Afford Anything - Q&A: My Insurance Bill Jumped 60 Percent – Should I Drop It?!

Episode Date: August 20, 2024

#533: Kristin is floored by the 60 percent increase in her homeowner’s insurance this year. Should she cancel the policy and self-insure instead? Susana and her husband are torn. They bought their dream home last year but now need to relocate indefinitely. What should they do with the house? An anonymous caller wants to help his soon-to-be wife invest a five-figure gift she received in another country. How do they untangle the complexities of managing money from abroad? Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode. Enjoy! P.S. Got a question? Leave it at https://affordanything.com/voicemail For more information, visit the show notes at https://affordanything.com/episode533 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, if you got an unexpected $40,000, what would you do with it? Oh, I would hand it to my friend Paula. Oh, wow. Of course. You're welcome. Why, thank you. Thank you. Well, we are going to be answering a question from someone who got an unexpected gift of 40,000 euros.

Wow. But before we get to that, we're also going to tackle a question from someone who bought a house last year but now has to leave the state for maybe up to three years. Oh, no. What do they do with their house while they're gone, especially as something that's such a new purchase? Before we get to that, we're going to talk to somebody else who is wondering if insurance, home insurance, is even worth it. Okay. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice carries a trade-off.

And that involves not just your money, but your time, your focus, your energy, your attention, any limited resource that you need to manage. So what matters most and how do you make decisions accordingly? those are the two questions that this podcast is here to solve. I'm your host. My name is Paula Pant. Every other episode, we answer questions that come from you, the community. I do so alongside my buddy, the former financial advisor, Joe Sal C-Hi. What's up? I've got my cup of coffee. Sounds like we've got some great questions. I can't wait to hear what we say. Well, why don't we kick off with this question from Kristen, who is wondering if the cost of paying homeowners insurance is even worth it, should she even bother?

Hi, Paula and Joe. My name is Kristen. I live in Arizona. And I have a question about self-insuring my home. We own our house in full, and it is worth about $570,000. Our insurance just went up from 3,000 to 5,000. And I feel like that's just insane. Although I have been told that that's kind of normal. But to me, that sounds like an insane number. Our house is actually an underground like cement bunker, basically. It's like a Hobbit house built into a hill and it's all cement. And we just feel like there's not much that can happen to this house. So why are we spending $5,000 a year to insure it? Can you help me through this thinking process? When is it a good idea to self-insure a house. Thank you so much. Kristen, first of all, thank you for your question. And I

hate to be the one to say this, but $5,000 in annual insurance on a home that is worth $570,000. Not only is that normal, but it actually sounds like a pretty good deal. That's exactly what she doesn't want to hear. Yeah, exactly. It's precisely what you don't want to hear, but that is a good deal on homeowners insurance. But just because something is a good deal does not necessarily mean that you should pay it. Let's unpack whether or not you should even bother paying for this homeowner's insurance. For the sake of everyone who's listening, who's wondering, wait a second, I didn't know that was an option. If you, and Kristen, you know this, but I'm saying this for everyone, if you have a mortgage on a property, your lender is going to require you to pay homeowners

insurance. I don't know of a single instance in which a lender does not mandate it. But, Kristen, in your case, your home is fully paid off. You do not have. a mandate from a lender. It is completely up to you whether or not you want insurance as asset protection. And there's a reasonable case that you, well, you know what, let's unpack this. The first question that I would ask back to you is, imagine the worst were to happen. imagine that some type of disaster were to decimate your home to the point where it would be absolutely unlivable and you would have to either reconstruct it or buy an alternate home. How prepared are you to do that? Because this answer could go in one of two ways. I don't know what your income is and I don't know what your net worth is.

So it might very well be the case that your annual income is $500,000 and you have no major expenses and save the bulk of your income. And you could very easily, with a $500,000 annual income, you could very easily pay cash for a replacement home with two, three, four years worth of savings. If that's the case, then yeah, I don't think there's a reason to insure your home because your income would be sufficiently high enough and your savings and your net worth through taxable brokerage accounts are sufficiently high enough that you can pretty much self-insure if that's the case. But it might also be the case that your animal income is $50,000. And if something were to happen that decimated your home, it would be catastrophic. So my question back to you is, which one of the two boats are you in? Is your annual income 50,000 or is it 500,000? We had a house across the street from us that burnt down early in my career.

It was the saddest thing watching the mom and her two kids stand outside of their house. I was friends with the assistant fire chief, Paula, and this fire, thank goodness nobody was hurt. but the fire was so horrific that he had pictures of it in his office of his firefighters on the roof cutting these escape holes for the flames to come out and these huge flames coming up. And I remember sitting and watching the three of them cry together while their house burnt down. And I found out later that they didn't have homeowners insurance. And they were playing the risk it game, however, meaning that they didn't have the money to rebuild the house. They ended up having to sell the property under duress.

somebody built a new house there later, the new owner, but they were put in a position. So I think you want to be really careful and really conservative with your estimate of how much money do I need to set aside for the rebuild if something happens. Now, the cool thing, concrete bunker, how about how? Sounds awesome. Yeah, that sounds like a really fun place to live. I could do that. And natural air conditioning, too, you know, I mean, in Arizona, think about how hot it could get.

Exactly. If I'm underground, I'm in a northeast Texas, as Paula knows, and some of you. you may know, it is so hot here. I want to go underground right now. Let's go. Let's go underground. I can hear the chiching every time my electricity meter spins again. Like it's going full blast right now. And my bill's going to be through the roof. But I really like that house. Yeah. So quick, yeah, quick story. I went to years ago, Cooper Pidi in Australia. It's on the way to Uluru in central Australia. Middle of the desert, super hot, but we found, we met this local who lived deep underground. Wow. I mean, talk about natural cooling. It was just, that's cool. It was amazing. Anyway, that's cool. Get it? Come on. Come on. Come on. That's cool.

