Afford Anything - Q&A: Should You Buy a House Now or Invest Your Down Payment Instead?

Episode Date: October 7, 2025

#649: Many first-time buyers feel like they’re watching the train pull out of the station. If you’ve saved for years but can’t afford a home nearby, should you stretch to buy further (maybe hours) away or invest that cash instead? In this episode, we dig into the psychology, math, and lifestyle tradeoffs behind the “buy now or wait” dilemma. Plus, we unpack total return, explain when umbrella insurance is worth it, and share what every teen should learn about money. _______________________________________________ Listener Questions in This Episode Anonymous (aka “Lydia”) (3:26): ”I saved six figures for a down payment, but houses are still out of reach. Do I buy far away, rent forever, or invest the cash instead?” Lydia, an Australian listener, spent eight years saving for a home, only to find that every option feels like a compromise. Sky-high prices close to work, or long commutes for affordability. It’s a dilemma many face: does owning mean freedom, or does it just tie you down? We explore how to separate fear from opportunity, why “starter-home-turned-rental” plans often backfire, and how to measure the real cost of lost time when you move hours from work. Ultimately, it’s about aligning your money with your life, not the headlines. Anonymous (aka “Aristotle”) (29:38): “My ETF is up 10% and yields 3%. Is my net return 13%?” It’s a common question for anyone tracking their investments. We unpack the difference between total return and your personal rate of return, and why those two numbers rarely match. You’ll learn what actually drives performance, and how to read your brokerage dashboard like a pro. Joel (39:44): “Umbrella insurance; do we need it and how much?” If you own a home, drive a car, or rent out a property, you’re exposed to more liability than you might realize. We break down how umbrella insurance works, when it’s essential, and how much coverage makes sense. It’s one of the cheapest ways to protect your wealth. Julia (56:13): “I’m building a high-school personal finance course. Should I cover insurance or credit?” When teaching teenagers about money, where do you start? We explore why understanding decision-making (opportunity cost, compounding, and spotting bad financial advice) matters more than memorizing credit scores or insurance terms. Key Takeaways Don’t buy from FOMO; let lifestyle goals—not market panic—drive your choices. Total return includes price changes and income, but your broker’s “personal rate of return” shows the truest number. Umbrella insurance offers millions in protection for relatively little cost; bundle it with home and auto. Teach teens the “why” behind money choices before the “what.” Understanding tradeoffs beats memorizing rules. Chapters Note: Timestamps will vary on individual listening devices based on dynamic advertising segments. The provided timestamps are approximate and may be several minutes off due to changing ad lengths. (4:14) Anonymous Lydia’s question: should I buy now or invest my down payment? (8:23) The emotional trap of FOMO and rising prices (11:45) Why “live there now, rent it later” rarely works (22:14) The hidden cost of long commutes and lifestyle tradeoffs (29:38) Anonymous Aristotle’s question: how do I calculate my true investment return? (39:44) Joel’s question: Is umbrella insurance worth it and how much should I buy? (56:13) Julia’s question: what high schoolers should learn first about money Share this episode with a friend, colleagues, or with the person at your school that teaches personal finance classes: https://affordanything.com/episode649 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, you know, it's a tough world out there for anyone who is not yet a homeowner. Such a struggle. I mean, you look at the 20% down payment that we hear that we should have. And if you don't do the 20% down payment, well, then you've got PMI for what feels like the rest of your life. So what do you do? Right. Well, and the situation got worse after the pandemic because home prices skyrocketed. Remember, in 2020, home prices went up 17% in just one year. year. According to a report from Harvard's Joint Center for Housing Studies, home prices nationwide are up 30 percent as compared to 2019. And looking at the data that I just saw last week on home

prices with housing shortages in many places across the United States, it's not going to get better anytime soon. Yeah, exactly. Home prices are still going to climb. And then on top of that, you now have high interest rates. And so all of that creates a situation where if you're not yet a homeowner, it's very hard to break onto that scene. You know, if you purchased a home prior to the pandemic, great. Good on you. Yeah, exactly. If you bought a home pre-pandemic, you have equity. And it's funny because you and I remember pre-pandemic, so many people were saying, oh, look at how much home prices have risen. Because in 2018, people were comparing prices to what they were in 2012. And so people were saying, look at how much home prices have gone up over the last five, six years.

it's too expensive now. People were saying that in 2017, 2018, 2018, 2019, and then, boom, we hit that pandemic inflection point and things got a lot worse, a lot faster. I think we have a tendency

to do that with everything. Stock prices, right? I don't want to buy stocks because it's too high right now. I'm going to wait for the price of computers to come down before I buy my next computer. And yet what always happens,

prices march on. But in this case, they're not only marching on when it comes to, real estate, it is straight up. Right. We're going to hear from a caller who's been saving for eight years for a down payment and is wondering, should she continue or should she change course? We're going to answer that question first. After that, we're going to answer two questions, one from somebody who has a question about how to calculate his total returns when he's

looking at dividends plus asset appreciation. And another from some, someone who's wondering about umbrella insurance. We talk so much about growing your assets. Let's shift the conversation onto how do we protect what we've grown. So we're going to answer those two questions in the middle. And then at the end, we're going to broaden this out to talk about what we should be teaching the youngest generation, today's high schoolers, when it comes to personal finance. All that? Yeah, it's a wide array of topics. So I think you'll enjoy today's menu. 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 Panta. 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 See High. How's it going, Joe? It's going great. You and I, before we hit record, we got all stretched out. And so we're ready for some exercise. Oh, yes. Well, our first question today comes from Anonymous. Hi, Paula and Joe.

