0:00

Hey Joe, do you know anybody who retired at the age of 34? I...

0:04

no. You're

0:07

about to. One of our

0:09

callers is 31. Has a

0:11

goal of retiring in three and a half years. So by

0:13

the time he is 34 and a half. And

0:16

a half. I like the half. And a half. You know, because

0:18

in the world of financial planning, 59 and a

0:20

half is a significant age. 70 and a

0:22

half for RMDs is the significant age. And 34 and

0:25

a half happens to be... 34 and a

0:27

half. Exactly. Welcome to the

0:29

Afford Anything podcast. The show that understands

0:31

you can afford anything, including retiring at

0:33

34 and a half. But

0:36

you can't afford everything. Every choice

0:38

that you make is a

0:40

trade off. That applies not just to your

0:42

money, but to your time, your focus, your

0:44

energy, your attention. So what matters

0:46

most and how do you make decisions

0:49

accordingly? Answering these two questions

0:51

is what this podcast is all about.

0:53

My name is Paula Pant. I trained

0:55

in economic reporting at Columbia University. I

0:57

am the host of this show. And

0:59

my buddy, former financial planner, Joe

1:02

Salcihi, joins me every other

1:04

episode to answer questions that come from

1:06

you, the community. How's it going, Joe?

1:08

It is going great as people

1:10

can hear. My voice is a

1:13

little bit rusty. I'm

1:15

a little bit sick, but I'm ready to

1:17

go. We got some great questions. We

1:20

have incredible questions. And Joe, our first

1:22

question comes from an anonymous caller who

1:24

has doubled her income

1:26

and is now trying to

1:29

grapple with how to deal with a much higher

1:31

tax bracket. Then we're going to talk to a

1:33

renter who is wondering how to

1:35

make the most of the fact

1:37

that she's paying so much in rent. And finally, we're going

1:39

to close out with a 31 year

1:42

old caller who is trying to retire in

1:44

three and a half years. We're going to

1:47

start by giving our anonymous caller

1:49

a nickname. Joe, what would you like

1:51

to name her? You know, back

1:53

on a topic that I like a lot,

1:55

which is recent television, I know Paula, you

1:57

and I are the same there. You're all

2:00

about you're all about pop

2:02

culture and about watching the latest thing.

2:04

For those of you new to the

2:06

podcast I am absolutely not. She's not. She's not at

2:08

all. And I'm gonna say a few

2:10

words that Paula won't know anything about. There

2:12

was a show Paula called Downton Abbey which

2:15

was pretty. What's a show? That's right. What's

2:17

a television? I've seen Downton Abbey

2:19

actually. Downton Abbey was great and there's a

2:21

newish version that's on max called

2:24

The Gilded Age and The Gilded

2:26

Age is about the robber barons

2:29

and about the people and the

2:31

making of New York City. So

2:34

from J Gould to Mrs. Astor,

2:37

the Society of New York

2:39

City. And one of my

2:41

favorite characters on this

2:43

show is the spouse of

2:46

a man who runs

2:48

a big steel company. So he's

2:50

kind of the Andrew Carnegie of

2:53

the time and her name is

2:55

Bertha Russell who is the spouse

2:57

of kind of

3:00

an Andrew Carnegie character and she is

3:03

socialite making her way in the world.

3:05

And what I like about this for

3:07

this person is that this anonymous

3:10

caller is doing the same thing. She's making

3:13

her way in the world Paula. She's doing

3:15

some great things much like Bertha Russell on

3:17

The Gilded Age. Highly recommend the show by

3:19

the way. Alright. Then

3:21

our first caller who is anonymous will

3:23

be named Bertha. Hello

3:27

Paula and Joe. I am an anonymous caller

3:29

who called in a couple years ago and

3:31

when I was experiencing cash flow issues having

3:34

recently split with my partner. Your responses

3:37

were very helpful to me and

3:39

I am happy to report that I'll be starting a

3:41

new job in the coming weeks and my income will

3:43

go from a hundred and forty thousand a year to

3:46

over two hundred ninety thousand a

3:48

year including RSUs and bonus payments.

3:51

That's incredible. Congratulations. I'm trying to

3:53

decide how to structure my investments

3:55

going forward considering this significant pay

3:58

increase. I am forty. Seven

4:00

years old filing single, I have

4:02

the loose call of retiring by

4:04

age fifty five, desiring approximately eighty

4:06

thousand in annual retirement income and

4:08

a paid off primary residence. Here's

4:11

the structure my for an investment. I've got

4:13

two hundred, twenty thousand in a Roth

4:15

Ira. Twenty. Thousand in a

4:17

traditional Ira from a four one.

4:19

K roll over years ago. Over.

4:22

Five hundred and twenty thousand dollars in

4:24

a traditional four o one K from

4:26

my current soon to be previous employer.

4:29

approximately. One hundred Forty thousand in

4:31

a brokerage account where I have about

4:33

seventy five percent of those funds in

4:35

Ladder T bills, and approximately five hundred

4:37

thousand dollars in combined equity between my

4:40

existing home and one rental property. And

4:42

last but not Li said that, ninety

4:44

thousand dollars in cash savings in the

4:46

High Yield Account and Cd. And

4:49

considering making me the just months and

4:51

twenty twenty four given my job change

4:53

and tax implications of this higher salary,

4:55

I love your. Thoughts on these changes:

4:58

First, I will roll my previous Four

5:00

O One K into my new employers

5:02

Four O One K. I am wondering

5:05

if despite being in a high tax

5:07

bracket now and in immediate future should

5:09

I make parcel are all Roth Four

5:11

O One K contributions. Into.

