BiggerPockets Money Podcast

BiggerPockets Money Podcast 122: Getting Back to Financial Independence Basics—Using Lockdown to Reset Your Finances

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Scott and Mindy have focused on coronavirus for the last few episodes, talking to experts about how the virus has affected the stock market, the 4% rule, and even early retirees.

They've interviewed financial planners to get tips for using the current market conditions to their advantage, as well as chatted with a mortgage broker to determine the best time to refinance.

In this episode, Scott and Mindy talk about lifestyle creep and how they have both been affected over the last couple of years. They revisit the basics of financial independence, spending less than you earn, increasing your income, investing wisely, creating multiple sources of income, and living your best life once money has been taken care of.

Using their lockdown spending as a guide, Scott and Mindy go through the steps they’ve taken and the changes they’ve made to their expenses—including what they will add back once the world reopens and what expenses they don’t miss.

This episode will help you get back to your financial independence basics, too.

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Mindy:
The goal for financial independence is not I got to quit my job. I think that a lot of people kind of lose sight of that. So, the goal should be financial independence, so that I can then live the life that I truly love. That can be volunteering. That can be starting a business that employs other people. You don’t really make that much money, but you don’t care because it’s your lifelong passion. Just set a goal.

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Mindy:
Hello, hello, hello, and welcome to the BiggerPockets Money Podcast Episode Number 122. My name is Mindy Jensen. With me, as always, is my getting ready for a reset co-host, Scott Trench. Oh, wait, that sounds bad. That sounds like you’re resetting something big, but finances are big. So, I’ll stick with that. Welcome, Scott.

Scott:
How’s it going, Mindy?

Mindy:
I’m having a great day. How are you doing?

Scott:
I’m doing fantastic. Excited to talk about money and get back to I think kind of the more longer-term focus here. So, we’ve talked a lot about Coronavirus recently. We’ll talk a little bit about it today, but it’s time to get back on track for the long-term things that work in any environment.

Mindy:
I couldn't say it better, so I won't. Scott and I are here to make financial independence less scary, less just for somebody else and show you that by following the proven path, you can put yourself on the road to early financial freedom, and get money out of the way so you can live your best life.

Scott:
That's right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, or start your own business, or take a moment to reset your finances, we'll help you build a position capable of launching yourself towards those dreams.

Mindy:
Okay, today’s episode does not feature any guests, but is instead just Scott and I talking. We are going to jump right in. But before we do, let’s hear a note from today’s show sponsor.

Mindy:
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Mindy:
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Mindy:
Okay, huge thanks to the sponsor of today’s show. In recent weeks, we have tried to allay your financial worries. The stock market dropped rather rapidly in March. So, we brought in the master JL Collins to talk about the history of the market and his opinion of its viability. Spoiler alert, he’s pretty pro-stock market, even after all of these drops.

Scott:
Yes. In Episode Number 118, we brought in a certified financial planner to share some smart money moves to try to take advantage of market conditions. Kyle Mast from Episode 41 originally and Episode 84, the second time. We came back in Episode 118 for the third time and had a bunch of great ideas about like the Roth IRA, contribution ladder, and those types of things in particular. It’s a really good episode there if you haven’t checked it out yet.

Mindy:
Yes, I took the information that I learned from that episode and I applied that. I haven't actually contributed to my Roth IRA in a long time, but because the filing deadline has been moved to July 15th, I think, the tax filing deadline, your contribution deadline has been moved as well. So, I was able to contribute to my 2019 Roth IRA and will soon contribute to my 2020 Roth IRA as well. We also wanted to check in and see how early retirees are handling this new normal. We brought in an all-star cast for Episode 119, The Mad Fientist, Millennial Revolution, GoWithLess, Marriage, Kids and Money, and a future guest, Doug Nordman from The Military Guide. They all joined us to share how the market downturn has affected their early retirement lifestyle and plants.

Scott:
And then the second to most recent episode here was one where we talked to Michael Kitces. He’s a CFP like Kyle Mast, but he’s done a lot of extensive original research on the 4% rule, back testing portfolios against the historical worst case market conditions in the last 140 years, and just a phenomenal data nerd that I just thoroughly enjoyed. You just push the play button on that episode and watch this guy go to town, destroying every mathematical and logical argument that a naysayer for the FIRE movement might have. It was phenomenal.

Mindy:
I really enjoyed watching your face. You said that he’s a data nerd. You’re a bit of a data geek yourself, Scott. Just watching him say these things, and Scott’s like, “Yes, yes, yes, yes.” It’s like, I cannot agree more. You said mathematics behind this. You can’t argue with Michael Kitces, because he uses math and math doesn’t lie. Two plus two is always four. It’s never not four. So, he shows you the mathematical reasons behind why this works. What did he do in that screenshot? He had what? 100 cases of 30 years’ worth of data. In one instance in year 31, you went below zero.

Scott:
Yeah, it’s just a phenomenal way to go about it. It’s really good application of statistics, back testing, market research, portfolio, analysis, and all that kind of stuff. The conclusion is the basic tenets of this thing we call the FIRE movement, “Financial Independence, Retire Early.” They hold true unless you’re planning for something that is far worse than anything ever produced in modern history. So, you can always make that argument that this time, it’s going to be far worse than anything ever anything else. But we’d all argue that I think if you plan for that, you’re really going to be so far, you’re going to sacrifice many more years of your life than is necessary to build out such a ridiculously conservative position.

Mindy:
That’s interesting that you say that towards the end of the episode. Michael gives you permission to, if you’re at a job that you hate and you’re not quite at your FIRE number yet, reevaluate your numbers and maybe change up your life. Quit the job that you hate, maybe take a pay cut, and go find a job that brings you happiness while you’re continuing to pursue your financial independence. I got a text from a friend who said, “I think this episode was meant directly to me. That spoke to me so much. I am going to quit as soon as I can go back to work from Coronavirus.”