This is Anonymous calling from Australia. Paula, I just wanted to thank you for your first Friday episodes. I find that to be super calm and factual, especially being on the other side of the world because all I see are rage rate headlines. I just hit my goal of saving six figures for a house, but I don't know if I should be buying a house or not. Single family homes that need a lot of work

are going for $1.2 million in my city. and even though I earn 100K per year, I would never qualify. Houses that I can put 20% down minus fees are about two hours away in the 450K price range. Even making 100K per year, putting 20% down, adding an extra 30% to the mortgage payment to account for taxes, the ever-growing insurances and unexpected repairs, a house two hours away would still eat 60% of my take-home pay. I'm kind of worried that this is a terrible financial decision, but at the same time I'm suffering from the worst promo since I've sacrificed for eight years to save this house deposit, and house prices in Australia never seem to hit a ceiling. They just keep skyrocketing, so if I don't

buy a house now, I might not be able to buy one. I've considered other options like townhomes or apartments, but the body corporate fees are insane. It almost weighs out the cheaper prices of these house types. My other option is to rent out the spare rooms, but given that affordable houses are about two hours away from the city, I would seriously struggle to find roommates, and I wouldn't be able to rent the rooms out for a lot. I also keep putting my house deposit in a compound interest calculator and I could actually retire at 55 without adding another cent. So now I'm thinking that I've been wasting my time and money trying to build a house deposit because it should have been invested instead. My plan for this house was to live in it for a few years until I move overseas

where I would return it into a rental property. I want to retire in Australia and live in this house since it would be paid off at that point. It would also be a place for my mum to live as she older, as you let me stay at home all this time to keep my financial goals. Other info that you might need is that I am 27, debt-free, and two-thirds away to my 100K-invested goal across my taxable and retirement accounts. My taxable account is a 60-40 split of total stock market index funds and reeks at Vanguard, and within each category is a 50-50 split of Australian and international. I kind of feel like I've done everything right, but it's still not enough.

Should I dump the house fund into my taxable account and, get about buying a house. Keep the cash just in case an opportunity comes up, grind it out for two more years to get a bigger house deposit, invest it now and then take the funds out when I hit 40, as I would expect to have a high-paying job by then, or buy a 450K house and grind it out for a few more years with both an insane commute and house payment. Or another option, quickly find someone to marry with another high-paying job, but that was kind of a joke. Thanks so much for your help with my dilemma. Anonymous. Thank you for the question. And before we start with an answer, we've got to give you a name. We have to. For people new to the Afford Anything podcast, you can't be anonymous. We're all

friends here. And friends are not anonymous, Paula. Right. So Joe, tell me, have you watched anything interesting recently? I had the pleasure of hanging out with a couple of friends who listened to both Afford anything and stacking Benjamin's. At the end of my time in Portland, Nathan and Catherine invited us to have dinner at the restaurant that has been in his family for years. But they also turned me on, Paula, to a fantastic show that I missed back in 2023 on Netflix called The Law According to Lydia Poet. And Lydia Poet, I never knew this, was the first female lawyer in Italy. We watched episode one, Cheryl and I, my spouse, and I watched episode one just yesterday. And Nathan and Catherine, I know that you're probably listening.

Fantastic recommendation. Like not just a great time hanging out with you guys. Thank you so much. But also fantastic. So I think we call her Lydia. Lydia. Lydia, that's a beautiful name. Lydia, first of all, I feel for the situation that you're in.

Your question echoes a frustration that makes. many people are feeling. The disconnect between incomes and home prices that Delta has gotten so large that it can be incredibly difficult to make purchasing a home affordable. So let's talk through, number one, the root question of should you buy a home? Does this make good financial sense? And number two, if the answer is yes, then how? I want to start. with the root question of should you buy a home? Number one, you mentioned a key line that I hear from a lot of people that I want to highlight, which is, if I don't buy a house now, I might not ever be able to buy one. I hear a lot of people say that. And that line sends up some red flags

because it indicates that you might be fomowing into a home purchase. The reality is that you don't know what the future holds and 10 years from now yeah i actually did this math the other day 365 times 12 is over 4,000 so 4,000 days from now right imagine how drastically your life can change in 4,000 days none of us have any concept of how much we might be earning 4,000 days and you're 27. So in 4,000 days, you'll be 39. And at that time, your income might be sufficiently high that even though home prices have climbed, the delta between what you make and the price of a home might be significantly reduced. Your income might be high enough at that stage. Or, and we'll talk about this in a moment, the assets that you've built in your portfolio,

the stock investments that you've built might be sufficiently high enough that homes are increasingly within reach. And I know in the United States there was research that was recently published just in the last week or two that shows that the average age of a first-time home buyer in the U.S.

is right around 40. And that's why I highlight 4,000 days from now when you're 39 because that would put you right around the age of the average first-time U.S. home buyer. I do want to caution her, though, because I think what people may read into what you just said, Paula, is that you can bet on that fact and just never bet on the future. But I think what you're explaining is that the future does not equal the present. Things will most certainly change.

We don't know how they will change. But I love your point about FOMO just because it's not true today does not mean that it won't. It might not be true in the future. It might be that you will never be able to afford a home. However, it also might happen that even if house prices continue to rise, that you find this phenomenal deal. You live next door to someone. And rather than put it on the market, they'd rather sell to you. You might have a friend who has a friend who knows about a house that other people don't know about.

We see these things happen all the time. But I love this idea of cautioning against it has to be today. It has to be right now. Yeah. And the other element of that is that, Lydia, you mentioned that you plan on leaving the country in a couple of years. You said that ultimately you want to retire in Australia. But as far as this particular house is concerned, you want to live in it for a few years until you move overseas. And at that point, you're going to turn it into a rental property. The math behind what makes for a good rental property is completely separate from the want behind what makes for good personal living for you. And here's what I mean by that. If you're a rental property investor, you're going to make completely different decisions about what you buy because it is a spreadsheet-based decision. So quality of life is not going to be taken into account. Distance to work, distance to family, personal preferences, such as weather,

climate, all of these things that you think about when you're thinking of your own personal home, you're not going to think about when you're buying an investment property. When you're calculating what's a good investment property, you are purely running a spreadsheet on what's going to give you the best risk-adjusted return. And I caution people against trying to find a property that would be both a good personal residents and a decent rental because if something tries to be both, it often ends up doing neither well because you compromise so much on both ends. You compromise on what you want for a personal residence. And then you compromise on the returns, the risk-adjusted returns that you're getting