5:13

This new account I will. Also have

5:15

of employer match. Second, To

5:18

maintain the option to contribute to a

5:20

Roth Ira, I am seeking to convert

5:22

the twenty thousand dollar traditional Ira and

5:25

twenty twenty four to a Roth Ira.

5:27

My taxable income should be less this

5:29

year, considering the partial year in the

5:32

lower income position. So. My

5:34

thoughts are to convert this before I

5:36

have a full year at my new

5:39

income with bonus payouts, cetera. I'm.

5:41

Also reading about the pro rata rule in

5:43

a fight and bert the full amount of

5:45

this existing are a It will clear the

5:48

way for me to make backdoor Roth contributions

5:50

in the future. I love

5:52

to get your thoughts on these adjustments and for

5:54

you to weigh in on some of my questions.

5:56

I prefer to be a D I Y investor

5:58

but also wondering if I. Baba Financial

6:01

Investor Info: These decisions. You.

6:03

Two are the best and I never missed an

6:05

episode. Burst of

6:07

first Wow congratulations as I

6:09

could even get through your

6:12

question without having to play

6:14

a round of applause that

6:16

is incredible. I. Am so happy

6:18

for you! I am so proud of you! What?

6:21

A sewage success that's

6:23

incredibly exciting news. and

6:25

wow. This. This makes

6:27

my day to this did this is why we

6:29

do what we do, write an article here. Success

6:32

stories like this. Yes as great. So.

6:34

To your questions. First of all, What?

6:37

Are the offerings in your new employers? Four

6:39

O K. Are. They good

6:41

offerings. You have a variety

6:43

of choices. Are the. Expense

6:46

ratios. Reasonable assumes. The

6:48

guinea that matters. Paul. Yeah.

6:51

Well the result is is your four o one

6:53

k provider can change that at any time. So

6:55

even if it's good right now, if they

6:57

decide to go cheap for some reason or

6:59

somebody decides they got a buddy who sells

7:01

four One K plans. They. Make some

7:04

decisions that you don't like.

7:06

You're stuck with it. so

7:08

I would never roll it.

7:11

Even if all of the answers your

7:13

questions are great, which is the criteria

7:15

most people use, I still wouldn't rule

7:17

it to the current Four O One

7:19

K. You'd rather to the separate account.

7:21

At a place like Schwab or Fidelity,

7:23

your Vanguard, you have every choice imaginable

7:26

and so your Four O One K

7:28

could have some stuff. It's really good

7:30

at some stuff it's not good at

7:32

in those are going to change based

7:34

on whatever the committee that runs the

7:36

Four O One K decides to do

7:38

with that overtime. and as that changes

7:41

you can then change your Ira allocation.

7:43

To. Match that. So you're four. One

7:45

K doesn't have a great international fund.

7:48

Your Ira allocation could be over exposed

7:50

to international because you'll have none inside

7:52

of your Four One K. What?

7:55

hit what on work i feel like we're talking that

7:57

two different things right now number one there's the question

7:59

of where should she roll over her 401k? But

8:01

number two, there's also the question of, if

8:04

you have a condition in which one

8:07

particular type of account doesn't give you a

8:09

good selection of assets, how do you then

8:11

play the asset location game across

8:14

a variety of different accounts? In

8:16

your example, if you have a 401k

8:19

that doesn't have access

8:21

to good funds within

8:24

a particular asset class, you

8:26

can offset that by locating

8:28

that asset class inside of

8:30

a different type of account. Right,

8:33

but that is distinct from the

8:36

primary question which is, should

8:38

she roll over her 401k to her

8:41

new employers? But it's not. The

8:43

reason it's not is because if the

8:45

401k is where you restricted,

8:48

Paula, if you're restricted based on

8:50

whatever the 401k committee decides

8:53

to do, then you need

8:55

an unrestricted account where you can kind

8:57

of pour over these asset classes to

9:00

mitigate the risk that you might not be able

9:02

to get that asset class inside the

9:05

401k the way that you would want it to be. I

9:08

suppose all of this does become moot if she

9:10

simply rolls over the 401k to

9:12

a location that is not

9:14

controlled by her employer because then she would

9:16

have control over that location. So for example,

9:19

if she rolled it over to a rollover

9:22

401k account in one

9:24

of the big three discount brokerages, Vanguard

9:26

12 fidelity, then it all becomes moot.

9:28

Well, not 100% because remember when

9:32

she's still adding money in the future, if

9:34

she doesn't have a great asset class, if

9:37

there's an asset class that she needs, if there's something

9:39

she needs that she can't get in her 401k,

9:42

it still is going to

9:44

be material how she

9:46

then allocates that IRA and

9:48

sets that up to

9:50

offset the fact that she can't get

9:52

exposure to this asset class that she

9:54

really wants. Right, but those are

9:56

with new contributions inside of her new

9:58

employers 401k. She'd be offsetting

10:00

that with assets in her rollover

10:03

401k as well as in her IRA. Yes.

