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The Pillars of FI: Designing the Life You Want

The BiggerPockets Money Podcast
47 min read
The Pillars of FI: Designing the Life You Want

On today’s epic show, we speak with Brad Barrett and Jonathan Mendonsa from Choose FI. Brad and Jonathan share their pillars of financial independence — the 10 things you need to do in order to achieve FI.

We cover beginner-level topics such as frugality and index fund investing, but we also touch on more advanced topics like tax optimization and travel hacking.

This episode went so long — and contained such fantastic information — that we simply could not squeeze it into a regular show. So we didn’t. We made it a two-part episode so we didn’t miss a moment with Brad and Jonathan.

Click here to listen on iTunes.

Listen to the Podcast Here

Read the Transcript Here

Scott: Welcome to BiggerPockets Money Show Number 14, Part 1.

“You’re going to get to this place where your money is earning enough money for you to support you for the rest of your life. Just everything that we’re talking about on My Munch, this is a tool that you could put in the toolbox to get to this goal of financial independence faster. But it’s a pick your own adventure”.

It’s time for a new American dream, one that doesn’t involve working in a cubicle for 40 years, barely scraping by. Whether you’re looking to get your financial house in order, invest the money you already have, or discover new paths for wealth’s creation, you’re in the right place. This show is for anyone who has money or wants more, this is the BiggerPockets Money podcast.

Scott: How’s it going, everybody? I’m Scott Trench and I’m here with my co-host, Miss Mindy Jensen. How are you doing, Mindy?

Mindy: Scott, I am doing awesome today as usual. I am always doing awesome. And today, we’re out in Oregon with my family, just enjoying the sunshine and the beautiful Pacific Northwest. What’s going on with you?

Scott: Not much. We are back here in the office. Another typical day here in the office here on this typical day recording a podcast except we had a really long, awesome conversation with our friends, Brad and Jonathan, today.

Mindy: That’s the problem with what happens when you get four personal finance people together to talk about money. The conversation just lasts forever. And you know, we talked about cutting this into one 60-minute show, but there is just so much fantastic information, we decided to keep it all and turn it into two parts.

Scott: Yeah, and these two parts are jam-packed full of information. We have gone in and we’ve discussed what we call the pillars of financial independence with Brad and Jonathan from over at Choose FI. Really brilliant guys that have lots of insight into how to approach financial independence and we discuss their ten pillars, their ten foundational components to moving towards financial independence, one by one.

And the conversation, as Mindy mentioned, goes on for like maybe an hour and a half or something like that and we go really deep into all of these so we’re looking forward to sharing that with you guys and this episode will contain the first several of those pillars and then we’ll break out the remaining portion into another episode for next week.

Mindy: Yeah, and the show actually went almost two hours, Scott, because we just—none of us could stop talking about this.

Scott: Time flies when you’re having fun.

Mindy: Yeah, exactly. It was a really great show. I had a lot of fun.

Scott: But before we get to the main interview here, let’s give a quick work to today’s sponsor.

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All right, thank you for today’s sponsor.

Mindy: Without further ado, here is Part One of our epic Choose FI podcast interview.

Scott: Brad and Jonathan, welcome to the BiggerPockets Money Show. Thank you so much for taking some time out to hang out with us today.

Brad: Yeah, thanks for having us.

Scott: Awesome. Well, one of the things you guys sent us over prior to this is you have these pillars of financial independence and I thought we could kind of just jump right in and start talking about them and maybe get some lively debate going here because I know that we’re probably all on the same page with most of this stuff but I know there’s some different opinions there. What do you think about that?

Mindy: I’ll say the same but different. There are some things that I went through them and I don’t disagree with anything that they say but I have some different thoughts on their ideas.

Scott: We’re all on the same page. These are the pillars of financial freedom so we know—

Brad: Same team for sure. I wonder, I’m curious if you guys put them in order, too. We loosely did but I’m not sure that we really hashed out the exact order so I’ll be curious to hear that, too.

Jonathan: I was thrilled about coming out on the show with you guys just because there’s absolutely—there’s four or five aficionados involved in this conversation and what struck me as I was thinking about how to prepare for this episode was everybody here has done it in slightly different ways and so yeah, I think it will be a lot of fun to riff off your own take on this.

Scott: Awesome. Well yeah, so the first one that you guys talk about is low-cost index funds. So for people that are listening, why do you guys suggest that investing in low-cost index funds is a pillar of financial freedom?

Mindy: And I’m going to jump in really quick and say, what is an index fund? We like to make sure that everybody knows what we’re talking about before we get started down that road.

Brad: All right, so yeah, we definitely believe in low-cost index funds. I think essentially what we believe is that we cannot outperform the market. So, it seems highly unlikely based on just like the background research that we’ve seen, the historical data that if we try to actively manage or try to find these brilliant managers who charge significant fees, and I know you guys have talked about it certainly in past episodes where investing in fees, they matter, because the compound returns, it just cuts a significant portion out of your overall nest egg at the end of the day.

I mean, you’re talking potentially over a 40-year compounded period, that even like a 1% fee, so if you find some mutual fund that has a 1% expense ratio, it sounds fairly innocuous, right? like, oh, it’s just 1% over decades. It can cut off upwards of 25-30 plus percent of your nest egg. So I think my argument is, I am not going to outperform the market over 40 years with my own investing genius or the guy down the street at the Edward Jones. Like, the likelihood of me finding one of 20 people on earth who are going to outperform by the random guy down the street is highly, highly unlikely. So I choose to basically buy a broad-based index fund.

So in my case, I pick Vanguard’s Total Stock Market Index Fund. I think there’s definitely up for debate on Warren Buffett uses Vanguard’s S&P 500 fund is his option. Obviously, Schwab, Fidelity have many similar options, right? Low-cost index funds. So an index fund, in my case is, with this Total Stock Market Index Fund, it’s buying a small piece of essentially every publicly traded company in America.

So I’m not trying to pick winners. I’m not trying to actively manage or outperform. I’m just buying a small little piece of every public company in America which to me is buying a little bit of the hard work of tens, if not, hundred plus million people in America who are all trying to make their companies better. To me, that’s a long-term recipe for wealth-building.