Scott:
There you go.

Mindy:
Well done, Michael. And then last week, we spoke with a mortgage broker, Seth Jones, about lending requirements and refinancing your loan. Should you wait or should you do it now? We even discussed mortgage forbearance, and should you use mortgage forbearance if you don't need it? Just in case you didn't listen to that episode, which you should because it's a great one. No, you should not use mortgage forbearance unless you absolutely need it, because it can affect your credit.

Mindy:
Okay, so this week we’re getting back to financial independence basics, kind of a reset, if you will. We’ve been locked down for about four weeks now, and my spending has changed dramatically. I mean, first of all, you can’t go anywhere or do anything because everything’s closed, but I’ve cut my travel budget by 100%. Unlike many FIRE adherences, I don’t miss it at all. It turns out I really like having a steady routine and being at home and just kind of hanging out and relaxing. It seems to me that travel is very, like go, go, go all the time. I don’t know maybe that’s my travel partner. Have you ever seen Carl? He can’t sit still.

Scott:
Yeah. I made probably 20 trips in 2019. That involved air travel. Probably 11 or 12 of those were BiggerPockets or work related, which are also fun. I just love my job and love those types of travel. And then probably seven or eight of them were mostly personal reasons. So, certainly, missing a little bit of that travel. We actually had a trip scheduled for a week or two ago. We’re going to go to Grand Cayman and going to go scuba diving for the first time. So, we’re certainly missing that trip. Certainly, we were supposed to have a wedding in July, where one of my good friends is getting married, and I’m going to be in that wedding. That was postponed till November. So, we are certainly missing the travel. But also, obviously, not spending the money, especially with that travel.

Mindy:
Yeah, I am supposed to be going to Las Vegas this weekend for my in-laws’ 50th wedding anniversary, Happy anniversary, Michelle and Bill. So, there has been some travel that’s been disrupted. That would have been a good trip to go to, that would have been a nice, fun time. It’s always fun to see family. But yeah, in 2019, I think I traveled every month and it was just a lot for me. So, that part, I’m not missing so much. I don’t know. Well, I know you’re not married to somebody who obsessively watches your monthly spending because you’re not married yet. But I am married to somebody who obsessively watches our monthly spending.

Mindy:
We talk about it all the time and it’s actually kind of funny. Like every morning, “We only spent this much this week.” I’m like, “Okay, great,” like whatever. I don’t like keep track of it. Okay, great, in one ear and out the other. He tells me that last year on average, we spent $5,000 a month, which is $60,000 a year. Back to that 4% rule, my 4% rule numbers are based on spending $40,000 a year or even more like $36,000 a year with a little bit of a cushion. $60,000 a year for those of you who are not math nerds is slightly more than $36,000, almost double. So, I track my spending. I talk about money on this show. I talk about money all day, every day, anyway.

Mindy:
I still allowed lifestyle creep to creep up on me. I was actually really shocked when he told me that and now, we’re on track to spend $2,500 this month. We cut our spending in half just by not being able to buy anything at all. I don’t feel like I’m not able to buy anything at all. I mean, I don’t go shopping. I don’t miss like doing that kind of thing. But lifestyle creep is real, and it happens if you’re not paying attention. It happens if you’re paying attention.

Mindy:
I track my spending. I have not one, but two apps on my phone for spending tracking, courtesy of the Waffles on Wednesday spending tracker, where you can make your own mobile spending tracker using their instructions. We will link to that in the show notes, which can be found today at biggerpockets.com/moneyshow122. But Scott, let’s get back to the financial independence basics. What are the core tenets of financial independence?

Scott:
Spend less than you earn. Invest aggressively. Increase your active earned income or create assets.

Mindy:
Okay, and you forgot the fifth one, live the life that you truly love now that money is no longer a consideration.

Scott:
I like that addition.

Mindy:
Yes, I like that addition too. So, how do you spend less than you earn? You track your spending, because when you don’t know where your money is going, you will find that it goes so easily. I mean, “It’s just $1, it’s just $10. Oh, I’ll buy dinner for everybody. Oh, I’ll just do this,” and then all of a sudden you’re like, “Where did my paycheck go? I got it five minutes ago and it’s gone.” Scott, I’m going to put you on the spot. How do you save money? Do you pay yourself first? Do you get your paycheck, pay all your bills, and then bank what’s leftover? Do you have a system in place or you just kind of willy nilly?

Scott:
Well, when I started out on the journey, the first thing I did was I tracked my spending. I used mint.com. So, all of my spending goes through mint.com. It goes either through one of my bank accounts, hooked up with Mint or through a credit card. My credit cards being linked up with Mint. In the rare instances where I use cash, for example, I might prepay my gym membership at a local gym with cash to get a discount, not have to pay credit. That I will categorize if it’s a large expense manually. And then I might spend $300 or $400 a year in petty cash, outside of that, which I just kind of lump into my entertainment budget and don’t track specifically. So, that allows me to really automatically track every single dollar that I spend.

Scott:
And then when I started out, I really looked at the big categories, where's my money going? Those categories were really housing and transportation and food at first. Over time, really, I was able to basically eliminate my housing expense. So, there's just a couple ways I can look at my housing expense because a house hack. I pay money to a business that I own to occupy space and a property that I own. You can look at it as "Here's the amount of rent I would pay if I was attended to here, which is about 800 bucks a month or it's free." So, I looked at it, "Okay, that's my biggest expense. How do I make that an economic neutral or even a wealth building facility rather than a loss in rent?" I started out with house hacking, right?