on the rental property. And as a result, you end up with a personal residence that you don't really like that also is a weak rental producing weak returns. So it's one thing to have a home that you bought because you wanted it. And then your life circumstances change and you make the decision that you're going to hang on to this home because you have a low interest rate. It is cash flow positive. You don't want to pay the transaction costs associated with selling it. It makes perfect sense to me to have a home that you bought for the sake of personal enjoyment that you later decide to hold onto as a rental because of all of the factors that I just mentioned. That is a very different scenario than going into a purchase with the intention of it being a

hybrid personal residence slash rental. But again, Paula, I don't think that that precludes the fact that if the math checks out and it's a fantastic rental property, then maybe she purchases. the house as a rental property, knowing that later on she wants to move into this. So it's not so much a hybrid is a great rental property that might end up being a home for her in the future? Possibly. I mean, I don't know the numbers on this property. She said that it would be in about the 450,000 price range. But I don't know what that translates to in terms of how much it would rent for and then what that nets out in terms of its cap rate. But I think to be clear, the top of

your funnel is it needs to check out as a rental property first. Don't buy a house you want to move into later that doesn't make sense on paper because I was thinking about the possibility of maybe flipping this around about instead of having a property that she may have as a rental property later, buy a property that she may have as a rental property now. But I certainly don't want her to make a bad rental decision because it's just a house that she wants to buy today. and then afford to live in tomorrow. This is my favorite type of question. And the reason this is my favorite type of question is so often in life,

we can't do everything we want to do. We have these goals and they are directly competing. And sometimes like now for Lydia, the stakes are really high. I have these two directions I want to go in and they seem to be rather mutually exclusive. If I leave the money in a spot that it's liquid so that I can put the down payment on the property, I don't get my long-term financial independence goal as soon as I would want to. If I put it in the financial independence pot and the market goes down, now it's not available for home purchase. And if I put it in home purchase, I probably don't even want to count that money anymore at all toward financial independence, which is, you know, her grind it out or get married to statement.

which was funny. What I love about this is that this is that ultimate thing when I was a financial planner, which is the cage match, the MMA cage match. You put your two goals into the cage. Because what I heard over and over, Paula, was what's the smart financial decision? What's a smart financial? Don't start there. You know why? Because 10 years from now, you're going to look back and you're going to go, I don't know that that was the decision for me. I think what you want to start with is what do I want to do do I really is my goal really to own a house and if I own a house and in the MMA cage match that is on top of your financial independence at 55 and it's beaten the hell out of it and now financial independence has to wait till 60 or 65 are you okay

with that sacrifice to own the house and if not then let's go the other way if you're 55 years old and you're renting your entire life how do you feel about that. Now you're financial independent. You can live wherever you want, but now you don't have that quote, home that is yours. Which one wins? I can't answer that, but I'll tell you in everybody's case when I was a financial planner, one of those goals wins. And it doesn't mean that one precludes the other, which is why I love Paula, you saying that, you know what, don't fall more because things may change. But I clearly don't want to start with what's the great financial decision. Don't start with more money, start with more life. And I don't know what more life looks like to you.

So, Lydia, that's my advice, would be begin with, what do you want to do? If you're sitting right across from the table from me, I would say, which one of these do you want to do more? The other thing, Lydia, I do not know how the mortgage process works in Australia. But I can tell you in the United States, and I'm saying this partially for the benefit of all of our listeners, you don't need 20% down. In the U.S., you can, with an FHA loan, put as little as 3.5% down. So your options in the U.S. are 3.5% down or 5% or 10%. There are lots and lots of opportunities for first-time home buyers to get in with low-down payments.

And you will have an additional fee called either PMI or MIP, depending on the type of mortgage that you get. it's basically an additional fee that you hold until you reach 20% equity. And at the time you reach 20% equity, you call your lender, you tell them that you have 20% equity. They verify that and then they drop the PMI or MIP. I'm saying that largely for all of the U.S. listeners who are in a similar situation, don't feel like you need 20% down. You don't. You can get into that first home with as little as 3.5%.

I don't know how the system works in Australia, but I would certainly look into that. By the way, if there's anybody in our community, afford anything.com slash community, who knows the Australian housing market, I would invite you to chime in over there. Again, afford anything.com slash community. You could be a great resource for Lydia. And that's free, by the way, available for everybody. I want to return back to the possibility of investing this money in a stock portfolio, allowing it to grow, and then if you're not attached to the goal of homeownership,

maybe buying a home with that money if the stock portfolio grows, let's say it doubles in the next 10 years. Maybe at that point you've got a much bigger stash of cash and you use that to make a a bigger dent into a housing purchase. If you're not attached to the goal of buying a home, then you can expose this money to stock risk because there isn't a fixed timeline. So the reason we tell people, hey, if you've got a goal within the next five years, you don't want to expose it to the risk of stocks because that five-year timeline is so short, that applies when that five-year timeline is fixed, right?

If there's something that you want to do in exactly five years, or maybe the wiggle room is between four to six years, then yeah, that's a fixed timeline, you're attached to the goal, you really want it to happen in five years, so you reduce your stock exposure because you don't have the ability to withstand that volatility because of that time scale. But if you're not attached to the goal,

and that time scale is flexible, then you can expose your assets to a greater degree of risk because if it doesn't work out, you're cool with that. Yeah, the idea of owning a house doesn't have to be house right now. Yeah. It can be a house 10 years in the future. And you know, when you look into the future, the average person, at least in the United States, changes jobs every 4.2 years, I believe, is still the number. And things change that we don't expect to change.

what if she ends up for career reasons moving unexpectedly paula and now she if she has this money invested i mean i think often we think in binary results and binary choices and what if there's a middle ground which is why i played with that idea of instead of renting the house later what if she found a great rental house now that could pay the mortgage could pay enough cash flow it has to make sense as a rent a unit, but it also might be one that in the future she decides to move into. That may also work. Honestly, I'm less in love with that idea, largely because she has the ambition of going overseas soon. I'm more in love with that idea, not from a this idea only perspective. I'm more in love with the fact that there may be other choices. I think it's the beginning of the exploration of

what are all the different things I can do. I bring that. up the same way, Paul, that you bring up investing the money if you're not attached to today's date. What are some other things that we could do? Right. So in other words, both of those are examples of the third option. Right. You know, Lydia, the other thing that I don't like about this $450,000 house that's two hours away, that's an insane commute. It is an insane commute.