Yeah, thank you. Here a week. But you do want to be conservative. And I would think what could happen that would force this house to be uninhabital? Maybe it doesn't burn down because of the type of thing that it is, but what could cause it? There's a bigger thing here, though, Paula, that people don't think about, this is what you want to worry about whenever it comes to any type of insurance, what are the things that come out of the blue that an insurance company thinks about, but I don't. There is an additional coverage that's on top of every single homeowner's policy you see. It's all over the place. And it is all around liability. It isn't about the structure. It's about what if somebody gets hurt at your house, something.

thing happens at your house, you're held liable and your house is put up against the lawsuit, whatever that may be. Liability insurance is a big, big part of your homeowner's policy. Now, generally, when you go get an umbrella liability policy, the umbrella is added on to your homeowner's policy, right? And the company usually wants to make sure you got a homeowner's policy through them before they will sell you an umbrella liability policy. So I don't know about being able to get an umbrella that covers lawsuits outside of self-insure. But, Kristen, that is the number one thing I would think about is how am I going to cover the threat of a liability? Right. And the other thing to think about, Kristen, is earlier in my answer, I talked about,

what is your annual income? The other component of that question, and the reason I gave those two extremes, 50,000 or 500,000, is because I don't know what your income is, but I assume that it's probably I mean, I don't know. I don't know you. But if you are like the average person, I assume that it's neither of those two extremes. It's somewhere in the middle. But the reason that I use those two extremes as illustrative extremes is to put forth the concept that, number one, your income is going to play a big role in making this decision. Number two, the percentage of your income that you save. So the, the sheer raw dollar amount of money that you save every single year or that you can save every single year is going to play a big role. Number three, the amount of money that you already have in savings and in non-age restricted investment accounts. In other words, savings and investments that you could tap is going to play a big role in this. And number four, and we haven't talked about this yet, the security of your income. How relatively sure are you that your current income and savings rate, annual savings rate, will persist for the next several years?

That will also play a role. Those are the things I would weigh when it comes to the question of, are you able to replace this home if something were to happen? One thing that a lot of people, when they explore this idea like she is, Paula, I know many people that I worked with that could have self-insured. They could have. And then they go through all of these, well, what if this, what if this, what if this, what if this, what if this? And just freedom from worry made them go, you know, I don't want anything to do with it. But for a lot of people, they're like, you know what? I'm not that worried about it.

Kristen clearly, you know, hey, I live in a Hobbit house. My house ain't going to catch on fire. What's going to happen to my house? So I like her thinking there. The second piece, though, is the amount of money that I'd have to put away may adversely affect these other goals that I have. It's frustrating because you have enough to do what you want, but you got to be careful with where the asset is.

I think that's probably a good cross-section of the afford-anything community. You have enough money. to do the thing, but not to do all the things. Isn't that weird? You can afford anything, but not just everything. Exactly. I just made that up. Joe, you should trademark that. It'd be totally great. Why don't I go on the Today Show? And I'll just say it's my own thing. So, Joe, I think what you're saying, if I can paraphrase what you've just said, is depending on what goals you have for your money, different goals have different time horizons. And that time horizon is going to influence the way in which you invest that money, right? The type of account that it's held in,

the amount of risk that it's exposed to, the level at which it can grow. If Kristen is putting aside money that is available to be tapped as an alternative to having insurance, that money is going to have to be a little bit more liquid, right? It's going to be exposed to less risk. It has to be more tapable. And therefore, it's going to come at the expense of alternate uses of that money that would be less liquid, but maybe have stronger long-term growth. And not even that, Paula. I mean, yes, yes, yes, yes to all that. But on top of that, if she ever spends that money on something else, then she just got rid of her insurance policy. Right. And you can't do that. You can't do that because then you end up being the people across the street from me who played the

risk at game. Right, right. She can't use that money to go travel through sub-Saharan Africa for eight months. Yeah. So I would just make sure that she's got enough there. But I think the other goals aren't harmed. Listen, avoiding a $5,000 expense every year. Every year, yeah. It adds up. I'm just trying to avoid the sun. Kristen, I'm sure you already know this and you're you're already doing this, but I'm going to say this for the sake of everyone else who's listening. If you are flabbergasted by the cost of homeowners insurance, remember, increasing your deductible is a great way to lower your premiums. And shopping around, the provider that gave the best value two years ago might not be the provider that gives the best value today. So once a year,

shop around, recheck what's on offer, go for the highest deductible. Those are all of the the standard best practices when it comes to keeping your insurance but lowering the premium. So I'll say that for the sake of everyone listening. But Kristen, I don't know if you're surprised by our answer or not because I feel like in the personal finance space, there isn't a lot of discussion about the possibility of just foregoing homeowners insurance entirely. And so I think a lot of people might have assumed that we would be against it. And our answer, neither of us gave a hard no.

Both Joe, you and I are both open to that idea, assuming that all of the conditions are in place for it. Yeah, just watch out for the unintended oops. Didn't think about that. Exactly. And you raise a very good point, Joe, with the liability coverage. It's a big concern. And clearly, when you look at any homeowners policy, I mean, it's all about liability. Right, right.

And what's concerning about liability, you know, when it comes to the cost, of replacing a home, that is a known cost. You can reasonably estimate how much it would cost you to replace your home or to move into an alternate home in a similar neighborhood of a similar size, right? So it's a known cost. The liability is unknown. That's what makes that a much more volatile element of this equation. We may have some afforders who are in the legal community and they know this already. But speaking to people that I know in that community, the number of times that the amount of the settlement just happens to equal the amount of liability coverage that's on the policy.

