BiggerPockets Money Podcast

BiggerPockets Money Podcast 164: Attacking Your Fixed Expenses & What You Can Do to Boost Cashflow: Finance Friday with Kyle and Sarah

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Kyle and Sarah are in a great position. Kyle owns a mechanic and repair shop while Sarah works a regular 9-5. Combined, they’re both bringing in a solid amount of cash flow each month, but it may be getting offset by their expenses. With monthly expenses going into the 5-figures, it’s been hard for Kyle and Sarah to get the cashflow to start their real estate investing.

A few months back Kyle and Sarah began tracking their expenses, and like many people, they were shocked at what they found. Some takeout food here, some shopping there, and other random expenses were really adding up, so they started to reduce their costs.

Kyle and Sarah both have made significant contributions in their retirement and investing accounts, but they could be investing a lot more and getting a lot of write offs!

Scott and Mindy walk through the main expense categories that Kyle and Sarah have, breaking down what can be improved, reduced, and left alone. Like many people, Kyle and Sarah have found that with some fine-tuning to their budget, they’ll be able to increase their investments, by a lot!

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Read the Transcript Here

Mindy:
Welcome to the BiggerPockets Money Podcast, show number 164, Finance Friday edition, where we interview Kyle and Sarah and talk about reining in spending to focus on what matters most.

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Kyle:
I’ve since finding BiggerPockets Money, we found, what, about three months ago? So we’ve probably been listening to the podcast for a little bit longer, but we really didn’t start tracking anything-

Sarah:
Right.

Kyle:
… until about three months ago. And then you guys covered credit card hacking in one of the-

Sarah:
Episodes.

Kyle:
… episodes. And I went from cash back to travel rewards after hearing about the lady that did the travel rewards for everything up until she got financially independent and the started using that for their travel, and I was like, that’s where it’s at for me. Because the cash back really doesn’t matter to me. I just use it just to pay off the credit card. But the travel rewards ended up turning into a better benefit for us, the way that I pay the credit card.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me as always is my rugby aficionado cohost, Scott Trench.

Scott:
You know, that’s a rocking awesome introduction, Mindy. Thank you.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else, and show you that by following the proven steps, you can put yourself on the road to early financial freedom and get money out of the way so you can lead 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, start your own business, or simply just accelerate your financial journey, doing more things right, we’ll help you build a position capable of launching yourself towards those dreams.
Mindy and I just had a tremendous amount of fun today because Kyle and Sarah are a pretty successful couple. They were making good income. They had some assets. But they were spending a lot. They weren’t tracking their spending and so their money was leaking through their bucket like water. It was just flowing through their hands, through their accounts. And six months ago they discovered FI and they’re in the middle of this fire hose of information and discovering how to right their financial situation and it’s just so fun to see them doing all the right things, them all coming together, their financial position improving, and then opening their eyes to all the additional possibilities they have to continue that progress.
I think they’ll literally go from accumulating one, 2,000 a month, to accumulating six, 7,000 dollars a month, dramatically changing their tax profile, how tax advantaged their situation is, and we didn’t even get to the whole point, the many ways for him to grow his business and begin investing, while we talked about that. So, very exciting, very fun episode, and can’t wait to introduce them.

Mindy:
I could not agree more, and all the changes that they’re going to make are going to become very effortless and unnoticeable. They’re going to stop… She mentioned going to CVS, specifically. She’s going to stop going to CVS so many times and not even notice. It’s just going to be something that she just stops doing. Once you start tracking your spending and seeing how much you can cut without really feeling a pinch, then it becomes a game. Then it’s, well how much can I cut? I could stop going here. I could stop spending money on this. I can cut this out completely. Just like Liz from Frugalwoods cut out absolutely everything when she first discovered financial independence, and then she said, you know what? I miss yoga. But how can I add yoga back in, inexpensively? I miss bubble water. How can I add that in, inexpensively? And she now has the life that she truly loves and doesn’t miss all the things that she used to have.
My attorney makes me say the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott, nor I, nor BiggerPockets is engaged in the provision of legal, tax, or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants, regarding the legal, tax, and financial implications of any financial decision you contemplate.

Scott:
That’s right. This is just for fun and entertainment, and nothing we should say should be taken as advice. Now let’s go tell Kyle and Sarah what to do with their money, huh, Mindy?

Mindy:
Yes. Kyle and Sarah, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you two today. This is going to be a lot of fun.

Sarah:
We are so excited to be here.

Mindy:
So a little bit of backstory, Kyle owns an auto repair business. He and his fiancee, Sarah, have an 18 month old daughter, but they struggle with spending, and quote, from Kyle’s application, he said, “I didn’t realize how much money we spend until I started tracking it. We averaged $10,000 a month in spending in July, August, and September of this year,” and I’m going to say, “You know what? You are not alone.” If you don’t track your spending, it’s so easy to just, “Oh, it’s only $5. It’s only $10. Oh, let’s go out to dinner. I don’t feel like cooking,” and then all of a sudden, every dollar that came in is out the window. And it didn’t have any place to go.

Scott:
It’s like water. It evaporates if you’re not stretching it.

Mindy:
Yes.

Kyle:
Yep.

Mindy:
So let’s look at your financial picture. What is your income, what are your monthly expenses, where are you investing? Things like that. Let’s start with your income.

Sarah:
Okay.

Kyle:
So, I personally take a $2,000 a week draw from the business and then quarterly profit distributions. The quarterly profit distributions can be really anywhere. They’ve been $5,000, they’ve been $50,000. There’s really no consistency in it, where I’ve only really been doing professional numbers in my business for about two years now. Before then it was just a hobby that paid me enough to take-

Sarah:
Pay the bills.

Kyle:
Yeah, pay the bills. That’s really all it’s been. So I really only have two years of really being consistent with the numbers, to the point where I can now take a weekly draw and then do the profit distributions quarterly.

Sarah:
I get paid every two weeks. It’s about $1200 every two weeks. So I’m making about $2400 every two weeks. We can get into this, I did just up my 401K a little bit, and so that changed, but I think we’re actually going to bring it back down. So on average, it’s about $2400 a month.

Scott:
Great. So if we break this into… I have to, because you do yours weekly and you do yours every other week, in terms of how you think about spending, so that’s going to be $104,000 in income, from a steady basis, plus bonuses, what we will call bonuses for our purposes, distributions, from your business here. And then you’re bringing in about $1400, is that an after tax amount, or is that the pretax amount, Sarah?

Sarah:
Okay, so $2400 a month, $600 a week. And this is after taxes.

Scott:
Okay. Great. So $2400 a month is going to be about 30-ish a year, or so. So you’ve got 130 in base income and let’s break it down to monthly just because for our purposes, it helps us be consistent. If you’re listening, it’ll be consistent to hear it on a monthly basis. So what’s that, 130? You’re going to be about 12,000 a month, we’ll call it. No. 11,000 a month.

Kyle:
I was at 11,9 last month. So that’s a pretty good number to go on if we’re just thinking vague. It’ll fluctuate a little bit from there, but it was 12,9, I mean 11,9 last month.

Scott:
Great. So we’ve got, let’s call it between 10 and 12,000 a month in total income. 11,9. Yeah. We got a ballpark picture, then. Some of that’s going into 401Ks. Is any of your income, Kyle, going into a pre-taxed account like a self-directed or a 401K or something like that?

Kyle:
So last year I put the 1,000 into a traditional IRA, but other than that, no. I do have my Roth IRA from contributions before I hit the income cap, where I have to transfer over to a traditional IRA.

Scott:
Great. Any other sources of income like investments or anything like that?

Kyle:
So I have my investments… So income, no. But we do have money in the stock market. I have 126,000 in with my-

Sarah:
Mutual funds.

Kyle:
In mutual funds. And then she has 20,000 in her mutual funds. She has 30,000 in a 401K and I have between both my IRAs, about 23,000.

Scott:
Awesome. So we’ve got a number of assets here, as well. What are your expenses? On a monthly basis, you just started tracking your expenses recently. Do you have a ballpark of where that money’s going?

Sarah:
Yes.

Kyle:
Yes. So I have it broken down into a crazy spreadsheet that would take us days to go over. On average, we spend about 5500 on regular expenses that get paid every single month. And then after that we spend about $1,000 on life insurance. And then on average, we spend about $2,000 on money spent on take out, personal care.

Sarah:
CVS.

Kyle:
Yeah. Household expenses. I do a lot of, I just signed up to take my Boston, or my Massachusetts Real Estate Agent course. So I have that in there under continued education. So there's always stuff like that popping in there. I spend about $125 a month on my dog. Stuff like that, so it ends up being about $2,000 a month spent on needless stuff, I guess.

Mindy:
It’s not needless stuff. It’s mindless stuff, and that’s not even the right way I want to say it. It’s just, if you’re not tracking where your money goes, it will go wherever it feels like going.

Sarah:
Yeah.

Mindy:
So I love that you, when I asked you if you track your spending, you’re like uhh, so that is my first piece of advice is, start tracking your spending without guilt and without shame. Just start, every time you spend a dime, write it down. On this day, I went to this store and I spent this much money, I bought this stuff. So it’s easy to categorize. As you first start doing it, you’re like, oh, it was groceries and makeup and hairspray and deodorant, and then you just start throwing everything under groceries or groceries and personal care, or-

Sarah:
Yeah, we started. Yeah.