It's an absolutely insane commute. And there's the petrol costs, which in Australia is not cheap, a leader of petrol is so much money. I don't love the sheer amount of money that she's going to spend on petrol. Plus, on top of that. The commute time. Yeah, two hours each way, four hours round trip. So then a nine to five workday turns into a seven to seven if you put a two hour commute

on either end. I'm with you on that one. I immediately felt grind. And I think maybe it was Lydia that I wanted to hear it, but I did hear some. Even in your voice, as you were explaining, how tough that would be, all in the name of owning a property. Yeah, and I just don't see the benefit of property ownership if it requires a nine to five to turn into a seven to seven. Because fundamentally, what is a home? It's an asset.

And if you want to buy assets, you have stocks, publicly traded assets that are available to you. And so from a financial perspective, the goal is to accumulate assets. From a financial perspective, but again, we don't know what her motivation is to own this house. And I would want to explore that more. Well, Lydia, I hope this discussion has helped. Oh, final thing that I'll say, I love that you brought up offsetting part of the out-of-pocket costs with roommates. I know that with this house that's far away, that would be a challenge. but I love broadly speaking for any home that you buy or heck even for any home that you rent.

I love the openness to roommates because in a world in which home prices are expensive, roommates are the number one way to reduce those costs to make housing more affordable, to make your life easier. Plus, if you get the right roommate, it's fun to have someone around. It's kind of like having another member of the family. It's like having a cousin that lives with you, except that you're not actually related. You're friends or maybe strangers who became friends.

The right roommate kind of turns into an unofficial family member. You get to reduce costs and also deepen relationships at the same time. I think roommates are such a win-win in that regard. Oh, and final point. Don't marry someone with a high-paying job. marry someone with an amazing work ethic because a high-paying job can be lost but an amazing work ethic

that's character, that's values. Jobs come and go, but work ethic lasts forever. So thank you, Lydia, for the question. And best of luck with whatever you decide. Call us back and let us know what decision you make. We're going to take a break to hear from our sponsors and when we return, we're going to answer two questions, one that's about how to protect your assets and another that's about how to understand your investment returns.

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deals for up to 70% off. That's W-A-F-A-I-R.com. Sale ends December 7th. 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, built to evolve with your business. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the FinTech Hustle that got them named one of America's most innovative companies by Fortune magazine. That's what being a fifth third better is all about. It's about not being just one thing, but many things for our customers. Big Bank Muscle, FinTech Hustle. That's your commercial payments a fifth third better. Welcome back. Our next question comes from Anonymous.

Hey, Paul and Joe. This is, let's go with Anonymous, just to see what kind of fun name you guys come up with for me. My question is about trying to figure out my overall return from an investment. I'm an ETF investor. The chart says that I have increased 10% this year, but I've also got a 3% dividend. So does that make my net return 13%? I'm not really sure. I'm no one probably overthinking this, but I'd be curious to see how you guys look at this. All right, thank you. Yes. Next question. Let's keep it going, Paula. That was a simple answer. Who we got next? Yeah, look at what we did with that. We were amazing with that. Record time. Record time. Anonymous, first let's give you a name and then we can explain why the answer is yes.

I just put into a co-pilot, who are some historic figures who are interested in compounding returns? Aristotle debated the morality of charging interest on loans contributing to the understanding of interest rates. Cicero, a Roman statesman who wrote about the implications of interest rates on loans, indicating a formal understanding of compound interest. of course, Fibonacci. Can't forget Fibonacci. Yeah. Mathematician who studied the principles of compound interest. Maybe it's Fibonacci.

And then our own Stacking Benjamin's Ben Franklin, duh, known for his wisdom and personal finance and saving strategies. I like the first one. I say, I like Aristotle. Yeah, it's a great name. Right. My two choices for names were Joe or Aristotle. All right.

Anonymous, your name will be Aristotle. In honor of the man who debated the morality of interest. I do have two things here. I mean, obviously it's pretty simple, right? 10% plus 3%. But it does depend on when during the year you receive those. And it's also muddled by contributions. So your actual return could be less if you got 10% on the full amount at the beginning of the year. And then you added 3% later on in the year. So you might not. have actually had a full 13%. It all depends on when the money was invested, which is why I like that most online statements now will calculate your return for you. They will show you that discluding your contributions that came in, here's what your rate of return was, your personal rate of return. So I might go to whether it's fidelity or Vanguard or whoever and try to look up what your personal return was. And that would be found typically not on the dashboard, but rather in the

statement itself. So if you look at the PDF statement, which is kind of tucked away and hidden in a corner of the drop-down menu. I use Schwab and it does show you right on the front. This is your personal return, which I enjoy. But yeah, I can't think of any of the major providers that don't have it on that PDF statement. Right. Oh, the great thing with Schwab, by the way, for anybody who uses it. I just discovered this. The columns where they show you, you know, because Schwab shows you a ton of data and it can be a little bit overwhelming, you can actually reorganize those columns. That is interesting. I'm wondering if I put in return, you know what I mean? If I rearranged at some point of mine to better make sense of what I was looking for. Maybe. I just know that I was getting overwhelmed by all the data that I was seeing and then I realized I

could reorganize it. So I reorganized my Schwab profile so that, the first couple of columns are the things that I care about, and then everything else, my brain just filters out and I don't even see it. But I do think, Paula, I do think we answered Aristotle's question. Beautiful. Perfect. Oh, I do want to make one other broad point, and this is really for the sake of everyone listening, because the crux of the question, the underlying premise that I want people to understand is that any asset makes money in two ways. There is the appreciation on the asset, and then there is the dividend or the income stream