Scott:
The second biggest expense was my transportation expense, which was mostly my car payment on my Corolla, and associated gas, mileage, those types of things. I have a very short commute when I do drive. So, I spent about $2,000 all in last year related to my car payments. So, $800 a month for housing 200 bucks a month for the car. Now, here’s the really big embarrassing one now that I’m looking at it for 2019 is my food budget. I spent about 20 grand on food, about half of which was on groceries and half of which was on dining out and delivery, which is not the best use of money. But because I have almost no expense, my housing and transportation, I’m able to get away with overall all-in, about a net annual spend of about $30,000 for my personal spending there.

Scott:
Now, I will caveat that as well and say that I’m excluding a couple of things here for those listening. One, I’m excluding anything related to getting engaged or getting married, which is a big expense, because it’s not my lifestyle expense. It’s a one-time situation. I’m also excluding my taxes, which I think most people just exclude, but I have to pay taxes out of pocket for certain parts of my income. I’m excluding any expenses related to running businesses as I designate is separate from my lifestyle.

Mindy:
Okay, that’s fair. Like I said before, I have two spending trackers on my phone. One is for regular old spending, and one is for expenses for the house, because we did just buy a new house that needs a lot of work. So, every time I go to Home Depot and drop $2,000, I don’t think it’s fair to count that against my regular lifestyle spending. That is housing expenses. I think we’ve spent something like $30,000 on the house right now. I bought windows and lots of other things. But yeah, that doesn’t count because that’s not a recurring cost, but groceries are.

Mindy:
There’s this little podcast called BiggerPockets Money. If you listen to Episode Three, you can hear Erin Chase talk about how to cut your grocery bill in half, Scott Trench needs to. Do you remember recording that? That was the best show ever because you’re just sitting there like, “Oh my goodness, I could have cut my spending.”

Scott:
You know what though? Look, I cut my housing and transportation expense. I love how me, and my fiancé eat. I love taking her out to dinner at least once a week when stores are open. We like to go out to breakfast on many Fridays prior to work hours. That’s like a little tradition we have and a little tip there for a fairly frugal but wonderful date you can have for that type of stuff. She likes to make delicious food. So, I’m not willing to continue cutting back more on the grocery and food budget right now, because I’m happy with that level of spend. I’m frugal enough in other areas. Of course, I have some passive income to do it, but I do track it. I track every dollar and that’s the key.

Mindy:
Well, I’m glad that you track every dollar. Maybe you could start a little blog called French Toast on Fridays?

Scott:
Yeah, there you go.

Mindy:
But no, if you are looking for ways to cut your $20,000 a year grocery bill, Erin Chase’s episode has a lot of really great tips.

Scott:
Yeah. I’d say that the big contributor there is going to be the restaurants and dining out.

Mindy:
Yes. Right now, I’m not going out to eat at all. We are still locked down from the Coronavirus. There are restaurants that are doing takeout, but I don’t know how comfortable… I know how comfortable I feel with that, 0% comfortable. So, I’m not doing any takeout right now. When we do get the luck down lifted, I will be going out to dinner more just because I want to support the local economy, and support the local restaurants that are supporting the local waitresses, and all the people that are currently not working. So, I do have plans to go out. I do expect my spending the next month to be quite high, but it’ll be Scott Trench-like.

Scott:
There you go. I will say in light of the Coronavirus stuff, my spending has dropped considerably on like regular life situations. But because we’re at home all the time, you can call it investment. I’ve spent a lot of money on things like I bought a pull up structure that’s like pretty sturdy. So, I can work some weights and a subscription to it online, workouts to Beachbody, so that I can work out in my garage on a regular basis. I’m buying a bookshelf and some furniture as we decided, “Hey, we’re going to be in this place for a while, let’s clean it out, and really reorganize it and make it more digitalized.”

Scott:
So, I spent a couple hundred bucks on things related to that. And then, of course, we’ve stocked up considerably on household goods, because of all the uncertainty and all that kind of stuff, just like everybody else in the worst of American consumerism. But like, hey, we didn’t have a pantry before. It’s like, “Okay, now’s a good time to get a pantry.”

Mindy:
Okay, so here’s a question. You are setting up a home gym. Are you going to continue with your gym membership after the ban has lifted?

Scott:
That’s a great question. So, I told you I prepaid my membership annually because I got a deal there. I think that was the right bet. I can’t play it around Coronavirus. So, I will have the gym membership and the home workout equipment. But because I don’t have a line of sight into this ending, I’m not going to go weeks, and weeks, and weeks, and weeks, and months, and months without being able to work out with weights and in a way that is fairly efficient. So, that’s just very important to me.

Mindy:
Yeah, that’s a good point. I just renewed my membership, I believe March 8, right in time for the whole thing to be shut down. I go to the gym and I take the classes there. If you’ve ever met me, you know I hate working out, but I do find value in it. I will continue to have the gym membership. But there are things that I don’t find value in and I’m going to step back from there. We’re doing a lot of different things with cooking. These weird food shortages have shown me that there are different ways to cook. You don’t have to go and grab ingredients from the grocery store. You could just find something in your pantry.

Mindy:
We had a thing in our Facebook group. If you’re a member of our Facebook group, you may have seen this. Chef Chris Clarke from Something About Food? Podcast did this super fun ‘Show me your pantry’ thing, where you take a picture of your cupboards and you show it to her. She picks ingredients and “Oh, you can take this, and mix it with that, and mix it with this, and have a great meal.” You’re like, “Oh my goodness, that’s amazing.” So, I’ve been sharing pictures with her.

Mindy:
I’ve been kind of trying to clear out the pantry, but it’s also showed me different ways to shop. I’m going to Costco and buying the 20-pound bag of onions. I share that with my neighbor. We have one other person that we’ve been isolating with. So, I’m saving money, I’m cooking better. I have time to make these three-hour dinners. It’s really nice to see that that’s something that I do find value in. I’m going to continue doing that.