Scott: One of the things that I think is so interesting about index funds is they’re kind of like a lazy approach but also that they’re super effective of these low fees. There’s a huge body of research out there, if you want to read books like A Random Walk Down Wall Street or anything that Jack Vogel has posted or talked about in his entire career. There’s this fantastic research that says it’s so hard to pick winning stocks and so hard to pick winning mutual fund managers. I love this as a pillar of FI but I would caution people against just thinking, I’m going to invest in index funds and that’s the entirety of what I’m going to put into investing.

I think there’s a case to be made for saying go out and read these books. Understand the whole thought process, all the way from technical trading and trying to do value investing like Benjamin Graham or some of these Warren Buffett type things and then arrive back at index fund investing. I feel like there’s a lot of, even though it seems kind of silly, there’s a lot that’s worthwhile in that approach of learning about why this is such a powerful tactic as opposed to just kind of accepting it from us. Like hey, this is the way to go. Set it and forget it in an index fund. It doesn’t matter which one you pick. What do you think of that?

Jonathan: Yeah, I love that you brought up complexity but I think it’s basically a double-edged blade and many times, it’s used to keep people on the sidelines or rather, to get them into something that’s really not in their best interest. I don’t think that the problems—if you think about how marketing is used in our country and all around the world and in many cases, it’s used to get us to sign up for something that really does not have our best interest at heart.

In many cases, at least historically, advisers have used this veil of complexity to get us to sign up for products that are siphoning off millions and millions of dollars off our portfolios over a period of 10, 20, 30, 40 years. And when you actually look at an aggregate level what that’s meant for the everyday investor, it’s despicable. It’s horrible. And what index funds do and what Brad was highlighting was, it reclaims all of that inefficiency that’s built into having multiple middlemen that are siphoning off these charges when they make trades and siphoning off assets under management. And just keeps that money in your bank accounts and your investments and over time, what you find is that you don’t need to beat the market. If you can just keep up with the market because you’re getting those fees so ridiculously low, you just crush the game.

And so, I think that yes, complexity reflects real life and it’s fine but you don’t need to start with dual momentum, you know? Index investing is more than good enough and frankly, it’s better than what the average do-it-yourself is doing. I think that you would be doing a disservice to people to minimize index investing as like a tiny little piece. It’s an incredibly powerful tool that at no other point in time in human history have people had access to.

Mindy: Yeah, and I think that index funds for people—there’s the four of us who are fairly accomplished financially, financial mindset, and if you were just starting out, if you don’t know what you’re doing, an index fund is a really great way to start. I’m not sure—I know I want to invest in the stock market but I don’t have enough time to do all of the research on Apple and Netflix and Google. And and and and. I’m just going to go with an index fund. You don’t even really have to know the difference between the S&P 500 and the Dow Jones and you know, the NASDAQ and all of these other indices. Just put your money into something.

An index fund is a great way to put your money into something while you wait and have a chance to learn because you’re never going to reach financial independence on your own salaried life. You’re just not going to make enough money to grow your wealth that much. What are you making? A million dollars a year? Probably not. I don’t know. Maybe Scott is, but that’s not my current salary.

Scott: Yeah, obviously I think we’re on the same page here. Index funds make a lot of sense for long-term buy-and-hold investors’ portfolio. Consider that as one of the primary approaches that you’re kind of pursuing here if you’re not looking for something more active along the line of entrepreneurship or maybe real estate as some of our listeners are.

But yeah, I invest in index funds and have a substantial part of my portfolio in them. And I invest with Vanguard as well because of their low fees and great things. I think we’re all pretty much on the same page here as this being one of the best places to put your money or at least consider in that regard.

So I guess the second pillar here—Jonathan, do you want to talk about the second pillar here, the low-cost housing?

Jonathan: Yeah, well honestly, this is one that I should like show up and handwrite back to you because this is—you’re my inspiration for all of this and honestly, I’m just going to basically read research that I got mostly from your book. But even before that, you can find examples of people that have made an unconventional choice that got radically different results than what you’re getting or what you got in your own life. And you know, in my immediate circle, my immediate social group, we basically made all the same choices as our friends and all the same choices as our parents. And we got the same average results.

But when I went outside of my immediate social circle and I went out to this financial independence community, I found examples of people that had completely blown up the game and found ways to retire decades ahead of anybody else that I knew. I mean, obviously in my zip code and my city and my state. But there were enough examples of them that I’m like, huh. They are really onto something.

And so, while low-cost housing is in and of itself a subset of one of our pillars of FI, it basically says, you know what? Your home is maybe a great place to live but don’t get high on your housing, right? Like you don’t want to dump every single penny you have into this. Just have a reasonable place to live and save the difference and put it into, like you said, growing a business or index fund or something else. But inside that subset, I realized that there were some people that figured something out to actually make home ownership an incredible investment.

Specifically, I’m highlighting this idea of house-hacking. And obviously, you are intimately familiar with it. Your audience is intimately familiar with it but if you can live at almost no cost or for free and actually have people living in the same home as you paying down your bills, you’ve cut the biggest segment of the pie chart that describes where your money is actually going. You’ve just immediately stuck a knife into 50% expensive home ownership. And that is millions and millions of dollars over a relatively short period, like 10-15 years.

Mindy: Yeah, Scott covered this in Episode 2 of the BiggerPockets Money podcast and we’ll link to that in our Show Notes. This is Show 14 so you can find the Show Notes at BiggerPockets.com/MoneyShow14. Scott talked about house-hacking and I want to bring up after—I’m going to let Scott go ahead and talk about house-hacking but then I also want to bring up other ways to also cut your spending and have lower-cost housing. I hear from a lot of people, oh I have kids. I could never house-hack, right? I have a wife and she would never want to move or whatever. So there’s other ways to do it that aren’t necessarily living with somebody else.

Scott: Yeah, I think you could talk about housing, the slowest way to move towards financial independence, it seems to me, is to work a median income job and stash—save 10% of your stuff into a 401K and then live in the nicest, fanciest home that you could possibly live in that’s 30 minutes away from work. And then of course, the fastest way to financial independence is to sell all your possessions and go live under a bridge.