that it pays out. And so the total return of that asset is the appreciation plus the dividend. And I think that is a foundational piece of understanding what an asset is and how an asset makes money that often is not articulated. And so sometimes when we have these conversations around returns, people will look at the price appreciation on a share of stock, or they'll look at the price appreciation on a home, going back to our earlier conversation about housing, and dividends will be factored out of the equation, or conversely, they will take a dividend strategy and become a dividend enthusiast, right? And then you hear this massive emphasis on dividends, but sometimes that emphasis comes to the exclusion of other factors. So I think just starting with that base understanding

of this is how assets make money. Assets make money through a combination of appreciation and dividend pay out, even if something doesn't formally have a quote-unquote dividend, like a house, that house, if it's used as a rental, still has an income stream. And an income stream is functionally the dividend. And it is often, when it comes to the stock market anyway, very much you can think of it as a teeter-totter. I mean, on one end, if it receives very high dividends, that's probably because the management team knows that there is very little opportunity for capital appreciation. And to lure investors, then, they will pay a very high dividend. Or they just don't need the money. So why not pay it out to the owners of the company, right? So this will be a lot of

utility stocks where utilities don't have a lot of room for growth. They might be able to be more efficient, but they're not going to grow because they're regulated on what the area is that they serve. They can't grow their market substantially. You'll find this with railroads. You'll find it with shipping companies where it's very difficult for them to add new ships. So pipelines, you will see high dividends from those types of companies. On the other side, if you look at invidia, which has huge capital appreciation, well, clearly, the money has been in better hands with their management team than it would have been if they paid a dividend.

So Nvidia's board of directors said, yeah, we're, no, year long for a capital appreciation ride in this stock. So a company like Coca-Cola will be in the mid-range, right? Coca-Cola is often getting into new markets, maybe taking on new businesses. There is some room for capital appreciation, but also it's going to be slow if they do. So Coca-Cola pays in mid-sized dividend and you get mid-size growth on the capital appreciation front. So there is this, there's this fulcrum with them on either side. If you find a stock that you think is both high dividend and has high growth potential,

you have to ask yourself, what am I missing? Because you probably are missing something in your analysis of that stock. And to take that same framework and apply it to rental properties, often in the world of real estate investors, you'll see people who will either make a cash flow play or they'll make an appreciation play. So, for example, I have a friend who invests in two cities. He invests in Toledo, Ohio and Dallas, Texas. His properties in Dallas, Texas, from a cash flow perspective, more or less break even. But those properties are his appreciation play. Those are his growth plays.

By contrast, his properties in Toledo, Ohio, cash flow like crazy. They are incredible income plays. Those are his dividend buys. But they're unlikely to see high appreciation. So it's that same strategy that Joe just described in the stock market. also applied to rental properties depending on geographic location. So Aristotle, thank you for the question. And thanks for being a new member of the Afford Anything community.

Remember, as a new member, to subscribe to our newsletter, affordanything.com slash newsletter, and hang out with other people in the community, afford anything.com slash community. Our next question comes from Joel from Omaha. Hi, Paula and Joe, new to the podcast and really enjoy what I'm hearing so far. In a few recent episodes, you've talked about different types of insurance, whether that's long-term care insurance, disability insurance, health insurance, and some others.

I was hoping you guys would be able to cover some things about umbrella insurance. My wife recently had a coworker who was in a pretty bad car accident where she was at fault, and the other driver is now suing her for a large amount of money. Her insurance is not covering the full amount if the person were to win, and so that got us looking at some ways to better protect our assets. If umbrella insurance is a good idea, how do we shop for it? What are some things to avoid? What is the appropriate dollar amount for our net worth and any other tips or tricks?

that you can provide for us so that we get the right coverage for us. Thank you. Joel, what a great question because we haven't, Paula, talked about umbrella liability insurance in a long time. Right. This is an important insurance and it also is a little bit of an outlier because generally the rubric that I like to use when thinking about insurances is this. actuaries assess the risk of an incident happening and then pass the magnitude of that risk onto you through the amount of money you're going to pay to buy that type of insurance. So let me explain what I mean by that. Most term life insurance policies are never cashed in for the death benefit.

And because of that, term life insurance is very reasonably priced versus a whole life insurance policy where there is a one-to-one ratio on number of people that own it and number of payouts that the company is going to have to endure. If you continue to pay for this for your whole life or you have a paid up policy where you prepay by a certain time, whole life is going to pay out to everybody. But term life insurance, because most people pass away after the term has expired, much less expensive. So, That's why whole life costs more. So when I look at insurance types, I think disability coverage, very expensive. Why is it expensive? Because the insurance company thinks it's going to happen to you. Long-term care. They think it may not happen to you, but when it does, it hurts. It is very, very, very expensive. I think about some other coverages, cancer insurance as an example, very inexpensive. Because not only do you have to have this tragic thing happen. It has to be as a result of one type of problem that you may have, cancer, accidental death and dismemberment insurance. I see lots of people that work in cubicle land or work from home and they work on a keyboard all day. And it only pays if you have an accident while it work. So it's really inexpensive because very few people are going to use it. Umbrella, though, to me, is the outlier, Paula.

which is this in term insurance, the two types of insurance that I often, when I was a financial planner, recommended people get, even though we know it probably won't happen to you. And that's because the magnitude is so high. And to your point, Joel, you talked about your friend where they're going to be sued and they don't have enough assets to cover the lawsuit or may take all their assets, this could be a huge problem for you and your family. So I like the risk reward between buying umbrella liability, which is generally not expensive to get and adding that to your coverage level. Now, there's a couple things that have to happen before you can get umbrella liability. Most insurers, by most, I mean 99% of insurers, insurers will generally want to have both your

home and your auto insurance, they want those bundled through them before they will even let you buy umbrella liability insurance to them. So if you have them through two different companies, it's going to be a little bit more of a struggle to get umbrella liability. The second thing is the default most people go with still today is a million dollars. And when you look at these lawsuits that happen now, nobody's stopping at a million. I would look at two million 3 million. The cool thing about umbrella liability coverage that we have seen is when you have umbrella liability coverage, the law firm knows that that's an easy get. So the person that sues you knows that $2 million, $3 million is an easy get. Once they do discovery, they will know

that you have this policy. They will often go after the policy proceeds and leave the rest of your assets alone. because that's what the insurance is there for is to take care of the claim. And also, the law firm doesn't want to fight over your assets. They don't want an extended legal battle. And usually the person who hired the law firm, the person who's suing you also doesn't want that. But it can't be a million because often just the medical bills this person may have might be more than a million dollars. So I would look at a larger number, two, three, four, or five million, see what that cost versus a million, look at the value of your asset base and make a decision then. Usually umbrella liability policies have a cost that's structured in two pieces. The first is just the cost of having a policy, which is going to be the vast majority of the cost. Adding that next million, the next million, the next million is a sliver above. I was so surprised when I started looking at bigger numbers than just a million dollars, how cost effective that could be.

