Afford Anything - My Husband Makes Double My Income, But Saves Nothing! Should I Be Worried?

Episode Date: March 20, 2024

#494: Tatyana is about to pay off her house at age 39! What’s next? Her husband, who earns twice as much (and whom she met after she bought the home), has no savings. They want a boat. Should she focus there? Matthew recently ended a relationship that resulted in a real estate buyout with an 8.1 percent interest rate. With rates expected to decline, how long should he wait to refinance the loan? Rachel’s friends know her as the finance gal, but she’s stumped about closed-end funds. What should she know about these investments? Erin and Angelique call in with a loan strategy to tackle Steve’s double mortgage dilemma from Episode 478. 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/podcast-questions For more information, visit the show notes at https://affordanything.com/episode494 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, have you ever paid off a home? I have not. I've always subbed that because I had low interest rates and I had low manageable payments and instead save for my long-term goals. Ah, interesting. And I took the opposite track. I decided that that was going to be priority. And so I have seven doors and I paid them all off free and clear.

I hear a discussion coming. I do too. Well, welcome to the Afford Anything podcast, the show that understands you can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. It 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 what this show is all about. My name is Paula Pan, I'm the host of the show. Every other episode, we answer questions that come from you, the audience,

and my buddy, the former financial planner, Joe Saul C. High, guy who got kicked out of the financial planning world. Booted to the curb. Yep. I think it was the, I think I booted the financial planning world to the curve. Oh, who dumped who? That's right. I feel like it's high school.

I got to dump it before it dumps me. So, yeah, he joins me every other episode to answer these questions. What's going on, Joe? I don't. There's questions all around us. You know, a question I just had answered yesterday, Paula? What's that? I found out that humans eat way more bananas than monkeys.

Well, there's more humans on the planet than monkeys, right? There's eight billion of us. No. Or do you mean, like per individual? Yeah. Like, I've eaten a ton of bananas, but I've never eaten a monkey. Ew. Ew.

Ew. Gross. Humans. Humans eat more bananas than monkeys. Joe. Well, that's our show for today. And we're out. No extra charge for that, Paula.

Gross. Okay. Moving on. Here's what we're going to cover in today's episode. Tatiana is about to pay off her home one day before her 39th birthday. What should she do next? What should her next financial priority be? Rachel has a reputation as the finance person among her friends, but she's a little stumped about closed-end funds.

What does she need to know? We're going to answer these questions in today's episode, starting with Tatiana. Hi, Paula. Long-time listener with a question on what to do with, quote-unquote, disposable income. My mortgage will be paid off in 60 days. just one day shy of my 39th birthday. This is the goal I've been working incredibly hard towards independently for 13 years. I purchased the property before meeting my husband and have no other debt, no credit card debt, no loans, and my car is paid in full. I'm self-employed with a small

business making a salary of about 50k. My husband makes about 100k and pays home expenses such as utilities and groceries. He's working towards a pension through his employer with about 16,000, years to go, and he has an unmatched Roth retirement account. Unfortunately, he doesn't do a very good job with his retirement contributions and has no independent savings or assets other than a paid-off vehicle. We will not be having children, but we do have a goal to purchase a boat and get into the cruising lifestyle, which can be extremely expensive. Not sure if that will be a long-term lifestyle or just something we have fun with for a couple years. We really won't know until we try, and we have about $40,000 in joint cash savings to start that dream. I'd like to know what would be best to do with my

income once I don't have a mortgage. Rebuilding my cash savings is definitely a priority. But after reaching a comfortable amount, maybe open up a retirement account of my own and what type of account would you suggest? Or maybe I should make some low risk investments. Definitely open to all suggestions. Thank you so very much for all of your wonderful advice. Tatiana, first of all, congratulations on paying off your home. That is incredible. And you mentioned you earn an income of $50,000. You know, you're not making a crazy six-figure income where you're, you know, making $500,000 and paying off this home. On a $50,000 income, you're able to have a fully paid off home at the age of 39, one day shy of churning 39, in fact. So at the age of 38 and 364 days. you are able to have a fully paid off home. That is absolutely incredible. So huge, huge, huge. Congratulations to you for accomplishing such a big goal. Now, what should you do next? If I'm understanding your question correctly, I'm getting the impression that you don't have much in the way of retirement savings. And I say that because you asked within your question, you said that you want to rebuild your cash savings, which I think is a great idea. And then, you said, and open up a retirement account, am I correct in interpreting that to mean that you don't have a retirement account?

