BiggerPockets Money Podcast - 542: DIY Finance Friday: How to Create a Customized Path to Financial Independence

Episode Date: July 2, 2024

Want a personalized financial independence plan that’ll get you closer to early retirement? Well, we’ve got just what you’re looking for! On this second annual “Financial Independence Day,��� Mindy and Scott are sharing a new way to get you to financial freedom faster. With so many applications for our “Finance Friday” series, we decided to make a downloadable that allows you to do your own personal finance review AND build a faster path to FIRE! But before you start filling out your financial independence plan, listen to this episode. We review some common traps and pitfalls that have stopped our Finance Friday guests from achieving financial freedom. We’ll explain exactly what each net worth bracket should focus on, how to get through the saving and investing “grind” to FIRE, and the biggest mistake most people make that will STOP them from ever finding financial independence. Want to reach financial independence faster? Download the DIY Finance Friday document here, and if you want Mindy and Scott’s personalized suggestions, apply to be a Finance Friday guest!  In This Episode We Cover How to build your own plan for financial independence and reach early retirement faster Coming up with your financial snapshot to see a complete picture of your net worth The biggest opportunities to reach FIRE for different net worth brackets The “middle-class trap” that will stop you from retiring early (even if you’re wealthy) Getting through “the grind” and how to know you’re on the right path for FIRE Whether building wealth comes through a “process” or a “single event,” and how to combine both And So Much More! Links from the Show BiggerPockets Money Facebook Group Network with Other Investors on The Path to FIRE Through the BiggerPockets Forums Finance Review Guest Onboarding Join BiggerPockets for FREE Scott on BiggePockets Listen to All Your Favorite BiggerPockets Podcasts in One Place Apply to Be a Guest on The Money Show Podcast Talent Search! Find an Investor-Friendly Agent in Your Area Find Investor-Friendly Lenders Property Manager Finde Apply to Be a Finance Friday Guest BiggerPockets Money 426 - The New Path to Financial Independence is HERE BiggerPockets Money 157 - The Money Date: What You Should (And Definitely Should Not) Do to Align Your Finances as a Couple BiggerPockets Personal Finance Forum Review Mindy’s Budget See Mindy and Scott at BPCON2024 in Cancun! Scott Trench’s Step-by-Step Guide to Building Your Perfect, 1-Page Investment Plan 00:00 Intro 01:59 FIRE for DIYers 04:45 Your Financial Snapshot  15:25 Opportunities for FI 23:08 Avoiding the “Middle-Class Trap” 32:58 Getting Through The “Grind” 39:32 You NEED Both of These  44:24 Changing Your Path to FIRE  52:07 Happy FI Day! Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/money-542 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail] Learn more about your ad choices. Visit megaphone.fm/adchoices

Today, we are celebrating the second annual Financial Independence Day, a holiday I totally made up by sharing DIY finance Friday instructions and a Google sheet that helps you organize your numbers all in one place. Hello, hello, hello, and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen, and with me, as always, is my number nerd co-host, Scott Trench. Mindy, so glad you could budget some of your great time today to come here on the show with me. Thanks so much. Bigger Pockets has a goal of creating 1 million millionaires, and you are in the right place if you want to get your financial house in order because we truly believe that Financial Independence Day is attainable for everyone no matter when or where you're starting.

I love it, Scott. Yeah, yeah, yeah, yeah, Financial Independence Day, Mindy's holiday. I know that not everybody wants to come in and sit down in the hot seat or share their information publicly on Bigger Pockets money. So Mindy and I wanted to share how we review Finance Friday episodes, what we're looking for, all the requirements it takes to apply for that, and basically give you the toolkit and how we think about and assess folks' financial situations for entertainment purposes only, of course, here on Bigger Pockets Money, so that you can potentially apply it DIY style, again, for entertainment purposes only for yourself. To that end, we've created a companion download, which includes a just a two-sheet document that allows you to kind of get a quick overview of the cash coming into your life, income minus expenses, and your balance sheet, the wealth that you have and where it's deployed. And we've also got a handy Google sheet and spreadsheet that gives you kind of some detailed information about what information you'll need to do your own DIY Finance Friday. You can find those at biggerpockets.com slash resources, completely free. Hope you check them out. And with that, let's go and get into Finance Friday, hypothetical Finance

Friday and how we think about it. Yeah, DIY style. So, Scott, you and I started Finance Friday because we knew that sometimes your head is down. You're focused on one goal. And it can be so difficult to see any other options other than the one that you have mapped out for yourself. Pay off debt, then start investing or max out retirement accounts no matter what. And, you know, the problem with using superlatives, like always do this or never do that, is that it doesn't leave a lot of room for alternative ideas. I know that my own personal mind will get kind of locked in on one thing, and I don't even consider any other options. So enter Scott and Mindy. We take a look at all of your numbers and your goals. And we share what we would do in your situation.