Kyle:
Yeah.

Mindy:
Yeah.

Sarah:
We started saving receipts and then we started tallying things, entering them in the spreadsheet.

Kyle:
We also, we only use one credit card.

Mindy:
Perfect.

Kyle:
And so I pull that out in a Excel form and then I break it up into our spreadsheet. Just so that it’s easier to move around.

Mindy:
In COVID times, it can be a lot easier to just put everything on a credit card instead of trying to pay cash for things. I don’t know if you try to pay cash for things. On the flip side of that, it’s super easy to spend a whole lot of money when you’re not, you go, “Oh, I’ll just put it on the card. I don’t have to worry about the cash.”

Sarah:
Right. [crosstalk 00:11:20]

Mindy:
So I get why people aren't paying cash right now, but keeping track of where it's going and seeing it… The way that my husband and I started off, we had a notebook, a piece of paper on the countertop, and we would come in the house, and I would immediately write it down, and the first day of the month, you're like, "Oh, there's three transactions. Whatever." And the 15th day of the month, you're flipping the page, you're thinking, "Oh my goodness, where is all this money going? Why am I going to the…" I've said this so many times, but, "Why do I go to the grocery store literally every day?" There's no reason to go to the grocery store every single day. Make a list, stick to it, and don't go every day. It's just, it's right there on the way home.

Sarah:
Yeah.

Mindy:
It’s so easy to stop.

Kyle:
I have pretty good credit card control. On average, I get about $6-7,000 in cash back on my credit cards each year.

Scott:
Wow. That’s amazing.

Mindy:
Holy cow, that’s awesome.

Scott:
And that’s because of your business, right?

Kyle:
Yeah.

Scott:
That has to be probably a lot to do with your business.

Sarah:
The business helps.

Kyle:
Yeah. The business definitely helps, but I’ve since finding BiggerPockets Money, we found about three months ago-

Sarah:
No, I think beginning of the summer.

Kyle:
So we’ve probably been listening to the podcast for a little bit longer, but we really didn’t start tracking anything-

Sarah:
Right.

Kyle:
… until about three months ago. And then you guys covered credit card hacking in one of the episodes and I went from cash back to travel rewards after hearing about the lady that did the travel rewards for everything up until she got financial independent and then started using that for their travel, and I was like, that’s where it’s at for me because the cash back really doesn’t matter to me. I just use it just to pay off the credit card. But the travel rewards ended up turning into a better benefit for us, the way that I pay the credit card.

Scott:
Got it. Well, I love it, and it sounds like there’s a lot of creativity. It sounds like you guys are motivated, you’re willing to try the hacks here, you have a really good starting point with a pretty solid, high income here, and opportunities to increase that. And what I’m looking at, what I’m hearing is, I’ve got $8500 in expenses that you just mapped out. 5500 in what you call fixed expenses, which I want to dive into in a second, 1,000 in life insurance, and 2,000 on that fun stuff, the personal stuff, the stuff that is non-recurring.

Kyle:
Yeah.

Sarah:
Yeah.

Scott:
It sounds like, what I think is going to happen is your tracking is going to, I think, immediately make a dent in that $2,000 a month spend. So I’ll leave you guys to tackle that one, because I’m sure that as you are intentional, you’ll be like, “Do I really want take out tonight, or would I rather have the $35 back-”

Sarah:
That’s been our last four weeks.

Kyle:
[crosstalk 00:13:52]been insane.

Sarah:
That’s been our last four weeks.

Kyle:
We were spending $1,000 a month on take out. Last month it was 350, this month it was 270.

Mindy:
Yay!

Scott:
Love it. And there’s no reason to get it to zero. Sometimes you like take out.

Kyle:
Yeah.

Sarah:
Now it’s like once, maybe twice a week. And that’s it.

Kyle:
Yeah.

Scott:
That’s a huge, incremental thing. So those are the variable expenses.

Sarah:
Correct.

Scott:
We have fixed and variable. I love that you’re starting with that, you’re going to make an immediate dent with that. But I want to dive into the fixed expenses because we’re talking about the 80-20 rule with finance, that’s your 80%, or at least your 65 or 70% in your case.

Mindy:
Hold on.

Scott:
So what’s compiling… Oh, go ahead, Mindy.

Mindy:
Before we jump into those, I want to know what you did with the money that you saved on take out. So you were spending $1,000, and then this month was only 270. What did you do with that money?

Kyle:
I just keep it in my bank account.

Mindy:
Okay.

Sarah:
But I think that we had a lot, so this month we had a lot of Christmas or gift expenses. We have a gifts category. So we had a lot of gift… That went up this month.

Kyle:
[crosstalk 00:14:53].

Sarah:
So this month it’s starting to even out a little bit. But what else?

Kyle:
But it’s not like I, when we save extra money, it’s not like I immediately move it to a different account. So I have an account with Capital One that gets a half a percent return, so that’s like a revolving amount. When I don’t need it in my checking account, it just goes directly there. I stopped contributing to any of the mutual funds when coronavirus happened. I was like, “All right, let me see where this is going to go,” and I stopped contributing to that at all. Then I read the book Simple Path to Wealth, so then I’ve been… I do keep that money with an advisor and I’ve been thinking about moving that, I opened an account with Fidelity, so that I had an HSA qualified health plan, but wasn’t putting money into an HSA.
So I now have an HSA through Fidelity that I’ll fund and we had separate health insurance, but as of the first of the year, we will be together, so then I can contribute to the HSA on her behalf, as well. So we’ll be able to max that out.

Scott:
I love everything I’m hearing. It sounds like you were doing just fine previous to this, before it started doing this.

Kyle:
I’m kind of doing it blindly.

Scott:
Yeah. But you were clearly, you’ve clearly been accumulating some assets, you’re ahead of most people in terms of your money situation. When you started this journey, probably it sounds like six months ago, seven months ago, maybe more in earnest, and now you’re starting to figure it out and the pieces are starting to come together and you’re making strides on the income front, or I don’t know… We’ll talk about that in a second, but you’re making strides in the expense front, you’re making strides in the allocation of the capital that you’re accumulating, and I think it’s great. This is really fun here. Let’s get into the fixed expenses and life insurance. What is going on there? What’s the largest of your fixed expenses?

Sarah:
The largest would probably be, I think it goes mortgage, and then it goes daycare.

Scott:
Okay. Mortgage and then daycare. And what do you think the amounts on those are?

Sarah:
So our mortgage right now is 1600. We are in the process of refinancing so that’ll bring us down to about 1350, I think, and then daycare is 1500 a month.

Scott:
And then what else is going on in that, you said 5500, so we’re at about-

Sarah:
Yes.

Scott:
… 3100. What else is going on in there?

Kyle:
After that, our grocery expense is about $1,000 a month right now. So I have auto insurance, our fuel, and my car loan all under auto expense, and that comes out to about $600 a month. Which that will be going down after, talking to my accountant, he doesn't think I… So I have my, the car that I use at work is under my personal name. He thinks I should be switching that over to the business because I use it more for business than for me, which I never really thought about it that way because I consider it my personal car, even though I don't use it really. I use it more for the business than I do for my personal. So the payment and the insurance on that will get switched over the business, as of the first of the year.

Scott:
That’s going to be a huge advantage for you because you’re going to be able to deduct a lot of the expenses associated with that. We can’t, I don’t think, comment on that, as not being accountants, what the appropriate move is there, but if you’re doing that, that will certainly save you some money in taxes, I think.

Kyle:
Yeah.

Sarah:
Yeah.

Kyle:
We use her car as our personal car and then that’s really just… I use it 70% for work, so he thinks that it should be moved over into the business expenses.

Scott:
Great. And is this the sum total of what you consider your fixed expenses?

Sarah:
Oh no.

Scott:
Mortgage, daycare, grocery, auto. Okay, go ahead.

Sarah:
So then we have our health insurances. Kyle’s is about 270, 300. Mine comes out of my paycheck. It’s $500 a month. But that is outside of the 2400 a month I bring home.

Scott:
Great.

Sarah:
So it doesn’t directly come out of our income, but it still affects expense for us. And then what else do we have? Internet, cable, that’s 150. Jiu jitsu.

Kyle:
I go to jiu jitsu every month, so that’s 150. I did have a motorcycle loan, and I just paid that off, I think it was six weeks ago. So that’s no longer-

Scott:
Congrats.

Kyle:
Thank you. And then so we do $50 a month on pet insurance, then we have $30 for-

Sarah:
Rental insurance.

Kyle:
Rental insurance.

Sarah:
No, not… Home insurance. Not rental insurance.

Kyle:
Yeah. Home insurance, but the housing insurance, our house insurance only covers the outside, this covers our stuff on the inside in case something were to happen. And then Spotify and Netflix.

Mindy:
Okay, so I have a question about the insurance. You have home insurance. Do you not have homeowners insurance? Or that’s the-

Sarah:
Well, because it’s a duplex, it’s considered a condo. So we have a master policy.

Mindy:
Okay.