10:06

I suspect that the reason that she's thinking about

10:08

rolling over the 401k to exist inside of

10:12

the new employers plan is so

10:15

that she can manage one dashboard. Absolutely. That's

10:17

typically the motivation. And

10:19

so there's a distinction between the

10:22

mathematical answer and the behavioral answer because

10:24

behaviorally, it is more

10:26

convenient to manage out of one dashboard. But

10:29

the drawback to that, of course, is that font selection

10:31

can be curtailed. And when

10:33

she leaves this position at

10:35

some point, she already has this master

10:37

IRA. The average person now

10:39

changes jobs more than seven times during

10:42

their career, which is why I like

10:44

having this master IRA where I can have

10:47

complete flexibility at any time. And

10:49

then I'll always contribute to my current

10:52

employer. And then when I leave

10:54

that employer, it goes over to the master

10:56

IRA, which is my kind of my home

10:58

base account. Okay. So I think

11:00

you and I then are converging on a

11:02

similar answer, which is roll over the 401k

11:05

to an independent location, not

11:07

to the new employers plan.

11:10

Yeah, absolutely. All

11:12

right. Solved. To

11:15

your next question, which is given

11:18

that you are in a high

11:20

income bracket, should you make Roth

11:22

contributions? That's a

11:25

fascinating question. And my

11:27

question back to you is how

11:30

long do you plan on being in

11:32

a high income bracket? If

11:35

you reasonably think that

11:37

you want to remain ideally

11:40

under ideal circumstances in a high

11:43

income tax bracket, or you want to

11:45

remain as a high income earner for

11:49

the next 20 years, make

11:51

a Roth contribution. Absolutely. Because then you

11:53

get the capital gains, you get the

11:55

dividends, all of that is tax exempt.

11:58

But if you think that this is something

12:00

that's temporary. If you plan

12:03

on being a high-income earner for,

12:05

let's say, the next four or five years,

12:08

and five years from now, you want to

12:10

take an early retirement, under

12:12

that set of circumstances, the Roth would

12:14

not be a good plan. So, largely,

12:17

it depends on how long do you plan on

12:19

continuing to earn a high income, and how long

12:21

do you plan on continuing to be in a

12:23

high-income bracket? But I think what I'm

12:25

hearing, Paula, is that your bias is like

12:28

mine. We have a bias

12:30

toward making Roth contributions. Not away

12:32

from it, bias toward. But

12:34

if you're going to be only in

12:36

a high-income spot for a few years,

12:39

then flip that. Yeah, that's a

12:41

good point. My default

12:43

is Roth is better,

12:46

unless there is some type of extenuating

12:49

circumstance that would

12:51

compel you to not make a Roth

12:53

contribution. And so, the last

12:56

caller, the final caller, that we're going to

12:58

talk to in today's episode, Rob. Rob

13:00

wants to retire in three and a half

13:02

years. That is an

13:05

example of an extenuating circumstance,

13:07

a goal of no longer earning an active

13:09

income in three and a half years from

13:12

now. That's an example of an

13:14

extenuating circumstance that would lead me

13:16

to say, all right, don't bother making

13:18

Roth contributions, because three and a half

13:20

years from now, when you do quit that job, you're

13:23

going to be in a dramatically lower tax bracket. But

13:25

again, if you're planning on staying in that job for 20 years,

13:29

15 years, heck, I'd

13:31

say even 10 years. Even

13:33

if it's a 10-year plan of

13:35

staying at a high-income threshold, I'd

13:37

make Roth contributions. And

13:40

the reason for that is because

13:42

the benefit of tax-exempt

13:44

growth, compounded tax-exempt

13:47

growth, is not

13:49

something that you want to pass up unless there is

13:51

a compelling reason to do so. Yeah,

13:53

totally agree. Which also I

13:55

think then Paula feeds our answer on

13:58

the converting. the

14:00

small traditional IRA to a

14:02

Roth IRA? Absolutely.

14:05

Because if she thinks that her income now is

14:07

going to be a little lower than it's gonna

14:09

be for the next several years, do it now.