Because it's easy on the homeowner. The homeowner is going to go ahead and settle for that amount. the insurance company knows they're already on the hook for that amount, so they're going to pay it. It is pushing the easy button on the whole system. And a question that that brings up for me is exactly what you're talking about, Paul. If you don't have that policy, that's the easy button that the attorney's going to go after representing the person who was injured on your property or whatever might have happened in that lawsuit, what do they go after? Then they go after other assets. Yep.

So great point. It is very much blue sky. if you are sufficiently high enough income and high enough net worth that you could self-insure, then that becomes an even scarier proposition. Yeah. And then I'm wondering if there's a, you know, a legal way then to put your, and now we're getting to a mess. Because then, you know, now the financial planner brain comes out of me. I'm like, I wonder if there is a way then to legally put your house under a different

ownership structure whereby, holy cow. You know what it? And then you're like, I might just pay the homeowners insurance. versus higher your, the good news is I don't pay the $5,000 bill. The bad news is I pay $5,000 in legal fees to keep my structure set up so that if there's a liability. I don't think it has to be that difficult. I think the thing you want to explore is, are there companies out there that would sell me a liability policy separate from a homeowner's policy where they won't look and ask, do you have homeowners insurance that already has liability protection? Right.

Well, thank you for the question, Kristen. I hope we've given you plenty to think about. In just a moment, we're going to hear a question from Susanna, who bought a home last year, but now has to temporarily move out of state. What should she do? We're going to hear that question in just a moment, but first, we're going to hear a word from the sponsors who make it possible for us to bring you this show at no cost to you. Fifth Third Bank's commercial payments are fast and efficient. but they're not just fast and efficient. They're also powered by the latest in payments technology

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Hello, Paula and Joe. First of all, I want to thank you for what you do. Your podcast has been a precious and inspiring resource for me over the last few years. I need advice on what to do with my house while I live out of state. My fiancé and I bought our first home last year in a city in Texas that's 25 minutes away from downtown Austin with a 5% down payment. We're moving out of state next year for anywhere between one and three years. The exact time frame is unknown. We'd love to come back to our house after the temporary move, so we're considering very

renting it out, but can't decide between long-term and short-term rental. The house is 25 years old and needs some cosmetic renovations in the kitchen and bathrooms. Even after the renovations, it will almost certainly be cash flow negative as a long-term rental. As a short-term rental, it could be cash flow positive, but would need a higher up-front cost, as the renovations may include higher-end-scale items, furniture, and landscaping to compete with other listings in the area. While most of these renovations include things with want to do for ourselves, if we didn't have to move, we would probably do them slowly over a couple of years instead of within less than a year.

An advantage of short-time rental, though, I believe, is that we're not sure how long will be away, so we can theoretically come back at any time as well as visit our family and stay in the house if we want to. we love our house and the location and see ourselves living here long term. However, if it turns out to be the best option for goal of reaching financial independence sooner, we could consider selling it. I believe that given the current housing market conditions and the small equity we have, we wouldn't get much out of it and we might end up having to pay something out of pocket. For context, we are both in our early 30s, have no debts other than our,

mortgage and a car loan with 2% interest rate. We started our FI journey about three years ago, although we haven't been able to invest as aggressively as we want to because I'm a PhD student on a stipend at the moment. That's about to change though, because I'm about to finish my program in three months and we'll start working full-time right away, effectively doubling our household income. We could use some of the extra income to pay for up-fron costs, And if needed, take the hit of negative cash flow. Due to multiple factors, we cannot avoid the temporary move and we wonder how to put ourselves in the best financial position possible.

What are your thoughts? How would you go about making this decision? Thanks. Susanna, first of all, congratulations on buying a home, especially. She said 25 minutes from downtown Austin, Texas. That is an amazing location. For the last decade, Austin has just been popping and popping and popping. I mean, there are not many cities in the U.S. that have had such consistent fast growth. And it does not seem to stop. I remember when my family started going there, they had the state swim meet there. It was the first time I was there with my kids. And the area I-35 and Lady Bird Lake, it was like this open field. And now it's all high-rises.

all high rises down by where rainy street is and a lot of the restaurants and bars are. Like that area's crazy. Yeah. Just crazy. The number of cranes, that skyline has changed so significantly over the years. Yeah, exactly. And as so many people are moving in, not just to Austin, but to Texas overall. Yeah, Texas has just seen so much growth and it continues to see so much growth.

It's a fantastic place to live, a great place to own the fact that you have locked in a home. that is relatively a new home. You said it's only 25 years old. That is not an old house. So you've got a relatively newish, 25-year-old home, 25 minutes outside of Austin. That's absolutely beautiful. I'm very excited for you.

I do not like the idea. I'm sure you've guessed this by now. I do not like the option of selling the house. As you've said, you've built very little equity in this home. You may even have to pay something out of pocket in order to sell. So the sale, the sale would be cash flow negative. So I do not like that idea at all.

When we were both listening before we hit the record button, just for everyone, Paula audibly went, oh. Yeah, yeah, as soon as she said that, Susanna, when he said, with how little equity we have, we wouldn't make much money from the sale. In fact, we might have to pay cash out of pocket for the privilege of selling. Just this completely visceral reaction from Paula. Yeah, you could see me wince. You could see it in my face.