Sarah:
I know. It’s weird. We have a master policy for the whole outside building, for the building. And the for my $30 is for the inside, the walls-in home insurance.

Mindy:
Okay. Regarding auto insurance, or regarding insurance in general, do you have the same insurance coverage, or insurance company, for your auto, your mortgage, your house, your… Okay. That’s another thing I want to recommend that you do is reach out to multiple insurance companies. Hit all the big ones. State Farm, Allstate, Geico, Liberty, I’m trying to think-

Sarah:
I use Liberty Mutual for mine.

Mindy:
Reach out to all these companies and get a quote. Get all the things together and say, I want a quote on bundling them, and see what happens because a lot of times when you bundle them together, your rate will drop. You’ll get a discount, I think they’re called line discounts, for each additional thing that you insure with the same company.
Another thing that insurance companies do is not reward you for loyalty. Your rate will go up two or 3% every year. And you’ve been there for 20 years, all of a sudden you’re like, “Why am I paying so much for insurance?” You call another company and you’re like, “How much lower is my rate?” So if they’re not going to reward you with loyalty, do not reward them with loyalty. And every year or every other year, get a re-quote from all the same companies and see what they can do for you because it’s not that big a deal to switch your insurance company, especially when you can save a lot of money. You could save 15% or more on Geico. I actually have Geico and…

Sarah:
And you love it.

Scott:
You’re in good hands with Mindy.

Sarah:
Yeah.

Kyle:
Yeah.

Mindy:
But insurance is one of those things that you don’t think about. You just pay the bill every year, and oh, whatever, I can’t remember what it was last year. And then, that’s probably what it was last year. So just revisit it and see what’s going on every year, every other year.

Sarah:
I found it interesting, too, I think you said it on the last guy that you did when you were exploring his finances, that once you’re over 25 years old, you let your company know, and when you have kids, you let your company know.

Mindy:
Yes.

Sarah:
Your insurance company. I thought that was fascinating when you said that.

Mindy:
Yes, because then you’re a safer person after… When you’re 24 you are a reckless mess, but once you turn 25, you’re a responsible adult and you can go forth and prosper. And when you have a child, now all of a sudden you follow the speed limit.

Sarah:
Oh, yeah you do.

Scott:
I don’t know how attached you are, but I would wonder how that motorcycle fits into that in the insurance policies and those types of things.

Kyle:
So I used to have it on there in full insurance, and that cost me $68 a year.

Scott:
Okay. That’s not that bad.

Mindy:
$68 a year.

Kyle:
No, I used to just pay it.

Mindy:
Yeah. No big deal.

Sarah:
[inaudible 00:22:35].

Mindy:
Now, do you have a motorcycle license, Sarah?

Sarah:
I did.

Mindy:
Okay, so I have a motorcycle license, my husband has a motorcycle license. At one point we had a Honda Shadow. And a crotch rocket.

Sarah:
Okay. [crosstalk 00:22:48]I had a Honda Shadow. That’s what I got my license on.

Mindy:
Yeah. It’s a great bike. He had a crotch rocket. But by switching me being the primary on the crotch rocket and him being the primary on the Honda Shadow, we saved money because I am a woman, so therefore I’m better. According to the insurance company.

Sarah:
Yeah. That’s so crazy.

Mindy:
And we didn’t ride them very frequently. We don’t have them anymore, but the same with sports cars. Go ahead, Scott.

Scott:
Well, I just wanted to zoom out for a second here and say when we list your expenses out one by one here in the fixed category, we’ve got a mortgage for 1600 bucks, we’ve got life insurance for 1,000, we’ve got daycare for 1500, groceries for 1,000, auto, health, internet. It’s almost like there’s so much opportunity here, I think, for you to make progress over the next year or two, and systematically reducing each one of these fixed expenses, that is going to be, I think the biggest opportunity for you in your finance. And what I think is interesting, and I’m really glad we started with insurance here, insurance is actually one of the smaller components of your overall spending in this category, but it’s the most easily actionable one, it seems like, in the first step. And so I think that when I’m zooming out, think about our framework for attacking this, I think which ones… You’ve already got the variable expenses and it sounds like you’re under control there and know what’s going to make you happy and what’s not. And you’ve made a $750 drop in those in one month or two.
But this is, I think, the interesting part. So I think when you talk about insurance, that’s perfect, is to think about putting them all on one thing. With health insurance, you guys are now spending $800 a month on health insurance, and Sarah, you’re spending $500 a month out of your paycheck. Kyle, I would wonder if you could talk to your insurance, or your accountant, or your insurance broker and see if there’s a way to get Sarah on your plan

Sarah:
We just did that.

Scott:
Okay, great.

Sarah:
Yeah, so starting January, I will go onto his plan, and I think it’ll go down about 720, 730. Something like that. But right now, my doctor’s appointments, I pay $170 every time we have to bring our daughter to the doctor’s, on top of my $500 a month. So with his, it’ll lower it just a little bit, but we won’t be paying out of pocket so much. We’ll have a $20-30 copay. So that alone is awesome. I’m excited for that.

Scott:
Great.

Kyle:
Yeah.

Mindy:
I’m excited for you.

Kyle:
Yeah, it will lower our expense when we actually do use it. Hers also isn’t HSA qualified, so now that we’ll be together, we can hit that max as put money into the HSA, so we’ll save that money there, on top of saving money when we actually have to go to the doctor.

Sarah:
Yeah.

Scott:
Love it. I just looked at that and thought there’s an opportunity there with the way you run your health insurance. Love that you’re already on top of that and making that move. That’s going to save you some money and make your lives a lot simpler, and I love the HSA max out way you’re thinking there. Moving back up to auto, you’ve got an insurance loan. What’s your interest rate on that loan? That car loan?

Kyle:
3.49.

Scott:
Okay, so it sounds like that’s not really an opportunity for us here. You could pay it down, but a lot of people would rather invest or do something else with the excess cash flow. How are you thinking about that?

Kyle:
So it’s $40 a month in interest right now. I just refinanced in, what, in the beginning of the year? So I’ve had the car for two years. It was at 4.99 and then it got to 3.49. I just refinanced it. So that’s how, I think I put $2,000 down when I refinanced it. I originally had financed about $18,000. So I put two grand down and then I’ve been… The bank that I got the refinance at has a coin machine, so when I trade in all my coins, it goes directly to my car. And I do that three times a year. So I’ve been paying it down a little bit faster by doing it that way, but I don’t really care to pay it off. It’s only-

Sarah:
Yeah, it’s not huge.

Kyle:
It’s $260 a month. And now it will be under the business, starting next year. So it won’t even really affect me all that much, if I continue to use the loan and pay it out outright.

Mindy:
Yeah, once it’s under the business I wouldn’t pay it off really at all.

Kyle:
Yeah.

Mindy:
I would just pay whatever the-

Sarah:
Yeah.

Mindy:
… going rate is.

Kyle:
Yeah, that’s my plan on that.

Mindy:
So I want to jump back to that insurance really quick. Now that you’re not paying $500 a month pre-tax for your insurance, I want to see that in your 401K. You had mentioned at the beginning of the show that you had increased your 401K, and then you were going to pull it back. But you’re all of a sudden going to get $500 more a month because you’re not on their insurance anymore.

Scott:
Or the HSA.

Sarah:
Okay, so we’re going back and forth currently about the 401K, because I put in 8% and I get… So if I put in the 5%, I get the 4% match. But I was putting in 8%, getting the 4% match. That’s what I’ve been doing for a while. Then I just recently, the past month, 35% to get about an extra 400, 500 in it. It was once I paid off my student loans. I had the extra 400, so I was trying to get it into the 401K.

Scott:
You just paid off student loans, too. That’s awesome.

Sarah:
Yeah. That was huge, so we’re excited about that. But now we don’t know. We don’t know if we should put it into the 401K or if we should put it into index funds. We don’t know where to put it.

Scott:
I’d put it into an index fund in the 401K. Those are not mutually-

Sarah:
Okay.

Scott:
Well, look. Let’s zoom out.

Mindy:
That’s an option.

Scott:
Let’s zoom out and talk about the broader context of the, do I invest in the 401K or not? When I started at my very first point building wealth, I did not put any money into my 401K, except for that which I got a match.

Mindy:
Against somebody’s better judgment.

Scott:
But the reason I did that is because I was saving up for a house hack. And I was like, that house hack is going to produce a way better return than the money in the 401K. I’m not making that much income right now. I think I’m going to make more later, and be at a higher tax bracket, so for me, at that point, it made sense in those circumstances, not to invest in the 401K. A few years went by and I had a surplus of cash and did not have a lot of time to invest actively in house hacks or more rental properties. And so now I maxed out my 401K every year. But in general, I think that there’s an advantage to doing that in some cases. What are your thoughts?

Sarah:
My thought was always max out the 401K if I can. But I think lately we’ve been having reservations because we won’t be able to touch that money until I’m 59 and a half. So that’s where our reservation lies. Are we okay locking it up til I’m 60? Or do we want to put less in there and more in the index funds so that we can touch it when we want?

Kyle:
It’s also a Roth 401K.

Scott:
Great. Yeah, that’s what I do is a Roth 401K.

Sarah:
Yeah.

Kyle:
Okay.