Because if you don't, then that is absolutely your first priority. Open a retirement account and put as much money as you can into it. You mentioned also that your husband doesn't seem to have any retirement assets. I'm a little bit confused about his situation because you did mention that he has a Roth retirement account. You said it's an unmatched account. which is fine. Plenty of people have unmatched accounts. But if he has a Roth retirement account, you said that he doesn't have any independent savings or assets other than a paid off vehicle.

Does that mean that he has access to a Roth retirement account but that there is zero saved inside of it? Or does that mean that he has a Roth retirement account, but there's a very, very small amount saved inside of it? That part I could use a little bit more clarity on, but regardless, It sounds as though he has, at a minimum, access to a Roth retirement account. It would be great for him to put some money in there. I know that he's working towards a pension, which is good. But he's 16 years away from that pension. So having additional savings to build out the retirement planning stool, right?

The three-legged stool of retirement planning would be a great idea. So in addition to his pension, he should be contributing money to that Roth retirement account. Meanwhile, you also need to open up a retirement account if you don't already have one and build out those retirement savings of your own. That is absolutely the first priority that I want both of you to have. I would start thinking about the amount of money that you spend today and at the very least to be able to emulate that same lifestyle. And then think of, do you want to live a different lifestyle then? And then there's tons of calculators at all of the big money management websites, probably the place where, the Roth is that you mentioned, they probably have retirement calculators there. Just go begin modeling

that and then see how much money is the right amount to put away. You know, you knew the amount of money to put away to make sure that you paid off that mortgage before your 39th birthday. You want to do the same thing with retirement. If I have this goal, I want to live this lifestyle. I need to put X amount of money away and I need to put it in investments. Now, you talked about low risk investments, Tatiana. There are many different. types of risk. And when you talk about low risk, you're probably talking about market risk when most people mention that. There's another risk. My problem with when you use a, quote, low risk, aka low market risk investment for retirement, you are very safely not going to save enough money

to get anywhere. So what we truly need to do, the bigger risk is we need to beat inflation. because we saw how much over COVID and right afterwards, like inflation running just rampant, moving everything so much more expensive than it was just five years ago. If we don't beat inflation, dollar for dollar, every dollar you want to spend above that pension for retirement, you just can't do it. You can't live today and save enough money to live tomorrow. So the two types of investments that have beaten inflation over long periods of time, are stocks and real estate.

And the way to do that, the way I think to mitigate your risk with stocks is to buy a well-diversified fund that buys a lot of different companies. So you're betting on the economy, which will beat inflation, versus betting on one company to do it. So a great company, a lot of people in our community like to start with, is a mutual fund called the Vanguard Total Stock Market Index. It's a fantastic place to start because you buy a little bit of everything. your risk is, is that the entire economy folds.

So for me, I'll take that risk and I will then be fighting the bigger risk, which is that I don't beat inflation. By the way, I love the fact that your husband has that pension. That pension represents so much money that you don't have to put away that other people do. That's a great. A pension by security, now what you're working to do is by flexibility, right? having money save for you and your husband is going to buy you. We want to spend a little bit more this month. We want to do something special this month.

If you have enough savings, you can do that. With a pension, you really can't do that because you're going to get the same check every single month. And that will be your set budget. So buy yourself some flexibility by really getting going on that retirement savings. Right. As far as the goal of buying a boat and living the cruising lifestyle for a while, That is fantastic. I love that idea. It'd be better if they invited us.

But before that happens, I see that as secondary to first securing your future when you are in your 70s and 80s and 90s. Retirement is absolutely goal number one. And once retirement is secure, then you can turn your attention to a financial goal that you have for your 40s or your 50s. But taking care of the 90-year-old version of you has to come before. for doing the fun thing for the 50-year-old version of you. Yeah, it is funny. Just as humans, we have a tendency to front-fill our stuff, right? The goal that's in front of us is the one we think about, that long-term goal.

I'll deal with it later. And yet, compounding interest can work so much in our favor if we backfill instead. Right. So we start with the 90-year-old version. We secure that. Then we go to the 80-year-old version, secure that. Then the 70-year-old version, 60-year-old version. Once that's all securing cake, then I go, okay.

now I can party on the boat with Paul and Joe. Yeah, exactly. Exactly. Congrats on paying off the home. That is huge. That's incredible. That's going to make this job a lot easier. Exactly.