So I think the approach that we’re all kind of on the same page here with is that there somewhere in the middle is the realm of reason as you’re trying to move towards this goal and get towards FI. And I’m a little bit more on the extreme side where as a young, single guy, I was willing to live in a basement with a roommate and rent out the top floor and live for free that way. But there’s a whole range of options.

Jonathan: Wait, wait, wait. You had a roommate in the basement?

Scott: Yeah, so it’s a duplex. Up-down duplex and there’s two beds, one bath upstairs and two beds, one bath downstairs. Got a roommate in the downstairs.

Jonathan: You’re so hardcore. I love it.

Scott: All right. So I just made a big step up this week. This week, literally this weekend—I moved upstairs into the house-hack. Big change. Big life change. Girlfriend moves in.

Mindy: Congratulations, Scott.

Brad: And Scott, certainly, house-hacking, if I had met you 16 years ago, I would have house-hacked. So that would have been phenomenal and I love that message. But like Mindy was saying, there’s certainly other ways to save and to be intelligent about your housing. And I think like Jonathan was kind of alluding to—a lot of people think, oh, our house is our biggest investment, right? Because you’ve seen on HGTV that someone put in $100,000 kitchen or something like that. That has to be a good investment. Well, not so much.

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

But instead of buying a McMansion half a mile from us, we bought a nice, moderately-prices—we essentially found the lowest-priced four-bedroom house in this particular school district that we could. And after putting a decent down payment down, our entire monthly payment is only a little bit more than $1000 a month. Principal, interest, everything, escrow.

I mean, that’s to live in this fairly wealthy area. It was just the intentionality. I think that’s the crucial part of FI. We can make decisions but think about it. Have some intentionality. Have some foresight. So we know we wanted to be here specifically. We knew we didn’t want to break the bank even though we could afford it, right? We didn’t want to do that. So we bought a nice house that we could live comfortably. And we’ve been here for 13 years now.

Scott: I think that when it comes to house-hacking and cost of housing, there has to be some sort of, what is your relative position in life? I met with a guy a few weeks ago who had read Set for Life and we went and got coffee in the morning and we were talking about life and finance. And he comes up and he goes, I’m making you know, a household income in the threes. I’m looking for a house-hack. What’s a reasonable—I’m like, well, you can buy—if you’re making that much income and you’re spending as little as he was, you’re going to coast towards financial freedom pretty rapidly.

So house-hack, really, your cost of housing, unless you go overboard and buy a million or two million dollar home is not going to be the huge barrier that is to someone that’s making an immediate income. And so it’s kind of understand your relative position and hey, for that person, house-hack is really an immaterial part of their financial plan. It could be the biggest part of your plan or you can make decisions that are different like Brad and still have a great outcome.

Brad: You know, and the way I think about this FI and the journey to financial independence is that this is a pick your own adventure. And there are basically—what we’re going through is a list of tools that we all have available. We all can select from the same tools. And some of them may or may not suit your own particular, I don’t know, characteristic or the way that you visualize living your life. You do not have to do everything that we’re going to talk about in this episode. But you’re going to have to do something. You can’t just sit on the sidelines.

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

Mindy: Yeah. So what I’m hearing from all of you guys and what I’ve experienced in my own life is that you have to be conscious of where your money is going. And this falls into the Mindy pillars, which are a little different. I mean, they’re the same but different. Mine are more like recommendations for what you’re doing in the beginning of your financial independence journey. Track your spending is my number one recommendation for anybody who asks how do I get started on this financial independence path. And you can’t know where you want to direct your money until you know where it’s going right now.

And everybody has stuff that they spent their money on that’s not necessary. That is, I don’t want to say worthless, but I do want to say worthless. Going to get coffee is a huge one that everybody brings up but really, if you want to be financially independent, how important is that coffee? If it’s so important to you that you can’t not do it, then what else is in your life that you’re spending money on that you don’t really care about so much? And that’s kind of my number two.

Three is know what really matters to you so you can spend money where it counts and save money on things that you don’t really care about. Like, I don’t really care about clothes so I shop at a thrift store. But I care about my coffee so I buy really good beans and I make it at home so I still have a really good taste. I grew up on, let’s not name names—let’s say store bought coffee in the big containers—

Brad: Oh, they’re not going to be a sponsor of this show. You can just throw them under the bus.

Mindy: But my parents still buy.

Brad: It’s in a blue container.

Mindy: Wow. The best part of waking up is good coffee in your cup. My parents still actually use that. They take—it’s not FI. I think it’s frugality a little too far when it comes to coffee and they reuse their coffee grounds. They make a pot of coffee with like five scoops and ten things of water. Next time, they make coffee, they add two more scoops to it and use the coffee grounds over. And let me tell you, if you think that sounds good, you are—coffee’s not on the list of things you want to spend money on. It is not a good choice.

Jonathan: I love that. I think that principle of kind of stretching yourself in a hard place and finding out whether or not something is adding value so you can bring it back. I’ve certainly done that with coffee. I’ve tried the ground coffee and I was like no, I think I like it better with the whole bean. And then I went and tried the gourmet coffee and now I’ve landed kind of on the bags from Costco. It was kind of this nice price point but it certainly is a metaphor for every other aspect of your life.

Mindy: Yes. And you know what you just said is really, really important. After doing 13 episodes of this show, we’ve heard over and over again, once I started down this FI path, I wanted to cut everything. And that’s a really great exercise is to cut everything out of your life that you—obviously, you need shelter. You need food. You need water. Keep those in. Everything extra, cut it out and see what you can live without. You’ll be surprised at what really doesn’t matter. You might be surprised at what does matter.

We had Liz from Frugal Woods on a couple of weeks ago and she said the seltzer thing is such a great example of this concept. She’s like, oh, I really love seltzer water. I actually have been to her house. That’s all they drink. The only thing she puts in her mouth is seltzer water and food. So she drinks a lot of this and for her to cut that out or be willing to try to cut that out is kind of lost on people who have seen how much she drinks—how much seltzer she drinks. That sounded bad. You should see how much she can put away.