Scott:
But there’s a whole thing around that. Well, let’s zoom out here. You guys are bringing in 11, 12,000 a month, whatever we determined, after tax. And you’re spending 8500, maybe a little bit more than that, on a regular basis, but you are accumulating somewhat.

Sarah:
Yeah.

Scott:
Within six months to a year, I believe that you guys are going to be in a position where you’re accumulating five or $6,000 a month after tax. So I honestly believe that, based on this discussion here, that that’s a very reasonable outcome for you guys, as you transform your financial position here. Cut these fixed cuts and perhaps see some income increases or whatever, or other economies. When you get to that point, you’re going to have the option to both max out your 401K with that $19,000 limit, and have tons of cash left over for after tax activities. Which I think is a pretty exciting potential reality. What’s your reaction to that? Am I giving you a realistic vision? Or am I in fantasy land?

Sarah:
I think that’s pretty realistic. But I think also, Kyle doesn’t have a 401K. So that even makes me feel like because he doesn’t have a 401K, yes, I should put more into mine.

Scott:
Why don’t you have a 401K?

Kyle:
I looked into what the fees were going to cost me, as being a business, and none of my employees have any interest in putting into it. So by the time I pay the fees on getting it set up, it was going to cost me more money to have it than if I just didn’t do it at all. I’ve also been searching for my first income property for about three months now. So I read a book about 401K and was like, max out your 401K, and now I’m on chapter nine of your book, and I’m like, well we shouldn’t be putting anything into a 401K. We should be buying income properties.

Scott:
Well, let’s talk about this. How much liquidity do you have outside of retirement accounts? What’s your cash position in general?

Sarah:
About 150-ish.

Scott:
You have $150,000 in cash?

Sarah:
Well-

Scott:
Outside of retirement accounts.

Kyle:
Outside of retirement accounts and outside of our one year expenses savings.

Sarah:
It’s a non-qualified invested account. So it’s not a retirement account. They’re two individual accounts that are invested in the market. But if we wanted to cash them out now, we could turn around and take all the cash.

Scott:
Great. So you have access to liquidity that you could use to deploy in whatever you’re interested in-

Sarah:
Yes.

Scott:
… including real estate.

Sarah:
Yeah.

Scott:
So look, again, I think you think about where you are now, and you’re accumulating, it sounds like a few thousand dollars a month, on average? Is that right?

Sarah:
Yeah.

Kyle:
Yeah.

Scott:
Prior to this? Again, I think once you attack these fixed expenses, it’ll take you six months to a year to go through some of these changes. You’ll be able to knock out a fee with the health insurance. But we haven’t even got to grocery, daycare, mortgage, life insurance yet. As you attack those, I think you’re going to go from accumulating, two, $3,000 a month, to five, $6,000 a month. And so that’s not going to be a problem. Cash is going to be a problem for you in the short run, but I think on an accumulation basis, it may not be, which allows you the option, again, to both max out and have plenty left over to have all the fun you want in the real estate or business re-investment world. Mindy, what do you think?

Mindy:
I was just going to say the same thing. I really, really, really like the idea of contributing to your retirement accounts, your pre-tax retirement accounts, when you’re young. Kyle, you’re 32? And Sarah, how old are you?

Sarah:
32.

Mindy:
Okay. So I read this study way back when I was young enough to do something about it, and I never did anything about it, so don’t do what I did, but if you contribute, let’s say $1,000 a month to your retirement accounts from age 22-30, and then never again, and then $2,000 from 30-65, you’ll have more in your retirement accounts if you started when you were 22 and did it for eight years than if you started at 30 and did it for 35. And I know somebody’s listening to this and is going to correct me, and that’s great. I would love you to correct me and let me know where that information is incorrect, but it’s not, because I did the math, and you have a ton more thanks to the power of the 8th wonder of the world, compound interest.

Sarah:
Compound interest. Yeah.

Mindy:
Arnold… No, Arnold Schwarzenegger.

Sarah:
[crosstalk 00:34:04]was him.

Mindy:
Albert Einstein said that. And he didn’t actually. Somebody corrected me on that, too. And that’s okay. Somebody said it, and they’re right. It is the 8th wonder of the world, but it is amazing. So I would love for you to be able to put more into your 401K because you’re 32 years old. You’ve got a ton of time until you are 65 or 59 and a half when you can take it out. You’ll still need money then. You have a daughter. Maybe there are more coming, maybe there aren’t, but you will have more expenses down the road. I would put away while you can, reduce your taxable income. I’m sure you’re paying a lot to Uncle Sam. You don’t need to. You can keep that for yourself.
The HSA, maxing that out is going to be huge. And you said you can max it out for her, as well. You could also max it out for the baby. I think the family max is $7,000 a year contribution? I would love to see that maxed out.

Kyle:
Yeah. That’s-

Mindy:
That just grows and grows. We have a friend of the show, Brandon, the Mad Fientist, wrote an article called HSA: The Ultimate Retirement Account. You just put money into your HSA. What I do is, I max it out every year and then I don’t take money out. I just keep throwing it in there. We are blessed with health and we have nominal health expenses. I save all my receipts and in 10 or 15 years, I can start pulling that money out. I don’t need to get reimbursed this year. I can get reimbursed in 10 years, for my expenses now. So that’s going to help.

Sarah:
Oh really?

Mindy:
Yeah. That is something that I don’t think is as well known as it should be. So I’m going to send you a link to this article. I’m going to add a link to the show notes for this episode, which can be found at biggerpockets.com/moneyshow164, and that’s an awesome article, and he goes really into the ins and outs of how you can use the HSA when you’re not using it to pay for medical expenses. But I would love to see you maxing out, by the end of 2021, 2022, maxing out your HSA and your 401K, your Roth IRA, Kyle. Sarah, do you have a Roth IRA?

Sarah:
No. I only have the Roth 401K.

Mindy:
Okay. Scott, you could have both, correct?

Sarah:
You can have both.

Scott:
Yeah. I just want to address something on the retirement accounts. Kyle, you quoted Set For Life, and thank you for that plug there. In that book, where I think I'm confusing people is I say retirement accounts don't count as that financial runway or tangible wealth. But remember, in that book, I'm talking to the 50,000 or less income earner per year, starting with zero, and not saving anything. And how to compress that and get off to the races. And for that, I think working towards that runway and then house hacking is a critical thing. You're not in that position. You guys earn well into the six figures. You have hundreds of thousands of dollars in assets, and potential to generate a tremendous amount of savings.
So for you, I think you can have your cake and eat it, too, by getting the tax advantages or, with these retirement accounts, and having plenty left over. So you can move toward financial freedom both by creating that tax advantage position, and by investing after tax in assets like brokerage accounts and real estate. Is that helpful?

Sarah:
Yeah.

Kyle:
Yeah.

Scott:
I’m sorry. I’m confusing folks, but it’s really that specific circumstance that I think is where that makes a lot of sense.

Sarah:
Yeah.

Kyle:
Okay.

Mindy:
Okay, great. So I want to, I believe you can have both a Roth 401K and a Roth IRA. Is that correct, Scott?

Sarah:
You can.

Mindy:
Oh, sorry.

Scott:
Yes.

Mindy:
Great. Then I want you to have that, too.

Scott:
Well, I got another thing here, we got a lot of stuff on that, but this might go a long time, guys, because we’ve got a lot of stuff here with this. So Kyle, you own a business with employees, right? I would suggest that you go shopping in the next couple of weeks and get that 401K plan set up because you can play a whole lot of games with your 401K there to shield income. So as we talk about your business, we probably won’t even get to your business today, but I bet you as you focus on your business and scaling revenue and income, you’re going to generate more profit and you’re going to want to shield more income from taxes.
You can conceivably get up to 30, 40, $50,000 into that IRA through your business, especially if you have employees, via profit sharing and other types of items like that, when you go and set that up. I think you should go and get advice. I’m not sophisticated enough to tell you exactly what to do there, but I would get on the phone with five or six people and sit down and just go through the mindnumbingly painful exercise sorting out the sales people from the actual value creation. But you can set up plans really in your favor, if you’re able to go and research that and figure that out. It will fry your brain a little bit as you go through the nuances that allow you to do that and the technicalities. But that’s a really powerful mechanism for business owners with employees, in situations like yours.

Kyle:
Okay.

Mindy:
I have a self-directed solo 401K because I have a separate business outside of working for BiggerPockets, and I am able to put up to $54,000 a year into my 401K contributions. That’s my own 19,500 contribution for this year, and then my company can match my salary up to 25% of my salary. They can match that into my 401K. Now, that works for me because I am self-employed with no other full time employees, except for my spouse. This is something, again, it doesn’t…

Scott:
It’s better when you have employees, though. Because I set this up, without going into specific details, as an employee of BiggerPockets, I set this up for our founder, a plan like this, and was able to achieve some really good gains there, as well, without going into too much detail there.

Mindy:
Okay.

Scott:
But you could be able to do something like that, too. This is exciting. Mindy and I are having a lot of fun. We have so many ideas.

Mindy:
I’m so excited.

Kyle:
What type of person would I talk to about that? Would I talk to my regular financial advisor about setting that up?