Yeah. All of the money that you have been putting towards the mortgage that you now have available to you that you can put towards a retirement account. And that means you can really accelerate the growth of your retirement savings. And I think you're going to see that your retirement investments, grow very, very quickly now that all of the money that was going towards your mortgage can get put into a retirement. Yeah, it's a huge cash flow benefit having that bill eliminated. So, congratulations. Fifth Third Bank's commercial payments are fast and efficient, but they're not

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place to host during the holidays. You can get up to 70% off during Wayfair's Black Friday sale. Wayfair has Can't Miss Black Friday deals all month long. I use Wayfair to get lots of storage type of items for my home, so I got tons of shelving that's in the entryway, in the bathroom, very space saving. I have a daybed from them that's multi-purpose. You can use it as a couch, but you can sleep on it as a bed. It's got shelving. It's got drawers underneath for storage. But you can get whatever it is you want, no matter your style, no matter your budget. Wayfair has something for everyone. Plus they have a loyalty program, 5% back on every item across Wayfair's family of brands. Free shipping, members-only sales, and more. Terms apply. Don't miss out on early Black Friday deals. Head to Wayfair.com now to shop Wayfair's Black Friday deals. for up to 70% off. That's W-A-Y-F-A-I-R.com. Sale ends December 7th. Our next question comes from Matthew. Hey, Paula. I'm a long-time listener and really appreciate your common-sense approach to money problems. I have a question about mortgage refinancing. I recently got out of a long-term relationship and had to buy out my axe and refinance or jointly owned house somewhat quickly under my own name.

This was the right move emotionally and personally in terms of moving on and wrapping things up, but because I did not have a lot of control over the timing, I got stuck with a very high interest rate on the mortgage, 8.1%. The mortgage is for roughly $78,000, and the result is a $920 payment. I can afford this on my current salary. My take-home pay is about $4,250 a month, and I have a lodger who pays half the mortgage. But I was thinking it would be financially wise to refinance when rates fall.

Obviously, the economy is unpredictable, but it does seem likely that interest rates are going to fall in the next couple years. I was wondering how you would approach the question of when to pull the trigger on a refinance. Should I just set a mental target rate like 5% and plan to refinance the moment when rates falter that are below? Or would you take a different approach? Thanks so much. Matthew, that is such a good question. First of all, you've done all the right things.

Kudos to you. I get that this is a sucky situation, but you made the best decision in a sucky situation. and you should be proud of yourself for that. You're doing it right, and you're asking the right questions. And this is such a good question. And it applies to anyone who's listening who is in a similar position because there are so many other people who are listening to this show right now who also have a high interest rate on their home

and they're wondering, when rates start to drop, when should I refinance? Now, for a little bit of context, the Federal Reserve meets eight times the year. The next meeting, which is going to be in March, they are widely expected to hold rate steady. The meeting after that, which is going to be April 30th and May 1st, is if they lower interest rates, that will be the earliest point at which they could potentially lower interest rate. It's widely agreed that that's not going to happen any time before their April 30th, May 1st meeting. Even if they do start lowering interest rates at the April 30th May 1st meeting, and there are some armchair commentators who think, you know what, they might not even do it that early. They might actually wait beyond that. But that's all speculation. But even if, in the best case scenario, they do start lowering interest rates at the April 30th, May 1st meeting, it would only be by a handful of basis points. So we're not going to see any significant changes in interest rates until the end of the year. Now, how much is that going to be? Time will tell.

Bank rate is expecting that new mortgage originations by the end of 2024 will probably be around 6%. But again, all of this is speculation. And it's, you know, even the members of the Federal Reserve Board do not know the answer to this. And the reason for that is these answers will be determined based on economic data that comes out. So seeing what the jobs report. looks like in the month of March, the month of April, the month of May, seeing what the inflation numbers look like in those months, those numbers, that economic data will inform the decisions that the Fed makes throughout the year. And it will inform the number of times across the

eight Fed meetings this year, the number of times that the Fed lowers interest rates across those eight meetings, and the degree to which they lower interest rates across those eight meetings, all of that will be determined on a meeting by meeting basis. based on the economic data that we have at the moment. In addition to that, major geopolitical factors, such as wars being fought overseas, all of those have effects on supply lines, they have effects on oil, they have effects in an interconnected world on price shocks and economic movement, and there are Black Swan events that we cannot predict.

And so all of that is to say, we don't know how quickly rates will drop, nor do we know by how much rates will drop. And it isn't just that we don't know that. It's that the members of the Federal Reserve Board themselves do not know that. This is all being decided in real time. So that leads to the question, when should you refinance your mortgage? And what I would say is, given that we don't know the extent to which rates will drop in total, what I would do, is set a guideline based on the difference between your current rate and the rate that you could get if you were to refi.