14:11

Yeah, exactly. Sooner the better. Bertha,

14:14

you mentioned that you're 47 and

14:16

you have a flexible goal of retiring

14:18

by age 55. Which

14:22

means, given that it's a flexible

14:24

goal, you plan on working for

14:26

at least another eight years, but it might be 10,

14:28

it might be 12. And

14:30

that is a long enough time period

14:33

to spend in a high tax

14:35

bracket that making Roth contributions right

14:38

now for the first few years, I think

14:40

would be a good plan. As

14:42

you get closer to your ideal

14:44

retirement age, when you think that

14:46

you're five years away from it,

14:49

I would reevaluate. And by

14:51

the time you get to that point,

14:53

you'll also have a better sense of

14:56

whether or not you still

14:58

plan on retiring at 55 versus

15:02

whether you want to push that to 58 or 60. But

15:07

at this point, given that you are at

15:09

least eight years away and possibly more, I'd

15:12

make Roth contributions for the first couple of years. And

15:15

the last part of Bertha's question involved whether

15:18

she should hire a financial advisor. She said

15:20

she prefers to be a DIY investor, but

15:22

she's wondering if a financial advisor can help. As

15:25

you know, Paula, I am very

15:28

pro advisor, but my

15:30

definition of advisor is different

15:32

than I think a lot of people

15:34

when they think about financial advisor. So

15:37

as I answer this question, I just wanna be clear

15:39

about what we're talking about. You

15:42

should hire financial advisors who make

15:44

you smarter, who will argue with

15:46

you, who will push you, who

15:48

will make you better. You

15:51

need to be the CEO, which means no

15:53

matter whether somebody else presses the button or

15:56

not, I believe that you still are in

15:58

control of your own destiny. So

16:00

you need to be the one

16:02

who's responsible for your goal. And

16:05

I think a lot of people think that when

16:07

they hire a financial advisor, they're going to delegate

16:09

all this financial stuff. You

16:11

take General Motors and Mary Barra, the

16:13

CEO of General Motors. Mary

16:15

doesn't come into GM twice a year and go,

16:17

so how's this car thing going? We

16:20

doing okay? No. But

16:22

people think that when I hire advisors, that

16:24

that's what I should do with my money.

16:27

But you are Mary Barra. You are the CEO.

16:30

And so because of that, you have,

16:32

quote, vice presidents or advisors who know

16:34

more about powertrain than you do, who

16:37

know more about how the steering

16:39

works, about the different pieces of the

16:41

car than you do. But

16:44

you still need to know everything

16:46

yourself. So I like

16:48

financial advisors, but I don't like ones

16:50

that just take it away and

16:52

do the magic thing. I want

16:54

somebody who's going to help

16:57

you continue to become

16:59

even better at this. Now,

17:02

is it hard? No. And

17:04

can you do it yourself? Absolutely.

17:07

But every smart person I know

17:09

surrounds themselves with smart people. They

17:12

have smart people around them who make them even

17:14

smarter. You know, heck, I mean,

17:16

imagine Paula, you've had Morgan Housl on the

17:18

show. Imagine if Morgan Housl

17:20

were in your corner and he knew you

17:23

personally, you know, how much

17:25

better would you be with your money

17:28

if you had Morgan Housl who knew

17:30

everything about your goals and was helping

17:32

you? That's what we're looking for

17:34

when it comes to financial advisors. So

17:37

broadly speaking, then it has what

17:39

I think of as a board of advisors. Absolutely.

17:43

Yes. And and you can

17:45

also delegate some of the stuff that you could

17:47

do, but you know that they'll

17:49

get it right and they could do it quicker.

17:51

Like as an example, if you're building out like

17:53

a retirement game plan, right, and how you're going

17:55

to spend money over your retirement years and how

17:57

you want to access your accounts, there's

18:00

plenty of calculators online that could do

18:02

that. And advisors done this

18:05

hundreds of times every year. They'll do

18:07

it much faster than you do. So

18:09

you may pay for expedience. You

18:11

know what I mean? Like how much is your

18:13

time worth? So you may pay for

18:15

some of that stuff too, where you're like, yeah,

18:17

I could do that, but I'd much rather have

18:19

it done for me by somebody who's done it

18:21

a thousand times. I know it's gonna be right.

18:23

It's gonna be done much quicker. And now I

18:26

can save my brain power for the stuff that

18:28

actually matters. Versus inputting stuff

18:30

into a spreadsheet. So I

18:32

like both of those functions. I like number

18:34

one, person that pushes me. Number

18:36

two, if I'm building models, somebody who

18:38

has a shop where they do that all the

18:41

time. I'm a smart guy, I could build a

18:43

car. And by the way, I'm not being

18:45

funny. I think I could build a car. It would take me

18:47

about eight years, and it would probably

18:49

run like crap. But I could build a car.

18:51

I prefer to buy one, because

18:53

these companies do it every single day,

18:55

and I know that it's gonna run

18:57

reliably. The real

18:59

skill set to develop is the skill

19:02

of selecting people, recognizing talent. The

19:04

skill is the skill of recognizing skill. Oh,

19:07

totally agree. Yeah. When people

19:09

tell me that they don't like financial advisors

19:11

because they had a bad one, I

19:14

don't think that's indictment on all financial

19:16

advisors. I think that's an indictment on

19:18

your interviewing skills. There

19:21

are A players, B players, and C players

19:23

in every field. From financial

19:26

advisors to veterinarians. To

19:28

car manufacturers. Yeah. Ha

19:30

ha ha ha ha ha. Just

19:33

because you're hating on my Ford

19:35

Pinto. Ha ha ha ha ha ha

19:37

ha ha. All

19:40

right, well, Bertha,

19:42

I think that answers your questions. Thank

19:44

you for asking those questions. Thank you

19:47

for being such a longtime member of

19:49

this community. And huge

19:51

congratulations to you on

19:54

this incredible new step

19:57

on doubling your income. That's amazing.

20:01

Next, we're going to answer a question from

20:03

Humira, who is tired

20:05

of paying rent with nothing to

20:08

show for it. She's wondering

20:10

what she can do. But

20:12

first, I'd like to thank

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Every style, every home. Our

24:01

next question comes from whom ira.

24:06

Hi Paula this is who Myra

24:08

I just wanted to ask you.

24:10

With been paying rent for the

24:13

past couple of years and. I'm.