Scott:
Talk to your financial advisor about it and ask for referrals to folks who could set that up. Because you’re looking for basically a company retirement plan, and you’re going to set it up. Since your employees don’t seem like they’re interested in the retirement accounts, that allows you to set that up and maximizing your personal advantage, rather than necessarily as a benefit to employees, you could also choose to set it up to incentivize employees and retain them. But that’s going to be an option you’re going to have to discuss with the plan advisor.

Kyle:
Okay.

Scott:
But yeah, I would talk to your financial advisor for a referral there.

Mindy:
And I want to say, just while we are having the discussion about your company, you are a mechanic. Are you on the Car Talk trusted mechanics list?

Kyle:
I am not.

Mindy:
Okay, so Car Talk is a… Well, it was, and maybe it still is, an NPR show. It is two guys, the smartest men on the planet, who love working on cars. They went to MIT and then they went and opened up their own auto mechanics business and people will call in and say, “Hey, my car’s doing this,” or, “It’s making this weird sound,” and they’re like, “Oh. I know what that is. It’s this.” It’s this weird thing and they’ve even taken the actual car to other people, mechanics who have looked at it and can’t find it, and they’d diagnose it over the radio, which I find fascinating. But anyway, they have a mechanic files. If you can get your shop listed on their trusted repairs list, any time I move, I go there to find a mechanic because they won’t list you if you’re a scammer. And you don’t listen to my show if you’re a scammer, so I know you’re honest.

Sarah:
[crosstalk 00:41:46]scammers.

Mindy:
So I want you to get on the Car Talk mechanics list, as well, and see what that does for your business, too. Do you have a manager for your company, for your business, or is that something that you do yourself?

Kyle:
That’s basically my role.

Mindy:
And how many employees do you have?

Kyle:
So right now, I have four.

Mindy:
Oh okay. I don’t really know anything about the mechanics business. Yay.

Scott:
I don’t think we’re going to be able to get to the aspect of increasing your income on the business side today just because of, from a time constraint, although I’d love to talk to you about that. That’s one of my favorite things in the world.

Kyle:
Oh. Well [crosstalk 00:42:27].

Sarah:
Yeah. Sign us up.

Scott:
Maybe we can have a second episode. But I do want to continue rolling through some more of these fixed expenses because again, when we look at financial positions, there’s always one lever. It’s spend less, earn more, invest, or create. And you have two huge levers in my opinion here. Right now. You’ve got your expenses, your fixed expenses in particular, and then you’ve also got that income potential with your business because you have control over that.
And so today we’re focusing on all of the expenses, maybe we can come back and do the income another time here. But let’s continue marching up the ladder here and go into groceries. Which I don’t think we need to spend a ton of time on, but I know Mindy has some things to say about it. So you spend $1,000 a month on groceries.

Mindy:
Yeah. That seems a little high for two people and a baby.

Sarah:
You should see what the baby eats.

Mindy:
I’ll give you that.

Sarah:
I think it is a little high. I think we could easily drop it down to 800.

Mindy:
Okay. [inaudible 00:43:27]fair.

Sarah:
And then even a little bit more, but-

Mindy:
Episode number three of the BiggerPockets Money Podcast featured Erin Chase, who talked about how to get your grocery budget under control and one of her top tips was just shop the sales. Get the grocery store sale flyer and look at what’s on there. Oh, chicken’s on sale this week. I guess we’re eating chicken. Or pork is on sale this week. I guess it’s pork.

Sarah:
Yeah.

Mindy:
Or we’re going to have a meatless Monday or we’re going to have three meatless days. Meat is a big expense. I don’t know if you’re vegetarian or…

Kyle:
I’m a protein-tarian.

Mindy:
There’s so many ways to-

Scott:
What did you say?

Kyle:
That I’m a protein-tarian.

Mindy:
Protein-tarian.

Scott:
Okay, got it. Perfect.

Mindy:
Oh hey. So my friend Dan did a study, what is the least expensive source of protein? And eggs came up as his least expensive source of protein.

Sarah:
We do eat a ton of eggs.

Kyle:
Yeah.

Mindy:
Yeah, I do, too. But just shopping the sales and having a plan when you go to the grocery store. That’s my huge problem.

Sarah:
Yeah, we can be better about that. Yeah.

Kyle:
Yeah, we literally, up until maybe three weeks ago, would just go to the grocery store and then figure out what to make with it when we got home. And that wasn’t working, so we started doing Crock-Pot meals and then planning out my meals for the week. I’m the one that goes, I will go get takeout food, especially Chinese food, about seven times a day. It doesn’t bother me. So that’s my biggest weakness. So planning out my meals for the week-

Scott:
I’d take that grocery bill and the amount of money you’ve been spending on takeout, and call it food. And say, what can I do to that budget that’s reasonable? This is not a eat rice and beans forever, you don’t need to do that with your income, but it’s like, do I have control over that budget, or is it spiraling? And I think you’re going to do just fine. I think you got $1,000 to cut out of that overall food spending budget on a monthly basis, and still be delighted with what you’re eating. Is my guess, I guess.

Mindy:
Oh, the Savings-Sherpa. What episode was he on? He spends like eight cents a month or something on his grocery budget. I can’t remember. Let me look him up because that was a really good one. He had a lot of great tips.

Scott:
Let’s talk about daycare real quick.

Sarah:
Ugh, okay.

Scott:
While we look that up.

Mindy:
Scott, who has no kids.

Scott:
So what’s going on with that?

Sarah:
Yeah, Scott. Get ready.

Scott:
I’m here to learn about this one. So I’ll let Mindy chime in with the advice here.

Mindy:
Okay. So, the Savings-Sherpa was episode 75. And he really does an excellent job with his budget, his food budget specifically, and his website can help you with a lot of great tips, as well. And basically he is also shopping the sales. Back to the daycare, $1500 is a huge bite. I totally get that. Totally understand. But this is your baby. I’m assuming you shopped around and looked. Finding one with an opening is-

Sarah:
It was… Yes.

Mindy:
… difficult.

Sarah:
We found two with openings for us. We went and looked at one, and we liked it. We went and looked at the less expensive one and we walked out as soon as we could.

Kyle:
Yeah.

Sarah:
And so then we signed up for the first one. We love it, thank God. We think it’s awesome. She’s doing great.

Kyle:
Yeah. She learns so much there. They have a good academic plan, and I know everybody thinks their kid’s advanced, but she really is over the top advanced. She basically has already potty trained herself. She’s just-

Mindy:
Lucky you.

Kyle:
Above and beyond.

Sarah:
She’s great, the daycare’s great, but it hurts our pockets.

Kyle:
Yeah.

Sarah:
Definitely.

Mindy:
And that is going to be another three and a half years until she’s in Kindergarten?

Sarah:
Yeah. And then we get nervous about adding a second kid into this mix and paying for daycare for two.

Kyle:
Yeah, because it only doubles that expense.

Sarah:
Yeah.

Mindy:
Does the daycare have any discounts for having an extra kid?

Sarah:
They have a 10% discount for having two kids in there, but the infant expense is more than $1500 a month.

Kyle:
Yeah. And we were paying that.

Sarah:
And there’s also COVID charges.

Kyle:
Yep. Now we’re getting weekly COVID charges.

Sarah:
And it used to be we could put her into daycare for 10 hours a day, and now with COVID, it’s only eight hours a day. So that limits, or that has lessened my working hours a little bit, but yeah, it’s our only option right now. A nanny would be just as expensive.

Mindy:
Yeah, so well, with two kids, a nanny might be better because then it's $1500, assuming that she would charge the same for both kids, when my husband and I were having babies, I made nothing. I made absolutely nothing and I wanted to stay home with my kids, which is not the choice that all parents make, and this is not a judgment on anybody, but it didn't make financial sense for me to continue to work because I had such little income. So I did go and stay home with my kids. When you have a second kid, would it make sense to stay home? Do you want to stay home? Is there any sort of hybrid solution you can do? Or can you stay home, or step back a little bit, Kyle, and maybe promote somebody from within to manage the shop and do some of the things that you're doing, once your real estate agent business ramps up?

Kyle:
So, that actually is my plan. My goal for this year was to get somebody in my office, running my office, so I could take over the manager position. My goal for next year is to have two people in my office and the one that I have there now will hopefully become the manager, because it’s really, the manager role is only really about 15 hours a week. So he can basically do his job and be the manager, if I hire somebody to fill his position for the full day.
So my goal is to have him become manager, manage the operation while I’m there, and then I only really need to… I’m trying to get my work week there down to about 10 hours a week. Go in on Mondays and Fridays to check numbers, and as long as everything’s good, then have a team meeting and leave. So I do see extra time in my future, but it’s probably going to be at least another year before that happens.

Mindy:
Okay, so that’s just something to plan for in the future, if you could get the daycare costs down a little bit, that would be great, but again, you don’t want to just go with the bottom of the barrel. You went to the discount place and you’re like, how do we get out of here?

Kyle:
Yeah.

Sarah:
Yeah.

Mindy:
Yeah. That’s-

Kyle:
And in my mind, I’m like, I’m not trying to get to the point in the next three years where I don’t have to work at all. So having this expense up front and knowing that my daughter’s getting a good education, even though she’s only 18 months old, you’d be surprised how smart she is. The stuff they teach her there really, I don’t think I could teach her that stuff. So having her go to an academically run daycare makes me feel like the expense is worth it, especially where it’s not driving me into poverty. And I do plan on doing real estate, so hopefully I’ll have X amount of income that will hopefully pay for daycare for me in the coming future.