So, Scott, let's go over the numbers that we ask our guests for. Yeah, sure. And just as another part of prefaceing this situation, you know, I think Mindy you'd agree that you and I don't, we're not like Ramit Sati, right, on his show, where he really deals with the emotions. Like, he actually labels his podcast as a relationships podcast because so much of the issues with money that he deals with are related to the interpersonal dynamics, often with couples. We also don't deal with, I think, the wacko is the word I'll use, situations that like

Caleb Hammer, who's awesome. You should definitely check out his stuff as well, does on his podcast where like, you know, there's all sorts of drama and all those kinds of things that are going in there. Our DIY process that we're talking about here is for someone who's pretty serious about achieving financial independence inside of the next maybe 10, 15 years, maybe sooner, and is really more of like the college course level of trying to fiddle with their financial plan and think about what their investment portfolio should look like at a future state in a big way. Would you agree with that, Mindy, and that's how we design, and that's how your mindset going into designing this? Yes, absolutely. I am not here to judge your past financial, I don't want to say misdeeds,

your past financial transactions and decisions. That's in the past. And until somebody invents a time machine, we're not going to be able to go back and change it. But we want to look at where you're at now and where you want to be and give you some ideas for how to get there. Yeah. So the typical, the typical bigger pockets money, finance Friday guest will come to us with usually a pretty solid career. Let's call it, you know, we rarely have folks making less than $50,000. And we also rarely have folks making more than $250 a year. So typically our guests are coming in in that 100 to $225,000 household income range. And you want to list out your income.

So that's the first place to start. All right. There are four basic pieces of information that we need from guests in order to begin the process of doing a DIY finance Friday. Those are income, expenses, debts, and assets. The income side of the equation is usually pretty easy for most folks. It comes from a job, contract work, side hustle, so on and so forth. may come from investments as well. The expenses are everyone, like almost everyone does their income

the same and knows how to articulate it. The expenses are much harder. People, when they don't actually have hard numbers, often provide estimates of their expenses that are wildly different and usually underestimate their expenses pretty dramatically over the past period. A good way, if you're trying to frame out your own DIY finance Friday to think about whether your expenses are realistic is if your income is 10,000 a month and your expenses on your piece of paper are $6,000 a month and you haven't accumulated $4,000 a month on average for the last six months to a year, your expenses estimates are wrong. So that's a good way to think about it to a large degree in a lot of situations, right? The next piece is debts, usually people are pretty able to pretty easily do the work

in maybe an hour or two to compile all of their debts and the interest rates and the balances remaining on them. And then there are the assets, which again are usually pretty easy to track, although they can be sprawling in some of our listeners' portfolios because many folks are generally good with money. That's why they listen to Bigger Pockets money in their free time. Thank you very much. You generally have a good idea of that. So you might have investment accounts spread across a bunch of different 401ks, IRAs, brokerage accounts, cash, and those kinds of things. And again, those are pretty easy to assess. So those are the four numbers that we're looking for. It does take time to compute them. And typically that time investment is going to be disproportionately weighted for

most to categorizing and tabulating the expenses that are coming out of your life. Do you agree with that, Mindy? I do agree with that. And I want to go down each one of those again because now I have my own commentary. When you are considering income, maybe you just have one job. And that's great. That's going to make it really easy to account for your income. But if you are married and your partner works, then you've got two incomes. But maybe you're married, your partner works and one of you or both of you have a side gig. It's always better, in my opinion, to estimate your income on the lower side. Oh, I make between 2,500 and 3,500 every month on my side gig. Go for the 2,500, because you can always find more things to do with that extra thousand dollars. But when you're estimating a 3,500 and it

consistently comes down low, that's another way that you're not hitting that mythical $4,000 of savings that Scott was referring to every month. But that's kind of all I have to say about the income. What are your income sources? What are all of them? Look over the whole year, the whole past year. did money come into your bank account and where did it come from? Again, if you only have one job, then that's super easy. But make sure you're accounting for everything. Number two is the expenses. And this one, I could not agree with Scott more. This is where so many people are guesstimating low when they should be guesstimating high. If you're not tracking your expenses, that's a great place to start. If you want an example of somebody who has tracked their expenses, I will show you my very real

expenses at biggerpockets.com slash Mindy's budget. And again, we're going to link to all of these things in our show notes. But the real life tracking of my spending was actually kind of eye-opening to me, somebody who has already been tracking spending for a while, in that I estimated incorrectly many times. You will see there are spreadsheet, in my spreadsheet, there are categories that are bright red telling me that I did it wrong. And there are categories that are green saying, he did a good job there. But those are way quieter than the bright red one saying that I'm wrong. But I did it publicly to show you that it's really hard, even if you are a money expert in air quotes here, even if you're a money expert, it is still hard to estimate accurately every single month your number.

So you guess and you constantly work on your expenses. But I will say, I can't agree with Scott Moore, this is where the bulk of the issues come from. And you will hear. here Scott in Finance Friday episode saying, oh, okay, you make $10,000, you're spending $6,000. So what are you doing with the $4,000 that you're saving every month? And frequently, that will be something that they can't answer because they're not actually saving $4,000 a month because they are actually spending more. Yeah, the amount of cash that you've invested or that has piled up in your savings account in the last six months is usually a better predictor of the spread between your income and

your actual budget than the numbers that you estimate. you're not actually pulling them out and doing, you know, basically zero basing and tying all of your expenses to the penny into your historical spend. And, you know, it doesn't make you a bad person that you're doing your expenses wrong, but if you want to get an accurate accounting of where your money's going, you need to have your expenses correct. So start tracking your expenses. I don't think that this, these sheets that we're sharing today, Scott, can be filled out in entirety today by some of the money. somebody who hasn't been tracking their expenses.

But you can take a guess today and then see how close you are with, you know, it'll take you five hours at least, probably, if you're completely new to it and you haven't looked at the stuff, to really get it accurate. And that's the better part of an afternoon and a weekend or whatever in there. It'll take you 10 minutes to guess at it. And that's as good as starting place as any. So, but like, you every, it's strategy starts with hypothesis, right? And then you refine and refine that hypothesis until you get to get better and better strategy.

here, which is all we do on DIY Finance Friday. So just to throw it out there. You have work to do, but if you want a 10-minute exercise from today, download this piece of paper, fill it out with your best guesses in 10 minutes and see what that tells you because you might learn a lot from it about where to look for opportunity while you're conducting the five-hour grind. Absolutely. That's a great point, Scott.