Scott:
Yeah, I love it. Virginia would be appalled if I said, “We’re cooking.” Basically, we’re eating all of our meals at home. They’re all extremely affordable. That allows us to go and try a couple of new recipes and things with better quality ingredients in some cases. So, we’ll get some high-quality meats and those types of things, and make them at home, and all that kind of good stuff. I mean, there’s nothing, like you can only order Uber Eats so many times. That’s more expensive than anything else. So, you go to the grocery store. Now you have to do what we’ve been talking about all along, which is make most of your meals most of the time at home with reasonable grocery stores. It’s just the only option that most people have in a reasonable sense in light of the Coronavirus situation.

Mindy:
Yup, I saw this funny tweet. This woman said “Oh, I picked the wrong time to spend the last 29 years not knowing how to cook.” But if you’re looking for recipes, Pinterest is filled with them.

Scott:
Absolutely.

Mindy:
You can hit up Chef Chris Clarke in our Facebook group and ask her to take a peek at your pantry.

Scott:
There you go.

Mindy:
Okay, before we move on to increasing your income, let’s hear a note from today’s show sponsors.

Mindy:
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Mindy:
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Mindy:
Okay. Scott, two of the best real-life examples of increasing your income were told on our shows not that long ago, Financial Mechanic came on as a guest on Episode 97. She shared her story of knowing your worth, asking for a raise, negotiating salary, and how salary isn’t the only thing that you can negotiate.

Scott:
Yeah, I thought it was a fantastic episode. Just in terms, we kind of asked the question, how do we generally go about increasing our incomes in this current environment? Is that kind of the…

Mindy:
Mm-hmm (affirmative).

Scott:
I think temporarily, what we’re seeing here is we’re seeing lots of layoffs. We’re seeing lots of people unemployed. We’re seeing lots of businesses appearing to struggle right away. It’s very difficult for me to sit here and think, “Hey, are all these businesses really running so lean and so tight that with one month into this thing or within weeks into this thing, they had to lay off 20 million people?” That’s just a crazy assumption for me. It doesn’t make any sense how you could be keeping it that close to the chest at all times in one of the best economies. But from there, you have to realize I think is we are likely in a deflationary period for wages in the short term, I think, right?

Scott:
I think that overall, you’re going to see incomes in this country decline, or at least wage income in total decline over the next couple of weeks and months. So, I think that that turns out if you’re laid off or if you’re in the job market looking, I think your prospects of getting a raise have just declined significantly. I think your prospects of keeping your job have declined significantly. I think your prospects for other types of work have declined significantly. So, I think that leaves how do I become very creative about this and have those multiple different income streams, right? Like landlords are not expecting the same amount of rent on average that they were getting a few months ago, right? We’re at least aware of the possibility that I got 100% of rents in April.

Mindy:
In April?

Scott:
In April. I'm not going to get that in May, and I can't get that in June, right? So, I expect, generally speaking, across my various income streams for a decline in income over the next coming weeks. Whether that's from a decline in dividends, whether that's a decline in the rents that I'm going to receive, whether that's a decline in interest rates I'll get on cash in the bank, right? I do happen to be the CEO of BiggerPockets, so I kind of can understand what my salary probably won't be changing there. I think we're in relatively reasonable shape as a business at BiggerPockets. So, I don't think there's going to be any problems there for me or the team there. But that's, I think, the mentality you have to understand with that.

Scott:
So, in that context, how do I go about increasing my income right now? Well, it’s the same thing you would do in any other economy but just with that caveat, right? I know that I’m going to have a little harder time getting that side hustle income, or a little more competition if I’m going to drive for Uber, or a little more competition if I’m going to try to do something online, an online gig or freelance work, right? I’m going to have to accept a little lower wages. But that’s all in the context of the discussion we just had previously, where I’m probably spending a lot less than my run rate is in normal times. So, how’s that for framework to think about that?

Mindy:
I think that’s a great framework to think about, but I also want to say that there are still businesses that are hiring right now. Amazon is having a little bit of a bump in sales. I don’t know if you’ve been spending a lot of time on Amazon. I get way too many Amazon packages right now, but they are hiring pickers. Is it a glamorous job? No, but it’s a job. I mean, there are people who are getting their hours cut. Does anybody have time right now? Everybody has time. There’s nothing open, you can’t do anything. So, if you can’t do something, generate income in a different way. That’s really easy for me to sit here and say that. I recognize that, but there are still opportunities out there to generate income.

Scott:
Yeah, it’s interesting because the economy is just all slowing down right now it seems like. I have this suspicion that a lot of people are just at home and they’re not being as productive as they are in normal times, right? It’s hey, I’m at home, and if you’re working from home or I’m maybe laid off, or something like that. How do I occupy that time? Am I doing that productively? What are productive uses of time? Is it listening to podcasts, those types? We have a lot of insider information obviously, with BiggerPockets. We track our business performance very closely. We’ve seen a decrease in listenership to podcasts. We’ve seen a decrease in audiobook sales recently.

Scott:
You wonder why that happened was because people are not commuting anymore. They're not going to the gym. So, they're not listening to these types of things. By the way, thank you BiggerPockets Money listeners. We actually have not seen a change in listenership. If anything, we've seen actual some growth in recent weeks. So, we know that's because you love my jokes, but we appreciate your loyalty as listeners. But we're seeing these things industry wide, which leads me to wonder out loud if the fact that people are stuck at home and there's a recession looming means that people are just kind of settling into unproductive habits generally. Something to wonder about yourself, can you come out of this with part time work that's reasonable and safe?