The last thing that I'll say, there is a way to mitigate the cost of umbrella liability coverage. And that is often people have umbrella liability coverage because they have assets they need to protect. Term insurance is the opposite. You buy term insurance because you don't have assets to cover things. And so you buy term insurance in case you pass away so that you're, family, your loved ones, whatever you're supporting, that those people, those institutions can continue to be supported without you around. Umbrella liability coverage you buy when you have stuff that you really don't want to part with if there was a lawsuit. In that case, what I often

found was you may be able to raise your deductibles on your homeowners coverage, on your auto coverage, if you haven't done that already. And the cost of the cost. cost difference in having a higher deductible for these, which will impact your assets a little bit, but there's a cap on the amount that the insurance company will demand from you before the insurance pays. That price difference often is the same or more money than what the umbrella liability coverage cost. We were often able, Paula, to add umbrella liability coverage to somebody's portfolio of insurances without costing them more premium by creating an insurance plan that made more sense for them. They already have assets. Why wouldn't they raise their deductibles?

If they don't have an experience of homeowners claims or car insurance claims, certainly, if you have a family of bad drivers, you may not want to raise your car insurance deductible, but otherwise raise those. And I was often pleasantly surprised. that we could add that insurance coverage without having it affect the bottom line. I'll chime in from a real estate investor perspective because my experience with umbrella liability policies is entirely through the lens of real estate investing.

If you are a rental property investor, there's no reason not to have an umbrella liability policy. So one of the most common questions that I get, in fact, shockingly, like I feel like I get this question more than it merits, particularly from beginner investors. And that question is, should I have an LLC for my properties? I get that question so much from real estate investors. Sometimes to such an extent that I will go into a room, this happens often when I'm speaking live in front of a crowd, I will go into a room to talk about rental property investing.

And the first question, somebody raises their hand, the first question out of their mouth is, should I create an LLC? And I've often wondered why people start with that, you know, why people aren't starting with, how do I know if it's a good deal or not? Let's say I got a bad deal. Do I get an LLC? Yeah. Yes, whether it's a good deal or a bad deal, no matter what the deal is.

For some reason, a lot of people begin with the question. Well, they begin with a proposed solution. So when they ask the question, should I create an LLC? What they're doing is they're suggesting a solution rather than illuminating the question. The fundamental base question behind that is how do I protect my property? And so rather than starting with product, let's start with problem. The problem is, I want to protect my property. What are the best ways to do that?

And that's a much better way to phrase that question rather than suggest product, which is formation of LLC. To the question of should I form an LLC, I mean, we can go down the rabbit hole if somebody really wants to, but the short answer is, if you have a mortgage on the property, that that could trigger the due on sale clause. So you need to counterbalance the liability protection that you're getting from an LLC with the risk of triggering the due on sale. sale clause. That's the short answer. But to the broader question of how do I protect my properties, the answer is umbrella liability insurance. So 100% if you are a rental property investor, get umbrella liability insurance. Well, then I think between my answer and your answer, we just said that maybe 90% of our audience should get umbrella liability insurance. Wow, we should like get a license to sell this stuff, man. I know. Right? Because the answer is yes and

unqualified, yes, Joel. And I'm glad you brought this up because it is an important but often overlooked area of coverage that we don't address. Low probability, high magnitude, easy to add your portfolio of insurances. And I would do it in a heartbeat. And it sounds like Paula Wood, too. It can be hard to find. I've had this problem living in New York City because I own rental properties, but I rent my primary residence. And living in New York City, I don't own a car.

So I'm a renter who doesn't own a car. Therefore, I have neither homeowners, primary personal residence homeowners, nor auto insurance. It was difficult for you to find an umbrella policy then. Yeah. Yeah, exactly. The reason is that companies have some limited liability protections on car insurance and on homeowners, and they want to make sure that they are able to negotiate with a law firm using those numbers first before they have to go to the umbrella.

And if they feel like they're trusting another company, I mean, imagine that you're an insurance company holding someone's car insurance. and you find out there was a lawsuit coming, but the person at umbrella liability covers through somebody else, you're going to try to wiggle out of your portion of having to pay and let the umbrella liability company handle it, if at all possible. And it just creates this friction between insurance companies. Insurance company's goal is to get rid of all that friction. So that's why they want you to have both. So Joel, thank you for the question.

and thank you for inspiring the discussion. Best of luck with insurance shopping. We're going to take one final break to hear from the sponsors who make the show possible, and when we return, we're going to hear from a teacher who is teaching a personal finance class and is wondering what to include in the curriculum.

That's up next. Welcome back. Our final question today comes from Julia. Hey, Paula and Joe. I absolutely love your podcast and love all the advice that you give callers. I have kind of a different question for you. I'm a high school math teacher,

and this year is the first year that my school is offering a personal finance course. It counts as a math credit for students. So there is quite a bit of math involved, but I would say primarily it's to teach personal finance. I have a lot of freedom over what I teach. This first semester, I started with budgeting, and then we did bank accounts, checking, savings, and CDs. Next, I'm going to teach them all about investing, focusing on stocks and bonds, and then investing for

retirement and the different kinds of retirement accounts. Next semester, I am going to teach about taxes and career, like how to read a paycheck and all that kind of stuff, and then how to file their taxes and everything related to that. But I think I will have enough time to either teach about insurance or to teach about credit scores and loans. What do you think is the more important topic if I don't have time to do both? Or would you quickly cover both and not go as deep into it? Is there any other topic you think is super, super important for a high school student to know? I'm thinking about possibly trying to include stuff about car ownership or how to finance going to college. Really curious to hear any of your thoughts.