So, my dear listeners, guess away. Scott, this is a great place to take a quick break so we can hear a word. from our show sponsor, but when we come back, we are going to get into debts and assets, as well as some of the biases that we have when we are looking at somebody's numbers. 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, where your tax refund can make the biggest impact.

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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. All right, welcome back to the show where we're going to get you out of debt and into assets. We're going to look at debts now. Debt's, like Scott said, pretty easy to do. Gather up all your debts or as many as you can remember right now. And then if others pop up down the road, oh, I forgot about that one. Throw it in there too. It's like Scott said, this is a work in progress. and we are guessing. We are getting our best guess.

If you have the solid numbers, throw them in. But if not, estimate and then perfect as you go. And on Bigger Pockets Money, we're not really like this. You know, we have some folks. We welcome everybody. But most of our people that come on Finance Friday on the show are not so novice to personal finance that they don't really know about all of their debts for that. And so that's definitely one that most people can knock out pretty easily.

if you don't know about your debts, it's usually one little thing that you forgot about from five years ago for most of our listeners. But if you don't know about that, then you should definitely think about like, where can I go to get basic entry level information about my personal finances? And debts should be relatively easy for most bigger pockets money listeners, unless you are a brand new face here. If you're struggling to compute all of your debts, one of the best resources out there is going to be credit karma, which should be able to pull them pretty easily for you in most cases. Do you agree with that, Mindy? I do. I think it should be very easy, but, and I have never been one to be in credit card debt. I have had, you know,

random other debts, but like my mortgage is basically my only debt. I have my, I consider my credit cards to be expenses because I pay them off every month. And then assets, you know, again, most, most of our listeners are pretty, I have a general idea of where they're assets are, it's work to kind of tabulate them and compute them. And sometimes your guesses can be pretty wrong, which is why I actually love the idea now that I said it of everyone should just put down a guess right away before they actually look at their numbers if they haven't started looking at them and see how far off that guess is from your actual net worth, debts, liabilities, all that kind of stuff and your income and expenses. I think that'll

probably be a really good exercise that'll open your eyes to a lot of things. But generally, again, those assets are going to be in places like your 401k at work, your home, savings accounts, if you have an after-tax brokerage account. And generally speaking, people are pretty aware of these things. What I think you should not count in your net worth for this exercise are things like your car, right, or your boat, or your other toys that you're not intending to use for, like your computer, right, or your fancy suit collection. These are not assets that are going to generate investment returns. And here at Bigger Pockets Money, we're all about financial independence. And so I do not include any of those items in my personal net worth statement, although they

technically do contribute to my personal net worth, but something to consider there. I also don't have a boat just for what it's worth. Thank you for clarifying, Scott. I have two suits. Yeah. Really? I don't think I've ever seen you in a suit. And I've known you since, well, since God was a boy.

I've got a black suit for weddings and a blue suit for rehearsal dinners. Oh, there you go. That's kind of all you need. And board meetings, of course. Yeah. All right. So with the assets, I would encourage you to break them out into 401k traditional and 401k Roth, if you have both.

And by 401k, I also mean 403B, TSP, all of those accounts. However, I am going to ask you for your 457 account. If you have one, consider me jealous. That should go in a separate line because we're going to treat that a little bit differently. And if you have a 457 plan, holy canoli, I hope you're maxing it out as much as you can. Anyway, we'll get into that in a little bit. But I definitely want, rather than here are all of my assets on one line, I think it's helpful to spread them out, show what is in your Roth IRA, what is in your 401k, what is in your

after-tax brokerage account. How much cash do you have, sitting around isn't the right word, but how much cash do you have liquid ready to go? And this will help you get a very holistic view of your financial situation. And if you decide that once you get all these numbers together, you want to be a guest on the Finance Friday, it will help us have a holistic view of your numbers as well. Okay, Scott, now that we have shared with our listeners, what are the numbers we're looking for?

That's not the end of our story. You and I've been doing this for a long time, so I think it's more second nature for us. But we have some biases towards specific situations that we see when we see the numbers. We've been looking at these numbers for so long we can just screenshot the numbers in our head and be like, oh, I see the issue right here. I'm curious about your biases, Scott. Yeah. So, I mean, I come into a lot of these with a clear bias in mind. And I'm surprised every once in a while.

So that definitely happens. But I have the biases for a reason. They generally reflect the pattern that I've seen over hundreds of conversations, both on bigger pockets money and one-on-one with people. So look, when someone has a net worth of less than 500,000. So less than a million, certainly less than 500,000. The first place I look is what's the spread between your income and expenses. Whether that net worth is zero, you know, negative 150,000 or $400,000, that's the biggest lever, right? If we can take the, you know, 100K in salary minus $65,000 in expenses and take, we have now, I have 35k a year, that 35k a year times 10 years is 350 grand.