24:15

Wondering if it would be better if

24:17

we just paid the red and told

24:20

with a credit card where we can

24:22

earn either miles for traveling or cash

24:24

back. I'm not sure if

24:26

that's an idea that people have ever

24:29

done, but I know it's a very

24:31

simple question. as any of your

24:33

staff or somebody could just quickly

24:35

email. Me, the answer or something.

24:37

I'd be so appreciative of that.

24:39

And by the way, I Love.

24:41

Love your podcast show and have been

24:44

listening. for the last few days and

24:46

I'm just really. Grateful for it. Thank

24:48

you so much. Who

24:50

Myra? Thank you for being a new

24:53

member of this community. I'm so excited

24:55

that you found the show and that

24:57

you are loving it! I want to

24:59

ask you to go listen to episode

25:01

of Fi The Oh for Five Zero

25:03

for with Brian Kelly the Planes guy.

25:06

Nine of you left your question before

25:08

that episode aired. In fact we're actually.

25:11

Recording. This episode before that episode aired

25:13

so I know you haven't heard it because the

25:15

haven't actually aired as of the time that we're

25:17

recording this. We. Haven't aired that episode

25:19

yet but by the time you hear

25:21

this we will have aired that episode

25:23

and Brian Kelly the planes guy. Had.

25:26

A role in developing. Something.

25:29

Called the Bills card bills.

25:31

Be I else he. If

25:34

you are going to pay your rent with a

25:36

credit card, Use. Built.

25:39

Because. It was designed specifically for this

25:41

purpose. Now here's the thing. a lot

25:43

of landlords do not accept credit cards

25:46

or is the to the charge them

25:48

type of the see. What? Built

25:50

does and part of a specific not

25:52

an ad. I have no financial relationship

25:54

with them. I make zero dollars and

25:57

Zero cents from anything related to Built.

26:00

So I have absolutely no financial interest

26:02

or relationship with this the what they

26:04

do and I think this is very

26:06

cool is. If your

26:08

landlord does not accept credit cards, or

26:10

if your landlord charges a fee for

26:12

a credit card payment which is typically

26:14

the case for most landlords. Bills.

26:17

Will process it as a

26:19

credit card transaction button below.

26:21

Actually mail a check to

26:23

your landlord so your landlord

26:25

received the check as though

26:27

it's any. Ordinary.

26:30

Checking account. Generated.

26:32

Rent payments. But meanwhile

26:34

you. Get. The credit card

26:37

reward you get hotel rewards, travel

26:39

rewards, Dining. Reward shopping rewards,

26:41

whatever you on to typically. Travel

26:44

rewards tend to broadly

26:46

speaking. Have the best redemption!

26:48

Now you. Know. I'm

26:51

going to put a giant asterisk

26:53

year and see the thing that

26:55

I hope is so obvious that

26:57

it should go without saying which

26:59

is is there is. Any

27:01

risk. Any risk at all.

27:04

The. This might turn

27:06

into. A source of revolving

27:08

debt. Meaning you might end up racking

27:10

up debt by virtue of doing this,

27:12

then obviously don't do it and that

27:14

those not just for pay your rent

27:16

with a credit card. But for paying

27:18

for any consumer discretionary purchase. With

27:21

a credit card. This. Is

27:23

a very financially savvy audience so I.

27:26

Hope. That your all listening to that disclaimer

27:28

and going well Done. But. For.

27:31

The sake of anybody who might be new

27:33

here or listening to a Personal Finance podcast

27:35

for the first time, That of course, Is.

27:37

Foundational. To. Any discussion about

27:40

the use of credit cards for

27:42

generating rewards. Published by

27:44

Be a good time for primer for people

27:46

to know more about what revolving debt is

27:48

like the how that works. Now it's different

27:50

than other day. Ah. Alright, glad you

27:53

asked. There are two types of

27:55

debts: Revolving debt and installment debt.

27:58

Installment. debt is the type

28:00

of debt that has fixed periodic

28:02

payments. So for example, a

28:05

mortgage is a type of installment debt

28:07

where you have typically a monthly

28:09

payment, a fixed monthly payment. Now it could

28:11

be adjustable if you have an adjustable rate mortgage,

28:13

but it is a monthly

28:15

payment of a fixed

28:18

amount for a

28:20

specified duration. Even if you have

28:23

an adjustable rate mortgage, there is still a

28:25

fixed amount that exists for a specified duration,

28:27

right? That is an example of installment

28:29

debt. Another example might be

28:31

student loans where you pay a particular

28:34

amount every single month as

28:36

a monthly installment for that student loan.