Oh, man. Don't do that. That is absolutely. No, don't do that. Well, so let me tell you of the two that are remaining then, Paula. I do not like the, and I know she's leaning this way. And my general feeling is to find a way to do the thing you want to do, right? How do we do the thing we want to do and make it work? I like that approach to financial planning versus trying to find the optimal thing because you're always going to guess wrong. Right. Figure out what it is that lights you up and how do I make that work financially. But I hear her leaning towards short-term rental, Paula. But then I hear all of these expenses that are going to go into the property. So it's not really marketable today. She's going to put a,

bunch of money in it and then she's going to move back and she's not going to recoup all of these expenses with the short-term rental business. So I'm not a fan of the short-term rental. Here is, I'd love to get your take, but mine is this. I think if she goes ahead and goes, you know what, I'm going to do the long-term rental year by year. And I'm going to just add in whatever the negative cash flow number is to my short-term housing situation. So in other words, if I pay $1,500 a month for my short-term housing wherever I'm moving to and I'm losing $400 a month on this house, my short-term situation is $1,900 a month. And I just accept the fact that I'm going to be cash flow negative and that is the carrying cost for me on this property to keep it for when I come back.

And I don't think that's an onerous amount of money. I don't think it's now if the caring cost ends up being huge if she's really cash flow negative, that may be a different thing. But assuming that her income's going up like she said it is and they are 99% sure they're moving back, just get a renter in there. And sure, you won't be able to visit and stay there for the year to three years. But you can work around year to three years. Yeah. There are so many things that I want to unpack here. Number one, this is your personal residence. This is not an investment property. The decisions that you make when you're buying an investment are different than the decisions that you make when you're buying something for the sake of personal consumption.

So I don't want you to calculate the capri. I don't want you to be running spreadsheets trying to figure out the ROI on this. That was not the purpose of the purchase. And if you try to force something to do multiple things simultaneously, it ends up doing none of the above well. The purpose of this home was to be your home, and so you're in the business right now of trying to maintain and preserve your home while losing as little as possible. If you were to take the short-term rental route, I agree with Joe, I think that would be a big mistake for the following reasons. Number one, I don't know. I'm not convinced short-term rentals are actually going to make more money. I don't know how much analysis you've done in that area, but short-term rentals often have substantially higher vacancy rates. There's a much higher cost of turnover. There's a much higher

operational cost. So with a short-term rental, okay, let's use a long-term rental as a barometer. Let's say that if you have a long-term rental, it is occupied on average 11 and a half months out of the year, you can run a set of numbers based on that assumption. With a short-term rental, you often are going to have some fairly substantial vacancy rates. I don't know precisely what the typical short-term rental vacancy is in your particular area, but you're competing with all of the other short-term rentals in that area, and there's going to be a price to occupancy trade-off. So let's assume that you have a 60% occupancy rate or maybe if you're lucky a 70% occupancy rate.

Okay, you can run a projected gross rent based off of that. And then from that, you need to subtract the cost of every turnover. Because with every turnover, someone's got to come in there to take out the trash, to run the dishwasher, to wipe down the surfaces, to run a load of lawn. to vacuum the carpets, to make sure the toilet is plunged, that costs money. You're going to be out of state, so you can't do that on your own. So the cost of that turnover, the cleaning costs and the management costs, and the cost of refilling the dish soap and the kitchen sponges and the fabric softener sheets, right? the cost of refilling all of those consumables, which are expected on a short-term rental, are, again, substantial.

You also have much higher utility costs, providing the internet, providing the cable. You know, a good short-term rental, the guests expect coffee. And if the hairdriere breaks, they want to make sure that there's going to be a hairdryer and an iron, because those are the things that you provide at hotels. And a short-term rental is the equivalent of running a hotel. You're no longer in the real estate business. You're in the hospitality business. You're competing against Marriott.

Exactly. Yeah, you're competing against Marriott Hilton. It's amazing how much the Airbnb game has changed. It used to be the people were accepting of you stand on their couch. I mean, that's how it started, right? Not at all. Not at all. If it's not a hotel experience, you're done.

Even in 2012, nobody accepted that. Absolutely no one. I mean, maybe in 2008 people did, but by 2012, which was when I started, people were demanding. They wanted an iron. They wanted a haird dryer. When I was a super host, we got complaints about the fact that we didn't have a full-length mirror. Because if you think about it, every hotel that you go into, there's at least one full-length mirror. That is the standard in every hotel room.

We didn't have one. Talk about learning from a fire hose. Right? So have you really, truly adequately crunch the numbers as it pertains to the occupancy rates and the turnover costs and the higher utility costs and the higher consumable costs and the cost of permitting. Oh, and let's not forget, sales tax and occupancy tax, because you have also additional taxes that you pay when you're a short-term host, right? You've got to pay sales and occupancy tax on every stay. Once you've run all of those numbers, I think there's a very low probability that you're

going to make more money as a short-term host. It's incredibly hard to do so. And the people who do so successfully are ones who do an enormous amount of analysis so that they can buy precisely the right property in the right location that is optimized for short-term rental revenue. It is highly unlikely that you've bought a home for personal consumption, and it just happens to have all the right conditions in place when it comes to competition from other short-term rental businesses in the area, projected occupancy rates, local labor costs. It's highly unlikely if you haven't done the proper analysis ahead of time that you just happen to be holding an asset that is optimized as a profitable short-term rental. Short-term rentals have higher gross revenue,

absolutely. And I think a lot of people see that and assume that higher gross revenue translates to higher bottom line. But Texas has high sales and occupancy tax. You know, Texas has no state income tax. And so they have to offset that with not just higher property taxes, which every homeowner faces, but they also offset it with higher sales and occupancy taxes. Got to make it up somewhere. Yeah. And which specifically impacts short-term rentals. You know, that's a tax. that you do not pay as a long-term rental. So I just really strongly doubt that you're actually going to make more money on this as a short-term rental. I would want to see some very robust spreadsheets before I believed that this would actually outperform a long-term. There's another option that we haven't talked about, and that's midterm rentals or medium-term rentals. A property is considered a mid-term rental if the rental period is greater than $3.3.5. 30 days, but less than a year. So typically a midterm rental will have rental lengths of three months,