That's a major asset to deploy in a major part of the strategy. So I want that number to be as big as possible. We can increase up to 40 a year. That's $400,000 to play with over the next 10 years and invest. So I'm really looking for that. And I think that most of the opportunity for people in that stage of the journey is going to be on the expense side. And that's the next bias I have is that I'm going to look for expense opportunity to cut back. Generally in the big three, housing, transportation, and food. But certainly there's always, there's many situations where there's another wacko category like Amazon shopping that comes up. And there. The income side I've generally bias away from unless the person is really excited about

different opportunities or ideas. Typically, most folks are optimized on the income front or they're optimized relative to the constraints in their life, right? You know, I make $85,000 a year in this job. If I could make $125,000 a year doing the same job, I'd have already jumped ship and be doing that job instead. Usually the income opportunities comes with major sacrifice or extreme volatility or those types of things for folks. So while that is occasionally an opportunity, I typically shy away from that from a biased perspective. Once people get past about a million dollars in net worth and certainly about two and a half million dollars in net worth, then my focus really goes to the balance sheet. Not a lot of folks coming on on Finance Friday earn more than

$250,000 a year household income and a 10% yield on a $2.5 million portfolio is $250,000, which is more than almost everyone's annual income. And so it's really about where you invest and are you investing in a way that actually unlocks freedom. We see a lot of people trapped in the millionaire status where they've got $500,000 in their home equity and $700,000 in their 401k and Roth retirement accounts and no passive cash flow. So they essentially have no freedom. And so it's how do we make major reallocations of where we're investing or where we're

spending, putting where we have our assets deployed in order to actually generally generate spendable passive cash flow or equivalently reduce cash outlays, right? So a great example of this is someone has a $1.7 million net worth and a $300,000 mortgage, right? Their portfolio generates very little cash flow. But if they paid off that mortgage, which is not good investing advice, that would dramatically decrease the amount of cash and income they need to realize in order to enjoy a lot of freedom. And their retirement is generally paid off. So those are the areas of, those are the biases I typically come into conversations with. And where I'm usually surprised, when I'm surprised, is when someone has something, an ace up their sleeves in the form

of a business opportunity. So like a side hustle that should be their main business or a skill set that would allow them to buy a business. Or they're 22 and they should go try their hand at something before life gets in the way and really makes it impractical for them to take on something with huge upside, but so much uncertainty. So those are the things I come into. and where I'm looking at a general sense and would definitely encourage you to start there if you have a fairly typical situation. But there's tons of gotchas out there. And I think what Mindy does really well is coming with less bias, which is a great Yan Yang for this because usually that I'm surprised, Mindy has sussed out with her excellent questioning for members. Well, thank you, Scott.

I appreciate that. My focus is usually on their expenses because what I have seen over and over and over again is that expenses are misrepresented. And one of the easiest ways that I can tell that your expenses are misrepresented is when everything ends in zero. I spend $100 on gas. No, you don't. You never spend $100 on gas. You spend $98 on gas or $104 on gas. and when you're not using actual exact numbers.

And again, we said to guess in the beginning, but once you have started to refine your numbers, your numbers won't be round numbers. They might every once in a while come up to a round number. But you need to know your expenses. And that is the number one problem when your income minus your expenses doesn't equal your savings. It's because your expenses is incorrect, not your income, not your saving. Well, your savings is incorrect because your expenses are incorrect. So I almost don't even care what your

income or debts are when I'm looking at a finance Friday. I really focus on those expenses. And, you know, I have also been surprised. There are several times I'm like, wow, your expenses seem really out of whack. And Scott's like, yeah, but they make $400,000 a year. Does it matter? Well, you know what? You're right. They're not spending $400,000 a year. So, you know, every once in a while, that is an incorrect focus of mine. But if your estimated numbers are incorrect, I'm going to send you to your expenses. I just want to agree. That is the most common problem we have with folks that have a net worth of less than $500,000

is not having that control over expenses or not having enough time pass to allow that. We often get folks on the Finance Friday show that are like, you seem like you're doing almost all the right things here. Carry on. It's just that something changed recently. Like they finally finished residency and are now a doctor. And like, guess what? Like sometimes the right financial plan is in place and you just need time to pass. And that can be frustrating. We need to need, you know, there's a grind component to it. But generally, if you want to accelerate it, it starts with expenses. And it's not just the people under $500,000 a year. It can also be the multimillionaires in some cases because they forget that the expenses are, you know,

are the number one variable in the financial freedom equation. The less you spend, the more cash you accumulate and the lower your asset base needs to be. So if you can wipe out, if you have a $3,500 a month mortgage payment for principal and interest, that's $40,000 a year, if you wipe that out, you need a million less dollars in your asset base per the 4% rule to achieve financial independence, for example, right? That's one example of this. Again, bad math if it's 3%, but good math if it makes you feel free, right? Good, good in the context of freedom, bad in the context of the ultimate long-term, you know, end-of-life net worth number, which is usually not what people are optimizing for when they go through this exercise. Exactly. All right, Scott, you just alluded to portfolio imbalances or the middle-class trap of having most of your wealth in home equity and retirement accounts. How would you advise people in this situation who have their finance Friday, numbers all set out, how would you advise them to craft their portfolio moving forward so that they don't have this reach retirement and have like nothing?

The easy answer to the question is reduce your spending and continue maxing out. Like, I'm going to use an example of a household that makes $140,000 a year, has a $400,000 primary residence, and all of their wealth is in their home equity and their retirement accounts. be worth $600,000. Look like they're doing pretty well on paper, right? Many years have passed here with this. Probably live a nice life here. Well, the issue is that you're not going to be able to use your 401k or your home equity

to fuel your financial independence date, which is what we're all about on bigger pockets money, right? This is not, hey, here's how to plan for a traditional retirement and be set at that point. You're on track to do that. If you're listening to Bigger Pockets money, you want something different, most likely. And in order to get something different, you're going to make a change. because you only make $100,000, only make $140,000 a year, and you have a family and a house and all those kinds of things, you probably only have about $20,000, $25,000 of investments left over to invest in any given year, right? Let's imagine the late 30s, early 40s, a couple and family here, right? So what do you do with that? Well, what you are doing currently is paying off your mortgage and place.

