Afford Anything - Q&A: Her Brother Owns 3 Houses — Is That Why We Have a 'Housing Shortage'?

Episode Date: July 21, 2026

#734: Depending on which source you ask, the U.S. is short somewhere between 1.2 million and 10 million homes — and the reason for that wild range says as much about who's counting as it does about the shortage itself. 👉 Free cheat sheet: which investments belong in which account: https://affordanything.com/assetlocation This week, Paula and Joe tackle three listener questions: whether the housing shortage is real or a wealth-concentration problem, whether a 26-year-old should pay off his mortgage or keep investing toward financial independence, and how to simplify a portfolio spread across 13 funds. We discuss: Whether the housing shortage is real — or just wealthy people buying vacation homes Why entry-level starter homes are in shorter supply than luxury homes - A simple way to add housing supply in your area while increasing your own rental income How to simplify a $1.5 million portfolio spread across 13 funds without losing tax efficiency Which investments belong in a Roth account vs. a 401(k) vs. a taxable account Why taking a 30-year mortgage (and paying it off fast) can beat a 15-year mortgage How to decide whether to pay off a mortgage early or invest the difference instead Whether you're trying to make sense of housing headlines, tidy up a portfolio that's grown out of control, or figure out what to do with extra cash each month, this episode will help you think more clearly about the trade-offs. ⏱️ TIMESTAMPS Note: Timestamps may vary slightly depending on dynamic ad placements. (01:41) Is America's housing shortage actually real? (06:29) The real numbers behind the housing shortage (14:29) A stunning stat on building permits vs. new jobs (24:32) A simple way to add housing and earn more (28:23) A caller's plan to retire in 15 years (33:01) Which accounts should hold which investments (40:22) Why more funds can beat fewer funds (52:19) A costly bias that skews money decisions (58:46) Should a 26-year-old rush to pay off his mortgage? (1:09:04) A gut-check for choosing between two paths 🔗 RESOURCES 👉 Free cheat sheet: which investments belong in which account: https://affordanything.com/assetlocation 👉 7 Expensive Rental Property Mistakes to Avoid (free guide): https://affordanything.com/rent 👉 Practical Investing and the Efficient Frontier, with Joe Saul-Sehy: https://www.youtube.com/watch?v=Tz59b5H5puw 👉 Submit your own question for a future episode: https://affordanything.com/voicemail Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, have you ever owned a second home or a vacation home? I did. Well, I owned a rental property. Oh, but that's different. That's not a vacation home. No, I have not. I've not looked into it, but I never have purchased one. No.

Yeah. All right. So we're going to answer a question from someone who knows people, has family members, who have second homes that stay empty, vacant, unlike a rental property. And she's wondering, is there really a housing shortage? or are there just a whole bunch of people who have a whole bunch of vacant homes sitting around? We're going to answer that question. We're also going to hear from a woman who wants to retire in 15 years with an annual

retirement income of 100,000. And we're going to hear from a gentleman who is 26 years old. He has a very good income, especially for the age of 26. And he is planning on buying a $350,000 home. What does he need to know? We're going to tackle all of that right now. All of that. Welcome to the Afford Anything podcast, the show that knows you can afford anything, not everything.

This show covers five pillars, financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's double-eye fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia. Every other episode-ish, I answer questions from you, and I do so with my buddy, the former financial planner, Joe Saul C-high. What's up, Joe? You know, Paula, I just bought a new pair of shoes. I've just decided I'm not going to buy anything Velcro anymore because it's just a rip-off.

Come on, come on, people. With that said, let's hear our first question, which comes from Karen. Hi, Paula and Joe. I keep hearing that the U.S. needs to build more housing because we have an under supply. However, I often wonder if we really do have a shortage. See, I have a brother who is. a patent attorney. He's also married to a patent attorney. Needless to say, they have a lot of money. They own three houses and will possibly buy a fourth near his wife's family. These houses are all for

their personal use. So I wonder if our country is actually short on housing, or if, due to high income inequality, we just have wealthier people buying up a lot of the available supply, which, let's be honest, is at price levels most normal people couldn't afford anyway. could you provide some clarity on the housing supply issue? Thanks. Wow. Yes, Karen, I love the question. And yes, absolutely. Now, bear with me while I put my nerd glasses on because I pulled up a bunch of stats to answer this.

So short answer, yes, we have a massive, massive shortage. How big of a shortage we have is going to vary depending on who's measuring it. And a couple of nuanced points that I want to bring to the forefront, there is wide variation in terms of where the shortage is located and the price point of the shortage. So, Karen, when you talk about a wealthy brother who's a patent attorney and has a bunch of vacation homes, two things. Number one, when people buy vacation homes, oftentimes they are buying higher-end luxury homes, which is different from entry-level starter homes.

And that's, our shortage is largely concentrated in the entry-level starter home domain. There's shortage all throughout, but there is more of a shortage in the entry-level starter home domain. And those are not the homes that wealthier people are buying a second home. So the type of housing is pertinent to the discussion, also the location of housing. So generally, when higher-income people buy vacation homes, they're buying those homes. in Aspen on Hilton Head Island. They're buying Fort Lauderdale,

like they're buying those homes in desirable vacation destinations. Mackinac Island and Michigan, right? These are places that people like to go to for vacation. Whereas the cities and towns and major metro areas where the housing shortage is most prominent and we're going to go through a lot of detail in just a moment, those are not vacation destinations.

Those are places where people live, where people have jobs, but they're not places largely where people tend to have vacation homes. So you ready, Joe? I am certainly ready. And I even think, you know, and I love that you're about to put some nuance on this, but if it weren't as nuanced as you're about to get into and wasn't so location specific, I still do think that there's a housing shortage. I think somebody owning three homes means.

that we do have more of a housing shortage. If I make enough money that I decided to buy three houses myself, it contributes to more of a housing shortage. I feel like on one hand, she is putting some stank on her brother for owning three different houses. But if there weren't houses on this property, if he chose to have 100,000 acres of land, let's say, it wouldn't have been a problem. It would have been, you know, he's so wealthy, he owns 100,000 acres of land. But if he has 100,000 acres of land that has eight bedrooms on it, well, then we immediately go, well, wait a minute.

Is this, you know, are these available houses or is this not available houses? Yeah, yeah. So, Joe, I think you're talking about the distinction between Karen's asking about the absolute number of houses and you're talking about housing availability. So we're talking about the distinction between the absolute number of houses in existence. versus housing availability. Yeah, which means the question is, should someone who has extreme wealth be allowed to own three houses or five houses?

Yeah. And so the stats that I'm about to present demonstrate that the absolute number of houses, regardless of who is the owner, the existence of the absolute number of houses is in severe shortage. So, ready for those stats? All right. Bring it. We'll start with Zillow, which puts the shortage at 4.7 million housing units.

Oh, that's it. Yes. So there's a wide range. So bear with me because the White House Council of Economic Advisors says 10 million homes. So this is a 2026 report from the economic report of the president says that there would be 10 million more homes if home building had continued at its historical pace. Zillow is putting it at 4.7 million. Freddie Mac is putting it at 3.7 million. units below what's needed given the current population.

Notably, their current estimate, as of Q3-20204 was $3.7 million. Their 2018 estimate was only $2.5 million. So in the previous six years, the Freddie Mac Gap grew by roughly 50%. Realtor.com put the shortage based on their 2026 housing supply gap report. They put the deficit at 4.03 million homes. That's as of 2025. Again, that is a rise from the 2024 report where they had put the shortage at 3.8 million homes. The Congressional Research Service, they actually have a lot of studies inside of it.