So she added it back in and she found a way to get that cost down to like practically nothing. So that’s a really good point. See what’s really important to you. Cut out everything and then see what you need to add back in. And you know, if you need to add it back in, that’s fine. Just know that that’s a choice that you’re making.

Scott: Yeah and I actually went and bought the soda stream machine and now I’m making my own seltzer water at home and it’s actually way better than any of the stuff you can get like in a can or whatever. So no, but I think that the theme here is just know where your money is going and assess reality and don’t allow your budget where your dollars flow. That does not lie.

And where most people lie to themselves, I think, is they say, oh I want to achieve financial independence and then they spend two-thirds or more of their income on two categories alone which are housing and transportation. And I think we just talked about housing here. The third pillar of FI that you guys label is that transportation category or at least cars. So can we maybe jump into that and maybe hear what your viewpoint is on that area? Maybe Brad?

Brad: Yeah, we—on our pillars of FI, we put it as buy used cars. But I think it’s a larger issue than that. For me at least, I bought a new car back in the day. So it was 2003. I still had my little Honda Civic since my very first car. It’s going on almost 15 years to the day now. And to me, it’s about being again intentional about that and also realizing it’s like a Not Keeping Up with the Joneses type scenario.

Like to me, I get marginal utility out of a BMW or a Mercedes even though by any measure, I could obviously afford it, right? But that’s $500 a month. Let’s say my wife and I, we each have a 2003. She’s got a Toyota Highlander. I’ve got a Civic. And these things are going to last forever. They both have a 100,000 plus miles on it. But imagine we bought a new Mercedes, each of us, every three years. What is that, $500 plus a month for each of us? I mean, that’s real money. $1000 a month compounded over decades, I mean, we’re talking literally hundreds upon hundreds of thousands of dollars.

And that’s the issue is I think most people say, oh I can afford the payments, right? You hear that all the time. I’m going to manage my car payments. I’ve heard that term more times than I care. I didn’t know what it meant at first but it just essentially means like hey I’m going to keep buying new cars, leasing, rolling into like this is the amount that I want to pay per month. And I’m going to do, come hell or high water, whatever it takes to get that new car, and keep it rolling with this payment into perpetuity whereas I paid off my car in whatever it was, three or four years, and I’ve had no car payments now for 12 plus years.

Think about the amount of money stockpiled again, into low-cost index fund and buying a house and whatever it may be, whatever investment you choose. That just, it adds up to such a significant amount of money. And Scott, to your point, about with your pie chart, and I actually told you, I spoke with a high school class before we recorded this and I was quoting you left and right. So I was talking about, of course, plugged the book Set for Life, and I was talking about your pie chart because that really stuck out to me, is 33% for housing, 17% for transportation. That’s 50%, right? If you can cut out 17% just by buying one car, or in this case, maybe even buying a used car, going even one step farther.

And Jonathan can talk to this, certainly, and cutting out that 17% for in my case, 12 plus years and I’m hoping the autonomous vehicle fleet takes over like well before I need to buy a new car. So I expect this to be the one and only car I ever buy in my entire life.

Jonathan: You know, one of the things that really stood out to me after I did this, and the reason that we took the time to record the episode and before we were recording the episode, I did some research and I was so bad at cars and I’ve never really been able to understand, why are they so expensive? It’s just $250 bucks a month, okay times 12. What is that? You can add that up pretty quickly and now you have a general understanding.

It wasn’t that I necessarily believed in car payments. I knew they were bad but I couldn’t quantify it and what I’ve found out is there’s so many more costs attached to just owning a vehicle, even when it’s paid off, than you could possibly comprehend. So like just to play this out. Think about the cost. You have your depreciation costs. Your car is worth this the first year, then this the next year, then this the next year. The opportunity costs of not having that money be able to work for you. You have the insurance. You have the maintenance. You have the taxes. You have the risks, the gas costs. You have your toll roads. You have to pay to get there.

And all these things when you add together, how do you quantify that? I just try to create like a couple of different scenarios of you have this new car and you drive it for five years and then compare that to what if you have a five year old car and a ten year old car? Really, what I noticed is even more than whether or not, it’s a gas sipper versus a gas guzzler, whether or not you buy it new and whether or not you drive it until it’s dead, those are the two factors. And then right behind that is, is it a gas sipper or a gas guzzler? A new car is costing you around $7200 a year.

When you put all of those different costs into place, that’s how much we’re talking about. If you were to purchase a ten-year-old car and drive that one into the ground, that’s costing you $2600 a year. So like, this is when you add all these costs in place. You realize that a car is a losing proposition. It doesn’t matter—it is just a losing proposition. Everybody is losing money on it. But you can lose less, right? And to the tune of $5000 a year just by picking a five or a ten-year car over a new one. I thought, to me, finally it sunk in with that. And I think it’s just worth a conversation because so many of us think, well, we can manage the payments.

Mindy: I have an example of this. I love that you used the word opportunity costs because that’s in Mindy’s pillars as well. Know your opportunity costs. That’s a term that’s been in and about but it might not be a familiar term to some of our listeners. Opportunity costs refers to a benefit that a person could have received but gave up to take another course of action. Stated differently, an opportunity cost represents an alternative given up when a decision is made.

So when you buy your $30,000 car, that’s $30,000 you don’t have to invest and at exponential gains, that’s $100,000 down the road, a million dollars down the road. However much time you have to grow this investment, you just lost that because you bought the $30,000 car. I bought an Acura Integra. I bought it from a friend. I think I paid $2500 for it. I drove it for ten years and then I sold it for $1000.

So, over the course of ten years, it cost me $1000 plus we had to do a new muffler or something. So it was like no maintenance and no expenses. Then, when I sold it I bought my 2003 Honda Element brand new because I wanted it—it was my first brand new car and I deserve it. So that cost me $16,000 at the time. My opportunity costs are exponential because I have since learned how to invest and that actually costs me a lot more than my $16,000.