it all into the 401k. That's where the investment dollars are going. And if you want to achieve early financial freedom, something about that has to change. One option is to just reduce your expenses dramatically in all these other areas so that after maxing out the 401k or Roth, there's still tens of thousands of dollars a year left over to invest in aftertax brokerages or real estate. That can be very difficult and will require huge sacrifices. You can wait and just allow your fixed expenses, stop the goalposts moving, and your job and income, hopefully to increase in order to, and use the additional spread to begin doing that, but that creates a decades-long journey to invest. So this person is kind of stuck,

and it's a really hard situation. If they actually want to make changes, they have to make one of two pretty hard choices in most cases. One is sell their house and downgrade their lifestyle to some degree, consider house hacking or whatever, because that's really where half of their liquidity is going. And the other is to stop investing in the 401k, which can also be problematic because there's often a match and that's the easy button and that feels safe and secure. And it is a time-tested thing. You know you're going to get to financial independence in 30 years if you do that. But unless you're willing to do some sort of major sacrifice on the income or expense front, you're kind of stuck. And I think that's one of the things that I'm super passionate here

about bigger pockets money is helping people avoid. You avoid that situation in the first place by never moving on that trajectory and saying, no, from the age of 25 or early in life, I'm going to set myself on a different trajectory so that my spread between my income and expenses is large after any retirement expenses. So I can invest that in after tax stock accounts or I can invest it in real estate or I have enough liquidity to buy a small business or try some of these alternative investments that can actually produce spendable cash flow early in life and allow you to declare your independence day in your 30s or 50s or 50s.

40s instead of at 65. And so that's the big middle class trap. We don't have an easy answer for that at bigger pockets other than don't cite yourself on that trajectory from the beginning. So you're not in that position. And instead, your position looks like I have way less equity in my house, but way more in rental properties or way more in after-tax brokerage accounts. And I have a huge business and investment portfolio and relatively modest 401K bonds. That's That's where a lot of really good options come into your life, in my opinion. So how am I doing at explaining the middle class trap? I think you're doing great.

And I am going to share that I myself am, I'm not in the middle class trap. We do have a fairly balanced portfolio in that some of our stuff is in retirement accounts and some of our home equity. I think it's like a third, a third and slightly less than a third. I think we're more heavily weighted in after-tax stocks than 401K balances. But last year, I turned 50. And I thought to myself, I'm sorry, two years ago I turned 50. It's hard when you get old your mind wanders.

I thought you've been doing this for nine decades, Mindy. Who said that on one of the shows? I have been doing this for nine decades, but I'm only 50. It's, you don't, the math doesn't work, but don't worry about it. Trust me. But when I turned 50, I was so excited because I could put an extra $6,000 in my 401K for the over 50 catch-up. And then I finally realized, you know, all this money that I keep putting into my 401k is great. It's reducing my taxable income.

But I'm going to be subjected to RMDs when I turn 72 or 70 and a half or whatever the age is for RMDs. I'm not there yet, so I don't know the exact age. but that's going to be a lot when I start, you know, if I continue to contribute to my 401K. And oh, I assume that everybody knows everything I'm talking about. RMD means required minimum distributions. And when you turn, I want to say 72, 72 and a half, 73, something like that. When you turn that age, the IRS requires you to start taking distributions from your 401K. even if you don't need the money. So you are paying taxes on these distributions if they are

traditional 401ks. And I don't want to take out money according to the government. I want to take out money according to me. So we have shifted, even though I get an extra $6,000 to max out my 401k with every year, we have shifted to more after tax brokerage account investing. So if you find yourself in the middle class track, after you've looked through all of your numbers and you discover that your 401k balance is significantly larger than your after-tax account, perhaps just shift a little bit. Again, you have to take into consideration your taxable income and what you're doing with all of your investments. It would be a great idea to talk to a tax strategist just to get a clear picture of what could happen to your finances in the future, but definitely start looking into after-tax

brokerage account investing. And one of the things you said at the beginning of that, I think, is critical. You said, my net worth is roughly a third, a third, a third in these buckets, right? And that is a critical exercise to do in the context of this plan. So take that sheet of paper, right, the DIY Finance Friday sheet that we've talked about with your income, expenses, assets, and liabilities. And then on the back of it, flip over one of those pages. And on a blank sheet of paper or the back of it, think, okay, in five years, 10 years, pick your time, horizon, I should have a net worth of X, right? Let's call it a million bucks. Where do you want that

million bucks? Right. And not many people who are starting from scratch will tell me, oh, I want that million bucks to be $500,000 in my $750,000 primary residence, and $500,000 in my 401k, $10,000 in my savings account, and $7,000 in my credit card balance. No one says that, right? They all say something different. And that's the problem that we find with middle class trap. So many people are in that position, literally a millionaire, but feel completely trapped. And you need to look at that and say, like, okay, that's where I'm on, that's how I'm on track for. Well, what do I need to change to make that not become a reality? And that's all we do on Finance Friday, essentially. It's all I do on finance Friday to say, okay, like, I understand, I think I know where you want that to be,

but let me take a couple of guesses. What do you like better here? Okay, now I've got that. Okay, they want a half real estate, half stock portfolio with enough cash to make them feel comfy. Okay, let's back into that. Now we can say, okay, that for that $40,000 a year, I'm going to are going to accumulate for the next 10 years, $400,000. I'm going to deploy 200,000 of that into rental properties, probably two rental properties, maybe one, depending where you live, maybe four, if you're in a fortunate part of the country where you can actually afford real estate and rental properties with $50,000 down. But that's where I'm, that's how I back into the overall thought process. And it's as simple and as hard as guessing at what you're

going to want 10 years down the road from your portfolio and then making the decisions there. And then if one part takes off, like if real estate explodes, you divert more to stocks. And if you had stock market explodes, you put more into real estate. Right. And over the time, you fine-tuned backing into that pie chart you drew for your net worth statement at the end state. Perfect. Scott, thank you for clarifying.

