BiggerPockets Money Podcast - 14: The Pillars of FI: Designing the Life You Want with Brad Barrett and Jonathan Mendonsa from Choose FI

Episode Date: April 2, 2018

On today’s epic show, we speak with Brad Barrett and Jonathan Mendonsa from Choose FI. Brad and Jonathan share their pillars of financial independence — the 10 things you need to do in order to achieve FI. We cover beginner-level topics such as... Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Bigger Pockets Money, show 14, part one. You're going to get to this place where your money is earning enough money for you to support you for the rest of life. So just in everything that we're talking about in my mind, this is a tool that you could put in the toolbox to get to this goal of financial independence faster. But it's a pick your own adventure. It's time for a new American dream, one that doesn't involve working in a cubicle for 40 years, barely scraping by. Whether you're looking to get your financial house in order, invest the money you already have, or discover new paths for wealth, you're in the right place. This show is for anyone who has money or wants more.

This is the Bigger Pockets Money podcast. How's it going, everybody? I'm Scott Trench. I'm here with my co-host, Ms. Mindy Jensen. How you doing, Mindy? Scott, I am doing awesome today, as usual. I'm always doing awesome. And today we're out in Oregon with my family.

Just enjoying the sunshine and the beautiful Pacific Northwest. What's going on with you? Not much. We are back here in the office. Another typical day of recording a podcast, except we had a really long, awesome conversation with our friends Brad and Jonathan today. That's the problem with what happens when you get four personal finance people together to talk about money. The conversation just lasts forever.

And, you know, we talked about cutting this into one 60-minute show, but there's just so much fantastic information we decided to keep it all and turn it into two parts. Yeah, and these two parts are jam-packed full of information. we have gone in and we've discussed what we call the pillars of financial independence with Brad and Jonathan from over at ChooseFI, really brilliant guys that have a really, you know, a lot of insight into how to approach financial independence. And we discussed their 10 pillars, their 10 foundational components to moving towards financial independence one by one. And the conversation, as many mentioned, just goes on for like maybe an hour and a half

or something like that. And we go really deep into all of these. So we're looking forward to sharing that. with you guys. And this episode will contain the first several of those pillars. And then we'll break out the remaining portion into another episode for next week. Yeah. And the show actually went almost two hours, Scott, because we just... Time flies and you're having fun. Exactly. It was a really great show. I had a lot of fun. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing.

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Kickstart your well-being journey with your first audiobook free when you sign up for a free 30-day trial at audible.com slash BP Money. Without further ado, here is part one of our Epic Choose FI podcast interview. Brad and Jonathan, welcome to the Bigger Pockets Money Show. Thank you so much for taking some time out to hang out with us today. Yeah, thanks for having us. Awesome. Well, one of the things you guys sent us over prior to this was you have these pillars of financial

independence. And I thought we could kind of just jump right in and start talking about them and maybe get some lively debate going here because I know that we're probably all in the same page with most of this stuff. But I know there's some different opinions there. What do you guys think about that? I'll say same but different. There are some things that I went through them and I don't disagree with anything that

they say, but I have some different thoughts on their ideas. We're all on the same page. These are the pillars of financial. freedom. So I mean, you know. Same team for sure. And I wonder, I'm curious if you guys put them in order too. We loosely did, but I'm not sure that we ever like really hashed out the exact order. So I'll be curious to hear that too. I was thrilled about coming on this show with you guys just because there's absolutely, there's four or five officiados, you know, involved in this conversation. And what struck me as I was thinking about, you know, how to prepare for this episode was everybody here has done it in

slightly different ways. And so, yeah, I think it'll be a lot of fun to riff off of your own take on this. Awesome. Well, yeah, so the first one that you guys talk about is low-cost index funds. So for people that are listening, why do you guys suggest that investing in low-cost index funds is a pillar of financial freedom? And I'm going to jump in really quick and say, what is an index fund? We like to make sure that everybody knows what we're talking about before we get started down that road. Absolutely. All right. So, yeah, we definitely believe in low-cost. index funds, I think essentially what we believe is that we cannot outperform the market. So it seems highly unlikely based on just the background research that we've seen, the historical data

that if we try to actively manage or try to find these brilliant managers who charge significant fees, and I know you guys have talked about that certainly in past episodes where investing fees, they matter because the compounded returns, it just cuts such a significant portion out of your overall nest egg at the end of the day. I mean, you're talking potentially over a 40-year compounded period that even like a 1% fee. So if you find some mutual fund that has a 1% expense ratio, it sounds fairly innocuous, right? Like, oh, it's just 1%. But when compounded over decades, it can cut off upwards of 25, 30 plus percent of your nest egg. So I think my argument is I am not going to outperform the market over 40 years with

my own investing genius or the guy down the street at the Edward Jones. Like the likelihood of me finding one of 20 people on earth who are going to outperform by, you know, the random guy down the street is highly, highly unlikely. So I choose to basically buy. a broad-based index fund. So in my case, I pick Vanguard's total stock market index fund. I think there's definitely up for debate on Warren Buffett believes Vanguard's SMP 500 fund is his option. Obviously, Schwab, Fidelity have many similar options, right? Low-cost index funds. So an index fund, in my case, is with this total stock market index fund, it's buying a small piece of essentially

every publicly traded company in America. So I'm not trying to pick winners. I'm not trying to actively manage or outperform. I'm just buying a small little piece of every public company in America, which to me is buying a little bit of the hard work of tens, if not 100 plus million people in America who are all trying to make their companies better. To me, that's a long-term recipe for wealth building. Awesome. One of the things that I think is so interesting about index funds is they're kind of like a lazy approach, but also that they're super effective because of these low fees. There's a huge body of research out there. If you want to read books like a random walk down Wall Street or anything that Jack Bogle has posted and talked about