So a meta-analysis, which means a meta-analysis means you're analyzing all of the analyses. So you're putting together a big bucket of analyses and looking at all of them together. In this big bucket of a meta-analysis, the CRS is summary says, that the shortage is between approximately 4 million and 5 million units. Although these estimates vary based to number one on data sources, number two on the target vacancy rates, because you can't have 100% occupancy, and number three on methodology in terms of measuring vacancy and occupancy. But somewhere between 4 to 5 million is what Congress, the Congressional Research Service says. Finally, one more, one more, one more. National Association of Home Builders, they put the

shortage. That's the low end estimate. They put at only 1.2 million housing units. Some of these numbers surprise me. Yeah. Generally, when you look at this, we talk about this with financial advisors, right? Look at the incentives. Generally speaking, people will create a methodology of creating statistics, which will help them toward their incentives. I'm so surprised that that home builder's number is so low. I would have expected them to have the biggest number, especially with, as we record this, the legislation sitting in front of the president that it appears he may end up ignoring, which is going to make it easier for home builders to build houses faster, to speed up some of the regulatory loopholes that they have. So I would have expected that number to be the biggest one to be like, oh man, it's 12, it's 15 million.

The other thing is surprise to me is the fact that those two numbers are so, so, so different. Yeah. Well, part of what's going into Freddie Mac's estimate is that Freddie, Mac is also taking into account that, according to Freddie Mac, one million U.S. households simply have not formed. So Freddie Mac is taking household formation into account because of the affordability strain. And so based on, this is where the methodology gets really, you know, different. Freddie Mac, part of their report, states that there are people, so, for example, If you live with a roommate, then you and your roommate, if housing conditions were more affordable, you and your roommate would each have their own condo or you would each have your own single family home.

You would each live in your own separate autonomous dwelling, which means you and your roommate would form two separate households. But because of affordability conditions, if a person lives with a roommate, then what would have otherwise been the formation of, two households gets consolidated into the formation of one household, right? And then you think the households have three or four roommates. That's four households that have now been consolidated into one household. And then you think about people who are in their 20s or 30s who are still living with their parents or living with grandparents or uncles or aunts. Again, that is lack of household formation. So part of the reason that there is so much variation in the estimates is that some of these stats are purely looking at homes that have not been built,

whereas others are also taking into account households that have not been formed that otherwise would have been formed. Just to give a further context in terms of what investment institutions and other private institutions are putting the shortage analysis at, and bear in mind, these are all independently run analyses. Moody's says that there's a housing shortage of two million. Goldman Sachs says there's a shortage of three million. We've talked about Zillow already, which is over four million. Brookings says five million. McKinsey says eight million. So across all of these private investment firms, consulting firms, private institutions running their own independent analyses, the number, the shortage, and again, this is not housing a village. And again, this is not housing a

which Karen's question was about housing availability. Is there an adequate supply of housing, but the availability is skewed? That was Karen's question. All of these studies are around absolute supply. And all of these studies are saying that the shortage in absolute supply is somewhere between a shortage of 1.2 million units to the low end of the estimate is 1.2 million. the high end is 10 million and the kind of consensus number seems to be somewhere around four to five million. And the consensus is nobody saying there's not a shortage. Right.

You're right. There is nobody saying there's not a shortage. And the fact that their numbers swing by millions just blows me. Of course, in a country with 340-ish million people, what's one million or two million difference between Fred's? Right, right. Yeah, as a percentage of total. number of households. Now, there is, Karen, there is nuance to this. Again, whenever we talk about

national housing stats, stats get flattened whenever you're talking in national numbers because there is so, as I often say on this podcast, there is no such thing as the real estate market. There are just many, many, many hyper-local micro-nitch markets. And so to go to your question, where are wealthy or high-income people buying their second homes, their vacation homes. Generally, they're buying those homes in Aspen. They're buying those homes in Hawaii. They're buying those homes in desirable vacation destinations. That tends to not be the locations where we see the most acute housing supply.

The state with the biggest supply shortage is California. Of course, California is a large state generally. But is it biggest by percentage? as well? Well, the stats from Zillow state that relative to, this is not for California broadly, but specifically for Los Angeles and San Francisco, as well as New York, Boston, and D.C. Relative to the population, they have the largest housing deficits. That's among the 50 largest metros according to Zillow. A little further nuance to that is that we are seeing population decline in some of those cities. So New York City has the large.

largest gap at 400,000 units. Los Angeles has the second largest at 337,000 units. And so, Joe, to your question, is it relative? Again, this is not by state. This is, I'm looking right now at the NAR housing shortage tracker, the National Association of Realtors Housing Shortage Tracker. Among major metros, I mentioned Los Angeles has the second largest shortage. They have, on average, one new housing permit for every three new jobs. Wow. Wow. Yeah. Yeah. Well, there's a stat right there.

Yeah, exactly. So, yeah, again, going back to absolute number of housing, one new housing permit for every three new jobs, you can see how that concentration would really grow. The shortage concentration would grow in specific locations. We also have some really wonky economic data right now, Paula. I read this last week and I just pulled this up again back to the National Association of Realtors and their last quarterly data. The supply of houses is up nationwide moderately.

So it's up. Relative to last year? Yes. Yes. Yes. Correct. And there are fewer buyers. There are fewer closed sales than there were this time last year.

even with that data. So you would think one plus one equals two, more supply, fewer buyers means prices come down. Prices actually up. Prices up about 2.8% year over year. What's interesting, again, is that this is partially Paula because of the fact that we don't have a national real estate market. And in places where prices are up, they're up a lot and they're up on those luxury homes. So 43% of sales in the last quarter were in the luxury category.

There's 43% of sales and prices up 4% year over year. Now listen to this, 250,000 to 500,000, 45% of sales, the biggest chunk, prices up only 1.5% year over year, much more like a normal inflationary number. Well, even 4% could be a inflationary number. But homes under 250% only 12% of total sales, but a lot of homes of under 250,000. Under $250,000. Yeah, what I say? Under $250.000. You said $250. Yeah. Homes under $250,000, only $12% of sales. But prices are down 10% from a year ago. So prices on affordable housing actually are coming down. Prices on luxury housing.

the ones that our color is asking about. Exactly, which is why it can be flattening and reductive. Again, anytime you're talking about broad aggregate numbers, you know, when you're commingling entry-level affordable homes with luxury homes, I mean, you're talking, that's the equivalent of asking about the price of pants on TEMU versus the cost of a pair of pants at Nordstrom. Shoppers at Timo and shoppers at Nordstrom, are in different markets and what might affect pricing at the Nordstrom level does not necessarily

correlate to pricing at the TEMU level and vice versa. And this might be our first big aha of the episode is that when you hear statistics, what a lot of us do, Paula, is we draw conclusions. Immediately, we draw conclusions. When we hear, as an example, you know, just taking the one that I shared just a moment ago, the fact that we have more inventory, but prices are up. When you parse the data, it doesn't look at all like we first thought. And so when somebody presents you with a bunch of statistics, it is best to them begin asking more questions and see if you can separate it down to figure out more about where these stats actually come from, who are the people with the stats, what are the incentives behind the stats?

And then third, maybe when we look more granularly at the data, is granularly a word? Yeah, yeah, granularly. Yeah, it's a word. So when we just, it's difficult for my tug to form that whole word. The adverb form of granular. When we take a more granular look. That's a much better way. I should have said it that way.