Jonathan: Yeah, the marginal utility of vehicles. I think there is a point in time in which a car is just a car. You know the first time you get into that car with the heated bucket seats, it’s amazing. But now, two or three weeks in, it’s just a norm. And then you’ve got to get something else to get that new fix. That’s once you’ve kind of truly bought into that new consumer mindset and you move from hey, this $20,000 vehicle really was just designed to get me from Destination A, my home, to my job that’s two and a half miles away. But I’m paying for those bucket seats for the 90% of the time that I’m not even in it. It’s just sitting in my driveway as a nice paperweight. Waiting for it to depreciate. Waiting for something to go wrong so I have to fix it. And paying taxes on it every single year.

Scott: So I think we’re very clear on the point that hey, if you buy an expensive car and you’re bleeding lots of money and that’s a huge part of your budget that you are not prioritizing financial independence and it’s going to slow down your journey. What do you guys think—maybe I’ll ask this one to Brad here—what do you think someone should do if they’ve got an expensive car already and they’re like two or three years into the note? They bought it a couple of years ago. Should they sell that car and start over and eat their loss or how should someone in that position handle the situation?

Brad: Yes, that’s a hard question. I don’t obviously know the real world specifics behind each scenario but I think the first thing I would do is just like anything, I would research it. That, to me, is the first step of anything in FI. It’s figure out what your options are, right? So I think if it winds up that you can get out of that car without taking a complete bath on it, then yeah, I probably would look to resell it and buy, like Jonathan is saying, buy a gas sipper, as he calls it. Buy a fuel economy car that’s a used car. And hold that for the next 10 or 15 years.

I wish I had a better answer for you but I think that’s how I would start, is just take a look at my situation, assess it, do the research. See what I could sell it for and hopefully extricate myself from this situation that while sure, I can maybe “afford” the payments every month, now that I’ve come to this epiphany of FI and I understand how much this is truly costing me, how can I get out of this as quickly as possible? I think that’s how I would approach it mentally.

Scott: I’m just fascinated by that question because it seems so straightforward. If someone is starting from scratch, if they’re following these pillars, they’re going to have a great outcome almost certainly, right? Over the course of five to ten year period. But it’s the person that’s already got the fancy house and already got the fancy car who those things are tied into their identity and their status at this particular moment in time, making those changes and going maybe not all happening at once but over a couple of years. But making those changes seems the real difficulty in this situation versus maybe getting started on the right path.

Brad: Yeah, Scott, I actually have something really pertinent. A friend of mine who recently came across FI, he lives here in Richmond. He actually got introduced to my podcast and him and his wife and his family, they are making moves. I mean literally, I have never seen people transform their lives like they have. They put their house up for sale. They are downsizing dramatically and cutting hundreds of thousands of dollars from their mortgage ultimately by making that move.

Oddly, that was easier for them than the car situation. So they were able to do something similar to what we did actually with the housing, which was live in the same school district with maybe comparably, if you argue ostensibly, it’s a four-bedroom house, right? So they’re moving four-bedrooms to four-bedrooms. They don’t have the frills, maybe they don’t have the extra space but they’re cutting off well over $1000 a month. Probably $1500 a month. That was kind of a lateral move. They were able to do that fairly easily.

The car, and maybe this speaks as to why I had such a hard time answering the question is, the car was more vexing for them because they couldn’t come up with that perfect answer. You know, they had very little equity. What they would have had in equity, they probably couldn’t have bought something that they were ultimately happy with so they decided to aggressively pay down those notes on those cars and move forward and just keep those cars forever. Again, it’s you have to do what works for your life.

The four of us, we’re not here to speak on high and say this is the only path to FI. That’s not the way this works. You need to figure out what works for your life. This is not the Brad Show telling you this is what you have to do. Figure it out and come to a conclusion but do it intelligently and with some intentionality, right? Those are my buzz words, I think, because they matter.

Scott: I guess to transition here a little bit you know, that’s the car side of this. You said we were talking earlier about the 33%. First of all, that was a great response to the question of what should you do in that situation? There is no right situation there. I mean that’s the point. That’s a tough question. I struggle with that exact question.

I don’t know the right answer. I kept my car and continued to pay off the note. And I’d like to think I put a lot of thought into my personal financial situation. That’s a hard one but I think we all agree that buying a used car or trying to set that up from the beginning in the most cost-effective way is really the best strategy. And you have tougher choices if you don’t do that in the first place.

Now, this awkward transition—transitioning to kind of the next pillar of FI. I actually want to skip a few on your list and go to number seven, which is travel rewards because I think that I like to bucket that into that kind of transportation section. If 33% of your expenses are housing and then the next 17% are transportation, which includes both your auto commute and perhaps any vacation and travelling that you’re doing. So can you tell us a little bit about your philosophy on travel rewards?

Jonathan: Let me let Brad completely unpack this, I guess, because he is the guy. But I will just say the one common thread between these two that hasn’t even really been highlighted up to this point is with everything that we’ve talked about up to this point, you’re paying for with after-tax dollars. Your home, you’re paying for with after-tax dollars. Your car, after-tax dollars. That’s actually a cost that I didn’t even include, really, in the true cost of car ownership.

But that, especially for those of you that are listening to that, that are maybe in a 25% and beyond marginal tax bracket, that is a very real type of opportunity cost to spending the money now. And the reason I want to set that up is to say that Brad, to me, basically revealed this whole new world of travel rewards where you, instead of paying for flights and different types of trips without after-tax dollars, showed me a way to do it not only for free but then not even be taxed on it really in any way, shape, or form, at least from an income perspective. So this is a complete game-changer, especially for the person that’s looking to optimize every particular aspect of their life.

Brad: What’s cool is I think the three of you have taken advantage of travel rewards. I know personally, on many trips. And Scott, I was thrilled to hear you say that you’ve recently started to get into travel rewards and you realized, this was kind of a hole in your knowledge and at least your attention, probably, right? It just was something you didn’t pay attention to but now you are.

Mindy: I tried to teach him.