in his entire career, there's this fantastic body of research that says it's so hard to pick winning stocks and so hard to pick winning mutual fund managers. I love this as a pillar of five, but I would caution people against just thinking, oh, I'm going to invest in index funds. And that's the entirety of the thought I'm going to put into investing. I think that there's a case to be made for saying, go out and read these books, understand the whole thought process all the way away from technical trading and trying to do value investing like Benjamin Graham or some of these, you know, Warren Buffett type things. And then arrive back at index fund investing. I feel like there's a lot of, even though it seems kind of silly, there's a lot that's worthwhile in that approach of learning about why this is such a powerful tactic as opposed to just kind of accepting it. from us, like, hey, this is the way to go, set it and forget it, and an index fund, doesn't matter

which one you pick. What do you guys think of that? Yeah, I love that you brought up complexity, but I think it's basically a double-edged blade, and many times it's used to keep people on the sidelines, or rather to get them in something that's really not in their best interest. I think that the problems, if you think about how marketing is used in our country and all around the world, in many cases, it's used to get us to sign up for something that really does not have our best interest at heart. In many cases, at least historically, advisors have used this veil of complexity to get us to sign up for products that are siphoning off millions and millions of dollars off our portfolios over a period of 10, 20, 30, 40 years. And when you actually look at like at an

aggregate level, what that's meant for the everyday investor, it's despicable. It's horrible. And what index funds do, and what Brad was highlighting is it reclaims all of that inefficiency that's built into having multiple middlemen that are siphoning off these charges when they make trades and siphoning off assets under management and just keeps that money in your bank accounts, in your investments. And over time, what you find is that you don't need to beat the market. If you can just keep up with the market because you're getting those fees so ridiculously low, you just crush the game. And so I think that, yes, complexity reflects real life and it's fine, but you don't need to start with dual momentum. You know, index investing is more than good

And frankly, it's better than the average do it yourself investor is doing. I think that you would be doing a disservice to people to minimize index investing is like a tiny little piece. It's an incredibly powerful tool that at no other point in time in human history have people had access to. Yeah. And I think that index funds, you know, for people, there's the four of us that are fairly accomplished financially financial mindset.

And if you are just starting out, if you don't know what you're doing and index fund is a really great way to start. I'm not sure. I know I want to invest in the stock market, but I don't have enough time to do all of the research on Apple and Netflix and Google and, and, and, and, and, and, and, and I'm just going to go with an index fund. You don't even really have to know the difference between the S&P 500 and the Dow Jones and, you know, the NASDAQ and all of these other indices. Just put your money into something. An index fund is a great way to put your money into something. while you wait and have a chance to learn because you're never going to reach financial independence on your own, like, salaried life. You're just not going to make enough money to grow your wealth that much. I mean, what are you making a million dollars a year? Probably not. I don't know,

maybe Scott is, but that's not my current salary. Well, yeah, I think that, I mean, obviously, I think we're all on the same page here. Index funds make a lot of sense for a long-term buy and hold investors portfolio. Consider that as one of the primary approaches that you're kind of pursuing here if you're not looking for something more active along the lines of entrepreneurship or maybe real estate as some of the listeners are. But yeah, I invest in index funds and have a substantial part of my portfolio in them. And I invests with Vanguard as well because of their low fees and great things. So I think we're all pretty much on the same page here as this being one of the best places to put your money or at least consider in that regard. So I guess the

second pillar here, Jonathan, do you want to talk about the second pillar here, low cost housing? Yeah, well, honestly, this is one that I should like serve up and hand right back to you because This is, you're my inspiration for all of this. And honestly, I'm just going to basically read research that I got mostly from your book. But even before that, you can find examples of people that have made an unconventional choice and get radically different results than what you're getting or what you got in your own life. And, you know, in my immediate circle, my immediate social group, we basically made all the same choices as our friends and all the same choices as our parents. And we got the same average results. But when I went outside of my immediate social circle and I went to this financial

independence community, I found examples of people that had completely blown up the game and found ways to retire decades ahead of anybody else that I knew. I mean, obviously in my zip code and my city and my state, but they were enough examples of them that I'm like, huh, they are really on to something. And so while low cost housing is in and of itself a subset of one of our pillars of fight, basically says, you know what, your home is a, maybe a great place to live, but don't get high on your housing, right? Like, you don't want to dump every single penny you have into this. Just have a reasonable place to live and save the difference and put it into, like you said, growing a business or index fund, something else. But inside that subset, I realized that there were some

people that had figured something else to actually make homeownership this incredible investment. And specifically, I'm highlighting this idea of house hacking. And obviously, you are intimately familiar with it. Your audience is intimately familiar with it. But if you can live at almost no cost or for free and actually have people living in the same home with you, paying down your bills, you've cut the biggest segment of the pie chart that describes where your money is actually going. You've just immediately stuck a knife in the 50% expensive homeownership. And that is millions and millions of dollars over a relatively short period of like 10 to 15 years. Yeah, Scott covered this in episode two of the Bigger Pockets Money podcast, and we'll link to that in our show notes.

This is show 14, so you can find the show notes at biggerpockets.com slash money show 14 or Money Show 14. Scott talked about house hacking, and I want to bring up after, I'm going to let Scott go ahead and talk about house hacking. But then I also want to bring up other ways to also cut your spending and have lower cost housing that, you know, I hear from a lot of people, oh, I have kids. I could never house hack or I have a wife and she would never want to move or whatever. So there's other ways to do it that aren't necessarily living with somebody else. Yeah, I think that when you could talk about housing, you know, the slowest way to move toward financial independence, it seems to me is to work a median income job and stash, save 10% of your stuff into a 401k and then live in the nicest, fanciest home that you can possibly live in.

That's 30 minutes away from work. And then, of course, the fastest way to financial independence is to sell off your possessions and go live under a bridge. So I think the approach that we're all kind of on the same page here with is that there's somewhere in the middle is the realm of reason if you're trying to move towards this goal and get towards FI. And I'm a little bit more on the extreme side where, you know, as a young single guy, I was willing to live in a basement with a roommate and rent out the top floor and live

for free that way. But there's a whole range of options. Wait, wait, wait, wait. You had a roommate in the basement? Yeah, so it's a duplex, up-down duplex. And there's a two beds, one bath upstairs, two beds, one bath down. I got a roommate in the downstairs. You're so hardcore. I love it.

All right. So I just made a big step up this week. This weekend, literally this weekend, I moved upstairs. Into the house hack. Big change. Big life change. Moving off from the world. Yeah.