And so if there's a difference of about one and a half to two percentage points, that's the rate at which I, the difference in rate at which I would refi. So your rate is currently 8.1%. If you can get a rate of about 6.1% to 6.7%, 6.7%, to 6.7%. 6, 6.7%, somewhere within there, I would refi at that point. And the reason that I'm benchmarking it to the delta between what you have and what you could get, rather than any speculation about how far rates will drop is because we don't know how far rates will drop. The Fed themselves, Jerome Powell, does not know how far rates will drop. Nobody knows that. Nobody can know that. So the question is not how far will rates drop.

The question is what is the delta between the rate that I have versus the rate that I could have at this very moment. When that delta reaches between one and a half percentage points to two percentage points, when it gets to that range, that's when I would pay the cost of refying. I think there's a couple things that Matthew can explore today. Because the way that I look at this, Paula, is I just go through my very very very. options right now. Obviously, Matthew said that it was affordable and that he can continue along the path that he's on now, but he prefer a lower rate. But let's say that that wasn't the case. Let's say that he had to because what I really like about the show is when we explore the options that are available and people can then see what my true choices are. And the way I see it,

there are two choices if he was going to pull the trigger right now. And one is he's, he can make a bet. And I love how perilous that is, Paula, based on everything that you said, because I think people make bets all the time and they truly don't have all the data. And even knowing that the people making the decision don't have the data yet shows you even how much more perilous it is. But if you're going to make a bet, that means you go into either an adjustable rate or a balloon product.

So for people that don't know what those are, a seven-year balloon is where the bank, instead of guaranteeing a rate for 15 or 30 years, they only have to guarantee it for, in the case of a seven-year balloon, seven years. And because they only have to guarantee the rate for seven years, they will give you a lower interest rate than if they have to bet what interest rates are going to be 15, 20, 30 years from now. But balloons are risky because you are on the hook for paying off the entire balance when the balloon comes due, or you could refi, but there's no guarantee of anything if your plan hinges on a refi. Which is why I love going through all these options and how they work.

Because I see people with seven-year balloons all the time. They will choose it. They'll look at the interest rate. The interest rate is pretty low. Oh, what could go wrong in seven years? Yeah. Which is exactly, what could go wrong in seven years? Right.

What could go wrong in seven years. Exactly. The second choice you have is an adjustable rate mortgage. So an adjustable rate mortgage, the rate is going to adjust. And these are going to be all over the place, where maybe it's a low rate for three years, and then it will bump up. maybe bump up again, then bump up again, and it will finally hit a final rate. So that buys you a little more time sometimes than a seven-year balloon will give you,

but you're still betting on rates coming down over a set amount of time, or you're locking in probably a higher rate than what you have right now over the long term, which means that you're going to have to refinance again. The third thing, the third option is, is of course a refinance right now. I'm on bank rate right now as we're talking, Paula. And right there on the front page for refinance, it has a company and it says 6.374% 30-year fixed refinance. Well, hell, 6.374. We're very close.

We can do that right now. Oh, but wait, there's more. Wait, there's a lot more. One lesson that mortgage experts have told me over and over and over is when you read the rate on any website, this is a company's best lie. And the reason is, is there are two factors always included in a mortgage. There's the interest rate and there are the origination cost, which there's a bunch of fees that come with your mortgage. And generally, the company that's offering you a very low rate is also going to lop a bunch of fees on the top end, which are going to make that rate pretty close to the same well everybody else is drinking out of, right? These companies, these banks don't have a lot of room for wiggle.

I mean, they're all playing in the same pool, and it's an incredibly competitive environment. And because of that, when you see a company that's offering a wildly different rate than everybody else is, you can't go skipping down the hallway going, I found this thing. You didn't find anything. What you found was somebody who's hiding information from you. 99.9%. I want to say 99.9%. Let's put it this way, Paul. I've been doing this for over 30 years.

I've never found that not to be the case. Never, ever, ever. And sure enough, as I look into this, 6.374%, 1.72 points. You're going to buy points to get that mortgage. So they're showing you a great rate with paying points means you're going to pay an upfront cost to drive the rate down. He could do that today. He could do that. And he locks in this 6.3.7.