We find that the data makes much more sense. Right, right. Oh, I found on a subject of data, this is what I was looking for earlier with regard to a couple of structural patterns around locations. So coastal metros, L.A., San Francisco, New York, are losing residents, but they have a lot of regulatory constraints that are keeping both demand and pricing high. Whereas in places like Phoenix, Austin, Dallas, Atlanta, Miami, they have much more lax regulatory constraints, but they just can't build fast enough to keep pace with population and job growth. In Atlanta or Dallas, it's a throughput issue. Like, it's just a can you build fast enough

to keep pace with all of the people who are coming in, whereas in, you know, in New York, it's a regulatory issue. So some of the constraints are different depending on what location you're looking at. And then you've got places like Central Florida. You know, Austin and Central Florida, both Austin, Texas and Central Florida, those two places in particular have really done an amazing job of building fast. Like loosening regulations around building. One thing Austin has done very, very well is they've let people build ADUs in their backyard, especially with the growth that Austin has seen, it could have become a housing

crisis and it is not. You see the same in central Florida. That entire band from Clearwater, Tampa, St. Pete, all the way over to Melbourne, like coast to coast, that whole central Florida band, you. you just see so much new construction. If you want to buy an affordable home, go to Melbourne, Florida. You can get a home there for nothing. I mean, it's just, if you want to be an owner, Melbourne, Florida is the place to do it. So there are pockets of the country that have a housing surplus, very localized pockets. But that's very different than Karen's question,

which is around vacation luxury home availability. Yeah, yeah. And by the way, Melbourne Chamber Commerce, if you'd like to sponsor this episode, is that you have afford anything. A few other stats. The South in general has the largest cumulative deficit in raw numbers. So the South has a deficit,

according to Stock Titan, this data from Stock Titan, the deficit in the South is 1.62 million homes. but the northeast faces the most acute shortage when measured against cumulative construction since 2012. So the South has been beat up for the longest amount of time and so has the most cumulative damage, but the Northeast has the most acute damage in a shorter period of time. So again, going back to all housing is local.

One interesting note, there are no cities in the Midwest that appear in the list of the top 20 metros with the worst shortages, which is to say the Midwest, relative to the rest of the country, is doing a lot better in terms of the shortage, the supply problem. And in terms of affordability, then, might be a great place to focus on if you're location independent. Yeah. So if you don't want to move to Melbourne, Florida, there are going to be a lot of places,

a lot of places in the Midwest where you're going to find that affordability. live in Cincinnati where Pullet grew up. Yeah, Cincinnati where I grew up, Indianapolis, where I own rental properties. Another cool town. Exactly. Of the top 50 major metro areas, Memphis has the lowest overall shortage. Actually, according to ABC News 27, the Memphis shortage is just over 3,300. So we're like measuring it at a four-digit number, like in the low thousands.

Very close to adequate supply. Yeah, exactly. Like that, I mean, that's like a rounding error. Sure. Yeah, that's getting pretty close to rounding error. So, anyway, so Karen, I hope that adds some context and some nuance and flavor to your question. The short answer is, yes, we definitely, definitely have a severe housing supply of somewhere between 1 to 10 million units nationwide. although how severe that supply is in terms of how it affects you is going to vary depending

on if we're talking about entry-level housing versus higher-end luxury homes and also if we're talking about a coastal major metro area in California or New York versus a city in the Midwest. Yeah. And I think this isn't good news or bad news, but I think we also figured out we can't blame the national shortage on her brother. I'll let her decide if it's good news or bad news. I've had times where I go both ways. Sometimes with my siblings, it's been good news. Other times it's bad news.

You're looking for any excuse to blame all of our nation's problems on your siblings. It's all my sister's fault. Well, thank you, Karen, for the question. We are going to take a moment to hear from the sponsors who make the show possible And when we return, we're going to hear from Sarah, who has a goal of retiring in 15 years with a retirement income of $100,000. That is up next. This episode is brought to you by L'Oreal Group. Beauty is a powerful force that moves us.

That's why L'Oreal Group has built a business that is inclusive at its heart with 100% of its brands, championing diversity. With 25,000 professional opportunities for people under 30 world. wide and 54% of leading positions held by women. Diversity is a strength that helps L'Oreal group create the best beauty products for all people. Visit laurel.com to learn more. When WestJat first took flight in 1996, the vibes were a bit different. People thought denim on denim was peak fashion, inline skates were everywhere, and two out of three women rocked the Rachel.

While those things stayed in the 90s, one thing that hasn't is that fuzzy feeling you get when WestJet welcomes you on board. Here's to West Jetting, since next. 96. Travel back in time with us and actually travel with us at westjet.com slash 30 years. Welcome back. Before we get to Sarah's question, there was something I meant to say at the end of Karen's question that I forgot to say, which is, I am a big believer that if you want to do something to improve the housing shortage, increase density. Just do what is in your power. If every single one of us increases density by way.

one unit or even heck one bedroom. If all of us do our role in that, if that happens at a wide enough scale, that has a powerful effect on increasing the total housing supply. And so I am a big, big, big believer in if you want to both do well and do good, if you want to make more money and also increase housing supply, buy a home with a basement that can be converted, like a walkout basement that can be converted to an autonomous dwelling unit. So now you've got a single family home with a walkout basement, right? You turn that walkout basement into a separate unit. Now the single family home that you bought is two units instead of one. You have just played your part in increasing the number of units available. You've just doubled from one unit to two.

You can do the same thing if you buy a single family home that has a detached garage and you convert the detached garage into becoming its own unit. You can do the same thing if you buy a home and build an ADU, an accessory dwelling unit in the back as an autonomous independent unit. You can even do the same thing. If you can't necessarily create an entire separate unit, if you get a two-bedroom home and you have, let's say you've got a large living room, For the cost of some drywall and a few two-by-fours, like it's very, very cheap to build a partition wall, you can put up a partition wall and turn a two-bedroom into a three-bedroom. And now you've created more housing density. So a larger family, and large families often struggle to find places to live, a larger family can live there. And what's beautiful about this solution is that you're doing something proactively to address the nation's housing shortage, which is a serious problem.

And you yourself as a rental property investor are making more money because now you have just purchased a single family home and turned it into a two unit. Or you've purchased a two bedroom home and you've turned it into a three unit. So you yourself are making more money and you're also making a positive contribution to this housing supply shortage. So I'm a big believer in doing that. Number one, I just want to say that. Number two, if you live in a high cost of living area like I live in Manhattan, right, You're obviously not going to do that in Manhattan, unfortunately, even though Manhattan needs it. You're going to do it in a place where you have cheaper costs.

You don't have the regulatory burden. You know, you don't have the permitting and red tape burden. And you're going to do it in a place where the numbers pencil out such that it makes sense to do it there. So all of that is to say, we've put together this free guide and it's seven expensive mistakes that first time real estate investors make, it's totally free. You can download it at Afford Anything.com slash rent. That's affordanything.com slash rent, particularly if you live in an expensive area and you're thinking about investing in a less expensive area. Like you live in New York, you're thinking about investing in Indianapolis. Or even if you don't, even if you live

in Indianapolis, and you're thinking about investing elsewhere in Indianapolis, but you want to maybe turn a two bedroom into a three bedroom, regardless of whether you're investing locally or out of state, these are just some of the mistakes that you should avoid. It's a free guide, afford anything.com slash rent. With that said, let's turn to our next question. Comes from Sarah. Hi, Paula and Joe. I'm a second time caller here. I called in a few years ago with the question about adjusting the 4% rule for expected differences in spending over the years as a way to safety check what my financial planner was doing. Your answer and what I learned from listening to your podcast helped give me the confidence and knowledge to take an earlier

mini-retirement. Since that call, I took a couple years break from work, spent time with my kids, relocated, bought a house, and returned to work about a year ago. I was working with a financial planner that charged a flat annual fee to help me through a lot of change and uncertainty, and also investing some money from equity I had in my last employer. I made the decision to self-manage my money now that I am back to work and expect the next five to ten years to be really stable. I'm hoping to retire in about 15 years with the retirement income of about $100,000 per year. My question is about how to take over what my financial planner was doing and simplify in a way that is more manageable for me to do myself. I have about $1.5 million invested that was being managed by my financial planner and is split into just over a million in a rollover IRA, $150,000 in a Roth IRA, and $325 in a taxable account.