on this. Like I said, I have a lot of freedom. And so I'm just planning out the whole year. Thank you so much. Julia, first of all, I love that you're teaching this. This is amazing. She is doing God's work. Right? Exactly. Thank you for doing God's work. And I love that you have so much freedom and flexibility to determine what goes into the curriculum. Oh, I'm just going to speak stream of consciousness right now. anything related to car ownership, car purchasing and ownership and maintenance, that is, as a high schooler, your first major expenditure. So absolutely anything related to that, I would a thousand percent throw in. Similarly, preparing them for the expenses that they're going to face, either as college freshmen, you know, if you're living in a dorm, then you may not directly be paying

for housing or food, but there are still those ancillary expenses going to target just to get face wash and toothpaste. And, you know, I was highly unprepared for how much that would add up. So preparing them either for the expenses that they will face as college freshmen living on dorms or the experience that they will face at trade school, at vocational school, as college freshmen who don't live in a dorm, who maybe still live with their parents, walking them through sample budgets for all of those different scenarios. Those are the first two things that come to mind when I think about what I would want to impart onto high school students.

I like all those. I immediately, Paula, went to something even more foundational. If I had my choice of any topic, right at the top, I would go to something very much what I consider to be the foundation, which is none of these topics at all. Decision making, when it comes to personal finance, I think just the foundations of making good decisions. So this would be the importance of goal setting. After I wrote my book, I talked to some college professors. They didn't love it. Not that they didn't love the book. They didn't love the fact that I hadn't explained why it was so important. important to begin with the end of mind. Like I suppose in chapter one that beginning with the

end of mind makes sense to everybody. One professor at junior college in Chicago really pushed back at me and said, you know, these guys just go out and buy things and they're not thinking long term. They're not thinking long term versus short term. And I would love in chapter one that you had had this idea of opportunity cost and not even call it opportunity cost. I have the thing that cost $100 in front of me versus I have this long-term thing that I want that I might not even think that I want today. Like living beyond today, I thought was really good. So I think this would include things like probabilities, like what's the probability that this would happen? Compound interest, which we talked about earlier today, right? I know speaking with a gentleman who works big

time with youth in the Pittsburgh area told me when he talked to students about debt and about staying out of debt, the eye roll you could see from everything. Like, oh, God, who cares? Yeah, because it sounds like smug grown up moralizing. Yes. But when he told them about the Roth IRA and the little bit of money they could put in a Roth IRA, Paula, and then went through the rule of 72 in compounding interest, they're like, I could be a freaking millionaire and not work that hard. are you kidding me? Like just the idea of if I save more early on, just aha, there was this big explosion. And all of a sudden everybody's like, okay, how can I get my summer job ASAP to put money in a Roth IRA right flipping now? This idea of riches. And I don't know if it's social

media or just, you know, everybody wants to be, wants to be wealthy. Sometimes the carrot is more appealing than the stick. Oh, sure, right. So goal setting, probabilities compound interest opportunity cost, I think that unit to me would be foundational to everything Julie is talking about. You know, on that note, that actually makes me think of something else that's going to be critical, which is how to suss out good advice from bad, smart media consumption, because people get so much financial advice from TikTok or Instagram that I might even show a handful of videos and then deconstruct them and say, all right, here's a TikTok video with this person who is saying,

XYZ, let's deconstruct this. How do we know if this person is giving good advice or bad advice? Right. So intelligent social media consumption. And, Julia, we do a TikTok Minute weekly on the Stacky Benjamin show. So feel free to write to me and I will send you. a bunch of horrible, horrible TikTok advice. Joe at stacking benjamins.com.

Yes, there's a, there's a guy, Paula, talking about how you can afford all these amazing cars behind him. And he's walking and he's bragging about all the high-end luxury vehicles that he owns. And if you actually pause the video, you will see that he is wearing a valet shirt. Oh. Oh. He doesn't own any of these cars.

It's horrible advice. Wow. And he's talking about just financing the cars. Another guy in a swimming pool talking about how the best way to save a million dollars is to go to like a courtyard by Marriott sneak in the back door and just get free breakfast and then invest the money you would have spent on breakfast. Horrible. How much money does he think people spend on breakfast? I bet. That was our question. How does this make you a millionaire? If I'd like go a pop tarts, I'll have a million dollars. It was just, oh my good. The advice that we, that quote advice. So, Paula, I think you're you're right on there. Yeah, yeah, yeah. The one I like, you know, when she was mentioning insurance versus credit scoring, I love credit scoring, but I also feel like left to my own device. If I were 18 years old right now, I'll figure out credit.

And don't get me wrong, I think stepping in it with credit is horrible. And maybe you want to cover it a little bit. But the foundations of insurance or something, I think people will never get anywhere else. And if you can get that immediately in high school, you'll get something that the vast majority of people will never ever have on their plate. I think, you know what I mean? credit will come to sooner or later. Well, you know, I think there's a fundamental thing about insurance that a lot of people don't get, especially when you're young.

I remember having a roommate when I was probably 26 or so. I had a roommate who was like ranting about how his health insurance was a waste of money because he never used it. Right. But you know, it's funny, Paula, we laugh about that. And yet, what did I hear when I was a financial planner all the time? I'm not going to get long-term care insurance. And again, I'm not advocating for long-term care insurance. I just always advocated. We need a strategy because of the magnitude of this problem. And the one thing

people would always say is, I'm not going to buy the insurance because what if I never use it? I would just look at my client and go, of course we don't want to use it. Like who said, hey, I'm going into a nursing home. High Five. I got to use that insurance. Like we go down the car. I'm like, Oh my goodness. I got to make sure I get this premium. Let's go hit a tree. What are you talking about? I think just articulating that to students, there's this mental switch that has to flip because every other product, you buy it with the intention of using it. Cissors, towels, Gatorade, right? You buy these things with the intention of using it. Insurance is the one thing that you

buy that you hope to never have to use, you know? And so, So it's a total mental flip. It's like Drano. Drano is the one thing that you buy for the sole purpose of pouring it down the drain. What's fascinating, Paula, I spoke with about a year and a half ago an insurance expert from MIT. And when I was interviewing her, it was fascinating too. And, Julia, I would put this in your discussion. For the vast majority of things, Paula, we don't want to use it.