six months. These are often the types of properties that are corporate rentals. They're rented to traveling nurses, traveling executives, people in the movie industry who are coming to town for a period of three or four months, things like that. Midterm rentals can have their place. the problem is, A, the cost of furnishing, B, the cost of management, because management's going to be a lot more expensive for a midterm rental. The haircut is pretty substantial

because if you're processing a turnover every three months, that's an enormous amount of work for the property managers. Again, vacancy can be high for those. And a lot of short-term rental owners have converted their place into mid-term rentals, rentals, so competition is higher than it used to be. So those are the drawbacks. That being said, with a midterm rental, you don't have all of the cleaning costs associated with the short term. You're not washing their bed sheets. So you are spared from a lot of that. And you don't have

the sales and occupancy tax burden. So you're spared from that. So I would say maybe on the midterm rental. I think that's at least worth looking into. It's worth crunching some numbers. to see if that's viable in the area. But either midterm or long term, I think, is going to be your best bet. If there's a hospital, a university, or someplace in the region where a midterm rental might work out, Paula, I hadn't thought of the possibility of a midterm rental, and that may make her happier. Someone with a midterm rental is going to overlook many of those amenities that the Airbnb crowd really wants. What's nice about midterm rentals is that you are not in the hospitality sector anymore.

With a midterm rental, you're not running a hotel. You're not washing the bed sheets. You're not making sure that there's adequate toilet paper and paper towels and kitchen sponges. You know what midterm renters love more than anything? What's that? Not renters, but people that own the property love. People that do midterm rentals are rarely statistically at the property. they generally are there because they have a commitment. It's only going to last a few months. They're spending tons of time at the university or at the hospital or wherever. And the wear and tear from all of the landlords I know that do midterm rentals love the fact, love the fact that they are pretty kind to the property of most cases.

Right. Joe, I agree with you. Even if a midterm or a long term rental is a little bit cash flow negative, one or $200 a month, I mean, That's the holding cost of holding onto your property. Yeah. Because this property, it's not an investment property. It's a personal residence. Bake it in. Yeah. Yeah, that is an entirely different animal than something that is purchased for the purpose of an investment and has to be evaluated accordingly.

I think one of the biggest misconceptions around real estate that people make, and I feel like this is a lesson. that like, no matter how often I repeat it, I don't know how well it comes through. The magic isn't the physical item itself. The magic is the math behind the decision. And so just because the physical item might be a house or a condo or a townhouse or, you know, just because the physical item might be a property, that's not what makes the magic. The magic comes from the math, not from the physicality. And what I mean by that is that people often understand that there's a distinction between buying a can of Coca-Cola for personal consumption versus buying a can of Coca-Cola because you own a hot dog cart and you're going to sell that can of Coca-Cola for a markup at your hot dog cart. in either case it's the same can of Coca-Cola,

but in scenario A, you bought it because you want to drink it yourself, and in scenario B, you bought a case of 12 cans of Coca-Cola because you want to divide that case of 12 into individual cans and sell each one at a markup at your hot dog cart. Intuitively, people get that. But when people do the same thing with a house, it's like it's treated differently. the same concept applies, but it's just, it's treated differently.

Like, if you're buying Coca-Cola for your hot dog cart, you've got to pay attention to what you're paying for that case of Coca-Cola and to how many you think that you can sell at your hot dog cart based on historic hot-dog cart sales. You've got to run some projections and run some numbers and acquire the cans at a good price and sell it at the right markup. otherwise it's not going to work. And how many cans I need to sell to make sure I make the rent payment to keep the lights on? Right. Not just how many can I sell. How many do I need to sell? Yeah.

What's the math behind it? Yeah. Right, right. Whereas if you're buying a can of Coke for yourself, it's because you're thirsty and you want to drink a can of Coke. And you really like Coke. Yeah. And so maybe in this situation, it's like, all right, you bought a can of Coke for yourself. But it turns out that before you had the chance to drink it, you had to leave.

And so you want to give it to your hot dog cart, right? You're going to give the can of Coke to your hot dog cart and hope that it sells while it's there. You're going to try to sell me a half-drank can of Coca-Cola in this scenario? But you know what I'm saying? Like in one scenario. It's why at a garage sale people discount the hell out of everything because the goal is not to make a ton of money off it. The goal is to get rid of it. And her goal is not to make money off the house.

her goal is to bridge the gap. Yeah. Yeah. Essentially, her goal is to get rid of three years worth of use. Yeah. I think the garage sale analogy really works here. Her goal is to get rid of the exclusive rights to use that property in 2025, 2025, 2026, and 27.

Yes. Because she owns those exclusive rights, but she doesn't need to use it. So now she's going to garage sale exclusive rights during. exclusive rights during that period of time. And obviously that doesn't mean she shouldn't try to get good money for it. It seems to me like so many things are changing in Susanna's life that the possibilities here are wide open. And I think part two of this is going to be as exciting as part one.

Yeah, absolutely. Absolutely. So, Susanna, I hope that answer shed some light on your next steps. And I think either midterm or long term could be good routes. But please don't sell the house. Because 10 years from now, I think you'll be very glad that you held on to it. So thank you, Susanna, for the question. Congrats on everything that's up ahead.

All right, we're going to take one final break to hear from the sponsors who make this show possible. And when we return, we are going to hear from an anonymous caller whose girlfriend just received a gift of 40,000 euros. Sweet. Welcome back. Our final question today comes from Anonymous. You know what this means. We give every anonymous caller a nickname. Why am I not prepared?