Congratulations. Scott. Oh, congrats. That's awesome. And Scott, I mean, certainly house hacking, if I had met you 16 years ago, I would have house hacked. So that would have been phenomenal. And I love that message.

But like Mindy was saying, there are certainly other ways to save and to be intelligent about your housing. And I think like Jonathan was kind of alluding to, a lot of people think, oh, our house is our biggest investment, right? Because you see on HDTV that someone put in a $100,000 kitchen or something like, that has to be a good investment. Well, not so much. It depends on your return, right?

I guess conceivably could be a good investment depending on your particular zip code, your street. But for most people, there's probably not going to be 100 plus percent return on that. But what we did was we're in a very upscale part of the Richmond metro area. We found a very specific, we knew we were going to have kids. We found a very specific school district that we really wanted to move into. We thought it would be a perfect place to live. We found a four-bedroom house.

But instead of buying the McMansion that we could have half a mile from us, we bought a nice, moderately priced. We essentially found the lowest price for a best room. bedroom house in this particular school district that we could. And after putting a decent down payment down, our entire monthly payment is only a little bit more than $1,000 a month. Principal interest, everything, escrow. And I mean, that's to live in this fairly wealthy area. So it was just the intentionality. I think that's the crucial part. I think that's the crucial part of FI, right? Is we can make decisions, but think about it, have some intentionality, have some foresight. So we knew we wanted to be here specifically. We knew we didn't want to break the bank,

even though we could afford it, right? We didn't want to do that. So we bought a nice house that we could live comfortably, and we've been here for 13 years now. I think that when it comes to like house hacking at cost of housing, there has to be some sort of like, what is your relative position in life? You know, I met with a guy a few weeks ago who had Red Set for Life, and we got coffee in in the morning. And we're talking about life and finance. And he comes up and he's like, oh, I'm making, you know, household income in the three. right? I'm looking for a house hack, what's reasonable? And I'm like, you know, well, you can buy if you're making that much income and you're spending as little as he was, you're going to coast

towards financial freedom pretty rapidly. So house hack really, and your cost of housing, unless you go overboard and buy the million or $2 million home, is not going to be the huge barrier that it is to someone that's making immediate income. And so it's kind of understand your relative position. And hey, for that person, house hack is really an immaterial part of their financial plan. It could be the biggest part of your plan. or you can make decisions that are differently like Brad and still have a great outcome. You know, and the way I think about this and the FI and the journey to financial independence is that this is a pick your own adventure.

And there are basically what we're going through is a list of tools that we all have available. We all can select from the same tools. And some of them may or may not suit your own particular, I don't know, characteristics or the way that you visualize living your life. You do not have to do everything that we're going to talk about in this episode, but you're going to have to do something. You can't just sit on the sidelines. At the end of the day, this is a very simple equation.

It's just based on the math and your income minus your expenses is your savings. If you put enough of that aside for a long enough or hopefully short enough period of time, you're going to get to this place where your money is earning enough money for you to support you for the rest of life. So just everything that we're talking about in my mind, this is a tool that you could put in the toolbox to get to this goal of financial independence faster. But it's a pick your own adventure. Yeah.

So what I'm hearing from all of you guys and what I've experienced in my own life is that you have to be conscious of where your money's going. And this falls into the Mindy pillars, which are a little different than, I mean, they're the same but different. Like, mine are more like recommendations for what you're doing in the beginning of your financial independence journey. Track your spending is my number one recommendation for anybody who asks, how do I get started on this financial independence path? And you can't know where you want to direct your money until you know where it's going right now. And everybody has stuff that they spend money on that's not necessary. That is, I don't want to say worthless, but I do want to say worthless. Like going to get coffee is a huge one that everybody brings up.

But really, if you want to be financially independent, how important is that coffee? If it's so important to you that you can't not do it, then what else is in your life that you're spending money on that you don't really care about so much? And that's kind of my number two, three is know what really matters to you so you can spend money where it counts and save money on things that you don't care about. Like I don't really care so much about clothes. So I shop at a thrift store. But I care about my coffee. So I buy really good beans and make it at home.

So I still have a good taste. I grew up on let's not name names. Let's just say store bought coffee in the big containers that. Oh, they're not going to be a sponsor of this show. That is a true statement. but my parents, my parents still buy. Wow. The best part of waking up is good coffee in your cup.

My parents actually still use that. They take, it's not fine. I think it's frugality. They take frugality a little too far when it comes to coffee and they reuse their coffee grounds. They make a pot of coffee with like five scoops and ten things of water. And then the next time they make coffee, they add three more scoops to it and use the coffee grounds over.

And let me tell you, if you think. think that sounds good. You are, coffee's not on your list of things you want to spend money on because it is not a good choice. I love that. I think that principle of kind of stretching yourself a little bit and putting yourself in a hard place and then finding out whether or not something's adding value so you can bring it back. I've certainly done that with coffee. I've tried the ground coffee and then I was like, no, I think I like it better with the whole bean. And then I went and tried the gourmet coffee and now I've landed kind of on the bags from Costco as kind of this nice price point. But it certainly is a metaphor for every other aspect of your life. Yes. And

you know what? What you just said is really, really important after doing 13 episodes of this show, we've heard over and over again, once I started down this FI path, I wanted to cut everything. And that's a really great exercise is to cut everything out of your life that you, like, obviously you need shelter, you need food, you need water, you know, keep those in, everything extra, cut it out and see what you can live without. And you'll be surprised at what really doesn't matter. You might be surprised at what does matter. We had Liz from, Rooklewood's on a couple of weeks ago. And she said, you know, the seltzer thing is such a great example of this concept. She's like, oh, I really love seltzer water. I actually have been to her

house. That's all they drink. The only thing she puts in her mouth is seltzer water and food. And so she drinks a lot of this. And for her to cut that out or be willing to try to cut that out was kind of lost on people who haven't seen how much she drinks. But how much seltzer she drinks. That sounded bad. You should see how much she could put away. So she added it back in and then she found a way to get that cost down to like practically nothing. So, you know, that's a really good point. To see what's really important to you.