And yet there are a few examples of where insurance does. doesn't work very well because of the fact that people do tend to use it. Pet insurance. People that buy pet insurance are people that love their pets. And because of that, if you buy pet insurance, you're probably going to use the pet insurance, which is why pet insurance, people talk about how expensive it is to buy pet insurance and how many exclusions some of the policies have for that very reason. So when things are aspirational, insurance doesn't work as well. And I just found that very fascinating that when you look at insurances that work versus insurances that are more of a struggle, do I buy it or do not buy it? Dental insurance again

is another one where a lot of studies show that for most people, paying just your dentist outright makes about the same amount of sense as buying dental insurance. Now, the cool thing about dental insurance is it spaces the premiums out so that you don't have one big out of pocket at one point so your emergency fund doesn't get hit so super hard with one big dental visit that you might have. But besides that, on a dollar for dollar comparison, dental insurance for most people ends up pricing out to be about the same as not having. Vision insurance, same. Yeah. But I love that topic for this very, look at how excited we got about the topic. And it is something that the vast majority people don't know. I love the idea of

covering credit, obviously not understanding credit, ruin my early financial life. So I love that. But insurance is just something nobody's going to ever come across without you, Julia. You know, the one thing about credit, I would at a minimum, I would have a glossary for them because I remember being intimidated and overwhelmed by all of these acronyms that I didn't understand. APR, APY, what does that mean? And I remember asking. somebody that I have a very, very clear memory of, I think it was second semester of freshman year of college, asking somebody, okay, what is APR? And they're like, annual percentage rate. They knew they could parrot that back. And I was like, yes, but what does that mean? And they couldn't answer. Yeah, exactly. The world of credit and debt has all of this jargon. You don't even know how to parse

through the jargon in order to be able to have a conversation about it. Going back to insurance, actually, I was asking an insurance agent once. I was a little bit older, I was probably about 27 at the time. And I remember she used the word adjudicated. And I was like, I don't know what that means, right? What is it adjudicated? What is that? And so I think for both credit and insurance, just having a glossary so that these big

scary words, don't intimidate you into avoidance, that can go a long way, particularly for young people. I think there is something fundamental about credit when I talked about going to the fundamentals first, and this is on purchasing decisions, you know, the true danger of Klarna or a firm and where that lies. And then also looking at, I think, the difference in interest rate, when we pay interest out to a credit card and we sign on the dotted line for 25% and yet our expected return on a great stock market or real estate investment would be 10. Like just the ridiculousness of those two

numbers like 10%. Well, if I'm lucky, there's a bunch of people when I just said 10 are going, are you crazy seven. Don't count on 10, which makes it even more ridiculous that we just go sign on the dotted line for 25 without even thinking of. about it. But I do like the idea before any of those topics, this idea of understanding compounding interest, opportunity, cost, goal setting probabilities. And how to intelligently watch TikTok. Intelligently parse. Yeah. Good advice from bad. Our friend Roger Whitney said something a couple of years ago to me that said that still resonates with me. Roger Whitney's the retirement answer man. Roger said, if an advisor leads with product run, if they lead with process, that's your first clue that they might be worth talking to more.

It doesn't mean you should hire them, Paula, but it just means they pass level one. But if they tell you, oh, Paul, I got this great thing, run away. Yeah. That's what I was alluding to in the previous question when I talked about the LLC question, how that question has product embedded in it. The question has the solution, the assumed solution embedded in it, which is why it's a flawed question. Right. Question should be, how do I protect my risk of this investment going? Right.

And that's the real beauty of learning about money is fundamentally when you really have an in-depth understanding of this field. What you're truly learning is how to ask better questions. That's the, I think the goal, the real goal of financial education is how do I ask better questions? and then how do I think critically about the answers that I'm receiving? In that regard, it isn't about what to think. It's about how to think. And it isn't about what you know, even. It's about how to find out.

So to summarize this, Julia, we just teach everything. Just teach everything. Just tell the students to forget the rest of their curriculum. You teach them eight hours. Teach them the whole world of finance. I love it. I love it. Yeah, I love that you're teaching this course.

That's wonderful. there should be more financial education in schools. So thank you, Julia. Thank you for the work that you're doing. Joe, we've done it again. Done it yet again. Joe, where can people find you if they'd like to hear more of you? A great show for your friends that are just starting out because it has a you can do it attitude and we kind of take a beginner approach is the Stacky Benjamin show every Monday, Wednesday, Friday. We dive into current events and tell you what's evergreen, what you need to know from current events with a headline. We have great mentors that we interview some of the smartest people on Earth. And then on Friday, Paula Pant takes part in a roundtable

discussion of smart people where we take a piece from the popular press and we mull it over. We've talked recently about using your 401k better. Speaking of financial advisors and financial advice, we talked about one financial advisor wrote a piece for Kiplinger about things he doesn't see in enough financial plans. So we talk about how to make sure your financial plan includes those three things. So that's stacking Benjamin Show every Monday, Wednesday, Friday. Amazing. Well, thank you so much for being an afforder. If you enjoyed today's episode, please do four things. First, subscribe to our newsletter, afford anything.com slash newsletter. Second, hang out with the members of our community, affordanithing.com slash community.

Third, share this episode with your friends, your family, your neighbors, your your colleagues with the person at your school who teaches personal finance classes, even though it's technically like a math class. With your homeowners rep. Right. And your umbrella insurance agent and your auto insurance person. They're finance nerds. They'll love it.

Share this with all of the people in your life because that's the single most important way that you spread the message of F-I-I-R-E. Finally, open up your favorite podcast playing app. Hit the follow button so that you don't miss any of our amazing upcoming episodes. And while you're there, please leave us a review. you. Thank you again for being part of this community. I'm Paula Pant. I'm Joe Solcihai. And we'll meet you in the next episode.