Scott:
I love it. You can’t argue with a lot of this stuff. This is one of those things that sounds like it’s really important to you and you’re willing to spend on it, it means a lot, and I love the attitude of, it is what it is, I’m going to finance it with passive income. That’s an outstanding answer to it. It’s not a, I can’t afford it, how can I afford it, right?

Kyle:
Yeah.

Sarah:
Yeah.

Scott:
Anything else you want to add on daycare?

Mindy:
No, not on daycare. I want to move to the life insurance discussion. Because this is $1,000 a month. This is $12,000 a year. I don’t have life insurance, so I don’t know if that’s a normal cost, but it sounds high to me. I don’t want to just sit here and plug all of our episodes, but we spoke with Joe Saul-Sehy on episode 139 called Everything You Never Wanted to Know About Life Insurance, But Absolutely Need To. And I’m wondering if that is a changeable cost? Is that something that you really need?

Sarah:
It breaks down, it’s actually 850 a month, and it breaks down… He has disability insurance. And he pays about 115 a month on disability insurance so that if anything happens to him, he still has enough money for us to pay the bills, since he’s the biggest income maker. And then his life insurance is a little bit more expensive than mine. His is 425 and mine is about 312.

Mindy:
Okay, so that’s both of you.

Sarah:
Yes.

Kyle:
Yes.

Sarah:
So, our understanding of this life insurance is it’s at cash value life insurance that we can use as retirement income, if we decide to use it as retirement income, rather than just saving it for when we’re gone.

Kyle:
It is a universal, permanent life insurance policy. I did listen to episode 139. When he started to talk about how you can over-fund and then you can basically take a loan against your policy, the money stays in your policy, and we can invest the money inside of our life insurance policy, into an index fund if we like. We can take a loan against it, meaning the money stays in the life insurance policy, accumulating wealth, while we can also loan against it, tax free. So it won’t be available to us for about 10 years because of the ramp up in-

Sarah:
Cash value.

Kyle:
… actual cash value. I don’t know if you’ve ever heard of Garrick Anderson. It’s a lot of his style of teaching of using life insurance policies to build wealth through that. I don’t really know everything about it, but it’s been something I’ve been into for a while. So-

Scott:
Who set up this policy for you?

Kyle:
My financial advisor.

Scott:
Okay. He’s not going to like me very much. Your financial advisor is likely not a fee-only financial advisor. Your financial advisor is likely getting a commission on this life insurance policy, would be my guess. Is that correct?

Kyle:
Yes.

Scott:
What I would do, following this call, is I would have a call with two or three different fee-only financial advisors and tell them your situation, invest the $1,000 or however much it’s going to cost you for the consultations and those fees, and I would get some second opinions on that, because this person who has got… They may not be a fiduciary, I don’t know, in your best interest for that.

Sarah:
They are.

Scott:
They are a fiduciary? Okay.

Sarah:
Yes.

Scott:
But they’re also getting a commission for your life insurance policy and certain things that you’re going to set up. And I just think it’s helpful, even if you’re going to keep, you can keep working with them, but to get that second opinion from somebody who is just a fee-only, thinking about that. Because that incentive is not there.

Sarah:
Okay.

Kyle:
Okay.

Scott:
Does that make sense? Mindy, what do you think about that advice?

Mindy:
I think that’s actually really smart. One of the things that Joe had mentioned in that episode was that a lot of times the financial advisors and financial planners aren’t necessarily working in your best interest when they are recommending these policies. I don’t know enough about life insurance to know that this is good or bad. But I would definitely recommend finding a fee-only financial advisor, and a great place to start looking for one is on the XY Planning Network. That’s xyplanningnetwork.com. That’s a free resource to find fee-only financial advisors in your area. That was created by Michael Kitces and somebody whose name I’m drawing a blank on.

Sarah:
Mm-hmm (affirmative).

Scott:
Yeah. I got to admit something here. I was on a call with a financial advisor recently, because I was thinking about some things and I have some new good problems with the job, being a CEO here and that kind of stuff, and this guy painted a picture of a similar policy. He painted a picture of, man, if you had just had an active manager, we would have sold at the bottom of that little dip. And I’m like, I’m sitting here, I do the BiggerPockets Money Show Podcast, I’ve done 150 episodes, and I’m being sold by this guy and feeling like… I didn’t do it. But I was tempted because he was so eloquent about it and he has so many other high profile clients that are very successful with that. And I just walked away being like, man, if I’m sitting here and I do all this stuff and I just heard, I just heard Joe, interviewed him myself on the insurance philosophy and I’m thinking about it because it’s so tempting, there’s something here.
And there are specific cases where a universal life insurance makes a lot of sense, but I just think it would be helpful to get that second or third opinion from a couple of folks who aren’t designing a portfolio to get a lot of assets under management and to get a lot of insurance policies set up, because that’s how they make their money. Look, I just want to say here, it was really hard for me to turn the guy down, frankly, on some of those. And again, this is what I do for a living. So that one piece.
The second thing I want to say about life insurance is one of the advantages… Look, there are specific cases, and this is why you should get really specific advice. We don’t have time to dive into here on the show, but as a general framework, after discussing this with Joe, the advantage to some policy like this, in my opinion, outside of the insurance… We talked about the insurance piece. There’s the peace of mind piece, which you can get through a term policy, for example. Outside of that, though, there’s the guarantee and the ability to, after tax, access some of the contributions prior to retirement, to fund things maybe as a source of liquidity.
I think, if I’m thinking through your situation, my instinct, this might not be the right answer, but my instinct is to think, how do I shelter as much money as possible, pre-tax, through other mechanisms like the HSA, like the 401K, like your employer 401K that you may be able to set up, for example, with a pension or whatever those types of things are that allow you to put that. And then if after you shield that 75, $80,000 in income, you’re still making two, $300,000 because your income’s exploding over the next couple of years when we talk about your business.
Then, and you still have more cash, then I think that that’s where some of the components of this life insurance policy stuff may make a lot of sense, because that’s when you can begin sheltering even that excess cash flow from taxes there.
So that would be my instinct on your life insurance policy. It may not be correct, and it may be something just to do more research on, but hopefully that’s helpful.

Sarah:
I think you’re right. I think we need to do a little more research on it because I set mine up almost four years ago. He set his up about a year or so ago. But we weren’t looking for FI when we were doing that. We were on a different-

Kyle:
Yeah. We [crosstalk 00:58:56]mind.

Sarah:
We were on a different path, so to speak. And so I will admit something that I actually work for our financial advisor. So it’s a little more personal than your average financial advisor. But

Scott:
Oof. [inaudible 00:59:09].

Sarah:
But I completely understand. I understand what you’re saying.

Kyle:
So we actually really have a great relationship with him, so-

Scott:
Okay.

Kyle:
So there’s nothing he’s going to personally. He does treat us very well. I do understand where our relationship lies, and as far as I’m concerned, regardless of what I choose to do with my money isn’t going to hurt our relationship with him. He’s not that type of guy.

Scott:
Oh, it’s never like that, by the way. I’m never saying that these folks are trying to take advantage or anything like that, I just wonder if that… Incentives are always helpful to work out with the fiduciary who’s fee-only in some cases, in my opinion, sometimes.

Sarah:
Yeah.

Kyle:
Yes.

Scott:
Okay. So we’ve now talked about insurance. We’ve talked about your regular insurance, we’ve talked about life insurance, we’ve talked about daycare, we’ve talked about groceries, and we’ve talked about some of the other smaller fixed expenses. The last thing here, and I know we’re running pretty long, is the mortgage. Do you have any thoughts on your living situation? It sounds like you’ve read some books. Maybe you’ve encountered the concept house hacking. What are your thoughts there, generally? There’s no right or wrong answer. I just love to hear it.

Kyle:
So house hacking is a difficult concept for me because we have dogs that don’t necessarily like other people. And I love my dogs more than any person other than the people that live in my direct household. So in that sense, I’m thinking house hacking could never work for us, but I’ve already gotten pre-approved to look at multis. I’ve looked at a couple in our area, so I actually live, or we live about 30 miles from my shop, so I have a pretty good commute. So I was thinking of moving closer to the shop, but the average house near my shop is about $700,000. I don’t want to live that close to my shop. So we thought about getting a multi-family where we could house hack, but it has to have a yard that’s separate from every other tenant and that’s extremely hard to find around here.

Scott:
I thought you mentioned earlier that you live in a duplex. Is that-

Sarah:
So we live in a duplex, but we don’t own both sides. We own just one side.

Kyle:
And our yard is completely separate from his, our entrance is nowhere near his. Nobody bothers us. Our other neighbor is maybe 150 feet in between our house and their house, so we have plenty of room here, even though our actual plot of land is very small, it’s cozy and nobody bothers us.

Scott:
Okay, so what I’m hearing is, you’re not attached to your specific residence, but you are attached to a lifestyle that gives you a decent home and place where you can have privacy for your dogs. Is that correct?