Cut out everything and then see what you need to add back in. And, you know, if you need to add it back in, that's fine. Just know that you, you know, that's a choice that you're making. Yeah. And I actually went and bought the Soda Street machine and I'm now making my own seltzer water at home. And it's actually way better than any of the stuff you can get like in a can. or whatever. So, no, but I think that the theme here is just know where your money is going and assess reality and don't allow your budget where your dollars flow. That does not lie. And where

most people, I think, lie to themselves is they say, oh, I want to achieve financial independence. And then they spend two thirds or more of their income on two categories alone, which are housing and transportation. And I think we just talked about housing here. The third pillar of five that you guys label is that transportation category, at least cars. So can we maybe kind of jump into that and hear what your kind of viewpoint is in that area? Maybe Brad? Yeah, we on our Pillars of FI, we put it as buy used cars, but I think it's a larger, a larger issue than that. It's, for me at least, I bought new car. I bought a new car back in the day. So it was 2003. I've still had my little Honda Civic since my very first car. It's going on almost 15 years to the day now.

And to me, it's about being, again, intentional about that and also realizing it's like a not keeping up with the Joneses type scenario. Like to me, I get no marginal utility out of a BMW or a Mercedes, even though by any measure I could obviously afford it, right? Quote and unquote. But that $500 a month, let's say my wife and I, we each have 2003. She's got a Toyota Highlander. I've got a Civic. And these things will last forever. They both have 100 plus thousand miles on it.

But imagine if we bought a new Mercedes, each of us, every three years, right? What is that? $500 plus a month for each of us? I mean, that's real money, right? A thousand plus dollars a month compounded over decades. I mean, we're talking literally hundreds upon hundreds of thousands of dollars. And that's the issue is I think most people say, oh, I can afford the payments, right? You hear that all the time.

Like, I'm going to manage my car payments. I've heard that term more times than I care. I didn't know what it meant at first. but it just essentially means like, hey, I'm going to keep buying new cars, leasing, rolling into, like, this is the amount that I want to pay per month. And I'm going to do come hell or high watered, whatever it takes to get that new car and keep it rolling with this payment into, you know, infinity, into perpetuity. Whereas I paid off my car in whatever it was, three or four years, and I've had new car payments

now for 12 plus years. Think about the amount of money stockpiled. Again, in a low-cost index fund, in B. buying a house and whatever it may be, right? Whatever investment you choose, that just, it adds up to such a significant amount of money. And Scott, to your point about with your pie chart, and I actually, I told you, I spoke with a high school class before we recorded this. And I was quoting you left and right.

So I was talking about, of course, plug the books set for life. And I was talking about your pie chart because that really stuck out to me is 33% for housing, 17% for transportation. That's 50%. right if you can cut out 17% just by buying one car or in this case maybe even buying a used car going even one step farther and jonathan can talk to this certainly but and cutting out that 17% for in my case 12 plus years and i'm hoping the autonomous vehicle fleet takes over like well before i need to buy a new car so i expect this to be the one and only car i ever buy in my entire life you know i

I think one of the things that really stood out to me after I did this. And the reason that we took the time to record the episode and before recording the episode, I did the research is I'm so bad at cars. And I've never really been able to understand. Why are they so expensive? It's just 250 bucks a month. Okay, times 12. You know, what is that you can add that up pretty quickly and now you have a general understanding. I mean, it wasn't that I necessarily believe in car payments. I knew they were bad, but I couldn't quantify it. And what I found out is there's so many more cost attached to just owning a vehicle, even when it's paid off, then you could possibly comprehend. So like just to play this out, think about these different types of costs. You have your depreciation costs. So your car is worth this the first year, then this the next year, and this the next year. You have the opportunity cost of not having that money being able to work for you. You have the insurance. You have the maintenance. You have the taxes. You have the gas cost. You have your toll roads. You have to pay to get there. And all these things when you add together, how do you quantify that? And so I just tried to create like a couple different scenarios of you have this new car and you drive it for five years. You have a four and then compare that to what

if you had a five year old car and a 10 year old car. And, you know, it really, what I noticed is even more than whether or not it's a gas sipper versus a gas guzzler, whether or not you buy it new and whether or not you drive it until it's dead. Those are the two factors. And the right behind that is, is it a gas sipper or a gas guzzler. A new car is costing you around $7,200 a year. I mean, when you put all of those different costs into place, that's how much we're talking about. If you were to purchase a 10-year-old car and drive that one, you know, into the ground, that's costing you $2,600 a year. So like, this is when you add all these other costs in place, you realize that a car is a losing proposition. It is just a losing proposition. Everybody's

losing money on it. But you can lose less, right? And to the tune of $5,000 a year just by picking a five or a 10-year-old car over a new one. And I thought to me, finally it's sunk in with that. And I think it's just, it's worth a conversation because so many of us think, well, we can manage the payments. Yeah. So I have an example of this. I love that you use the word opportunity cost because that's in Mindy's pillars as well. Know your opportunity cost. And that's a term that's bandied about, but it might not be a really familiar term to some of our listeners. Opportunity cost refers to a benefit that a person could have received but gave up to take another course of action. Stated differently, an opportunity cost represents an alternative given up

when a decision is made. So when you buy your $30,000 car, that's $30,000. You don't have to invest. And at exponential gains, that's, you know, $100,000 down the road, a million dollars down the road, you know, however much time you have to grow this investment, you just lost that because you bought the $30,000 car. I bought an Accura Integra, and I bought it from a friend. I paid, I think I paid $2,500 for it.

I drove it for 10 years and then I sold it for $1,000. So over the course of 10 years, it cost me $1,000 plus like we had to do a new muffler or something. So it was like no maintenance and no expenses. Then when I sold it, I bought my 2003 Honda Element brand new because I wanted to, this was my first brand new car and I deserve it. So that cost me $16,000. At the time, my opportunity cost.

are exponential because I have since learned how to invest. And that actually cost me a lot more than than my $16,000. Yeah, the marginal utility of vehicles. I think there is a point in which a car is just a car. You know, the first time you get into that car with the heated bucket seats, it's amazing. But now two or three weeks in, that's just the norm. And then you've got to get something else and now get that new fix. That's once you've kind of truly bought into that consumer mindset. And you move from, hey, this $20,000 vehicle really was just designed to get me from, destination A, my home to my job that's two and a half miles away. But I'm paying for those bucket seats for the 90% of the time that I'm not even in.