But if he does that, he's paying these huge points, which is going to bring it up toward where he is today. Right. And in addition to that, once you've paid points, you're incentivized never to refi again because you've already bought the rate down. So then the next question is, is there a way to avoid all that? And a way that we would do this when I was a financial planner is called a no point, no cost mortgage. You have to be very clear. with the lender. This is what I'm looking for. No point, no cost mortgage. That doesn't mean points are rolled in. I've had lenders. Look me and then. I go, oh, yeah, this is no point, no, no, no, no, no. No, no, no. I want no, no points. I also don't want to pay any cost. I want the cost rolled in. So guess what they, when they do that, Paul, I guess what they do? They roll all of those costs than the interest rate. So the interest rate is going to be higher than if I

pay the cost up front because they're going to make their money some way. But if it's lower than what I have today and I need cash flow today, for me, there is no downside to doing that. There is no besides the fact, there is one downside, Matthew. And the fact is you're just resetting the 30-year loan. He's two years in. He's got 28 years to go. Now he's going to have 30 years to go. Now you can also mitigate that. You can ask the bank if they can do something called recast the mortgage with a no point, no cost loan. No point no cost recast means they're just going to lower my interest rate and I'm going to have a brand new loan that's 28 years and two months, whatever that is. That's a very specialized mortgage. There's not a lot of people that do that.

But those are some questions I think you can ask if you feel like I want to do something today. If I can find Paula a no point, no cost mortgage and drive that rate down today, I'm not going to wait for the two points. I love everything that you said. but I might be able to do something today. So I love going over all the different options because I would often, when I was a financial plan, I'd see somebody go, oh, I went with a seven year balloon and go straight today. And in the next seven years, rates are sure to go down. No, rates aren't sure to do crap.

Rates aren't sure to do anything. And the banker only told you that so they could get the commission on the loan today. And they're long gone seven years from now when your house is in trouble and you can't afford to refinance the mortgage. Yeah, beware of anything that anyone tells you when they have no accountability for the outcome. So oftentimes when you're buying a home or refying a home, I notice this a lot with buying a home, a real estate agent will say, well, you know, this neighborhood's totally going to go up and value. You have no accountability for that statement. And you're not the one on the hook if you turn out to be wrong. I had clients in this type of environment where

rates have come down from that 8.1. You can easily find interest rates that are lower. Paula, the no point, no cost mortgage is an option that people took. But they're like, you know, I just want lower payments every month. I need the flexibility. My budget's way too tight. I was in more over my head than I thought. And we did a no point, no cost mortgage now. We did another one six months from now. Every time as the Fed kept dropping the rate, and then mortgage rates followed. They don't always follow, as you know. Mortgage rates followed.

They just did it three times in a two-year period, just trying to drive that rate lower and lower. And finally, then they lock it in. And when they got to the point where they were very comfortable, and they knew they could do that forever, they went back to the traditional way of doing it that you're talking about, where there's that two-point difference that one and a half to two-point difference that covers the delta based on the fees that you're going to pay in the mortgage,

makes it worth it. When it got to a comfortable point, then they would do a more traditional loan where they go ahead and they pay the fees. They usually don't pay points, but they pay the fees, which drove the interest rate down much more than a no point, no cost loan does. And then they go back to the traditional life. Right. So there's an option.

That's a more aggressive option. But it's one that a lot of people haven't heard of. They don't know that. And by the way, again, and this is the danger. the banker will look you in the eye and say, oh, yeah, this is no point, no cost. No, no, no. Banker, I'm not talking about cost rolled in. I'm not talking about the fact that you're going to refinance my house and lop on $2,000 more on the new loan to cover the fees.

I don't mean that. I mean the interest rate is higher because I'm literally paying zero fees. And you have to see that on the paperwork. They're required by law to show all your fees. That fee number says zero. and then it's on the table for me. On the topic of mortgage recasting, we actually have callers,

all of whom have comments related to mortgage recasting. Awesome. These comments are actually a response to a question that we answered, if you'll recall, our editor, the guy who edits both the Afford Anything podcast and the Stacking Benjamin's podcast, Steve, best editor on the planet, got to say,

Steve called in with a question. about his own mortgage. And in fact, Steve, since you are our editor, can you play just a snippet of your original question to refresh everybody on what you asked? The purchase price of the house will be $500,000. Our down payment will be $100,000, which we already have put in cash on the side. Our current home is worth about $350,000 and there's no mortgage on it. It's paid off. The challenge, my wife doesn't want to sell our current house until we've closed on the new one. It's going to cost about $3,500 to $3,500 a month. We have additional savings put aside to help us make that payment for a few months, but my income can't support that $3,500

monthly payment for too long. Knowing that our house will probably sell quickly once we do put it on the market, I anticipate we can knock on a huge chunk of that mortgage balance. However, it seems silly to refinance a mortgage has only been in existence for a few months in order to get the remaining balance down to a manageable payment that we can actually afford. How would you go about this? I love the fact that people go back and listen to the episode, Paula, that you and I answered that. But we also said, you can get really creative here. And we've got a phenomenal afford anything community.