I was sort of thinking in my head, but not really. You're very good at that. And I did look it up while you were sharing that. your required minimum distributions are starting at age 72 unless you turn age 72 after December 31st, 2022, which will probably apply to most people listening, in which case it's age 73. So you are required to take required minimum distributions starting the year that you turn age 73. Okay, so Scott, we have to pause for another quick break from our sponsor, but when we come back, we will look at advice for getting through the grind and the number one piece of information

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that we find many Finance Friday folks in the midst of. Yes. So the grind, Scott, is the middle. The point of time between discovery. covering financial independence and actually reaching it. Scott, what is your advice for somebody to get through that grind? Yeah. So the grind is like, let's say we talk to somebody who has a net worth today of $250,000 is a couple years under their career and wants to retire in 10 years with a net worth of $1.5 to $2 million, right? They're going to need to accumulate $75,000 a year, so it's a relatively high-income earner. And this is not atypical of the guests that we would have on a finance Friday, right? And they need to deploy it pretty reasonably. And hopefully the

investment portfolio doubles in that time period. And that gets them pretty close back soon. Well, during that time period, if they're watching their budget, working hard, enjoying life, like, they're just slowly getting rich. Mr. Money Mustache wrote a great article about this. He's like this like, wait, I remember reached out to him 10 years ago and always has stuck with me. And they were complaining about, hey, I'm doing all the right things. I'm spending very little. I earn a good amount. I stick my money in index funds every month. And like, it just goes by and it ticks up.

What am I doing wrong? And Mr. Moumoustache is like, that feeling you have there, the dull, boring, obvious feeling, that's the feeling of getting rich. That's the grind, right? Like, that's what it is, right? It is time passes and you add to the pile and you move towards your freedom number in there. And so what we have with a lot of folks is, hey, you have one or two choices while you're in the grind. You can continue to upheave your life.

and make huge sacrifices, burn the midnight oil to start a business or side hustle or try to get to accelerate that journey. You can sacrifice and cut back on your lifestyle back as far beyond the point of reasonableness. Or you can sit there and let time pass. And for many people, that's the most reasonable option. I just met with a couple recently in the Denver area. They're doing great. Multiple rental portfolio, probably a little bit under, you know, a little bit of one and a half, two million dollar net worth. that kind of situation. A couple properties in various stages of debt to equity, they're leveraged

reasonably. They make good money and they're like, what do we do now? It's like, well, you can either start paying off your 3% interest rate mortgages and generate more cash flow from rental properties. You can sell your nice home and your nice neighborhood and house hack and move your kids out of school. Or you can say, great, we're doing great. We don't have to like worry about accumulation that much anymore. Let this portfolio de leverage and not bite into the investment portfolio. we're coast-fi. So there's all these options. That's probably the right option for that particular couple there. And that's totally okay in the context of the grind. But just know, like, sometimes, some of you, many of you listening to the show perhaps, may be optimized to the point of reason

in your portfolio. And it's just let time pass and start enjoying life. You did it. I don't know about how you feel about it, Mindy. I think that's great advice. What I advise people to do is to start planning what happens next. Don't be so caught up in the, I have to get to FI, that you don't make any plans for afterwards. And unfortunately, this is actually really common. People are so, and like Carl and I found ourselves in this problem. We retired to nothing. We were going to, like, we have two kids. Trust me, the days get filled up. But we didn't have any real plans. We were just so focused on the number itself. So I want you during the grind to start thinking about what comes next. Create a bucket list. Put down everything, the wild things. If you want to climb Mount Everest, put it on the list.

I don't want to climb Mount Everest. I'm not going to go with you. But if that's something that you want to do, put it on the list. Put little things on the list. Like try out this new restaurant in town or try out these 75 restaurants in town. Whatever you want to do, put it on your list. and start crossing those off now. One of the things that Carl and I really got, one of the best things that we got out of our conversation with Rameet was that we haven't been focusing on our current lives and how to make it better. So that's what we're doing now.

We're using the money that we have to make our life better in the now. You can do that while you're grinding through. I mean, does it matter if you reach financial independence in 2030? or 2031, if you have an amazing experience all the way to 2031, or you have a super crap experience all the way to 2030, pardon my French, you know, focus on how you can make your life better while you're in the grind and focus on what you're going to do once you quit. Completely agree with that. I talked to another person recently who was, who the household makes a really high income, like this one was north of several hundred thousand dollars a year.