I'm always prepared. I'm not prepared. So Paul, I think, well, you know what? This is only fair anyway. Because listen, my contract does not say. Your contract. I have to come up with all the anonymous people all the time. Like what type of a horrible job is this?

The working conditions. Goodness. I can't. Oh. The labor conditions on this show. I got to give advice and come up with all the anonymous stuff. All right, Joe. You want me to take a crack at it?

Yeah, Paula, try to actually do part of the job here, okay? Ouch. All right. Well, we've all wrapped up the most recent season of House of the Dragon. Oh, my God. Wait a minute. What? Yeah, right?

I don't watch much television, but I do watch... Are you about to do a pop culture reference? I sure am. Somebody send Paula, a couple aspirin and tell her to go back to bed. Something is wrong, people. I am a huge fan of House of the Dragon. The character, Damon, I'm not going to ruin it for anybody who hasn't seen it, so no spoilers here. But Damon is in a role in which the woman in his life has...

money, resources, power. Together, they have to figure out how to best harness that. And that is very similar to the question that's being asked. And so, in honor of that, this caller will be named Damon. Hey, Paula. I'm a long time listener and I'm followed your work for a long time. I really, really have gotten a lot of value from it. So thank you so much for all the work that you've done.

I have a girlfriend that has just received a large financial gift of 40,000 euros. She's based in Kenya, but she's German. I'm Kenyan. The money is in Germany, and she's just spent about 10,000 euro of it to buy a new car and would like to spend an additional 3 to 5,000 of it to fix up the car because it's a little old. She's really young and has pretty much no idea what to do with the rest of the money, aside from keep it in a savings account. But I'm afraid it's not going to really accrue much growth there.

I'd like your advice on what we can do with the rest of that money. Should we keep it in Germany and look at the investment options there? Should we move it to Kenya and look at the investment options here? Should we invest in bonds, invest in stock ETFs, invest in real estate. I know my questions are a little vague and wide, but I'd like just to hear what you would do with. a large financial gift like that. We intend to get married sometime next year and having two kids

within the next five years. Myself don't have a very big income. I'm an entrepreneur with a fitness business, which brings in very little money, which about 70% of it goes to my living expenses. She has a business that she runs with her family and is quite successful. So she's able to save a lot of money from there as well. So yeah, just looking forward to your advice. Thank you. Daman, what a great question. And I love the fact that the two of you are very worried about taking good care of this money. You know, there have been many studies done, Paula, that show that when somebody has any type of windfall. And the most heartbreaking to me is when it's an estate because the people that built up this estate gift, worked really hard for it. And yet people treat it as expendable money and

money that they blow on stuff that if it was their own money, they wouldn't have done. So the fact that you and your girlfriend are taking great care of this money, I think is commendable, very commendable. Yeah. And truly, truly can help you build a foundation toward wealth, which is, you know, the crux of your question. So there is a. an order of operations, I think, at work here. And the first order is, if you don't have an emergency fund, money in the bank for rainy days, well, then the perfect place to put this money is to build that emergency fund. So to have, depending on where your income comes from, how reliable it is, experts say three to six months expenses, some really conservative people have more money than that

in an emergency fund. You want to be careful with that money. So I can tell you, if you're at that step of order of operations, then what you want is called a high yield savings account because you want this money to come close to keeping up with inflation. If you're beyond that and you're actually looking at building foundational investments, I think the best way to do this is to begin with the end of mind. Start with what are my goals and then work backwards. You said, should I put it in bond? Should I put it in stocks? Well, those are going to be for different timeframes. So if that goal is seven or eight years from now, maybe something that mixes bonds into it and very low risk large company stocks like utility stocks, something that has those in it. I like an index fund

that would have those types of large company value stocks they're called. Boring mix of stocks and bonds would be appropriate. But when you get above 10 years, clearly having money in stocks is the best place to be because, you know, we've seen huge inflation lately, Paula, and the only way really to stay ahead of inflation is to be the person selling the stuff that's going up in price because then you're capturing a portion of that sale. So as the Big Mac goes up in price, if you're selling Big Macs, aka you own stock in McDonald's, you're going to recoup some of that money. The only way to keep it in front of inflation is in real estate or in the financial markets, in the stock markets.

Now, the best way to start that financially is to buy a broadband of everything, buy a broadband of everything and then keep adding to it. And that would be something like the total stock market index. And if you want more on that, read Jail Collins' incredible book, The Simple Path to Wealth. I think that's a great place to begin. Let me break in for a minute, Joe. Yeah. Damon, to your question, when you asked, should we invest in bonds, should we invest in stocks, the nature of that question is starting with product.

And so, Joe, what I like about what you said is that let's put aside the question of product. Because we're not really asking about product. We're asking about first, what's the goal here? What are the goals? What are the timelines? Start with what are we solving for? Process. Yeah.

Yeah. process and then backfill with product. The first thing that I want to solve for is what are some of your shorter term or more immediate goals? You mentioned that within the next five years, you'd like to have two kids. What that tells me is there are going to be costs associated with signing a pre-up. There are going to be some legal costs there. There are going to be some legal costs there. they're going to be costs associated with potentially having a wedding if that's something you choose to do. I don't know, perhaps you'll get married at a courthouse or maybe you'll elope. Many couples do.

But if you choose to have a wedding, then there might be costs associated with that. They're also going to be medical expenses associated with the cost of two pregnancies. So right away, where my brain goes is, all right, let's make sure that we're setting aside money to cover the pre-up, money to cover a wedding if you choose to have one and money to cover projected medical bills that are associated with two kids. I think the reason this is so important is because, you know, they say that beauty is in the eye of the beholder. And I think a beautiful market position is also in the eye of the beholder.