So we asked all of you to answer this question. And Paula, yeah, they stepped up. They did it. So let's hear first Angelique called in. And this is Angelique's take. Hi, Joe and Paula. Thanks for helping the world think through various. solutions to an issue. Steve is in the same situation as I am. I chose to take a loan with a recast

provision out on the new house. When I sell my current house, I can put the money toward the mortgage and they will reameterize the loan creating lower minimum monthly payments. I am not charged to fee to use this provision. Thought this would be something Steve would like to know. Thanks from Portland Oregon. Thank you, Angelique. And by the way, Paula, that's what I'm talking about with Matthew. you. If you can recast the loan, use a no point, no cost version of that, it sounds like that's what Angelique did. Didn't cost her anything. She was able to recast it. Perfect. We also heard from Aaron. Hi, Paula and Joe. After listening to episode 487 today, I had a question for you or a comment. One thing you didn't mention to Steve was the option of mortgage recasting, not refying, but recasting,

where you go in and make a lump payment and then the mortgage lender recalculates your monthly payment going forward. I know some friends that do it when they make home purchases and then after they sell other properties and want to change their monthly payment on their existing mortgage. So something to consider. Bye. Wonderful. Thanks, Erin. So big thanks to Angelique and Aaron for helping us out, Paula.

Yeah, absolutely. Thank you. You came through. Absolutely. Thank you, Matthew, for the question, and thanks to everyone from the Afford Anything community who called in to share their wisdom. Our final question today comes from Rachel. Hi, Paula and Joe. I have a question for you all.

Being the FI-minded person in my friend group, I often get questions from my friends. and for the first time, I have one that I really don't have any experience with or know how to answer. To make a long story short, one of my friends inherited a number of investments from the passing of one of her parents and has been sorting those out over the course of a long, long time. And one of the last remaining ones that she has turns out to be the Blue Rock Total Income Real Estate Fund. which as far as I can tell is a closed-end private interval fund. I don't believe the returns on this are very good, and she's wanting to get out of it,

and they are doing a quarterly buyback. And so other than contacting them and seeing what the situation is with that, I have no other idea what to say, as I've never encountered one of these closed-end funds before. So I was wondering if you could tell me, and I guess all of us, a little bit about what these are, other than something with a very high expense ratio, and how she could hypothetically go about getting out of it. Thank you so much for your time.

You know, Paula, there's so many different wild, obscure investment choices. And I know it's confusing, not just for your friends, Rachel, which makes you such a value, friend to have, right? The explainer in your group that when it stumps the money nerd that you realize just how convoluted this gets. But Rachel already knows what I'm about to say in the first part of this, which is, Paul the way I like to think about money and investing is that there's really three levels. There are the base level investments that we just go by directly, right? Which generally for 99.9% of us, the three we're choosing from. When we're investing, not saving are stocks, bonds, and real estate. I can go buy a piece of real estate. I can go

buy a bond. I can go buy a bond. Now, if I go buy an individual bond, an individual piece of real estate and individual stock, I have a risk. We talked earlier with Tatiana about the risks that are out there. And the market risk is the one I think she was alluding to when she said low risk funds. Well, there's a risk when you buy a single stock or a single piece of real estate or a single bond that that company goes under that piece of real estate ends up having, you know, an oil spill underneath the property, whatever it is. So to mitigate that risk, the second level is what I call clamshell packaging. And Wall Street has come up with all this clamshell packaging on each of these to mitigate some of these risks for the average person

in the afford anything audience. And it's very nice. What they do is they take a bunch of stocks or a bunch of bonds or a bunch of real estate and they clamshell package it together. And the reason I like clamshell packaging, Paula, is an analogy, is sometimes I'm going to cutting this stuff open like I cut my finger. And it's because the people that made this clamshell packaging often weren't thinking about me. They're just trying to shove this stuff together and sell it to me, right?

So I got to watch out for that packaging because Wall Street has done us a favor, but also they've created some gotchas. And by the way, we're not going to get into it today. But the third level then is the government then has a wrapper around it. Like in our house growing up, we observe Christmas. And so my grandmother, when I was young, before she would head to Florida for the winter, she would drop off the presents at our house. And it would say, don't open until December 25th.