And guy drives a 10-year-old car. He's asking me if he should buy a $30,000 Tesla Model Y to replace his, I think it was 10 or 20-year-old car. I think he had one 10-year-old car and one 20-year-old car. And I was like, dude, buy the car in that situation, right? And like that's, you know, like if the income was $80,000 a year, I'd say no. But there, you know, or no, that, you know, that's a real trade-off. But in this case, like, delaying financial freedom by one month.

month to spend the next 10 years driving a better car is probably a really good tradeoff. And so there's like lots of those things of like there's too much optimization that can happen in some cases, I think. And Mindy probably, you may feel that you may have made too many optimizations in prior years. I certainly probably did in a couple of cases. Yes, I think that we could have loosened our purse strings. We could have done, I mean, hindsight's 2020, Scott. Of course, there's a billion things we could have. have done different or better, and you make the best decision with the information that you have on hand at the time. And at the time, the entire personal finance community was like, get to FI as

fast as you can and be super frugal. And, you know, it's all about getting there. And now I think there's a lot more focus on it's all about the journey. And really, if you're going to be living for the next 10 years anyway, wouldn't you rather enjoy those 10 years? Absolutely. Mindy, I want to ask you, I want to talk about another framework that I encounter a lot in Finance Fridays here, which is this concept of process or event in the world of personal finance. And occasionally, we'll come across couples, for example, who have radically different views on this. Right. So, for example, we had maybe 250 episodes ago or something like that.

We had a couple where the man wanted to build a business. He was always having a new entrepreneurial idea that was going to be the next breakthrough component here. And so they weren't saving. And his partner wanted to contribute to the 401K in there. And this can be a major conflict, right? Because like, why aren't we putting all the money into the business when that's going to actually blow things up? And well, we're not actually seeming to get ahead because the business never takes off and we can't go here. And I just want to chime in that I think they're both right, like those ideas.

that there needs to be a formula for moving towards wealth. Like your spreadsheet needs to say, I'm going to accumulate this much every month, and that is going to be moving me towards financial independence at a very reasonable clip. And if you're serious about getting there fast or have that entrepreneurial itch, you should be taking shots on a regular basis and setting aside funds for that side hustle or small business. I think it's not one or the other for most people, after the very, bits, first bits of the financial foundation are set up, like an emergency reserve and no bad debt, for example. But I actually think that that's a really good thing to keep in mind is if you're

really craving financial freedom early in life, you probably should be doing both. You should be spending your expenses should be highly controlled. You should have a stable source of income that generates a good spread. And there should be something in your repertoire that has the potential to really deliver a huge outcome for you. Again, like a small business, like real estate projects, like a side hustle combo with a small business that can take off. I really think that's the X factor that I see consistently across folks who really get there fast. But, again, I think the trap that people can fall into is if they think it's all event,

only a few, usually and often in their 20s, some things, really seem to pull off. a huge business outcome without having that underlying formula and strong financial foundation. What do you think, Mindy? Do you agree with that overall observation? I absolutely agree with that. And everything you were saying makes me think of your investment philosophy worksheet. It is a one-pager, and it is a document that we have. We will include it in our show notes. You can also find it at biggerpockets.com slash resources. It is called the investment philosophy worksheet. It is Scott's design, and it just covers your goals, your cash management, your core tenets, your investment asset classes. And this is something you've got

a target date, bonus considerations. This is something that you work on. If you are not partnered up, you work on it by yourself. If you are partnered up, you work on this with your partner so that you each have an investment philosophy that you can agree on. And I really love this document. It's not something that it's a one and done. Scott comes back and revisits. Scott, is this in every year you revisit or isn't every quarter? My investment philosophy, I revisit about once a year.

Once a year. So once a year, you just check in. Maybe you and your partner have decided, like Scott said, one of you wants to do a business, one of you wants to do 401K, you come to an agreement. Okay, we have 20,000. I don't like the term extra dollars, but we have 20,000 extra dollars to put towards this. And I would feel really comfortable with 10,000 going to the 401k and 10,000 going to the business.

Great. Then let's do that. And then next year, that business has all of a sudden gone crazy. It's exploded and you are making so much money. Maybe you can afford to put more into your 401k while also continuing to fund the business. Or maybe the business fell apart. It was not a good concept. It didn't pan out. It was the wrong time frame. Whatever. Then you can revisit and shift more into the 401k. But having it written down, having something that you both agree on. You know, Scott, we talked about having the money date. I absolutely think that's a great time to fill out your investment philosophy workshop. So that's another tool that you can use just to have conversations with your partner about your money and where you want it to go. Scott, something that I have in my mind, but I want to hear your answer first.

What is the number one consideration you're looking for when you see the Finance Friday numbers? I believe that you're on bigger pockets money or coming to us for Finance Friday to pursue early financial freedom. So, you know, like we're not like, this is not how to like retire at 65 starting at 30 with a million dollars by contributing $200 a month year 401K. You want that? You can do that. This is how to get there early. And so one of the biggest considerations that I have is this concept of spendable liquidity. How are you actually going to harvest your portfolio in the future end state in a way that you're comfortable with retiring on early? And the biggest thing I'm looking for is is that are we moving towards a picture that looks like, hey, there's $100,000 in actual passive income that are coming into your life, typically?

or are we looking at a portfolio like this one that came into me a while back, this person was worth $3.5 million dollars. They had a million dollars in stocks. They had a million dollars in real estate equity. They had a $750,000 life insurance policy, $250K in cash, and $500k in their million home with a mortgage payment of $3,300 a month. And like this person reached out to me and said, how do I generate $60K in passive cash flow? And it's almost like it's, it's not comical because it's, it's, this person is, is really struggling with this question.