I also have about 500,000 in home equity and 25,000 in a 401K. Now that I'm looking at my portfolio myself, I'm invested in 13 mutual funds and ETFs that include things like a global rate in 1 to 3 and 20 year bonds. My IRA, Roth IRA, and taxable account also all have the same allocation. This seems too complicated for me to maintain and know where to invest any new money, and I also think each of these accounts should be allocated differently. My question is about how I can make this manageable for myself. I know I don't have to worry about tax in the IRA and Roth IRA

by where to replace any funds, and I know that I'm limited in the taxable account without triggering taxes. I'm mainly looking for how to reduce how many different funds I have, like can I go to three or four? I would also like to make my asset allocation more efficient. I would really appreciate any advice on how to simplify my portfolio you. And thank you again for everything you've taught me and the profound impact it has had on my life. Thanks.

That's so exciting. The fact that she was able to take the mini retirement and get all that done. It's just great. Yeah, it's incredible. Sarah, thank you for calling back. And also congratulations on what you've done, on spending that time with your kids and relocating. And Joe and I can give you information, but you're the only person who can make changes in your life. And so it's incredibly gratifying for us to hear that you've actually taken this information, taken action on it, and used it to live a better life. As always, Paula, when we have questions like this, I think it's important to take what seems initially complex, because you can hear a lot of complexity in this question. Yeah. And to really boil it down to what are the truly important

pieces of the question. And there's a couple of questions that I would have back to her. The first one is she says she thinks these accounts should be allocated differently. And what I would have loved to have heard was how. How does she think they should have been allocated differently besides more simply? I have thoughts on that. Well, me too. But I would have like to have seen because it might have given us an idea toward what her end goal is and what would have made hit her happier. Second is she says she wants to be more efficient. Efficient means so many different things. I hear that she wants it more simple. Does she mean more tax efficient? Does she mean more smooth ride toward her goals? Is that more efficient? Like I'm not sure. Efficient is a word that

sounds phenomenal, but it can mean so many different things, depending on how you apply it. So I'm not really sure how she wants it to be more efficient. But that said, I knew you'd have ideas. And of course, I have a bunch of ideas, too. Well, when she said that she wants it to be allocated differently, you know, she's got exactly the same allocation in a tax deferred traditional IRA as well as a Roth IRA, as well as taxable account. So you think about the three different tax treatments, right? Tax deferred, tax exempt, taxable. She's got the exact allocation in accounts with all three of those tax treatments. So when I hear her say that she thinks it should be allocated differently, which I completely agree with. And when I hear her say that she wants it to be

more efficient, I interpret both of those statements to mean she wants good asset, yeah, asset location. She wants better asset location. It is so funny because for people that aren't with us on you two, I'm holding up my notes, but check out what I drew. I drew a little text triangle. Ooh. Immediately, Paula, we're on the same page. Yeah, yeah, exactly. And just for people who are new to this, who are wondering what the heck we're talking about, here's how asset location works. There are three different types of accounts that you can create that have three different tax treatments. One is tax exempt.

So a Roth account, Roth IRA, Roth 401K, those are tax exempt accounts. That means that in the year you make that money, you pay taxes on that money. But everything that you put in to that Roth account or that tax exempt account, all the capital gains, all the dividends, all the growth forever will be tax free. And so whatever you expect to grow the most should go into the tax-exempt account because all of that growth is tax-free, right? So you don't want to have your bond allocation in that account because that's not going to grow as much as the small-cap allocation or depending on your philosophy. Maybe there's a lot of controversy over like mega-caps, whatever you think is going to grow the most. some of that is speculation, but whatever asset class you think is going to grow the most, maybe it's small caps, maybe it's large caps, whatever it is that you think is going to grow the

most. I keep saying that. That's what goes into your tax-exempt accounts, your Roth accounts. That's an example. That's what we call asset location of you're not disrupting the overall asset allocation of your total portfolio, but you are making a decision that a point. portion of your portfolio is going to go into the account that has the best tax treatment for that portion, right? You do the same thing with your tax deferred accounts. Those are the accounts

in which you don't pay the taxes in the year that you make the money. So you get a tax benefit in the year that you make that money. But down the road, you know, 20 years down the road when you're taking out those dividends in capital gains, that's when you pay the Piper. So you're going to be paying the Piper on a much, much bigger sum of money, right? And then taxable is taxable. And I think when you take those and you start looking at asset location, of course, then there is the investments that throw off the biggest tax price. You might want to put in either the tax-free bucket or into the pre-tax bucket, the most tax-efficient ones. You probably want to put in the taxable account side because of the fact that they're going to be much more efficient.

But even more than that, to me, I think I look at these three and I think about them in terms of flexibility and utility. The biggest utility bucket, the one that's really going to be useful as a Swiss Army knife later is the tax-free one. Because I can then maximize tax brackets down the road whenever I feel the need. The more money I have there, the better off I'm going to be when it comes to maximizing tax brackets. bracket concern. So let's say I'm living in the bottom of one tax bracket. I can take just the money between the place that I'm living in that bracket all the way down to the bracket below it out of that tax-free bucket. The government thinks I'm living a much cheaper lifestyle than I am. So the cost of money becomes a lot easier with that money in the tax-free portion. So I want to use that

almost like a spread across the entire landscape of the rest of my life, the flexible money, I really want to know what my goals are. So I want to start with, when do I think I'm going to use this money? And then how do I efficiently get money out of that pre-tax bucket so that I don't really flag the government too much? So I'm going to take that out also much more like a spread, but also according to ease of use. So while I can take the money out pre 59.5 or the money in the 401k, maybe age 55, I'm going to choose to minimize my use of loopholes by using it after that just for ease of management. And I think then I'm going to try to spread that money out over time.

So the way I look at these is dependent on your goal, if it's pre-55, I might go more heavily into that taxable bucket first, which means that's going to be your more conservative allocation because it's the first bucket of money I'm going to. And then the other two, because I'm using the more like spreads against each other, I'll be more aggressive in the tax free bucket and in the pre-tax bucket, which then gets to her stated goal is, I'm not going to need this money for 15 years. Now, she didn't say she's not going to need it for anything, but I assume that when she said that retirement's 15 years away, the premise of the question is, this is my retirement money. What do I do with it? Well, if it's 15 years away, those bonds immediately,

in my eyes, go by-bye. They're gone. Yeah, that makes sense. Here's the problem, though, with what I just said, which is if you take what I just suggested there and you do it, I just increased the volatility in your portfolio by quite a bit. And there's a reason why financial planners don't do that. They don't do that, not because they're not afraid of the market, Paula, but because they're afraid of you. They are afraid of their client not being able to hang on to the roller coaster ride that is a higher volatility portfolio.