It's just sitting in my driveway as a nice paperweight, waiting for it to depreciate, waiting for something to go wrong, so I have to fix it and paying taxes on it every single year. I think we're very clear on the point that, hey, if you buy an expensive car and you're bleeding lots of money and that's a huge part of your budget, that you are not prioritizing financial independence and it's going to slow down your journey. What do you guys think, maybe I'll ask this one to Brad here, what do you think someone should do if they've got an expensive car already? And they're like two or three years into the note.

They bought it a couple years ago. Should they go and sell that car and start over and eat their loss? Or how should someone in that position handle their situation? Yes, that's a hard question. You know, I don't obviously know the real world specifics behind, you know, each scenario. But I think the first thing I would do is just like anything, I would research it. right? Like that to me is the first step of anything in FI's is figure out what your options are, right? So I think if it winds up that you can get out of that car without taking a complete bath on it, then yeah,

I probably would look to resell it and buy, like Jonathan's saying, buy a gas sipper, as he calls it, a high fuel economy car that's a used car and hold that for the next 10 or 15 years. I think, I wish I had a better answer for you, but I think that's how I would start, is just take a look at my situation, assess it, do the research, see what I could sell it for, and hopefully extricate myself from the situation that while sure, I can maybe afford, quote unquote, the payments every month, now that I've come to this epiphany of FI and I understand how much this is truly costing me, how can I get out of this as quickly as possible? I think that's how I'd approach it mentally.

Yeah, I'm just fascinated by that question because, you know, it seems so straightforward. If someone's starting from scratch, if they follow these pillars, they're going to have a great outcome, almost certainly, right, over the course of five, 10-year period. But it's the person that's already got the fancy house and already got the fancy car, who those things are kind of tied into their identity and their status at this particular moment in time. Making those changes and going, maybe they're not all happening at once, maybe it's a couple years, but making those changes seems the real difficulty in the situation versus maybe getting started on the right path. Yeah, Scott, I actually have something really pertinent about a friend of

mine who recently came across FI. He lives here in Richmond. He actually got introduced to my podcast, and him and his wife and his family, they are making moves. And I mean, literally, I've never seen people transform their lives like they have. They put their house up for sale. They are downsizing dramatically. And cutting. hundreds of thousands of dollars from from their mortgage ultimately by by making that move and oddly that was easier for them than the car situation so they were able to do something similar to what we did actually with the housing which was live in the same school district with you know maybe comparably if you if you argue ostensibly it's a four bedroom house right so they're moving four bedroom to

four bedroom sure they don't have the frills maybe they don't have the extra space but they're cutting off well over a thousand dollars a month probably 1500 a month. That was kind of a lateral move. They were able to do that fairly easily. The car, and maybe this speaks to why I had such a hard time answering the question is, the car was more vexing for them because they couldn't come up with that perfect answer. You know, they had very little equity. What they would have had an equity, they probably couldn't have bought something that they were ultimately happy with. So they decided to aggressively pay down the notes on those cars and move forward and just keep those cars forever. So again, it's you have to do what works for your life, right? Like the four of us,

we're not here to speak on high and say, this is the only path to five. That's not the way this works. You need to figure out what works for your life, right? Like, this is not the Bradshaw telling you, this is what you have to do. Figure it out and come to a conclusion, but do it intelligently and with some intentionality, right? Those are my buzzwords, I think, because they matter. And I guess, I guess kind of to transition here a little bit, you know, that's the car side of this, right? You said that, which we're talking about earlier, about 33% was how, first of all, that was a great response to the question of what should you do in that situation? There is no right situation there, right? I mean, that's, yeah, that's the point. That's a tough question. I struggle with that exact question.

I don't have the right answer. I kept my car and I'm continued paying off the note. And I'd like to think I've put a lot of thought into my personal financial situation. That's a hard one, but I think that we all agree that buying a used car or trying to set that up from the beginning in a most cost-effective way is really the best strategy and that you have tougher choices if you don't do that in the first place. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going and more importantly

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Get more with Northwest Registered Agent at Northwest Registered Agent.com slash money free. Now, this awkward transition, transitioning to kind of the next pillar of FI, I actually want to skip a few on your list and go to number seven, which is travel rewards because I think that I like to bucket that into that kind of transportation section. If 33% of your expenses are housing, then the next 17% are transportation, which includes both your auto commute and perhaps any vacation and traveling that you're doing.

So can you tell us a little bit about your philosophy on travel rewards? Let me let Brad completely unpack this, I guess, because he is the guy. But I will just say the one common thread between these two that even really hasn't been highlighted up to this point is with everything that we've talked about up to this point, you're paying for with after tax dollars, your home, you're paying for with after tax dollars, the cars after tax dollars. That's actually a cost that I didn't even include, really, in the true cost of car ownership. But that, especially for those of you that are listening to this, that are maybe in a 25% and beyond marginal tax bracket, that is a very real type of opportunity cost to spending the money now. And the reason I want to set that up is to say that Brad, to me, basically revealed this whole new world of travel rewards where you, instead of paying for flights and different types of trips with after tax dollars, showed me a way. to do it not only for free, but then not even be taxed on it, really, in any way,

shape, or form, at least from an income perspective. And so this is a complete game changer, especially for the person that's looking to optimize every particular aspect of their life. Yeah, and what's cool is I think all three of you have taken advantage of travel rewards on, I know personally on many trips. And Scott, I was thrilled to hear you say that you've recently started to get into travel awards and you realize this was kind of whole in your knowledge or at least like, like your attention probably, right?

Like you just, it just was something you didn't pay a ton of attention to, but now you are. I tried to teach him. Yeah, I admit, I did not listen to Mindy. What I did, what did work for me and did change my mindset on this is episode number nine of the Choose FI podcast where you guys walk through. Here's a plan to just make a tremendous amount of, you know, money or I guess rewards from spending that you do anyways normally in life. And if I could go back, yes, I will.