Scott:
Even if it doesn’t pay what the rate it was paying six, seven, eight weeks ago, right? Can you come out of this with a new skill? Can you come out of this with 10 more knowledge, 10 books that you’ve read that are productive towards your long-term goals, those types of things? Can you map out your goals for the first time ever here? So, I think those are the ways to think about looking at this from the context of income generation.

Mindy:
Okay. Invest in low cost quality investment vehicles. Scott, what does a low-cost quality investment vehicle?

Scott:
This is the third pillar of financial freedom, right? The third pillar is invest in assets that appreciate in cash flow, right? The best way to do that, I think, is to go invest in, what we mean by low cost is index funds or funds that do not require high management fees, right? So, for example, if I go out and buy Berkshire Hathaway stock, I’m not incurring a management fee. I’m incurring the fees of the CEOs and management and shareholders and employees and all that kind of stuff, I bet for investing for a portion of the proceeds that market capitalization company, but I’m not paying a money manager to pick that stock for me.

Scott:
When I invest in a mutual fund, oftentimes, those come with a manager who is picking those stocks and taking a performance fee on top of the fees of management for all those companies that they’re investing in. So, that’s what we mean by that is we, as a group here on BiggerPockets money, like to invest in index funds that have the lowest possible overhead fees to give us the broadest possible diversification across as many businesses as possible. So, JL Collins, I think, is really the thought leader on this subject in his book, The Simple Path to Wealth. We had him on what episode? 116?

Mindy:
116.

Scott:
Yeah, very recently. He likes the index fund called VTSAX, right? We’ll be able to abbreviate for that, but it’s basically you’re investing in the 5,000 largest companies in the world. You’re investing in them pro rata based on their market capitalization. So, similarly, I like the S&P 500, which is another index fund called VOO simply because it’s got larger companies in it. It’s simpler for me to understand but six to one half a dozen the other type situation where didn’t really matter. Just look for index funds that have very low fees. Invest for the very, very, very long term is kind of the philosophy that we stick with.

Mindy:
Yup, Vanguard has been thrown about but I do want to throw out Fidelity as well. Obviously, their fund is going to be named something different, but it’s the same basic idea.

Scott:
Yeah, and which index funds you invest in may also be a function of the retirement account vehicles that your employer offers. So, for example, we don’t have at BiggerPockets a Fidelity or Vanguard option because it’s impractical for us to have that in our retirement planning. So, we have an index fund called the Great-West 500 Fund. That is the lowest fee index fund in our retirement vehicle set. So, that’s what I invested in through my 401k, not because if I had a lower cost index fund, I’d invest with that.

Mindy:
My husband is very tech savvy, like all he does is read tech news all day long. So, we invest in the Vanguard Tech ETF called VGT.

Scott:
Nice.

Mindy:
But again, it covers the tech industry. There’s an index fund for everything. Find one that you think sounds interesting and go with that and VTSAX.

Scott:
There you go.

Mindy:
Okay, number four, create multiple passive streams of income. This is slightly different from the investing in low cost quality investment vehicle, Scott. This one includes real estate, something near and dear to our hearts, and starting a business. I just want to put out an idea, just a thought for you. There was a triplex around the corner from my old house. We live in a fairly… Would you say, Denver’s a high cost of living or medium cost of living areas?

Scott:
I think Denver’s certainly in the higher end cost a living. It’s not New York or San Francisco or Los Angeles, but certainly one of the top 10 metro areas in terms of expense I bet in this country.

Mindy:
Okay, so a higher cost of living area. This property was on the market for $500,000. I had an offer out for $450,000, we were going back and forth. They were about to accept it. I kind of pulled back because I was getting a little scared. Frankly, one of the tenants there was frightening to me. I was not looking forward to kicking them out. I was going to hire a couple of really big guys to come with me.

Scott:
Mindy, no one sells a house that’s in perfect condition with wonderful on-time tenants who are perfectly well behaved in a great location for a big discount.

Mindy:
I know.

Scott:
Not very real estate investor…

Mindy:
He had just put this guy in there. I’m like, “You didn’t screen him at all.” Anyway, even being involved in in BiggerPockets and all of these things, it was kind of frightening to me, but the numbers were amazing. I was having breakfast with Darren Sager, and he’s like, “Why would you not make an offer on it?” So, it’s $450,000, would have been the purchase price. Under market rents for all three tenants, were coming in at $38,000 a year. Now, that’s not the 1% rule, which is you’re renting out for 1% of the purchase price per month. But it was really close, and it was under market.

Mindy:
I really believed that $10,000 or $20,000 worth of rehab costs on this property would have increased it such that I could be getting 1%. That covers what I thought I was spending every year, $38,000, $40,000, $45,000 a year. $450,000 would have covered me for my whole spending for the year. Whereas, to generate $40,000 with the 4% rule, I would have needed a million dollars.

Scott:
Yeah, I think when you think about the 4% rule, right? It’s interesting because the 4% rule involves, hey, I’ve got a stock and bond portfolio. I’m going to spend the interest that’s generated by my bond portfolio and the dividends generated by my stock portfolio. I’m going to sell off a tiny fraction of both my bond and stock portfolio, right? I’m going to rebalance every year. Those are fundamental assumptions for the 4% rule. So, when you think about a real estate investor, a real estate investor will typically consider themselves retired only when they are able to spend less than their total cash flow produced by their portfolio. So, that’d be the equivalent of a stock investor only spending most of the dividends and not selling anything off.

Scott:
So, I actually think that a real estate retiree living off less than the total amount of cash flow produced by their business after accounting for expenses, like CapEx, expected long term vacancies, these types of things. That person, I think, is actually living in a really, really conservative financial position from retired standpoint to your point. All right. So, in the context of this fourth wealth builder, investing in appreciable or creating assets, right? We have investing in assets and creating assets. Real estate’s kind of a hybrid, because you’re not creating an asset and you’re not starting a business. But you’re kind of doing a hybrid, right? You have to run the business of real estate, but it is much more passive than many other types of businesses that you could go and start right.