Scott: I will admit, I did not listen to Mindy. What did work for me and did change my mindset on this is Episode Number 9 of the Choose FI podcast where you guys walk through, here’s a plan to just make a tremendous amount of money, or I guess, rewards from spending that you do anyways normally in life. And if I could go back, yes, I will—when I do go back, I will probably revise an edition of Set for Life, so that you guys, and put that into the section on transportation because I think it’s that important. Why not take advantage of something free that you can get by just using good financial habits in the first place?

Brad: I’m going to be in Scott’s book.

Jonathan: That’s awesome. Very, very cool.

Brad: I think the smart habits part that you just focused on there, Scott, I think that’s the crucial points. So obviously, many millions of people—tens of millions of people get in trouble with credit cards. Right? So this is a proceed with significant caution. Hopefully people listening are either in a good financial position or on their way there. So travel rewards in my estimation, only for people who can pay on time and in full every single month. So like that’s just table stakes to even think about getting into this.

So if that’s you, like my family—we use our credit card forever. And we paid it off every month. We got out pittily little 1% or 1.5% rewards. We kind of laughed all the way to the bank, right? It seemed great. It’s a bonanza. But when you learn about travel rewards and you learn about credit card sign-up bonuses, it’s like, the world has changed. It’s this epiphany. I think that’s where Scott, you are now, which is kind of cool in that you realize, okay—I can open up a credit card. I can reach the minimum spending requirement, as it’s known. So let’s say $3000 in the first three months.

All right, those are the requirements to get the bonus and then you get 50,000 miles or points. Just hypothetically. That’s pretty standard. That means you just take the $3000 of your regular expenses that you’re putting on your card anyway over that first three months—and that’s a cumulative amount—and you pay it off and you get 50,000 miles. In all likelihood, I like to argue that miles are usually worth, depending on the mile, of course, like bout two cents per point. So you could probably parlay that into $1,000 worth of free travel if you get a pretty decent average to above average redemption.

Now keep in mind, that’s essentially like getting a 33% rebate on the $3,000 that you would have spent anyway, right? Like normally you’re only getting 1% but just by being smart, by being a little more optimized and putting that same spending on a new credit card, you’re getting a 33% rebate. Where for me, where I put all of my dollars essentially in life that I spend on these new credit cards, I’m getting somewhere between 20-40% back on every dollar I spend. So it’s like getting again, 20-40% rebate or discount, however you want to look at it, on every single dollar I’m spending in life as Jonathan would say. That’s winning, my friends.

Jonathan: #Winning, Brad. This is 2018.

Brad: First time I’ve ever said it.

Scott: And there’s a specific approach, a specific way to go about doing these cards and some rules to this game that again, listeners, you should go and listen to Episode 9 of the Choose FI podcast to learn about those specifics. One of them that I’ll highlight that I’m working on currently is the Southwest Companion Pass. So I literally, after listening to this episode, I went and got the Southwest business card for my real estate and I got 60,000 bonus points after I spent $3,000 in the first month or so. Then, I got another one for personal use, a Southwest card, and I should be getting the 50,000 point bonus in the next couple of weeks. And with that—

Jonathan: Me too! At the same time.

Scott: Yeah, at the same time. I just got to pay my bill and then in a couple of weeks afterwards, the points will flow into my Southwest account. And I’m going to be at 110,000 points. I’m going to get the Southwest Companion pass and I’ll be able to designate someone and that person will be able to come on flights around the country with me whenever I buy any flights on Southwest and essentially doubles the values of these points. It’s just unbelievable pack to get a ton of travel.

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

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

Scott: Yeah, and I’m 27 so I have a lot of weddings to go to this year. The next two years, I think I’m going to eight weddings and associated bachelors’ parties and all these kinds of stuff. And these things are expensive. They’re absurd. It’s like $1000 just to go to the wedding and give a gift and all that, a hotel, I mean it’s nuts. But I can use this to offset a huge chunk of that and I’m actually already using my first points this weekend to go to Vegas for the first of these bachelor parties that’s coming up. So yeah, I won’t be available on Thursday through Sunday, Mindy.

Mindy: Well, I hope you have a good time. Yeah, wedding season. Wedding year. Your life’s wedding season. Like you said, you have eight in the next two years. Eight so far.

Scott: Yeah, it’s ridiculous.

Jonathan: For that, if you want to listen to that episode, just go to ChooseFI.com/009 or we have all of our travel resources on ChooseFI.com/travel. But yeah, I’m glad you brought it up and it certainly is a game-changer.

Mindy: Awesome, yeah. I will link to that in the Show Notes as well.

Scott: So we’re having a classic podcast problem where we go through the list and we take a really long time on the first five and now we’re going to have to go pretty quick on the last ones. So if you do want to add some more, let me know which ones you want to spend a little bit of extra time on. But let’s see if we can talk very briefly about kind of these next few if that’s all right with everybody.

Jonathan: Yeah, so I think what we should do is, we can go through groceries pretty quickly. Tax optimization, we should spend a little longer on. College hacking is pretty short. And cut the cord and cable is basically all together and we can finish up on side hustle. So I think of those, there’s only like two that really deserve any amount of real time. The rest are just sound bites.

Scott: Great.

Mindy: Okay. And we tackled grocery bills with Erin Chase from Five Dollar Dinners back on Episode 4 of the BiggerPockets Money Show. I will link to that in the Show Notes as well. But what is your take on grocery bills, Jonathan?

Jonathan: I just think it goes back to what you were saying earlier about not tracking it. You know, grocery stores have a very intentional plan when you come in. You may not realize it but the goal is for you to walk out with 20 things that you didn’t realize that you needed and that’s reflected on your receipt.

And I think that simply tracking it is the cure to that. Just almost immediately, that little bit of intentionality will cut your grocery bill by 20% and then if that’s without effort, you could probably slash another 20-30% with a little bit of effort. And Brad uses a metric of $2.00 per person per meal but I think any system will work. You just need to look at what you’re spending and have a plan.

Brad: Yeah, and I think it’s not just money either. It’s about your time, which is arguably equally as important if not more important. So I know my wife is a wonderful cook but she doesn’t want to cook every day. That’s not her plan. So what she does is, she very intentionally makes larger portions. So she’ll make as we call them like person dinners. So it’s like six-person dinners or person meals for one cooking.