And when I do go back, I will probably revise an edition of Set for Life, set to you guys, and put that into the section on transportation, because I think it's that important. Why not take advantage of something free that you can get by just using good financial habits in the first place? I'm going to be in Scott's book. That's awesome. Very, very cool. And I think the smart habits part that you just focused on there, Scott,

I think that's the crucial point. So obviously many millions of people, tens of millions, is people get in trouble with credit cards. Right? So like this is a proceed with significant caution. Hopefully people listening are either in a good financial position or on their way there. So travel rewards in my estimation only for people who can pay on time and in full every single month.

So like that's just table stakes to even think about getting into this. So if that's you, like my family, we used our credit card forever and we paid it off every month. We got our pittily little, I don't know, 1%, 1.5% rewards. We kind of laughed all the way to the bank, right? It seemed great. It's a bonanza. But when you learn about travel rewards and you learn about credit card signup bonuses,

it's like the world has changed, right? It's this epiphany. And I think that's where, Scott, you are now, which is kind of cool in that you realize, okay, I can open up a credit card. I can reach the minimum spending requirement as it's known. So let's say $3,000 in the first three months. All right. Those are the requirements to get the bonus.

And then you get 50,000 miles or points, just hypothetically. That's pretty standard. So that means you just take $3,000 of your regular expenses that you're putting on your card anyway over that first three months. And that's a cumulative amount. And you pay it off and you get 50,000 miles. And in all likelihood, I like to argue that miles are usually worth depending on the mile, of course, like about two cents per point.

So you could probably parlay that into $1,000 worth of free travel if you get a pretty a pretty decent average to above average redemption. So that's, now keep in mind, that's essentially like getting a 33% rebate on the $3,000 that you would have spent anyway, right? Like normally you're only getting 1%, but just by being smart, by being a little more optimized and putting that same spending on a new credit card, you're getting a 33% rebate. So for me, where I put all of my dollars essentially in life that I spend on these new credit cards, I'm getting somewhere between 20 and 40 percent back on every dollar I spend. So it's like getting, again, 20 to 40 percent rebate, discount, however you want to look at it. On every single dollar I'm spending in life, as Jonathan would say, that's winning my friends. Hashtag winning, Brad.

This is 2018. First time I've ever said. Yeah. And there's a, you know, and there's a specific approach. The specific way to go about doing these cards and some rules to this game that, again, listeners, you should go and listen to episode nine of the Choose F5 podcast to learn about the specifics. One of them that I'll highlight that I'm working on currently is the Southwest Companion Pass. Yeah. So I literally, after listening to this episode, I went and got the Southwest business card for my real estate and I got 60,000 bonus points after I spent three grand in the first month or so.

then I got another one for a personal use Southwest card and I should be getting the 50,000 point bonus in the next couple of weeks. And with that, that's a hundred. We're at the same time. Yeah, right at the same time. I just got to pay my bill and then a couple weeks afterwards, the points will flow into my Southwest account. And I'm going to be at 110,000 points. I'm going to get the Southwest companion pass and I'll be able to designate someone and that person will be able to come on flights around the country with me whenever I buy any flights in Southwest. It essentially doubles the value of these points.

I mean, it's just an unbelievable hack to get a ton of travel. So I'm right here with you, and I'm incredibly excited about it. So basically what that means, since all of your points are basically worth two points, essentially, you have essentially 220,000 Southwest miles that are good from whenever you get it now, which is in March or April, depending on when you're listening to this, all the way through the end of 2019. So basically, all of your domestic flights through the end of 2019 are going to be completely free for you and another individual who you can specify.

And I will say that Southwest is opening up a flight to Hawaii later on this year. So your trips to Hawaii to go surfing, you know, or whatever, are completely covered. And I will also say one extra tip that you can change who that individual is, that is your designated hitter going with you on these flights, up to four times in one calendar year. So that person can be Mindy at least one time, right? You can carve that out. But this is huge, man.

And this is a massive opportunity that people miss. Yeah. And I know, I'm 27, so I have a lot of weddings to go to this year. The next two years, I think I'm going to eight weddings and associated bachelor parties and all that kind of stuff. And these things are expensive. They're absurd. It's like $1,000 just to go to the wedding and give a gift and all that.

Like at a hotel, I mean, it's nuts. But I can use this to offset a huge chunk of that. And I'm actually already using my first points this weekend to go to Vegas for the first of these bachelor parties that's coming up. So, yeah, I will be available on Thursday through Sunday, Mindy. Well, I hope you have a good time. Yeah, wedding season. Wedding, your wedding.

Your life's wedding season. Like you said, you have eight in the next two years. Eight so far. Yeah, it's ridiculous. All right. Hey, for that, if you want to listen to that episode, just go to choosify.com slash zero nine. Or we have all of our travel resources are at choosify.com slash travel. But yeah, I'm glad you brought it up, and it certainly is a game changer.

Awesome. Yeah, I will link to that in the show notes as well. So we're having a classic podcast problem where we go through a list and we go take a really long time on the first five. And now we're going to have to go pretty quick on the last ones. So if you do want to add some more, let me know which ones we want to spend a little bit extra time on. But let's see if we can kind of talk very briefly about kind of these next few, if that's all right, everybody. Yeah. So I think what we should do is we can go through groceries pretty.

quickly. Tax optimization, we should spend a little longer on college hacking is pretty short and cut the cord and cable are basically all together and we can finish up on side hustle. So I think of those, there's only like two that really deserve any real amount of time. The rest are just sound bites. Great. Okay. And we tackled grocery bills with Aaron Chase from $5 dinners back on episode four of the Bigger Pockets Money Show. I will link to that in the show notes as well. But what is your take on grocery bills, Jonathan? Yeah, I just think it goes back to what you were saying earlier about not tracking it. You know, grocery stores have a very intentional plan when you come in.