Scott:
Now, if you're thinking about investing in real estate in the context of Corona, go back and listen to Episode 121 with Seth Jones, where we go into great detail about mortgages, right? Buying real estate typically involves using leverage. Getting a loan right now, you're going to want to have your tax documents in a row. You want to make sure that there weren't any major disruptions to your income or that if you were, you're still able to qualify for financing on the types of properties you'd like to buy, right? Have a strong cash position and analyze for the fundamentals. But we are seeing in many markets a lightning of competition.

Scott:
Properties are sitting on the market for a little bit longer. Asking price seems to be reducing a little bit. Asking rents at least, a lead indicator for rents long term seem to be declining a little bit. So, we’re starting to see a little bit of softening there. So, it could be a good opportunity to get in the market, but then you’re timing the market. So, it really comes down to that long term strategy and understanding what you need to do while also taking practical considerations, like the financing stuff we talked about last week into consideration when you’re going into make your first purchase here.

Mindy:
But you can again, be using all of this extra time that you have to be educating yourself. If you haven’t been paying attention to the real estate market in your area, now is the time to start looking at what properties are being listed for, what they’re selling for, how long they’re sitting on the market. Because once you start seeing these things and you get kind of a feel for what’s going on, you can spot a deal. It doesn’t need to sit on the market for 50 days for you to know that it’s a good deal for it. Just because it’s sitting on the market for 50 days doesn’t mean it’s a good deal.

Mindy:
I reached out to some investors in the resort areas near us because I think there’s going to be some deals out there. I need to start learning that market again and see what’s going on. So, I can take advantage when there is something. But like you said just a moment ago, there’s less competition. I think that as people are not prepared financially for Coronavirus and this wasn’t something that you put in your little budget sheet. “Oh, make sure I have a line item for Coronavirus every month just in case it happens.” But there are people who got caught with their pants down and they might have to…

Scott:
We do have a line item in our underwriting for that though. It’s called reserves. It’s called conservative assumptions around vacancy and cutbacks, right?

Mindy:
Yes!

Scott:
Absolutely. One of the whole points of this Money show, right? Why does BiggerPockets have a Money Podcast? Well, one, Mindy and I love talking about money, right? We got to do this show before they gave me the big job here at BiggerPockets. We do this show because when you want to invest in real estate, you need to do it from a position of financial strength. You got to cover the basics. Spend less than you earn, accumulate capital, have good credit, put yourself in position to make meaningful investment. How do you get started with real estate investing with 1,000 bucks and ruined credit? You don’t. In our opinion, right, Mindy?

Mindy:
Yes, yes.

Scott:
Fix your credit problem and you fix your income problem. You do that over a long period of time, and you invest in a position of strength, where each investment accelerates your position towards your goal, but you don’t depend on any of them, right?

Mindy:
Yes, but not all of the investors that are out there right now have followed Scott and my advice. So, there may be opportunities out there. There may be opportunities simply because other people aren’t buying, and you would like to buy. You have the ability to buy. There may be opportunities when somebody made a foolish choice, didn’t buy from a position of strength, and now needs to liquidate their holdings so they don’t lose everything.

Scott:
We call these people motivated sellers. There how you get a great real estate investment deal in lots of cases, a little bit of dark humor there. Now, moving on to the other side of this, right? So, we have real estate, we have business, right? I highly, highly suggest if you’re interested in getting into a business, or starting a business, or owning a business, or buying a business, or any type of thing related to that, go and listen to the BiggerPockets Business Podcast hosted by J and Carol Scott, and start with Business Episode 51, right. Let me talk about this for a minute because this episode came out recently. Actually, one of my favorite episodes of the BP Money show ever might have been the one with Michael Kitces, Episode 120, right?

Scott:
One of my favorite podcasts ever might also be BiggerPockets Business 51, which came out the same week. It was just a great week of podcasts for my personal enjoyment, at least. Now, they interviewed a guy named Nigel, I can’t pronounce his last name. So, Nigel bought a [inaudible 00:41:19]. Listen to the episode, but basically 320,000 businesses in this country are being shut down or sold by baby boomers who own them every year, right? A staggering number. Many of those businesses are not sold, they’re shut down. If you go on places like BizBuySell and look in your local market, you’ll see unsexy, boring, but established 20-, 30-year businesses selling for two or three- or four-times cash flow.

Scott:
For a real estate investor, that's considered 25%, 33% or 50% cash-on-cash ROI. The consideration for these folks isn't "How do I get top dollar for selling my business?" You can get seller carry notes on them, you can finance them with small business loans with 10%, 20% down, right? There's lots of financing options for this. There's lots of cash flow. There's lots of businesses that just can't get sold because there's no buyers, even with those price points and sellers shutting them down. So, go listen to this show. They'll explain this concept much more articulately than I just did. But that's a really good introduction to this incredible market of massive opportunity that I think exists out there.

Scott:
I think there’s a really close relationship with that market of these small carpet cleaning, laundromat, electronics store, liquor store, HVAC company, construction equipment rental. These types of businesses that sell for these small multiples of cash flow, or even in some cases, small multiples of inventory on hand. Maybe electronics store is selling for $600,000 and if you just sell out of the current inventory, you’re going to make $400,000, right? So, you’ve got a lot of downside protection. This is a really fascinating industry. I think the Coronavirus could trigger a really interesting opportunity for people to go in there, buy these businesses, make extraordinary returns.