And if I opened up that wrapping paper, you know, I get my hand slapped. The government slaps your hand if you get in that wrapper. So there's the base level investment. there's a clamshell packaging, and then there's the government wrapping. Now, why is this important? A close end fund is clam shell packaging. The two basic ways that we see stocks and bonds packaged are the old way, which is mutual funds. Now, what a mutual fund does is inside a mutual fund, they buy a collection of stocks, so you're not buying just one. In the very old days, they had managers. They still some of them have managers, but a lot of the times,

It's just a collection of stocks that emulates an index. It can be either an index or managed. But it works like a subway. At the beginning of a day, I can get in. At the end of the day, I can get out. In the middle of the day, it does what it does. And that's the mutual fund. Because of all kinds of advances in technology and advances in just the way Wall Street

operates, they came out with a much more efficient way to do that, which is the exchange trade of fund. For 98% of us, an exchange trade fund, a mutual fund, very synonymous, except with an exchange trade of fund, I can get in and out all day. I don't have to wait until the end of the day. Yeah. I can put a stop loss on if I want. Not sure that I do that. Right. You can do all kinds of things with an exchange traded fund that you can't do with a mutual fund. And I just see that as progress in this area. The frustrating thing about exchange traded funds is that while it's better clamshell packaging with less gotchas in most cases. Companies have not yet made it that easy to set up an automatic investment into exchange

trade. I think that's coming. I'm sure that's coming. And there are some people who will treat exchange traded funds in the same way that they treat individual stocks. There are some people who are just flipping them all day long, right? There are high frequency traders who will trade ETFs. Yeah.

Yeah. You know, so. And that obviously, that's nobody who's listening to this podcast, I hope. Yeah. But there are high frequency traders who are flipping ETFs all day long. But the cool thing is because it's a more modern type of investment over the mutual fund, the fact, Paula, that they can use it for these diverse opportunities and in different ways makes it much more flexible. But it still is clamshell packaging.

Close end fund is clamshell packaging that was created by brokers to be able to, get more money out of people. And what happens is you have the underlying investments like you do in a mutual fund or exchange traded fund. The value of those funds, the price tag called the net asset value in a mutual fund or just the share price on an exchange traded fund, really same thing. That's based on what the underlying securities are doing plus whatever the very low management fee is on top of that. in a close end fund, everybody is trapped in the elevator and outside investors look at what they think that elevator is worth now and in the future. And the price is going to move independently of the assets on the inside.

It will, the price will move based on speculation, based on the number of people that want these investments, based on a whole bunch of factors. Now, there are public close end funds that you and I can get into any day. and people will speculate. They'll go, oh, I think real estate's going up. I buy a close-end fund, and a close-end fund may go up faster because of the mania around real estate in a certain environment or around the price of collection of stocks or whatever it is. It will also go down faster because people are speculating. So close-end funds add that.

Now, when you make that private and you can't get into it at a minute-by-minute day-by-day basis, now you're, you've got to go to the company and you have to ask them, how the holy hell can I get out of this thing? And it is much more, Paula, like another clamshell packaging. In my opinion, and we might get some pushback on this and I'm okay, I'm okay with that because I am making a lot of generalizations here. So people just kind of understand where we're going, almost like I'm sure Rachel does with her friends when she's trying to explain this over, you know, over a foamy beverage or a dinner. another clamshell packaging in the real estate area is a timeshare. Ew. Yeah.

And this type of a close end fund, to me, to me, these are fighting words. It's kind of like a timeshare. Right. Where there's not a lot of people that want to buy these things because of the speculation, because of the nature of it, I can just go, why would I just go buy an exchange rate of fun or buy a mutual fund? Yeah, you know what? That's actually a good analogy because the sucky thing about among many sucky things about

time shares is that they're hard to get out of. Yeah. As are closed-end funds. And so, Rachel, what you have to do is you have to ask the company for the paperwork that tells you how to get out. Generally, what they do is they have a buyback once a quarter. And I think you explain that in your call, that they do have a, that they have a periodic buyback.

They'll have some forms you have to fill out to get back. And you're going to get whatever the going rate is, which is going to be different than the underlying assets inside of that fund. It will be based on the amount of people that want it versus the amount of people that want out. And if you know anything about time shares, you know how that's going to go. Just because of the locked in thing, and especially one that's been around for a long, long time, there's a hell of a lot more people trying to get out than there are people getting in.

And they may have provisions that once a quarter, they're going to let X amount of money out. This, by the way, makes sense to me. The reason it makes sense, Paula, is if this is investing in real estate or it's invested in some asset that is not liquid, to avoid the close end fund collapsing on top of itself, they can only sell off a bit at a time. Right. And so they're like, okay, we understand everybody wants out, but we're going to let 10% of you out this quarter. And then the next 10%.

