for that specific thing, the better. Obviously, it doesn't have to be incredibly specific. But again, like we've said all the way through, the closer.

you can model it to reality, the more efficient you're going to be able to be with your money. So, Joe, that is the through line for all of the answers. Is modeling? Is that weird? Yeah, exactly. Exactly. Play with spreadsheets. I went in today not expecting that to be the through line.

Right. It's funny how we tend to have through lines, completely unplanned through lines. Yes. And I'm wondering if Guy predicted that one. Remember how he said he likes to predict what we're going to say? Guy, did you think that was going to be the through line? Did you think that was going to be it? Did you get that right?

Because I didn't. I had no idea. Well, I hope that, as guys said, I hope we added some additional layers of depth or nuance to some of these answers. Well, thank you, Po Jolla, for asking that question. Joe, I think we've wrapped this one. Yet again, thank you for spending this time with us. Where can people find you if they would like to hear more of you? You can find my writing on financial.

planning in my book Stacked, which I co-wrote with Emily Guy Burkin. It is... You should read page 13 of that book. That features the Paula Pant. Yeah. Page 13, best page of the book. Stack is a series of achievements starting off with the thing I talk about at the beginning of every conversation, which is begin with the end of mind.

And we talk about how to model that all the way through difficult things like the efficient frontier. So find stacked wherever finer books are sold. and wherever finer books include page 13 and Paula Pant. This is the only book. This is an exclusive page 13 with Paula Pant. When Joe and I appeared at events and he's giving away copies of the book, people have him sign the book and then they have me sign page 13.

In Boston, you did. Yeah, I did in Boston. I did it. So, Joe, when you went on book tour for Stacked, you went on a 40 city book tour. and I joined you for eight out of those 40 cities. And in all eight of those cities, I wasn't expecting people to ask me to sign the book, but I signed page 13. Yeah. So that was a lot of fun.

It was so great. Well, Joe, thank you again for taking the time to be with us today. Thank you, Paula. That's our show for today. If you have any questions that you would like to ask, if you'd like to hear your voice aired on this show, go to afford anything.com slash voicemail to ask your question. Also, please subscribe to our newsletter. If you go to afford anything.com slash newsletter, we are becoming much more active there and are sending out long, detailed newsletters with storytelling and information and inspiration to help you better allocate your money, your time, your focus, your energy to make those better decisions about how to live the best version of your life. Again, that's affordanything.com slash newsletter.

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long-term travel, whatever it is that interests you, you will find your people at afford anything.com slash community, all of which is no cost. You can find me on Instagram at Paula Pant, P-A-U-L-A-P-A-N-T, on Twitter at Afford Anything. And you can join our Facebook group. Just search Afford Anything on Facebook. You can also find us on YouTube. for tuning in and for being part of the afford anything community my name is paula pan i'm joe sal see hi and i will meet you in the next episode