Scott:
The wonderful thing about this is this guy is preserving the legacy of these business owners, who have poured 30 years of their lives into it. Often who have hired folks who are on parole, or who are single mothers and depend on that job and are preserving their jobs and their legacy as a business. It’s just a fantastic episode and a fantastic opportunity to go explore if you’re interested in this sort of thing in conjunction with real estate. And then of course, you can also go the entrepreneurial route and start your business from scratch.

Mindy:
Yes. Alan Donegan is from PopUp Business School. We had him on our Episode 17, and he was also a guest on the Business Podcast, Episode Number 9. PopUp Business School talks about how to create… What is that book, Lean Startup? This is like the ultra-super, super lean startup. You don’t need to go and buy a building and invest in all the brand-new equipment in order to start a business. You can piggyback off of other businesses. You can start it from your own house. You can test out the waters.

Mindy:
Alan does a really great job of teaching you how to do that through a series of these free business schools that he runs mainly in the UK, but he’s starting to come over to America too. But just starting your own business and learning how to do it right is so powerful. It’s really not that hard. You hear these statistics. Frankly, I don’t even know what the actual statistic is, 90% of all small businesses fail within the first year and 95% of those fail in the second year or something. But when you look at it, it’s because they’re making bad choices, most of them. Making a few key choices can really be the difference between success and failure in your business. But yeah, Episode 51 of the Business Podcast. Holy cow! You got to it before I did. That is just fire.

Scott:
Yeah, love that episode. Again, all this comes in the context of starting a business is probably going to be very difficult right now. Generating significant side hustle income is probably going to be more difficult now than it was six to eight weeks ago. You may be the exception, you may find a creative way around that. That’s wonderful.

Scott:
But if you go into it understanding that’s a possibility and also understanding that right now, your dollars are going farther in the stock market than they were six to eight weeks ago. Offsetting that potentially lower wage or greater challenge to get started, right? That your dollars may go farther in buying a business or real estate in coming weeks or months. That certainly you’re spending less most likely. Your dollars are going farther towards overall wealth accumulation to your total amount of savings. So, understand that in that context and don’t be discouraged if there is a little bit more difficulty in starting a business or generating that extra income in the short run here.

Mindy:
In the short run.

Scott:
That effort is rewarded just as strongly over time, I think.

Mindy:
Starting a business can be very time intensive. I don’t want to say that a lot of time on your hands, but you kind of have a lot of time on your hands. You can do some of the time intensive work that maybe when real life happens again, when real life reopens, you might not have the opportunities to do. Use your time wisely is what we’re trying to say of it. Okay, Scott, the last one is live the life you truly love, because money is now not a consideration.

Scott:
Yeah, this is just what we did, right? Money is a tool to help us get to the lifestyle that we desire, right? The trick here is I believe that most people in this country or even the world do not have a crystal-clear understanding of what it is that they want. What life do you want? Where do you want to live? How do you want to live? What do you want to be in your house? How do you want your family to live? What do you want to do for work? Even if you’re retired, what do you want to do to be productive or pursue your hobbies, right? If you don’t know those things, you need to figure them out. The way you do that, I think, is through goal setting. You set a goal. You set a five-year mission and vision. You set annual goals. You set quarterly goals. You set weekly goals, and then you track your progress daily.

Scott:
What I would do in good times/bad… I do this for my career. I’ll do it in retirement. I’ll do it throughout my life, but work, it’s also not like overnight process. You can’t just like sit down right now and map out your five-year vision for your life in crystal clear detail and work toward it uninterrupted. It will evolve. You may have no idea what you want. Start with something that generally sounds good, and evolve that over time until you are feeling very good and you know exactly what you want. Because I guarantee you that you can’t get towards any of these other goals.

Scott:
You’re not going to put in the time and sacrifice to spend less than you earn. Increase your skill set. Increase your income. Invest super diligently in a disciplined manner through the ups and downs in the markets over a very long period of time, or start businesses and be responsible for other people’s lives if you don’t know what you want. So, it’s all comes down to that. Understand it’s a work in progress, and go set about and figure it out.

Mindy:
Absolutely, 100% agree. The goal for financial independence is not I got to quit my job. I think that a lot of people kind of lose sight of that. So, the goal should be financial independence, so that I can then live the life that I truly love. That can be volunteering. That can be starting a business that employs other people. You don’t really make that much money, but you don’t care because it’s your lifelong passion. Just set a goal. Scott, you have a very impressive goal sheet. I have seen you fill this out. What have we worked together now? Five years? I’ve seen you fill this out pretty much daily for five years.

Mindy:
I would like to link to that in the show notes for today’s show, so people can see not only what it is that you’re doing, but also start a goal setting regimen for themselves because you’re kind of a success story. I don’t know if you know this, but youngest CEO in BiggerPockets history? That’s kind of a tongue in cheek joke because the only other CEO we ever had is not that much older. That’s Scott.

Scott:
Well, yeah. Look, I don’t know if I’m like a goal setting guru. There’s lots of really good resources out there. I actually started off with looking at some of the stuff by Darren Hardy, I think he’s got some really good stuff. There’s a book called The 12 Week Year. If you’re interested in goal setting around that, which you can probably predict what that’s about. We’ve got a journal at BiggerPockets, the 90-day intention journal that you can buy, that can help you set some goals. It’s specifically geared towards real estate but can be used towards lots of other things. And then personally, what works for me is I just write down what I want on a piece of paper.

Scott:
I write down my five-year vision. I write down my quarterly goals, and then I have a daily log that I work with towards those quarterly and annual goals every day. I just fill it out. It’s a printout, you can find it on BiggerPockets. We’ll link to the show notes if you want to see mine. It has my goals on it. One of the goals is related to Virginia. There’s nothing in Virginia that I care about, Virginia is the name of my fiancé. So, just note that when you’re doing this but that’s my mechanism there. Just whatever works for you. It’s nothing fancy. It’s a Word document that I created. So, you can download them there, but I encourage you, however, it is you want to go about it, write down what you want. Work toward it every day even if it’s for 5, 10 minutes.