28:40

A car loan, same thing. For

28:42

your car loan, for the people who have car loans, you pay

28:44

a fixed amount

28:46

every month for X amount

28:48

of time. Now by contrast, a credit

28:51

card is an example of revolving debt

28:53

where the monthly payment

28:55

fluctuates based on the size of

28:57

the balance. If you have an

29:00

outstanding credit card balance of $1,000, well,

29:04

of course I hope you pay it off in full,

29:06

but the minimum monthly payment

29:08

that you're required to make if

29:11

your balance is $1,000 is going

29:13

to be different than the minimum monthly payment that

29:15

you're required to make if your outstanding balance is

29:17

$10,000, right? The

29:20

duration doesn't change, but the size of

29:22

that minimum required monthly payment changes based

29:25

on the size of the balance. That's an

29:27

example of revolving debt. A home

29:29

equity line of credit is another example of revolving

29:31

debt. Now revolving debt tends

29:33

to be where people get themselves into

29:35

trouble for a variety of

29:38

reasons. Number one, the interest rates on revolving

29:40

debt tend to be higher. That's

29:42

one of the reasons why credit card debt

29:44

is a hole where when people start falling

29:47

into that hole, the hole tends to

29:49

get deeper faster because the interest rates

29:51

are so high. But in addition to

29:53

the interest rates, part of

29:55

the second reason that revolving debt tends to

29:57

be a source of stress. for

30:00

the people who have it is because of

30:02

the fact that that monthly payment fluctuates,

30:04

and therefore it's much more difficult to

30:06

plan for. So by

30:08

contrast, if you have, let's say,

30:11

an adjustable rate mortgage, yes,

30:13

that payment is going to fluctuate, but

30:15

it will do so only at pre-specified

30:18

intervals, which makes

30:20

it far less burdensome than

30:23

a payment that fluctuates

30:25

every month, and therefore is

30:28

much, much more difficult to accommodate

30:31

in a given fixed budget. It's

30:33

also the revolving nature of the loan that

30:35

gives it the higher interest rate. Companies,

30:38

when they're being repaid, and this is how

30:40

I like to think about debt and make

30:42

sense of it, is that if

30:45

they know they're gonna get a set installment on

30:47

a set date, it's very easy to assign a

30:49

fixed interest rate to that. But if

30:51

they're saying, hey Paula, I'm gonna give you access to 25,000

30:53

bucks, use

30:55

it as you want, and you're more

30:58

likely to probably use it when you're

31:00

experiencing financial stress, and you're not

31:02

gonna use it when you're not experiencing financial stress, that's

31:05

gonna raise the interest rate because of

31:07

the unpredictable nature of how you will

31:09

use this line of credit. Exactly.

31:12

That's the reason, by the way, that your credit

31:14

score will temporarily drop when you apply for a

31:16

new line of credit. The

31:18

credit rating agencies see the

31:21

fact that you are applying for credit as

31:24

a potential red flag

31:26

because it signals to them

31:28

that you need the money. Yeah, you might

31:31

have an issue. Right. Now

31:33

your credit score won't drop for long, but

31:36

any time that you apply for a new line

31:38

of credit, your score will take a temporary ding.

31:41

That shouldn't dissuade you from doing it, but

31:43

it does mean don't do it

31:45

too often, and don't take

31:47

out a credit card the week

31:49

before you apply for a mortgage. Right. But

31:52

Humayra, to answer your question, I

31:54

love that idea. I

31:57

love the idea of getting rewards for paying your

31:59

rent because typically... a rent payment is the biggest

32:01

monthly expense that you have, so why not get

32:04

rewards for it? I'm going to

32:06

link in the show notes to two

32:08

sources of information. One of course,

32:10

there's episode 504, our interview

32:12

with The Points Guide, Brian Kelly. The

32:15

second is a video that we ran

32:17

as a YouTube exclusive. So every now

32:19

and again, we interview

32:22

a guest and air that interview

32:24

only on YouTube and nowhere

32:26

else. We ran

32:28

a YouTube exclusive with Jason

32:31

Steele. He is the founder

32:33

of CardCon, which is, believe it or

32:35

not, it is a conference

32:37

about credit cards. Their

32:40

conference is about everything. So he's the

32:42

founder of CardCon, which is a conference about

32:44

credit cards. He and I met in person

32:46

in Atlanta and sat down and

32:48

did a lengthy interview

32:50

about credit card rewards.

32:53

We aired that on YouTube as a YouTube exclusive.

32:55

I'm going to link to that in the show

32:57

notes, which you can access at

33:00

no cost by going to affordanything.com/show

33:03

notes or

33:05

by visiting our website. So thank

33:08

you, Humayra, for the question and

33:10

enjoy those rewards. Joe,

33:12

guess what's up next. Oh, I can't

33:14

wait, but you're going to tell me. It's

33:17

Rob, the 31-year-old who wants to retire in three

33:19

and a half years. Oh, awesome.

33:21

We're going to hear from Rob

33:23

in a moment. But first, I'd

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at Dell. Floating

35:13

in. Our

35:25

I we are ready. Our final

35:27

question today comes from Rob.

35:31

Say. Poland Joe This is rob

35:33

up in Canada. I. Have

35:35

a question for you as I'm so grateful

35:37

for all of your insights. That. First,

35:39

a little about myself. I'm thirty

35:41

one. Married. And.

35:43

No kids. And I have

35:45

a goal to quit my job and three and a

35:47

half years. My. Wife has had

35:50

no earnings since twenty twenty. Whenever I

35:52

quit my corporate job, Sold.

35:54

Our house. To. Free us up to

35:56

move around wherever we want to. Hire.

35:59

And Sixty five. $3,000 a year

36:01

which comes from freelance consulting and

36:03

rental properties and employment. We

36:06

have $325,000 saved up and our expenses are $3,000 a month and

36:08

$5,000 a year for travel. I

36:15

own real estate through two rental

36:17

property partnerships. Now Partnership

36:20

One has had some issues but

36:22

I'm working through those based on

36:24

your advice from previous

36:26

episodes so hats off to you.