And truly, that would happen when I was a financial planner. You would have two people that own the same exact thing. loved it, one hated it. And it was all based on what you wanted to do. So that's why I think starting with the use of it is so important because asking what is best, best is going to be different depending on how you answer the things, Paula, that you were bringing up. Right. That's a good way to say it. Don't start with product. Start with use. You know, the other use, though, that I would advocate for, particularly when it comes to the mental bucketing of the fact that this is a gift.

Your girlfriend is relatively young. If she were to put this aside for retirement, just set it and forget it. I mean, this could turn into a substantial amount of retirement money. And the fact that she makes good money, she has a really good income, means that she could take, she's spending, let's say, 15,000 euros on this car out of 40,000. so she's got 25,000 left over. If she puts 25,000 euros aside for retirement, just drops it in, puts it there for retirement,

forgets about it for the next 40 years, and then from the savings from her income, she covers the cost that I previously outlined, pre-nup, wedding, two pregnancies, all of that being generated from the savings from her income. she then can mentally bucket the 25,000 euros that remained after the car purchase as, hey, this is money that I have for when I'm in my 60s and when I'm in my 70s, right? And then that gift that was given to her by presumably a loved one is something that she can carry with her into her old age. And I think that that mental bucketing is significant because then it's like a piece of that loved one is there with her in her 60s and 70s.

We often compare the amount of money, 25,000 euros with what we can do with it today. But truly when we talk about the future, we should talk about what you're talking about also, Paula, which is future usage of this money. And this is actually really fun. if you're listening to this and you've got a retirement plan, this is a fun exercise that I'd love to take everyone through. So there's this mathematical, magical calculation called the rule of 72. And the rule of 72 works like this. You take the interest rate, you think you're going to get, you divide it into 72. And that tells you how many years roughly it's going to take your money to double. So the only math you need to do, let's say that he thinks on this 25,000 euros is his girlfriend. We'll imagine, Paula, he didn't say how old's girlfriend is. Like, he's, he's Let's say she's 30, okay, just for this illustration. She's 30 years old. She has 25,000 euros. She thinks she's going to get 8% on this money.

That's what she's going to do. 8% into 72. It's going to double every nine years. So what does this mean if she doesn't spend the money to your point, Paula, until she's 65? Well, that's not 25,000 euros anymore because it's going to double. If she's 30 now, it's going to double when she's 39. It's good double when she's 48. It's going to double when she's 57.

and again when she's 66. So I said 65, I'll just say 66. So four times by 66, that's not 25,000 euros. That first double makes it 50. The second double makes it 100. The third double makes it 200. The fourth double, which happens when she turned 66, 400,000 euros. It's not 25,000 euros. It's 400,000 euros that she has for future use. That's a powerful thing. Beautiful, beautiful. And that's why the mental bucketing of take this entire money as a lump sum, put it towards retirement, and then use the savings from her high income to pay for shorter term expenses. That's why that mental bucketing is so powerful because then when she's 66 years old, she'll look at this 400,000 euros and say, wow, that loved one who gave me that gift, this is what it turned into. And so the sentimentality of that becomes that much more significant. So I really like, the more we talk through this, I really like the idea of taking that entire 25,000 that's left over after the car and in one big lump sum, putting it to the side for long-term retirement,

investing it for when she is 66 years old, and then cash flowing her shorter term needs. through her immediate income and savings. And a great place to start, if she hasn't, is the total stock market index. Because the stock market over long periods of time has averaged around 10%. Because the question, Paul, a lot of people ask is, okay, Joe, you used 8%. Where am I going to reliably get 8%? Well, the word reliable over short term is very difficult. But over long, long terms, if we believe that the economy is going to continue, we look

at places where reliably you got 10%. Let's just back it down by two points and go, you know what? If I think we get 10 using the total stock market, I think we can use eight is our number. You know, financial planners love to do this and I highly encourage this, hope for the best, plan for suboptimal. And so I think eight is a nice conservative number. And starting with the total stock market, you're not betting. I think you're betting is that we're going to have an economy then.

That's all you're betting. because if we are, then you're going to be in it. You know, Paula, we've seen somebody in one headline I saw, I love the headlines around now when we've had some gyrations in the stock market. Somebody called it a whipsaw market, right? That it's just crazy ups and downs. In a market like this, you see the reason why people sell in markets like this is because they're worried that bad things are happening.

You know what the cool thing is about owning the index, Paula? is that in a market like we had a few weeks ago, when the stock market dropped, when the Dow dropped a thousand points, on those days, the market's very indiscriminate. You know, you've got horrible companies that go down

and will continue to go down over long periods of time. But on a day where there's a thousand point drop, not only do crappy companies go down, but mediocre companies, you know, they're okay, they're good enough.

They go down nearly the same. And great companies also go down nearly the same on a day like, that because everybody's just bailing out, right? And the problem is people don't want to be the last person holding onto these stocks. But on a day like that day, the thousand point drop day, it's a great day to realize that when I own an index, if a company's not good enough to be in the index and it goes by-bye from that index, it's self-cleaning. I don't have to sell. The index is going to sell it for me because it's no longer good enough to be a part of that

index. And guess what's going to happen? Another company that's more deserving gets put in that index instead. So the cool thing isn't on a day when you see all these headlines, Whipsaw Market, market collapsing, market whatever, the roller coaster ride, all of these, you know, it's funny. If you got on an elevator and your two choices were plummet or sore like we see in headlines all the time, like nobody would want anything to do with that elevator. And yet when it comes to the stock market, that's what we see all the time. So when I say the only thing you're betting on, is that we're going to have an economy. That's all you're betting on.