You may not realize it, but the goal is for you to walk out with 20 things that you didn't realize that you needed. And that's reflected on your receipt. And I think that simply tracking it is the cure to that. I mean, it's just almost immediately that little bit of intentionality will cut your grocery bill by 20%. And then if that's without effort, you could probably slash another 20 or 30% with a little bit of effort. And Brad uses a metric of $2 per person per meal, but I think any system will work. You just need to look at what you're spending and have a plan. Yeah, and I think it's not just about money either.

It's about your time, which is arguably equally as important, if not more important, right? So I know my wife is a wonderful cook, but she doesn't want to cook every day, right? Like that's not her plan. So what she does is she very intentionally makes larger portions. So she'll make, as we call them, like person dinners. So it's like six person dinners or person meals for one cooking. So we know that we have it essentially for leftovers, two other nights. So now that has saved her two additional nights cooking.

And in most cases, that's going to be more efficient economically as well because you're, you know, it's just economies of scale, I guess, simply. And you're reusing a greenance or, you know, it's not costing you. and a hugely additional amount to add in those extra person meals. It might be an extra chicken cut in or something, right? So you're not normally adding a ton of ingredients. So it's more efficient time-wise and it's more efficient money-wise as well. So I think really just sitting down on, for us, it's Sunday morning and saying, all right,

what are the two meals we're going to cook this week? And that'll pretty much get us through Monday through Friday very, very easily. And I'll throw in that something that everyone seems to have skipped over here, which is that if you're planning these meals and buying them from grocery stores and being reasonable, you're also eating pretty healthily, right? You're not going to be baking up some sugar-loaded, unhealthy, you know, candy-filled meals. You're going to be doing something that's at least moderately healthy, and that actually compounds with a lot of the other things you're doing in life to work towards five. Yeah, and you're not eating out as well, right? So it's an additional benefit.

Yeah, and one of the things that Aaron really kind of hammered home in, it was episode three, in that episode four, one of the things she really hammered home was, you know, just having a plan will help you down the road. You know, you have a plan for your meals. You go to the grocery store with a plan, so you're actually buying ingredients that you have a plan to use. How many times you've gone to the grocery store? Oh, this looks interesting. That looks good. And then you get home, you're like, well, what can I make with this? Nothing. Like, what goes with ketchup and ice cream? I have to go back to the store because nothing goes with anything that I bought. So having a plan at the grocery store, having a plan when you get home. And then like you said, Brad, your wife, you know,

cooks ahead of time or has a plan ahead of time. So she has an opportunity to, you know, use everything up. When it comes to Wednesday, you're like, oh, well, this is what's on the schedule. So I don't have to try to come up with something after a really hectic day or whatever. So yeah, definitely having a plan in all aspects of your meal planning, your meal stages really helps you crush your grocery bill. Well, let's move on to the fifth pillar, which is tax optimization. This is one that I'll admit that I just don't have as good a grasp on as I should. I own some real estate, which is actually tax advantage, but I'd love to know kind of what you guys are thinking about in terms of this area.

Yeah, so I think we only have time to go very, very high level with this stuff. But the FI community, not Brad and Jonathan, but the FI community has aggregated some techniques that really, really show off the power of maxing out these pre-tax accounts, like your 401k. And in particular, I'm thinking about things like the Roth conversion ladder. And there's another technique that's really powerful, especially for someone that's considering like a tactic like being an early retiree, capital gains harvesting, incredibly incredibly powerful. Very high level. Let me just go ahead and throw this out there that in the United States, our government has made the choice not to tax capital gains for a married couple filing jointly

if they make $90,000 or less. Now, play this out. If you can get enough money into your pre-tax accounts that grows over this period of time, 10, 15, 20 years to a point where it's spitting off up to $90,000 in capital gains, you can draw that out without paying a dime, a dime in federal taxes.

A few states that charge state tax, but a lot of states don't. So no federal tax, no state tax. That is mind-blown. And so anyways, not that this is the episode where we show you exactly how that works, but rather you don't know what you don't know until you do. And you're not going to learn about this stuff just on your normal nine to five slog watching keeping up with the Kardashians. It's just not going to happen.

You have to position yourself in a place to collect and aggregate good information from people hopefully that are relatable, but ultimately it comes down to positioning yourself to getting that information and then taking action with it. This stuff really works. This is why Warren Buffett basically says I pay less in tax than my accountant. Because Warren Buffett's, he's a billionaire, obviously, his accountant is getting paid as an employee, but Warren is paying his taxes based on capital gains. You need to find out what are the people that have beaten the game? What do they figure out that I haven't?

And then figure out what piece of that you can implement in your own life. Yeah, I think it's great. And one of the things that I always think about is once you achieve fire, I have not experienced this part of things. But once you achieve fire, living off your passive income, a lot of times you're tax rate will go drastically down. And in some cases, if you own a business, for example, you may have a year where you have a loss. And you can do into a lot of cool things if you have, you have a paper loss one year and moving this money out of your 401k and into a Roth,

those types of conversions. Obviously, you want to talk to an accountant about that. But the farther you get along down the side of things, like a lot of really cool options begin to materialize. I'm glad you mentioned the accountant. I was thinking about this, Brad, did everything I said, was that all correct? Was I on the right side of the line with that? Essentially, you were definitely correct. It's when you're pulling money out of these tax deferred accounts, and I think why we focus so significantly on 401k's, traditional IRAs, 4-3Bs, 457s, the pre-tax accounts is because you're controlling what you can control.

So in this case, you are getting the tax deduction today, okay? And now, whereas most people, when they're 59 and a half or later and they start are pulling that money out, they have to pay ordinary income tax on that money when they pull it out. That's just how these accounts work. But the key here is that not necessarily for people in the financial independence community, because they are controlling what they can control. And for them, it's keeping their expenses so low. In most cases, people have mortgages paid off. Their expenses are just not that significant. So imagine a scenario where you're even, let's just argue, we're not even talking early retired. Just say traditional retired. You're 60 years old. Your expenses are only

$30,000 or $40,000 a year. Well, you pull that money out. Normally, that would be just kind of lopped on top of your normal income and it would be at a fairly significant marginal rate. Whereas for people in the FI community, if you're only pulling out $30,000 from your accounts, well, that's subject to ordinary income tax, but you get such a significant, now, I guess, with the new tax laws, it's not standard and personal exemptions. It's just a much larger standard deduction. So I think based on 2018, it's $24,000. So that would just come right off the top. So at worst, assuming nothing else, the worst back of the envelope calculation ever, your taxable income would only be $6,000. And even if, you know, at the lowest rate, you're talking 10%, right?