So we know that we have it essentially for leftovers two other nights. So now that has saved her two additional nights cooking and in most cases, that’s going to be more efficient economically as well because it’s just economies of scale simply and you’re reusing ingredients. It’s not costing you a hugely additional amount to add in those extra person meals. It might be an extra chicken Cullen or something, right?

You’re not normally adding a ton of ingredients. So it’s more efficient time-wise and it’s more efficient money-wise as well. So I think really, just sitting down—for us, it’s Sunday morning and saying, all right, what are the two meals we’re going to cook this week? And that will pretty much get us through Monday through Friday very, very easily.

Scott: And I’ll throw in something that everyone seems to have skipped over here which is that if you’re planning these meals and buying them from grocery stores and being reasonable, you’re also eating pretty healthily, right? You’re not going to be baking up some sugar-loaded unhealthy candy-filled meals. You’re going to be doing something that’s at least moderately healthy and that actually compounds with a lot of the other things you’re doing in life to work towards FI.

Brad: Yeah, and you’re not eating out as well. So it’s an additional benefit.

Mindy: Yeah, and one of the things that Erin really kind of hammered home in, it was Episode 3, not Episode 4. But one of the things she really hammered home was you know, just having a plan will help you down the road. You have a plan for your meals. You go to the grocery store with a plan so you’re actually buying ingredients that you have a plan to use.

How many times have you gone to the grocery store—oh, this looks interesting. That looks good. And then you get home and you’re like, well, what can I make with this? Nothing. What goes with ketchup and ice cream? I have to go back to the store because nothing goes with anything that I bought. So having a plan at the grocery store, having a plan when you get home, and then like you said, Brad, your wife cooks ahead of time or has a plan ahead of time. So she has an opportunity to use everything up when it comes to Wednesday.

Like, oh this is what’s on the schedule so I don’t have to try to come up with something after a really hectic day or whatever. So definitely having a plan in all aspects of your meal planning. Your meal stages. It really helps you crush your grocery bill.

Scott: Let’s move onto the fifth pillar, which is tax optimization. This is one that I’ll admit that I just don’t have as good a grasp on as I should. I own some real estate which is naturally a tax advantage but I’d love to know kind of what you guys are thinking in terms of this area.

Jonathan: Yeah, so I think we only have time to go very, very high level with this stuff, but the FI community, not Brad and Jonathan, but the FI community has aggregated some techniques that really, really show off the power of maxing out these pre-tax accounts like your 401K. In particular, I’m thinking about things like the ROTH conversion ladder. And there’s another technique that’s really powerful, especially for someone that’s considering like a tactic like being an early retiree. Capital gains harvesting. Incredibly, incredibly powerful. Very high level.

Let me just go ahead and throw this out there, that in the United States, our government has made the choice not to tax capital gains for a married couple filing jointly if they make $90,000 or less. Now play this out. If you can get enough money into your pre-tax accounts that grows over this period of time, 10, 15, 20 years to a point where it’s spitting off up to $90,000 in capital gains, you can draw that out without paying a dime, a dime in federal taxes. A few states charge state tax but a lot of states don’t.

So no federal tax, no state tax. That is mind-blowing. So anyways, it’s not that this is the episode where we show you exactly how that works but rather, you don’t know what you don’t know until you do and you’re not going to learn about this stuff just on your normal 9 to 5 slog watching Keeping up with the Kardashians. It’s just not going to happen. You have to position yourself in a place to collect and aggregate good information from people hopefully that are relatable but ultimately, it comes down to positioning yourself to getting that information and then taking action with it.

This stuff really works. This is why Warren Buffett basically says, I pay less in tax than my accountant. Because Warren Buffet—he’s a billionaire. Obviously, his accountant is getting paid as an employee but Warren is paying his taxes based on capital gains. You need to find out, what are the people that have beaten the game? What did they figure out that I haven’t and then figure out what piece of that you can implement in your own life?

Scott: I think that’s great. One of the things that I always think about is once you achieve FI, I have not experienced this part of things, but once you achieve FI, you’re living off your passive income. A lot of times, your tax rate will go drastically down.

And in some cases, if you own a business, for example, you may have a year where you have a loss and you can then do a lot of cool things if you have a paper loss one year in moving this money out of your 401K and into a ROTH, this types of conversions. Obviously you want to talk to an accountant about that but the farther you get along down the side of things, a lot of really cool options begin to materialize.

Jonathan: I’m glad you mentioned the accountant. I was thinking about this, Brad. That we did everything I said, was that all correct? Was I on the right side of the line with that?

Brad: Essentially, you were definitely correct. When you’re pulling money out of these tax-deferred accounts, and I think why we focus so significantly on 401Ks, traditional IRAs, 403bs, 457s, the pre-tax accounts, is because you’re controlling what you can control. So in this case, you are getting the tax deduction today. And now, whereas most people, when they are 59 and a half or later and they start pulling that money out, they have to pay ordinary income tax on that money when they pull it out. That’s just how these accounts work.

But the key here is not necessarily for people in the financial independence community because they are controlling what they can control and for them, it’s keeping their expenses so low. In most cases, people have mortgages paid off. Their expenses are just not that significant so imagine a scenario where your—even, let’s just argue we’re not even talking early retire. Just say traditional retire and you’re 60 years old, your expenses are only $30,000-$40,000 a year.

Well, you pull that money out, normally, that would be just kind of lopped on top of your normal income and it would be at a fairly significant marginal rate. Whereas the people in the FI community, if you’re only pulling out $30,000 from your accounts, okay well that’s subject to ordinary income tax but you get such a significant—now, I guess with the new tax laws, it’s not standard and personal exemptions, it’s just a much larger standard deduction.

So I think based on 2018, it’s $24,000 so that would just come right off the top. So at worst, assuming nothing else, the worst back of the envelope calculation ever, your taxable income will only be $6,000. Even if at the lowest rate, if you’re talking 10%, right? So you’re paying $600 in tax, in federal tax that year just because you controlled what you could control, right? You got the tax deduction up front.