And so you kind of got to ask yourself, while it makes sense over long periods of time to beat inflation, and the best way to beat inflation is to buy the companies that create the inflation in the first place because the cost of a handbag or the cost of we were using pants earlier. Yeah. The cost of pants. Tewu versus Nordstrom. Yeah, but for both of those companies, they're going to keep pace with inflation. Well, to create shareholder value, they got beat the pace of inflation. Yeah. So they have to find a way to beat the cost of inflation. So owning those companies makes total sense. So right along with these companies, which have a capital, objective to beat inflation. They're in it for the sustainability of their company. That's why I suggest

owning companies make sense over 15 years. Man, the problem is, though, is that that is a bucking Brock override, Paula. And so I think she has to ask herself if that's okay. Because when she says she wants it to be easier to manage and she wants it to be more efficient, I would actually suggest that those two are a little bit diametrically opposed. And when you tell me that you have $1.5 million of investments, my desire to go along with a simpler portfolio becomes less. I would suggest instead, if you're going to manage your own money at $1.5 million or more, I would become, and this is painful to say, it's going to be painful to hear it. It might rub some people the wrong way. you need to become more comfortable with a rising number of asset classes.

So there's a level of education that I think that you need much more than you need simplicity. You can make it more simple, but at what cost? Because the reason you got rid of the financial planner, I'm assuming is because of the cost. If you make it more simple, you're going to pay that cost, but you're going to pay that cost in returns. You're just paying it out in a different way. In terms of getting more comfortable with a rising number of asset classes, if you have a good dashboard that looks at your holdings, you know, that tracks your holdings and helps you see what you have and rebalance as needed, it's not all that much more complicated. I'm thinking about Paul Merriman. Paul Merriman has a four-fund portfolio, an eight-fund portfolio. He's got a 10-fund portfolio. it's not that much more complicated to manage the 10 fund as opposed to the four fund.

Particularly as a buy and hold investor who is going to one time set everything to the proper allocation and then check in again a year later to rebalance. There might be like the initial day of reshuffling everything. that's going to be the greatest hill to climb, but very much like rental properties, you frontload the workload, and then after that it's just maintenance. I think there's one cautionary tale, which is, I totally agree with you. I think it should be nearly as easy. If you set this up correctly, managing four funds versus managing 10 means you're going to spend maybe 10 minutes more per year, rebalancing. I mean, 10 minutes. However, there's some people that see that as a lot more complexity And again, this kind of goes back to know yourself.

The gentleman who currently hosts the Bogleheads podcast, a Bogleheads on Investing podcast is a CFP named John Luskin. John, at a recent talk, had a great, great slide that I loved on LinkedIn. He said, intelligence is knowing that a 10-fund portfolio beats a 4-fund portfolio over time. Wisdom is knowing you'll never maintain it. If you're not going to maintain it, even if it's only 10 minutes, you definitely shouldn't do it. And then you go back to cost, Paula, if it's cost, because I know people worry about cost. And this is when we get back into the financial planner, no financial planner game.

How are you paying the cost? Because there's going to be a cost. Paul Merriman has shown in his extensive research that there is a cost for reducing the number of positions. Now, there is definitely a, like declining utility. Yeah. Yeah. Going from 10 to 20 does not have the utility going from 1 to 10, right? Right.

Going for 1 to 10, huge utility, 10 to 20, not so much. But I think the answer lies in and how to make this easier. There is a great way that I think about this, Paula. And it goes back to when I, when I sold my financial planning business, I decided to become a high school teacher and a track coach. So I went back to school to get my post-BA teaching certificate. And when I did that, I had to take a class on the way humans learn, on human development. And it's very interesting that when kids learn, you can spend all day. I see these parents that spend all day telling their kid why, why this happens, why that happens. The human

brain is not generally ready for that until much later stages of human development. So telling your five-year-old why we're doing something is not nearly as effective, is saying, just do it. It's because I said so. And the efficacy of telling them why you're doing it makes almost zero change in the behavior. But for an adult, if you don't tell an adult why, it drives us crazy. Because in human development, adults are not going to change unless they know the why. So when she says global reet, and I don't think, you know, she's listing off position she doesn't think she could have ostensibly, I think, global reet. The question that wasn't stated, but that I heard there was, why do I own this? I have these different bond funds. Why do I own them?

What I love about timelining this out and then matching the brokerage money, the non-IRA money, to a time frame and then marrying the pre-tax money and the tax-free money to a time frame is you can begin to answer for yourself the why question. This global re-exist in my portfolio because global real estate over a 20-year period is a fantastic diversifier, which, by the way, it is, and that's why you would hold it. But when I know the why behind it, I don't sit here and look at this thing and I go, this is, I don't, I own real estate in Singapore when I'm sitting in Terrejo, Indiana. What am I doing with a global REIT? Well, once I know the why behind it, it becomes much, much better. So that's also why I want to learn a little bit more about how

these asset classes work, because when I can get the why behind it and I can place it to a time frame. I can marry it to a time frame. I then am not going to blow up or I'm much less likely to blow up my own strategy. I think also using the efficient frontier and Joe, you've done trainings in the past around the efficient frontier. We'll link to a couple of the episodes that we've done. We won't go deep into it. But seeing where these various asset classes map out on the efficient frontier. For me, that was really eye-opening in terms of that why question. Because for me, I actually, it influenced me to not have a REIT position in my portfolio, frankly, because I saw where REITs were along the dimension of both risk and return. And it was

just too far off the plan. Like, relative to the construction of my portfolio, And again, it's going, your mileage may vary, right? Everyone's portfolio is different. But based on my portfolio, by mapping it out on the efficient frontier, I saw that I didn't need a reposition, but some other people are going to reach different conclusions. I like that especially for another reason. I like it because we know things are going to change. And if we know why we hold it, we also then begin to parse out, speaking of, you know, back to this idea, parsing out, data, we begin to parse out when that might not work for us anymore. Because in some conditions, these asset classes work very well and others they don't. And number one, if I understand why

an asset class isn't working well versus why it is working well, I also know why we continue to hold it or why the conditions may have changed. And I need to get rid of it. You and I, Paula, offline, I've been talking about this gentleman a lot. I'm going to bring him up again. Joseph Moore, him up on this show before, the historian. You know, the past does not equal the future. And he goes into this idea that we think that the past equals the future and it doesn't. And what's great about the efficient frontier is it moves. It moves over time. Exactly. And so the one thing that you have to know when you're building an efficient frontier portfolio is that it isn't going to stay on the efficient frontier because as new data comes in, it will change. So you are no longer looking for

an optimal portfolio because then you're just chasing returns, right? Which has always been a fool's errand anyway. Instead, you're getting behind the why I own this stuff in the first place and I'm using it as a construction vehicle in an environment that is much more like a sandy beach and you're building a sandcastle where it's all going to change and your sandcastle's going to get wiped away. you know the conditions under which you built that and you're much, you have the confidence and the fortitude to withstand the changing conditions versus getting married to a portfolio. This is why I don't suggest buying a Paul Merriman portfolio. I love the Paul Merriman portfolios.

Everybody's listening to this knows how much I love Paul Merriman. If you just buy his portfolio, I believe you're chasing returns. I think it's far more important to understand why the hell I, own this and where it fits in my timeline because stuff's going to change. If I buy his portfolio, I think the past is going to equal the future. It's also why I'm not on board the risk parity train. I know risk parity is hot with some audiences. I think it's great. It's been great. The past does not equal the future. I'd much rather understand why the hell am I owning so many managed futures in my portfolio. I don't get it. I don't think it's something that we should own in the future. So I'm not a fan

of risk parity, which is interesting because you get risk parity, how? From the efficient frontier. The efficient frontier is kind of a first step toward that. But I think it's important to understand why I love the efficient frontier and I don't love some of the places people have taken it. I'm just going to press the easy button and buy this or buy that. Well, then you ruin the reason why you were doing it in the first place, which is getting why I own this.