But it's like, if I handed you a pile of cash with $3.5 million, you can take $1.5 million into your savings account at a bad bank that only offered 4% API and generate $60,000 a year in passive cash flow. But that's the thing that I'm always on the lookout for is, is your plan going to result in that person's portfolio where you're stuck making $250,000? thousand dollars a year and feel trapped. That's what I want to avoid for people. And I'm always looking for that. And the cost is lack of optimization. That person was optimized. Stox are optimized, but they produce no income. And most people, most people don't want to sell equity in their stock portfolio at 40 to live off of. They want to spend income. Their real estate portfolio is levered to the point where it doesn't produce any cash flow. That optimizes long-term wealth, but doesn't provide any freedom. The mortgage is not helping them, and the life insurance policy, don't get

me started. But that's what I'm looking for when I'm looking for these portfolios. That's the number one thing I'm looking for is, is that your portfolio or is that where you're headed? And can I help you avoid that? Because if you're not building any wealth, we'll fix that first. But once you are building wealth, is it actually going to be congruent with this goal of freedom and bettering your life early, which I think is what we're all about here. How am I doing, Mindy? Well, you just said the G word, which is my most important consideration, is your goals. Because your goals are going to drive the, I can't say advice, the suggestions that I would make based on your situation and your goals are part of your situation. I have this much income,

this much expenses, this much debt, this much assets, and this is my goal. Well, if your goal is different than somebody else's goal with the exact same scenario, the advice is going to be different. I'm sorry, the suggestion. It's always a suggestion. It's just a suggestion. This is for entertainment purposes only. But your goal is what we're working towards. So driving you down, like think of a destination as you're driving.

Google Maps is going to take you down this road if you're going to that spot. But if you're going over here, Google Maps is going to take you this way. So I need to know your end destination so I can give you the right map to get there. So I think it is very important to really think about what your goal is and make sure that it's attainable. If you're making $25,000 a year, you have $400,000 in student loans. You're not going to retire next year. That's just a fact. So make sure that your goal is attainable.

And if it's not attainable with your specific current situation, then how can you change? your current situation in order to get where you want to be. I love it. And Mindy, this is why you and I make such a good team is because when someone doesn't have a clearly defined goal, I give it to them, oh, you're going to become financially free with this portfolio that can spend this at the earliest possible time. And I'm going to back into that and engineer everything backwards from there. And that is often what people want. That's what, that's like what we're doing here. But not always. And, you know, we get there. And I think you're much better than me about actually sussing out what what somebody wants at the highest level, because then you have a

totally different engineering approach to getting there if what I just said is not your goal. So, yeah, absolutely. Scott, I used to feel really bad when we had different answers to a question because I'm like, oh, well, clearly Scott's right and I'm wrong. No, it's, we're coming at it from different places. Scott is in his early 30s. I'm in my early 50s. We are, he's the CEO of the company. I'm a lowly employee. And I'm not like, I don't mean it like that. But he's, He's got a different set of life skills and a different set of thought processes than I do. I have two kids who are in their teens. Scott, they're both going to be in high school this year.

Can you imagine? Daphne was starting kindergarten when I started at bigger pockets. And now she's in high school. This is crazy. And Scott's daughter is one and a half? Yep. Almost. She'll be two in October.

She'll be two in October. So there's, we've just, we come at it from different places. but I think that's why it works so well because we've got different ideas. And you might agree with me sometimes and you might agree with Scott sometimes. And that's great. We're just giving you something to think about. So when you are thinking about your own Finance Friday, your DIY finance Friday, try to think of what I would say. Try to think of what Scott would say. Feel free to post in our Facebook group, Bigger Pockets. No, BiggerPockets Money, Facebook group, which is Facebook.com slash groups slash BP money, or post in the forums on BiggerPockets, email Scott and I, Scott at BiggerPockets.com,

Mindy at BiggerPockets.com, and ask, hey, what would you do in this situation? Or, how about this? Join us for a Finance Friday. Now, we have had Finance Friday guests who use their real name, use their video, share all their numbers, they're very transparent. But we have also had Finance Friday guests who use a fake name. I'm not going to tell you who it is because it doesn't matter. We've had people decide they don't want to use.

their video. We just want your story, your scenario, and we want to share your numbers. So if you would like to get our advice, we would love to have you. So if you would like to join us on a Finance Friday episode, apply at biggerpockets.com slash finance review. There is a place to let us know your level of anonymity that you would like to have. If you would like to have some anonymousness, anonymity, I guess is the correct English word. But you could also make it up as long as you can use it in a sentence, you can make up a word. I just did anonymousness. Let us know what you want.

All right, Scott, this was super fun. I love talking about money. I don't know if you know that. Again, all of the resources that we've shared can be found at biggerpockets.com slash resources or linked to in the show notes, including the money date episode that I referred to just a moment ago and the episode where we walked you through Scott's investment philosophy worksheet. That was a lot, Scott. Yeah, that was. I love talking about this stuff.

And hopefully, you know, you found some value if you're listening to the way, the frameworks that we use to approach the problems, they're not always going to be correct. Usually, not always. Usually there's no, there's not some like tactical maneuver or advanced technique, like a mega backdoor Roth or, you know, a conversion ladder or all this other stuff that's going on. Usually it's very simple questions about how much is coming in, how much is coming out. where can we turn the levers and drive things forward and what is the asset base going to look like at the time of the end goal and those high-level decisions can be made on a piece of paper

they should be informed by the spreadsheet but the strategy is usually very simple or the simple ones are the most effective the tactics only multiply it so i love talking about this stuff we'll get into the tactics occasionally but it's just fun it's just fun it's fun to think about it and it's fun to optimize for freedom and optionality in people's lives. All right, Scott, I think that's a great place to end. Should we get out of here? Let's do it. That wraps up this episode of the Bigger Pockets Money podcast.

He, of course, is the Scott Trench, and I am Mindy Jensen saying, happy financial Independence Day. Bigger Pockets Money was created by Mindy Jensen and Scott Trench. This episode was produced by Eric Knutson, copywriting by Calico Content. Post production by Exodus Media and Chris Mickin. Thanks for listening. Thank you.