You controlled your expenses and kept them low. And then you pulled out exactly that amount. And then your federal tax liability is almost zero. Your effective liability is even if we’re saying $600 and $30,000 is say 2%. Your effective tax liability is 2%. That is truly incredible and that is really crushing the game, you know?

Scott: So I have a question about this because this is something I could talk about all day long and just learn kind of figure out how I want to go about things. I’m not sure on this kind of stuff, right? So that scenario you just described means you’re deferring a lot of money right now and you’re going to build up a significant chunk of change and the primary plan, I’m underlying this as the assumption, is you’re going to rely on withdrawals from this 401K or tax-deferred account in retirement at retirement age. But what if you’re like me and building up a lot of real estate and side businesses and you expect to have a very high level of ordinary income even after retirement or 401K? How does the math change at that one point for tax optimization strategy?

Brad: Yeah, I mean I guess these traditional strategies—and that’s a great question, Scott—this “traditional” for traditional FI people doesn’t work quite as perfectly for you. Because like you said, my scenario is predicated on essentially having no income, being truly “retired”. Being financially independent, right? So there are strategies. Like Jonathan alluded to. There’s the ROTH IRA conversion ladder and that’s way beyond the scope of this conversation.

Maybe you can get Brandon from The Mad FIentist on or back on and talk to him about that. That’s a crucial, crucial strategy for people looking to access money before 59 and a half. So those are two of the scenarios but yours is obviously a different one, Scott. I’m not sure that right off the top of my head, I have the perfect answer for you for how do I access that money either early or not early, as it may be, without paying a significant amount of federal tax?

So in your case, then maybe what you can control, and this comes back to then personal preferences. Okay, maybe I decide the ROTH IRA is better for me. I have no idea, honestly. I have no idea what your income is, if you can’t contribute to that, etc., etc. But again, it comes back to my point from the cars before which is do your research, understand the scenario, and then make a decision.

So for me, I would say, the people not in your scenario, in the more traditional FI, I think the tax-deferred accounts are a slam dunk for all the reasons that I listed. Now, for you, maybe that’s a different answer. Again, on this podcast with the limits of time and such, I can’t answer it precisely but I think it’s worth looking into.

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

Mindy: You mentioned Brandon the Mad FIentist. And we are going to have him on in a couple of weeks. And we are going to talk about tax optimization because that is really—we can get really into the weeds, into that conversation or into that topic in this conversation. But he’s got a really amazing article on his site that talks about why you should always invest in your 401K even if you plan on taking it out early, even if you have to pay penalties and fees and taxes and all of that.

He comes to the conclusion, and he’s really smart—he comes to the conclusion—not that you guys aren’t. I’m not trying to belittle your intelligence either. But talking to Brandon always makes you feel kind of dumb because you’re like, wow, I can’t believe one person can be so smart. Anyway, he comes to the conclusion that no matter what your end game, investing in your 401K, contributing to your 401K as much as you possibly can is always the best choice.

So you know, again with the intentionality and you know, coupled with frugality, you can really make some pretty amazing decisions when you talk to other people about this. I just learned about capital gains harvesting and I can’t wait to do that. I have a lot of stocks because I started investing a long time ago before I found this whole FI concept. I have a lot of individual stocks and I bought them a long time ago. I’m a buy-and-hold investor. So now my capital gains on them is incredible. But if I can get my income down below that threshold, I think—there’s a lot of numbers involved—but if I can get my income down, then I can start selling some of these stocks that I want to keep.

Sell them now. Buy them back at the same price. Now my cost basis has been reset. So instead of I bought it at $20 and now it’s worth $100, so I sell it at $100. I could write off all those capital gains because I haven’t hit that ceiling and now I buy it back at $100 because it’s still worth $100 to me. And then you’ve reset your costs. But that’s not something I would have come up with on my own.

So definitely listening to these podcasts, reading these blogs, you could get a lot of really amazing ideas. And not every concept is going to work for your situation. But you know, capital gains harvesting could be something really powerful for somebody who’s been investing for a long time. Just the concept of oh, I really should invest in my 401K. I don’t know, Scott. Are you investing in the 401K?

Scott: So this year, for the first time in several years, I’ve started maxing out my 401K. And it’s because I have set aside some of my efforts of my side hustles and focusing more on BiggerPockets here so I have more cash and less ideas on how to invest it in real estate. So that’s yeah, definitely a change up there for me.

Mindy: Yeah, I’d really like to have a diversified portfolio. And real estate is my love but the stock market is a way to diversify.

Scott: All right, that was Brad and Jonathan from Choose FI. Awesome. As we mentioned, I think, in the introduction to this, we had a great time with Brad and Jonathan and this interview continued going for another like 40 minutes. Maybe 50 minutes. Maybe an hour. I can’t remember. So we are going to split this into two parts. So the second part of it and the conclusion to this interview with Brad and Jonathan will actually air next week.

Mindy: Same time. What is it, same bat time, same bat channel? You’re too young for that. Okay.

Scott: Yeah, way too young for that. Way over my head.

Mindy: That was a show in the ‘60s. It was called Batman. Anyway, okay. So thank you so much for sticking around until the very end of this episode but we’ve got a lot more next week so for BiggerPockets Money Episode 14, Part 1, this is Mindy Jensen. Over and out.

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In This Episode We Cover:

  • The 10 pillars of FI
  • What low cost index fund is
  • Why investing in low cost index funds is a pillar of financial freedom
  • Low cost housing
  • The idea of house hacking
  • Scott’s ideas about the fastest way to achieve financial freedom
  • Mindy’s pillars to financial independence
  • Transportation costs
  • What opportunity cost is
  • Travel rewards
  • Jonathan’s take on grocery bills
  • Having a plan before going to the grocery store
  • Tax optimization
  • Some techniques for maxing out the free tax account
  • Traditional retirement versus early retirement
  • And SO much more!

Links from the Show

Books Mentioned in this Show

Tweetable Topics:

  • “Complexity reflects real life.” (Tweet This!)
  • “You can’t know where you want to direct your money, until you know where it’s going right now.” (Tweet This!)

Connect with Brad and Jonathan

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.