Kyle:
Yes.

Scott:
Well, look, I think that’s awesome. And I think what I would just encourage you to do is I would say, can you find that? Can you maybe hire an agent or talk to a couple agents and say, “Hey, perfect world, does this thing that we’re looking for exist? Or are we in fantasy land? Is there a place like this that we could find?” Because that might be a way to really continue turbo charging things here. Or maybe you’ve got somebody who has also got dogs like that as a tenant. Maybe there’s a perfect tenant out there that would be willing to go in on that. I would just encourage you to leave your mind open to that possibility.

Kyle:
I’m completely open to it. I literally just signed up for my real estate classes because I’ve been trying to network with so many real estate agents that they don’t get back to me, or they send me that $500,000 three bedroom, two bath house near my shop, and I’m like, “That’s exactly what I asked not to look at. That’s not what I want. We don’t care about having some big fancy house.”

Scott:
Where are you located?

Kyle:
We’re about 20 minutes… So right now we’re in Haverhill, which is about 40 minutes north of Boston. My shop is about 20 minutes north of Boston.

Scott:
So I would check out… This is a plug here. I’m going to plug it real hard, but I would check out the BiggerPockets Real Estate Agent Directory and chat with a couple of the local agents in your market because they’re all investor friendly focused agents, and there might be someone there. You could interview three or four of them, and figure out which one might be able to help you. Maybe some of them are doing the south side or whatever, or not really in your area, but so look for that. But if you could find a good fit there, you might be able to find someone who’s not going to waste your time with luxury properties right next to your office that you don’t want.

Mindy:
That’s an excellent idea. Yeah, I’ve had those agents, and I’m an agent now and that’s exactly why I got my license, because I didn’t want to call them to set up a showing and then wait for them to get back to me a day later, and then, “Oh, we can’t see it for two more days,” and then by the time we get there, they’re like, “Oh, it’s under contract.”

Sarah:
Yeah.

Mindy:
That’s… No. I want what I want and I want it now and I want to see it because the market goes like this, so let’s get going, and I think it’s great.

Kyle:
There was a three family not far from us that I attempted to purchase and literally in the amount of time that it set up to get me into the showing, it took two days, it was sold. So at that point, I wanted to go that day when I saw it, and I literally saw it on Zillow. I know that’s not a place to be looking, but I have nobody else helping me really find what I’m looking for. So I found it on there, went to look at it, they were asking…
So here’s the other thing is, rental properties in our area are over the top. This was a three family, they were asking 600. It sold for 700. But for those apartments, the rent would only be about $1800 a month, which-

Scott:
That’s pretty good for an area like that, in my experience with Denver. That’s closer to the 1% rule with those. At 600 it’s great, at 700, maybe not so much.

Kyle:
That’s what I thought. At that point, you’re basically, hopefully breaking even. If not, you end up in a loss.

Scott:
Yeah.

Sarah:
Yeah.

Scott:
Yeah. Fair enough. So look, I love it. We just systematically walked through your variable and fixed expenses. You’ve done a great job of already beginning to track your spending and getting some control over your discretionary budget. And I think that we spent our time perfectly focused on the non-discretionary, the fixed side of things, and had a really good discussion through each line item, some of which are not going to be touched, and some of which I think you guys have a chance to explore, research, and really cut back on over the years, to expand that saving rate.
I wouldn’t be surprised, again, if you’re able to quickly, within the next three to six months, jump another 1-2,000 a month in savings, and begin approaching that 5-6,000 a month standpoint. What do you guys think?

Sarah:
Yeah. I’m up for a challenge.

Kyle:
Yeah. That’s exactly what I was thinking, but I also haven’t been thinking like this that long, so I don’t know, in my mind I was like, is this even really feasible? How do we get it down any more? And what do we do with it once we do get it down? Where do we put that money? That’s what I was curious about. I didn’t know whether to put that into retirement accounts or if it was worthy to put it into index funds or try to get into real estate.

Scott:
Yeah. Look, I think that’s a whole nother discussion. Look, why don’t we do this? Why don’t we have you guys back on in a few weeks and let’s talk about just that. Let’s talk about expanding your income on your business, and the asset allocation that we would want from this because you’re likely about to have this problem of too much money, which is a great problem, right? Rich Dad, Poor Dad calls it the problem of either having not enough money or too much money. You’re going to have all this cash, you don’t know what to do with it. What a great problem. We talk about retirement accounts, but it’s not that simple. Let’s build a financial fortress with a significant amount of liquidity that keeps you guys really able to sleep at night, some solid retirement accounts that are tax advantaged, and then go to town on your business, after tax businesses like real estate and your personal business. That’s a wonderful, fun set of challenges, I think.

Sarah:
Yes.

Mindy:
Yeah, I think that’s going to be a fabulous show. And that could be a regular Monday show, Scott. That doesn’t even have to be a finance review. That could be a regular Monday show where we dive deep into all the things that you could be doing, because I do see very easy, Sarah can max out her 401K. I see very easy, Kyle can max out the HSA. I see very easy, Kyle can set up a 401K plan and max or come close the first year, and absolutely max it out the second year, while Sarah’s maxing out hers, and the HSA, and even doing some after tax investments. The Roth IRAs. I would love to see the Roth… Sarah’s Roth, Kyle’s Roth IRAs maxed out. Sarah’s 401K maxed out. Kyle starting a 401K and maxing that out. Can you max out your 401K and your IRA at the same time? Not the Roth, the regular? I’m not sure.

Scott:
We’re getting really technical with some of those things. I think we should probably know the answer to that. I don’t know the answer to that. Yeah. So-

Mindy:
[crosstalk 01:08:27]

Sarah:
[crosstalk 01:08:29]as you can.

Scott:
Yeah. Okay.

Mindy:
Yeah, we will post that in the Facebook group. I want to double check with a tax advisor because I feel like you should be able to, but it also feels like maybe you can’t.

Sarah:
So the only thing we run into right now is, with his income, he cannot contribute to a Roth. With my income, I can. He makes too much to contribute to the Roth, so what he is doing, is he is doing a tax-deferred traditional IRA.

Scott:
We’re going to have a lot of fun here because that means that you’re not taking enough distributions out of your business and piling up cash inside your business, as well, from what I understand. Is that right?

Kyle:
Yes.

Scott:
Because you just listed, you said you’re taking 2,000 a week out of the business and sometimes a few thousand in distributions, but if you got income that’s above the Roth limits, something’s going really right for you, which is really exciting. Sorry. I’m just chiming in there with that.

Kyle:
I hired a business coach about two years ago and his first thing was like, you need at least three months of expenses put away. So I keep that there and-

Scott:
Perfect.

Kyle:
… [crosstalk 01:09:26]through that. I finance myself for a lot of… If we need new equipment, I’ll basically finance it from my savings so that I don’t have to pay any interest on financing stuff.

Scott:
Your coach is really wise with that, but it just means that next year you’re going to be able to pull out a lot more income that even you just discussed from your business, with that. So anyways, I’m getting excited. I’m getting antsy.

Sarah:
Okay.

Kyle:
I felt like we were going to come on this show and get a ration of how we’re doing everything wrong. I was like-

Scott:
No, you’re doing everything right. And all the pieces are coming together. It’s just, focus on progress, not perfection, and be happy with it because you guys are in such a strong position with this. You have all the good problems in the world and so much opportunity here.

Sarah:
Yeah.

Mindy:
Yeah. What I see you guys doing right, the most important things that you’re doing right is thinking about money, being conscious about money, recognizing that I don’t need to spend every dime that comes in, and you’re both on the same page.

Sarah:
Yeah.

Mindy:
That is so huge. There are people who have applied to be on the show and they are not on the same page and I actually asked somebody, is this going to be okay to talk about? Because I’m not sure from the tone of this application if this is going to be a real big wedge between the two of them.

Sarah:
Right.

Mindy:
But the fact that you’re both on the same page is fabulous. You’re thinking about money, you have the income to be able to finance the life of your dreams, you just need to focus a little bit. And I think that that’s going to be… When we talk to you again in a couple of weeks, you’re going to be like, I saved up this much money, I got this going on, this, this, this, this, this. And you’re just going to be on top of the world. You’re like, “I don’t even care that it costs $1500 for my daughter’s daycare because I just saved $10,000.”
So some of the things that we talked about today were your insurance. I think that is going to be a good one to look at. Your car insurance, house insurance, motorcycle insurance, any other kind of insurance that an insurance company like that would sell. I don’t know if something like State Farm or Allstate actually sells life insurance, but talk to them about bundling everything together in one and consider higher deductibles if you can afford that, which is… It sounds like you can.
Tracking your spending is, like you’ve already seen, it is going to just open up your eyes and you’re going to be astonished at both where the money is going, and how much you can save without feeling a pinch. You could cut out everything and just drink water and just eat rice and beans and peanut butter and jelly and totally feel the pinch and also save a lot of money. But just by being conscious of where your money’s going, you’re really going to be able to see where things are going and say I don’t want that to go there. I don’t want that to go there. I’m not going to get Chinese food seven times a day, Kyle.

Sarah:
Tell him, Mindy.

Mindy:
Once a day. And then cut that down to once a week. Because that’s not really all that healthy, Mr. Proteinavore.