36:29

Thank you so much but I

36:31

need your help with Partnership Two. So

36:35

help me Paula Juan Canobie. You're

36:37

my only hope. Okay, I'm sorry.

36:39

I know you struggle with pop culture references.

36:42

I need your help though with Partnership

36:44

Two. I'm a

36:46

50% owner of two properties

36:48

worth $160,000 and $125,000. They

36:52

have mortgages that are $92,000 and $78,000 respectively at 3% and 2%. The

37:00

combined cash flow is $700 a

37:02

month after all the costs are

37:04

factored in. Now we

37:07

budgeted for some repairs whenever we purchased the

37:09

properties but I underestimated

37:11

the cost so I ended

37:13

up contributing an extra $30,000 of my

37:15

own money to pay for everything. Now

37:18

the business is paying me

37:20

back $2,500 a year so

37:23

at this rate it's going to take years

37:25

to recuperate these costs and we're

37:27

going to continue to be low on reserve funds. That's

37:30

why we're thinking of doing a $40,000 to $50,000 cash out refinance in fall of

37:32

2025 when

37:36

the mortgage is renewed. I'll be paid

37:38

back in full and we'll have $10,000 to $20,000 in reserves

37:40

that way. Between

37:43

the current 6% interest rate and

37:46

a larger loan balance, our monthly

37:48

payments would go up quite a bit. We

37:51

still have free cash flow but

37:54

man, something's still nagging at me. So

37:56

I ask you, what do you think of our

37:58

plan? red flags that

38:00

I'm not seeing. Now you

38:03

probably have no idea how appreciative myself and

38:05

your audience is for all of your insights,

38:07

so I would like to close by just

38:09

saying thank you so much. Rob,

38:12

I totally get where you're coming from when

38:14

you're like, something just doesn't, you know, I

38:17

get this nagging thing for

38:19

everybody wondering. We'll pull back the curtain, Paul's

38:21

like, Joe, are you okay? I'm like, it's

38:23

nagging me too. Whatever's nagging Rob

38:25

is nagging me. And

38:27

here I think is the crux of my

38:29

issue Rob, which is that what

38:31

you've done with that cash-out refi is you've

38:34

taken money that you already had, an equity

38:37

in a house, and

38:39

instead of really creating a

38:41

reserve, you've just taken

38:43

money that you already had and you made

38:45

it liquid but you've

38:47

now added an interest rate

38:49

that you have to pay to a bank to

38:52

access that capital in your house. Well,

38:54

and I will say this is future tense. He

38:56

hasn't taken out the cash-out refi yet. Yeah, I'm

38:59

just saying if he does this, this

39:02

is what he's created. He truly hasn't created

39:04

any new wealth. He's just put

39:06

money in a spot where he feels more

39:08

comfortable, but he's going to pay a bank

39:10

to do that, right? Which

39:13

means that he really doesn't

39:15

have any new money created. He

39:19

has an extra expense and

39:21

it knocks down the cash

39:23

flow, which is fine

39:25

except for that interest rate to the bank.

39:28

If you were taking that money and

39:31

deploying it somehow to

39:33

earn an interest rate that beats the interest rate

39:35

that he's paying to the bank, I would go,

39:37

that's great. But taking that

39:39

money and just making it

39:42

available for an expense

39:44

that hasn't happened yet just

39:46

makes me go, okay, I get it. And

39:49

I understand how that would make me feel more comfortable

39:52

too because I love the emergency fund, Paula. You know

39:54

how you and I love the emergency fund. But

39:57

an emergency fund that is just

39:59

money. sitting that we owe an

40:01

interest rate on to me. Right,

40:05

exactly. And I feel exactly the same

40:07

way. The idea of taking out a

40:11

cash out refinance increases

40:13

your interest payments, it increases the

40:15

level of risk by virtue of

40:17

increasing the monthly payments, and

40:20

it creates a drag on the

40:23

growth of your overall net worth. I

40:25

would rather see you take

40:27

out a HELOC than I would

40:29

see you do a cash out refi. Yeah,

40:32

me too. The beauty

40:34

of a HELOC as we just described

40:37

when we were answering Humira's question

40:40

is that if you don't need to

40:42

access the money, then you don't access

40:44

it. It's similar to having

40:46

a credit card in that regard. You

40:49

know, if you have a credit card with say

40:51

a $10,000 line of credit on it, you could theoretically,

40:56

and not just you, but any person

40:58

listening to this theoretically might

41:01

have a credit card with a $10,000 line

41:03

of credit, which they

41:05

have forgotten about and is sitting at the bottom of

41:07

a drawer and is completely untapped.

41:10

But if they ever needed it, that line of credit

41:12

is open and is there. Well a

41:15

HELOC is like that, except

41:17

of course it's much better than a credit card

41:20

in that it has a much more reasonable interest

41:22

rate, but it serves the function of being money

41:25

that you can tap if you need it,

41:28

but existing purely as an

41:30

open line of credit such that if you

41:32

don't need to

41:34

tap it for any type of emergency, you don't have to.