The biggest problem I saw in 16 years as a financial advisor was not that you had the wrong asset classes. It was that you blew up your strategy. And my whole methodology of constructing a portfolio is a way to help you avoid blowing yourself up, which happened far, far, far more than people think. Right. I had a friend who asked me for some advice. He's 48 years old and essentially has almost close to zero, close to zero.

retirement savings. The little bit that he had was in individual stocks. He asked me for some help. I gave him a long, detailed explanation as to why he should move into index funds instead of individual stocks. Thought I had convinced him. I checked back with him a week later. He had gotten caught up in the SpaceX IPO. Oh, no. Yeah. Well, and once again, not that it's performed badly as of the time that we are recording this. As of the time that we're recording this, it's actually below its initial IPO release price. Oh, is it? That's funny. It wasn't two days. It wasn't two days. I've been checked it too days. Well, there you go. Actually, that's illustrative of the volatility. And that is the reason why we don't like it. Not that it can't go to the moon. Get it?

Yeah, but I'm not that. Not that can't do that. But the volatility versus being your first position or a major position is not where you start. Right, right, right. Exactly. And, And there's this cognitive bias resulting, which is evaluating a decision based on the results that it yielded rather than on the decision-making process itself. So any given investment may or may not pay off. That doesn't make the underlying decision right or wrong. For example, you run a red light. There are no negative consequences.

You don't get into an accident. You don't get a ticket. You reach your destination faster. Was running a red light a good idea? No. It was a bad idea that happened to have a positive consequence. Great. And now, Jim, I'm going to steal that one.

Oh, thank you. Thank you. That's fantastic. That's why I do this professionally. All right, can I match a story with the story? Oh, do so. While you were talking, I have this wonderful friend of mine who texted me just a couple days ago.

She's a wonderful local woman in her mid-70s living on a, fixed income and really needs to stretch her dollars. So just for the price of buying me breakfast, we have gone out to breakfast before and I've helped her with portfolio stuff. So she writes me, I received this info in my inbox. I'm considering taking stock from some Texas railroad land, which by the way, I had already told her she should probably get rid of that. But another story.

It's from some Texas railroad land to invest in Energy X. I know lithium is a big deal. and they're going to be working on some lithium projects here in Northeast Texas, what is your reaction? And I wrote, far too much risk, I'd be more diversified. And then I told her, I love this quote. And this might have been Paul Merriman who put this up on screen, this quote, and I snapped a photo of it. But listen to this. He's quoting Paul Samuelson, who is the Nobel laureate in 1974.

Paul said, investing should be dull. It shouldn't be exciting. Investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas. It's not easy to get rich in Las Vegas at Churchill Downs or at the local Merrill Lynch office. Yeah. Yeah. And then she wrote me back and said, thank you. I hope you don't mind saving my ass again. Nice. But it could make a lot of money. Lithium. projects, Energy X, could be phenomenal, not for a 70-year-old with money that she really needs to have last for a long time. Right. Well, Sarah, I hope that provided some perspective, provided some next steps. We also, on free giveaways, we like to give things away. We like to

give a lot of things away. We have an asset location cheat sheet. So afford anything.com slash asset location. What we talked about earlier in terms of what assets do you put in what type of tax treatments? What should go in tax exempt versus tax deferred versus taxable? We have those asset classes and where they go laid out in this. And it's totally free. Afford Anything.com slash asset location. That's afford anything.com slash asset location. We should be like Oprah with that. You get a cheat sheet and you get a cheat sheet. Everybody gets an asset location cheat sheet. And the crowd here on YouTube goes wild.

Oh my God, I got a cheat cheat cheat. Cheat, cheat, cheat. All right. Well, with that, we're going to take one final break to hear from the sponsors who let us give this stuff to you for free. When we return, we are going to hear from Michael, who is 26, single, has a high income and is about to buy a home. Oh, by the way, if you're looking for something to do during the commercial break, afford anything.com slash asset location. Welcome back.

Our final question today comes from Michael. Hey, Paula and Joe. It's Michael in New Mexico. And I've got it what I think is a bit of an interesting situation that I'm hoping can spark some good discussion for you all. So to kind of lay out my situation, I'm 26 and single. I make about 120,000 a year. And I currently have saved about $460,000.

roughly equally split between my taxable investment accounts and my retirement savings. I planned before the end of the year to buy a $350,000 house with 20% down. And I expect that loan will have about 6% to 7% interest rate on it. When I run the numbers on whether I should save the money into my investments or put it into my mortgage to achieve FI faster, I get roughly the same amount of time. And when I hit FI, I don't necessarily plan to just retire right away, but rather to continue working in some kind of part-time capacity to allow me to dedicate more time to the things I value. When I run the numbers on what my withdrawal rate would look with these two paths, so that's

where it kind of gets interesting. So with the loan, I plan to spend about $3,000 a month, roughly two-thirds of that being the actual loan itself. And if I were to pay that loan off, I'd have a withdrawal rate of somewhere between two and three percent, depending on what my exact rate of return is over that time. And if I were to save the money into my investments, I'd have a withdrawal rate of roughly 4%. To me, paying off the loan makes more sense from the math standpoint, as I'd have a lower withdrawal rate. And even if I don't necessarily need that money, I would have more flexibility if I got married or something else changed my life situation. I'm not particularly emotionally

attached to paying off loan versus investing the money. I'm just trying to find the best use for the money that I'm already going to be saving towards some form of FI. Am I going about this problem in the right way? Or is there something I've missed in my thinking on this? I'd love to your input. Thank you so much for listening. Michael, I love the question. We're going to give you two answers. We're going to answer the question that you directly asked, but we're also going to answer some of the questions that you haven't asked. But we'll start with what you haven't asked. I sure am. It's a dare. I don't know what you're up to for the next 20 minutes show, but I'm listening to you answer all kinds

of hypothetical questions, apparently. Well, okay, because the thing with this level of focus on the mortgage interest rate, the thing that's the thing that's is going to come up for him, and he has not asked this question, is 15-year versus 30-year. Michael, when you go to apply for that mortgage, you're going to be presented with that question, and I think you're going to be very tempted to take out the 15-year because that's going to have a lower interest rate. And the reason for that is very simple. If somebody is giving you a loan for a longer period of time, there's necessarily more risk. So the interest rate has to be higher to adjust for the fact that there's inherently more risk with a longer loan.

No matter what the prevailing interest rates are at the time that you take out this mortgage, I guarantee you the interest rate on that 15-year fixed will be cheaper than the interest rate on the 30-year fixed. Given that the nature of your question was so focused on do I pay off the mortgage or not and so focused with the mortgage rate itself at the crux of that question, I suspect that when it comes time to make that decision, you're going to be very tempted to get the 15 year. My recommendation, even though that you did not ask this, is do not get the 15 year, get the 30 year. And Joe, I bet you can guess why I'm saying that.

Well, Ojo would have agreed with you. No. I used to set this up for people where you take the 30 year at a marginally higher interest rate. It depends on where the yield curve is. But sometimes, and if they're close enough, take out the 30 year, take the rest of the money, put that money in a spot and invest it. Then if you lose your job, the cool news is that you have less of a commitment. You have a smaller monthly commitment, so you have more flexibility. The disability statistics are very disturbing that people have that we don't want to look at.