So you're paying $600 in tax in federal tax that year just because you controlled what you could control, right? You got the tax deduction up front. You controlled your expenses and kept them low. And then you pulled out exactly that amount. And then your federal tax liability is almost zero. Your effective liability is even if we're saying $600 and $30,000 is 2%. Right.

So your effective tax liability is 2%. That is truly incredible. And that is really crushing the game, you know? So I have a question about this because this is something I can talk about all day log and just learn about and kind of figure out by how I want to go about things. I'm not sure on this kind of stuff. Right. So that scenario you just described means you're deferring a lot of money right now and you're going to build up a significant chunk of change. And your primary plan, I'm underlying this as the assumption, is that you're going to rely on withdrawals from this 401k or tax deferred account in retirement at retirement age.

But what if you're like me and building up a lot of real estate? state and side businesses, and you expect to have a very high level of ordinary income even after retirement or 401K. How does the math change at that point for tax optimization strategy? Yeah, I mean, I guess this traditional strategy, and that's a great question, Scott, this traditional strategy, quote unquote traditional, right, for traditional five people, doesn't work quite as, quite as perfectly for you. Because, like you said, that it's, my scenario is predicated on essentially having no income, being truly retired, quote unquote, being financially independent, right? So there are strategies like Jonathan alluded to. There's the

Roth IRA conversion ladder and that's way beyond the scope of this conversation. Maybe you can get Brandon from the mad scientist on or back on and talk to him about that. But that's a crucial, crucial strategy for people looking to access money before 59 and a half. So those are two of the scenarios, but yours is obviously a different one, Scott. I'm not sure that right off the top of my head, I have the perfect answer for you for how do I access that money either early or not early, as it may be, without paying a significant amount of federal tax. So in your case, then maybe what you can control. And this comes back to then personal preference is, okay, maybe I decide the Roth IRA is better

for me. You know, I have no idea, honestly, right? I have no idea what your income is, what if you're, if you can't contribute to that, etc, et cetera, et cetera. But again, it comes back to my point from the cars before, which is do your research, understand the scenario, and then make a decision. So for me, I would say for people, not in your scenario, in the more traditional FI, I think the tax deferred accounts are slam dunk for all the reasons that I listed. Now, for you, maybe that's a different answer. And, you know, again, on this podcast, on this podcast with the limits of time and such, I can answer precisely,

but I think it's worth looking into. Absolutely. And, and I, you know, you can tell that you know your stuff because you're able to kind of assess all these different options and talk about these different paths and different results for people in different life situations. And that's what this is all about is I'm not making the optimal decision yet because I haven't invested enough time and thinking about this for my current position. I had a strategy that I got from point A to point B and now I'm not sure anymore. And I think I need to, you know, learn more about it and maybe consider doing exactly what you're talking about with these 401K plans depending on what's going on.

Yeah. You mentioned Brandon, the mad scientist, and we are going to have him on in a couple of weeks. And we are going to talk about tax optimization because that is really, we can get really into the weeds into that conversation or into that topic in this conversation. But he's got a really amazing article on his site

that talks about why you should always invest in your 401K, even if you plan on taking it out early, even if you have to pay penalties and fees, and taxes and all of that, he comes to the conclusion, and he's really smart. He comes to the conclusion, not that you guys aren't, I'm not trying to belittle your intelligence either, but like talking to Brandon always makes you feel kind of dumb because I'm like, wow, I can't believe one person could be so smart. Anyway, he comes to the conclusion that no matter what your end game, investing in your 401K,

contributing to your 401K as much as you possibly can is always the best choice. So, you know, again, with the intentionality and, you know, coupled with frugality, you can really make some pretty amazing decisions. When you talk to other people about this, I just learned about capital gains harvesting, and I can't wait to do that. I have a lot of stocks because I started investing a long time ago before I found this whole FI concept.

I have a lot of individual stocks, and I bought them a long time ago. I'm a buy and hold investor. So now my capital gains on them is incredible. But if I can get my income down below that, threshold, I think it's, there's a lot of numbers involved. But if I can get my income down, then I can start selling some of these stocks that I want to keep. Sell them now, buy them back at the same price. Now my cost basis has been reset. So instead of, I bought it at 20, and now it's

worth 100. So I sell it at 100. I can write off all those capital gains because I haven't hit that ceiling. And now I buy it back at 100 because it's still worth 100 to me. And then you've reset your cost. But that's not something I would have come up with on my own. So definitely listening. to these podcasts, reading these blogs, you know, you can get a lot of really amazing ideas. And not every concept is going to work for your situation, but, you know, capital gains harvesting could be something really powerful for somebody who's been investing for a long time. Just the concept of, oh, I really should invest in my 401K. I don't know, Scott, are you investing in the 401K?

So this year, for the first time in several years, I've started maxing out my 401K. And it's because I have set aside some of my efforts on my side hustles and I'm focusing more on bigger pockets here. And so I have more cash and less ideas on how to invest it in real estate. So that's, yeah, definitely a change up there for me. Yeah, I really like to have a diversified portfolio. And real estate is my love, but the stock market is a way to diversify. All right. That was Brad and Jonathan from Choose FI. Awesome. As we mentioned, I think in the introduction to this, we had a great time with Brad and Jonathan. And this interview continues going for another like 40 minutes, maybe 50 minutes, maybe an hour. I can't remember. So we are going to

split this into two parts. So the second part of it and the conclusion to this interview with Brad and Jonathan will actually air next week. Same time. What is it? Same bat time. Same bat channel. You're too young for that. Yeah, way too young for that. Way over my head. That was a show in the 60s. It was called Batman. Anyway, okay. So thank you so much for sticking around until the very end of this episode, but we've got a lot more next week. So for Bigger Pockets Money, episode 14, part one. This is Mindy Jensen over and out.