41:37

There will be usually an annual

41:39

fee for that, but that pales

41:41

in comparison to the interest rate

41:43

cost that you'll pay if

41:45

you do a cash out refi. I

41:49

think the answer that I have Paula though

41:51

is a little different for Rob, which is

41:53

just be okay

41:55

with the company owing you the money,

41:57

the partnership owing you that money. over

41:59

time, it is what it is, the

42:01

property is going to continue to appreciate

42:04

or not based on the value of

42:06

that property. You will still

42:08

have the same number on your net worth

42:10

statement, which means that I

42:12

think the way to create the emergency

42:14

fund that you're looking for is going

42:17

to be found elsewhere. I

42:19

would dig further then into other

42:22

income opportunities and come up with the

42:24

money for the emergency fund a different

42:26

way. Right. I do want

42:29

to applaud you though. You and your spouse

42:31

both jointly live on $3,000 per month. That

42:35

is certainly you don't

42:38

have a spending problem in your

42:40

personal life. That is an incredibly low

42:42

cost of living. I want

42:44

to applaud you for managing to keep your

42:46

living costs down to $36,000 a year. That's

42:49

incredible. That's remarkable.

42:52

That'll make it much easier to retire in three

42:54

and a half years. Right, exactly.

42:57

I agree with you, Joe. I think replenishing the

42:59

emergency fund should not come out of a cash

43:02

out refi. It can come

43:04

from either slowly through how the

43:06

business pays him back or

43:08

it can come through increasing

43:10

his income. Accessing

43:12

that through a cash out refi fundamentally

43:15

means, Rob, that you would

43:17

be paying a high interest

43:19

rate on money that is

43:22

designed to just sit in a savings account, which

43:25

is sort of the

43:27

opposite of arbitrage, paying a

43:29

higher interest rate so that the money can sit in

43:31

an account with a lower interest rate. Well,

43:34

thank you for the question, Rob. And

43:37

congratulations on everything that

43:39

you're building, the savings that you've

43:41

amassed, especially relative

43:43

to your income. Right. You're

43:46

31 years old. You have an income of

43:48

65,000 and you've saved 325,000. So

43:53

by the age of 31, you

43:55

have Savings that are five times

43:58

your annual income. The

44:00

equity in or property rent or Saturday's yeah.

44:02

Exactly So there's this.

44:05

Notion in the book, The Millionaire next

44:07

Door. That. Some people are

44:09

what's called prodigious accumulators of Laos.

44:12

Meaning. That. The. Level of

44:14

wealth that they've grown relative to

44:16

their income and their age is.

44:19

Remarkably. High. Looking

44:21

at your number's it's clear that that's what. You

44:23

are. You are a prodigious accumulator

44:26

of love. Your.

44:28

Net. Worth relative to your income and

44:31

age is. Astonishing. So huge.

44:33

Huge props to you. Thank.

44:36

You for being part of this community and for

44:38

providing that example to the community. So.

44:41

We've. Done it again. I can't believe

44:43

it. Such. Great questions. I

44:45

yeah, certainly did. Too But what are you

44:48

up to these days? Where can people find his they liked

44:50

him Or a deal? Well. With

44:52

Memorial Day. Just happening

44:54

in the United States. Paula

44:56

we have a thing every

44:58

year odd stalking Benjamin's where

45:00

the gentleman from the number

45:02

One website for seen parts

45:04

of all things. Comes

45:06

on the show to celebrate the beginning of summer.

45:09

It's obviously a time that.lots of

45:11

families thinking about going out and

45:13

traveling in. If you are. You.

45:16

May be going to a theme park so where's all

45:18

the fun at out You save money and if you

45:20

get save money how do you make sure it's actually

45:22

worse? It. I've been to Disney

45:24

like some people have any see these

45:26

families paula that are having the opposite

45:28

of fun. They are all crying and

45:30

everybody's miserable and hot and annoyed. and

45:33

they didn't really do great job of

45:35

planning. so we celebrate the beginning of

45:37

summer every year at stake. Impediments with

45:39

Robert Niles from The Park Insider. So

45:41

it's almost like you know, how are

45:44

Puck Study still sees his shadow and

45:46

you find out whether there's six more

45:48

weeks of winter? Not. On

45:50

statue Benjamin's, you know, Summer is year

45:52

when Robert Niles comes back, I believe

45:54

this is his eighth appearance on the

45:56

show. And you know what else

45:58

is happening right around now? So. This episode

46:01

is coming out on May 28th. That's

46:03

528. Guess what? The

46:06

next day is 529. Hello.

46:09

That you make sure that you have a

46:11

529 plan. Duh.

46:13

So for those of you

46:15

who are saving for somebody's college

46:18

education, whether it's for your kids, for

46:20

yourself, for your grandkids, for a niece

46:22

or nephew, 529, May 29 is

46:24

the day that you check in

46:28

on your 529 plan. So

46:30

happy 529. Happy 529. Well,

46:34

thank you so much for tuning in. You can

46:36

access the show notes. As I mentioned, we're going

46:38

to leave links in the show notes to a

46:41

lot of the things we've talked about. You can

46:43

find the show notes at affordanything.com/show notes. That's where

46:45

you can subscribe to get the

46:47

show notes sent directly to you. You

46:50

can also chat with other members of

46:52

the community by going to affordanything.com slash

46:54

community. Both the show notes and the

46:57

community are absolutely no cost.

47:00

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47:02

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47:14

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47:22

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47:24

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47:26

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47:30

Thanks again for tuning in. I'm Paula

47:32

pants. I'm Joe. So I'll see you. Hi. I'll

47:34

meet you in the next episode.