You're not betting that this company's going to be good enough to stay around because the index will clean it for you. Joe, what do you think of the fact that she's from Germany originally and they live in Kenya now? Oh, this question. Keeping money in Germany? Yeah. So he asks, should we keep it in Germany and look at the investment options there or should we move it to Kenya and look at investment options here?

I want to hear if we agree on this one. In this case, I don't like it at all. I do not like it at all. Ooh, tell me why. Well, the reason is if you're from Ireland and you have some money in Ireland and you're going back there all the time and you are financially savvy enough to call into the Afford Anything podcast, you probably track it a little bit. If you're from India and you do that, then having some investments in India and you follow

it a little bit, she didn't call. He called. It's his voicemail. and he is asking for her, I think she isn't tracking this stuff at all. And so leaving money in an economy where you don't follow anything going on in that economy, you don't have anything to do with it. And you're moving away from there to Kenya. Instead, I wouldn't have any of this money in Germany.

I would have zero in Germany. Would you move it to Kenya and then use it to invest in the Vanguard Total Stock Market? Yes. much more likely that I would do that than do some German investment. It's there. It's with both of them. They can both track it together. Now that said, I don't know a lot about investing as a Kenyan national in the Kenyan. So I don't know how all that works. So I'll put that caveat on my answer. I'm looking at Vanguard's website right now. Vanguard offers services in the America's Asia, Pacific and Europe, but to open an account and invest, you must be a U.S. citizen with a U.S.

mailing address. If you live or work outside of the U.S., you can check out Vanguard's international site. Here they have a special notice to non-U.S. investors. Well, yeah, I wasn't thinking Paula Vanguard-specific. Okay. I don't know that I care about what the company is. I mean, don't get me wrong, this is a commodity, so I do want to look at the price. But Fidelity has a total stock market index.

I'm sure there's many multinational companies that offer a total stock market index product. Right. And you can buy Vanguard funds through an alternate brokerage, right? Mutual funds and ETFs can always be purchased through brokerages that are not in-house, because they are publicly traded. Joe, I disagree with you around moving the money to Kenya because they would have to pay to convert this from from euros into Kenyan shilling. So there's going to be that currency exchange hit.

And if this money, if this 25,000 euro is going to be set aside for retirement, I mean, I think it's too early for them to decide where they're going to retire. And so I don't see any benefit to converting it to Kenyan shilling only potentially to convert it again into a different currency. Why not just keep it in euros, invest it in a total. stock market index, let it sit until she turns 66 years old, and then at the age of 66, she can know at that point where she wants to retire and convert appropriately. But I'd rather it be kept in euros because that's a much more stable currency, a much

larger and more stable currency. So, Joe, I think we disagree again. Oh, how does it feel to be wrong over and over and over, Paula? That's my favorite part of every show. You get Joe's take, you get my take, and you can decide which one you like. Oh, I thought it was being wrong. It was your favorite part. But yeah, that's what I would do.

I would keep it in euros. Keep it in euros, invest it in a total stock market index. I don't know that I have a huge opinion there. I would do the total stock market index, though. So Paul is at least partially right. Well, Damon, I hope. that answered your question. Congratulations on the upcoming family that you're building. Well, Joe, we have done it again. And Joe, you have a new product that's coming out, don't you?

We do. We have a guide to your benefits. And for a lot of companies, especially in the United States, it's going to be open enrollment season, Paula. And so many people look at this open enrollment sheet. And I remember when I was a financial planner and people made so many mistakes. They made so many mistakes. So that's going to be released in September, but people on the pre-order list are going to get two things. And all you do when you pre-order, you don't, you don't actually have to hand us any money. It just, we will tell you when it's live and you'll get the first ability to dive into our HR benefits guide. You're also going to get for that notice, two things. Number one is you will get a copy of what I used to call my Sherlock home sheet, which was the sheet of Paul is trying to find every dollar

that might be hidden in sofa cushions that you don't realize. Like everything from, have you repriced your homeowner's coverage, right? To today's question, have you looked at these different companies for your homeowner's coverage? Have you looked at your deductibles on your insurances? Like every single little place where there might be money, I used to use this as a financial planner,

and we would, my team and I would check all the buttons, and we're going to give that away for people that sign up for that. And then one person on that list is, is also going to get it for free. It's going to get the HR manual for free. The manual, you have access to it forever. As long as we make it, you've access to it. The average person changes jobs, 4.2 years. The government's always changing the rules. HR departments are always changing the rules. So as your benefits change, you just go back in and it's updated. It's

there, you know, that we've got your back. So it's our benefits guide coming on September the 3rd. But it's stacking benjamins.com slash benefits. Stackingbenjamins.com slash benefits to get on the list. And if you do it before September 3rd, you get the Sherlock Holmes list and you might get it for free. Oh, fantastic. Stackingbenjamins.com slash what was this? Benefits. Benefits.

Benefits. Awesome. Kudos to you for putting that together, Joe, because I know how time-consuming and daunting putting together a... Because you might have done this once or twice. Yeah, I'm working right now on building a course on how to get a raise. It is a major undertaking. Well, hopefully we got a raise out of our audience today with some of our answers. Nice segue.

Look at that. Ninja. Well, thank you so much for tuning in. If you enjoyed today's episode, please share it with a friend or a family member. That's a single most important thing you can. do to spread the message of great financial health. Follow us on your favorite podcast playing app, including Apple Podcasts and Spotify. And sign up for our newsletter, Afford Anything.com slash newsletter, so that you won't miss

any of our amazing updates. You can chat about this also with members of the community, affordanithing.com slash community. Thank you so much for tuning in. I'm Paula Pant. I'm Joe Sol C-high. And we will meet you in the next episode. Awesome.