Sarah:
Yeah.

Kyle:
It keeps me athletic.

Scott:
Is it good Chinese?

Sarah:
No, he has the worst taste in [crosstalk 01:12:39].

Kyle:
I love it. [crosstalk 01:12:39]

Scott:
I love good Chinese food.

Kyle:
Everybody says that. I’m literally, it’s my thing. I just, I love Chinese food. And-

Scott:
Maybe make your own.

Mindy:
I was just going to say that. It’s not that hard.

Sarah:
He’s starting to get better at cooking, so-

Kyle:
I don’t know. It’s-

Sarah:
He might get there.

Kyle:
… the most intimidating thing. If you told me, Kyle, you should do this, I will literally just go do it. Cooking is ridiculously intimidating to me. I just…

Sarah:
Oh, we’re learning.

Kyle:
It’s the worst thing I do in life.

Mindy:
Find one recipe that you really want to make, make it, and see how it tastes. And-

Scott:
Yeah, and find a better Chinese food restaurant, too. Come on.

Sarah:
We’re searching.

Scott:
So the next two items we have are think about researching 401K plans for your company and your HSA here, maximize that HSA. Sheltering income from tax is going to be important, especially because you’re in a high income tax bracket. Whether or not you’re pulling the money out of your business is irrelevant. Your taxes are reflecting something that’s over the Roth IRA limit. You have a great problem there. You need to get under that Roth IRA limit by sheltering some income from taxes and those types of things, and begin thinking about that. And so I think that the financial planning is going to be a big one, and I think you’re going to have 25-50 hours of homework in there, frankly. I think that’s going to be, to get that really right, I think you’re going to have to really dive in there. You’re going to stumble and take a couple of steps to find the right referral and connection, but I think that’s really important for you as a business owner, to think through all that kind of stuff.

Mindy:
I also want to say that episode 161 is with the Mad Fientist where he comes in and talks about the Roth IRA, the backdoor Roth IRA, the mega-backdoor Roth IRA, and that episode came out on January 11th, so I definitely want you to listen to that, because he is really just the expert on those things. He loves reading the government policies on all that stuff and then can regurgitate it in English. So you don’t have to do either of those things.

Sarah:
Yeah. Very important.

Scott:
Or Scottish. I think he lives in Scotland now.

Mindy:
Yeah.

Scott:
Close enough.

Sarah:
Nice.

Mindy:
And I just really think that you guys are going to be able to max out all of the things as soon as you get your spending dialed down to where you want it to be. Scott, is there anything else you wanted to suggest?

Scott:
No, just this is so fun because it's so great to see you guys having… Look, you didn't do anything wrong. You're doing everything right. You just hadn't stumbled across the concept of financial independence and this world of, this religion of fire that we've got going here. You've got it and now you're just in this exciting part of figuring it out and you're just going to have, I think, such an incredible year ahead of you in dialing this in. And then you're going to be off to the races within five, 10 years. You're going to build up a staggering net worth if you're able to make these changes and stick with them for a little bit.

Sarah:
That’s what we’re excited for.

Kyle:
Yeah.

Mindy:
I’m super excited for you guys because this is going to be fabulous, and we’re going to check in with you and you’re going to be like, “Yep. We’re already millionaires.”

Sarah:
Yeah. Oh man.

Scott:
Yeah, that may be conservative. We’ll see the [inaudible 01:16:03].

Mindy:
Yes. Now you’re going to be billionaires.

Sarah:
Oh wow.

Mindy:
Trillionaires? I think you’ve got great things happening for you. And this was really exciting. Thank you so much for coming on the show today. I really appreciate your time.

Sarah:
Thank you.

Kyle:
And congratulations, Scott, on getting married.

Scott:
Oh yeah, thank you. I’ve got one of these now.

Sarah:
Yeah, that’s awesome.

Scott:
I like to do the fist rather that one of the fingers because it could be misinterpreted. But thank you, guys.

Sarah:
Oh wait. You guys. You didn’t ask us for a joke.

Mindy:
Oh, oh. What is your favorite joke to tell? Scott, do you want to ask it? I’m sorry. [crosstalk 01:16:34]

Scott:
We’re not doing it in famous form, but we’ll ask you, what’s your favorite joke to tell at parties?

Sarah:
Okay, you ready?

Mindy:
Yes.

Sarah:
What kind of exercises do lazy people do?

Mindy:
Oh, I should know this.

Scott:
Lazercises. No.

Sarah:
Ready?

Mindy:
Yes.

Sarah:
Diddly squats.

Scott:
Ah.

Sarah:
That’s a good one, right?

Scott:
I like it.

Mindy:
I love that.

Scott:
Yeah.

Mindy:
I just started doing 100 squats a day, over the course of the day.

Sarah:
That’s awesome.

Mindy:
It’s wow, that really burns your legs up.

Sarah:
It does.

Kyle:
Yeah.

Sarah:
It does.

Mindy:
[crosstalk 01:17:06]I got to get a few days and it will be easier. But boy oh boy, I can walk funny now. Diddly squats. I love that.

Scott:
I like it.

Mindy:
Okay, Kyle and Sarah, thank you so much for your time today and we will check in with you in a few weeks and see how you’re doing.

Kyle:
Okay.

Sarah:
Love it. Thanks so much.

Mindy:
Thank you. Have a good day.

Scott:
Thanks, guys.

Mindy:
Okay, Scott. That was Kyle and Sarah. I had so much fun talking to them. I am so excited for the possibilities that they have before them in their young lives, getting ready to conquer the world together.

Scott:
Yeah. That was just really fun. It was like, I think they came in expecting to be like, oh we’re doing everything wrong with all this stuff. No. They’re doing everything right. They’re in the process, the messiness and the transition, once you go from not really being super intentional about everything you’re doing with money, to having a reason for every dollar. That’s a six month, year long, maybe even two year process. And they’re right at the beginning of it. It’s so exciting. So fun to see, so encouraging. If you’re in that position, do not feel bad for a second. Just be excited about all of the amazing progress that you can begin making in that and how many people are going to get a chance to learn from what they’re doing, in a really constructive way today?

Mindy:
I think so many people are right where they are. I know I’m making good income, but I can’t seem to really save much. I can’t seem to really get ahead. And you heard them, when they said that they started tracking their spending, they were shocked at how much they were spending. It is so easy to spend every dollar that’s in your wallet. I’ve seen it happen, I’ve done it myself. Many, many years in a row before I got my financial stuff together. So I love that they think that they’re not doing it all right and they’re not doing everything right, but they can see where they can make changes, and they’re doing it together. That is what’s so important. They’re doing it together.

Scott:
Yeah. They have not yet reached optimization of their entire financial position, but I just want to say, they’re doing everything right because they’re making progress on a regular basis and thinking through every part of it. They’re doing everything right, they just haven’t completed the play yet. They’re in the middle of it, which is so fun and exciting. And look, we said back in like, in six months to a year, they’re going to be dramatically having a different savings profile. In three to five years, it’s going to be unrecognizable because their daughter is going to be in school, end of daycare. Or end of much of daycare, for much of the year, for those [inaudible 01:19:40]dramatic expense.
So all of these big fixed expenses that they’ve got are going to be achievable, it’s just a matter of when they get to pick them off, one by one.

Mindy:
Yeah. I am super excited for their progress. I can't wait to have them on again in a couple of weeks or a couple of months. And again in a year. I want to see what's happened in a year. So we will definitely have them on again for an update, down the road. We are just getting started with our finance review episodes and we really love doing this. I don't know if you can tell, we have a hard time hiding our excitement. And if you would like us to review your finances, you can apply at biggerpockets.com/financereview. Okay Scott, this was super fun, but this ran really, really long. Should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 164, the BiggerPockets Money Podcast, he is Scott Trench, and I am Mindy Jensen saying chop, chop, lollipop.

 

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In This Episode We Cover

  • Why everyone needs to track their expenses and start to budget
  • How to start tracking without shame
  • Why you should get quoted for insurance bundling every few years
  • The importance of contributing to your HSA (health savings account)
  • Why employers may want to start 401(k) programs for their employees
  • Whether or not a life insurance policy may be worth the money
  • What should and shouldn’t be a variable cost in your budget
  • And So Much More!

Links from the Show

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 BiggerPockets Money Podcast! Each week, financial experts Mindy and Scott interview unique and powerful thought leaders about how to earn more, keep more, spend smarter, and grow your wealth. You'll get tips for getting your financial house in order and actionable advice from guests who have been in your shoes—and found their way out.
    Avi-Gil Chaitovsky Investor from Teaneck, New Jersey
    Replied about 1 month ago
    They need to drop the life insurance and switch to term. They'd pay significantly less for better coverage and can invest the difference in other ways. We did well with policygenius
    Zachary Paschke from Scranton, Pennsylvania
    Replied about 1 month ago
    If your needs change often one of the ways to get rid of a permanent policy is to convert the permanent policy into term. That said, people should always review their options. Wisely set up permanent policies can become less expensive over time than term. No one option is better for everyone. Many people don’t realize “buy term and invest the difference” is a marketing line developed by an insurance company. People assume because it’s less expensive that makes it cheaper and that’s not always the case.