I don't want to buy disability coverage because I'm safe, but the statistics say otherwise. that the chance of that happening to you are better than you think. So your overhead is less with a 30. You can put the money into the market and you can, if the long-term averages continue to do what they've done for long periods of time,

then you'll end up with more money that way as well. Wait, you said you used to agree with me. Sounds like you still do. No, that was my old argument. Oh. It was 100% my old argument. Boo. All right, what's your new argument?

Well, I think you choose one way or the other. I mean, here's the thing, Paula, is that if he's going to go into let's pay off debt, let's get the debt paid off as fast as possible. And I do like, to your point, thinking like a CFO, the bank will give you 15 and 30. You don't have to follow any of those. Right. You could say, you know what, my payoff plan is 18.5. Right, right, right.

So, Michael, just let's take a step back because I realize we, we, you know, we're going to We've gotten off track and we're starting off by answering the question that you haven't asked. We have, but we're halfway down that road, Paul. We are. Yeah, yeah, yeah. But I think it'll help answer the question that he did ask to first address the question that he didn't ask. Yes, which is actually where I'm kind of going is with the question that he asks, that he did ask. Because I do more strongly believe, you know what, if you can dive bomb that interest rate, if you're committed to paying off that debt quickly, then pay. it off quickly. And a very quick way to pay it off. If you're going to devote extra money, take a lower interest rate because you're going to put more than the 15 number in anyway.

So don't be halfway into this strategy, be all in on the strategy and do it. Wow. The biggest problem I have, again, with do it yourself mechanics, is that without that third party in the way, the reason why, Paula, for me, that I would help people set up this 30 you'd invest the difference strategy worked was because of me. Because I will also tell you that when I gave people this is a to-do to do at home and I wasn't the one that did it and they were going to do it, it never got done. It didn't get done. So if it's not going to get done, take the 15.

Take the bank at what they, whatever, you know, the best thing is that they'll give you and let them dictate the terms. You don't have to play by that. You can still pay it off. And with a 30 or a 15 year, a 40 year loan, a adjustable rate loan, whatever, you can pay it off in eight if you have the resources to do it. Don't take out an adjustable rate loan. But what the bank gives you is not the important thing.

It's what you do with that. I think that's the more important part of the equation. So if he's going to go to our paying off that loan early, and it depends on what the yield curve looks like, and it also depends on if you would actually invest the difference and leave it alone, I would probably take the 15 and pay extra on the 15. Okay. I disagree. I would take the 30, but then pay it off as rapidly as possible.

So, Michael, the good news is where Joe and I are converging, where we are in agreement, is on the question that you did ask, which is that both of us seem to be in agreement, that your optimal strategy is to pay off the mortgage as fast as possible. I don't know that that is the optimal strategy, because I do want to get to that, because that's the question that he asked. Yeah, that is the question that he asked. I am on team pay off the mortgage as fast as possible. Take out a 30 and pay it off as quickly as you can.

The reason for taking out the 30 is that because you have a lower monthly payment, even though the interest rate is going to be a little bit higher, because the 30 gives you a lower monthly payment, if any type of emergency unfolds, Joe, you talked about how people frequently get short-term or long-term disability, right? You might get into an accident. Something might happen. Or a loved one gets into an accident and you need to go take care of them or you want to go take care of them for a while. If anything happens, you've got flexibility. Whereas if you are burdened by that much, much higher monthly payment that comes with a 15 year mortgage, you have just curtailed your flexibility. And particularly in your 20s, I mean, at any state, age of life, but especially when you're young, you don't want to curtail your flexibility. You want, like, one of the great benefits of youth is maximum optionality.

And so preserve that optionality in your 20s and 30s by virtue of not saddling yourself with a higher monthly payment than necessary. So I would take out a 30-year mortgage, 30-year fixed-rate mortgage, and then I would pay off that mortgage as quickly as possible. And the reason for, I've just described the reason why I would go through. 30 instead of 15, which is not the question you asked. But to the question that you did ask, which is, do you pay off the mortgage or do you invest this money? The reason that I would focus on paying off the mortgage as quickly as possible is because the delta between your expected

return in paying off the mortgage versus your expected return in putting it into a broad market index fund, that delta is not wide enough to justify the risk. I don't know if that's the case. Number one, it depends on his time frame that he actually gets it paid off. If he gets it paid off in seven, eight, nine years, maybe. If he gets it paid off in 16, 17, 18 years. This is where the phrase, and by the way, Michael, this is not your fault. This is my issue. But the phrase doing the math triggers me.

And the reason it triggers me is a mentor mine told me early in my career, beware charts and graphs and math can be charts and graphs. There's a big difference in doing the math if you're expected return of future market is 7.5% and your return of future return is Dave Ramsey 12%. Huge difference. And it's going to hugely affect your strategy. So when we let the math dictate our expected outcomes, we have to look at what the human did to affect the math. Before we got to the math, we decided on some benchmarks. And I would love to see when you ran the math. Because often, I worked with a lot of engineers when I was an advisor, Paula.

And they would generally use this phrase, I did the math. And I'd never dispute the math. Of course, you're going to lose when you're fighting an engineer. and you're going to dispute the math. But what I would dispute were the inputs that they used to come up with the math. Because the input is going to change the math substantially. I think that if we're running a 7.5% expected return, Paula, I think you're right. I think you're right on.

I think the delta does not justify the return. If we're looking at, though, a 10.2 return over 17 years, 18 years to pay. off the mortgage, then it way, way maps out much better for investing the money. I think running a between 8 to 9% return, like 10.2 is a little high to project with that degree of certainty. I think mapping out even somewhere between 8 to 9% long term annualized return just doesn't make sense. That delta is too small. I don't know. Here's a I do know. I don't know what the future is going to do. I don't know what's going to happen. So here's what I would do. I would ask the question, which one makes you less unhappy? If you decide to

pay off the loan, you are capping your upside on your financial return. But you're also getting rid of some potential downside, right? You're decreasing the standard deviation. You're zeroing in on exactly what's going to happen. And for some people, that's what they're looking for. I'm looking at to eliminate as much risk in this equation as possible. And by dealing with a fixed asset and a fixed rate of return, we've effectively done that. We're much more likely to know our outcome. We're a lot less likely to know our outcome if we have the money invested and we have the mortgage there for a longer period of time.

However, if we just look back 15 years, and remember, I'm the guy that just got done saying the last 15 years doesn't equal the next 15 years. 15 years. The last 15 years are pretty sweet. But you're limiting your upside. Yeah. And if you, But the last 15 years, I just got to say, the last 15 years were so sweet, historically abnormally sweet. You can take the 1990s. You can take the 1980s. You can take 2010 to 2020. You can take the last 10 years. You can pretty much take anything besides that first decade, 2000 and 2010. Exactly. Could be that decade. mapped out the way better off if you had kept the mortgage. So I would not go in expecting a return.

I would not go in trying to guess what the return's going to be. I would go in going if I decided to invest the money and the market went down or did not do as well as I had hoped. Does that make me less unhappy? I love how I'm using a double negative. But I think you know where I'm going with this, which is if I do this strategy and it goes against me, which one, so I go ahead and I zero on the interest rate. Which one will you regret less is what you're saying? Yes. And the stock market rocks.