So the goal here then, Rachel, is to get your name in line. fast as possible. So that maybe six months or, it depends on how many people are in line. If it's three months from now, six months from now, nine months from now that you have your name in paper, that you request your redemption.

Unfortunately, you're going to get whatever you're going to get, and it probably ain't going to be good. So the sucky news is that these funds are tough to get out of. The good news is you at least understand the landscape quite a bit better. Yes. And Rachel, feel free to steal that.

Do not quote me. Make sure your friends know what a badass you are as you explain to them how close-end funds work. It will be our secret that we shared this moment together. Well, thank you, Rachel, for the question. And props to you for being the person who helps their friends with their finances, right? And I think a lot of people who are listening to this episode are that person in their friend group. You're the one who's known as the finance person among your friends. and you're the one who is constantly helping your friends with their financial questions.

So props to everyone who's listening, who is serving that role among your friends and family. Well, Joe, we've done it again. It was so fun. So, so, so, so fun. Always. Joe, where can people find you if they'd like to hear more about closed-end phones? Or not. I think one close on fund a discussion every four years.

Yes. Every time that there's a leap day, we will have this conversation. And then we will close the conversation until the next leap day. See you again in 2028. You can find me at the Stacking Benjamin show along with the Paula Pan. Our contributors to Stacky Benjamin's Paula are badass. And what's funny is you and I learned so much from Mr. Penzo. He was one of the original Plutus Award winners.

He has this very quirky blog. And you guys and our co-host OG, Mom's Neighbor Doug, we mix it up every Friday and talk about some great, great stuff that people are writing. Sometimes really great stuff people are writing on the internet, the blogging community's writing. And sometimes we talk about stuff that we completely disagree with, the blogging community. is writing. But on Fridays, you'll get more Paula, our friend Len, OG, Doug, and me on stacking measurements. And it's always a lot of fun. Well, thank you, Joe. And if you enjoyed today's episode, please share this with friends, share it with family members, neighbors, colleagues,

share it with the people in your life. That's the most important thing that you can do to be the finance person in your friend group. Also, subscribe to our show notes, afford anything.com slash show notes. Again, that's afford anything.com slash show notes for a synopsis of every episode and timestamps for all of the questions and loads and loads of goodies that we share with our show notes subscribers. Finally, chat about this episode with the community, afford anything.com slash community. Thank you so much for tuning in.

My name is Paula Pant. I'm Josalci. Hi. And we will catch you in the next episode. I was love when you learn new languages and you learn some of the common phrasing's like, thank you. You know, like, thank you versus so many of the other languages is so clunky. Thank you.

Just does not roll off the tongue. You know what I mean? Yeah. How about garazzi? Yeah, that does roll off the tongue. Merci. Like, just beautiful, like beautiful. I don't remember what it was in Indonesia, but it was very beautiful in Indonesia, too.

It's terrible in Nepali. It's way better in English. Yeah, seriously. But isn't that fun? It's so fun to take different words. And some of them, you're like, why don't we go with that? Another ones, you're like, whoever decided that word. Yeah.

No, thank you. It's like, I feel like it's equal opportunity across the board. Like some places, they got it right in a place you're like, uh-uh. Yeah. In Nepali, it's a Doniabad. Holy cow. I know, right? No one ever says it.

I think we were trying to say that last week while we, were just, we were on a road to go, we were, we were on the road to go hiking and we were flipping through Cheryl's book. And, and she was like, oh, God, I don't know how I'm to be able to say thank you. Don't worry. Nobody says it. Literally nobody ever says it. You just say it in English, because like it's no one ever says Donyavad. It's, it's like, that's a, that's one of those textbook words that no one actually says in practice. Yeah. Like swagatam, which means welcome. Nobody ever. says that in practice. Swagatham. Yeah. Yeah. Wow. Swagathom. Yeah. Swagathom.

It's so funny. It's like the first time, you know, for a long time before I knew anything about languages growing up in Michigan, right? That, I remember Prego spaghetti sauce coming out. You know, forever I eat this sauce. And then I go to Italy and I find out for the first time that Prego means, you know, you know, forever I eat this sauce. And then I go to Italy and I find out for the first time that Prego means, you know, you know, you know, you know, you know, you know, forever I eat this sauce. And then I go to Italy and I find out for the first time that Prego means, you're welcome. Like if you had Prego, like, no. Prego should be, I'm sorry. Prego should be you picked the wrong one.

Prego should be real Italian is so much better. Like what's the, how do I put that? But you're welcome? what a cocky tomato sauce you know I'm like it totally is

Prago like you you you