Mindy:
But I think your document is very helpful to people who haven’t started one before.

Scott:
Yeah, what’s helpful also is I got like five, six years now of these printouts. That’s a lot of trees but that’s what works for me. They’re all in my filing cabinet down here. I can review back to them. If one day when I’m old, I go like, “Back in 2020 in April during Coronavirus, I was doing this, this, this, this, and this. It was a productive day or a lousy day.”

Mindy:
Well, I think reviewing what worked and what didn’t is very helpful for going forward. I would say you’re very successful and part of your success is because you have your eye on your goals all the time.

Scott:
Yeah, I’ve never distracted for more than a couple of hours, or a couple a day, or two at most from my top overall goals.

Mindy:
I think that’s pretty powerful. Look what it’s gotten you.

Scott:
Well, thank you. I appreciate the compliment.

Mindy:
Okay, Scott, do you have a joke for us today?

Scott:
Oh, gosh.

Mindy:
Wow, you’re not prepared.

Scott:
I’m not prepared. I didn’t realize I was going to be on the spot for the famous for today. I’m going to go to my favorite Instagram profile right now. It is @dadsaysjokes. I just heard that Kim Jong Un is sick. I guess that makes him Kim Jong Il.

Mindy:
That’s oh… I can’t… No, because that’s… Okay. So, I don’t wish somebody to be sick, but I’m probably not the president of his fan club.

Scott:
Yeah, yeah.

Mindy:
That’s kind of funny.

Scott:
What else you got Mindy?

Mindy:
What do you call a man doing yard work? Mow.

Scott:
I like it.

Mindy:
What do you call a man in the bushes?

Scott:
We’ll have a lot of clippings of these jokes by the way for you, guys if you’re interested in listening later.

Mindy:
The position of co-host-

Scott:
A man in the bushes?

Mindy:
… is now available, because I quit.

Scott:
Russell?

Mindy:
Yes.

Scott:
That’s my brother’s name. Yeah.

Mindy:
Russell. Oh, I didn’t know his name was Russell.

Scott:
Russell or Rusty Trench [inaudible 00:52:35]. Rusty, if you’re listening, we love you. You’re awesome.

Mindy:
Rusty, I am the president of your fan club too.

Scott:
There you go.

Mindy:
Okay, Scott, should we get out of here? This is kind of a pretty long episode. Although, I think it is really important to revisit the basics of financial independence. Clearly, I have been messing it up by doubling my spending every year. Just getting back to the why am I doing this, your goals, what’s your why of fi? What my why of fi is to be secure.

Scott:
Yeah, love it. Hey, look, it’s all the things we talk about all along. Spending less than you earn and track your income, spend less than you earn and track your spending. Look for ways to increase your income over the long term. Invest in low cost, quality index funds for the very long term and other appreciable assets, like real estate or small businesses. And then create streams of income opportunistically, right? It’s the same stuff.

Scott:
We do it all in the context of that goal of developing a long-term lifestyle that is exactly what we want, independent or not dependent on wage income, right? That is the key to this whole game. That’s what we believe is a very worthwhile mission for your personal finances. A very important goal for the vast majority of people in this country or any capitalist society. We love it and we’ll be there attacking this forever.

Mindy:
We will, okay. From Episode 122 of the BiggerPockets Money Podcast. He is Scott Trench, and I am Mindy Jensen. We’re going to go reset our finances. That was dumb too. I need to work on these, these are really starting to suck. Okay, if you have any suggestions, send them to me, because I clearly can’t make them up by myself.

Scott:
But if you’re still listening, we would truly appreciate it if you could leave us a rating or review on iTunes and join us on the discussion on our Facebook page. Just type in BiggerPockets Money into Facebook and request to join the group. You’ll be asked a couple of questions and you’ll need to have a joke handy, like I did not today, but we love that discussion. We’ve got about 3,000 or 4,000 members. We have a lot of lively little debates on there that are going fantastically. We’ve also got a new BiggerPockets official Facebook group, which is for the real estates component of that. So, you can join both or none, but please do leave us a review.

Mindy:
Thanks. Have a good day.

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In This Episode We Cover:

  • The basics of financial independence
  • Spending less than you earn
  • How Scott and Mindy save their money
  • How their spending changed
  • Increasing your income
  • Investing in low-cost, quality investment vehicles
  • Creating multiple passive streams of income
  • Living the life you truly love
  • And SO much more!

Links from the Show

Books:

Tweetable Topic:

  • “Starting a business can be really time intensive.” (Tweet This!)

Connect with Scott & Mindy:

The BiggerPockets Money Podcast is for anyone who has money… or want to have more! Join BiggerPockets Community Manager and Podcast Director Mindy Jensen and CEO Scott Trench weekly for the BiggerP...
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    Dustin Young Rental Property Investor from Oak Creek, WI
    Replied 5 months ago
    Hey Scott! Can you please share your goal sheet as mentioned in the episode? I have the 90 day Journal but am always looking for options to improve.
    Amber Bennett Realtor from Saint Petersburg, FL
    Replied about 1 month ago
    https://www.biggerpockets.com/files/user/ScottTrench/file/daily-log-template-for-me-2020
    Anita Morrish from San Antonio, Texas
    Replied 5 months ago
    Yes, same as above
    Amber Bennett Realtor from Saint Petersburg, FL
    Replied about 1 month ago
    https://www.biggerpockets.com/files/user/ScottTrench/file/daily-log-template-for-me-2020