Because I think if we assume that we're going to choose the wrong thing, if we go in assuming we choose the wrong thing, I think we're going to make a better decision about which way is going to be the one that we pick. So basically as a thought exercise, assume that with the benefit of hindsight, once you know in the future how history ends up unfolding, if you assume that with a benefit of hindsight, you've chosen the mathematically wrong thing, which one would you still regret less? Right. I think it's a fantastic thought exercise. Yeah. Because clearly doing what you are suggesting that he does would have been horrible the last 10 years. It would have been way worse.

And I will say, as somebody who paid off all of my rental properties, seven rental totally free and clear. And that means paying off 3% mortgage interest rates, between 3 to 5%, like 3 handle to 5 handle, paying all of them off and then seeing how the market performed, I will say I have zero regrets. But what's funny about that is, so what you just said is it wasn't about the math at all. Because I've known you for a long time, Paula, that wasn't a mathematical decision. Right, right. That was a know-yourself decision. Yeah, it was a, it was a know your self-decision, it was also contextualized with the fact that I am not a tenured professor. I am an entrepreneur.

And those are very different risk profiles. If you're a tenured professor and you plan on never quitting that job, or at least you don't plan on quitting that job in the next 20 years, you know that you have income certainty, right? And that is a very different position to be in from somebody who, like Michael, wants to reach FI and then switch to part-time work. and he's going to be entering a phase in his life where he's going to have income uncertainty. And when you're entering a phase of income uncertainty, then, and I know this by virtue of being an entrepreneur,

where you're also constantly in living in just perpetual income uncertainty, you want to create certainty in the other elements of your life so that you are better positioned for the uncertainty on the income side of the spectrum. Well, and that certainly is a piece of knowing yourself. Certainly. Certainly. The lack of certainty is certainly. Yes.

It is a big piece of knowing yourself. It's not just emotionally like we were talking about earlier with whether I have global reeds in our portfolio, right? And if I'm going to blow up my portfolio. But it also is knowing your income streams, knowing your time frame, knowing all of these things. Like, you know, we compare ourselves to the S&P 500. The S&P 500 doesn't have any.

timeframe. So it's, it's the most ridiculous thing on people go, well, my portfolio didn't beat the S&P 500, so I didn't do very well. Well, when's your goal? My goal is three years from now. Are you kidding? The last thing you wanted was anything to do with the S&P 500. So comparing your results to that is ridiculous. So knowing yourself is also, Paula, knowing what you're talking about. What are the other extenuating circumstances in your own life? Our mutual friend, Andy Hill, Andy Hill paid off his mortgage at a young age. And it was because he wanted to quit his job. I mean, point, he wanted to work for himself. He wanted to be an entrepreneur. And he knew, like you just said, that having less overhead was going to help him achieve that goal.

Right. Andy Hill's been on this podcast. He's talked about that decision. And for him, it was because he's got two kids who are still young and he wanted to spend more time with them. So the cost of that is paying off the mortgage instead of investing in the market. And look at the number of mathematicians over the years that have argued with him. Right. You know, and said, oh, man, that's dumb. And I look at Andy and I'm like, there's nothing about that that was dumb. Right.

The math didn't math. But it was a great decision. Yeah. So I don't know that I have an opinion at which one is best. My opinion is you clearly like paying off the mortgage. Yeah. For me, I think I gave him the parameters around how I think about it. Right.

There's far more potential upside to keeping the mortgage. And Michael, my position is, I don't think that the delta, the likely delta on that upside justifies it. I also think given your goals, given the fact that you want to make a career change, switch to part-time, go into a more exploratory phase of your life once you reach FI, given all of that, plus given the likelihood that your life might change significantly, maybe you'll get married, maybe you won't, nobody knows, given And that so much is up in the year and you want to preserve flexibility, optionality, all of that points to keep your overhead low.

And the way you keep your overhead low is get the 30-year mortgage and then pay it off as fast as possible. Those two things keep your overhead low. All right, it's fun to disagree with you, Joe. Yeah, I think there is so much more fighting we could do because just the phrase, just the phrase that the Delta doesn't make sense. drives me crazy. But pulling out the calculator, and I think everybody can do this on their own, pulling out the calculator, I could so quickly go the opposite way on that notion alone. But we will,

we will let the mathematicians go at that one. I do agree that it is based on the goal. And I do agree that if you're looking for more flexibility earlier on, he's putting himself in a place where you've been where Andy has been. And, um, and, um, and, um, not a bad place to be. What I wouldn't do, though, Michael, is blame it on the math. I would not. The math part still, obviously, Paul, even when you said it, it wrinkled me. The math part drives me crazy. The part that doesn't drive me crazy is basing it on your goals. That piece I have no problem with. You could always blame it on a sibling. Going back to the first question. You could. You probably should. Let's not even say could. That's what happens.

sibling said that this was the way to go. And then when it doesn't work out, you got somebody to blame, which is even better. And that's why Paula is frustrated. Yeah. Yeah, the plight of the only child, nobody to blame it on. It is so frustrating. All right. Well, thank you, Michael, for the question. Joe, I think we've done it again. I think we have. But our good friend, Rima, is telling us that we need your questions. So we can fight more, Paula. We need your Questions. If you have a question that you want to submit to us, go to afford anything.com slash voicemail. That's afford anything.com slash voicemail. Especially questions that you think would agree with my way of thinking, not Polos.

Especially questions where you think Joe and I will disagree because those are the most fun ones to answer. Send us any questions that you think will provoke a Paula versus Joe showdown. That once again is afford anything.com slash voicemail. We're also going to give you afford anything.com slash asset location if you want to discover where to locate your assets. And if you know what I mean. And if you want to play your role in increasing the housing supply, in solving our nation's shortage problem, doing good while also doing well for yourself, because you'll make more

money by virtue of doing that. Afford-anything.com slash rent. Thank you so much for being part of the Afford- Anything community. Joe, where can people find you if they'd like to know more? Well, guess what? You can find me on YouTube. We're on YouTube right now. We just this last week made public our discussion with one guy that maybe a few people have heard of, a gentleman named Morgan Housel. And coming up next week, another guy that I can't stop mentioning on. the show. Made public our discussion sounds so like what is he going to say now? Oh, you can't believe. What did he make public? We'll make it like BuzzFeed. The 14th thing he said made me L.O.L. And that's on the Stacky Benjamin's YouTube channel where you can also find our discussions with Paula Pantt where we're live on Mondays, by the way, creating our Friday episodes.

And that's always fun. And Paula, who is traditionally pretty horrible at trivia, is like mounting a charge. I've no idea what's happening. But Paula is on the move. So if you want to see if Paula does not finish last place, you can also, which would be so weird. Wouldn't that be weird? Unprecedented. These are unprecedented. We're living in unprecedented times. Yes. But my discussion with the one and only Morgan Housel and the history professor, I can't stop talking about Joseph Moore coming next week to YouTube. Just go to the Steckin Benjamin's YouTube page. Smack that like button. subscribe, all the above. Ring the notification bell.

Ring the bell. Ring our bell. Thank you again for being an afforder. If you enjoyed today's episode, you know where to go. Affordanything.com slash voicemail, afford anything.com slash rent. And afford anything. com slash asset location. Those are your three destinations.

This is the Afford Anything podcast. My name is Paula Pant. I'm Joe Sal Cajai. And we'll meet you in the next episode. When you're co-mingling, entry-level affordable homes with luxury homes. That's the equivalent of asking about the price of pants on Timo as compared to the price of like Cardier.

Does Cartier make pants? No, they don't. He can see how far away from the luxury market I am. They're a jewelry maker, not a clothing designer. Pants at Tiffany's. Ha ha ha ha ha ha